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REGISTRATION NO. 33-35820
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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MDU COMMUNICATIONS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4841 84-1342898
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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108-11951 HAMMERSMITH WAY
RICHMOND, B.C.
CANADA V7A 5H9
(604) 277-8150
(Address and Telephone Number of Registrant's Executive Offices)
ROBERT A. BIAGIONI
108-11951 HAMMERSMITH WAY
RICHMOND, B.C.
CANADA V7A 5H9
(604) 277-8150
(Name, Address and Telephone Number of Agent for Service)
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COPY TO:
William G. Pusch
Eugenie D. Mansfield
Odette Polintan
Davis Wright Tremaine LLP
2600 Century Square
1501 Fourth Avenue
Seattle, WA 98101-1688
(206) 622-3150
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Approximate Date of Commencement of Proposed Sale to Public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE (US$) PRICE (US$) FEES (US$)
-------------------------------------------- ----------------- -------------------- ---------------------- ---------------
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Common stock issuable upon conversion of 4,182,780 (5) $3.28/$2.92 (2) $13,524,146.20 (2) (5) $ 3759.71 (5)
Series A convertible preferred stock
Common stock issuable upon exercise of 3,241,749 $0.75-$2.50 (3) $ 4,459,561.50 (3) $ 1,239.76
warrants
Common stock issuable upon exercise of 250,000 $1.50-$2.00 (4) $ 384,963.75 (4) $107.02
options
Common stock 3,480,485 $3.28 (2) $11,415,990.80 (2) $ 3,173.65
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TOTAL 11,155,014(5) -- $29,784,662.25 (5) $ 8,280.14 (5)
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Less fee paid with preliminary filing ($7,836.97)
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Fee paid with this Amendment $443.17
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(1) The number of shares being registered represents our good faith estimate
of the maximum number of shares we may issue upon (a) conversion of our
Series A convertible preferred stock, and (b) exercise of common stock
purchase warrants and stock options. For purposes of estimating the
number of shares of common stock to be included in this registration
statement, we calculated the maximum number of shares of common stock
issuable in connection with:
- the conversion of all of the Series A convertible preferred stock
at a conversion ratio of one to 1.15; and
- the exercise of all of the warrants and options.
The actual number of shares of common stock received upon conversion of
the Series A convertible preferred stock and exercise warrants and
options may vary from this number. In addition to the shares set forth
in the table, the amount of shares to be registered under this
registration statement includes an indeterminate number of shares
issuable in respect of the Series A convertible preferred stock,
warrants and options, as such number may be adjusted as a result of
stock splits, stock dividends and similar transactions in accordance
with Rule 416 under the Securities Act of 1933.
(2) Based on the average of the reported best bid and best ask prices of the
common stock reported on the OTC Bulletin Board on April 24, 2000 of
US$3.28 for the 3,637,200 shares included in the original registration
statement, and on June 22, 2000 of US$2.92 for the 545,580 shares being
added under this Amendment No. 1, for the purpose of calculating the
registration fee in accordance with Rule 457(c) under the Securities Act
of 1933.
(3) Based on warrant exercise prices which range from US$0.75 to US$2.50 per
share.
(4) Based on option exercise prices which range from US$1.50 to US$2.00 per
share.
(5) Due to an increase of the conversion ratio from one to one, to one to
1.15, under the terms of the Certificate of Designations for the Series
A convertible preferred stock, the number of shares being registered
under this Registration Statement is being increased by 545,580 shares,
causing a corresponding increase in the Maximum Aggregate Offering Price
and in the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
FILES A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)
OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT BECOMES
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a),
MAY DETERMINE.
2
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PROSPECTUS
11,155,014 SHARES
MDU COMMUNICATIONS INTERNATIONAL, INC.
COMMON STOCK
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MDU COMMUNICATIONS We have prepared this prospectus to allow
INTERNATIONAL, INC. Selling Stockholders to sell up to
108-11951 Hammersmith Way 11,155,014 shares of our common stock
Richmond, British Columbia which the Selling Stockholders currently
Canada V7A 5H9 hold or may acquire upon:
- conversion of our outstanding
Series A convertible preferred
stock; or
- exercise of warrants and options
to purchase shares of our common
stock.
SELLING STOCKHOLDERS: We are registering these shares by filing
See page 35 for the names of the a registration statement with the
Selling Stockholders Securities and Exchange Commission using
a "shelf" registration process. This
process allows the Selling Stockholders
to sell their common stock over a period
of time and in varying amounts, as
described under "Plan of Distribution."
TRADING MARKET AND SYMBOL: We will receive no proceeds from the
NASD OTC Bulletin Board - MDTV conversion of the Series A convertible
preferred stock or the sale of any of our
common stock by the Selling Stockholders.
We will receive the proceeds from the
Selling Stockholders' exercise of
warrants and options. However, the
Selling Stockholders are under no
obligation to exercise the warrants and
options.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is June 30, 2000
3
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PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION
Unless we indicate otherwise, financial information in this
prospectus has been prepared in accordance with United States generally
accepted accounting principles. We present our financial information in
Canadian dollars. In this prospectus, except where we indicate, all dollar
amounts are in Canadian dollars. References to "$" or "Cdn$" are to Canadian
dollars and references to "US$" are to U.S. dollars.
TABLE OF CONTENTS
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Page
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Prospectus Summary..................................................................................................1
Risk Factors........................................................................................................5
Cautionary Note Regarding Forward-Looking Statements................................................................8
Use of Proceeds.....................................................................................................9
Price Range of Common Stock and Related Stockholder Matters.........................................................9
Management's Discussion and Analysis of Financial Condition and Results of Operations..............................10
Business...........................................................................................................17
Management.........................................................................................................28
Certain Transactions...............................................................................................32
Legal Proceedings..................................................................................................32
Principal Stockholders.............................................................................................32
Selling Stockholders...............................................................................................34
Plan of Distribution...............................................................................................36
Description of Capital Stock.......................................................................................37
Changes In and Disagreements With Accountants......................................................................37
Legal Matters......................................................................................................40
Experts............................................................................................................40
Where You Can Find Additional Information..........................................................................40
Index to Financial Statements.....................................................................................F-1
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Except as otherwise required by the context, all references in this
prospectus to (a) "we," "us," "our," or "Company" refer to the consolidated
operations of MDU Communications International, Inc., a Delaware corporation,
and its wholly-owned subsidiaries, MDU Communications Inc., a Canadian
corporation, and MDU Communications (USA) Inc., a Washington corporation, and
(b) "you" refers to prospective investors in the common stock. Unless
otherwise indicated or unless the context otherwise requires, all information
in this prospectus assumes the conversion of all the shares of Series A
convertible preferred stock and the exercise of all the warrants and options
by the Selling Stockholders as more fully described in "Selling
Stockholders," "Description of Capital Stock" and "Plan of Distribution."
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PROSPECTUS SUMMARY
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NOTE: This summary contains basic information about us and this offering.
Because it is a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus carefully,
including the section entitled "Risk Factors," and our Consolidated
Financial Statements and the related Notes to those statements included in
this prospectus. This prospectus contains certain forward-looking
statements. The cautionary statements made in this prospectus should be
read as being applicable to all related forward-looking statements wherever
they appear in this prospectus. Our actual results could differ materially
from those discussed in this prospectus. See "Cautionary Note Regarding
Forward-Looking Statements."
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OUR BUSINESS
We provide digital satellite television services to residents of
multi-dwelling unit properties ("MDUs"). MDUs include apartment buildings,
condominiums, gated communities, universities, nursing homes, hospitals,
hotels, motels, and other properties having multiple units located within a
defined area.
We offer two types of digital television services, digital set-top
television services and satellite master antennae television ("SMATV")
services, to the residents of MDUs. We provide our services under access
agreements with MDU property owners. Many of these agreements give us the
exclusive right to provide digital satellite television services to the
residents of the MDU properties.
We have entered into a long-term agreement with Star Choice
Communications Inc. ("Star Choice") to establish and maintain distribution
systems and sell Star Choice satellite programming packages to the residents
of Canadian MDU properties. Star Choice is one of the only two satellite
broadcasters licensed to operate in Canada.
We have recently entered into a similar arrangement with DirecTV, Inc.
("DirecTV"), a United States provider of satellite television programming,
under which we are now providing our digital set-top services to MDUs in the
United States. DirecTV is the largest satellite broadcaster operating in the
United States.
We earn our revenue through the sale of digital satellite television
programming packages to the MDU residents. In our digital set-top systems, we
earn digital access fees and a percentage of the fees charged subscribers by
Star Choice or DirecTV. In our SMATV systems, our earnings result from the
difference between the wholesale price charged to us by program providers and
the price we charge for the programming package.
We provide and install our television viewing infrastructure into MDU
properties at our cost. This includes installation of a digital television
satellite dish, off-air antennae, internal wiring, and signal routing and
decoding equipment, including television set-top boxes.
We have been providing our digital satellite television services in
Canada since November 1998. As of May 2000, we had approximately 13,600
subscribers in 190 properties throughout Canada. We began operations and
marketing to building owners in the U.S. in June 2000 and we expect to begin
adding subscribers in July 2000.
Recently, we have begun offering security monitoring services to
residents of our MDU properties, using the existing or our installed
infrastructure. We have entered into a three-year agreement with ADT Security
Services Canada, Inc. under which we are authorized to resell their service
in exchange for an up-front subscriber fee and a revenue sharing fee .
In addition, we are in the process of developing high-speed Internet
access services . We have recently entered into a strategic agreement with
3Com Corporation under which we license software and hardware which is
particularly suited to MDU applications. We expect to begin offering our
Internet access services by July 2000.
Finally, we are seeking distribution arrangements with
telecommunications carriers to resell long distance telephone services. We
expect to begin offering our long distance telephone services during the fall
of 2000.
THE MDU MARKET
The North American MDU marketplace represents a large niche market of
potential telecommunications customers. As of March 2000, there were over
four million MDU television households in Canada out of a total of 11.8
million television households. In the United States, there were over 25
million MDU television households out of a total of 100 million television
households. Our goal is to become a significant provider of bundled MDU
products and services, using products and services that are available in the
marketplace, to the North American MDU marketplace.
Historically, the MDU market has been served almost exclusively by
local cable television operators. Generally, these providers used analog
technology and MDU residents could not access digital or competitive
services. Many cable companies have begun the process
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1
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of upgrading to a digital signal; however, this transition will require
significant capital outlays and time to complete.
We believe that today's MDU market offers us a very good business
opportunity because:
- Advances in communications and information technology have created a
large demand for new state-of-the-art services such as digital satellite
television.
- Regulatory changes in Canada and the United States authorizing the
provision of digital satellite television services has given television
viewers the opportunity to choose the provider of their television
programming based on quality of signal, cost and variety of programming.
- Our marketing program focuses on that choice and the benefits of using
satellite television programming over cable programming.
- There exists a significant percentage of MDU households that are either
not served or are under-served by either cable television providers or
the digital satellite television program providers.
- To date, Star Choice, DirecTV and other digital satellite television
program providers have focused primarily on the single family residence
market because of the lower cost of deployment and fewer technical
difficulties than those incurred in MDU properties.
THE INDUSTRY
The home entertainment and video programming industry continues to
develop competitive alternatives and consumer choices. The major choices in
the industry are: cable systems, direct-to-home satellite service (including
SMATV systems), wireless cable systems, and broadcast television. There are
other competitors in the field, such as Internet video providers, home video
sales and rentals, and even local telephone companies.
The cable system providers have continued to grow and dominate this
industry in terms of subscriber penetration, the number of programming
services available, audience ratings and expenditures on programming.
However, for non-cable systems, direct broadcast satellite providers dominate
the delivery of multi-channel video programming distribution systems.
Technological advances are rapidly occurring that permit all of these
various system providers to increase both:
- quantity of service (i.e., an increased number of channels using the
same amount of bandwidth or spectrum space), and
- types of offering (i.e., interactive services).
In addition, operators and distributors are developing and deploying advanced
technologies, especially digital compression, in order to deliver additional
video options and other services, such as Internet access and telephony to
their customers.
CORPORATE HISTORY
Our Canadian operating company, MDU Communications Inc. ("MDU Canada"),
was formed in British Columbia in March 1998. In November 1998, MDU Canada's
shareholders sold all of their MDU Canada stock to Alpha Beta Holdings, Ltd.,
an inactive U.S. public reporting company, in exchange for Alpha Beta stock,
and renamed it "MDU Communications International, Inc." Alpha Beta was
incorporated in Colorado in July 1995, but never conducted any significant
business activities and was essentially inactive in November 1998.
In April 1999, we reincorporated in Delaware. In March 2000, we formed
MDU Communications (USA) Inc., a Washington corporation ("MDU USA") to
conduct business in the U.S. We now operate as a holding company with MDU
Canada and MDU USA as our wholly-owned subsidiaries.
Our common stock currently trades under the symbol "MDTV" on the OTC
Bulletin Board.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 108-11951 Hammersmith
Way, Richmond, British Columbia, Canada V7A 5H9 and our telephone number is
(604) 277-8150. Our website is located at "www.mduc.com."
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2
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THE OFFERING
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COMMON STOCK OFFERED BY SELLING STOCKHOLDERS: 11,155,014 shares (1)
COMMON STOCK OUTSTANDING BEFORE THIS OFFERING: 13,371,820 shares (2)
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING: 21,046,349 shares (3)
USE OF PROCEEDS FROM CONVERSION OF SERIES A We will not receive any proceeds from conversion of
CONVERTIBLE PREFERRED STOCK AND SALE OF COMMON the Series A convertible preferred stock or the sale
STOCK: of the shares of our common stock offered by the
Selling Stockholders.
USE OF PROCEEDS FROM EXERCISE OF WARRANTS AND We will receive the exercise price of any warrants and
OPTIONS: options that are exercised by the Selling
Stockholders. Assuming exercise of all of the
warrants and options, the proceeds to us would be
approximately US$4,844,525. We intend to use any
proceeds from exercise of the warrants and options for
working capital and general corporate purposes.
NASD OTC BULLETIN BOARD SYMBOL: "MDTV"
</TABLE>
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(1) This number consists of (a) 7,674,529 shares of common stock that we
have reserved for issuance upon conversion of the Series A
convertible preferred stock and exercise of the warrants and options
held by the Selling Stockholders and (b) 3,480,485 shares of common
stock now owned by the Selling Stockholders. See "Selling
Stockholders."
(2) Based on our outstanding common stock as of May 31, 2000, which
includes the 3,480,485 shares of common stock beneficially owned by
certain of the Selling Stockholders.
(3) This number does not include (a) 3,385,360 shares reserved as of May
31, 2000 for issuance upon exercise of outstanding stock options
granted under our 2000 Incentive Stock Option Plan, or (b) any
shares of common stock issued by us in transactions occurring after
the date of this prospectus.
RISK FACTORS
Potential investors should carefully consider the risk factors set
forth under the caption "Risk Factors" beginning on page 5 and the other
information included in this prospectus prior to purchasing our common stock. An
investment in our common stock involves a high degree of risk. We have a limited
operating history and anticipate losses and negative operating cash flow for the
foreseeable future. Our operations are dependent on the viability of our
unproven business model, our relationships with strategic partners and key
vendors, and the availability of additional capital. See "Risk Factors" for a
description of these and other risks.
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3
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SUMMARY FINANCIAL DATA
The following summary financial information was derived from our
historical consolidated financial statements. You should read this information
in conjunction with the Consolidated Financial Statements and the related Notes,
and the discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contained elsewhere in this prospectus.
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YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
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(ALL AMOUNTS IN CANADIAN DOLLARS) 1998 (1) 1999 1999 2000
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(AUDITED) (UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 0 $ 566,698 142,482 585,789
Gross profit............................. 0 227,128 16,202 259,140
Operating expenses....................... (97,845) (2,752,788) (1,035,125) (8,053,492)
Net loss................................. (97,845) (2,525,660) (1,018,923) (7,714,111)
Adjustment for beneficial conversion
feature of convertible preferred shares.. - - - (11,147,175)
Adjustment for beneficial conversion
feature of warrants...................... - - - (355,047)
Net loss applicable to common stockholders $ (97,845) $(2,525,660) $(1,018,923) $(19,216,333)
=========== ============ ============ =============
Basic and diluted loss per share......... $ (0.02) $ (0.28) $ (0.11) $(1.86)
Shares used in computing basic and diluted
loss per share........................... 8,581,335 9,114,668 9,221,335 10,341,555
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September 30, March 31,
1999 2000
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(audited) (unaudited)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficiency)................................................ $(2,304,410) $ 8,602,481
Total assets................................................................ 4,000,578 13,869,864
Total liabilities........................................................... 2,621,892 915,294
Total stockholders' equity.................................................. $ 1,378,686 $12,954,570
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(1) Since we began operations on March 26, 1998, the information for the year
ended September 30, 1998, does not reflect a full 12 months of results.
4
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RISK FACTORS
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NOTE: You should consider carefully the following risks before you decide to buy
our common stock. We have described these risks and uncertainties under the
following general categories: "Risks Related to Our Business," "Risks Related to
the Industry" and "Risks Related to Our Common Stock." Our business, financial
condition or results of operations could be materially and adversely affected by
any of these or other risks. In that case, the trading price of our common stock
could decline, and you may lose all or part of the money you paid to buy our
common stock. You should also consider the risks and uncertainties associated
with forward-looking statements included in this prospectus with respect to our
plans, objectives, expectations, and intentions. See "Cautionary Note Regarding
Forward-Looking Statements."
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RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF OPERATIONS ON WHICH TO EVALUATE OUR POTENTIAL FOR
FUTURE SUCCESS.
We are a start-up company with a short history of commercial
operations. Our business is, therefore, subject to all of the risks inherent in
a company with little or no operating history. To establish viable commercial
operations, among other things, we must:
- secure adequate capital to fund (1) expansion of our services and
our territories, (2) acquisition or leasing of necessary equipment
needed to expand our business, and (3) working capital and capital
expenditures until we have positive cash flow (which may not occur
for the foreseeable future or at all);
- attract and retain management, technical, sales and marketing and
other personnel; and
- obtain market acceptance of our services and respond to
competitive pressures.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES FOR THE FORESEEABLE FUTURE.
Since our inception, we have incurred significant losses and we
continue to incur losses, resulting primarily from costs related to installing
our systems in a rapidly increasing number of MDU properties and general
corporate overhead. At March 31, 2000, we had an accumulated deficit of
$10,337,616. As a result of our business plan to continue expansion in Canada
and to begin expansion into the United States, we expect to incur losses for the
foreseeable future. We believe these expenditures are necessary to implement our
business plan. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses may be significantly
greater. We may never achieve or sustain profitability.
WE WILL NEED FURTHER CAPITAL.
We currently anticipate that our available funds will be sufficient to
meet our needs for working capital, capital expenditures and business expansion
through the fourth quarter of fiscal 2000, which ends September 30, 2000. After
that time we will need to raise additional funds. Also, we may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced services, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. There can be no assurance
that additional financing will be available on terms favorable to us or at all.
If adequate funds are not available or are not available on acceptable terms, we
may not be able to fund expansion, respond to competitive pressures, or take
advantage of unanticipated acquisition opportunities. Such inability could
negatively impact our business.
WE DEPEND SIGNIFICANTLY ON OUR STRATEGIC RELATIONSHIPS WITH OUR PROGRAMMING
PROVIDERS.
Under our agreements with Star Choice and DirecTV, we may not maintain
distribution systems or market direct-to-home satellite broadcast services for
others in Canada or the U.S., respectively. Consequently, we are totally
dependent on our program providers for satellite signals and programming. Events
at our program providers, which we cannot control, could adversely affect us.
Moreover, the satellite communications and programming industry is regulated and
regulations may be enacted that could have an adverse effect on our program
providers. Termination of our programming contracts would have a material
adverse effect on us.
5
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COMPETITION IN OUR INDUSTRY IS INTENSE AND GROWING, AND WE MAY BE UNABLE TO
COMPETE EFFECTIVELY.
The satellite communications and programming industry is highly
competitive, and we expect competition to intensify in the future. Satellite
television systems face competition from several sources, such as traditional
hard-wire cable companies, satellite receivers, direct broadcast satellites,
wireless cable, and other alternative methods of distributing and receiving
television transmissions. Further, premium movie services offered by cable and
satellite television systems have encountered significant competition from the
home video cassette recorder industry. In areas where several local off-air
VHF/UHF broadcast signals can be received without the benefit of cable
television, cable television systems have also experienced competition from the
availability of broadcast signals generally and have found market penetration
more difficult. We do not have significant market share in any of our markets.
Our competitors in each of our existing and future markets have greater
financial, technical, marketing and other resources, including brand or
corporate name recognition, than we do. In addition, a continuing trend towards
business combinations and alliances in this industry may create significant new
competitors for us. Many of these combined entities will have resources far
greater than ours. These combined entities may provide bundled packages of
communications video programming or cable services, including local, long
distance and digital subscriber line services, that compete directly with the
services we now offer or may offer in the future. These entities may also offer
services sooner and at more competitive rates than we do. No assurance can be
given that we will compete successfully with hard-wire cable and other pay
television systems, or other companies engaged in providing services provided by
us.
WE ARE GROWING RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT.
We are currently experiencing a period of significant expansion. In
order to execute our business plan, we must continue to grow significantly. This
growth will strain our personnel, management, systems, policies and procedures
and other resources. To manage our growth, we must implement adequate
operational and financial systems and controls and recruit, train and manage new
employees. We cannot be certain that we will be able to integrate new executives
and other employees into our organization effectively. If we do not implement
adequate systems and controls, recruit, integrate and retain necessary personnel
or otherwise manage growth effectively, our business, results of operations and
financial condition would be materially and adversely affected.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS.
Our performance is substantially dependent on the continued services of
our executive officers and other key employees, particularly Sheldon B. Nelson,
President and CEO, Robert A. Biagioni, CFO, and Gary J. Monaghan, President of
MDU Canada. The loss of the services of any of our executive officers could
materially and adversely affect our business. Additionally, we believe we will
need to attract, retain and motivate talented management and other highly
skilled employees, particularly those with technical backgrounds, to be
successful. Competition for employees that possess knowledge of both the
satellite communications and programming industry and our target market is
intense. We may be unable to retain our key employees or attract, assimilate and
retain other highly qualified employees in the future.
WE MAY BE ADVERSELY IMPACTED BY CHANGES IN FOREIGN CURRENCY EXCHANGE RATES.
We do not currently engage in significant operating transactions
denominated in United States dollars so any change in the Canadian/US dollar
exchange rate does not currently have a material effect on our operating cash
flows. However, as we expand our operations into the United States, exchange
rates may have a material adverse effect.
RISKS RELATING TO OUR INDUSTRY
CANADIAN REGULATIONS COULD ADVERSELY AFFECT US.
We are not directly regulated by the Canadian Radio-television and
Telecommunications Commission ("CRTC"). Our primary program provider, Star
Choice, is licensed by and subject to regulation by the CRTC, under a license
that expires in 2002. The CRTC's failure to renew Star Choice's license, or
changes in the laws, policies and regulations that may modify the present
regulatory environment, would directly affect Star Choice and we are unable to
predict the impact of such laws or regulations on Star Choice's operations. In
addition, preliminary CRTC regulations that allow us to obtain competitive
access to an MDU's internal wiring may not be adopted in a final form that is
favorable to us, which would have a material adverse effect on our business.
Finally, there can be no assurance that
6
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material and adverse changes in regulations affecting the digital
direct-to-home services business, and the broadcasting industry, in general
will not occur in the future.
UNITED STATES REGULATIONS COULD ADVERSELY AFFECT US.
As a sales agent for direct broadcast satellite (DBS) operators,
Internet service providers and home security services, we are not directly
subject to rate regulation or certification requirements by the Federal
Communications Commission ("FCC") or state public utility commissions because
we are not engaged in the provision of common carrier services. However, the
communications service providers for whom we act as a sales agent are subject
to varying degrees of federal, state and local regulation. Many aspects of
regulation at the federal, state and local levels currently are subject to
judicial review or are the subject of administrative or legislative proposals
to modify, repeal, or adopt new laws and administrative regulations and
policies, the results of which we are unable to predict. The United States
Congress and the FCC have in the past, and may in the future, adopt new laws,
regulations and policies regarding a wide variety of matters, including
rulemakings to implement provisions of the Telecommunications Act of 1996
("Telecom Act"), that could, directly or indirectly, affect the operation of
our business. Our business prospects could be materially adversely affected
(1) by the application of current FCC rules or policies in a manner leading
to a change in the regulatory status of our satellite television and
telecommunications operations, (2) by the adoption of new laws, policies or
regulations, (3) by changes in existing laws, policies or regulations,
including changes to their interpretations or applications, that modify the
present regulatory environment, or (4) by the failure of certain rules or
policies to change in the manner anticipated by us.
