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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/ X / Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 1999, or
/ / 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
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MDU COMMUNICATIONS INTERNATIONAL, INC.
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(Name of Small Business Issuer in its charter)
DELAWARE 84-1342898
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(State of Incorporation) (IRS Employer ID. No.)
108 - 11951 HAMMERSMITH WAY, RICHMOND, B.C., CANADA V7A 5H9
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (604) 277-8150
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
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(Title of Class)
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
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were CDN$566,698.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days. (SEE definition of
affiliate in Rule 12b-2 of the Exchange Act.)
Aggregate market value of Common Stock held by non-affiliates as of
November 30, 1999 was $7,563,604.
As of November 30, 1999 there were 11,474,085 shares of Common Stock
outstanding and no other outstanding classes of a common equity security.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
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EXCHANGE RATES. All dollar amounts herein are stated in US dollars except where
otherwise indicated. The following table reflects the rate of exchange for
Canadian dollars per US$1.00 in effect at the end of fiscal year 1999 and the
average rate of exchange during the fiscal year, based on the Bank of Canada
average noon spot rate of exchange:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30, 1999
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<S> <C>
Rate at end of fiscal year: 1.4768
Average rate for fiscal year: 1.4993
</TABLE>
ITEM 1 - DESCRIPTION OF BUSINESS
MDU Communications International, Inc., formerly known as Alpha Beta Holdings,
Ltd., was incorporated on July 14, 1995 as a Colorado corporation to engage in
the business of establishing and operating brew pubs. Through September 30,
1998, it had incurred net operating losses of approximately $26,500 and was no
longer conducting business activities. In November 1998, Alpha Beta Holdings,
Ltd. acquired all of the outstanding capital stock of MDU Communications Inc.
and changed its name to MDU Communications International, Inc. At the date of
acquisition, there was no affiliation between Alpha Beta Holdings, Ltd. and MDU
Communications Inc. On May 11, 1999, the state of incorporation of the Company
was changed to Delaware. It now operates as a holding company with MDU
Communications Inc. as its sole subsidiary.
MDU Communications Inc., a Canadian corporation, was incorporated on March 26,
1998 and commenced operations in August 1998. MDU Communications International,
Inc. and MDU Communications Inc. are jointly referred to as the "Company." The
Company's principal executive offices are located at 108 - 11951 Hammersmith
Way, Richmond, British Columbia, Canada V7A 5H9.
BUSINESS DEVELOPMENT
MDU Communications Inc. commenced operations in August 1998 and is in a start-up
phase. It provides home entertainment and information technology to the
residents of multi-dwelling units (MDUs) such as apartment buildings,
condominiums, gated communities, hotels and motels. The Company establishes
mutually beneficial relationships with owners and managers of MDUs to facilitate
delivery of these services. It has entered into a strategic alliance with Star
Choice Communications, Inc. ("Star Choice") to market Star Choice programming to
the Canadian MDU market.
The Company offers complete building wiring infrastructures, systems and
hardware and digital set-top receivers to MDU owners. It utilizes state of the
art wireless digital satellite equipment to receive scrambled broadcast signals
transmitted from satellites and decode them for viewing. Broadcast signals are
captured through a single master dish at the property and the signals are
distributed throughout the building to each unit using fiber or coaxial cable.
Each subscriber is equipped with a TV set-top box which decodes the signals. The
Company utilizes independent contractors to install satellites and building
wiring infrastructures and its commissioned salespersons to install TV set-top
boxes. Initially, the Company expects to realize revenues by sharing in the Star
Choice monthly fees charged to MDU residents for satellite TV service. Once a
building has been wired or the existing wiring has been upgraded, the
infrastructure is in place to provide other services such as home security,
local telephone services and high-speed Internet access for MDU residents which
could be the source of additional revenues. Security systems consisting of
closed circuit television cameras are installed at the time a building is wired.
However, to date the Company has not realized any revenues from the sale of home
security, local telephone or Internet access services.
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The Company also designs and supplies satellite master antenna television
(SMATV) systems for multi-dwelling unit properties. An SMATV system is capable
of receiving and distributing satellite and local television programming to the
residents of multi-dwelling unit properties, thereby eliminating the need for a
cable television provider.
FINANCING REQUIREMENTS
Management believes that the Company's cash on hand will not be sufficient to
provide funds necessary for the Company to expand its business and fund its
operating deficits for the next twelve months. As a result, management is
currently pursuing opportunities to raise CDN$15,000,000 in financing through
private placements of both equity and debt securities. On October 13, 1999, the
Company entered into an agreement with Canaccord Capital Corporation to assist
the Company with private placements and an initial public offering on the
Vancouver Stock Exchange. On November 26, 1999, the Company completed private
placements totaling 1,482,750 units, each unit consisting of one common share
and one common share purchase warrant. The net cash proceeds to the Company of
these private placements was CDN$883,719. Until additional funds have been
raised, the Company has put on hold its expansion plans and reduced its staff by
50% as a strategy to conserve capital.
STAR CHOICE STRATEGIC ALLIANCE
Currently, there are only two satellite broadcasters licensed to operate in
Canada: Star Choice and ExpressVu. Star Choice is a wholly owned subsidiary of
Cancom (Canadian Satellite Communications Inc.) which is publicly traded on the
Toronto Stock Exchange. Cancom is 24% owned by Shaw Communications, Inc.
ExpressVu is a wholly-owned subsidiary of BCE Inc. In the last few years, these
two companies have built a subscriber base of over 400,000 households, or
approximately 4% of the 11,000,000 Canadian households with television sets.
These two companies are focusing on single family dwellings and their marketing
and distribution efforts are primarily through retail and commercial stores. The
Company believes that the two companies have focused on the single family market
because of the favorable demographics, minimal technical challenges and
difficulty in effectively marketing services to MDU property owners, managers
and residents. By limiting their focus, the Company believes the two companies
have left a sizeable niche in the marketplace for distribution of direct-to-home
(DTH) systems to MDU residents. While the Company does not believe any other
companies are currently attempting to market satellite services to MDUs, it
recognizes that this window of opportunity may not remain open indefinitely.
In August 1998, the Company entered into a ten-year System Operation Agreement
(with 5-year renewal options) with Star Choice under which the Company will
establish and maintain distribution systems in MDUs throughout Canada and act as
a commissioned sales representative for Star Choice to market Star Choice
programming to the residents of MDUs 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 for use of a
TV set-top box. Star Choice programming subscribers are billed monthly by Star
Choice. The Company is entitled to 100% of the monthly access fee (which is
currently CDN$5.95) and to a 30% share of Star Choice's subscriber revenues.
Through September 30, 1999, access fees received by the Company totaled
approximately CDN$61,675. Star Choice retains responsibility for marketing its
broadcasting packages, while the Company is responsible for marketing its
services to the MDU market. The Company will incur only the cost associated with
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 others. Consequently, the Company is totally dependent on Star
Choice for programming. During the fiscal year ended September 30, 1999,
revenues from Star Choice were 31% of the Company's total revenues. Star Choice
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.
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Consequently, events at Star Choice beyond the control of the Company could
adversely affect the Company.
MARKET
The Company is attempting to build a Canadian national infrastructure, first
focusing on major markets such as the Lower Mainland of British Columbia and the
greater Toronto metropolitan area, which together account for more than 50% of
Canada's MDUs. Marketing efforts are directed at property owners, building
managers and real estate developers. As of September 30, 1999, Company had
installed its systems in 85 buildings in Western Canada and, as the result of an
acquisition of over 8,500 satellite master antenna television (SMATV)
subscribers in approximately 50 buildings, currently serves over 11,600
subscribers. As of September 30, the Company had entered into additional access
agreements that will allow it to wire and market to tenants in approximately 280
additional buildings, providing an additional potential customer base of over
18,000 subscribers. The cost to add these additional subscribers is estimated to
be CDN$9,000,000.
COMPETITION
The Company is not aware of any other companies currently focusing on the
Canadian MDU market. However, the Company faces competition from others who are
competing for a share of the Canadian subscriber base. These competitors include
cable companies, off-air broadcasters, gray market products and MMDS and LMDS
(multi-channel microwave or local distribution systems which transmit digital
audio/video over the air in scrambled form and subscribers receive the signals
through an antenna and decode the signal using a set top box analogous to those
used by satellite broadcasters).
CABLE COMPANIES. Traditional cable companies such as Rogers Communications,
Inc., Shaw Communications, Inc. and Le Groupe Videotron Ltee. currently dominate
the broadcasting market, serving an estimated 40% of the 11,000,000 Canadian
households with television sets. The balance of Canadian households are serviced
by individual off-air antennae systems or by private cable operators.
OFF-AIR BROADCASTERS. Off-air broadcasters send signals over the air which are
received by traditional television antennas in a local broadcast area. Signals
are accessible to anyone in the local area with an antenna. Given the limited
range of off-air broadcasting, it is suitable only for a local audience.
GRAY MARKET PRODUCTS. These are products and programming services that are not
licensed to be sold in Canada. Prior to the launch of the Canadian
direct-to-home digital satellite television services, some Canadians, including
MDU owners, purchased U.S. based systems and operated them in Canada. Canadian
digital satellite services offer much of the same programming, better reception,
warranty service and support, and do not operate in violation of Canadian law.
Also, many retailers of the U.S. based equipment have been subjected to legal
actions aimed at eliminating the sale of unauthorized equipment and reception of
unauthorized television programming. In the Company's opinion, these factors
have and will continue reduce the use of U.S. based systems in Canada.
