<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/ X / Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 AUGUST 10, 2000 THERE
WERE 13,371,820 SHARES OF COMMON STOCK OUTSTANDING
1
<PAGE>
PART I - FINANCIAL INFORMATION
EXCHANGE RATES
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 JUNE 30, 2000
-----------------------------------
<S> <C>
Rate at end of fiscal quarter: 1.4806
Average rate for fiscal quarter: 1.4802
</TABLE>
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
2000 1999
----------- -------------
(UNAUDITED) (AS RESTATED)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 6,421,488 $ 43,621
Prepaid expenses and deposits 35,157 15,407
Accounts receivable
Trade 146,221 178,607
Sales tax and other 185,119 79,847
-----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,787,985 317,482
PROPERTY AND EQUIPMENT, net (Note 2) 5,310,908 3,556,386
INTANGIBLE ASSETS
(net of accumulated amortization of $44,722
September 30, 1999 - $22,361) 104,350 126,710
-----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 12,203,243 $ 4,000,578
-----------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 938,474 $ 1,648,193
Wages payable 7,836 37,451
Other accrued liabilities 210,415 106,604
Notes payable - 829,644
-----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,156,725 2,621,892
-----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 5,588,789 1,559,720
Preferred stock 8,679,973 -
Share purchase options 2,191,740 649,445
Share purchase warrants 6,831,684 -
Share subscriptions received - 1,793,026
Deficit accumulated during the development stage (12,245,668) (2,623,505)
-----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 11,046,518 1,378,686
-----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 12,203,243 $ 4,000,578
-----------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS AND CONTINGENCIES (Note 4)
</TABLE>
See accompanying notes to the consolidated interim financial statements
2
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM INCEPTION OF
THE DEVELOPMENT FOR THE NINE FOR THE NINE
STAGE TO MONTHS ENDED MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 1999
----------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE $ 1,463,131 $ 896,433 $ 310,012
DIRECT COSTS 776,241 436,671 214,186
---------------------------------------------------------------------------------------------------------
GROSS PROFIT 686,890 459,762 95,826
---------------------------------------------------------------------------------------------------------
INTEREST INCOME 180,433 180,433 -
---------------------------------------------------------------------------------------------------------
SALES EXPENSE 2,840,748 1,489,359 791,325
---------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 103,188 62,848 3,638
Amortization 646,802 451,542 169,143
Consulting 1,291,045 1,113,600 177,445
Financing 4,259,424 4,259,424 -
Foreign exchange (gain) loss (222,621) (262,116) 36,496
Interest 87,194 52,845 14,384
Investor Relations 322,296 253,464 48,784
Management Fee 26,500 - -
Occupancy 182,467 112,638 31,724
Office 559,900 502,732 31,326
Professional fees 669,288 525,591 55,323
Repairs and maintenance 54,696 43,395 6,277
Telephone 185,786 134,732 23,477
Travel 247,418 197,767 35,811
Vehicle 23,291 8,802 8,523
Wages 1,835,569 1,315,735 433,057
---------------------------------------------------------------------------------------------------------
10,272,243 8,772,999 1,075,408
---------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $(12,245,668) $ (9,622,163) $(1,770,907)
---------------------------------------------------------------------------------------------------------
Adjustment for beneficial conversion feature
of convertible preference shares $(11,147,175) $ -
Adjustment for beneficial conversion feature
of warrants (355,047) -
---------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD ATTRIBUTABLE
TO COMMON SHAREHOLDERS $(21,124,385) $(1,770,907)
---------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.71) $ (0.19)
---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,341,669 9,097,085
---------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE $ 310,644 $ 167,530
DIRECT COSTS 110,022 87,906
-------------------------------------------------------------------------------------
GROSS PROFIT 200,622 79,624
-------------------------------------------------------------------------------------
INTEREST INCOME 100,192 -
-------------------------------------------------------------------------------------
SALES EXPENSE 622,118 430,542
-------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 55,307 455
Amortization 181,528 153,608
Consulting 31,953 -
Financing 18,000 -
Foreign exchange (gain) loss (140,294) 3,432
Interest 2,602 10,396
Investor Relations 143,266 12,132
Management Fee - -
Occupancy 48,246 18,852
Office 327,547 16,256
Professional fees 201,551 43,237
Repairs and maintenance 8,127 3,136
Telephone 72,417 14,174
Travel 141,476 14,978