WE FACE THE RISK OF SYSTEMS INTERRUPTIONS.
The satisfactory performance, reliability and availability of our
services is critical to our reputation and to our ability to attract and retain
customers and maintain adequate customer service levels. From time to time, we
have experienced temporary system interruptions for a variety of reasons,
including software bugs and lack of reliable integration between various
elements of our systems and those of our users. We may not be able to correct a
problem in a timely manner. Because some of the reasons for a systems
interruption may be outside of our control, we may not be able to remedy a
problem quickly or at all. Any future system interruption that results in the
unavailability of our services could result in negative publicity, which would
negatively affect our business.
RISKS RELATED TO OUR COMMON STOCK
SINCE OUR STOCK IS SUBJECT TO THE PENNY STOCK RULES, INVESTORS MAY FIND IT
DIFFICULT TO SELL THEIR STOCK.
Our common stock is subject to penny stock rules promulgated by the
Securities and Exchange Commission. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. In addition, the penny
stock rules require that prior to a transaction in a penny stock the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for our common
stock and make it more difficult to sell our common stock.
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE.
You may experience substantial dilution of your investment in our
common stock upon conversion of our Series A convertible preferred stock and
upon the exercise of our outstanding stock options and warrants. As of May 31,
2000:
- Each share of our outstanding Series A convertible preferred
stock was convertible into 1.15 shares of our common stock for a
total of 4,182,780 shares.
- 3,241,749 shares of common stock were reserved for issuance upon
exercise of outstanding warrants, at exercise prices ranging from
US$0.75 to US$2.50 per share. All of these warrants are currently
exercisable.
7
<PAGE>
- 3,585,360 shares of common stock were reserved for issuance upon
exercise of outstanding stock options at exercise prices ranging
from US$1.00 to US$5.00 per share. Of such stock options,
1,555,908 are currently exercisable.
In addition, if we raise additional capital through the sale of
additional capital stock or the issuance of debt that is convertible into our
capital stock, then your percentage ownership of our stock will be reduced, you
may experience additional dilution, and the new stock or debt may have rights,
preferences and privileges senior to those of our common stock.
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to
continue to be, highly volatile. For example, between December 2, 1998, when our
common stock began being quoted on the OTC Bulletin Board, and May 31, 2000, the
price of our common stock ranged from US$0.31 to US$9.00 per share. Purchasers
of our common stock may not be able to resell their shares following periods of
volatility because of the market's adverse reaction to volatility. We cannot
assure you that our stock will trade at or above historic levels or sustain its
current market price.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock in the
public market in the future, including the 11,155,014 offered by the Selling
Stockholders under this prospectus, then the market price of our common stock
could fall and our ability to raise capital through the sale of our securities
could be impaired. To date, we have had limited trading volume in our common
stock and the shares of common stock offered by the Selling Stockholders
constitutes a significant portion of our outstanding common stock.
Our certificate of incorporation authorizes the issuance of 50,000,000
shares of common stock. At May 31, 2000, 13,371,820 shares of common stock were
outstanding. 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 stockholders.
MUCH OF OUR STOCK IS OWNED BY MANAGEMENT.
Our current executive officers and directors beneficially own or have
voting control over outstanding shares of our common stock and hold presently
exercisable options to acquire our common stock, which taken together constitute
approximately 16% 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology. These forward-looking statements
include, without limitation, statements about our market opportunity, our
strategies, competition, expected activities and expenditures as we pursue our
business plan, and the adequacy of our available cash resources. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. The information set forth under the headings "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identify important additional factors that could materially
adversely affect our actual results and performance. We claim the protection of
the safe harbor for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995.
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USE OF PROCEEDS
We will not receive any proceeds upon conversion of the Series A
convertible preferred stock or upon sale of shares of our common stock by the
Selling Stockholders.
We will receive the exercise price of any warrants and options that are
exercised by the Selling Stockholders. Assuming exercise of all of the Selling
Stockholders' warrants and options, the gross proceeds to us would be
approximately US$4,844,525. We intend to use any proceeds from exercise of the
warrants and options for working capital and general corporate purposes.
PRICE RANGE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
Our common stock is not traded on a national securities exchange or the
Nasdaq Stock Market. It has been quoted on the OTC Bulletin Board under the
symbol "MDTV" since December 2, 1998. The range of high and low bid quotations
on the OTC Bulletin Board during each fiscal quarter since December 2, 1998, as
reported by Bloomberg, L.P., is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2000
-------------------------
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
December 31, 1999 $1.88 $0.31
March 31, 2000 $9.00 $2.13
June 30, 2000 $6.75 $1.53
(April 1, 2000 through May 31, 2000 only)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1999
-------------------------
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
December 31, 1998 $1.56 $1.31
March 31, 1999 $2.69 $1.44
June 30, 1999 $2.38 $1.06
September 30, 1999 $1.72 $0.63
</TABLE>
These quotations are in U.S. Dollars and reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
As of May 31, 2000, we had approximately 64 holders of record of our
shares of Common Stock.
"PENNY STOCK" RULES
Our common stock is a "penny stock" which is subject to Rule 15g-9
under the Securities Exchange Act of 1934 (the "Exchange Act"). It is considered
penny stock because it is not listed on a national exchange or Nasdaq, we have
been in business less than three years and have net tangible assets of less than
US$5,000,000, and our average annual revenue has not exceeded US$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 our 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.
DIVIDEND POLICY
We have not paid any cash dividends and we do not anticipate that we
will pay cash dividends on our common stock in the foreseeable future. Payment
of cash dividends is within the discretion of our Board of Directors and will
depend, among other factors, upon our earnings, financial condition and capital
requirements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
NOTE: This section contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are not guarantees of our future
performance. They are subject to risks and uncertainties related to business
operations, some of which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements. See
"Cautionary Note Regarding Forward-Looking Statements."
--------------------------------------------------------------------------------
OVERVIEW
We earn our revenue through the sale of satellite television
programming packages to MDU residents. Under agreements with our programming
providers, we earn a percentage of the fees charged to the subscriber. We also
earn a digital access fee for our digital set-top box service.
We have been providing our digital satellite television services in
Canada since November 1998 and will begin services in the U.S. in July, 2000. As
of May 31, 2000, we had approximately 13,600 subscribers in 190 buildings
throughout Canada.
In addition, we recently began offering other services, such as
in-suite security monitoring services, to residents of our MDU properties. Also,
we are in the process of developing products to provide high speed Internet
access and long distance telephone services. We expect to begin offering our
Internet access services by July 2000 and our long distance telephone services
during the fall of 2000.
We have incurred operating losses since our inception and do not expect
to generate profitable operations until fiscal 2001 or later. Our funding of our
operating expenses, working capital needs and capital commitments is dependent
upon our ability to raise financing through public and private placements of
both equity and debt securities, in addition to revenues from operations.
BASIS OF PRESENTATION
Our consolidated financial statements at and for the fiscal years ended
September 31, 1998 and 1999, and for the six-month periods ended March 31, 1999
and 2000, and their respective Notes ("Consolidated Financial Statements") have
been stated in Canadian dollars and have been prepared in accordance with
accounting principles generally accepted in the United States, consistently
applied. We have designated the Canadian dollar as our functional and reporting
currency on the basis that our principal business and activities are located and
conducted in Canada. We have accounted for the business combination of Alpha
Beta Holdings, Ltd. and MDU Communications Inc. as a reverse acquisition whereby
MDU Communications Inc. was identified as the acquirer and the assets and
liabilities of Alpha Beta Holdings, Ltd. were acquired at fair value. In
accordance with generally accepted accounting principles for reverse
acquisitions, our consolidated financial statements reflect the historical
results of MDU Communications Inc. and the related assets and liabilities at
their historic cost. The operations of Alpha Beta Holdings, Ltd., being the
legal parent but accounting subsidiary, are reflected in the consolidated
financial statements from November 22, 1998, and its assets and liabilities are
reflected at their fair value at the date of acquisition. Since Alpha Beta
Holdings, Ltd. was essentially inactive prior to the business combination, the
following discussion will relate to our continuing Canadian operations.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE PERIOD FROM INCEPTION (MARCH 26,
1998) TO YEAR ENDED SEPTEMBER 30, 1998
REVENUES. Our 1999 fiscal year's revenue of $566,698 was comprised of
69% SMATV revenue, 20% net programming revenue from Star Choice and 11% from
digital access fees ("set-top revenue"). SMATV revenue represented approximately
8,700 subscribers, most of which had been added by January 1999, and the set-top
revenue represented approximately 2,900 subscribers who were acquired over the
last nine months of the fiscal year. Fiscal 1998 revenues were $0 from inception
at March 26, 1998, to September 30, 1998. That period was spent in planning with
no SMATV or set-top subscribers.
DIRECT COSTS AND SALES EXPENSES. Fiscal 1999 direct costs were $339,570
and were primarily comprised of SMATV programming and maintenance costs. Direct
costs were 60% of net revenue in fiscal 1999. Salaries, wages, commissions and
benefits make up 35% of the sales expense. In-suite installation of set-top
boxes represents 26% of
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sales expense and the balance of 39% is primarily travel, advertising,
consulting and telephone expense, which includes $116,149 in non-cash stock
option compensation charges (see below). There was no direct costs or sales
expense for fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses increased 1,332% to $1,401,399 in fiscal 1999, from $97,845 in fiscal
1998, due to our market expansion, as follows:
- Advertising, promotion, travel and vehicle expenses were $128,755 or 9.2%
of total G&A and represented an increase of $84,198 over fiscal 1998.
- Occupancy, office, telephone costs, repairs and maintenance were $178,175
or 12.7% of G&A and represented an increase of $166,998 over fiscal 1998.
- Wages were $519,834 or 37.1% of G&A and includes non-cash stock option
compensation charges (see below) of $222,000. No wages were recorded in
fiscal 1998 but $26,500 in management fees was paid to companies controlled
by officers and directors as compensation for services rendered.
- Professional and consulting fees were $307,559 or 21.9% of G&A, which
includes non-cash stock option compensation charges (see below) of
$177,445, and represented an increase of $293,976 over fiscal 1998.
- Other non-cash charges consisting of amortization expense were $195,260 or
13.9% of total G&A in fiscal 1999. No amortization was recognized in fiscal
1998.
- The balance of G&A in fiscal 1999 consisted of interest and foreign
exchange losses of $71,816, or 5.1% of total G&A, and represented an
increase of $69,788 over fiscal 1998.
STOCK OPTION COMPENSATION CHARGES. We account for our stock-based
employee compensation plans under APB No. 25 whereby compensation cost is
recorded for the excess, if any, of the quoted market price of the common shares
over the exercise price at the date of the grant for all employee common stock
options issued. During fiscal 1999, compensation cost in the amount of $222,000
was recorded for options to purchase 300,000 shares of our common stock which we
granted to directors, officers and employees at a weighted average exercise
price of US$1.00. In addition, we granted stock options to purchase 100,000
common shares at an option price of US$1.50 for consultative and other services
provided by a relative of our president. The fair value of these options in the
amount of $177,445 has been recorded as a consulting expense (see note 7(c) to
the Notes to the Consolidated Financial Statements). No stock option
compensation charges were recognized in fiscal 1998.
NET LOSS. We reported a net loss of $2,525,660 for the year ended
September 30, 1999. The increase in net loss compared to the year ended
September 30, 1998 period was primarily attributable to the operating cost of
installing systems and obtaining over 11,600 subscribers in over 135 properties.
These operating costs were comprised of personnel, sales, and general and
administrative expenses totaling $2,752,788. These costs also include the
non-cash stock option compensation charges discussed above. In fiscal 1998 we
reported a loss of $97,845 consisting only of general and administrative
expenses for the period from inception to September 30, 1998.
RESTATEMENT. Subsequent to the issuance of our September 30, 1999
consolidated financial statements, our management determined that the fair value
of options issued to certain non-employees for services rendered during the
period should have been reported as sales expense, rather than capitalized to
property and equipment. As a result, the accompanying consolidated financial
information as of and for the year ended September 30, 1999 has been restated
from the amounts previously reported to give effect to an additional $116,149 of
sales expense, a reduction in amortization expense of $4,210 and a corresponding
reduction in property and equipment of $111,939. See Note 16 to the Consolidated
Financial Statements.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
REVENUE. Our revenue for the six months ended March 31, 2000 of
$585,789 was comprised of 39% SMATV revenue, 43% net programming revenue from
Star Choice , 17% from digital access fees and 1% from equipment and other
sales. Our revenue for the six months ended March 31, 1999 of $142,482 was
comprised of 68% SMATV revenue, 25% net programming revenue from Star Choice, 3%
from digital access fees and 4% from equipment and other sales. For the six
months ended March 31, 2000 SMATV revenue of $230,907 represented approximately
8,600 subscribers and the set-top revenue of $349,249 represented approximately
3,800 subscribers, compared to the
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<PAGE>
corresponding period with SMATV revenue of $97,098 and 8,500 SMATV
subscribers acquired from 4-12 Electronics Ltd. on December 31, 1998, and
set-top revenue of $40,229 representing approximately 1,200 subscribers added
in the latter half of the period. We also recorded interest income of $80,241
for the six months ended March 31, 2000 due to investing available funds from
January 28, 2000 to March 31, 2000. There was no corresponding interest
income in the six months ended March 31, 1999.
DIRECT COSTS AND SALES EXPENSES. Direct costs are primarily comprised
of SMATV programming and maintenance costs plus equipment costs, and are 38% of
revenue for the six months ended March 31, 2000, compared to 55% for the same
period of the prior year, with the change reflecting a higher proportion of
set-top revenues in the current period. Salaries, wages, commissions and
benefits make up 34% of the sales expenses for the six months ended March 31,
2000, compared to 32% of the sales expenses for the six months ended March 31,
1999. The balance of 66% and 68% respectively, consisted primarily of travel,
consulting, advertising and telephone expenses, which includes $64,418 in the
six month period ended March 31, 2000, and $116,149 in the comparable period in
1999, related to non-cash stock option compensation (see below).
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses for the six months
ended March 31, 2000 were $7,186,251 as compared to $674,342 for the
corresponding prior period. This 966% increase in G&A period over the previous
period is primarily because of non-cash charges. Excluding these non-cash
charges (see below) of $5,835,265 from the six-month period ended March 31,
2000, and $399,445 in the six-month period ended March 31, 1999, results in an
increase of $1,076,089 or 391%, which is more representative of the increase in
overall business activity. Advertising, promotion, investor relations, travel
and vehicle costs were $181,822 for the six months ended March 31, 2000 or 3% of
G&A, compared to $67,312 for the corresponding prior period, an increase of
170%. Office, occupancy, repairs and maintenance, and telephone costs were
$337,160 for the six months ended March 31, 2000 or 5% of G&A, compared to
$40,386 for the corresponding prior period for an increase of 735%. Wages,
professional and consulting fees for the six months ended March 31, 2000 were
$2,227,410 or 31% of G&A and up from the prior period's $514,057, primarily due
to increased staff levels and non-cash stock option compensation charges of
$1,567,279 in the six months ended March 31, 2000 and $399,445 in the six months
ended March 31, 1999 (see below). Foreign exchange gains of $121,822 and
interest expense of $50,243 for the six months ended March 31, 2000 compared to
$33,064 in foreign exchange loss and to $3,988 in interest expense for the
corresponding prior period. Other non-cash charges consisted of amortization
expense of $270,014 or 4% of G&A in the six months ended March 31, 2000 compared
to only $15,535 or 2% of G&A in the six months ended March 31, 1999 and reflects
the difference in subscriber base between periods and the comparison of six full
months of operations versus three full months in the period ended March 31,
1999.
STOCK OPTION COMPENSATION CHARGES. We account for our stock based
employee compensation plans under APB No. 25 whereby compensation cost is
recorded for the excess, if any, of the quoted market price of the common stock
over the exercise price at the date of the grant for all employee and director
common stock options issued. Stock options issued to third party consultants and
others are accounted for under Statement of Financial Accounting Standard No.
123 "Accounting for Stock-Based Compensation" whereby compensation charges are
recorded based on the fair value of the options granted. In the six months ended
March 31, 2000, $1,567,279 of G&A expense was non-cash stock option compensation
and consulting charges. In the period, we granted 90,276 options to officers and
employees at a weighted average exercise price of US$1.00 for performance up to
March 31, 2000, resulting in compensation cost of $523,998. In addition, we
granted 170,000 options to consultants at US$5.00 being the market value at date
of grant and the fair value of these options, and the amount of $1,043,281, has
been recorded as consulting expense. Further, stock option compensation charges
in the amount of $64,418 were recorded as sales expense based on the fair value
of stock options issued or issuable to suppliers. For the six months ended March
31, 1999, $399,445 of the G&A expense was non-cash stock option compensation and
consulting charges. Compensation cost in the amount of $222,000 was recorded for
the six months ended March 31, 1999 for options to purchase 300,000 shares of
our common stock granted to directors, officers and employees at a weighted
average exercise price of US$1.00. In addition, we granted stock options to
purchase 100,000 shares of our common stock at an option price of US$1.50 for
consultative and other services provided by a relative of our President. The
fair value of these options in the amount of $177,445 has been recorded as a
consulting expense. Stock option compensation charges in the amount of $116,149
were recorded as sales expense for the six months ended March 31, 1999 based on
the fair value of stock options issued to suppliers, calculated on the date an
eligible supplier completes the performance required to earn the options.
OTHER NON-CASH CHARGES. Included in the six months ended March 31, 2000
is $26,563 in consulting expenses related to 50,000 shares issued upon the
termination of our agency agreement with Canaccord Capital Corporation. Also
included in the same period are non-cash financing expenses of $4,241,424
representing the fair value of a two-year warrant granted to Gibralt Capital
Corporation. The warrant was for the purchase of 750,000 shares of common stock
at an exercise price of $2.50 per share. The fair value of the warrant was
determined using a Black Scholes option pricing model. The warrant was issued in
consideration of Gibralt Capital Corporation's termination of
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a financing agreement and its agreement to negotiate in good faith a new
financing agreement with terms more favorable to us. There was no
corresponding financing expense in the prior period.
NET LOSS. We reported a net loss of $7,714,111 for the six months ended
March 31, 2000, up from a net loss of $1,018,923 for the six months ended March
31, 1999. When non-cash charges, including amortization, of $6,169,697 and
$531,129 are excluded from these periods, the increase is primarily attributable
to the increased costs to operate over 12,400 subscribers in over 160 properties
for a full six months compared to 8,700 subscribers in 140 properties for
approximately three months of the comparable prior period.
ADJUSTMENT FOR BENEFICIAL CONVERSION. During the six months ended March
31, 2000, we issued 3,637,200 shares of Series A convertible preferred stock at
an issue price of US$2.50 per share, in exchange for cash proceeds of
US$7,725,000 and services in connection with the private placement with a fair
value of US$1,368,000 for total gross proceeds, prior to expenses of the issue,
of US$9,093,000. The Series A convertible preferred stock have a beneficial
conversion feature totaling $11,147,155 (US$7,725,000) measured as the
difference between the conversion price most beneficial to the investor, of
US$2.17, and the fair value of the underlying common stock at the time of
issuance, limited to the amount of cash proceeds received. In addition on
February 3, 2000, we completed a private placement consisting of 699,999 units
at US $0.75 per unit for gross proceeds of US$525,000. Each unit consists of one
common share and one common share purchase warrant exercisable for two years at
US$1.00 per share. The warrants also have a beneficial conversion feature
totaling $355,047, measured as the difference between the conversion price of
US$1.00 and the fair value of the underlying common stock at the date we had a
contractual obligation to issue the units, limited to the amount of the gross
proceeds received and allocated to the warrants. Each beneficial conversion
feature is recognized as an increase in the loss applicable to common
shareholders and in the calculation of basic loss per share for the six months
ended March 31, 2000, resulting in a net loss attributable to common
shareholders and basic loss per common share for the six months ended March 31,
2000 in the amounts of $19,216,333 and $1.86, respectively.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
CASH POSITION. At September 30, 1999, we had cash and cash equivalents
of $43,621 compared to $19,506 at September 30, 1998.
OPERATING ACTIVITIES. Net cash of $310,643 was used in operating
activities during fiscal 1999. The primary operating use of cash was from our
net loss of $2,525,660 which was partially offset by $710,854 of non-cash
charges, represented by $195,260 in amortization and $515,594 in stock option
compensation charges. In addition, we recorded as a source of cash $1,504,163
from changes in working capital. In 1998, net cash of $83,621 was used in
operating activities primarily from our net loss less cash provided by changes
in working capital.
INVESTING ACTIVITIES. Net cash of $3,662,251 was used in investing
activities during fiscal 1999, which was mainly comprised of purchases of
telecommunications equipment used in the reception of the digital satellite
signal, and certain intangible assets less cash acquired with Alpha Beta
Holdings, Ltd. In 1998, $47,033 was expended on the purchase of furniture and
equipment.
FINANCING ACTIVITIES. We generated net cash of $3,997,009 from
financing activities during fiscal 1999. In fiscal 1998 we generated net cash of
$150,160 from financing activities.
In fiscal 1999, our financing activities were:
- The exercise of options to purchase 640,000 shares of our common stock
at an exercise price of US$1.50 per share for net cash proceeds of
US$960,000 or $1,474,184.
- The issuance of demand convertible notes payable for proceeds of
$829,644 (the "Convertible Notes"). The Convertible Notes accrued
interest at various rates between 8.75% and 9.0%. The Convertible Notes
were convertible, as to principal and interest, at the option of the
note holder into fully paid non-assessable shares of our common stock
at original 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, we were unable to repay the Convertible Notes upon demand by
the note holders, and the Convertible Notes were re-negotiated with
extensions at the same rates of interest to between February 28, 2000
and June 30, 2000. The conversion prices were amended to between
US$0.50 and US$0.625.
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- The issuance of 5,213,835 shares of our common stock to effect the
acquisition of Alpha Beta Holdings, Ltd.
- Proceeds from the issuance of notes payable of $125,000. Our initial
funding was by way of six private demand notes totaling $275,000
bearing interest at 7.5%. We repaid the six demand notes on December
15, 1998 from warrant exercise proceeds.
- In May 1999, we received subscriptions for 670,000 shares of our
common stock at an issue price of US$1.75 per share for proceeds of
US$1,172,500 or $1,721,361. Expenses of the offering were $176,437.
These shares were subsequently issued in November 1999.
- In August and September 1999, we received US$168,000 or $248,102 on
account of subscriptions for 420,000 units at US$0.40 per unit, each
unit consisting of one share of common stock and a two-year warrant to
purchase one share of common stock for US$0.75 per share. These shares
and warrants were subsequently issued in November 1999 as part of a
total of 1,482,750 unit offering.
In fiscal 1998, our financing activities were $150,000 received from
the issuance of notes payable.
WORKING CAPITAL. At September 30, 1999 and 1998, our working capital
deficiencies were $2,304,410 and $144,718, respectively. The deficiencies,
funding to expand our business through acquisition of new subscribers and
funding for our anticipated operating deficits for the following fiscal years
caused us to pursue opportunities to raise financing through private placements
of equity.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
CASH POSITION. At March 31, 2000, we had cash and cash equivalents of
$9,122,224 compared to $82,699 at March 31, 1999. The increase in our cash
position is mainly due to proceeds received from common and preferred share
private placements and convertible promissory notes. These proceeds have been
used for our operating and investing activities during the six months ended
March 31, 2000.
OPERATING ACTIVITIES. Net cash of $2,556,095 was used in operating
activities during the period ended March 31, 2000. The primary operating use of
cash was from our net loss of $7,714,111 which was partially offset by
$6,169,697 of non-cash charges, represented by $270,014 in amortization and
$5,899,683 in stock option compensation charges, shares for service and value
attributed to warrants recognized as financing fees. In addition, we recorded as
a use of cash $1,011,681 from changes in working capital mainly from reduction
of trade accounts payable. In 1999, net cash of $236,261 was used in operating
activities. The primary operating use of cash in 1999 was from our net loss of
$1,018,923, which was partially offset by $531,129 of non-cash charges,
represented by $15,535 in amortization and $515,594 in stock option compensation
charges. In addition, we recorded as a source of cash $251,533 from changes in
working capital.