MMDS AND LMDS. MMDS and LMDS microwave technology is a hybrid of off-air
broadcasting and satellite broadcasting. Digital audio, video and, in some
cases, data are transmitted over the air in scrambled form. Subscribers receive
these signals through an antenna and decode the signal using a set-top box
analogous to those used by satellite broadcasters. Their drawback is that they
require a direct line of site from the transmission site to the customer which
limits their range.
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GOVERNMENTAL REGULATION
MDU Communications Inc. is not regulated by the Canadian Radio-Television and
Telecommunications Commission (CRTC) or any other governmental regulatory
agency. Star Choice and ExpressVu 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 is
totally dependent upon Star Choice for programming, it could be adversely
affected if Star Choice encountered regulatory problems.
EMPLOYEES
The Company had 32 employees as of September 30, 1999, all of whom are full time
employees. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are good.
As the Company grows, it will rely on independent contractors to install
building wiring infrastructure and commission salespersons to install
subscribers' TV set-top boxes.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's principal executive offices are located at 108 - 11951 Hammersmith
Way, Richmond, British Columbia, Canada. The premises consist of four offices
totaling 6,070 square feet leased for various terms ending May 31, 2001 through
December 31, 2001. Monthly lease and occupancy costs are approximately
CDN$4,500. In addition, the Company leases three sales offices across Canada
with aggregate monthly lease and occupancy costs of approximately CDN$2,900. The
Company does not require any significant warehouse space because its suppliers
deliver on an "as needed" basis.
ITEM 3 - LEGAL PROCEEDINGS
The Company has been named in an action by Shaw Cable Systems Ltd. ("Shaw") in
which Shaw seeks a permanent injunction and claims CDN$2,000,000 in damages
resulting from 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.
The Company has been named as a defendant in a claim by Whistler Cable
Television Ltd. for the return of personal property, damages for conversion, an
injunction and costs. The Company is contesting these claims. As the case is
still in the pre-discovery phase, the likelihood of any loss is not determinable
or reasonably estimable at this time.
The Company has received letters from Rogers Cablesystems ("Rogers") threatening
legal action if certain alleged activities on the part of the Company do not
cease. The Company has responded to these letters and there have been no further
actions by Rogers or its counsel with respect to any of these 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal year
ended September 30, 1999.
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FORWARD-LOOKING STATEMENTS
The statements contained in this Part I 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 in "Risk Factors"
at the end of Item 6, Management's Discussion and Analysis and other factors
identified from time to time in the Company's reports filed with the Securities
and Exchange Commission.
PART II
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ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's Common Stock is not traded on a national securities exchange or
the Nasdaq Stock Market. The Common Stock has been quoted on the OTC Bulletin
Board under the symbol "MDTV" since December 2, 1998. The range of high and low
bid prices as quoted on the OTC Bulletin Board during each fiscal quarter since
December 2, 1998 is as follows:
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<CAPTION>
FISCAL YEAR 1999
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QUARTER ENDED HIGH LOW
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<S> <C> <C>
December 31 $1.870 $1.313
March 31 $3.000 $1.500
June 30 $2.590 $1.060
September 30 $2.000 $0.590
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
As of November 30, 1999, the Company had approximately 116 holders of record of
its shares of Common Stock.
The Company has not paid any cash dividends and does not anticipate that it will
pay cash dividends on its Common Stock in the foreseeable future. Payment of
cash dividends is within the discretion of the Company's Board of Directors and
will depend, among other factors, upon the Company's earnings, financial
condition and capital requirements.
"PENNY STOCK" RULES
The Company's common stock is a "penny stock" which is subject to Rule 15g-9
under the Securities Exchange Act of 1934. It is considered penny stock because
it is not listed on a national exchange or Nasdaq, its bid price is below $5.00
per share, the Company has been in business less than three years and has net
tangible assets of less than $5,000,000, and average annual revenue has not
exceeded $6,000,000 in the past three years.
As a result, broker-dealers must comply with additional sales practices
requirements. Broker-dealers must determine that the investment is suitable for
the buyer and receive the buyer's written agreement to the transaction before
they can sell the Company's common stock to buyers who are not the
broker-dealer's established customers or institutional accredited investors. In
addition, broker-dealers must deliver to the buyer before the transaction a
disclosure schedule which explains the penny stock market and its risks,
discloses the commissions to be paid to the broker-dealer, discloses the stock's
bid and offer quotations, and discloses if the broker-dealer is the sole market
maker in the stock.
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UNREGISTERED SECURITIES SALES
Sales of securities during the fiscal year ended September 30, 1999 without
registration under the Securities Act of 1933, as amended ("1933 Act"), were as
follows:
A. COMMON STOCK (shares adjusted to reflect a 1-for-10 reverse stock
split which occurred in October 1998).
1. October 1998: 2,997,400 shares of common stock were sold for cash in
the aggregate amount of $29,974 without an underwriter to 10 offshore
institutional investors. The sales were made in reliance upon
exemptions from registration afforded to offshore transactions.
2. November 1998: 200,000 shares of common stock were sold for cash in the
aggregate amount of $2,000 without underwriters to 1 offshore
institutional investor and 6 individual investors. The sales were made
in reliance upon exemptions from registration afforded to offshore
transactions.
3. November 1998: 5,213,835 shares of common stock were exchanged for all
of the outstanding capital stock of MDU Communications Inc., a Canadian
corporation ("MDU"), which is now a wholly owned subsidiary of the
Company. The former MDU stockholders are the holders of those shares.
No underwriter was involved in the transaction. The sales were made in
reliance upon the exemption from registration afforded by Section 4(2)
of the 1933 Act.
The business combination of the Company and MDU has been accounted for
as a reverse acquisition in which MDU was identified as the acquirer
and the assets and liabilities of the Company were acquired at their
fair value. As a result, the 5,213,835 shares of the Company's common
stock issued to the former MDU stockholders were valued at the fair
value of the Company's assets as of the acquisition date in the amount
of $23,482. As the net Assets of the Company consisted solely of cash
on the acquisition date, and the amount of cash has been determined to
represent the fair value of the acquired assets.
4. December 1998: 640,000 shares of common stock were issued for cash in
the aggregate amount of $960,000 upon exercise of options held by two
investors. The options and the common stock issued upon exercise of the
options involved no underwriters and were done in reliance upon the
exemption from registration afforded by Section 4(2) of the 1933 Act
and Rule 504 of Regulation D thereunder.
5. June 1999: A subscription for 670,000 shares of common stock for cash
in the aggregate amount of $1,172,500 was received from two offshore
institutional investors. This transaction was done in reliance upon
exemptions from registration afforded to offshore transactions.
6. September 1999: Subscriptions for 420,000 shares of common stock for
cash in the aggregate amount of CDN$248,102 were received from three
offshore institutional investors. These transactions were done in
reliance upon exemptions from registration afforded to offshore
transactions.
B. OPTIONS
1. November 1998: One year options to purchase 640,000 shares of common
stock for cash at $1.50 per share were issued to two investors. These
options were exercised in December 1998, as described in Item A.4
above.
2. November 1998: Five-year options to purchase 175,000 shares of common
stock at $1.00 per share were granted to Sheldon Nelson pursuant to the
Company's 1998 Directors'/Officers' Non-Qualified Stock Option Plan.
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3. November 1998: Five-year options to purchase 125,000 shares of common
stock at $1.00 per share were granted to Douglas J. Irving pursuant to
the Company's 1998 Directors'/Officers' Non-Qualified Stock Option
Plan.
4. December 1998: Five-year options to purchase 100,000 shares of common
stock at $1.50 per share were issued as consideration for consulting
services. No underwriter was involved and the Company relied upon the
exemption from registration afforded by Section 4(2) of the 1933 Act.
5. March/April 1999: Five-year options to purchase 73,885 shares of common
stock at $1.50 per share were issued to two key suppliers. No
underwriter was involved and the Company relied upon the exemption from
registration afforded by Section 4(2) of the 1933 Act.
C. CONVERTIBLE PROMISSORY NOTES
1. April/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 US$327,500 due September 15, 1999, were issued to
one offshore investor. Both Notes bear interest at 8.75%. The
CDN$250,000 Note is convertible into common stock at any time prior to
the maturity date at a conversion price of US$2.00 per share and the
CDN$327,500 Note is convertible into common stock at a conversion price
of US$1.75 per share. Both Notes are past due and the Company is
negotiating for an extension. The Company was unable to repay the notes
on their respective due dates and on October 19, 1999, it negotiated an
extension to the repayment date to June 30, 2000. Both notes are now
convertible into common stock at any time prior to maturity at a
conversion price of US$0.625. The Notes were issued in reliance upon
exemption from registration afforded to offshore transactions.
2. May/June 1999: Two Convertible Promissory Notes in the aggregate
principal amount of US$65,000 and both due on August 31, 1999 were
issued to one accredited, sophisticated investor. The two Notes were
convertible into common stock at a conversion price of US$2.00 per share
and bore interest at 9.00%. Both Notes were past-due at September 30, 1999.
These two notes were replaced by a Replacement Convertible Promissory
Note in the principal amount of US$65,000 due on February 28, 2000 and
bearing interest at 9.00%. The Replacement Note is convertible into
common stock at any time prior to maturity at a conversion price of
US$0.50 per share. No underwriter was involved and the Company relied
upon the exemption from regulation afforded by Section 4(2) of the 1933
Act.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
The statements contained in 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 in "Risk Factors" at the end of this discussion and other
factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission.