Vehicle 1,010 1,879
Wages 494,012 108,531
-------------------------------------------------------------------------------------
1,586,748 401,066
-------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $(1,908,052) $ (751,984)
-------------------------------------------------------------------------------------
Adjustment for beneficial conversion feature
of convertible preference shares $ - $ -
Adjustment for beneficial conversion feature
of warrants - -
-------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD ATTRIBUTABLE
TO COMMON SHAREHOLDERS $(1,908,052) $ (751,984)
-------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.14) $ (0.08)
-------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,371,820 9,097,085
-------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated interim financial statements
3
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN CANADIAN DOLLARS)
(AMOUNTS FOR THE PERIOD SUBSEQUENT TO SEPTEMBER 30, 1999 ARE UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Warrants/options
Share and additional
Subscriptions paid-in capital to
Common stock Received 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 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
warrants - - - - 11,502,222
Issue of share purchase warrants - - - - 6,476,637
Net loss for the nine months
ended June 30, 2000 - - - - -
-----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 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 - - - 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
warrants 11,502,222
Issue of share purchase warrants - - - 6,476,637
Net loss for the nine months
ended June 30, 2000 - - (9,622,163) (9,622,163)
-------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 3,637,200 $8,679,973 $(12,245,668) $ 11,046,518
==============================================================================================================
</TABLE>
See accompanying notes to the consolidated interim financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM INCEPTION FOR THE NINE FOR THE NINE
OF THE DEVELOPMENT MONTHS ENDED MONTHS ENDED
STAGE TO JUNE 30, 2000 JUNE 30, 2000 JUNE 30, 1999
---------------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $ (12,245,668) $(9,622,163) $ (1,770,907)
Adjustments to reconcile net loss for the
period to cash utilized in operating activities
Amortization 646,802 451,542 169,143
Non-cash portion of wages expense 745,998 523,998 222,000
Non-cash consulting expense 1,220,726 1,043,281 177,445
Non-cash portion of sales expense 198,235 82,086 116,149
Non-cash portion of financing charges 4,241,424 4,241,424 -
Consulting fee settled with shares 26,562 26,562 -
Change in operating assets and liabilities:
Prepaid expenses and deposits (35,157) (19,750) (6,013)
Accounts receivable (331,340) (72,886) (164,557)
Accounts payable 938,474 (709,719) 626,549
Wages payable 7,836 (29,615) -
Other accrued liabilities 179,713 73,109 39,015
-----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,406,394) (4,012,130) (591,176)
-----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on acquisition of subsidiary 35,222 - 35,223
Purchase of property and equipment (5,711,626) (2,116,191) (2,468,249)
Purchase of intangible assets (149,071) - (149,071)
-----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,825,475) (2,116,191) (2,582,097)
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from notes payable 275,000 - -
Repayment of notes payable (275,000) - (150,000)
Proceeds from convertible notes payable 829,644 - 826,622
Proceeds from issue of common stock 1,286,271 1,235,956 50,155
Proceeds from issue of preferred stock 10,915,185 10,915,185 -
Proceeds from issue of warrants 355,047 355,047 -
Proceeds from exercise of warrants 1,474,184 - 1,475,264
Proceeds from share subscriptions received 1,793,026 - 1,544,924
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,653,357 12,506,188 3,746,965
-----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,421,488 6,377,867 573,692
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 43,621 19,506
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,421,488 $ 6,421,488 $ 593,198
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 43,184 $ 10,863 $ 8,233
-----------------------------------------------------------------------------------------------------------------------
Income taxes paid $ - $ - $ -
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE OF CASH AND CASH EQUIVALENTS
Cash $ 497,909 $ 497,909 $ 593,267
Short term investments 5,923,579 5,923,579 -
-----------------------------------------------------------------------------------------------------------------------
$ 6,421,488 $ 6,421,488 $ 593,267
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended June 30, 2000, the Company recorded non-cash
additions to property and equipment in the amount of $67,516 (nine months ended
June 30, 1999 - $133,851) representing the fair value of share purchase options
issued to suppliers.