INVESTING ACTIVITIES. Net cash of $871,490 was used in investing
activities during the six months ended March 31, 2000 all related to purchase of
property and equipment. In the six months ended March 31, 1999 we spent
$1,074,884, represented primarily by $149,071 on the acquisition of SMATV
subscribers and $961,035 on purchases of telecommunications equipment used in
the reception of the digital satellite signal.
FINANCING ACTIVITIES. We generated net cash of $12,506,188 from
financing activities during the six months ended March 31, 2000 as follows:
- On November 23, 1999, we completed a private placement consisting of
1,482,750 units at US$0.40 per unit, for gross proceeds of US$593,100.
Each unit was comprised of one share of common stock and a two-year
warrant to purchase one share of common stock for $0.75 per share. At
March 31, 2000, 420,000 of those units had been issued and offering
proceeds of $248,102 (US$168,000) had been received.
- On January 28, 2000, we raised US$7,725,000 (net of agency fees)
through a private placement of our Series A convertible preferred
stock. In connection with the offering, we entered into a Registration
Rights Agreement under which we agreed to have a registration
statement, which registers and qualifies the shares of common stock
issuable upon conversion of the Series A convertible preferred stock
for resale, declared effective by the Securities and Exchange
Commission and the Registration Statement of which the Prospectus is a
part has been filed to fulfill that agreement. In connection with the
offering of Series A convertible preferred stock, we entered into an
agency agreement with Haywood Securities Inc. Under that agreement,
Haywood Securities Inc. agreed to provide services in connection with
the issuance and
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sale of the Series A convertible preferred stock and the
qualification of the common stock issuable upon conversion,
including assisting in obtaining requisite regulatory approvals. In
consideration of these services, we delivered to Haywood Securities
Inc. a commission of US$618,000, paid by issuance of 247,200 Series
A convertible preferred stock, a corporate finance fee of
US$750,000, paid by issuance of 300,000 shares of the Series A
convertible preferred stock, and a warrant to acquire an underlying
warrant which is in turn exercisable into up to 309,000 shares of
common stock for a period of one year at a price of US$2.50 per
share.
- On February 3, 2000, we completed two private placements, one
consisting of the issuance of 125,000 shares of common stock at
US$0.80 per share, for gross proceeds of US$100,000, and the other
consisting of 699,999 units at US$0.75 per unit, for gross proceeds of
US$525,000. Each unit consisted of one share of common stock and a
two-year warrant to purchase one share of common stock at US$1.00 per
share. The net cash proceeds to us of these two private placements were
$909,435 (US$625,000).
- On February 15, 2000, a former director and officer exercised 125,000
options at an exercise price of US$1.00 for total proceeds of $181,100
(US$125,000).
- On February 28, 2000 and March 8, 2000, notes payable valued at
$829,644 at September 30, 1999, together with accrued interest of
$51,384, were converted to 997,736 shares of common stock. No proceeds
were received during the period.
During the six months ended March 31, 1999, we generated net cash of
$1,374,338 from the following:
- The exercise of warrants for the purchase of 640,000 shares of common
stock generated proceeds of $1,474,184.
- Proceeds from the issuance of notes payable of $125,000. Our initial
funding was by way of six private demand notes totaling $275,000
bearing interest at 7.5%. We repaid the six demand notes on December
15, 1998 from warrant exercise proceeds.
- The issuance of 5,213,835 shares of our common stock to effect the
acquisition of Alpha Beta Holdings, Ltd.
WORKING CAPITAL. At March 31, 2000, we had working capital of
$8,602,481, and at March 31,1999, we had a working capital deficiency of
$181,977. Our projected operating losses and capital costs to add new
subscribers and grow our business will require us to obtain further financing
through private placements of debt and equity.
MARKET RISK
We are exposed to market risk related to changes in interest and
foreign exchange rates, each of which could adversely affect the value of our
current assets and liabilities. We have not entered into any forward currency
contracts or other financial derivatives to hedge foreign exchange risk, hence,
we are subject to such risk from foreign currency transactions and translation
gains and losses. We do not currently engage in significant operating
transactions denominated in foreign currencies so any change in the CDN/US
dollar exchange rate would not have a material effect on our current operating
cash flows, however as we expand our US operations, that exchange rate may
adversely affect our business.
We do 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 not have a material impact on our future operating
results or cash flows based on the terms of existing liabilities.
CAPITAL COMMITMENTS AND CONTINGENCIES
We have access agreements with the owners of MDU properties to supply
our television viewing systems and services to the residents of those
properties; however, we have no obligation to build out those properties and no
penalties will accrue if we elect not to do so. See "Business--Our
Strengths--Access Agreements.
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RECENT EVENTS
STRATEGIC ALLIANCES
DIRECTV AGREEMENT. In May 2000, we entered into a long-term System
Operator Agreement with DirecTV, which gives us a share of net subscriber
receipts, depending upon the number of active subscribers, from the sale of
DirecTV programming services, plus a subsidy for subscriber acquisition costs
for each net subscriber addition. See "Business - Our Strengths - Strategic
Alliance with DirecTV."
We will incur only the costs associated with the implementation of the
services that we deliver, and will not share any of DirecTV's programming or
broadcasting costs. Under the agreement, we may not solicit sales or provide
equipment for any other direct-to-home digital satellite television services in
the United States. However, we are not prohibited from contracting with other
program providers in connection with its SMATV services. Consequently, we are
totally dependent on DirecTV for its digital set-top programming in the United
States.
The agreement has an initial term of five years, with an automatic
extension of the entire agreement to coincide with the termination of the
longest running property access agreement. Thereafter, the agreement is
renewable for an additional five-year period at the option of both parties.
Either party may terminate for the other's breach, bankruptcy or unapproved
assignment of the agreement. Under this agreement, we will establish and
maintain MDU distribution systems in non-rural states of the United States, as
defined in the agreement, and act as a commissioned sales agent for the
marketing of DirecTV programming to residents of MDU properties.
As this agreement was recently executed, as of this date we have not
derived any revenue from our alliance with DirecTV. DirecTV is not required to
use us on an exclusive basis and could either contract with others to install
distribution systems and market programming in MDUs or undertake such activities
directly through retail stores, as it does for single-family television
households.
3COM AGREEMENT. In May 2000 we entered into a Master Purchase Sales
Agreement with 3Com Corporation ("3Com") to become part of its preferred Visitor
Based Network. Under this agreement, we will receive preferred pricing and
discounts for equipment purchased to support our high-speed Internet services.
This is not an exclusive agreement, however, a portion of our discount is based
on purchase volume. The agreement has an initial one-year term, with automatic
yearly renewals at the option of both parties with associated yearly price and
discount adjustments. See "Business - Our Strengths - Strategic Alliance with
3Com."
COMPENSATION
MANAGEMENT AGREEMENT. In May 2000 we entered into a management
agreement with Mohamed Nabile ElBaz, Vice President of Broadband Technology,
which provides for annual compensation, excluding bonuses, of approximately
US$120,000. We can terminate this agreement at any time upon reasonable notice
and the payment of an amount equal to 6 months of salary. See "Management -
Significant Employees."
OPTION GRANTS. In May 2000 we granted options to our newly appointed
independent directors and to certain employees to purchase 347,500 common shares
of common stock, of which 150,000 options have an exercise price of U.S.$2.50
per share (the "Directors' options"), being a premium to the prior day's closing
price of the common stock. The first 75,000 of the Directors' options vest
immediately at the grant date and the remaining 75,000 vest one year after the
grant date. The 197,500 options granted to certain employees have an exercise
price of U.S.$5.00 and vest quarterly over a three year period from the grant
date. All of these options expire May 11, 2005. See "Management - Stock Option
Plans."
FUTURE CAPITAL REQUIREMENTS
The net proceeds of our recent common and preferred stock offerings
should be sufficient to allow us to expand our deployment of service in Canada
and to enter the U.S. market as planned during fiscal 2000. We may require
additional capital in the future to fund (1) deployment of satellite TV services
in excess of our expectations during fiscal 2000, (2) strategic acquisitions of
existing subscriber bases or businesses, or (3) complementary services that may
prove beneficial to us. We may seek funding from a combination of sources,
including additional private placements of equity or debt. No assurance can be
given that additional funding would be available on terms acceptable to us or at
all.
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BUSINESS
OVERVIEW
We provide high quality digital satellite television services to
residents of multi-dwelling unit properties (MDUs). MDUs include apartment
buildings, condominiums, gated communities, universities, nursing homes,
hospitals, hotels, motels, and other properties having multiple units located
within a defined area.
We have a contractual relationship with Star Choice Communications Inc.
under which we market its satellite programming to the Canadian MDU market. We
provide our services under access agreements with MDU property owners. The
access agreements give us the exclusive right to provide digital satellite
television services to the residents of the MDU properties and a right of first
refusal for all other new telecommunications services. As of May 2000, we had
installed or were in the process of deploying our systems in 190 MDU properties,
and were serving approximately 13,600 subscribers, in Canada. We had entered
into letters of intent or access agreements that will allow us to wire and
market to residents in approximately 200 additional MDU properties, providing an
additional potential customer base of over 24,000 Canadian subscribers.
Our goal is to build an infrastructure and service system throughout
the major MDU markets in North America to deliver television programming and
other services. Our strategy is to focus initially on geographical markets which
have a high concentration of MDU properties. In Canada, we have focused to date
on major metropolitan markets such as Vancouver, Toronto, Calgary, Edmonton,
Winnipeg, and Halifax.
We intend to pursue a similar strategy in the United States
marketplace, which is estimated to have over 25 million MDU television
households. In May 2000, we entered into an agreement with DirecTV to
market digital satellite television programming to the U.S. market. We opened
our first U.S. office in New Jersey in June 2000 and anticipate locating two
more U.S. offices in San Francisco, California and Chicago, Illinois, before the
end of calendar 2000. We began operations and marketing to building owners in
the U.S. in June 2000 and we expect to begin adding subscribers in July 2000.
We earn our revenue through the sale of digital satellite television
programming packages to the MDU residents. We do not charge the MDU property
owners for our equipment or for installation of the infrastructure.
We believe that we can compete effectively with cable television
providers, our major competitor in the MDU marketplace, for subscribers.
Advances in communications and information technology have created a large
demand for new state-of-the-art services such as digital satellite television.
In addition, regulatory changes in Canada and United States governing digital
satellite television services has given television viewers the opportunity to
choose the provider of their television programming based on quality of signal,
cost and variety of programming. Our marketing program focuses on that choice
and the benefits of subscribing to satellite television programming instead of
cable programming.
Recently, we have begun offering security monitoring services to our
subscribers, using the existing or our installed infrastructure. We have signed
a contract with ADT Security Services Canada, Inc. to market their in-suite
monitoring security programs in Canada. We anticipate entering into a similar
arrangement with a U.S. security monitoring service in the near future. In
addition, we are in the process of negotiating relationships through which we
will be able to provide high-speed Internet access services to our MDU
residents. We are also negotiating distribution arrangements with
telecommunications carriers to resell long distance telephone services to our
MDU residents. We expect to begin offering our Internet access services in July
2000 and our long distance telephone service during the fall of 2000.
We believe that there will be opportunities to grow and enhance our
profitability and competitive position through the acquisition of complementary
companies, technologies and services. We intend to pursue acquisitions that we
believe will provide the opportunity for increased sales penetration with
existing customers and new sales to potential customers, and that will extend
and vertically integrate our products and technologies.
OUR SERVICES
We offer both digital set-top television viewing systems and satellite
master antennae television (SMATV; pronounced "smat vee") viewing systems and
services to the residents of MDUs. Both of our systems use state-of-the-art
wireless digital satellite equipment. This equipment receives scrambled
broadcast signals transmitted from our
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broadcasters' satellites and decodes them for viewing, which eliminates the
need for a cable television provider. Broadcast signals are distributed to
each MDU unit via cable run throughout the property.
Currently, approximately 30% of our MDU subscribers use our digital
set-top systems and, as a result of our acquisition of a SMATV subscriber base
shortly after our formation, 70% use our SMATV systems. However, we believe that
the potential market for our digital set-top system is far larger than that for
SMATV systems. We intend to focus our marketing efforts on sale of our digital
set top services, and expect the percentages of digital set-top and SMATV system
revenues to be reversed within a year.
We employ a technical service staff who, in connection with independent
contractors, install and service the satellite and cable signal distribution
systems. Our direct marketing sales representatives install the set-top boxes in
properties equipped with our digital set-top system. We provide this equipment
and its installation to the MDU property and to subscribing residents at no
initial cost to them. Our cost to provide and install this equipment depends on
the type and age of the MDU property and the number of potential subscribers. We
generally only deploy into MDU properties where we project that our subscriber
revenue will cover our equipment, installation and marketing costs within 20 to
30 months of deployment.
DIGITAL SET-TOP SYSTEM AND SERVICE
Our digital set-top television viewing system and service can either
replace, or exist in competition with, the existing cable service in MDU
properties. Our service can be provided without disrupting existing cable
services; no MDU resident is obliged to subscribe to our programming if they
would prefer to remain with cable, regardless of whether their neighbours are
subscribers.
Our digital set-top system and service provides the following benefits
to MDU owners and residents:
- The MDU property is enhanced due to the availability of choice in
television service providers and new services.
- Subscribers do not have to sign any conditional sales or service
contracts.
- Technology upgrades are provided free of charge as they become
available.
- Every subscriber receives a digital set-top receiver that provides
better picture and sound quality than analog cable television, and
instant access to pay per view movies and special events at the
touch of a button. Cable services generally only provide digital
set-top receivers to their premium pay channel subscribers for a
higher monthly fee.
INFRASTRUCTURE. The required infrastructure for a digital set-top
system consists of: a single .9-meter satellite dish to receive satellite
broadcast signals and an "off air" antenna to receive local television signals,
which are mounted on the roof of the MDU property; a cable backbone distribution
system which is channeled through the building and connected to the existing or
newly installed cable distribution system to the individual suites; and a
television set-top box (with remote control) which decodes the broadcast signals
on each television in each suite. The set-top box takes the place of all of the
Head End (as defined below) equipment used in a SMATV system, except for the
satellite dish.
PROGRAMMING. The regular programming available to subscribers through
our digital set-top service provides the following features:
- Subscribers have more control over their program choices and do
not have to pay for program packages that they do not wish to
subscribe to.
- Subscribers receive all their local TV stations as well as the
digital satellite services.
- Subscribers have more channel choices than they would from the
majority of cable companies.
- Subscribers receive an interactive program guide feature built
into the set-top receiver that makes finding favorite channels and
programming the VCR for taping easy.
- Subscribers have a choice of billing options including monthly
billing.
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CANADIAN PROGRAMMING. Star Choice provides all of the digital
television programming and performs all of the billing and collection functions
on our existing Canadian digital set-top subscriptions. In addition, Star Choice
operates a call center that is open 24 hours a day, seven days a week. Star
Choice provides our MDU customers with a variety of program packages and viewing
options. Prices for Star Choices' programs range from $14.99 per month for the
basic package to $52.99 per month for the platinum package, which includes movie
services and a selection of approximately 120 other channels.
U.S. PROGRAMMING. DirecTV provides all of the digital television
programming and performs all of their billing and collection functions for the
programming packages. DirecTV also provides and operates a 24 hour, 7 day a
week call centre. DirecTV provides our customers with a variety of program
packages and a-la-carte viewing options. Prices range from $19.99 per month
for the basic package to $80.99 per month for the premium package, which
includes movie services and a selection of approximately 155 other channels.
REVENUES.
CANADIAN REVENUES. We have two primary sources of revenue from our
Canadian digital set-top service: programming revenue and digital access fee
revenue.
PROGRAMMING REVENUE. Under our contract with Star Choice, we
receive 30% of the gross subscriber revenues from our sale of Star
Choice programming within our MDU properties. The average MDU
subscriber currently spends approximately $38 per month on Star Choice
programming, excluding pay per view purchases, which generates revenues
to us of approximately $11.40 per month per subscriber.
DIGITAL ACCESS FEE REVENUE. We currently charge subscribers in
our Canadian MDU properties a digital access fee ranging from $5.95 to
$7.95 per month for use of our digital set-top receiver. Approximately
20% of our subscribers have multiple set-top receivers. Star Choice
includes this amount in its monthly billing to the subscriber. Upon
receipt of the subscribers' payments, Star Choice remits 100% of the
digital access fees to us.
U.S. REVENUES. We have three revenue sources from our U.S. digital
set-top service: programming revenue, digital access fee revenue and upfront
capital reimbursement:
PROGRAMMING REVENUE. Under our contract with DirecTV, we
will receive approximately 20% share of gross subscriber revenues
(excluding pay-per-view) from the sale of the DirecTV programming
services within our MDU properties. Our average U.S. subscriber is
expected to spend approximately $40 per month on DirecTV programming,
excluding pay per view purchases. Therefore, we receive approximately
$8.00 per month from the sale of programming to each subscriber. We
are also entitled to earn performance incentives.
DIGITAL ACCESS FEE REVENUE. We charge US subscribers a digital
access fee each month for the digital set-top receiver that we provide.
The current fee is $8.00 per month. It may vary in the future by
geographical market and in response to competitive pressures. We
receive 100% of this digital access fee and bill it directly to the
subscriber. We control the digital access fee rate. An average of 20%
of customers take a second receiver for an additional $8.00.
UPFRONT CAPITAL REIMBURSEMENT. We receive an upfront capital
reimbursement from DirecTV which partially offsets our costs in
acquiring subscribers.
SMATV SYSTEM AND SERVICE
SMATV is a private cable system and service that is used to replace
existing cable service in MDU properties. Our Star Choice and DirecTV agreements
allow us to purchase customized programming packages at a wholesale rate and to
resell them to our SMATV properties, much like a cable television supplier
would. MDU owners and residents benefit from our SMATV service for a number of
reasons:
- Our charge for the programming package is generally less than the
rate the property owner was paying for cable service.
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- The program package delivered to the residents is custom tailored
to suit their needs, and therefore people do not pay for
television services they do not want to watch.
- Our rates are guaranteed for a longer term than cable rates,
which have increased substantially over the past five years.
- Our MDU residents receive a television signal that is of superior
quality than that provided by most cable services.
INFRASTRUCTURE. The infrastructure we install for a SMATV system
(called the "Head End") consists of one or more satellite antennas, several
satellite receivers, decoders, processors, modulators and related accessories
which receive the television broadcast signals and distribute them to the
residents. The Head End is connected to the property's pre-existing cable
system, which distributes the broadcast signal received by the satellite
antennas within the property.
PROGRAMMING. Unlike our digital set-top system where each resident
subscribes to our service separately, in a SMATV system the MDU owner purchases
from us a package of television programming which is available to all of the
property's residents. We work with the property owner to custom tailor the
package of television programming to suit the needs of the residents located in
the property.
REVENUES. We do not charge the MDU owner any initial fee for our SMATV
system equipment or installation. Instead, we charge the owner a monthly rate
for the programming package, based on the total number of suites in the
property. In SMATV systems, our earnings result from the difference between the
wholesale price charged to us by program providers and the price we charge for
the programming package.
OTHER EXISTING AND FUTURE SERVICES
IN-SUITE SECURITY MONITORING SERVICES. We currently supply each of our
properties with a front door security camera system as part of our digital
set-top and SMATV systems. The camera allows residents to view the building's
front door and lobby area on their television sets. In addition, we recently
signed an agreement with ADT Security Services Canada, Inc., Canada's leading
electronic security monitoring company, that allows us to offer monitored home
security services to residents of our MDU properties. Under the terms of that
agreement, we market ADT's services to property owners, managers and residents,
and receive a customer activation fee for each subscriber to whom we sell this
service plus a residual revenue stream. We expect to enter into a similar
agreement in the U.S. shortly.
HIGH-SPEED INTERNET ACCESS. We are in the process of developing a
high-speed Internet access service system for our hotel and residential MDU
properties. There are three elements of the high speed Internet service for the
MDU subscriber:
- the construction of an intranet system within the MDU property
which we will provide through our strategic alliance with 3Com
Corporation (see " - Our Strengths - Strategic Alliance with
3Com"),
- the value-added services and back office applications, and
- the link of our intranet system within the property to the back
office applications and the Internet.
We are currently negotiating with various North American bandwidth
providers for the provision of the last element for several properties in Canada
and the United States which are being equipped to carry our high speed Internet
service.
Currently, most MDU residents access the Internet through a dial-up
service. However, dial-up access has several drawbacks including delays,
frequent busy signals and dropped calls. The demand for high-speed Internet
access is growing rapidly, as standard dial-up networks become increasingly
congested with the growing number of Internet users. The only high-speed
Internet access currently available to many Canadian MDU residents is through
cable modem services. In order to facilitate the transition of potential MDU
television subscribers away from cable programming to our digital satellite
programming, we believe that we must also provide high-speed Internet access.
Once implemented, our service is intended to deliver high-speed Internet access,
plus technical and customer support, to our subscribers over existing telephone
wiring, so that our subscribers have no further need for a cable connection. In
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addition, we believe that once implemented, our system and service will deliver
better, more secure Internet access to our subscribers at pricing competitive
with cable modem services. However, there is no assurance that we will be able
to realize profit from our high-speed Internet access service.
LONG DISTANCE TELEPHONE SERVICES. We are currently negotiating a
distribution agreement with a telecommunications carrier to resell long distance
telephone services. Our goal is to begin offering this service to our MDU
subscribers during the fall of 2000. However, there is no assurance that we will
be able to negotiate such an agreement or implement this service by that time or
at all.
ACCESSORIES. Our sales representatives offer remote control units,
power bars and other television viewing accessories to our MDU subscribers under
a distribution agreement we have with Recoton Corp.
OUR STRENGTHS
In addition to the high quality of our digital television viewing
programming and the choices that our products offer to MDU residents, we believe
that our access agreements with MDU property owners and our strategic alliances
represent significant competitive and business strengths.
ACCESS AGREEMENTS
Our access agreements with the owners of MDU properties grant us
exclusive rights to provide digital satellite television services at an MDU
property for a term of five years and a right of first refusal for all other new
telecommunications services. However, our access agreements generally do not
bind us to deploy our service within any particular time during the term or at
all. This gives us the flexibility to deploy only on those properties that,
after our preliminary market research, we determine meet our profitability
criteria. There is no penalty to us if we decide not to deploy a property, and
we may still decide to deploy on the property at some later point during the
agreement term if the economics become favourable.
In Canada to date we have not been required to pay access fees to MDU
owners, except in a limited number of properties. However, in the U.S. MDU
marketplace access fees are common for exclusive access agreements and generally
consist of an initial payment or residual fees, or some combination of both.
Following the U.S. trend, we anticipate that increases in competition will cause
us to pay access fees to property owners for exclusive access at some point in
the future in both Canada and the U.S.
As of May 2000, we had deployed or had access agreements or letters of
intent to service approximately 390 MDU properties. We believe the fact that we
have obtained flexible long-term exclusive access agreements will give us a
significant advantage over future competitors.
STRATEGIC ALLIANCE WITH STAR CHOICE
In August 1998, we entered into a long-term System Operation Agreement
with Star Choice. Under this agreement, we establish and maintain distribution
systems in MDUs throughout Canada, and act as a commissioned sales agent for the
marketing of Star Choice programming to the residents of our Canadian MDU
properties. We incur only the costs associated with implementation of our
services, and do not pay any of Star Choice's programming or broadcasting costs.
Under our Star Choice agreement, we may not maintain distribution
systems or market digital satellite television services for other program
providers in Canada. We are not, however, prohibited from contracting with other
program providers in connection with our SMATV services. Consequently, we are
totally dependent on Star Choice for our digital set-top programming. During the
fiscal year ended September 30, 1999, revenues from Star Choice were 31% of our
total revenues. Star Choice is not required to use us on an exclusive basis and
could either contract with others to install distribution systems and market
programming in MDUs or undertake such activities directly through its retail
stores, as it does to single-family television households.
Our agreement with Star Choice automatically renews at the end of the
initial ten-year term ending August 27, 2008 for successive five-year terms
unless either party gives notice of termination 60 days before the end of any
term. Either party may terminate for the other's breach, bankruptcy or
unapproved assignment of the agreement. In addition, Star Choice may terminate
the agreement at any time if (1) the terms of Star Choice's license from the
CRTC prohibit
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or materially impair its ability to provide programming to us, or (2) it is
determined that we do not have the authority to perform our obligations under
the agreement.