OVERVIEW
MDU Communications International Inc., formerly known as Alpha Beta Holdings,
Ltd., was incorporated in July 1995 as a Colorado corporation to engage in the
business of establishing and operating brew pubs. Through September 1998, the
Company was essentially inactive. In November 1998, Alpha Beta Holdings, Ltd.
acquired all of the outstanding capital stock of MDU Communications Inc., an
unaffiliated company, and changed its name to MDU Communications International,
Inc. It now operates as a holding company with a fiscal year end of September
30th and has MDU Communications, Inc. as its sole subsidiary.
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MDU Communications, Inc. is a nationally authorized Star Choice System Operator
providing home entertainment and information technology to the residents of
multi-dwelling units (MDUs) such as apartment buildings, condominiums, gated
communities, hotels and motels. In August 1998, the Company entered into a ten
year System Operator Agreement (with 5 year renewal options) with Star Choice
under which the Company will establish and maintain distribution systems in
MDU's throughout Canada and act as a commissioned system operator for Star
Choice. Under this agreement, the Company is entitled to 100% of the monthly
"digital access fee" (currently CDN$5.95 per month) and a 30% share of Star
Choice's monthly subscriber revenue. The Company establishes mutually beneficial
relationships with owners and managers of MDUs to facilitate delivery of these
entertainment and technology services. The Company offers complete building
wiring infrastructures, systems and hardware and digital set-top receivers
required to bring digital satellite viewing to the residents and owners/managers
of MDUs in Canada. Revenue will initially result from sharing in the monthly
Star Choice programming fees charged to the residents for satellite TV service.
Once a building has been wired or the existing wiring has been upgraded, the
infrastructure is in place to provide other services such as home security,
local telephone services and high speed Internet access which may provide
additional revenue to the Company. The Company also designs and supplies
satellite master antennae television (SMATV) systems for multi-dwelling
properties. A SMATV system is capable of receiving and distributing satellite
and local television programming to the residents of MDUs, thereby eliminating
the need for a cable TV provider.
As of September 30, 1999, the Company had over 11,600 subscribers in 135
buildings. The Company has limited financial resources, has incurred operating
losses since inception and does not expect to generate profitable operations
until fiscal 2000 or later. The Company's funding of its initial operating
expenses, working capital needs and capital commitments is dependent upon its
ability to raise additional financing and the Company is currently pursuing
opportunities to raise financing through private placements of both equity and
debt securities.
BASIS OF PRESENTATION
The Consolidated Financial Statements for the fiscal year ended September 30,
1999 have been stated in Canadian dollars and the Company has designated the
Canadian dollar as its functional and reporting currency on the basis that the
principal business and activity of the Company is located and conducted in
Canada. The business combination of Alpha Beta Holdings, Ltd. and MDU
Communications Inc. has been accounted for as a reverse acquisition whereby MDU
Communications Inc. was identified as the acquirer and the assets and
liabilities of Alpha Beta Holdings, Ltd. were acquired at fair value. In
accordance with generally accepted accounting principles for reverse
acquisitions, the consolidated financial statements of the Company as at and for
the fiscal year ended September 30, 1999 reflect the historical results of MDU
Communications Inc. and the related assets and liabilities at their historic
cost. The operations of Alpha Beta Holdings, Ltd. being the legal parent and
accounting subsidiary are reflected in the consolidated financial statements
from November 22, 1998 and its assets and liabilities are reflected at their
fair value at the date of acquisition. As Alpha Beta Holdings, Ltd. was
essentially inactive prior to the business combination, management's discussion
and analysis will relate to the continuing Canadian operations of the Company.
YEAR 2000 ISSUES
The approach of the year 2000 presents significant issues for many financial,
information, and operational systems. Many systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000, from January 1, 1900, which could have adverse
consequences.
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The Company has designated specific individuals to identify and resolve the year
2000 issues associated with its internal information technology (IT) systems,
its internal non-IT systems, and material third party relationships. It has
completed the identification of and has implemented its plans to address its
year 2000 issues. The Company uses commercially available standard software for
its critical operating and accounting functions and the software vendors have
provided the Company with program updates that are intended to rectify the year
2000 issues related to their software. The total cost of the software upgrades
for the Company's operating and financial applications was not material.
The Company's greatest year 2000 exposure comes from its programming suppliers.
The worst case scenario would be if one or more critical suppliers failed to
become year 2000 compliant and failed to develop acceptable workaround
solutions. While the Company has received written communication from its
programming suppliers that they have developed an action plan to address their
year 2000 issues, the Company cannot be certain that these plans will be
implemented or be effective.
While the Company does not have a formal contingency plan, it is monitoring its
programming suppliers to ensure they complete their year 2000 plans as
scheduled. The Company will implement a formal contingency plan should any of
its critical suppliers indicate that there would be delays resulting from their
own year 2000 plans. Such a plan could entail contacting and qualifying other
potentially year 2000 compliant suppliers. There can be no assurance that this
contingency plan for Star Choice and SMATV suppliers would be effective or
completed in a timely manner as the Company may not be able to find a suitable
alternative.
GENERAL
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto of the Company included elsewhere in this
10-KSB report.
OPERATIONS
INCEPTION PERIOD (MARCH 26, 1998) TO SEPTEMBER 30,1998
Although the Canadian Company was incorporated in March 1998, the first six
months was spent as a planning period and the Company sustained an operating
loss of CDN$97,845. There were no revenues for this period and expenses such as
advertising and professional/management fees accounted for 73% of the total
expenses. Initial funding for the Company was through six private loans
(promissory notes) of various amounts all totaling CDN$275,000 and bearing
interest at 7.5%. These demand loans had no set terms of repayment or conversion
features and were paid on December 15, 1998. The proceeds of these monies were
spent supporting the operating loss and purchasing office furniture and
equipment.
YEAR ENDING SEPTEMBER 30,1999
The Company reported a net loss of CDN$2,413,721 for the year ended September
30, 1999. The increase in net loss compared to the six month inception period is
primarily attributable to the increased costs representing the beginning of
sales operations to add over 11,600 subscribers in over 135 buildings. These
costs were comprised of increased personnel, sales, general and administrative
expenses and non cash stock option compensation charges of CDN$177,445 and
CDN$222,000 which were recorded as consulting fees and wages expense,
respectively.
The 1999 fiscal year's revenue of CDN$566,698 was comprised of 69% SMATV
revenue, 20% net programming revenue from Star Choice and 11% from digital
access fees. SMATV revenue represented approximately 8,700 subscribers, most
10
<PAGE>
of whom had been added by January 1999, and the Direct To Apartment Set Top
Box revenue represented approximately 2,900 subscribers who were acquired
over the last 9 months.
Direct costs are primarily comprised of SMATV programming and maintenance costs
and are 60% of net revenue.
Salaries, wages, commissions and benefits make up 38% of the total sales
expenses. In-suite installation of set top boxes represents 28% of the total
sales expenses and the balance of 34% is primarily travel, advertising and
telephone expenses.
General and administrative ("G&A") expenses of CDN$1,405,609 were as expected
for the Company's planned market expansion. Advertising, promotion, and
travel/vehicle costs were CDN$128,755 or 9.2% of the total G&A expense and
office, occupancy, repairs & maintenance and telephone costs were CDN$178,175 or
12.7% of the total. Wages, professional and consulting fees were CDN$827,393 or
58.9% of G&A expenses. CDN$399,445 of these expenses were non-cash items due to
stock option compensation charges. The Company accounts for its stock based
employee compensation plans under APB No. 25 whereby compensation cost is
recorded for the excess, if any, of the quoted market price of the common shares
over the exercise price at the date of the grant for all employee common stock
options issued. Compensation cost in the amount of CDN$222,000 was recorded for
300,000 directors'/officers' and employees' options granted at a weighted
average exercise price of US$1.00. At December 31, 1998, the Company granted
stock options to purchase 100,000 common shares of the Company at an option
price of US$1.50 for consultative and other services provided by a relative of
the Company. The fair value of these options in the amount of CDN$177,445 has
been recorded as a consulting expense (see note 7(c) on the Notes to the
Consolidated Financial Statements). Other non cash charges consisted of
amortization expense of CDN$199,470 or 14.2% of total G&A expenses. The balance
of the general and administrative expenses were made up of interest and foreign
exchange losses of CDN$71,816 or 5.0% of the total G&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of CDN$43,621
compared to CDN$19,506 at September 30, 1998. The increase in the Company's cash
position is mainly due to proceeds received from the exercise of warrants and
proceeds from share subscriptions and convertible notes.
Net cash of CDN$310,642 was used in operating activities during the fiscal year
ended September 30, 1999 which resulted from the Company's net loss of
CDN$2,413,721 being offset by CDN$598,916 of non cash charges of which
CDN$399,445 were stock option compensation charges. In addition the Company
recorded a source of cash in the amount of CDN$1,504,163 from changes in
working capital.
Net cash of CDN$3,662,252 was used in investing activities during the fiscal
year ended September 30, 1999, which was mainly comprised of purchases of
telecommunications equipment used in the reception of the digital satellite
signal. As of September 30, 1999, the Company did not have any additional
financing available for future capital expenditures but management is
considering the possibility of lease financing to fund the Company's future
short and long term plans. On November 18, 1999, the Company signed an Agreement
in Principal with MBT Capital to enter into a financing accommodation for a
leasing facility with a term to August 2008. While management believes that
leasing is an alternative to funding the Company's telecommunications
expenditure requirements, there is no certainty that the Company will be able to
successfully complete these leasing arrangements.