During the nine months ended June 30, 2000, the Company issued 50,000 common
shares valued at $26,562, in exchange for consulting fees received.
During the nine months ended June 30, 2000, the notes payable valued at $829,644
at September 30, 1999 were converted to 997,736 common shares
See accompanying notes to the consolidated interim financial statements
6
<PAGE>
1. BASIS OF PRESENTATION AND CONTINUING OPERATIONS
The accompanying unaudited interim financial statements have been
prepared in conformity with generally accepted accounting principles
for interim financial information and therefore, certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations
of the Securities and Exchange Commission. In our opinion, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the
interim periods presented. These financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained in our
Annual Report for the fiscal year ended September 30, 1999 on Form
10-KSB filed with the Securities and Exchange Commission. Our results
of operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for a full
fiscal year.
The financial statements have been prepared on the going concern basis
of accounting which contemplates realization of assets and satisfaction
of liabilities in the ordinary course of business. The Company has
limited financial resources, has incurred operating losses since
inception, has a deficit accumulated during the development stage of
$12,245,668 at June 30, 2000, and does not expect to generate
profitable operations until fiscal 2001 or later. The Company has
working capital of $5,631,260 at June 30, 2000, however additional
financing will be required to fund operating expenses, working capital
needs and capital commitments until the Company achieves profitable
operations. The Company is currently pursuing opportunities to raise
financing through private placements of both equity and debt
securities. 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.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Telecommunications equipment, installed $ 5,001,736 $ 3,295,475
Telecommunications equipment, not yet placed in service 460,831 320,944
Computer equipment 310,440 38,020
Furniture and fixtures 139,983 74,847
------------------------------------------------------------------------------------------------------------
5,912,990 3,729,286
Less: accumulated amortization (602,082) (172,900)
------------------------------------------------------------------------------------------------------------
$ 5,310,908 $ 3,556,386
------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
3. SHARE CAPITAL
(a) STOCK OPTION PLANS
(i) Details of changes in options to date under all
plans are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
JUNE 30, EXERCISE
2000 PRICE US$
-------- ---------
<S> <C> <C>
Balance outstanding,
September 30, 1999 473,885 $ 1.18
Activity during the period
Options granted 3,248,975 4.75
Options exercised (125,000) 1.00
Options cancelled (12,500) 5.00
------------------------------------------------------------------------------------------
Balance outstanding,
June 30, 2000 3,585,360 $ 4.41
------------------------------------------------------------------------------------------
</TABLE>
On May 12, 2000 the Company granted options to its
newly appointed directors and to certain employees to
purchase 347,500 common shares of the Company, of
which 150,000 options have an exercise price of
U.S.$2.50 per share (the "Directors' options"), being
a premium to the prior day's closing price of the
Company's stock. The first 75,000 of the Directors'
options vest immediately at the grant date and the
remaining 75,000 vest one year after the grant date.
The 197,500 options granted to certain employees have
an exercise price of U.S.$5.00 and vest quarterly
over a three year period from the grant date. All of
the options granted at May 12, 2000 expire May 11,
2005.
As at June 30, 2000, the following stock options were
outstanding:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE US$ 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
150,000 2.50 May 11, 2005
2,970,084 5.00 February 4, 2005 to May 11, 2005
----------------
3,585,360
----------------
</TABLE>
Of the outstanding options, 1,555,908 options, as at
June 30, 2000, are presently exercisable and
2,029,452 options are unvested and vest over a three
year period.
8
<PAGE>
3. SHARE CAPITAL (CONTINUED)
(b) WARRANTS
(i) As at June 30, 2000 warrants were outstanding as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
WARRANTS PRICE US$ EXPIRY DATE
--------- ---------- ------------------
<S> <C> <C> <C>
Outstanding at
September 30, 1999 - $ -
Issued
Agents' warrants 309,000 2.50 January 28, 2001
Gibralt Capital Corporation 750,000 2.50 March 1, 2002
Private placement units 699,999 1.00 February 3, 2002
Private placement units 1,482,750 0.75 November 25, 2001
------------------------------------------------------------------------------------
Outstanding at June 30, 2000 3,241,749 $ 1.22
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
(a) 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.