STRATEGIC ALLIANCE WITH DIRECTV
In May 2000 we entered into a long-term System Operator Agreement with
DirecTV. Under this agreement, we are able to establish and maintain MDU
distribution systems in non-rural states of the United States (as identified in
the agreement), and act as a commissioned sales agent for the marketing of
DirecTV programming to residents of MDU properties. We only incur costs
associated with the implementation of our services and do not pay any of
DirecTV's programming or broadcasting costs.
Under the DirecTV agreement, we may not solicit sales or provide
equipment for any other direct-to-home digital satellite television services in
the United States. We are not, however, prohibited from contracting with other
program providers in connection with our SMATV services. Consequently, we are
totally dependent on DirecTV for our digital set-top programming. As this
agreement was recently executed, we have as of this date, derived no revenue
from our alliance with DirecTV. DirecTV is not required to use us on an
exclusive basis and could either contract with others to install distribution
systems and market programming in MDUs or undertake such activities directly
through retail stores, as it does for single-family television households.
Our agreement with DirecTV runs for an initial term of five years, with
an automatic extension of the entire agreement to coincide with the termination
of our longest running property access agreement. Thereafter, the agreement is
renewable at an additional five-year period at the option of both parties.
Either party may terminate for the other's breach, bankruptcy or unapproved
assignment of the agreement.
We negotiate long-term access agreements with property owners and
managers of multi-dwelling unit buildings giving the company the right to deploy
digital satellite television services to their residents. We provide, at no cost
to the property owner, all of the equipment and wiring infrastructure necessary
to deliver the DirecTV services to each resident, including a single 24-inch
satellite antenna for each property and a digital set top satellite receiver for
each DirecTV customer. Customers pay for the DirecTV programming services they
select, as well as a low monthly access fee for the set top receiver.
STRATEGIC ALLIANCE WITH 3COM CORPORATION
Also in May 2000, we entered into a non-exclusive Master Purchase Sales
Agreement with 3Com Corporation to become part of their preferred Visitor Based
Network (VBN) in order to provide broadband Internet products, systems and value
added services, through our new high-speed Internet service to our MDUs. 3Com
has selected us to participate in a direct purchasing agreement as a result of
our mutual interest in developing closer working relationships with application
service providers involved in developing emerging market opportunities. We
believe that 3Com's technology and advanced system solutions will allow us to
expand and deploy our high-speed Internet service to residents of our MDU
properties more cost effectively, but with better performance, than our
competitors.
Under our agreement with 3Com, we will receive preferred pricing and
discounts based partially on purchase volume for equipment needed to support our
new high-speed Internet services and access to strategic technology that will
allow us to deploy the latest in 3Com's high-speed broadband Internet and VBN
system solutions in our MDUs. This equipment and these systems and services are
simple to deploy as they require no special construction or wiring because
existing telephone wires in buildings are used.
Our agreement with 3Com runs for an initial term of one year with
automatic yearly renewals at the option of both parties with associated yearly
price and discount adjustments. Since this agreement was recently executed, we
are currently conducting beta trials at various MDU properties locations and
have not purchased any products or made any payments to 3Com.
THE INDUSTRY
The home entertainment and video programming industry continues to
develop competitive alternatives and consumer choices. The major choices in the
industry are: cable systems, direct-to-home satellite systems (DTH), wireless
cable systems, and broadcast television. There are other competitors, such as
Internet video providers, home video sales and rentals, and even telephone
companies. However, the cable system providers have continued to grow and
dominate this industry in terms of subscriber penetration, the number of
programming services available, audience
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<PAGE>
ratings and expenditures on programming. However, DTH providers dominate the
delivery of non-cable multi-channel video programming distribution systems.
DIRECT-TO-HOME SATELLITE SYSTEMS
Digital DTH systems provide subscribers with superior picture and sound
quality, more control over their programming choices, more channels to choose
from, and more competitive prices than offered by cable providers. DTH systems
include the digital set top and SMATV systems that we offer.
In a DTH system, video and audio programming is transmitted by a
broadcaster, such as Star Choice or DirecTV, via a satellite to a satellite
dish at the subscriber's location. DTH systems include high-power digital
systems which transmit to small (approximately one meter) receiving dish
antennas, and low-power analog systems which transmit to large receiving dish
antennas. A digital DTH system typically consists of one or more up-link
centers, one or more geostationary satellites and the subscriber's receiving
equipment. The majority of digital DTH broadcasters deliver their programming
to subscribers via commercial satellite. At the up-link center, equipment
combines, compresses, encodes and transmits or up-links the programming to
transponders located on the broadcaster's satellite. The transponders receive
and amplify the digital signal and transmit it to subscribers' receiving
dishes within the footprint covered by the satellite. The receiving dish
either sends the digital signal to the subscribers' digital set-top box or to
the SMATV head end, depending on the television viewing system in place on the
property, both of which decode the digital signal and convert it into an
analog signal compatible with the subscriber's television set.
Currently, there are only two satellite broadcasters licensed to
operate in Canada: Star Choice and ExpressVu. Star Choice is a wholly-owned
subsidiary of Canadian Satellite 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 approximately 800,000 households, or approximately 6.8%
of the 11.8 million Canadian television households. Both Star Choice and
ExpressVu have historically focused on the sale of programming to single-family
dwellings primarily through retail and commercial stores.
There are two digital DTH satellite broadcasters licensed to operate
in the U.S.: DirecTV and Echostar. In the last few years, these companies have
built a subscriber base of over approximately 14 million households, or
approximately 14% of the 100 million U.S. television households. Echostar
focuses exclusively on the sale of programming to single-family dwellings and
currently has no presence in the MDU marketplace. DirecTV also focuses
primarily on single-family dwellings, however it was the first DBS provider in
the U.S. to offer a full range of entertainment programming to the MDU market.
DirecTV typically does not deploy MDU systems itself but does so by
contracting with third-party MDU system operators.
We believe that the satellite broadcasters in both Canada and the U.S.
have focused on the single family market because of the high percentage of
television households that are single-family dwellings, the minimal technical
challenges in deployment and the difficulty in effectively marketing services to
MDU property owners, managers and residents. By limiting their focus, we believe
that both the Canadian and U.S. satellite broadcasting companies have left a
sizeable niche in the marketplace for distribution of DTH systems to MDU
residents.
COMPETITION
The home entertainment and video programming industry is highly
competitive, and we expect competition to intensify in the future. In both
Canada and the U.S., we face our most significant competition from hard-wire
cable operators. In addition, our competition includes other DTH providers,
wireless cable, off-air broadcasters, and the home video cassette industry.
Our competitors generally have greater financial, technical, marketing
and other resources, including brand or corporate name recognition, than we do.
In addition, a continuing trend towards business combinations and alliances in
the industry may create significant new competitors with resources far greater
than ours. These combined entities may provide bundled packages of television
services that compete directly with the services we offer. These entities may
also offer services sooner and at more competitive rates than we do. There is no
assurance that we will compete successfully with our current or future
competitors.
OTHER DTH PROVIDERS. Due to the unique characteristics required to
effectively serve the MDU digital television viewing market, we are not aware of
any other companies that provide digital satellite television viewing systems on
a national scope in either Canada or the U.S. We do face competition from local
and regional providers of DTH
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<PAGE>
services, and also occasionally from Star Choice or ExpressVu or other DirecTV
operators who agree to service an MDU in their area. In addition, ExpressVu
has recently announced that it will begin actively marketing its services
directly to MDUs in the Toronto area and we expect this deployment to expand
to other metropolitan markets in the future. However, in the U.S., Echostar
currently does not service the MDU market and DirecTV only serves it through
other system operators such as us. We expect that the lack of a
national-level competitor will change over time, but believe that our direct
marketing program and our favourable agreements with Star Choice and DirecTV
will make it difficult for new entrants to the North American MDU market to
compete effectively with us, at least initially. However, we recognize that
this window of opportunity may not remain open indefinitely.
HARDWIRED CABLE SYSTEMS. Cable companies currently dominate the market
in terms of subscriber penetration, the number of programming services
available, audience ratings and expenditures on programming. In Canada,
traditional cable companies dominate the market, serving an estimated 70% of the
11.8 million Canadian television households. However, within the last few years,
the CRTC has implemented a number of reforms to increase competition in the
marketplace. In the U.S., the traditional cable companies serve an estimated 78%
of the 100 million U.S. television households.
The majority of cable operators currently use analog technologies which
produce inferior quality video and sound compared to digital technologies, and
which permit the transmission of less than 40 channels. Many cable operators
have begun the process of upgrading to a digital signal; however, this
transition requires significant capital outlays and time to deploy. Cable
operators are also beginning to offer telephony, although the use of integrated
facilities remains primarily experimental. In the meantime, we believe that DTH
providers like us have a window of opportunity in which to acquire and
consolidate a significant subscriber base by providing a higher quality signal
and up to 200 video and audio channels at a comparable price to most cable
operators' current service.
OFF-AIR BROADCASTERS. The majority of North American households which
are not serviced by cable operators are either unserviced or are serviced only
by broadcast networks and local television stations ("off-air broadcasters").
Off-air broadcasters send signals through the air which are received by
traditional television antennas at the customer's property. Signals are
accessible to anyone with an antenna, and programming is funded by advertisers.
Audio and video quality is limited, and service can be adversely affected by
weather or by buildings blocking a signal.
WIRELESS CABLE SYSTEMS (MULTI-CHANNEL MULTI-POINT DISTRIBUTION SERVICES
(MMDS)). MMDS systems are a hybrid of cable transmission and off-air
broadcasting. MMDS was developed as an alternative where hard-wired cable
systems are unavailable or not possible. MMDS programming is transmitted by
local cable operators in a scrambled form through the air via microwave
frequencies to a small microwave dish at the subscriber's property, which
converts the signal to a frequency band used by standard cable services.
However, this system generally requires a direct "line-of-sight" from the
transmission facility to the subscriber's receiving dish, which limits its range
and capability of being received. There are very few MMDS providers operating in
North America and they serve regional markets only.
MARKETING
STRATEGY
Our marketing strategy is to focus on geographical markets in North
America which have a high concentration of MDU properties. The number of
decision makers in each of these dense markets is generally a relatively small
group. When we enter a new geographical market we focus on reaching those
decision makers in the shortest time possible. We believe that our marketing
strategy is unique in that, unlike any competitor of which we are aware, we not
only market our services to owners and building managers, but also to each
resident of the MDU property through our direct marketing and telemarketing
teams.
IMPLEMENTATION
Our marketing strategy is implemented by our regional sales offices in
the targeted geographical market. Our regional sales managers market our SMATV
and digital set-top services to MDU property owners and managers. Our direct
sales managers focus on developing relationships with the resident managers at
each of our MDU properties. They also coordinate, train and deploy our direct
marketing sales representatives, who present our direct marketing program to
residents of our MDU properties. In addition, our telemarketing team, located in
our home office in Richmond, British Columbia, coordinates its activities with
our direct sales teams during initial system deployment. We believe that our
direct marketing and telemarketing program gives us a significant marketing
advantage over competitive service providers in MDU properties. However, there
is no assurance that this advantage would be sufficient to sustain our business
if Star Choice, ExpressVu, DirectTV or Echostar decide to actively market to
MDUs.
<PAGE>
When we first install our digital set-top service in an MDU property,
the property and resident suites are equipped with marketing materials and
decals clearly identifying the property as a building that is "MDU WIRED" and
offering residents a choice of service provider. Our sales representatives give
a sales presentation and system demonstration first to the resident manager and
then to each of the residents in the property on a one-to-one basis. In
addition, they offer each resident the opportunity to preview our digital
satellite service for free for 30 days, and describe our other products.
Following our initial marketing campaign at an MDU property, a sales
representative will visit the property periodically to work with new residents.
As part of our access agreements, resident managers of our MDU properties
provide us with monthly resident move in and move out information, and encourage
new residents to contact us for digital satellite service. We provide the
resident managers with marketing materials to assist in explaining our "digital
upgrade" process and our 30-day free service preview offer.
DIRECT MARKETING SALES FORCE
Our direct marketing sales force is currently comprised of
approximately 46 direct marketing sales representatives working from six
regional sales offices in Canada and one in the U.S. We are currently recruiting
our marketing teams in the U.S. In addition to conducting sales presentations
and system demonstrations, our sales representatives install the digital set-top
receivers in the suites if that is the service which we are providing. Our sales
representatives are compensated through a combination of salary and commissions
earned on their sale of programming and other service subscriptions to the MDU
residents.
GOVERNMENT REGULATION
CANADA
REGULATION OF OUR BUSINESS. Canada's Broadcasting Act and the
Telecommunications Act (the "Broadcasting Act") is implemented by the CRTC. The
CRTC regulates all matters relating to broadcasting and telephony, whether cable
or wireless, ranging from program content, local and long distance telephony,
broadcasting delivery infrastructure and pricing, except Internet services which
are not regulated. Our program provider, Star Choice, must operate in accordance
with the Broadcasting Act as well as in accordance with CRTC-imposed "conditions
of license" to maintain its license. The current term of Star Choice's license
from the CRTC expires on August 31, 2002. Since Star Choice is our sole source
for programming, we would be adversely affected if Star Choice were to encounter
regulatory difficulties or if its license is not renewed by the CRTC.
As a programming reseller, we are not regulated by the CRTC. In
addition, under a CRTC license exemption, we can provide MDU residents with
off-air antennae for the receipt of local television broadcasting not carried by
Star Choice, so long as the distribution system inside the building is owned and
controlled by the MDU property owner. Our access agreements that provide for
local television access are designed to comply with this exemption.
POTENTIAL PRICING DEREGULATION. Over the last few years, the CRTC has
issued public notices stating that it anticipates deregulation of pricing in the
broadcasting industry once a competitive market has been achieved. The CRTC
currently defines the achievement of a competitive market as occurring when the
number of subscribers lost by an incumbent cable broadcasting distribution
undertaking exceeds 5%. To date, pricing has not been deregulated. While the
CRTC does not regulate the rates charged by Star Choice to its customer or by us
to our customers, deregulation of broadcast industry pricing generally could
affect the prices that we can charge our customers in a manner which could have
an adverse effect on our business.
PRELIMINARY REGULATION OF CABLE OWNERSHIP. Before January 1, 1998, the
CRTC required that a cable television company own all cables from the
distribution panel in an MDU to and including the "subscriber drop," which is
the wall plate in each subscriber's suite. These cable wirings are commonly
called inside wires. However, the CRTC has enacted preliminary regulations
opening the use of inside wires to all competitors for no charge, regardless of
ownership of the inside wires. The CRTC has also preliminarily ordered the
incumbent cable companies to abide by a policy of noninterference with new
entrants and to assist with the transfer of its customers to a new entrant
within 24 hours of receiving such notice. These regulatory changes have created
the opportunity for us to install and connect our new cable distribution systems
to the inside wires of each MDU subscriber's suite in order to provide Star
Choice programming and other services to our subscribers in direct competition
with the incumbent cable company.
The CRTC has not finalized regulations relating to either the ownership
of inside wires or the technical feasibility of bandwidth sharing, another open
issue. However, we have attempted to conform our current operating
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practices with the current preliminary regulations as well as the anticipated
final regulations. There is no assurance, however, that the final regulations
will be favorable to us, and, if not, they would have a material adverse
effect on our business and financial results.
UNITED STATES
We are not directly subject to rate regulation or certification
requirements by the Federal Communications Commission ("FCC"), the
Telecommunications Act of 1996 ("Telecom Act") or state public utility
commissions because our equipment installation and sales agent activities do not
constitute the provision of common carrier services. However, DirecTV is subject
to varying degrees of federal, state and local regulation.
FEDERAL REGULATION OF OUR DIGITAL SATELLITE TELEVISION BUSINESS. As a
resale agent for DirecTV, we will not be subject to regulation as a direct
broadcast satellite (DBS) provider, but rely upon DirecTV to procure all
necessary retransmission consents and other programming rights under the U.S.
Copyright Act. To the extent that we may also elect to provide our MDU customers
with secondary transmissions of local broadcast signals not currently available
via satellite, our offering of these services will be exempt from compulsory
copyright provisions under the Master Antenna Television Services (MATV)
provision of the Copyright Act. Our DBS and MATV systems do not use or
traverse public rights-of-way, and thus are exempt from the comprehensive
regulation of cable systems under Title VI of the U.S. Communications Act.
Because we are subject to minimal federal regulation, we enjoy have
significantly more competitive flexibility than do the franchised cable
systems with which we compete. We have fewer programming restrictions, greater
pricing freedom, and are not required to serve any customer who we do not
choose to serve. In addition, with the exception of local zoning laws and
regulations, state and local authorities generally have no jurisdiction over
our activities. We believe that these advantages help to make our satellite
television systems competitive with larger franchised cable systems.
STATE AND LOCAL CABLE SYSTEM REGULATION. We do not anticipate that our
deployment of digital satellite television services will be subject to state or
local franchise laws. Although we may be required to comply with state and local
property tax and environmental laws, as well as local zoning laws and applicable
covenants, conditions and restrictions when installing our antennae and other
microwave equipment, we do not anticipate that compliance with these laws will
have any material adverse impact on implementation of our business plan. The FCC
has preempted certain state, local and private restrictions on over-the-air
reception antennas placed on MDU properties, including rental properties and
properties occupied by, but not within the exclusive control of the viewer. This
limits the extent to which MDU owners and we may enforce certain aspects of our
rights of entry agreements which otherwise would prohibit, for example,
placement of DBS receive antennae in MDU areas (such as apartment balconies or
patios) under the exclusive occupancy of a renter.
STATE MANDATORY ACCESS LAWS. A number of states have enacted mandatory
access laws. Although such laws differ in some respects from state to state,
state mandatory access laws generally require that, in exchange for just
compensation, the owners of rental apartments (and, in some instances, the
owners of condominiums and manufactured housing parks) must allow the local
franchise cable television operator to have access to the property to install
its equipment and provide cable service to residents of the MDU. Such state
mandatory access laws effectively eliminate the ability of the property owner to
enter into an exclusive right of entry with a provider of cable or other video
programming services. In addition, some states have anti-compensation statutes
forbidding an owner of an MDU from accepting compensation from whomever the
owner permits to provide cable or other video programming services to the
property. Such statutes limit the ability of cable or other video programming
providers to enter into exclusive right of entry with an owner of an MDU because
an owner usually is induced to enter an exclusive agreement through financial
incentives. These statutes have been and are being challenged on constitutional
grounds in various states. We do not currently anticipate establishing
significant operations in any mandatory access states. If we elect to operate in
mandatory access states, we will probably enter into bulk sales agreements with
MDU owners, whereby the MDU owner agrees to purchase cable television, at a
discount, for each unit in the MDU and provides the service to the MDU resident
as one of the amenities included in their rent.
PREFERENTIAL ACCESS RIGHTS. We do not generally negotiate exclusive
rights of entry in MDUs, but have negotiated exclusive rights to provide
satellite services in competition with competing cable or MMDS providers, and
`rights-of-first-refusal' to match price and terms of third-party offers to
provide telecommunications services in building where we have negotiated access
rights. We believe that these preferential rights of entry are now generally
enforceable under applicable law; however, current trends at the state and
federal level suggest that the future enforceability of these provisions may be
uncertain. The FCC has initiated a pending rulemaking to determine whether such
exclusive contracts should be limited to a maximum period of seven years.
Although it is open to question whether the FCC has statutory and constitutional
authority to compel mandatory access, there can be no assurance that it will not
attempt to
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do so. Any such action would tend to undermine the exclusivity provisions of
our rights of entry. The FCC also has issued a rule preempting certain state,
local and private restrictions on over-the-air reception antennas. There can
be no assurance that future state or federal laws or regulations will not
restrict our ability to offer revenue sharing or access payments, limit MDU
owners' ability to receive revenue sharing or prohibit MDU owners from
entering into exclusive access agreements, any of which could have a material
adverse effect on our business.
REGULATION OF OUR HIGH-SPEED INTERNET SERVICE BUSINESS. Information
service providers (ISPs), including Internet access providers, are largely
unregulated by the FCC or state public utility commissions at this time (apart
from federal, state and local laws and regulations applicable to business in
general). However, there can be no assurance that this business will not
become subject to regulatory restraints. Also, although the FCC has rejected
proposals to impose additional costs and regulations on ISPs to the extent
they use local exchange telephone network facilities, it has been suggested
that certain telephone-to-telephone services provided by ISPs using the
Internet backbone may be reclassified as "telecommunications services" and
subject to regulation as such. Any such change may affect demand for the
Internet related services which we intend to provide.
There also have been efforts at the federal and state level to impose
taxes and other burdens on ISPs and to regulate content provided via the
Internet and other information services. These efforts have not generally been
upheld when challenged in court. Nonetheless, we expect that proposals of this
nature will continue to be debated in Congress and state legislatures in the
future. No assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to Internet services would not have a material
adverse effect on us. In addition, although there is a trend in the law away
from ISP liability for content posted or published on the Internet, there can
be no assurance that our involvement in the provision of ISP services will not
subject it to liability for acts performed by third parties using the
Internet.
FUTURE GOVERNMENT REGULATION. Many aspects of regulation at the
federal, state and local levels currently are subject to judicial review or are
the subject of administrative or legislative proposals to modify, repeal, or
adopt new laws and administrative regulations and policies, the results of which
we are unable to predict. The United States Congress and the FCC have in the
past, and may in the future, adopt new laws, regulations and policies regarding
a wide variety of matters, including rulemakings to implement provisions of the
Telecom Act or the Copyright Act, that could, directly or indirectly, affect
the operation of our business. Our business prospects could be materially
adversely affected (1) by the application of current FCC rules or policies in
a manner leading to a change in the regulatory status of our private cable
television and telecommunications operations, (2) by the adoption of new laws,
policies or regulations, (3) by changes in existing laws, policies or
regulations, including changes to their interpretations or applications, that
modify the present regulatory environment, or (4) by the failure of certain
rules or policies to change in the manner anticipated by us.
EMPLOYEES AND CONTRACTORS
As of May 31, 2000, we had approximately 81 full-time employees and
three independent contractors. Of these employees, 54 were in sales and
marketing, 12 were in operations, and 19 were in administration. None of our
employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are good.
FACILITIES
Our headquarters are in Richmond, British Columbia, where we centralize
our accounting, marketing and other administrative functions. The office is home
to the our senior management team, our subscription management system,
operations and telemarketing centre. We also maintain offices in Dartmouth, Nova
Scotia to service the Halifax, Nova Scotia area, in Mississauga, Ontario to
service the metroplitan Toronto area, and in Winnipeg, Manitoba to serve the
Prairie provinces and all of our SMATV system customers. Our Calgary and
Edmonton sales representatives work from home offices. We opened our first U.S.
office in New Jersey in June 2000.
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We currently lease all of our facilities. The table below describes
each of our offices and the basic terms of our leases:
<TABLE>
<CAPTION>
----------------------------- ------------------------ ---------------- -------------------------
APPROXIMATE
LOCATION OFFICE TYPE SQUARE FEET LEASE EXPIRATION
----------------------------- ------------------------ ---------------- -------------------------
<S> <C> <C> <C>
Richmond, executive offices, 6,070 December 31, 2001
British Columbia administration, sales (three leases); May 31,
office 2001 (one lease)
----------------------------- ------------------------ ---------------- -------------------------
Dartmouth, Nova Scotia sales office 400 month to month
----------------------------- ------------------------ ---------------- -------------------------
Winnipeg, Manitoba sales office 1,900 August 31, 2002
----------------------------- ------------------------ ---------------- -------------------------
Mississauga, Ontario sales office 1,559 July 31, 2004
----------------------------- ------------------------ ---------------- -------------------------
Totowa, New Jersey sales and 8,327 July 30, 2002
administration office
----------------------------- ------------------------ ---------------- -------------------------
</TABLE>
*The rental rate for the Ontario premises increases every year to a maximum
amount of $14,028 during the last term year from August 1, 2003 to July 31,
2004.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
OUR DIRECTORS AND EXECUTIVE OFFICERS AND THEIR AGES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sheldon B. Nelson(2) 38 President, Chief Executive Officer and Director
Robert A. Biagioni(1)(3) 43 Chief Financial Officer, Secretary and Director
J.E. (Ted) Boyle(1) 54 Director
Douglas G. Hooper(1)(2)(3) 39 Director
Robert Dyck(2)(3) 43 Director
Gary J. Monaghan 40 President of MDU Canada
</TABLE>
---------------------
(1) Compensation Committee member
(2) Corporate Governance Committee member
(3) Audit Committee member
SHELDON B. NELSON. Mr. Nelson has served as President, Chief Executive
Officer and a Director since November 1998. From 1983 to 1998, he was President
of 4-12 Electronics Corporation, a provider of products and services to the
Canadian satellite, cable, broadcasting and SMATV industries.