Net cash of CDN$3,997,009 was generated from financing activities during the
fiscal year ended September 30, 1999. This was mainly the result of the exercise
of warrants to issue 640,000 shares of common stock of the Company for
CDN$1,474,184 of net cash proceeds, the issuance of 670,000 common shares of the
Company for CDN$1,544,924 of net cash proceeds, and the issuance of
11
<PAGE>
demand convertible notes payable for proceeds of CDN$829,644. The demand
convertible notes payable bear interest at various rates between 8.75 and
9.0% (all convertible at the option of the note holder into fully paid
non-assessable common shares of the Company) and at conversion prices between
US$1.75 and US$2.00. (see note 6 on the Notes to the Consolidated Financial
Statements). As of September 16, 1999, the Company was unable to repay the
notes as a result of a demand made by the note holders, but management
renegotiated extensions to these notes at the same interest rates to
February 28, 2000 and June 30,2000 with conversion prices between US$0.50
and US$0.625.
Management believes that the Company's cash on hand will not be sufficient to
provide funds necessary for the Company to expand its business and fund its
operating deficits for the next twelve months. As a result, management is
currently pursuing opportunities to raise CDN$15,000,000 in financing through
private placements of both equity and debt securities. On October 13, 1999, the
Company entered into an agreement with Canaccord Capital Corporation to assist
the Company with private placements and an initial public offering on the
Vancouver Stock Exchange. On November 26, 1999, the Company completed private
placements totaling 1,482,750 units, each unit consisting of one common share
and one common share purchase warrant. The net cash proceeds to the Company of
these private placements was CDN$883,719. Until additional funds have been
raised, the Company has put on hold its expansion plans and reduced its staff by
50% as a strategy to conserve capital.
The Company is exposed to market risk related to changes in interest and foreign
exchange rates, each of which could adversely affect the value of the Company's
current assets and liabilities. The Company has not entered into any forward
currency contracts or other financial derivatives to hedge foreign exchange
risk, hence, the Company is subject to such risk from foreign currency
transactions and translation gains and losses. The Company does not currently
engage in significant operating transactions denominated in foreign currencies
so any change in the CDN/US dollar exchange rate would not have a material
effect on its future operating cash flows. The Company is subject to foreign
currency risk on the interest and repayment provisions of its U.S. denominated
convertible notes payable which are in the process of being re-negotiated. Based
on the US$392,000 of US dollar convertible notes outstanding at September 30,
1999, an immediate decline of 10% in the value of the Canadian dollar relative
to the US dollar would result in an additional exchange loss of US$26,533 and
additional interest expense of approximately US$2,300 on an annualized basis.
The Company does not currently have an interest bearing investment portfolio nor
liabilities subject to variable interest rates. As a result, any change in the
prime interest rate would also not have a material impact on the Company's
future operating results or cash flows based on the terms of existing
liabilities. Changes in interest rates could have an impact on future
indebtedness to the extent that the terms and conditions of the indebtedness
had to be renegotiated.
The Company has signed agreements with building owners to supply the home
entertainment and information technology to the residents of buildings but the
Company has no capital expenditure commitments to commence the installation of
these services until the appropriate funding has been obtained.
RISK FACTORS
The preceding discussion contains 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. The Company faces a number of risks
and uncertainties that could cause actual results or events to differ materially
from those contained in any forward-looking statement. Additional risks and
uncertainties not presently known to the Company or that are currently deemed to
be immaterial may also impair the Company's business operations. Factors that
could cause or contribute to such differences include, but are not limited to,
the following:
12
<PAGE>
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We will require substantial additional capital for working capital and to
finance our continued expansion and to fund debt service requirements. Our
existing capital and funds from operations will not be sufficient to meet our
anticipated cash needs during the fiscal year ending September 30, 2000. To
address these needs, we are attempting to raise CDN$15,000,000 and have entered
into an agreement with Canaccord Capital Corporation to assist us in raising
additional capital. Recently we raised CDN$883,719 in two private placements. We
have placed our expansion plans on hold and have reduced our staff by 50% in
order to preserve capital. Because of the uncertainties in raising additional
capital, there can be no assurance that we will be able to obtain the necessary
capital to finance our operations. Insufficient capital will require us to
continue to delay and scale back or eliminate our proposed development
activities and could impair our ability to continue as a going concern.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND MAY INCUR FUTURE LOSSES.
To date, we have had limited revenues and have not shown a profit in our
operations. Through our fiscal year ended September 30, 1999, we had incurred
net losses of CDN$2,413,721 and had a total shareholders' deficit of
CDN$1,490,625. We do not expect to have profitable operations until fiscal year
2000 or later, and we cannot assure that we will ever achieve or attain
profitability. If we cannot achieve operating profitability or positive cash
flows, we may not be able to meet our debt service or working capital
requirements, which could have a material adverse effect on our business.
WE HAVE A LIMITED OPERATING HISTORY.
We commenced operations in August 1998 and are still in a start-up phase.
Accordingly, we have a limited operating history and our business strategy may
not be successful. Our failure to implement our business strategy or an
unsuccessful business strategy could materially adversely affect our business,
financial condition and operating losses.
WE DEPEND UPON OUR RELATIONSHIP WITH STAR CHOICE.
In August 1998, we entered into a ten-year system operation agreement with Star
Choice to install and maintain distribution systems in multi-dwelling unit
("MDU") properties such as apartment buildings, condominiums, gated communities,
hotels and motels. Under our agreement with Star Choice, we may not maintain MDU
distribution systems or market direct-to-home satellite broadcast services for
others. Consequently, we are totally dependent upon Star Choice for programming.
During the fiscal year ended September 30, 1999, revenues for Star Choice were
36% of our total revenues. Star Choice is not required to use us on an exclusive
basis for marketing its programming to MDUs. Also, adverse events at Star Choice
beyond our control could adversely affect us.
WE FACE COMPETITION.
While we are not aware of any other companies currently focusing on the Canadian
MDU market, we face competition from others who are competing for a share of the
Canadian subscriber base. These include cable companies, off-air broadcasters,
and others. Also, Star Choice and ExpressVu are the only two satellite
broadcasters licensed to operate in Canada and to date they have focused their
marketing on the single-family market. By limiting their focus, we believe that
there is a sizeable niche in the marketplace for our products and services.
However, this window of opportunity may not remain open indefinitely. Other
companies with substantially greater assets and operating histories could enter
this market.
13
<PAGE>
WE NEED TO MANAGE OUR GROWTH.
We have experienced growth, but to manage potential future growth effectively,
we must improve our operational, financial and management information systems
and must hire, train, motivate and manage our employees and commissioned
salespersons. Our future success will also depend on the ability to increase our
customer base and to attract and retain qualified technical, sales, marketing
and management personnel, for whom competition is intense. We may not be able to
effectively manage such growth, and failure to do so could have a material
adverse effect on our business, financial condition and results of operations.
WE DEPEND ON KEY PERSONNEL.
Our success depends substantially on the continued services of our executive
officers and key employees, in particular Sheldon B. Nelson, Gary Monaghan,
Joseph Strang, Douglas J. Irving and Patrick Gleeson. The loss of the services
of any of our key executive officers or key employees could harm our business.
None of our key executive officers or key employees currently has a contract
that guarantees their continued employment by us. There can be no assurance that
any of these persons will remain employed by us or that these persons will not
participate in businesses that compete with us in the future.
OUR COMMON STOCK IS TRADED ON AN ILLIQUID MARKET AND IS "PENNY STOCK."
Our common stock trades on the Nasdaq Bulletin Board under the trading symbol
"MDTV." Investors may find it difficult to obtain accurate quotations of the
price of our common stock and to sell our common stock on the Nasdaq Bulletin
Board.
Our stock is a "penny stock" which is subject to Rule 15g-9 under the Securities
Exchange Act of 1934. As a result, broker-dealers must comply with sales
practice requirements which may make it more difficult to buy or sell our stock.
Broker-dealers must determine that investment in our stock is suitable for the
buyer and receive a written agreement from buyers who are not the
broker-dealer's established customers or institutional accredited investors
before sales can be made to such buyers. Also, broker-dealers must deliver to
buyers a disclosure schedule that explains the penny stock market and its risks.
MOST OF OUR STOCK IS OWNED BY MANAGEMENT AND SEVERAL MAJOR SHAREHOLDERS.
Our current executive officers and directors and four other persons beneficially
own or have voting control over approximately 42% of the outstanding shares of
our common stock. Accordingly, these individuals will have the ability to
influence the election of our directors. Also, this concentration of ownership
may have the effect of delaying, deterring or preventing a change in control.
WE MAY ISSUE PREFERRED STOCK.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any vote or
action by our common stock holders. The rights of the holders of the common
stock will be subject to, and could be materially adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing flexibility in connection with
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control, discouraging tender offers for the common stock, and
materially adversely affecting the voting rights and market price of the common
stock.
14
<PAGE>
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE.
As of September 30, 1999, we had 9,221,335 shares of common stock outstanding.
Of these shares, approximately 170,100 shares (2%) were freely tradable without
restriction or registration under the Securities Act of 1933, as amended (the
"1933 Act"). The remaining 9,051,235 shares (98%) held by our existing
stockholders were "restricted" securities within the meaning of Rule 144 under
the 1933 Act and are eligible for sale in the public market only in compliance
with Rule 144. As of December 15, 1999, approximately 4,834,245 of those shares
will be eligible for sale in the public market in compliance with Rule 144.