(b) 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.
9
<PAGE>
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) 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.
(d) 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 at any
time 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.
(e) In May 2000 the Company entered into a management agreement
with a senior executive which provides for annual
compensation, excluding bonuses, of approximately US$120,000.
The Company can terminate this agreement at any time upon
reasonable notice and the payment of an amount equal to 6
months of salary.
5. STRATEGIC ALLIANCES
(a) In August 1998, the Company entered in a ten-year System
Operation Agreement with two five year renewal options, with
Star Choice Communications, Inc. ("Star Choice"). The Company
is responsible for establishing and maintaining distribution
systems in multi-unit dwellings throughout Canada and acts as
a commissioned sales representative for Star Choice to market
Star Choice programming to the residents of multi-unit
dwellings in which the Company has installed systems.
Residents that choose to subscribe to the service pay a
monthly access fee in addition to the program fees charged by
Star Choice for programming ordered by the customer.
The Company's contract with Star Choice gives the company a
30% share of gross subscriber revenues from the sale of Star
Choice programming services plus 100% of a digital access fee
within the multi-unit dwellings for a period of 10 years, with
renewal clauses.
10
<PAGE>
5. STRATEGIC ALLIANCES (CONTINUED)
(a) The Company will incur only the cost associated with the
implementation of its services, and will not share any of Star
Choice's programming or broadcasting costs. Under the
agreement, the Company may not maintain distribution systems
or market direct-to-home satellite broadcast services for
other satellite operators in Canada.
The Company's revenues are significantly dependent on its
strategic alliance with Star Choice. During the nine months
ended June 30, 2000, revenue from Star Choice accounted for
43% of total recorded revenues of the Company (nine months
ended June 30, 1999 - 26%; year ended September 30, 1999 -
36%).
(b) In May 2000, the Company entered into a long-term System
Operator Agreement with DIRECTV, Inc. ("DIRECTV"), a
California company. The Company's contract with DIRECTV gives
the Company a share of net subscriber receipts, depending upon
the number of active subscribers, from the sale of DIRECTV
programming services, plus a subsidy for subscriber
acquisition costs for each net subscriber addition.
The Company will incur only the costs associated with the
implementation of its services, and will not share any of
DIRECTV's programming or broadcasting costs. Under the
agreement, the Company may not solicit sales or provide
equipment for any other direct-to-home digital satellite
television services in the United States. However, the Company
is not prohibited from contracting with other program
providers in connection with its SMATV services. Consequently,
the Company is totally dependent on DIRECTV for its digital
set-top programming in the United States.
The agreement has an initial term of five years, with an
automatic extension of the entire agreement to coincide with
the termination of the longest running property access
agreement. Thereafter, the agreement is renewable for an
additional five-year period at the option of both parties.
Either party may terminate for the other's breach, bankruptcy
or unapproved assignment of the agreement. Under this
agreement, the Company will establish and maintain MDU
distribution systems in non-rural states of the United States,
as defined in the agreement, and act as a commissioned sales
agent for the marketing of DIRECTV programming to residents of
MDU properties.
As this agreement was recently executed, as of this date the
Company has not derived any revenue from its alliance with
DIRECTV. DIRECTV is not required to use the Company on an
exclusive basis and could either contract with others to
install distribution systems and market programming in MDUs or
undertake such activities directly through retail stores, as
it does for single-family television households.
11
<PAGE>
5. STRATEGIC ALLIANCES (CONTINUED)
(c) In May 2000 the Company entered into a Master Purchase Sales
Agreement with 3Com Corporation ("3Com") to become part of its
preferred Visitor Based Network. Under this agreement, the
Company will receive preferred pricing and discounts for
equipment purchased to support the Company's high-speed
Internet services.
This is not an exclusive agreement, however, a portion of the
Company's discount is based on purchase volume. The agreement
has an initial one-year term, with automatic yearly renewals
at the option of both parties with associated yearly price and
discount adjustments.
6. 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 licences. 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 MDU's internal wiring
may not be adopted in a final form that is favourable to the Company,
which would have a material adverse effect on the Company's business.