ROBERT A. BIAGIONI. Mr. Biagioni, a Chartered Accountant, has been the
Chief Financial Officer and a Director since February 2000 and Secretary since
November 1999. From 1986 to present, Mr. Biagioni has been the President of
Corus Financial Group which provides financial and operational consulting in the
United States and Canada, primarily in real estate, technology and
manufacturing. Mr. Biagioni has held senior financial roles with The HTM Group,
First Merchant Group, Telsoft Mobile Data Inc. (now Mobile Data Solutions Inc.)
and Sand River Resources Ltd. (now Rio Fortuna Explorations Corp.).
J.E. (TED) BOYLE. Mr. Boyle joined our Board of Directors as an outside
Director in May 2000. He has a 20-year executive career in the global
telecommunications industry. As founding President and CEO of ExpressVu Inc.,
Mr. Boyle was responsible for taking one of Canada's first national
direct-to-home satellite services from conception to launch readiness while
raising public awareness of DTH. Mr. Boyle has also held executive positions
with Tee-Comm Electronics, Regional Cablesystems and Canadian Satellite
Communications Inc. (Cancom). As Vice-President of Regional Companies at
Cancom, and later as Vice President of Market Development at Regional
Cablesystems, he led the licensing or acquisition of over 1,000 Canadian and
American cable systems.
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DOUGLAS G. HOOPER. Mr. Hooper joined our Board of Directors as an
outside Director in May 2000. He is an acquisitions and finance consultant, who
has extensive experience as a venture capitalist and mergers and acquisition
specialist in the mineral exploration, industrial processing and software
industries. Mr. Hooper was the founder and President of TelSoft Mobile Data
Inc., now Mobile Data solutions, Inc., a wireless communications software
company. In that position, he developed and implemented corporate strategy and
was responsible for raising capital, strategic alliances and mergers and
acquisitions. His background also includes several senior management positions
with venture capital investment firm The Equity Group.
ROBERT DYCK. Mr. Dyck joined our Board of Directors as an outside
Director in May 2000. He has been president of WRE Development Ltd. and its
Canadian and U.S. subsidiaries since 1978. WRE Development Ltd. owns, develops
and manages residential rental properties throughout the U.S. and Canada. Mr.
Dyck is also co-owner of Norquay Management, a residential property management
venture. As president, he has overseen the rapid expansion of a property and
development portfolio now valued at more that $100 million. Mr. Dyck has
substantial experience in the supervision of new apartment construction,
analysis of acquisition opportunities for development and investment purposes
and review of new technologies to increase the efficiency of the property
portfolio.
GARY J. MONAGHAN. Mr. Monaghan has served as President of MDU Canada
since November 1999, and from 1998 to November 1999 as Vice President, Sales and
Marketing of MDU Canada. Mr. Monaghan's experience in the cable television and
satellite communications industries started with Rogers Cable where he was
employed from 1983 to 1989. He was Regional Marketing Manager for Shaw
Cablesystems from 1989 to 1994. He ran his own satellite television company from
1994 until its bankruptcy in 1997. Mr. Monaghan joined 4-12 Electronics
Corporation as General Manager in April 1997 until December 1997.
SIGNIFICANT EMPLOYEES
OUR SIGNIFICANT EMPLOYEES AND THEIR AGES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph M. Strang 39 Director of International Sales, MDU Canada
Richard W. Hazell 34 Director of Technical Services, MDU Canada
John W. Mattice 39 Vice President, Finance and Administration, MDU Canada
Patrick J. Cunningham 32 Vice President, U.S. Operations
Mohamed Nabile ElBaz 41 Vice President of Broadband Technology
</TABLE>
JOSEPH M. STRANG. Mr. Strang joined MDU Canada in 1999 as Vice
President of Direct Sales and Marketing. Mr. Strang was Director of Sales and
Marketing for Westcom Communications from 1996 to 1999. From 1994 to 1996 he was
President of Universal Satellite.
RICHARD W. HAZELL. Mr. Hazell has been our Director of Technical
Services since December 1998. He was a lead technical officer with Scientific
Atlanta in Atlanta, Georgia, responsible for providing marketing and technical
support in Asia, Europe and Latin America from August 1996 to December 1998. In
1991 he founded, constructed and managed a cable television company in British
Columbia and sold the company in 1992. In addition, from 1993 to 1995 he
co-founded a cable television infomercial channel that broadcast throughout
Canada and the U.S.
JOHN W. MATTICE. Mr. Mattice joined us in February 2000 as Vice
President of Finance and Administration. Mr. Mattice is a Chartered Accountant.
He was Chief Financial Officer for Catamaran Ferries International Inc. from
1997 to February 2000, and performed various duties with the Office of the Group
Comptroller, Corporate Services Division and Assistant Controller of B.C. Hydro
from 1992 to 1997. From 1985 to 1991, he was an Audit Senior with Manning
Jamison, Chartered Accountants.
PATRICK J. CUNNINGHAM. Mr. Cunningham joined us in March 2000 as Vice
President of U.S. Operations. Mr. Cunningham is responsible for the
implementation of our business plan and expansion of our operations in the
United States. Mr. Cunningham held various positions with SkyView World Media,
LLC and its subsidiaries from June 1995 to March 2000, and was a maintenance
team leader with Schneider International, Inc. from September 1994 until June
1995.
29
<PAGE>
MOHAMED NABILE ELBAZ. Mr. ElBaz joined us in April 2000 as Vice
President of Broadband Technology. Mr. ElBaz will define, implement and drive
the strategic planning, marketing and business development for our high-speed
Internet division for the North American MDU marketplace. Prior to joining us,
Mr. ElBaz was at 3Com Corporation, one of our strategic technology providers,
since 1995, at which he played key roles in the launch and development of 3Com's
ATM network systems and Visitor-Based Networking (VBN), and in product planning
and management of 3Com's ATM LAN, MAN and WAN switching systems. Prior to
joining 3Com, Mr. ElBaz helped found LightStream Corporation (now Cisco Systems'
ATM business unit) from 1993 to 1994 and AtlasComm International from 1994 to
1995.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid
during our fiscal years ended September 30, 1998 and 1999, our only two fiscal
years, to our chief executive officer. None of our other most highly compensated
executive officers had annual salaries and bonuses exceeding $100,000 during
those fiscal years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------- --------------------------------------------
FISCAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY UNDERLYING OPTIONS (#) COMPENSATION
--------------------------- --------- ------------ --------------------- -------------------
<S> <C> <C> <C> <C>
Sheldon B. Nelson, President and 1998 -0- (1) -0- -0-
Chief Executive Officer 1999 $50,000 175,000 $7,750(2)
</TABLE>
(1) Mr. Nelson became the President and Chief Executive Officer on July 27,
1998. During fiscal year 1998, we did not engage in any business
activities.
(2) Auto allowance.
OPTIONS GRANTED IN FISCAL YEAR 1999
The following table provides information with respect to options
granted during fiscal 1999 to the executive officer named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SHARES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE PER
NAME GRANTED IN FISCAL YEAR SHARE (US$) EXPIRATION DATE
---- ---------------------- ---------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Sheldon B. Nelson 175,000 58% $1.00 11/24/03
</TABLE>
MANAGEMENT AGREEMENTS
Mr. Nelson, Mr. Biagioni and Mr. Monaghan have each entered into a
management agreement with us. Under these agreements, they receive annual
salaries of $180,000, $162,000, and $159,000, respectively. The agreements also
grant them the right to receive bonuses as determined by the Board of Directors
and to participate in our incentive stock option plans. The agreements require
them to maintain all confidential and proprietary information relating to our
business in confidence and to not be employed or enter into contracts with
persons or entities that compete directly with us during the 12 months following
termination of their respective agreements. Mr. Nelson and Mr. Monaghan's
agreement with us are employment agreements and Mr. Biagioni's agreement is a
consulting agreement between us and his corporation, Corus Financial Corp.
Each of our significant employees listed above is also party to an
employment or management agreement with us.
30
<PAGE>
COMPENSATION OF DIRECTORS
Our directors who are also employees do not receive cash compensation
for their services as directors or members of committees of the Board of
Directors. Our outside directors receive $1,000 per month and $1,000 per
meeting, and stock options under our 2000 Stock Option Plan. The outside
directors appointed in May 2000 received fully-vested options to purchase 25,000
shares at $2.50 per share, and another 25,000 options which will vest at the end
of one year if they attend 75% of all Board and committee meetings. We reimburse
directors for their reasonable expenses incurred in attending meetings.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Bylaws provide that, to the fullest extent permitted by the
Delaware General Corporation Law (DGCL), we shall indemnify our directors and
officers, and may indemnify its employees and agents. Such indemnification may
be made only if the person to be indemnified acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
our company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. The Bylaws
further provide that we may enter into an indemnification agreement pursuant
to which we will indemnify a director, officer, employee or agent to the
fullest extent permitted by the DGCL. At present, there is no pending
litigation or proceeding involving any of our directors, officers, employees
or agents in which indemnification is required or permitted, and we are not
aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
STOCK OPTION PLANS
We currently have two stock option plans under which we may grant
options to purchase shares of our common stock. The plans are summarized as
follows as of May 31, 2000:
<TABLE>
<CAPTION>
AUTHORIZED OPTIONS OPTIONS OPTIONS
PLAN NAME EFFECTIVE DATE OPTIONS GRANTED AVAILABLE EXERCISED
--------- -------------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
2000 Stock Option Plan February 5, 2000 4,000,000 3,510,360 489,640 125,000
Supplier Stock Option Plan December 31, 1998 215,135 100,000 115,135 0
</TABLE>
Both plans are administered by the board of directors who have sole
discretion and authority to determine individuals eligible for awards. The
conditions of exercise of each grant are determined by the board of directors at
the time of the grant.
2000 STOCK OPTION PLAN. Our 2000 Incentive Stock Option Plan (the "2000
Plan") authorizes the grant of options to our officers, directors, employees,
consultants and advisors. Our Directors/Officers Non-Qualified Stock Option Plan
and our Employees' Incentive Stock Option Plan were both terminated and the
265,276 options outstanding under those plans were consolidated into the 2000
Plan. Upon adopting the 2000 Plan, the board of directors granted an additional
2,785,084 options to certain of our directors, officers, employees and
consultants at an exercise price of US$5.00 per share. In May 2000, the Board of
Directors granted a total of 347,500 options to its newly-elected independent
directors and to certain officers and employees at exercise prices ranging from
US$2.50 to US$5.00. As of May 31, 2000, options to purchase 125,000 shares of
common stock had been exercised, and 3,385,360 options were outstanding. Of the
outstanding options, 1,355,908 options are presently exercisable and 2,029,452
options are unvested and vest over one- or three-year periods.
SUPPLIER PLAN. Our Supplier Stock Option Plan (the "Supplier Plan")
authorizes the grant of a specified number of five-year options to certain
key suppliers if they successfully complete specified work for us. If a
supplier who has received options ceases to be a key supplier, then that
supplier's options expire 30 days after the cessation date. As of May 31,
2000, we had granted a total of 100,000 options under the Supplier Plan.
These options were exercisable at prices ranging from US$1.50 and US$2.00 and
expire between March 2004 and March 2005. Options for 50,000 shares will be
granted to one of our current suppliers upon completion of its specified
work. As of May 31, 2000, all of the outstanding options under the Supplier
Plan were currently exercisable, and no options issued under the Supplier
31
<PAGE>
Plan had been exercised. All of the shares of common stock issuable under
these options are being offered for sale by this prospectus.
CERTAIN TRANSACTIONS
SUPPLY CONTRACT WITH 4-12 ELECTRONICS CORPORATION AND GRANT OF OPTIONS
4-12 Electronics Corporation is a Manitoba corporation owned by Chris
Nelson, who is Sheldon B. Nelson's brother. Sheldon B. Nelson served as
president of 4-12 Electronics Corporation until December 31, 1998. In December
1998, we purchased certain contracts to supply satellite television services to
MDU properties from 4-12 Electronics Corporation for $200,000. The purchase
included the related equipment leases, licenses and satellite reception
equipment located at the SMATV properties. We believe that the amount paid
represented the fair market value of the acquired assets.
CONSULTING SERVICES BY CHRIS NELSON
In December 1998, we granted Chris Nelson a five-year stand-alone
option to purchase 100,000 shares of common stock at an exercise price of
US$1.50 per share in consideration for consulting services in connection with
transiting assets we purchased from 4-12 Electronics Corporation. This option
may be exercised in whole or in part at any time until December 31, 2003. As of
March 31, 2000, none of these options had been exercised. All of the shares of
common stock issuable under this option are being offered for sale by this
prospectus.
LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings which could
have a material adverse effect on our business. The following are summaries of
currently pending legal proceedings.
SHAW CABLESYSTEMS LTD.
Shaw Cablesystems Ltd. commenced a lawsuit against us in the Court of
Queen's Bench of Alberta, Judicial District of Edmonton, on June 25, 1999. Shaw
alleges that our opening of junction boxes constitutes trespass on their
properties and seeks interim and permanent injunctive relief, damages of
$2,000,000, interest and costs. Shaw has agreed with us that no further steps
will be taken in this legal proceeding until we have completed our negotiations
with Shaw with respect to customer connection procedures. If the negotiations
are unsuccessful and Shaw prevailed in this litigation, we would be materially
adversely affected.
WHISTLER CABLE TELEVISION LTD.
Whistler Cable Television Ltd. commenced a lawsuit against us in The
Supreme Court of British Columbia on July 14, 1999. Other defendants are
Whistler Resort Management Ltd. and The Owners, Strata Plan No. LMS3230.
Plaintiff alleges that its personal property was taken and seeks return of its
personal property or damages in the alternative, damages resulting from breach
of the Broadcasting Act, R.S.C. 1991, C.11, an injunction against use of its
personal property, interest and costs. This case is in the pre-discovery phase.
We believe that an unsuccessful defense of this lawsuit would not have a
material adverse effect on us.
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 31, 2000 as to the
number of shares of our common stock and Series A convertible preferred stock
beneficially owned by (a) each person (including any group) known to own more
than 5% of the outstanding common stock or more than 5% of the outstanding
Series A convertible preferred stock, (b) each director, (c) the executive
officer named in the Summary Compensation Table, and (d) all directors and
32
<PAGE>
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 its name.
<TABLE>
<CAPTION>
Common Stock Series A Convertible
Preferred Stock
------------------------------------------ --------------------------------
Name and Address No. of Shares Percent No. of Shares Percent
of Beneficial Owner Beneficially Owned of Class Beneficially Owned of Class
------------------------------------- ------------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
Sheldon B. Nelson, President, Chief 1,137,682 (1) 8.24% 0 *
Executive Officer and Director
1504 - 170 Hargrave Street
Winnipeg, MB R3C 3H4 CAN
Robert A. Biagioni, Chief Financial 389,583 (2) 2.83% 0 *
Officer, Secretary and Director
305 - 250 West Fourth Street
North Vancouver, BC V7M 1H7 CAN
Gary J. Monaghan, President of MDU Canada 764,583 (3) 5.67% 0 *
415 Eastbourne Road
Kelowna, BC V1X 5K7 CAN
J.E. (Ted) Boyle, Director 25,000 (4) * 0 *
2273 Malden Court
Mississauga, Ontario L5K 1W6
Douglas G. Hooper, Director 25,000 (4) * 0 *
D68
Bowen Island, B.C. V0N 1G0
Robert Dyck, Director 25,000 (4) * 0 *
2102 Henderson Highway
Winnipeg, MB R 2G 1P6
Haywood Securities Inc. 938,280 (5) 6.56% 629,280 15.04%
Suite 1100, 400 Burrard Street
Vancouver, BC V6C 3A6 CAN
Belvedere Consultancy Ltd. 855,337 6.40% 0 *
c/o Bull Housser & Tupper
3000 - 1055 West Georgia Street
Vancouver, BC V6E 2K3 CAN
Gibralt Capital Corporation 865,000 (6) 6.08% 115,000 *
Suite 2000, 1177 West Hastings Street
Vancouver, BC V6E 2K3 CAN
531287 B.C. Ltd. 800,500 (7) 5.63% 0 *
Suite 597, 1027 Davie Street
Vancouver, BC V6E 4L2 CAN
Douglas J. Irving 604,937 (8) 5.44% 0 *
4331 Candlewood Drive
Richmond, BC V7C 4V9 CAN
Moore Stephens International 574,640 5.0% 0 *
Services (BVI) Limited, in trust
for the Wistaria Trust
Abbot Building, P.O. Box 3186
Road Town Tortola,
British Virgin Islands
34
<PAGE>
BPI Canadian Small Companies Fund 632,500 (9) * 632,500 15.12%
151 Yonge Street, Seventh Floor
Toronto, ON M5C 2W7 CAN
Lagunitas Partners LP 368,000 (9) * 368,000 8.80%
c/o Gruber & McBaine
50 Osgood Place
San Francisco, CA 94133
Deans Knight Capital Management 230,000 (9) * 230,000 5.50%
#730, 999 West Hastings Street
Vancouver, BC V6C 2W2 CAN
All executive officers and directors as a 2,366,848(10) 16.44% 0 *
group (6 persons)
</TABLE>
--------------------------
* Less than 5%
(1) Includes 699,140 shares held of record or beneficially owned 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 438,542 shares subject to options exercisable within 60 days.
(2) Includes 389,583 shares of common stock subject to options exercisable
within 60 days.
(3) Includes 644,640 shares of common stock held of record or beneficially
owned by 565423 BC Ltd., a British Columbia corporation wholly owned by
Mr. Monaghan, his spouse and trusts for minor children, and 119,943 shares
subject to options exercisable within 60 days.
(4) Consists of currently exercisable options to purchase shares of common
stock.
(5) Includes 574,200 shares of Series A convertible preferred stock
convertible into 629,280 shares of common stock within 60 days and
warrants to purchase 309,000 shares of common stock exercisable within 60
days.
(6) Includes 100,000 shares of Series A convertible preferred stock
convertible into 115,000 shares of common stock within 60 days and
warrants to purchase 750,000 shares of common stock exercisable within 60
days.
(7) Includes 400,250 shares of common stock and warrants to purchase 400,250
shares of common stock exercisable within 60 days.
(8) Includes 479,937 shares of common stock held of record by 571321 B.C.
Ltd., a British Columbia corporation wholly owned by Mr. Irving, his
spouse and children, and 125,000 shares of common stock held of record by
Mr. Irving.
(9) Consists of Series A convertible preferred stock convertible into the
number of shares of common stock shown in the table.
(10) Includes 1,343,780 shares of common stock and options to purchase
1,023,068 shares of common stock exercisable within 60 days and held
beneficially by the executive officers and directors.
SELLING STOCKHOLDERS
This prospectus relates to the offering by the persons listed below
(collectively, the "Selling Stockholders") for sale of shares of our common
stock acquired in private placement transactions, including those which may be
acquired upon conversion of our Series A convertible preferred stock or upon
exercise of options and warrants. Unless otherwise indicated, shares of common
stock were owned of record on May 31, 2000 by each Selling Stockholder. The
Selling Stockholders are offering the common stock for their own accounts. No
Selling Stockholder, to our knowledge, has had a material relationship with us
during the last three years, other than as an owner of our securities, except
for Haywood Securities Inc. and Douglas J. Irving. Haywood Securities Inc.'s
activities in connection with the sale of our Series A convertible preferred
stock is described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Financings." Douglas J. Irving was a director and chief financial officer and
secretary from the commencement of our operations until January 31, 2000.
34
<PAGE>
Assuming that all of the shares offered by the Selling Stockholders are
sold, none of the Selling Stockholders will beneficially own any shares of our
common stock after this offering, except for Douglas J. Irving who will continue
to beneficially own 479,937 shares, or 3.46%, of our outstanding common stock
after the offering.(1)
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF COMMON STOCK BEFORE THE OFFERING
---------------------------------------------------------------
NUMBER OF SHARES OWNED AND
SELLING STOCKHOLDER OFFERED UNDER THIS PROSPECTUS PERCENT OF CLASS (1)
------------------- ----------------------------- --------------------
<S> <C> <C>
531287 B.C. Ltd. (2) 800,500 5.65%
666521 Ontario Inc. (3) 66,700 *
ACE Corporation (3) 92,000 *
Aton Select Fund (3) 92,000 *
Avenir Capital Corp. (3) 85,100 *
Banque Privee Edmon De Rothschild SA (3) 46,000 *
Bel Cal Holdings (3) 109,250 *
Belvedere Consultancy Ltd. 855,337 6.01%
BPI Canadian Small Companies Fund (3) 632,500 4.52%
Britcomm Communications Ltd. (4) 60,000 *
Broadwater Capital Corp. (2) 675,000 4.81%
Brunswick Limited (3) 109,250 *
Canaccord Capital Corporation 50,000 *
Capmax Investments Ltd. (3) 29,900 *
Casurina Limited Partnership (3) 172,500 1.27%
CW Marketing Ltd. (3) 46,000 *
Deans Knight Capital Management (3) 230,000 1.69%
Dunrovin Holdings Ltd. (2) 500,000 3.60%
Gibralt Capital Corporation (5) 865,000 6.08%
Glenarriff Investments (3) 46,000 *
Global Strategy Canada Growth Fund (3) 115,000 *
Global Strategy Investment Funds, portfolio 103,500 *
manager for Investors Group Equity Fund (3)
Gruber & McBaine International ITF 115,000 *
Lagunitas Partners LP (3)
Gruber, Jon D. (3) 92,000 *
Haywood Securities Inc. ITF Charles Lyall (2) 266,666 1.96%
Haywood Securities Inc. ITF Lyall 330,000 2.41%
Family Trust (2)
Haywood Securities Inc. (6) 938,280 6.56%
Haywood Securities Inc. ITF Vista 266,666 1.96%
Del Mar Ltd. (2)
Howlett, Martha (3) 32,200 *
Irving, Douglas J. 125,000 *
Jacobs, William (3) 46,000 *
Kaimer Investment Corp. (3) 34,500 *
Lagunitas Partners LP (3) 368,000 2.68%
Lawrence, David 142,399 1.05%
Laxton, John Noel (3) 103,500 *
M.H. Holdings Inc. (7) 420,000 3.05%
Mazur, Stephen J. (3) 46,000 *
Murdoch, Blair (3) 32,200 *
National Bank Financial ITF John Freisen (2) 330,000 2.41%
Navesink Limited (3) 51,750 *
Nelson, Chris (8) 100,000 *
Oceanic Securities Inc. #3 (2) 200,000 1.47%
Oceanic Securities Inc. #5 (2) 200,000 1.47%
Old Canada Investment Corporation Limited (3) 57,500 *
Providence Securities (Bahamas) Ltd. 125,000 *
Rozel International Holding Limited (2) 266,666 1.96%
Safecrest Ltd. (3) 57,500 *
Sagit Investment Management Ltd. (9) 246,000 1.81%
35
<PAGE>
Simpson, Don (3) 46,000 *
Stephan, Rod (3) 46,000 *
Strand Management Corporation (3) 46,000 *
Thomas, Gren (3) 32,200 *
Tuscarora Capital Inc. (3) 66,700 *
US Global Investors (Guernsey) Ltd. (3) 57,500 *
Vertex One Management Inc. (3) 46,000 *
Winmark Capital Inc. (3) 40,250 *
---------- -----
TOTAL 11,155,014 45.48%
---------------------------------
</TABLE>
* Less than 1%.
(1) Computed on the basis of the 13,371,820 shares of common stock outstanding
on May 31, 2000 and rights to acquire common stock within 60 days of May
31, 2000 through conversion of preferred stock and exercise of warrants
and options.
(2) 50% of these shares are issuable upon the exercise of warrants with an
exercise price of US$0.75 or US$1.00 per share. The warrants are currently
exercisable and expire in November 2001 or February 2002.
(3) Consists of Series A convertible preferred stock currently convertible
into common stock at a 115% conversion ratio.
(4) Consists of common stock issuable upon exercise of currently exercisable
options for between US$1.50 and US$2.00 per share which expire between
April 2004 and March 2005.