Among the requirements of Rule 144 that will be applicable to the sale of those
shares are that no holder may sell a number of shares in any three-month period
that exceeds the greater of (i) 1% of our outstanding shares of common stock
(approximately 92,220 shares) or (ii) the average weekly trading volume in our
common stock during the four calendar weeks preceding such sale. Also, sales
pursuant to Rule 144 are subject to requirements relating to the manner and
notice of sale and the availability of current public information about us.
Our certificate of incorporation authorizes the issuance of 50,000,000 shares of
common stock. The future issuance of all or part of the remaining authorized
common stock may result in substantial dilution in the percentage of our common
stock held by our existing stockholders. Also, any stock we sell in the future
may be valued on an arbitrary basis by us and the issuance of shares of common
stock for future services, acquisitions or other corporate actions may have the
effect of diluting the value of the shares held by existing shareholders.
ITEM 7 - FINANCIAL STATEMENTS
15
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(FORMERLY ALPHA BETA HOLDINGS, LTD.)
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
MDU Communications International Inc.
(A development stage company)
We have audited the accompanying consolidated balance sheets of MDU
Communications International, Inc. (a development stage company) as at
September 30, 1999 and 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended
September 30, 1999 and the period from inception, March 26, 1998, to
September 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company (a development stage company) as
at September 30, 1999 and 1998 and the results of its operations and cash flows
for the year ended September 30, 1999 and the period from inception, March 26,
1998, to September 30, 1998 in accordance with accounting principles generally
accepted in the United States.
Chartered Accountants
Vancouver, British Columbia, Canada
December 3, 1999
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCE
To the Shareholders of
MDU Communications International Inc.
(A development stage company)
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 2 to the consolidated financial statements. Our report to the shareholders
dated December 3, 1999 is expressed in accordance with Canadian reporting
standards which do not permit reference to such events and conditions in the
Independent Auditors' Report when these are adequately disclosed in the
financial statements.
Chartered Accountants
Vancouver, British Columbia, Canada
December 3, 1999
17
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30,
1999 1998
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 43,621 $ 19,506
Prepaid expenses and deposits 15,407 7,593
Accounts receivable
Trade 178,607 -
Sales tax and other 79,847 -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 317,482 27,099
PROPERTY AND EQUIPMENT, net (Note 5) 3,668,325 47,033
INTANGIBLE ASSETS
(net of accumulated amortization of $22,361) 126,710 -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,112,517 $ 74,132
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 1,648,193 $ 15,867
Wages payable 37,451 -
Other accrued liabilities 106,604 5,950
Notes payable (Note 6) 829,644 150,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,621,892 171,817
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 7) 1,559,720 160
Share purchase options 649,445 -
Share subscriptions received (Note 8) 1,793,026 -
Deficit (2,511,566) (97,845)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,490,625 (97,685)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,112,517 $ 74,132
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTINUING OPERATIONS (Note 2)
COMMITMENTS AND CONTINGENCIES (Note 9)
APPROVED BY THE DIRECTORS:
Director
- --------------------------------------------
Director
- --------------------------------------------
See accompanying notes to the consolidated financial statements
18
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
For the period from inception
from inception (March 26,
of the development For the 1998)
stage to year ended to
September 30, September 30, September 30,
1999 1999 1998
------------------------- ------------------- --------------------
<S> <C> <C> <C>
REVENUE $ 566,698 $ 566,698 $ -
DIRECT COSTS 339,570 339,570 -
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 227,128 227,128 -
- ---------------------------------------------------------------------------------------------------------------------
SALES EXPENSE 1,235,240 1,235,240 -
- ---------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 109,172 78,014 31,158
Amortization 199,470 199,470 -
Consulting 177,445 177,445 -
Foreign exchange loss 39,495 39,495 -
Interest 34,349 32,321 2,028
Management fees 26,500 - 26,500
Office 57,168 54,103 3,065
Occupancy 69,829 64,429 5,400
Professional fees 143,697 130,114 13,583
Repairs and maintenance 11,301 11,301 -
Telephone 51,054 48,342 2,712
Travel 49,651 38,826 10,825
Vehicle 14,489 11,915 2,574
Wages 519,834 519,834 -
- ---------------------------------------------------------------------------------------------------------------------
1,503,454 1,405,609 97,845
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (2,511,566) $ (2,413,721) $ (97,845)
- ---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.26) $ (0.02)
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - 9,114,668 8,581,335
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
19
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM INCEPTION
FROM INCEPTION (MARCH 26,
OF THE DEVELOPMENT FOR THE YEAR 1998)
STAGE TO ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998
--------------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $ (2,511,566) $ (2,413,721) $ (97,845)
Adjustments to reconcile net loss for the
period to cash utilized in operating activities
Amortization 199,471 199,471 -
Non-cash portion of wages expense
(Note 7 (c)(ii) 222,000 222,000 -
Non-cash consulting expense
(Note 7 (c)(iii) 177,445 177,445 -
Change in operating assets and liabilities:
Prepaid expenses and deposits (15,407) (7,814) (7,593)
Accounts receivable (258,454) (258,454) -
Accounts payable 1,648,193 1,632,326 15,867
Wages payable 37,451 37,451 -
Other accrued liabilities 106,604 100,654 5,950
----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (394,263) (310,642) (83,621)
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITY
Cash acquired on acquisition of subsidiary (Note 4) 35,222 35,222 -
Purchase of property and equipment (3,595,436) (3,548,403) (47,033)
Purchase of intangible assets (149,071) (149,071) -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,709,285) (3,662,252) (47,033)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from (repayment of) notes payable - (150,000) 150,000
Proceeds from convertible notes payable 829,644 829,644 -
Proceeds from issue of common stock 50,315 50,155 160
Proceeds from exercise of warrants 1,474,184 1,474,184 -
Proceeds from share subscriptions received 1,793,026 1,793,026 -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,147,169 3,997,009 150,160
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 43,621 24,115 19,506
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - 19,506 -
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 43,621 $ 43,621 $ 19,506
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 32,321 $ 32,321 $ -
- ----------------------------------------------------------------------------------------------------------------------------
Interest received $ 5,466 $ 5,466 $ -
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended September 30, 1999, the Company recorded non-cash
additions to property and equipment in the amount of $250,000 representing
the fair value of share purchase options issued to suppliers. See Note 7
(c)(i).
See accompanying notes to the consolidated financial statements
20
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARE
SUBSCRIPTIONS
COMMON STOCK RECEIVED
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------------------------- -----------------
<S> <C> <C> <C> <C>
Issued for cash at inception,
March 26, 1998 160 $ 160 - $ -
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - - -
- ----------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 160 160 - -
Issued for cash 5,213,675 50,155 - -
Issued on business acquisition
(Note 7) 3,367,500 35,222
Exercise of warrants 640,000 1,474,183 - -
Issue of employees' options - - - -
Suppliers' options issued and issuable - - - -
Issue of options to consultant - - - -
Issued for cash (net of expenses
of the issue of $176,437) - - 670,000 1,544,924
Issued for cash (net of expenses) - - 420,000 248,102
Net loss for the year
ended September 30, 1999 - - - -
- ----------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 $1,559,720 1,090,000 $ 1,793,026
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS/OPTIONS
TO PURCHASE SHARES
----------------------------
NUMBER AMOUNT DEFICIT TOTAL
-------------- -------------- --------------- --------------
<S> <C>
Issued for cash at inception,
March 26, 1998 - $ - $ - $ 160
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - (97,845) (97,845)
- --------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 - - (97,845) (97,685)
Issued for cash - - - 50,155
Issued on business acquisition
(Note 7) 35,222
Exercise of warrants - - - 1,474,183
Issue of employees' options 300,000 222,000 - 222,000
Suppliers' options issued and issuable 73,885 250,000 - 250,000
Issue of options to consultant 100,000 177,445 - 177,445
Issued for cash (net of expenses
of the issue of $176,437) - - - 1,544,924
Issued for cash (net of expenses) - - - 248,102
Net loss for the year -
ended September 30, 1999 - - (2,413,721) (2,413,721)
- --------------------------------------------------------------------------------------------------------
-
Balance, September 30, 1999 473,885 $ 649,445 $(2,511,566) $ 1,490,625
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
21
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Prior to the acquisition described in Note 4 below, MDU Communications
International, Inc. (formerly Alpha Beta Holdings, Ltd.) ("International"
or the "Company") was essentially inactive. On November 2, 1998 the
Company acquired all of the issued and outstanding common shares of MDU
Communications Inc. ("MDU") and on November 24, 1998, the Company changed
its name from Alpha Beta Holdings, Ltd. to MDU Communications
International, Inc. MDU, a Canadian incorporated telecommunications
company is a national system operator for "Star Choice Communications,
Inc." and provides delivery of home entertainment and information
technology to residents of multi-dwelling units such as apartment
buildings, condominiums, gated communities, hotels and motels.
The acquisition of MDU has been accounted for as a reverse acquisition on
the basis that the former shareholders of MDU now control the affairs of
the Company. As a result, these consolidated financial statements of the
Company include the accounts of International (the accounting subsidiary)
and MDU (the accounting parent), for the period subsequent to the
effective date of the reverse acquisition described in Note 4. The
comparative figures as at September 30, 1998 and for the period from
inception (March 26, 1998) to September 30, 1998 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 2000 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. There can be no assurance that the Company will be
successful in its efforts to raise additional financing through these
offerings or, if available, that the Company will be able to obtain it on
acceptable terms and continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. Adjustments, if any, would affect the
carrying value and classification of assets and liabilities and the
amount of the net loss and deficit.