7. 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. The Company's
operations are located in Canada and the United States. For the nine
months ended June 30, 2000 all of the Company's revenues were
attributable to the Canadian operations and the majority of the
Company's assets were located in Canada.
8. SUBSEQUENT EVENT
On July 25, 2000 the Company granted options to certain employees to
purchase 180,500 common shares of the Company at an exercise price of
U.S.$5.00. The options vest quarterly over a three year period from the
grant date and expire July 24, 2005.
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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, Amendment No. 1 filed on June 30, 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 multiple dwelling unit 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 June 30, 2000, we had approximately 14,700
subscribers in 340 buildings throughout Canada. We began U.S. operations in
May 2000, have started marketing to building owners in selected metropolitan
areas and expect to sign on our first U.S. subscribers in August 2000.
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 began offering our Internet
access services in June 2000 in beta trial format and will begin billing
Internet subscribers in August 2000. We expect to begin beta trial of Voice
Over IP (VOIP) local and long distance telephony service in the fall of 2000.
VOIP is technology that enables voice traffic to be transported over the
Internet. The service will be offered within the properties that we have
deployed our broadband service. We expect that this will generate an
additional revenue stream using existing infrastructure that we have deployed.
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 June 30, 2000 and June 30, 1999 and
for the three month and nine month periods ended June 30, 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.
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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
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
REVENUE. Our revenue for the nine months ended June 30, 2000 of $896,433 was
comprised of 37% SMATV revenue, 43% net programming revenue from Star Choice,
17% from digital access fees and 3% from equipment and other sales. Our
revenue for the nine months ended June 30, 1999 of $310,012 was comprised of
66% SMATV revenue, 25% net programming revenue from Star Choice, 7% from
digital access fees and 2% from equipment and other sales. For the nine
months ended June 30, 2000 SMATV revenue of $334,486 represented
approximately 10,600 subscribers and set-top revenue of $541,467 represented
approximately 4,100 subscribers, compared to the corresponding period with
SMATV revenue of $203,490 and 8,500 SMATV subscribers acquired from 4-12
Electronics Ltd. on December 31, 1998 and set-top revenue of $99,487
representing approximately 1,400 subscribers added in the latter six months
of the period. We also recorded interest income of $180,433 for the nine
months ended June 30, 2000 due to investing available funds from January 28,
2000 to June 30, 2000. There was no corresponding interest income in the nine
months ended June 30, 1999.
DIRECT COSTS AND SALES EXPENSES. Direct costs are primarily comprised of
SMATV programming and maintenance costs plus equipment costs and are 49% of
total revenue for the nine months ended June 30, 2000 compared to 69% 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 75% of the sales expenses for the nine months ended June 30,
2000 compared to 49% of the sales expenses for the nine months ended June 30,
1999. The balance of 25% and 51% respectively, consisted primarily of travel,
consulting, advertising and telephone expenses, which includes $82,086 in the
nine month period ended June 30, 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 nine months ended
March 31, 2000 were $8,772,998 as compared to $1,075,477 for the
corresponding prior period. This 716% 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 nine-month period ended June 30, 2000 and
$399,445 in the nine-month period ended June 30, 1999 results in an increase
of $2,261,701 or 335%, which is more representative of the increase in
overall business activity. Advertising, promotion, investor relations, travel
and vehicle costs were $522,881 for the nine months ended June 30, 2000 or 6%
of G&A, compared to $96,756 for the corresponding prior period, an increase
of 440%. Office, occupancy, repairs and maintenance, and telephone costs were
$793,496 for the nine months ended June 30, 2000 or 9% of G&A, compared to
$92,873 for the corresponding prior period for an increase of 754%. Wages,
professional and consulting fees for the nine months ended June 30, 2000 were
$2,954,926 or 34% of G&A and up from the
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prior period's $665,825, primarily due to increased staff levels and non-cash
stock option compensation charges of $1,567,279 in the nine months ended June
30, 2000 and $399,445 in the nine months ended June 30, 1999 (see below).