(5) Consists of (a) 100,000 shares of Series A convertible preferred stock
which are immediately convertible into 115,000 shares of common stock,
and (b) 750,000 shares of common stock issuable upon exercise of a
currently exercisable warrant at US$2.50 per share which expires in March
2002.
(6) Consists of (a) 547,200 shares of Series A convertible preferred stock
which are immediately convertible into 629,280 shares of common stock, and
(b) 309,000 shares of common stock issuable upon exercise of a currently
exercisable warrant at US$2.50 per share which expires in January 2001.
(7) Includes (a) 165,000 shares of common stock issuable upon exercise of a
currently exercisable warrant at US$0.75 per share which expires in
November 2001, and (b) 40,000 shares of common stock issuable upon the
exercise of currently exercisable options at US$1.50 per share which will
expire in March 2004.
(8) Consists of 100,000 shares of common stock issuable upon the exercise of a
currently exercisable option at US$1.50 per share which expires in
December 2003.
(9) Includes (a) 100,000 shares of common stock issuable upon the exercise of
a currently exercisable warrant at US$1.00 per share which expires in
February 2002, and (b) 40,000 shares of Series A convertible preferred
stock which are immediately convertible into 46,000 shares of common
stock.
PLAN OF DISTRIBUTION
The shares being offered by the Selling Stockholders will be sold from
time to time in one or more transactions (which may involve block transactions):
- on the OTC Bulletin Board or on such other market on which the
common stock may from time to time be trading,
- in privately-negotiated transactions,
- through the writing of options on the shares,
- short sales, or
36
<PAGE>
- any combination of the above.
The sale price to the public may be the market price prevailing at the
time of sale, a price related to such prevailing market price, at negotiated
prices or such other price as the Selling Stockholders determine from time to
time. The shares may also be sold pursuant to Rule 144. The Selling Stockholders
have the sole and absolute discretion not to accept any purchase offer or make
any sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The Selling Stockholders may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. There
can be no assurance that all or any of the shares offered by this prospectus
will be issued to, or sold by, the Selling Stockholders. The Selling
Stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered by this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act or the Exchange Act or the rules and
regulations thereunder.
The Selling Stockholders, alternatively, may sell all or any part of
the shares offered by this prospectus through an underwriter. No Selling
Stockholder has entered into an agreement with a prospective underwriter. If a
Selling Stockholder enters into such an agreement or agreements, the relevant
details will be set forth in a supplement or revision to this prospectus.
The Selling Stockholders and any other persons participating in the
sale or distribution of the shares will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of any of the shares by the Selling
Stockholders or any other such person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and certain other activities with respect to such
securities for a specified period of time prior to the commencement of such
distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify certain of the Selling Stockholders,
against certain liabilities, including liabilities under the Securities Act , or
to contribute to payments such Selling Stockholders may be required to make in
respect of such liabilities.
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and various provisions of
our Certificate of Incorporation are summaries and are not necessarily complete.
Reference is made to the Certificate of Incorporation, a copy of which has been
filed with the SEC as an exhibit to our registration statement of which this
prospectus constitutes a part, for a more complete description.
Our authorized capital stock consists of (a) 50,000,000 shares of
common stock, par value US$0.001 per share, of which 13,371,820 shares were
issued and outstanding as of May 31, 2000 and (b) 5,000,000 shares of preferred
stock, par value US$0.001 per share. We have designated 4,100,000 shares of our
preferred stock as Series A convertible preferred stock, of which 3,637,200 were
issued and outstanding as of May 31, 2000.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders, including the election of
directors. The common stock carries no preemptive rights and is not convertible,
redeemable or assessable. The holders of common stock are entitled to dividends
in such amounts and at such times as may be declared by the Board of Directors
out of legally available funds. If we go into liquidation, dissolution or
winding up, the holders of common stock are entitled to ratably receive our net
assets available after payment or
37
<PAGE>
provision for payment of all debts and other liabilities, subject to prior
rights of holders of preferred stock then outstanding, if any. All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Our Certificate of Incorporation authorizes the issuance of 5,000,000
shares of preferred stock which may be issued in series with the powers,
designations, preferences and relative rights of each series to be provided for
in resolutions adopted by the board of directors pursuant to the authority to do
so set forth in our Certificate of Incorporation.
Our Board of Directors approved a certificate of designation creating a
series of preferred stock designated as the Series A convertible preferred
stock, and authorizing the issuance of up to 4,100,000 shares of Series A
convertible preferred stock, which was filed with the Delaware Secretary of
State effective January 26, 2000. The following is a summary of the rights and
preferences of the Series A convertible preferred stock:
- DIVIDENDS: The Series A convertible preferred stock does not bear any
dividends. However, so long as Series A convertible preferred stock is
outstanding, no dividends may be declared on the common stock or any other
subsequently designated and issued junior securities without the prior
consent of the holders of a majority of the outstanding shares Series A
convertible preferred stock.
- LIQUIDATION PREFERENCE: In the event of our bankruptcy, insolvency,
appointment of a receiver, dissolution or similar events and there are
assets and funds available for distribution to the holders of our capital
stock, the holders of the outstanding shares of Series A convertible
preferred stock will receive an amount equal to US$2.50 per share, plus an
amount equal to all declared and unpaid dividends on the Series A
convertible preferred stock, prior to any distribution to the holders of
common stock or any junior stock. Holders of the Series A convertible
preferred stock shall not be entitled to any further distribution in the
event of any liquidation, dissolution or winding-up of our affairs. If our
assets are not sufficient to pay in full the liquidation payments payable
to the holders of outstanding Series A convertible preferred stock, then
the holders shall share equally and ratably in the distribution of assets
in proportion to the full liquidation preference, including all declared
and unpaid dividends, to which each is entitled. Neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of our property or assets
nor our consolidation or merger with or into one or more entities shall be
deemed to be a liquidation, dissolution or winding-up of our affairs.
- CONVERSION RIGHTS: The Series A convertible preferred stock is immediately
convertible, at the option of the holder, into our common stock at a
conversion ratio of one share of common stock for 1.15 shares of Series A
convertible preferred stock until the Qualification Date, which is defined
as the earlier of (a) the date we receive a receipt for a final prospectus
from the British Columbia Securities Commission and a registration
statement for sale of the common stock issuable upon conversion of the
Series A convertible preferred stock is declared effective under the
Securities Act, or (b) January 28, 2001. The British Columbia Securities
Commission has informed us that it will not approve our prospectus unless
and until we are listed on a registered exchange or Nasdaq, which will not
occur until after June 26, 2000, if at all. We have therefore determined
not to file a final prospectus with the British Columbia Securities
Commission. Since the Qualification Date will not occurred by June 26,
2000, the conversion ratio is increased from its original one share of
common stock for each share of Series A convertible preferred stock to
1.15 shares of common stock for each share of Series A convertible
preferred stock. The conversion ratio is also subject to adjustment as a
result of stock splits, stock dividends, merger, consolidation or exchange
of shares for periods during which the registration statement of which this
prospectus is a part is not effective.
- AUTOMATIC CONVERSION: If any of the Series A convertible preferred stock
has not been converted by the holders during the earlier of (a) five days
after the date of this prospectus, or (b) January 28, 2001, such Series A
convertible preferred stock shall be automatically converted into common
stock without any further action on the part of the holders.
- VOTING RIGHTS: The holders of Series A convertible preferred stock will be
entitled to receive notice of and to attend all meetings of our
stockholders, to vote on all matters, including without limitation the
election of directors, and will be entitled to one vote per share. Except
as otherwise required under the Delaware General Corporate Law, the holders
of the Series A convertible preferred stock and the holders of the common
stock shall vote together and not as separate classes.
38
<PAGE>
WARRANTS AND OPTIONS
WARRANTS
As of May 31, 2000, we had issued warrants to purchase 3,241,749 shares
of our common stock outstanding, including warrants to purchase 309,000 shares
of common stock issued to Haywood Securities Inc. in connection with our Series
A convertible preferred stock offering. All of the shares underlying these
warrants are being registered for sale under this prospectus. The warrants
contain exercise prices ranging from US$0.75 to US$2.50 per share, and expire
between January 2001 and March 2002.
OPTIONS
At May 31, 2000, we had outstanding options to purchase 3,585,360
shares of our common stock, consisting of 3,385,360 options outstanding under
our 2000 Plan, 100,000 options outstanding under our Supplier Plan, and 100,000
options outstanding on a stand-alone basis. See "Management - Executive
Compensation - Benefit Plans" and "Certain Transactions". The shares of common
stock issuable upon exercise of the Supplier Plan options (plus 50,000 options
not yet issued under the Supplier Plan) and the stand-alone options are being
registered for sale under this prospectus.
REGISTRATION RIGHTS
Under a registration rights agreement with the holders of the
Series A convertible preferred stock, we agreed to register the shares of
common stock issuable upon conversion of shares of Series A convertible
preferred stock. This prospectus is part of the registration statement
intended to satisfy this obligation. The registration rights agreement
requires us to file a registration statement with respect to the shares. We
must also keep the registration statement effective until all of the common
stock offered pursuant to such registration statement has been sold. We are
responsible for the payment of all of our fees and costs associated with the
registration of the common stock covered by the registration statement. We
are required to indemnify and hold harmless each holder of such common stock
and its representatives against: (1) any untrue statement of a material fact
in the registration statement; (2) any untrue statement or alleged untrue
statement contained in any preliminary prospectus if used prior to the
effective date of the registration statement; or (3) any violation or alleged
violation of the Securities Act or the Exchange Act. Under the registration
rights agreement, the holders of the Series A convertible preferred stock
also have the right to include all or a part of their common stock in a
registration filed by us for purposes of a public offering in the event that
we fail to satisfy our other obligations as to the registration of the common
stock acquired by them.
We have also agreed to register the shares underlying certain of the
warrants held by certain of the Selling Stockholders for sale under this
prospectus.
DELAWARE ANTI-TAKEOVER LAW
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
If our common stock is authorized for quotation on the Nasdaq Stock
Market, we will be subject to the provisions of Section 203 of the Delaware
Corporation Law ("Section 203") regulating corporate takeovers. Section 203
prevents certain Delaware corporations, including those whose securities are
quoted on the Nasdaq Stock Market, from engaging, under certain circumstances,
in a "business combination" with any "interested stockholder" (a stockholder who
acquired 15% or more of a corporation's outstanding voting stock without the
prior approval of a corporation's board of directors) for three years following
the date that such stockholder became an "interested stockholder." A Delaware
corporation may "opt out" of Section 203 with an express provision in its
original certificate of incorporation, or an express provision in its bylaws
resulting from a stockholders' amendment approved by at least a majority of the
outstanding voting shares. We have not "opted out" of the application of Section
203.
CHARTER PROVISIONS WITH ANTI-TAKEOVER EFFECTS
Our Certificate of Incorporation contains provisions that may have the
effect of discouraging certain transactions involving an actual or threatened
change in control of our company. The Certificate of Incorporation grants to the
board of directors the authority to issue shares of preferred stock in one or
more series without stockholder
39
<PAGE>
approval. The ability to issue such preferred stock could have the effect of
discouraging unsolicited acquisition proposals or making it more difficult
for a third party to commence such acquisition.
TRANSFER AGENT AND REGISTRAR
Corporate Stock Transfer Corp. is the transfer agent and registrar for our
common stock.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The following changes of independent accountants have occurred:
1. 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 fiscal year ended September 30, 1998.
2. Deloitte & Touche LLP were principal independent accountants
for MDU Communications International, Inc. and audited its balance sheet as at
September 30, 1999 and September 30, 1998 and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
year ended September 30, 1999 and the period from inception, March 26, 1998 to
September 30, 1998, and are expected to continue as our principal independent
accountants. Deloitte & Touche LLP were engaged to be our principal independent
accountants on or about August 18, 1999.
In connection with the change of principal independent accountants:
(i) Nelson, Mayoka & Company, P.C. was 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 accountants' 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 Nelson, Mayoka & Company, P.C. on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
LEGAL MATTERS
The validity of the issuance of common stock offered by this prospectus
has been passed upon for us by Davis Wright Tremaine LLP, Seattle, Washington.
EXPERTS
The balance sheets as of September 30, 1998 and 1999, and the
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the year ended September 30, 1999, the period from inception of the
development stage to September 30, 1999, and the period from inception, March
26, 1998 to September 30, 1998, included in this prospectus and the related
financial statement schedules included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement, and
have been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission ("SEC") a
registration statement on Form SB-2. This prospectus, which is a part of the
registration statement, does not contain all of the information included in the
40
<PAGE>
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of MDU
Communications, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract, agreement or other document. You may review a copy of the
registration statement, including exhibits, at the SEC's public reference room
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Seven
World Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms.
We also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
SEC.
Our SEC filings and the registration statement can also be reviewed by
accessing the SEC's Internet site at http://www.sec.gov, which contains reports,
proxy and information statements and other information regarding registrants
that are filed electronically with the SEC.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MDU COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS
Independent Auditors' Report....................................................................................F-2
Consolidated Balance Sheets as at September 30, 1999 and 1998...................................................F-3
Consolidated Statements of Operations for the years ended September 30, 1999 and 1998...........................F-4
Consolidated Statements of Cash Flows for the years ended September 30, 1999 and 1998...........................F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended September 30, 1999 and 1998....F-6
Notes to Consolidated Financial Statements......................................................................F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2000 and September 30, 1999...........................................F-20
Consolidated Statements of Operations and Comprehensive Income (Loss) for the six months
months ended March 31, 2000 and 1999.......................................................................F-21
Consolidated Statements of Stockholders' Equity (Deficiency) for the six months
ended March 31, 2000 and 1999..............................................................................F-22
Consolidated Statements of Cash Flows for the six months ended March 31, 2000 and 1999.........................F-23
Notes to Consolidated Financial Statements.....................................................................F-24
</TABLE>
F-1
<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 (deficit) and cash flows for the year ended September 30,
1999, the period from inception of the development stage to 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 audits.
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 consolidated 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
its cash flows for the year ended September 30, 1999, the period from inception
of the development stage to 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.
As discussed in Note 16, the accompanying consolidated financial statements have
been restated.
Chartered Accountants
Vancouver, British Columbia
December 3, 1999 (except for Note 16
for which the date is February 3, 2000)
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA -U.S. REPORTING CONFLICTS
To the Shareholders of
MDU Communications International, Inc.
(A development stage company)
In the United States, reporting standards for auditors require 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 (except for Note 16 for which the date is February 3, 2000) is expressed
in accordance with Canadian reporting standards, which do not permit reference
to an uncertainty in the Independent Auditors' Report when the uncertainty is
adequately disclosed in the financial statements.
Chartered Accountants
Vancouver, British Columbia
December 3, 1999 (except for Note 16
for which the date is February 3, 2000)
F-2
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, September 30,
1999 1998
--------------------- --------------------
(AS RESTATED - SEE NOTE 16)
<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) 3,556,386 47,033
INTANGIBLE ASSETS
(net of accumulated amortization of $22,361) 126,710 -
----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,000,578 $ 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 (DEFICIT)
Share capital (Note 7) 1,559,720 160
Share purchase options 649,445 -
Share subscriptions received (Note 8) 1,793,026 -
Deficit accumulated during the development stage (2,623,505) (97,845)
----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,378,686 (97,685)
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $4,000,578 $ 74,132
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS (Note 2)
COMMITMENTS AND CONTINGENCIES (Note 9)
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
For the period For the period
from inception from inception
of the development FOR THE (March 26,
stage to YEAR ENDED 1998) to
September 30, SEPTEMBER 30, September 30,
1999 1999 1998
---------------------- --------------------- ----------------------
(as restated - see (AS RESTATED - SEE
Note 16) NOTE 16)
<S> <C> <C> <C>
REVENUE $ 566,698 $ 566,698 $ -
DIRECT COSTS 339,570 339,570 -
---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 227,128 227,128 -
---------------------------------------------------------------------------------------------------------------------
SALES EXPENSE 1,351,389 1,351,389 -
---------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 109,172 78,014 31,158
Amortization 195,260 195,260 -
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 -
---------------------------------------------------------------------------------------------------------------------
1,499,244 1,401,399 97,845
---------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $(2,623,505) $(2,525,660) $(97,845)
---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ - $ (0.28) $ (0.02)
---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - 9,114,668 8,581,335
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<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
of the development FOR THE (March 26,
stage to YEAR ENDED 1998) to
September 30, SEPTEMBER 30, September 30,
1999 1999 1998
------------------ --------------- -----------------
(as restated - see (AS RESTATED -
Note 16) SEE NOTE 16)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $(2,623,505) $(2,525,660) $(97,845)
Adjustment to reconcile net loss for the
period to cash utilized in operating activities
Amortization 195,260 195,260 -
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 -
Non-cash portion of sales expense
(Note 7(c)(i)) 116,149 116,149 -
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 (394,264) (310,643) (83,621)
---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on acquisition of subsidiary
(Note 4) 35,222 35,222 -
Purchase of property and equipment (3,595,435) (3,548,402) (47,033)
Purchase of intangible assets (149,071) (149,071) -
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,709,284) (3,662,251) (47,033)
---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from notes payable 275,000 125,000 150,000
Repayment of notes payable (275,000) (275,000) -
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 $ - $ - $ -
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
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 $133,851 representing
the fair value of share purchase options issued to suppliers. See Note 7
(c)(i).
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Share
Subscriptions Warrants/options Deficit
Common stock Received to purchase shares accumulated
----------------------- ------------------------ ---------------------- during the
Shares Amount Shares Amount Number Amount development Total
stage
----------- ----------- ----------- ------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued for cash at inception,
March 26, 19998 160 $ 160 - $ - - $ - $ - $ 160
Net loss for the period from
inception (March 26, 1998)
to September 30, 1998 - - - - - - (97,845) (97,845)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 160 160 - - - - (97,845) (97,685)
Issued for cash 3,367,500 50,155 - - - - - 50,155
Issued on business
acquisition (Note 7) 5,213,675 35,222 - - - - - 35,222
Exercise of warrants 640,000 1,474,183 - - - 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) - - 670,000 1,544,924 - - - 1,544,924
Issued for cash (net of
expenses) - - 420,000 248,102 - - - 248,102
Net loss for the year ended
September 30, 1999 (as
restated - see Note 16) - - - - - - (2,525,660) (2,525,660)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 (as
restated - see Note 16) 9,221,335 $1,559,720 1,090,000 $1,793,026 473,885 $649,445 $(2,623,505) $ 1,378,686
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
F-6
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(FORMERLY ALPHA BETA HOLDINGS, LTD.)
(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 and a national system operator for Star
Choice Communications, Inc., 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 in 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 accumulated deficit.
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and
reflect the following significant accounting policies.
(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 ("SFAS") No. 7,
"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.
F-7
<PAGE>
(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%
Furniture and fixtures 20%
</TABLE>
Direct costs of placing telecommunications equipment into
service and major improvements are capitalized.
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 Standards ("SFAS")
No.121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of", 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 that 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 ended
September 30, 1999 and the period from inception, March 26,
1998, to September 30, 1998 basic and diluted loss per common
share are equivalent as the effect of common shares issuable
upon the exercise of options or warrants would be
anti-dilutive. As of October 19, 1999, the Company had
outstanding securities which were convertible into 1,398,157
common shares which would be potentially dilutive in the
future.
F-8
<PAGE>
(h) FOREIGN EXCHANGE
The accounts of the Company and its foreign subsidiaries 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 expense
are translated at the rates prevailing on the respective
transaction dates. Translation gains and losses relating to
current monetary items and revenue and expenses denominated in
foreign currencies are included in income.
(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, compensation charges arise from those
situations where options are granted at an exercise price
lower than the fair value of the underlying common shares.
These amounts are amortized as a charge to operations over the
vesting periods of the stock options.
Stock-based compensation charges to other than employees are
recorded over the period that the related stock option or
warrant is earned. The amount of the compensation is based on
the fair value of the option or warrant at the applicable
measurement date.
(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 at September 30, 1998
and 1999 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.
(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 Accounting Standards Executive Committee of
the American Institute of Certified Public Accounts issued
Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5). Under SOP 98-5, the cost of
start-up activities should be expensed as
F-9
<PAGE>
incurred. The Company expects that the adoption of SOP 98-5
will not have a material impact on its financial position
or results of operations. The Company will be required to
adopt SOP 98-5 in fiscal 2000.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging
activities. SFAS No.133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. In 1999, SFAS No. 137 delayed the required
implementation by the Company of SFAS No. 133 to fiscal year
2001. The effect of implementation of SFAS No. 133 on the
Company's financial position or results of operations has not
been determined.
4. ACQUISITION OF SUBSIDIARY
On November 22, 1998, the Company completed the acquisition of all of
the issued and outstanding common shares of MDU in exchange for
5,213,835 common shares of the Company.
The business combination of the Company and MDU has been accounted for
as a reverse acquisition whereby MDU was identified as the acquirer and
the assets and liabilities of the Company were acquired by MDU at fair
value. Fair value has been estimated as $35,222 being the amount of the
sole asset, cash, of International at the date of acquisition. In
accordance with generally accepted accounting principles for reverse
acquisitions, these consolidated financial statements reflect the
historical results of MDU since its formation, and the MDU assets and
liabilities at their historic cost. The operations of the Company,
being the legal parent and accounting subsidiary, are reflected from
November 22, 1998 and its assets and liabilities are reflected at their
fair value at the date of acquisition.
Net assets of the Company at date of acquisition are as follows:
<TABLE>
<S> <C>
Assets
Cash $35,222
Liabilities -
--------------------------------------------------------
Net asset acquired $35,222
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, September 30,
1999 1998
--------------------- -----------------
<S> <C> <C>
(AS RESTATED -
SEE NOTE 16)
Telecommunications equipment, installed $3,295,475 $8,308
Telecommunications equipment, not yet placed in service 320,944 -
Computer equipment 38,020 11,308
Furniture and fixtures 74,847 27,417
-----------------------------------------------------------------------------------------------------------
3,729,286 47,033
Less: accumulated amortization (172,900) -
-----------------------------------------------------------------------------------------------------------
$3,556,386 $47,033
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
6. NOTES PAYABLE
The notes payable at September 30, 1999 and September 30, 1998 are
summarized as follows:
F-10
<PAGE>
<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 $250,000 $ -
as of August 15, 1999.
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
U.S. $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 U.S. $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.
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 of
U.S. $0.50 per common share.
F-11
<PAGE>
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:
<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>
(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 U.S.$1.50 per
share and exercisable for five years from the date of
issue. These options had not been issued at September 30,
1999.
F-12
<PAGE>
Under the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") the Company has
recorded stock based compensation charges in the amount of
$250,000 during the year ended September 30, 1999
($133,851 as additional capital costs of
telecommunications equipment and $116,149 as sales
expense). These charges are based on the fair value of the
stock options issued and issuable to suppliers calculated
on the date an eligible supplier completes the performance
required to earn the options. This amount is determined
using a Black Scholes option pricing model assuming a
weighted average annualized volatility of the Company's
share price of approximately 114%. For details of the
other material assumptions used in determination of the
fair value of these options see Note 7 (c)(ii).
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans")
On November 24, 1998 the Company established Employee
Plans whereby certain employees, officers and directors
will be granted options to purchase up to an aggregate of
600,000 common shares of the Company. 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.
<TABLE>
<CAPTION>
For the period from
inception of the YEAR ENDED Year ended
development stage to SEPTEMBER 30, September 30,
September 30, 1999 1999 1998
----------------------- -------------------- ----------------
<S> <C> <C> <C>
(AS RESTATED - SEE
NOTE 16)
Pro forma net
loss for the period $(3,006,895) $2,909,050 $(97,845)
------------------------------------------------------------------------------------------
Pro forma loss
per common share $ - $(0.32) $(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
F-13
<PAGE>
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, an expected term of five years, a weighted
average annualized volatility of the Company's share
price of 136% and a weighted average annualized risk
free interest rate of 5.50%.
(iii) Other Stock Options
At December 31, 1998 the Company granted stock options to
purchase 100,000 common shares of the Company at an option
price of 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 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 ($1,474,184).
The following table summarizes information concerning stock
options outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Exercise price
Number of options U.S.$ 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, 1999 Amount
----------------------------- -----------------------
<S> <C>
2000 $87,698
2001 82,217
2002 38,048
2003 13,644
2004 and thereafter 11,690
------------------------------------------------------------
$233,297
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
F-14
<PAGE>
(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. However, if the
negotiations are unsuccessful and if Shaw were successful in
its claim for damages, the Company's unsuccessful defense
would have a material adverse effect on the Company's
financial condition and operations.