22
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
generally accepted accounting principles accepted in the United States
and reflect the following significant accounting polices.
(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 Standards No. 2, "Accounting and
Reporting by Development Stage Enterprises." The Company's planned
principal operations have commenced, but there has been no
significant revenue therefrom. 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.
(c) USE OF ESTIMATES
The preparation of 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 consolidated financial statements,
and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
amortization. Costs of connecting and disconnecting service are
expensed. Amortization of property and equipment is provided using
the declining balance method at the following rates:
<TABLE>
<S> <C>
Telecommunications equipment, installed 14.5%
Computer equipment 20.0%
Furniture and fixtures 20.0%
</TABLE>
Direct costs of placing telecommunications equipment into service
and major improvements are capitalized.
23
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) PROPERTY AND EQUIPMENT (CONTINUED)
Amortization of telecommunications equipment commences once the
equipment has been installed at the customer's premises.
The Company performs a review for the impairment of long-lived
assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Under
Statement of Financial Accounting Standard ("SFAS") No. 121, an
impairment loss is recognized when estimates of future cash flows
expected to result from the use of an asset and its eventual
disposition are less than its carrying amount. No impairment
losses have been identified by the Company for the year ended
September 30, 1999 and the period from inception, March 26, 1998
to September 30, 1998.
(e) INTANGIBLE ASSETS
Intangible assets consist of a customer list and related contracts
which were acquired from a relative of the President of the
Company and are being amortized on the straight-line basis over
five years. Management regularly reviews the carrying value of
intangible assets based upon future expected cash flows. To date,
no impairment has been indicated.
(f) REVENUE RECOGNITION
The Company recognizes revenue on provision of satellite
programming to customers in the period the related services are
provided.
(g) LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities by including other
common share equivalents, including stock options and redeemable
convertible notes payable, in the weighted average number of
common shares outstanding for a period, if dilutive. For both the
year ending September 30, 1999 and the period from inception,
March 26, 1998 to September 30, 1998 diluted loss per common share
has not been disclosed as the effect of common shares issuable
upon the exercise of options or warrants would be anti-dilutive.
(h) FOREIGN EXCHANGE
The accounts of the Company and its foreign subsidiary are
expressed in Canadian dollars, its functional currency. Monetary
assets and liabilities denominated in foreign currencies are
translated at the rate in effect at the balance sheet date. Other
balance sheet items and revenues and expenses are translated at
the rates prevailing on the respective transaction dates.
Translation
24
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
gains and losses relating to current monetary items
and revenue and expenses denominated in foreign currencies are
included in income.
25
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) 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, deferred 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 to other than employees is recorded as
compensation expense in the statement of operations over the
period that the related stock option or warrant vests. The amount
of the compensation is based on the fair value of the option or
warrant at the date of grant.
(j) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", establishes
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.
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable,
accounts payable, accrued liabilities and the $150,000 note
payable outstanding at September 30, 1998 are estimated to
approximate their carrying values due to the relative liquidity or
short-term nature of these instruments. Due to the short term
maturities of the convertible notes payable and the fact that they
were issued for the proceeds as stated in the period from April 15
to June 15, 1999, the fair value of these convertible instruments
are also estimated to approximate the book value at September 30,
1999.
26
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) CREDIT CONCENTRATION
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts
receivable. Accounts receivable from Star Choice Communications,
Inc. (Note 10) at September 30, 1999, represented 76% of total
trade accounts receivable (September 30, 1998 - Nil%). The balance
of trade receivables are dispersed across a wide customer base.
The Company provides an allowance for bad debts based on
historical experience and specifically identified risk. At
September 30, 1999 and September 30, 1998 there was no allowance
for doubtful accounts.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs
of Start-up Activities". Under SOP 98-5, the cost of start-up
activities should be expensed as incurred. The Company expects
that the adoption of SOP 98-5 will not have a material impact on
its financial position, results of operations. The Company will be
required to adopt SOP 98-5 in fiscal 2000.
In June 1998, the FASB 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 (other than certain derivatives which qualify for
hedge accounting treatment) 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.
27
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
4. ACQUISITION OF SUBSIDIARY (CONTINUED)
<TABLE>
<S> <C>
Net assets of the Company at date of
acquisition are as follows:
Assets
Cash $ 35,222
Liabilities -
--------------------------------------------------------------
Net assets acquired $ 35,222
--------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Telecommunications equipment, installed $ 3,411,624 $ 8,308
Telecommunications equipment, not yet placed in service 320,944 -
Computer equipment 38,020 11,308
Furniture and fixtures 74,847 27,417
----------------------------------------------------------------------------------------------------
3,845,435 47,033
Less: accumulated amortization (177,110) -
----------------------------------------------------------------------------------------------------
$ 3,668,325 $47,033
----------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
6. NOTES PAYABLE
The notes payable outstanding at September 30, 1999 and September 30,
1998 are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
i) Demand convertible note payable with a maturity
value of $250,000, bearing interest at 8.75%, per
annum compounded monthly and past due as of
August 15, 1999. $ 250,000 $ -
ii) 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 -
iii) 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 -
iv) Demand convertible note payable with a maturity
value of U.S. $327,500, bearing interest at 8.75%
per annum compounded monthly and past due as of
September 15, 1999. 483,652 -
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. - 150,000
------------------------------------------------------------------------------------------------
$ 829,644 $ 150,000
------------------------------------------------------------------------------------------------
</TABLE>
All or any part of the principal amount of the notes outstanding at
September 30, 1999 and any interest thereon is convertible, at the
option of the holder, on or before the due date, into fully paid and
non-assessable common shares of the Company at a conversion price of
US$2.00 per common share in the case of the notes described in Notes 6
(ii) and (iii), above, and at a conversion price of US$1.75 in the case
of those described in Notes 6 (i) and (iv). 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 (iv)). The Company is in default at September 30, 1999.
6. NOTES PAYABLE (CONTINUED)
On October 19, 1999, the Company negotiated an extension to the repayment
terms of the notes payable in the amount of $733,652 to June 30, 2000. The
renegotiated demand, unsecured, convertible notes bear interest at 8.75%.
All or any portion of the principal, and any interest thereon, is
convertible, at the option of the holder, on or before the due date, into
fully paid and non-assessable common shares of the Company at a conversion
price of U.S.$0.625 per common share. On October 19, 1999 the Company also
negotiated an extension to the repayment terms of the notes payable in the
amount of $95,992 (Notes 6 (ii) and (iii), above) to February 28, 2000.
The renegotiated demand, unsecured, convertible notes bear interest at 9%.
All or any portion of the principal, and any interest thereon, is
convertible, at the option of the holder, on or before the due date, into
fully paid and non-assessable common shares of the Company at a conversion
price U.S.$0.50 per common share.
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
non-voting preferred stock also with a par value of $0.001 per
share.
(b) A reconciliation of issued and outstanding share capital of the
Company to amounts previously reported in Alpha Beta Holdings Ltd.
at September 30, 1998 is as follows:
29
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Amount
shares Cdn $
---------- --------
<S> <C> <C>
Common shares:
Balance, September 30, 1998 1,701,000 $ 1,277
Share consolidation on a 10 for 1 basis (1,530,900) --
- -----------------------------------------------------------------------------
Balance, September 30, 1998, post share
consolidation 170,100 1,277
Issued for cash 3,197,400 49,879
- -----------------------------------------------------------------------------
Balance prior to business combination 3,367,500 51,156
Adjustment of stated value of common
shares at reverse acquisition to value
of common shares of MDU (Note 4) - (841)
Issued on acquisition of the Company
(Note 4) 5,213,835 35,222
- -----------------------------------------------------------------------------
Balance subsequent to reverse
acquisition 8,581,335 85,537
Exercise of warrants 640,000 1,474,183
- -----------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 $1,559,720
- -----------------------------------------------------------------------------
</TABLE>
30
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS
(i) Suppliers' Stock Option Plan ("Suppliers' Plan")
On December 31, 1998 the Company established a stock option
plan pursuant to which certain key suppliers of the Company
will be granted options on completion of specified
activities. Under the terms of the Suppliers' Plan, eligible
suppliers can earn options to purchase an aggregate of
215,135 common shares of the Company. Details of options
issued to date under the Suppliers' Plan are as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise price
options U.S.$
----------- ----------------
<S> <C> <C>
Outstanding at inception of the Company (March 26,
1998) and at September 30, 1998 - $ -
Granted and fully vested 73,885 1.50
Exercised - -
----------------------------------------------------------------------------------------
Outstanding and exercisable at September 30, 1999 73,885 $1.50
----------------------------------------------------------------------------------------
</TABLE>
In addition to the stock options under the Suppliers' Plan
issued to September 30, 1999, the Company is obligated to
issue an additional 19,429 options to purchase common
shares of the Company at an exercise price of US$1.50
per share and exercisable for five years from the date of
issue. These options had not been issued at September 30,
1999.