Other non-cash charges consisted of amortization expense of $451,542 or 5% of
G&A in the nine months ended June 30, 2000 compared to $169,143 or 16% of G&A
in the nine months ended June 30, 1999 and reflects the difference in
subscriber base between periods and the comparison of nine full months of
operations versus six full months in the period ended June 30, 1999. Foreign
exchange gains of $262,116 and interest expense of $52,845 for the nine
months ended June 30, 2000 compared to $36,496 in foreign exchange loss and
to $14,384 in interest expense for the corresponding prior period.
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 nine
months ended June 30, 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 an exercise price of US$1.00 as a
performance incentive, resulting in compensation cost of $523,998. In
addition, we granted 170,000 options to consultants at an exercise price of
US$5.00 being the market value at date of grant and recorded the fair value
of these options, in the amount of $1,043,281, as consulting expense.
Further, stock option compensation charges in the amount of $82,086 were
recorded as sales expense based on the fair value of stock options issued or
issuable to a supplier for its performance to June 30, 2000. For the nine
months ended June 30, 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 nine months ended June 30, 1999 for options
to purchase 300,000 shares of our common stock granted to directors, officers
and employees at an exercise price of US$1.00. In addition, we granted stock
options to purchase 100,000 shares of our common stock at an exercise 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 nine
months ended June 30, 1999 based on the fair value of stock options issued to
suppliers, calculated on the date the supplier completed the performance
required to earn the options.
OTHER NON-CASH CHARGES. Included in the nine months ended June 30, 2000 is
$26,563 in consulting expenses related to 50,000 shares issued upon the
termination of our agency agreement with Canaccord Capital Corporation.
Included in the same period is a non-cash financing expenseof $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 US$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.
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NET LOSS. We reported a net loss of $9,622,163 for the nine months ended June
30, 2000, up from a net loss of $1,770,907 for the nine months ended June 30,
1999. When non-cash charges, including amortization, of $6,368,893 and
$684,737, are excluded from these periods, the increase is primarily
attributable to the increased costs to operate approximately 14,700
subscribers in over 340 buildings for a full nine months compared to 9,800
subscribers in 140 properties for approximately 6 months of the comparable
prior period.
ADJUSTMENT FOR BENEFICIAL CONVERSION. During the nine months ended June 30,
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 has 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 nine months ended June 30, 2000, resulting in a net
loss attributable to common shareholders and basic loss per common share for
the nine months ended June 30, 2000 in the amounts of $21,124,385 and $1.71,
respectively.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUE. Our revenue for the three months ended June 30, 2000 of $310,644 was
comprised of 33% SMATV revenue, 44% net programming revenue from Star Choice,
17% from digital access fees and 6% from equipment and other sales. Our
revenue for the three months ended June 30, 1999 of $167,530 was comprised of
63% SMATV revenue, 26% net programming revenue from Star Choice, 10% from
digital access fees and 1% from equipment and other sales. For the three
months ended June 30, 2000 SMATV revenue of $103,579 represented
approximately 10,600 subscribers and the set-top revenue of $192,218
represented approximately 4,100 subscribers, compared to the corresponding
period with SMATV revenue of $106,392 and 8,500 SMATV subscribers acquired
from 4-12 Electronics Ltd. on December 31, 1998 and set-top revenue of
$59,768 representing approximately 1,400 subscribers added in the period. We
also recorded interest income of $100,192 for the three months ended June 30,
2000 due to investing available funds from April 1, 2000 to June 30, 2000.
There was no corresponding interest income in the three months ended June 30,
1999.
DIRECT COSTS AND SALES EXPENSES. Direct costs are primarily comprised of
SMATV programming and maintenance costs plus equipment costs and are 35% of
revenue for the three months ended June 30, 2000, compared to 52% 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,
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commissions and benefits make up 85% of the sales expense for the three
months ended June 30, 2000, compared to 63% of the sales expenses for the
three months ended June 30, 1999. The balance of 15% and 37% respectively,
consisted primarily of travel, consulting, advertising and telephone
expenses, which includes $17,668 in the three month period ended June 30,
2000 and $nil 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
June 30, 2000 were $1,586,748, as compared to $401,066 for the corresponding
period in 1999. This 296% increase in G&A period over period is primarily
because of increased business activity. Advertising, promotion, investor
relations, travel and vehicle costs were $341,059 for the three months ended
June 30, 2000 or 21% of G&A, compared to $29,444 for the corresponding period
in 1999, an increase of 1058%. Office, occupancy, repairs and maintenance,
and telephone costs were $456,336 for the three months ended June 30, 2000 or
29% of G&A, compared to $52,418 for the corresponding period in 1999, for an
increase of 771%. Wages, professional and consulting fees for the three
months ended June 30, 2000 were $727,516 or 46% of G&A, up from 1999's
$151,768 due to increased staffing levels. Foreign exchange gains of $140,294
and interest expense of $2,602 for the three months ended June 30, 2000
compared to $3,432 in foreign exchange loss and to $10,396 in interest
expense for the corresponding period in 1999. Other non-cash charges
consisted of amortization expense of $181,528 for the three months to June
30, 2000, or 11% of G&A, compared to $153,608 in 1999.