(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 Defense disputing the
Plaintiff's 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.
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
F-15
<PAGE>
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>
For the period from Period from
inception of the March 26,
development stage YEAR ENDED 1998 to
to September 30, SEPTEMBER 30, September 30,
1999 1999 1998
----------------------- ------------------- -------------------
(As restated - See Note 16)
<S> <C> <C> <C>
Canadian statutory income tax rate 45.6% 45.6% 45.6%
Non-deductible expenses (9.4) (9.7) (1.0)
Tax loss carry forwards not
recognized in period of loss (36.2) (35.9) (44.6)
------------------------------------------------------------------------------------------------------------
Actual tax rate - - -
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
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 reasonably 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
-------------------- -------------------
(As restated - See Note 16)
<S> <C> <C>
Gross deferred tax liabilities:
Amortization $(219,845) $(854)
Gross deferred tax assets:
Operating loss carry forwards 1,023,997 44,568
----------------------------------------------------------------------------------------------------------
Net deferred tax assets 804,152 43,714
Less: valuation allowance (804,152) (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
$2,245,608 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
F-16
<PAGE>
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).
15. SUBSEQUENT EVENTS
(a) On October 13, 1999, the Company entered into an agreement with
Cannacord Capital Corporation ("Cannacord") which will provide a
basis for Cannacord 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 Cannacord. Cannacord
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. As at 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 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 Hong 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 a Hong Kong
corporation at 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 totaling 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 18, 1999 the Company signed an Agreement in
Principle 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 Principle 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 and completion of
due diligence by Star Choice, among other conditions of closing.
16. RESTATEMENT
Subsequent to the issuance of the Company's September 30, 1999
consolidated financial statements, the Company's management determined
that the fair value of warrants issued to certain non-employees for
services rendered during the period should have been reported as sales
expense, rather than capitalized to property and equipment. As a
result, the accompanying September 30, 1999 consolidated financial
statements have been restated from the amounts previously reported to
recognize an additional $116,149 of sales expense, a reduction to
amortization expense of $4,210 and a corresponding reduction to
property and equipment of $111,939. A summary of the significant
effects of the restatement is as follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
As Previously As Restated
Reported
------------------- -------------------
<S> <C> <C>
At September 30, 1999
Property and equipment $ 3,668,325 $ 3,556,386
Accumulated deficit (2,511,566) (2,623,505)
For the year ended September 30, 1999
Sales expenses 1,235,240 1,351,389
Amortization expense 199,470 195,260
Net loss (2,413,721) (2,525,660)
Basic and diluted loss per share (0.26) (0.28)
For the period from inception of the
development stage to September 30, 1999
Sales expenses 1,235,240 1,351,389
Amortization expense 199,470 195,260
Net loss $(2,511,566) $ 2,623,505
</TABLE>
F-18
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30, September 30,
2000 1999 1998
(Unaudited) (As restated - see
Note 15)
------------------- -------------------- -----------------
<S> <C> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 9,122,224 $ 43,621 $ 19,506
Prepaid expenses and deposits 31,497 15,407 7,593
Accounts receivable
Trade 197,696 178,607 -
Sales tax and other 166,358 79,847 -
TOTAL CURRENT ASSETS 9,517,775 317,482 27,099
PROPERTY AND EQUIPMENT, net (Note 5) 4,240,286 3,556,386 47,033
INTANGIBLE ASSETS
(net of accumulated amortization of $37,268
September 30, 1999 - $22,361) 111,803 126,710 -
TOTAL ASSETS $ 13,869,864 $ 4,000,578 $ 74,132
LIABILITIES
CURRENT
Accounts payable $ 718,820 $ 1,648,193 $ 15,867
Wages payable 98,965 37,451 -
Other accrued liabilities 97,509 106,604 5,950
Notes payable (Note 6) - 829,644 150,000
TOTAL CURRENT LIABILITIES 915,294 2,621,892 171,817
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
Common stock (Note 7) 5,588,789 1,559,720 160
Preferred stock (Note 7) 8,679,973 - -
Share purchase options 2,191,740 649,445 -
Share purchase warrants (Note 7(e)) 6,831,684 - -
Share subscriptions received (Note 8) - 1,793,026 -
Deficit accumulated during the development stage (10,337,616) (2,623,505) (97,845)
TOTAL SHAREHOLDERS' EQUITY 12,954,570 1,378,686 (97,685)
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,869,864 $ 4,000,578 $ 74,132
CONTINUING OPERATIONS (Note 2)
</TABLE>
See accompanying notes to the consolidated financial statements
F-19
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period For the six For the six For the For the For the
from inception months ended months ended period Year ended period
of the March 31, March 31, from September 30, from
development 2000 1999 inception of 1999 inception of
stage to (Unaudited) (Unaudited) the the
March 31, 2000 development development
(Unaudited) stage to stage
September to September
30, 1999 30, 1998
--------------- --------------- --------------- -------------- -------------- --------------
(As restated -see Note 15)
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ 1,152,487 $ 585,789 $ 142,482 $ 566,698 $ 566,698 $ -
DIRECT COSTS 666,219 326,649 126,280 339,570 339,570 -
GROSS PROFIT 486,268 259,140 16,202 227,128 227,128 -
INTEREST INCOME 80,241 80,241 - - - -
SALES EXPENSE 2,218,630 867,241 360,783 1,351,389 1,351,389 -
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising and promotion 47,881 7,541 3,183 40,340 9,182 31,158
Amortization 465,274 270,014 15,535 195,260 195,260 -
Consulting 1,259,092 1,081,647 177,445 177,445 177,445 -
Foreign exchange loss (gain) (82,327) (121,822) 33,064 39,495 39,495 -
Interest 84,592 50,243 3,988 34,349 32,321 2,028
Financing (Note 7(e)(ii)) 4,241,424 4,241,424 - - - -
Investor Relations 179,030 110,198 36,652 68,832 68,832 -
Management Fee 26,500 - - 26,500 - 26,500
Office 232,353 175,185 15,070 57,168 54,103 3,065
Occupancy 134,221 64,392 12,872 69,829 64,429 5,400
Professional fees 467,737 324,040 12,086 143,697 130,114 13,583
Repairs and maintenance 46,569 35,268 3,141 11,301 11,301 -
Telephone 113,369 62,315 9,303 51,054 48,342 2,712
Travel 105,942 56,291 20,833 49,651 38,826 10,825
Vehicle 22,281 7,792 6,644 14,489 11,915 2,574
Wages 1,341,557 821,723 324,526 519,834 519,834 -
8,685,495 7,186,251 674,342 1,499,244 1,401,399 97,845
NET LOSS FOR THE PERIOD $(10,337,616) $ (7,714,111) $(1,018,923) $(2,623,505) $ (2,525,660) $ (97,845)
Adjustment for beneficial $(11,147,175) $ - $ - $ - $ -
conversion feature of convertible
preference shares (Note 7(c))
Adjustment for beneficial (355,047) - - - -
conversion feature of warrants
(Note 7(e)(iii))
NET LOSS FOR THE PERIOD $(19,216,333) $(1,018,923) $ (2,525,660) $ (97,845)
ATTRIBUTABLE TO COMMON SHAREHOLDERS
BASIC AND DILUTED LOSS PER COMMON $(1.86) $(0.11) $(0.28) $ (0.02)
SHARE
WEIGHTED AVERAGE COMMON SHARES 10,341,555 9,221,335 9,114,668 8,581,335
OUTSTANDING
</TABLE>
See accompanying notes to the consolidated financial statements
F-20
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period For the six For the six For the For the For the
from inception months ended months ended period year ended period
to March 31, March 31, March 31, from September from
2000 2000 1999 inception of 30, 1999 inception
(Unaudited) (Unaudited) (Unaudited) the development to
stage to September September
30, 1999 30, 1998
--------------- -------------- ------------- ------------ ------------ ----------
(As restated-see Note 15)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $(10,337,616) $(7,714,111) $(1,018,923) $(2,623,505) $(2,525,660) $(97,845)
Adjustments to reconcile net loss for the
period to cash utilized in operating
activities:
Amortization 465,274 270,014 15,535 195,260 195,260 -
Non-cash portion of wages expense (Note 7 745,998 523,998 222,000 222,000 222,000 -
(d)(ii))
Non-cash consulting expense (Note 7 (d)(iii)) 1,220,726 1,043,281 177,445 177,445 177,445 -
Non-cash portion of sales expense (Note 7 180,567 64,418 116,149 116,149 116,149 -
(d)(i))
Non-cash portion of financing charges 4,241,424 4,241,424 - - - -
(Note 7 (e)(i))
Consulting fee settled with shares 26,562 26,562 - - - -
Change in operating assets and liabilities:
Prepaid expenses and deposits (31,497) (16,090) (29,291) (15,407) (7,814) (7,593)
Accounts receivable (364,054) (105,600) (153,905) (258,454) (258,454) -
Accounts payable 718,822 (929,371) 387,917 1,648,193 1,632,326 15,867
Wages payable 98,965 61,514 17,681 37,451 37,451 -
Other accrued liabilities 84,470 (22,134) 29,131 106,604 100,654 5,950
Net cash used in operating activities (2,950,359) (2,556,095) (236,261) (394,264) (310,643) (83,621)
INVESTING ACTIVITIES
Cash acquired on acquisition of subsidiary 35,222 - 35,222 35,222 35,222 -
(Note 4)
Purchase of property and equipment (4,466,925) (871,490) (961,035) (3,595,435) (3,548,402) 47,033)
Purchase of intangible assets (149,071) - (149,071) (149,071) (149,071) -
Net cash used in investing activities (4,580,774) (871,490) (1,074,884) (3,709,284) (3,662,251) (47,033)
FINANCING ACTIVITIES
Proceeds from notes payable 275,000 - 125,000 275,000 125,000 150,000
Repayment of notes payable (275,000) - (275,000) (275,000) (275,000) -
Proceeds from convertible notes payable 829,644 - - 829,644 829,644 -
Proceeds from issue of common stock 1,286,271 1,235,956 50,154 50,315 50,155 160
Proceeds from issue of preferred stock 10,915,185 10,915,185 - - - -
Proceeds from issue of warrants 355,047 355,047 - - - -
Proceeds from exercise of warrants 1,474,184 - 1,474,184 1,474,184 1,474,184 -
Proceeds from share subscriptions received 1,793,026 - - 1,793,026 1,793,026 -
Net cash provided by financing activities 16,653,357 12,506,188 1,374,338 4,147,169 3,997,009 150,160
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,122,224 9,078,603 63,193 43,621 24,115 19,506
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 43,621 19,506 - 19,506 -
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,122,224 $ 9,122,224 $ 82,699 $ 43,621 $ 43,621 $ 19,506
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 10,863 $ 7,030 $ 3,833 $ 32,321 $ 32,321 $ -
SUPPLEMENTAL CASH FLOW DISCLOSURE OF
CASH AND CASH EQUIVALENTS
Cash $ 51,452 $ 51,452 $ 82,699 $ 43,621 $ 43,621 $ 19,506
Short term investments 9,070,772 9,070,772 - - - -
$ 9,122,224 $ 9,122,224 $ 82,699 $ 43,621 $ 43,621 $ 19,506
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended March 31, 2000, the Company recorded non-cash
additions to property and equipment in the amount of $67,516 (year ended
September 30, 1999 - $133,851) representing the fair value of share purchase
options issued to suppliers. See Note 7 (d)(i).
During the six months ended March 31, 2000, the Company issued 50,000
common shares valued at $26,562, in exchange for consulting fees received (Note
7 (b)).
During the six months ended March 31, 2000, the notes payable valued at
$829,644 at September 30, 1999 were converted to 997,736 common shares (Note 6).
During the six months ended March 31, 2000, the Company issued 547,200
shares of Series A Convertible Preferred Stock with a fair value of US$1,368,000
in exchange for agent's services as described in Note 7(c).
See accompanying notes to the consolidated financial statements
F-21
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN CANADIAN DOLLARS)
(AMOUNTS FOR THE PERIOD SUBSEQUENT TO SEPTEMBER 30, 1999 ARE UNAUDITED)
<TABLE>
<CAPTION>
Warrants/
options &
additional
paid-in
Share capital
Subscriptions to purchase Convertible
Common stock Received shares Preferred stock
----------------------- ---------------------- ----------- --------------------
Shares Amount Shares Amount Amount Number Amount
---------- ---------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issued for cash at 160 $ 160 - $ - $ - - $ -
inception, March 26, 1998
Net loss for the period - - - - - - -
from inception to September
30, 1998
Balance, September 30, 160 160 - - - - -
1998
Issued for cash 3,367,500 50,155 - - - - -
Issued on business 5,213,675 35,222 - - - - -
acquisition (Note 4)
Exercise of warrants 640,000 1,474,183 - - - - -
Grant of employees' - - - - 222,000 - -
options
Suppliers' options issued - - - - 250,000 - -
and issuable
Grant of options to - - - - 177,445 - -
consultant
Issued for cash (net of - - 670,000 1,544,924 - - -
expenses of the issue of
$176,437)
Issued for cash - - 420,000 248,102 - - -
Net loss for the year ended - - - - - - -
September 30, 1999
Balance, September 30, 1999 9,221,335 1,559,720 1,090,000 1,793,026 649,445
(as restated see Note 15)
Issued for subscriptions 1,090,000 1,793,026 (1,090,000) (1,793,026) - - -
Issued for cash 1,887,749 1,054,853 - - 355,047 - -
Issued for services 100,000 53,125 - - - - -
Cancelled (50,000) (26,563) -
Exercise of stock options 125,000 273,600 - - (92,500) - -
Conversion of notes 997,736 881,028 - - - - -
payable to shares
Grant of employee stock - - - - 523,998 - -
options
Grant of consultants' and - - - - 1,110,797 - -
supplier stock options
Issue of preferred stock - - - - - 3,637,200 8,679,973
(net of expenses of issue
$2,206,013)
Beneficial conversion - - - - (11,502,222) - -
feature related to
convertible preferred stock
and warrants issued in
connection with a private
placement
Accretion of beneficial - - - - 11,502,222 - -
conversion feature related
to convertible preferred
stock and warrants
Issue of share purchase - - - - 6,476,637 - -
warrants
Net loss for the six months - - - - - - -
ended March 31, 2000
Balance, March 31, 2000 13,371,820 $5,588,789 - $ - $9,023,424 3,637,200 $8,679,973
<CAPTION>
Deficit
accumulated
during the
development
stage Total
------------ ---------
<S> <C> <C>
Issued for cash at $ - $ 160
inception, March 26, 1998
Net loss for the period (97,845) (97,845)
from inception to September
30, 1998
Balance, September 30, (97,845) 97,685)
1998
Issued for cash - 50,155
Issued on business - 35,222
acquisition (Note 4)
Exercise of warrants - 1,474,183
Grant of employees' - 222,000
options
Suppliers' options issued - 250,000
and issuable
Grant of options to - 177,445
consultant
Issued for cash (net of - 1,544,924
expenses of the issue of
$176,437)
Issued for cash - 248,102
Net loss for the year ended (2,525,660) (2,525,660)
September 30, 1999
Balance, September 30, 1999 (2,623,505) 1,378,686
(as restated see Note 15)
Issued for subscriptions - -
Issued for cash - 1,409,900
Issued for services - 53,125
Cancelled (26,563)
Exercise of stock options - 181,100
Conversion of notes - 881,028
payable to shares
Grant of employee stock - 523,998
options
Grant of consultants' and - 1,110,797
supplier stock options
Issue of preferred stock - 8,679,973
(net of expenses of issue
$2,206,013)
Beneficial conversion - (11,502,222)
feature related to
convertible preferred stock
and warrants issued in
connection with a private
placement
Accretion of beneficial - 11,502,222
conversion feature related
to convertible preferred
stock and warrants
Issue of share purchase - 6,476,637
warrants
Net loss for the six months (7,714,111) (7,714,111)
ended March 31, 2000
Balance, March 31, 2000 $(10,337,616) $12,954,570
</TABLE>
See accompanying notes to the consolidated financial statements
F-22
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(INFORMATION AS AT AND FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
-------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Prior to the acquisition described in Note 4 below, MDU Communications
International, Inc. (formerly Alpha Beta Holdings, Ltd.)
("International" or the "Company") was essentially inactive. On
November 2, 1998 the Company acquired all of the issued and outstanding
common shares of MDU Communications Inc. ("MDU") and on November 24,
1998, the Company changed its name from Alpha Beta Holdings, Ltd. to
MDU Communications International, Inc. MDU, a Canadian incorporated
telecommunications company is a national system operator for Star
Choice Communications, Inc. and provides delivery of home entertainment
and information technology to residents of multi-dwelling units such as
apartment buildings, condominiums, gated communities, hotels and
motels.
The acquisition of MDU has been accounted for as a reverse acquisition
on the basis that the former shareholders of MDU now control the
affairs of the Company. As a result, these consolidated financial
statements of the Company include the accounts of International (the
accounting subsidiary) and MDU (the accounting parent), for the period
subsequent to the effective date of the reverse acquisition described
in Note 4. The comparative figures for periods prior to the reverse
acquisition represent the historical results of operations, cash flows
and financial position of the accounting parent, MDU.
2. CONTINUING OPERATIONS
The financial statements have been prepared on the going concern basis
of accounting which contemplates realization of assets and liquidation
of liabilities in the ordinary course of business. The Company has
limited financial resources, has incurred operating losses since
inception and does not expect to generate profitable operations until
fiscal 2001 or later. In addition, on September 20, 1999, the Company
received a demand for payment with respect to outstanding notes payable
with a principal value of $733,652. The Company has negotiated an
extension to the repayment terms of these notes to June 30, 2000. The
Company has also negotiated an extension to the repayment terms of
notes payable in the amount of $95,992 until February 28, 2000. The
Company's funding of its initial operating expenses, working capital
needs and capital commitments is dependent upon its ability to raise
additional financing. The Company is currently pursuing opportunities
to raise financing through private placements of both equity and debt
securities and has engaged an investment banker to assist it in raising
financing through a public equity offering. As a result, on January 28,
2000 the Company issued 3,637,200 Series A Preferred Stock in exchange
for cash proceeds of $10,915,186 (U.S.$7,725,000) net of share issue
costs (Note 7(c)). In addition, the Company completed private
placements for cash of $909,435 as described in Note 7(e)(iii) and on
February 28, and March 8, 2000 the balance of outstanding notes payable
were converted into common shares of the Company (Note 6).
The Company's ability to continue as a going concern is dependent on
its ability to raise additional funds as required and ultimately to
achieve profitable operations. The financial statements do not include
any adjustments that might result from the outcome of the above noted
uncertainties. Adjustments, if any, would affect the carrying value and
classification of assets and liabilities and the amount of net loss and
accumulated deficit.
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and
reflect the significant accounting polices described below. In the
opinion of management all adjustments necessary to present fairly the
financial position, results of operations and cash flows at March 31,
2000 and for all interim periods presented have been made. Interim
results are not necessarily indicative of results for a full year.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are issued under the
name of the Company, being the legal parent, but are
considered a continuation of the activities and operations of
MDU Communications Inc. (see Note 4). All inter-company
balances and transactions are eliminated.
F-23
<PAGE>
(b) DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage enterprise as defined in
Statement of Financial Accounting Standard ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises."
The Company's planned principal operations have commenced, but
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 the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
(d) 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%
Furniture and fixtures 20%
</TABLE>
Direct costs of placing telecommunications equipment into
service and major improvements are capitalized.
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 Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", 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 six months ended March
31, 2000 and 1999; 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
F-24
<PAGE>
number of common shares outstanding for a period, if
dilutive. For the six months ended March 31, 2000 and March
31, 1999, the year ended September 30, 1999 and the period
from inception, March 26, 1998, to September 30, 1998,
basic and diluted loss per common share are equivalent as
the effect of common shares issuable upon the exercise of
options or warrants would be anti-dilutive. As of March 31,
2000 the Company had outstanding securities which were
convertible and/or exercisable into 10,129,309 common shares
which would be potentially dilutive in the future.
(h) FOREIGN EXCHANGE
The accounts of the Company and its foreign subsidiaries 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 expense
are translated at the rates prevailing on the respective
transaction dates. Translation gains and losses relating to
current monetary items and revenue and expenses denominated in
foreign currencies are included in income.
(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, compensation charges arise from those
situations where options are granted at an exercise price
lower than the fair value of the underlying common shares.
These amounts are amortized as a charge to operations over the
vesting periods of the stock options.
Stock-based compensation charges to other than employees are
recorded over the period that the related stock option or
warrant is earned. The amount of the compensation is based on
the fair value of the option or warrant at the applicable
measurement date.
(j) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," established
standards for the reporting and display of comprehensive
income and its components (revenue, expenses, gains and
losses) in a full set of general-purpose financial statements.
The Company has no comprehensive income items, other than the
net loss, in any of the periods presented.
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities and
notes payable at September 30, 1998 and 1999 and March 31,
2000 are estimated to approximate their carrying values due to
the relative liquidity or short-term nature of these
instruments.
(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 March 31, 2000, represented
70% of total trade accounts receivable (September 30, 1999 -
76%; September 30, 1998 - Nil%). The Company provides an
allowance for bad debts based on historical experience and
specifically identified risk. At March 31, 2000 there was an
allowance for doubtful accounts of $20,000 (September 30, 1999
and 1998 - $Nil).
F-25
<PAGE>
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accounts issued
Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" (SOP 98-5). Under SOP 98-5, the cost of
start-up activities are expensed as incurred. The Company
believes that the adoption of SOP 98-5 does not have a
material impact on its financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging
activities. SFAS No.133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. In 1999, SFAS No. 137 delayed the required
implementation by the Company of SFAS No. 133 to fiscal year
2001. The effect of implementation of SFAS No. 133 on the
Company's financial position or results of operations has not
been determined.
4. ACQUISITION OF SUBSIDIARY
On November 22, 1998, the Company completed the acquisition of all of
the issued and outstanding common shares of MDU in exchange for
5,213,835 common shares of the Company.
The business combination of the Company and MDU has been accounted for
as a reverse acquisition whereby MDU was identified as the acquirer and
the assets and liabilities of the Company were acquired by MDU at fair
value. Fair value has been estimated as $35,222 being the amount of the
sole asset, cash, of International at the date of acquisition. In
accordance with generally accepted accounting principles for reverse
acquisitions these consolidated financial statements reflect the
historical results of MDU since its formation, and the MDU assets and
liabilities at their historic cost. The operations of the Company,
being the legal parent and accounting subsidiary, are reflected from
November 22, 1998 and its assets and liabilities are reflected at their
fair value at the date of acquisition.
Net assets of the Company at the date of acquisition are as follows:
<TABLE>
<S> <C>
Assets
Cash $35,222
Liabilities -
------------------------------------------------------------------------------
Net asset acquired $35,222
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, September 30, September 30,
2000 1999 1998
-------------- ---------------- ----------------
(Unaudited) (As restated
see Note 15)
<S> <C> <C> <C>
Telecommunications equipment, installed $3,911,191 $3,295,475 $8,308
Telecommunications equipment, not yet placed in service 498,352 320,944 -
Computer equipment 157,955 38,020 11,308
Furniture and fixtures 100,794 74,847 27,417
-----------------------------------------------------------------------------------------------------------
4,668,292 3,729,286 47,033
Less: accumulated amortization (428,006) (172,900) -
-----------------------------------------------------------------------------------------------------------
$4,240,286 $3,556,386 $47,033
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
6. NOTES PAYABLE
The notes payable are summerized as follows:
<TABLE>
<CAPTION>
March 31, September 30, September 30,
1999 1999 1998
--------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
i) Demand convertible note payable with a maturity value of Cdn. $250,000,
bearing interest at 8.75%, per annum compounded monthly and due June 30,
2000 (September 30, 1999 - past due as of
August 16, 1999). $ - $250,000 $ -
ii) Demand convertible note payable with a maturity value of U.S. $327,500
bearing interest at 8.75% per annum compounded monthly and due June 30,
2000 (September 30, 1999 - past due as of
September 15, 1999). - 483,652 -
iii) Demand convertible note payable with a maturity value of U.S. $40,000,
bearing interest at 9.00% per annum compounded monthly and past due
as of August 31, 1999. - 59,072 -
iv) Demand convertible note payable with a maturity value of U.S. $25,000,
bearing interest at 9.00% per annum compounded monthly and past due
as of August 31, 1999. - 36,920 -
v) Notes payable with an aggregate maturity value of Cdn. $150,000, bearing
interest at 7.5% per annum compounded monthly and repayable on
demand. - - 150,000
----------------------------------------------------------------------------------------------------------------------------------
$ - $829,644 $150,000
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All or any part of the principal amount of the notes and any interest
thereon was convertible, at the option of the holder, on or before the
due date, into fully paid and non-assessable common shares of the
Company at a conversion price of US$2.00 per common share in the case
of the notes described in Notes 6(iii) and (iv), above, and at a
conversion price of US$1.75 in the case of those described in Notes
6(i) and (ii). The notes are unsecured. The Company was unable to repay
the notes on their respective due dates and on September 16, 1999 the
Company received a demand for payment with respect to outstanding notes
payable with a principal value of $733,652 (Notes 6(i) and (ii)). The
Company was in default at September 30, 1999.