Under the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) the Company has
recorded additional capital costs for telecommunications
equipment in the amount of $250,000 during the year ended
September 30, 1999, based on the fair value of the stock
options issued and issuable to suppliers calculated on
the date an eligible supplier completes the performance
required to earn the options. This amount is determined
using a Black Scholes option pricing model assuming a
weighted average annualized volatility of the Company's
share price of approximately 122%. For details of the
other material assumptions used in determination of the
fair value of these options see Note 7 (c)(ii).
31
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans")
On November 24, 1998 the Company established Employee Plans
whereby certain employees, officers and directors will be
granted options to purchase up to an aggregate of 600,000
common shares of the Company. Details of options issued to
date under the Employee Plans are as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise price
options U.S.$
----------- ----------------
<S> <C> <C>
Outstanding at inception of the Company (March 26,
1998) and at September 30, 1998 - $ -
Granted and fully vested 300,000 1.00
Exercised - -
----------------------------------------------------------------------------------------
Outstanding and exercisable at September 30, 1999 300,000 $1.00
----------------------------------------------------------------------------------------
</TABLE>
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 common stock options
issued. For the year ended September 30, 1999, compensation
cost in the amount of $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 presents the net
loss for the period and loss per common share had the
Company adopted SFAS No. 123.
32
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans") (continued)
<TABLE>
<CAPTION>
Year ended Year Ended
September 30, September 30,
1999 1998
--------------- ---------------
<S> <C> <C>
Net loss for the period $(2,797,111) $(97,845)
-----------------------------------------------------------------------------------------------
Loss per common share $ (0.30) $ (0.01)
-----------------------------------------------------------------------------------------------
</TABLE>
Using the fair value method for stock-based compensation, as
described in SFAS No. 123, additional compensation costs of
approximately $383,390 would have been recorded for the year
ended September 30, 1999 (period from March 26, 1998 to
September 30, 1998 - $Nil). This amount is determined using
a Black Scholes option pricing model assuming no dividends
are to be paid, vesting on date of grant, 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 U.S. $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 any
time 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 year ended
September 30, 1999. For details of the material assumptions
used in the determination of the fair value of these
options, see Note 7(c)(ii).
Prior to the acquisition of the Company as described in Note
4, Alpha Beta Holdings, Ltd. had issued options to purchase
640,000 shares of common stock of the Company at an exercise
price of U.S.$1.50 and an expiry date of November 5, 1999.
In December 1998, these options were exercised resulting in
proceeds to the Company of U.S.$960,000 ($1,474,184).
33
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning stock
options outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Exercise
Number of price
options U.S.$ Expiry date
--------- -------- --------------------
<S> <C> <C>
300,000 $1.00 November 24, 2003
100,000 1.50 December 31, 2003
40,000 1.50 March 1, 2004
33,885 1.50 April 1, 2004
</TABLE>
The weighted average exercise price of all options outstanding at
September 30, 1999 is U.S. $1.18.
8. SHARE SUBSCRIPTIONS RECEIVED
On May 28, 1999, the Company received subscriptions to purchase 670,000
shares for net proceeds after expenses of the issue of $1,544,924.
These shares were issued on November 19,1999. On September 15, 1999 the
Company received additional subscriptions to purchase 420,000 shares for
net proceeds after expenses of the issue of $248,102.
9. COMMITMENTS AND CONTINGENCIES
(i) Under the terms of certain operating leases for equipment and
premises, the Company is obligated to make annual net rental
payments as follows:
<TABLE>
<CAPTION>
Fiscal year ended
September 30, Amount
--------------------- -----------------
<S> <C>
2000 $ 87,698
2001 82,217
2002 38,048
2003 13,644
2004 and thereafter 11,690
------------------------------------------------------------------------
$ 233,297
------------------------------------------------------------------------
</TABLE>
34
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(ii) 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.
(iii) 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 the Plaintiff 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.
(iv) 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.
10. STRATEGIC ALLIANCE
In August 1998, the Company entered into a ten-year System Operation
Agreement, with 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.
35
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
10. STRATEGIC ALLIANCE (CONTINUED)
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 year ended September 30, 1999,
revenues from Star Choice accounted for 36% of total recorded revenues of
the Company (period from inception, March 26, 1998 to September 30, 1998
- $Nil).
11. GOVERNMENT REGULATION
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 dependent on
Star Choice for programming, it would be adversely affected if Star
Choice encountered regulatory problems.
12. 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>
Period from
March 26,
Year ended 1998 to
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Canadian statutory income tax rate 45.6% 45.6%
Non-deductible expenses (17.5) (1.0)
Tax loss carry forwards not recognized in period of loss (28.1) (44.6)
---------------------------------------------------------------------------------------------
Actual tax rate - --
---------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
12. INCOME TAXES (CONTINUED)
The Company had no income tax expense for the year ended September 30,
1999 or for the period from inception, March 26, 1998, to September 30,
1998 as a result of significant incurred losses. Additionally, the
Company has provided a full valuation allowance for net deferred tax
assets at September 30, 1999 and September 30, 1998, since realization of
these benefits cannot be reasonable assured. At September 30, 1999 and
September 30, 1998, deferred tax (liabilities) assets are comprised of
the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
---------------- ------------------
<S> <C> <C>
Gross deferred tax liabilities:
Amortization $(223,398) $ (854)
Gross deferred tax assets:
Operating loss carry forwards 1,029,474 44,568
---------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 806,076 43,714
Less: valuation allowance (806,076) (43,714)
---------------------------------------------------------------------------------------------------------------------
$ - $ --
---------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, the Company had loss carry forwards available to be
applied against future years' taxable income in the amount of $2,257,619
of which $97,738 will expire on September 30, 2005 and the balance on
September 30, 2006.
13. 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.
14. RELATED PARTY TRANSACTIONS
The Company purchased equipment and satellite subscribers for $200,000
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
U.S. $1.50 until December 21, 2003, in exchange for consultative
services. See Note 7 (c)(iii).
37
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS
(a) On October 13, 1999, the Company entered into an agreement with
Canaccord Capital Corporation ("Canaccord) which will provide a
basis for Canaccord and other investors to participate in a private
placement and subsequent initial public offering ("IPO") on a
Canadian Stock Exchange. The agreement is subject to: the Company
completing specified reorganization activities, including a creditor
arrangement plan which will result in a deferral of payments
otherwise due, an equipment lease finance arrangement, and further
due diligence by Canaccord. Canaccord is entitled to a corporate
finance fee of 200,000 shares of the Company, 100,000 payable on
October 13, 1999, and 100,000 upon completion of the private
placement. To December 3, 1999, 100,000 shares of the Company have
been issued in connection with this agreement.
(b) On November 11, 1999, the Company signed a Memorandum of
Understanding ("MOU") with Antech (Hong Kong) Ltd. to enter into a
joint venture relationship by December 31, 1999 to seek strategic
relationships to capture certain market and operational synergies
for Satellite TV, High Speed Internet, Telephony, and Security
products in the geographic areas of Honk Kong, SAR, Macau, Taiwan
and the People's Republic of China. The proposed 25% joint venture
interest will require an initial subscription by the Company for
25,000 common shares in Hong Kong corporation at a consideration of
HK$25,000 ($4,720). Failure to achieve a joint venture agreement by
December 31, 1999 will allow the parties to terminate their
involvement in the MOU.
(c) On November 26, 1999, the Company completed a series of private
placements totalling 1,482,750 units, each unit consisting of one
common share and one common share purchase warrant for aggregate
cash consideration of U.S.$593,100 ($883,719). The unit price of
U.S.$0.40 was based on a premium to market value of the Company's
common shares when the subscription program was undertaken on
October 21, 1999. The warrants have a term of 2 years from the date
of closing of the private placement at an exercise price of
U.S.$0.75.
(d) On November 19, 1999 the Company signed an Agreement in Principal
with MBT Capital to enter into lease financing transactions relating
to certain telecommunications equipment of the Company. Under the
terms of the proposed financing, MBT Capital would initially acquire
approximately 4,000 set top boxes currently in the hands of active
subscribers in exchange for $1,520,000 and then rent those boxes
back to the Company. The Agreement in Principal is subject to
receipt and acceptance of a formal commitment from MBT Capital, the
appointment of two MBT Capital nominees to the Company's Board of
Directors and completion of due diligence by Star Choice among
other conditions of closing.
38
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The following changes of independent accountants have occurred:
1. Kish, Leake & Associates, P.C. were principal independent accountants for
Alpha Beta Holdings, Ltd. and audited its balance sheet as at September 30, 1997
and the related statements of operations, cash flows and stockholders' equity
for the years ended September 30, 1997 and 1996 and the period July 14, 1995
(inception) through September 30, 1997.
2. Nelson, Mayoka & Company, P.C. were principal independent accountants for
Alpha Beta Holdings, Ltd. and audited its balance sheet at September 30, 1998
and the related statements of operations, stockholders' equity and cash flows
for the year ended September 30, 1998.
3. Deloitte & Touche LLP were principal independent accountants for MDU
Communications International Inc. and audited its balance sheet as at June 30,
1999 and September 30, 1998 and the related consolidated statements of
operations, shareholders' deficit and cash flows for the nine months ended June
30, 1999 and the period from inception, March 26, 1998 to September 30, 1998,
and is expected to continue as the principal independent accountant. Deloitte &
Touche LLP were engaged to be the principal independent accountants on or about
August 18, 1999.
In each of the foregoing changes of principal independent accountants:
(i) The former accountant was dismissed. The date of dismissal of Kish,
Leake & Associates, P.C. is unknown. Nelson, Mayoka & Company, P.C.
were dismissed on or about November 2, 1998, the date Alpha Beta
Holdings, Ltd. completed the acquisition of all of the issued and
outstanding stock of MDU Communications, Inc.