STOCK OPTION COMPENSATION CHARGES. Stock option compensation charges in the
amount of $17,668 were recorded as sales expense for the three months ended
June 30, 2000 based on the fair value of stock options issued to a supplier,
calculated on the date the supplier completed the performance required to
earn the options. In the three months ended June 30, 1999, no stock option
compensation charges were recorded as sales expense.
NET LOSS. We reported a net loss of $1,908,052 for the three months ended
June 30, 2000, up from a net loss of $751,984 for the three months ended June
30,1999. When the non-cash charges, including amortization, of $199,197 and
$153,608, 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 14,700 subscribers, compared to the same
period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
CASH POSITION. At June 30, 2000, we had cash and cash equivalents of
$6,421,488 compared to $593,267 at June 30, 1999. The increase in our cash
position is mainly due to proceeds received from common and preferred share
private placements. These proceeds have been used for our operating and
investing activities during the three and nine months ended June 30, 2000.
OPERATING ACTIVITIES. Net cash of $4,012,130 was used in operating activities
during the nine months ended June 30, 2000. The primary operating use of cash
was from our net loss of $9,622,163 which was partially offset by $6,368,893
of non-cash charges, represented by $451,542 in amortization and $5,917,351
in stock option compensation charges, shares for
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service and value attributed to warrants recognized as financing fees. In
addition, we recorded as a use of cash $758,861, from changes in working
capital, mainly from a reduction of trade accounts payable. In 1999, net cash
of $591,107 was used in operating activities. The primary operating use of
cash in 1999 was from our net loss of $1,770,907, which was partially offset
by $684,737 of non-cash charges, represented by $169,143 in amortization and
$515,594 in stock option compensation charges. In addition, we recorded as a
source of cash $494,994 from changes in working capital.
INVESTING ACTIVITIES. Net cash of $2,116,191 was used in investing activities
during the nine months ended June 30, 2000, to purchase property and
equipment. In the nine months ended June 30, 1999, we spent $2,617,320,
represented primarily by $149,071 on the acquisition of SMATV subscribers and
$2,468,249 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 nine months ended June 30, 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
June 30, 2000, 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. In connection with the offering, we entered into a Registration
Rights Agreement under which we agreed to file a Registration Statement
with the Securities and Exchange Commission to register the shares of
common stock issuable upon conversion of the Series A convertible
preferred stock for resale. A Registration Statement was filed with and
declared effective by the Securities and Exchange Commission in July,
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, pursuant to subscription agreements executed in
December 1999 and January 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).
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- 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 nine months ended June 30, 1999, we generated net cash of $3,746,965
from the following:
- The exercise of warrants for the purchase of 640,000 shares of common
stock generated proceeds of $1,475,264.
- Net proceeds from the issuance of convertible notes payable of
$826,622. Our initial funding was by way of six private demand notes
bearing interest at 7.5%. We repaid the six demand notes on December
15, 1998 from warrant exercise proceeds.
- The issuance of 5,213,675 shares of our common stock to effect the
acquisition of Alpha Beta Holdings, Ltd.
- The receipt on May 28, 1999 of subscriptions in the amount of
$1,544,924 for 670,000 shares of common stock.
WORKING CAPITAL. As at June 30, 2000 we had working capital of $5,631,260 and at
June 30,1999 we had a working capital deficiency of $742,642. 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.
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 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 multiple dwelling unit 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.