(ii) None of the principal accountant's reports on the financial statements
described above contained an adverse opinion or disclaimer of opinion
and none were modified as to uncertainty, audit scope, or accounting
principles.
(iii) The decision to change accountants was approved by the board of directors.
(iv) There were no disagreements with the former accountants on any matter
of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
PART III
--------
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following are the directors and executive officers of the Company.
SHELDON B. NELSON, age 37, has been the President, Chief Executive Officer and a
Director since November 1998. Before joining the Company in 1998, Mr. Nelson
held various positions with 4-12 Electronics Corporation and became its
President in 1996. 4-12 Electronics Corporation is a provider of products and
services to the Canadian satellite, cable, broadcasting and SMATV industries.
DOUGLAS J. IRVING, age 48, has been the Treasurer, Chief Financial Officer,
Secretary and a Director since November 1998. Mr. Irving was a partner in
Vistawest Capital Group, a venture capital company, from 1997 to 1998, and from
1989 to 1996 was Operations Controller of The Loewen Group Inc., the second
largest funeral home operator in North America.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the
Securities and Exchange Commission (the "SEC") thereunder require the Company's
executive officers, directors, and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of initial ownership
and changes in ownership with the SEC. Based solely on its review of copies of
such forms received by the Company, or on written representations
39
<PAGE>
from certain reporting persons that no other reports were required for such
persons, the Company believes that during the last fiscal year all of the
Section 16(a) filing requirements applicable to its executive officers,
directors and 10% stockholders were complied with.
ITEM 10 - EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid during
the fiscal years ended September 30, 1998 and 1999, which are the Company's
only fiscal years, to the Company's chief executive officer. None of the
Company's other most highly compensated executive officers had annual
salaries and bonuses exceeding $100,000.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND FISCAL SALARY BONUS OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR (CDN$) (CDN$) (IN SHARES) COMPENSATION
------------------ ------ ------ ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sheldon B. Nelson 1998 $48,000 -0- -0- -0-
President and Chief
Executive Officer 1999 $48,000 -0- 175,000 $6,000(1)
</TABLE>
- ----------------------
(1) Auto Allowance
OPTIONS GRANTED IN FISCAL YEAR 1999
The following table provides information with respect to options granted
during the last fiscal year to the executive officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------
Number of
Shares % of Total
Underlying Options Granted Exercise
Options to Employees Price Per Expiration
Name Granted in Fiscal Year Share Date
---- ---------- --------------- --------- ----------
<S> <C> <C> <C> <C>
Sheldon B. Nelson 175,000 58% $1.00 11/24/03
</TABLE>
COMPENSATION OF DIRECTORS
No compensation is paid to the directors.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 30, 1999 as to the
number of shares of the Company's Common Stock, which is the only outstanding
class of voting securities, beneficially owned by (i) each person (including
any "group") known to the Company own more than 5% of the outstanding Common
Stock, (ii) each Director, (iii) the executive officers named in the Summary
Compensation Table under Item 10, and (iv) all Directors and executive
officers as a group. Except as otherwise specified, each named beneficial
owner has sole voting and investment power with respect to the shares set
forth opposite his or its name.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
Sheldon B. Nelson, President, Chief Executive 869,640(1) 9.26%
Officer and Director
1504 - 170 Hargrave Street
Winnipeg, Manitoba R3C 3H4
40
<PAGE>
Douglas J. Irving, Treasurer, Chief Financial 819,640(2) 8.77%
Officer, Secretary and Director
4331 Candlewood Drive
Richmond, British Columbia V7C 4V9
Paul Andreola 694,640(3) 7.53%
2590 Trinity Street
Vancouver, British Columbia V5K 1E2
Pat Gleeson 694,640(4) 7.53%
214 - 6280 Willingdon
Burnaby, British Columbia V5H 2E3
Gary Monaghan 694,640(5) 7.53%
913 Purcell Court
Kelowna, British Columbia V1V 1N6
Anthony I. Tanti 694,640(6) 7.53%
1709 - 24th Street
West Vancouver, British Columbia V7V 4H7
Wistaria Trust 694,640 7.53%
Moore Stephens International
Services (BVI) Limited,
in trust for the Wistaria Trust
Abbot Building, P.O. Box 3186
Road Town Tortola,
British Virgin Islands
All officers and directors as a group 1,689,280 17.74%
</TABLE>
- ----------------------
(1) Includes 694,600 shares held of record by 567780 BC Ltd., a British
Columbia corporation wholly owned by The Sheldon Nelson Family Trust whose
trustees are Sheldon Nelson and his sister, Nicole Nelson, and 175,000
shares subject to options exercisable within 60 days.
(2) Includes 694,600 shares held of record by 571321 BC Ltd., a British
Columbia corporation wholly owned by Mr. Irving, his spouse and children,
and 125,000 shares subject to options exercisable within 60 days.
(3) Held of record by Andreola Holdings Ltd., a British Columbia corporation
wholly owned by Mr. Andreola.
(4) Held of record by Gleeson Enterprises, a British Columbia corporation
wholly owned by Mr. Gleeson.
(5) Held of record by 565423 BC Ltd., a British Columbia corporation wholly
owned by Mr. Monaghan, his spouse and trusts for minor children.
(6) Held of record by 571324 BC Ltd., a British Columbia corporation wholly
owned by Mr. Tanti, his spouse and trusts for minor children.
Management is not aware of any arrangements which could result in a change of
control of the Company.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
4-12 Electronics Corporation is a Manitoba corporation owned by Chris Nelson
who is Sheldon Nelson's brother. Sheldon B. Nelson served as president of
4-12 Electronics Corporation until December 31, 1998. In December 1998, the
Company purchased from 4-12 Electronics Corporation for CDN$200,000 certain
contracts to supply monthly satellite television services to multi-dwelling
unit properties. The purchase included the related equipment leases, licenses
and satellite reception equipment located at the SMATV properties. The
Company believes that the amount paid represented the fair market value of
the acquired assets.
In December 1998, the Company granted Chris Nelson a five-year option to
purchase 100,000 shares of the Company's common stock at a purchase price of
$1.50 per share in consideration for consulting services.
41
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
---------
<S> <C>
2.1 Certificate of Incorporation (1)
2.2 Bylaws (1)
2.3 Amendment to Bylaws (3)
3.1 See Article IV of Certificate of Incorporation
filed as Exhibit 2.1
6.1 Acquisition Agreement dated November 2,
1998 between Alpha Beta Holdings, Ltd.
and MDU Communications Inc. (1)
6.2 System Operator Agreement dated August 27,
1998 between Star Choice Communications Inc.
and MDU Communications Inc. (1)
6.3 Agreement dated December 31, 1998 between 4-12
Electronics Corporation and MDU Communications Inc. (1)
6.4 Sheldon B. Nelson Stock Option Agreement dated
November 24, 1998 (1)
6.5 Douglas J. Irving Stock Option Agreement dated
November 24, 1998 (1)
6.6 Chris Nelson Stock Option Agreement dated
December 31, 1998 (1)
16.1 Letter on change in Certifying Accountant (2)
16.2 Letter on change in Certifying Accountant (2)
21.1 Subsidiaries of the Company (3)
27.1 Financial Data Schedule (3)
</TABLE>
- ----------------------
(1) Incorporated by reference from Form 10-SB filed on May 12, 1999
(2) Incorporated by reference from Amendment No. 1 to Form 10-SB filed
on November 17, 1999
(3) Filed herewith
(b) Reports on Form 8-K.
--------------------
No reports were filed on Form 8-K during the fiscal year ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MDU Communications International, Inc.
By /s/ Douglas J. Irving
-----------------------------------
Douglas J. Irving,
Vice President
December 27, 1999
42
<PAGE>
Dated December 23, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sheldon B. Nelson Principal Executive Officer December 27, 1999
--------------------- and Director
/s/ Douglas J. Irving Principal Financial Officer December 27, 1999
--------------------- and Director
</TABLE>
43
<PAGE>
Exhibit 2.3
Amendment to Bylaws
of
MDU COMMUNICATIONS INTERNATIONAL, INC.
Article V, Section 3 of the Bylaws was amended by adding the following
paragraph thereto:
The Corporation (and its transfer agent or registrar, if any)
shall refuse to register any transfer of shares of stock,
warrants or other securities issued by the Corporation not
made in accordance with the provisions of Regulation S under
the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to registration under the Securities Act, or pursuant
to an available exemption from such registration.
<PAGE>
Exhibit 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
<S> <C>
MDU Communications, Inc. Canada
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEAR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CURRENCY> CDN
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 43,621
<SECURITIES> 0
<RECEIVABLES> 178,607
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 317,482
<PP&E> 3,668,325
<DEPRECIATION> 177,110
<TOTAL-ASSETS> 4,112,517
<CURRENT-LIABILITIES> 2,621,892
<BONDS> 0
0
0
<COMMON> 1,559,720
<OTHER-SE> (69,095)
<TOTAL-LIABILITY-AND-EQUITY> 4,112,517
<SALES> 566,698
<TOTAL-REVENUES> 566,698
<CGS> 339,570
<TOTAL-COSTS> 2,980,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,321
<INCOME-PRETAX> (2,413,721)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,413,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,413,721)
<EPS-BASIC> (.260)
<EPS-DILUTED> (.260)
</TABLE>