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RECENT EVENTS
In May 2000, the Company entered into a long-term System Operator Agreement
with DIRECTV, Inc. ("DIRECTV"), a California company, which will allow us to
enter the United States market. The Company's contract with DIRECTV gives the
Company a share of net subscriber receipts, depending upon the number of
active subscribers, from the sale of DIRECTV programming services, plus a
subsidy for subscriber acquisition costs for each net subscriber addition.
The Company will incur only the costs associated with the implementation of
its services, and will not share any of DIRECTV's programming or broadcasting
costs. Under the agreement, the Company may not solicit sales or provide
equipment for any other direct-to-home digital satellite television services
in the United States. However, the Company is not prohibited from contracting
with other program providers in connection with its SMATV services.
Consequently, the Company is totally dependent on DIRECTV for its digital
set-top programming in the United States.
The agreement has an initial term of five years, with an automatic extension
of the agreement to coincide with the termination of the longest running
property access agreement. Thereafter, the agreement is renewable for an
additional five-year period at the option of both parties. Either party may
terminate for the other's breach, bankruptcy or unapproved assignment of the
agreement. Under this agreement, the Company will establish and maintain
multiple dwelling unit distribution systems in non-rural states of the United
States, as defined in the agreement, and act as a commissioned sales agent
for the marketing of DIRECTV programming to residents of multiple dwelling
unit properties.
As this agreement was recently executed, as of this date the Company has not
derived any revenue from its alliance with DIRECTV. is not required to use
the Company on an exclusive basis and could either contract with others to
install distribution systems and market programming in multiple dwelling
units or undertake such activities directly through retail stores, as it does
for single-family television households.
In May 2000 the Company entered into a Master Purchase Sales Agreement with
3Com Corporation ("3Com") to become part of its preferred Visitor Based
Network. Under this agreement, the Company will receive preferred pricing and
discounts for equipment purchased to support the Company's high-speed
Internet services. This is not an exclusive agreement, however, a portion of
the Company's discount is based on purchase volume. The agreement has an
initial one-year term, with automatic yearly renewals at the option of both
parties with associated yearly price and discount adjustments.
With the completion of the DIRECTV agreement we began our U.S. operations
during the three months ended June 30, 2000 by opening an office in New
Jersey. Employees have been hired at the New Jersey location, as well as in
Maryland, Massachusetts and California.
On May 12, 2000 the Company granted options to its newly appointed directors
and to certain employees to purchase 347,500 common shares of the Company, of
which 150,000 have an exercise price of U.S.$2.50 per share (the "Directors'
options"), being a premium to the prior day's closing price of the Company's
stock. The first 75,000 of the Directors' options vest
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immediately at the grant date and the remaining 75,000 vest one year after
the grant date. The 197,500 options granted to certain employees have an
exercise price of U.S.$5.00 and vest quarterly over a three year period from
the grant date. All of the options granted at May 12, 2000 expire May 11,
2005.
On July 25, 2000 the Company granted options to certain employees to purchase
180,500 common shares of the Company at an exercise price of U.S.$5.00 and
vesting quarterly over a three year period from the grant date. All of the
options granted at July 25, 2000 expire July 24, 2005.
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 will 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On May 12, 2000 the Company granted options to its newly appointed directors
and to certain employees to purchase 347,500 common shares of the Company, of
which 150,000 have an exercise price of U.S.$2.50 per share (the "Directors'
options"), . The first 75,000 of the Directors' options vest immediately at
the grant date and the remaining 75,000 vest one year after the grant date.
The 197,500 options granted to certain employees have an exercise price of
U.S.$5.00 and vest quarterly over a three year period from the grant date.
All of the options granted at May 12, 2000 expire May 11, 2005.
ITEM 5. OTHER INFORMATION
On May 12, the size of the Board of Directors was increased from three to
five, Doug Hooper, Rob Dyck and Ted Boyle were appointed to the Board of
Directors
On July 25, 2000 Robert A. Biagioni tendered his resignation as Corporate
Secretary and the Board of Directors appointed Brad Holmstrom as Corporate
Secretary.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(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
Principal Financial and Chief Accounting Officer
Dated August 10, 2000
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