On October 19, 1999, the Company negotiated an extension to the
original repayment terms of notes payable in the amount of $732,571 to
June 30, 2000 (Notes 6 (i) and (ii), above). The renegotiated demand,
unsecured, convertible notes bear interest at 8.75%. All or any portion
of the principal, and any interest thereon, is convertible, at the
option of the holder, on or before the due date, into fully paid and
non-assessable common shares of the Company at a conversion price of
US$0.625 per common share. On October 19, 1999 the Company also
negotiated an extension to the original repayment terms of notes
payable in the amount of $95,992 (Notes 6 (iii) and (iv) above), to
February 28, 2000. The renegotiated demand, unsecured, convertible note
bears interest at 9%. All or any portion of the principal, and any
interest thereon, is convertible, at the option of the holder, on or
before the due date, into fully paid and non-assessable common shares
of the Company at a conversion price US$0.50 per common share.
F-27
<PAGE>
On February 28, 2000, the note payable in the amount of $95,992 plus
accrued interest was converted to 142,399 fully paid and non-assessable
common shares of the Company at a conversion price of US$0.50 per
common share. On March 8, 2000, notes payable totalling $732,571 plus
accrued interest were converted to 855,337 fully paid and
non-assessable common shares of the Company at a conversion price of
US$0.625 per common share. At March 31, 2000 there were no further
notes outstanding.
7. SHARE CAPITAL
(a) AUTHORIZED
The Company's authorized share capital consists of 50,000,000
common shares with a par value of $0.001 per share and
5,000,000 preferred stock also with a par value of $0.001 per
share.
(b) Details of common shares issued to March 31, 2000 including a
reconciliation of the issued and outstanding share capital of
the Company to amounts previously reported in Alpha Beta
Holdings Ltd. at September 30, 1998 is as follows:
Common shares:
<TABLE>
<CAPTION>
Number of
shares Amount
---------------- ------------------
<S> <C> <C>
Balance, September 30, 1998 1,701,000 $1,277
Share consolidation on a 10 for 1 basis (1,530,900) -
--------------------------------------------------------------------------------------------------
Balance, September 30, 1998, post share consolidation 170,100 1,277
Issued for cash 3,197,400 49,879
--------------------------------------------------------------------------------------------------
Balance prior to business combination 3,367,500 51,156
Adjustment of stated value of common shares
at reverse acquisition to value of common shares
of MDU (Note 4) - (841)
Issued on acquisition of the Company (Note 4) 5,213,835 35,222
--------------------------------------------------------------------------------------------------
Balance subsequent to reverse acquisition 8,581,335 85,537
Exercise of warrants 640,000 1,474,183
--------------------------------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 1,559,720
--------------------------------------------------------------------------------------------------
Issued for subscriptions 1,090,000 1,793,026
Issued for cash 1,062,750 500,465
Issued for services 100,000 53,125
Cancellation of shares issued for services (50,000) (26,563)
Issued on the exercise of stock options 125,000 273,600
Issued for cash on private placements (Note 7(e)(iii)) 824,999 554,388
Conversion of notes (Note 6) 997,736 881,028
--------------------------------------------------------------------------------------------------
Balance, March 31, 2000 13,371,820 $5,588,789
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
(c) PREFERRED SHARES
On January 28, 2000, the Company issued 3,637,200 shares of
Series A Convertible Preferred stock (the "Preferred Shares"),
at an issue price of US$2.50 per share, in exchange for cash
proceeds of US$7,725,000 and services in connection with the
private placement with a fair value of US$1,368,000 for total
gross proceeds, prior to expenses of the issue, of
US$9,093,000. The Preferred Shares are immediately
convertible, at the option of the holder, at a conversion
ratio of
F-28
<PAGE>
one common share for one Series A Convertible Preferred
share, until the "Qualification date", which is the earlier
of: (i) the fifth business day following (a) the date the
Company receives a receipt for its final prospectus from
the last of the British Columbia Securities Commission, the
Alberta Securities Commission and the Ontario Securities
Commission (the "Commissions") and (b) the date the Company
has filed with the United States Securities and Exchange
Commission and obtained effectiveness of a registration
statement qualifying the shares and (ii) January 28, 2001.
However, if the final receipt of each of the Commissions is
not issued before June 26, 2000, then the shares convert at
a ratio of 1.15 common shares for each Preferred Share. Any
Preferred Shares that have not been converted by the holder
by the Qualification date will automatically convert at a
ratio of one common share to one Preferred Share. In
connection with the issuance of the Preferred Shares, the
Company issued 309,000 share purchase warrants to an agent
that provide the right to purchase one Series A Convertible
Preferred Share at the issue price of US$2.50 per share.
The warrants were assigned a value of US$1,549,004.
The Preferred Shares have a beneficial conversion feature
totalling $11,147,175 (US$7,725,000), measured as the
difference between the conversion price most beneficial to the
investor, of US$2.17, and the fair value of the underlying
common stock at the time of issuance, limited to the amount of
the cash proceeds received. The beneficial conversion feature
is recognized at issuance as an increase in the loss
applicable to common shareholders in the calculation of the
basic loss per share for the six months ended March 31, 2000.
As the Preferred Shares are immediately convertible, the
company recorded accretion of $11,147,175 to additional
paid-in capital. In addition, the company recorded a preferred
stock dividend, representing the value of the beneficial
conversion feature, for a corresponding amount.
(d) 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.
In addition to the stock options under the Suppliers'
Plan issued to September 30, 1999, the Company was
also obligated to issue an additional 19,429 options
to purchase common shares of the Company at September
30, 1999 at exercise prices of US$1.75 to US$2.00 per
share and exercisable for five years from the date of
issue. On March 13, 2000, the Company granted an
additional 26,115 options (19,429 of which were
earned and recorded at September 30, 1999) to a
supplier under the Plan described above.
Under the requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") the
Company has recorded stock based compensation charges
in connection with the Suppliers' Plan as follows:
<TABLE>
<CAPTION>
For the
For the six months ended year ended
March 31, March 31, September 30,
2000 1999 1999
------------ ------------ ---------------
<S> <C> <C> <C>
Additional capital costs of $67,516 $66,926 $133,851
telecommunications equipment
Sales expense 64,418 116,149 116,149
$131,934 $183,075 $250,000
</TABLE>
These charges are based on the fair value of the
stock options issued and issuable to suppliers
calculated on the date an eligible supplier completes
the performance required to
F-29
<PAGE>
earn the options. This amount is determined using
a Black Scholes option pricing model assuming a
weighted average annualized volatility of the
Company's share price of approximately 114%. For
details of the other material assumptions used in
determination of the fair value of these options
see Note 7 (d)(ii).
(ii) Directors'/Officers' and Employees' Stock Option
Plans ("Employee Plans")
On November 24, 1998 the Company established Employee
Plans whereby certain employees, officers and
directors will be granted options to purchase up to
an aggregate of 600,000 common shares of the Company.
On February 5, 2000 the Company approved the 2000
Incentive Stock Option Plan ("2000 Option Plan")
whereby certain employees, officers and directors of
the Company and its affiliates were granted options
to purchase 2,705,360 common shares of the Company,
of which 2,615,084 have an option price of US$5.00,
being the closing price of the Company's stock on
February 4, 2000. The options have vesting periods
ranging from grant date to three years after the
grant date, and an expiry date of February 4, 2005.
The remaining 90,276 options granted were originally
authorized as part of the November 24, 1998 Employee
Plans and were redesignated to be included in the
2000 Option Plan. These options are exercisable at
US$1.00, are fully vested and have an expiry date of
February 4, 2005.
The Company accounts for its stock-based employee
compensation plans under APB No. 25 whereby
compensation cost is recorded for the excess, if any,
of the quoted market price of the common shares over
the exercise price at the date of grant for all
employee stock options issued. For the six months
ended March 31, 2000 compensation cost in the amount
of $523,998 (six months ended March 31, 1999 -
$222,000; year ended September 30, 1999 - $222,000;
period from inception, March 26, 1998 to September
30, 1998 - $Nil;) has been recorded under this
method.
An alternative method of accounting for employee
stock options is SFAS No. 123. Under SFAS No. 123
employee stock options are valued at the grant date
using a fair value method and the estimated fair
value of the options is amortized to expense over the
options' vesting period. The following pro forma
financial information present the net loss for the
period and loss per common share had the Company
adopted SFAS No. 123:
<TABLE>
<CAPTION>
For the period from Six months ended
inception of the -------------------------------------
development stage to March 31, March 31,
March 31, 2000 2000 1999
(Unaudited) (Unaudited) (Unaudited)
---------------------- ------------------ ------------------
<S> <C> <C> <C>
Pro forma net loss
for the period $(14,507,463) $(11,500,568) $(1,402,312)
Pro forma loss per
common share $ - $(2.42) $(0.15)
</TABLE>
<TABLE>
<CAPTION>
For the Period
from inception,
For the period from Year ended March 26, 1998 to
inception of the September 30, September 30,
development stage to 1999 1998
September 30, 1999 (as restated -
see Note 15)
------------------------- ------------------ ------------------
<S> <C> <C> <C>
Pro forma net loss
for the period $(3,006,895) $(2,909,050) $(97,845)
Pro forma loss per
common share $ - $(0.32) $(0.01)
</TABLE>
F-30
<PAGE>
Using the fair value method for stock-based
compensation, as described in SFAS No. 123,
additional compensation costs of approximately
$3,786,457 would have been recorded for the six
months ended March 31, 2000 (six months ended March
31, 1999 - $383,390; year ended September 30, 1999 -
$383,390; period from inception, March 26, 1998, to
September 30, 1998 - $Nil). The unrecognized value of
all remaining outstanding employee stock options as
of March 31, 2000 is $10,114,166 and will be charged
to pro forma net earnings in future years according
to the vesting terms of the options. This amount is
determined using a Black Scholes options pricing
model assuming no dividends are to be paid, vesting
on date of grant, an expected term of five years, a
weighted average annualized volatility of the
Company's share price of 136% and a weighted average
annualized risk free interest rate of 5.50%.
(iii) Other stock options
At December 31, 1998 the Company granted stock
options to purchase 100,000 common shares of the
Company at an option price of US$1.50 in recognition
of consultative and other services provided by a
relative of the Company's President. These options
may be exercised in whole or in part at anytime until
December 31, 2003. The fair value of these options in
the amount of $177,445 at date of grant has been
recorded as consulting expense during the six months
ended March 31, 1999 (year ended September 30, 1999 -
$177,445). For details of the material assumptions
used in determination of the fair value of these
options see Note 7(d)(ii).
On February 5, 2000 the Company granted an aggregate
of 170,000 stock options for provision of consulting
services by third parties. The options are
exercisable at US$5.00, expire February 4, 2005 and
were also granted under the terms of the 2000 Option
Plan. The Company recorded a stock based compensation
charge in the amount of $1,043,281 during the period
ended March 31, 2000 based on the fair value of the
options granted. The aggregate fair value of the
options at the date of grant was determined using the
Black Scholes model as described in Note 7(d)(i),
assuming an annualized volatility of the Company's
share price of approximately 214%.
Prior to the acquisition of the Company as described
in Note 4, Alpha Beta Holdings Ltd. had granted
options to purchase 640,000 shares of common stock of
the Company at an exercise price of US$1.50 and an
expiry date of November 5, 1999. In December 1998,
these options were exercised resulting in proceeds to
the Company of US$960,000 ($1,474,184).
(iv) Details of changes in options to date under all Plans
are as follows:
<TABLE>
<CAPTION>
Weighted For the year Weighted
average ended average
March 31, exercise September 30, exercise
2000 price US$ 1999 price
------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Balance outstanding,
beginning of period 473,885 $1.18 - $ -
Activity during the period
Options granted 2,901,475 4.85 473,885 1.18
Options exercised (125,000) 1.00 - -
-----------------------------------------------------------------------------------------------
Balance outstanding, end of period 3,250,360 $4.46 473,885 $1.18
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
There was no stock option activity for the period
from inception, March 26, 1998 to September 30, 1998.
F-31
<PAGE>
As at March 31, 2000, the following stock options
were outstanding:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price US$ Expiry Date
--------------------- ---------------- ---------------------------------------------------------
<S> <C> <C>
265,276 $1.00 November 24, 2003 to February 4, 2005
173,885 1.50 December 31, 2003 to April 1, 2004
12,375 1.75 March 12, 2005
13,740 2.00 March 12, 2005
2,785,084 5.00 February 4, 2005
---------------------
3,250,360
---------------------
---------------------
</TABLE>
Of the outstanding options, 1,393,609 options, as at
March 31, 2000, are presently exercisable and
1,856,751 options are unvested and vest over a three
year period.
(e) WARRANTS
(i) Details of changes in warrants to date are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise price
Warrants US$ Expiry Date
------------- --------------- ---------------------
<S> <C> <C> <C>
Outstanding at September 30, 1999 and 1998 - $ -
Issued
Agents' warrants (Note 7(c)) 309,000 2.50 January 28, 2001
Gibralt Capital Corporation (Note 7(e)(ii)) 750,000 2.50 March 1, 2002
Private placement units (Note 7(e) (iii)) 699,999 1.00 February 3, 2002
Private placement units (Note 7(e) (iii)) 1,482,750 0.75 November 25, 2001
--------------------------------------------------------------------------------------------------
Outstanding at March 31, 2000 3,241,749 $1.22
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
(ii) Gibralt Capital Corporation ("Gibralt")
On March 1, 2000, the Company issued a warrant to
purchase 750,000 shares of common stock of the
Company for a period of two years, at an exercise
price of US$2.50 per share to Gibralt Capital
Corporation. As described in Note 7(d)(i), under the
requirements of SFAS No. 123, the Company has
recorded stock based compensation charges in the
amount of $4,241,424 (US$2,925,927) based on the fair
value of the warrants issued to Gibralt at March 1,
2000, determined using a Black Scholes option pricing
model in consideration of Gibralt's termination of a
financing arrangement and an agreement to negotiate
in good faith a new financing agreement with terms
more favorable to the Company.
(iii) Private placements
In November 1999 the Company sold 1,482,750 units
comprised of one share of common stock and a warrant
to purchase one share of common stock for US$0.75 per
share, for a period of two years, for US$0.40 per
unit. 420,000 of these units had been subscribed for
on September 15, 1999 (Note 8).
On February 3, 2000 the Company completed several
private placements subscribed for in December 1999
and January 2000. One private placement consisted of
125,000 common shares of US$0.80 per share for gross
proceeds of $147,350 (US$100,000). The other private
placements consisted of 699,999 units at US$0.75 per
unit for gross proceeds of $766,450 (US$525,000).
Each unit consists of one common share and one
F-32
<PAGE>
common share purchase warrant exercisable for two
years at US$1.00 per share. The gross proceeds
were allocated between the shares and warrants
based on the relative fair value of the unit
components at the date the Company had a
contractual liability to issue the units.
Accordingly, the common shares were assigned a
value of $407,038, net of issue costs, and the
warrants a value of $355,047.
The warrants have a beneficial conversion feature
totalling $355,047, measured as the difference
between the conversion price of US$1.00 and the fair
value of the underlying common stock at the date the
Company had a contractual liability to issue the
units, limited to the amount of the gross proceeds
received and allocated to the convertible warrants.
The beneficial conversion feature is recognized as an
increase in the loss applicable to common
shareholders in the calculation of the basic loss per
share for the six months ended March 31, 2000.
8. 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 units
comprised of one share of common stock and a two-year warrant to
purchase one share of common stock for US$0.75 per share, for US$0.40
per unit, for net proceeds of $248,102. These units were also issued in
November 1999.
9. COMMITMENTS AND CONTINGENCIES
(i) Under the terms of certain operating lease for equipment and
premises, the Company is obligated to make annual net rental
payments as follows:
<TABLE>
<CAPTION>
Fiscal year ended
September 30, 1999 Amount
---------------------------------------------- ---------------
<S> <C>
2000 $87,698
2001 82,217
2002 38,048
2003 13,644
2004 and thereafter 11,690
----------------------------------------------------------------
$233,297
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
(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. However, if the
negotiations are unsuccessful and if Shaw were successful in
its claim for damages, the Company's unsuccessful defence
would have a material adverse effect on the Company's
financial condition and operations.
(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 that the
Plaintiff's has any legal right to bring the action, and
alleging that in any event the amount of damages suffered, if
any, is minimal. This case is still in the pre-discovery
phase. Given the preliminary stage of the proceedings, it is
not presently possible to estimate or determine whether there
will be any loss to the Company, and the amount, if any, of
such loss will be recorded in the period in which it becomes
determinable.
F-33
<PAGE>
(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.
(v) The Company has entered into management agreements with
certain senior executives which provide for annual
compensation, excluding bonuses, aggregating approximately
$500,000. The Company can terminate these agreements at any
time upon reasonable notice and the payment of an amount equal
to 24 months of salary. In the event of a change in control,
either party may, during a period of 12 months from the change
of control, terminate the agreement upon reasonable notice and
the payment of an amount equal to 36 months of salary.
10. STRATEGIC ALLIANCE
In August 1998, the Company entered in a ten-year System Operation
Agreement with two five year renewal options, with Star Choice
Communications, Inc. ("Star Choice"). The Company is responsible for
establishing and maintaining distribution systems in multi-unit
dwellings throughout Canada and acts as a commissioned sales
representative for Star Choice to market Star Choice programming to the
residents of multi-unit dwellings in which the Company has installed
systems. Residents that choose to subscribe to the service pay a
monthly access fee in addition to the program fees charged by Star
Choice for programming ordered by the customer.
The Company's contract with Star Choice gives the company a 30% share
of gross subscriber revenues from the sale of Star Choice programming
services plus 100% of a digital access fee within the multi-unit
dwellings for a period of 10 years, with renewal clauses.
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 six months ended March 31, 2000,
revenue from Star Choice accounted for 43% of total recorded revenues
of the Company (six months ended March 31, 1999 - 10%; year ended
September 30, 1999 - 36%; period from inception, March 26, 1998, to
September 30, 1998 - %Nil).
11. GOVERNMENT REGULATIONS
Satellite broadcasting and distribution of Canadian television signals
to cable operators in Canada are regulated by the Canadian
Radio-television and Telecommunications Commission (CRTC). Star Choice
and Express Vu are the only two licensees that have been approved by
the CRTC to distribute television and information services by
direct-to-home digital satellite transmissions in Canada. Both must
operate in accordance with CRTC imposed "conditions of license" to
maintain their licences. Also, they must comply with the Canadian
Broadcasting Act. Since the Company in its role as a system operator
for Star Choice is significantly depended on Star Choice for
programming, it would be adversely affected if Star Choice encountered
regulatory problems. In addition, preliminary CRTC regulations that
allow the Company to obtain competitive access to MDU's internal wiring
may not be adopted in a final form that is favourable to the Company,
which would have a material adverse effect on the Company's business.
F-34
<PAGE>
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>
Six Months Ended
-------------------------------------
For the period from March 31, March 31,
inception of the 2000 1999
development stage to (Unaudited) (Unaudited)
March 31, 2000
(Unaudited)
------------------------- ----------------- -------------------
<S> <C> <C> <C>
Canadian statutory income tax rate 45.6% 45.6% 45.6%
Non-deductible expenses (28.45) (35.0) (23.6)
Tax loss carry forwards not
recognized in period of loss (17.15) (10.6) (22.0)
Actual tax rate - - -
</TABLE>
<TABLE>
<CAPTION>
For the period from Year ended Period from
inception of the September 30, March 26, 1998
development stage to 1999 to September 30,
September 30, 1999 1998
------------------------- ----------------- -------------------
<S> <C> <C> <C>
Canadian statutory income tax rate 45.6% 45.6% 45.6%
Non-deductible expenses (9.4) (9.7) (1.0)
Tax loss carry forwards not
recognized in period of loss (36.2) (35.9) (44.6)
Actual tax rate - - -
</TABLE>
The Company had no income tax expense for the six months ended March
31, 2000 and 1999, 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 March 31,
2000 and September 30, 1999 and 1998, since realization of these
benefits cannot be reasonably assured. At March 31, 2000 and September
30, 1999 and 1998, deferred tax (liabilities) assets are comprised of
the following:
<TABLE>
<CAPTION>
March 31, September 30, September 30,
2000 1999 1998
------------------- ------------------ ----------------
<S> <C> <C> <C>
(Unaudited) (as restated -
see Note 15)
Gross deferred tax liabilities:
Amortization $(226,206) $(219,845) $(854)
Gross deferred tax assets:
Operating loss carry forwards 1,800,657 1,023,997 44,568
-------------------------------------------------------------------------------------------------------------
Net deferred tax assets 1,574,451 804,152 43,714
Less: valuation allowance (1,574,451) (804,152) (43,714)
-------------------------------------------------------------------------------------------------------------
$ - $ - $ -
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999 the Company's fiscal year end, the Company had
loss carry forwards available to be applied against future years'
taxable income in the amount of $2,245,608 of which $97,738 will expire
on September 30, 2005 and the balance on September 30, 2006.
F-35
<PAGE>
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 on December
31, 1998 for $157,689 from a relative of the Company's President. In
addition, the Company granted stock options to a relative of the
Company's President to purchase 100,000 common shares of the Company at
an exercise price of US$1.50 until December 31, 2003, in exchange for
consultative services. See Note 7 (d)(iii).
15. RESTATEMENT
Subsequent to the issuance of the Company's September 30, 1999
consolidated financial statements, the Company's management determined
that the fair value of warrants issued to certain non-employees for
services rendered during the period should have been reported as sales
expense, rather than capitalized to property and equipment. As a
result, the accompanying September 30, 1999 consolidated financial
statements have been restated from the amounts previously reported to
recognize an additional $116,149 of sales expense, a reduction to
amortization expense of $4,210 and a corresponding reduction to
property and equipment of $111,939. A summary of the significant
effects of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
------------------- -------------------
<S> <C> <C>
At September 30, 1999
Property and equipment $3,668,325 $3,556,386
Accumulated deficit (2,511,566) (2,623,505)
For the year ended September 30, 1999
Sales expenses 1,235,240 1,351,389
Amortization expense 199,470 195,260
Net loss (2,413,721) (2,525,660)
Basic and diluted loss per share (0.26) (0.28)
For the period from inception of the
development stage to September 30, 1999
Sales expenses 1,235,240 1,351,389
Amortization expense 199,470 195,260
Net loss $(2,511,566) $(2,623,505)
</TABLE>
16. SUBSEQUENT EVENTS
(a) In May 2000, the Company entered into a long-term System
Operator Agreement with DirecTV, Inc. ("DirecTV"), a
California company. The Company's contract with DirecTV gives
the Company a share of net subscriber receipts, depending upon
the number of active subscribers, from the sale of DirecTV
programming services, plus a subsidy for subscriber
acquisition costs for each net subscriber addition.
The Company will incur only the costs associated with the
implementation of its services, and will not share any of
DirecTV's programming or broadcasting costs. Under the
agreement, the Company may not solicit sales or provide
equipment for any other direct-to-home digital satellite
television services in the United States. However, the Company
is not prohibited from contracting with other program
providers in connection with its SMATV services. Consequently,
the Company is totally dependent on DirecTV for its digital
set-top programming in the United States.
F-36
<PAGE>
The agreement has an initial term of five years, with an
automatic extension of the entire agreement to coincide with
the termination of the longest running property access
agreement. Thereafter, the agreement is renewable for an
additional five-year period at the option of both parties.
Either party may terminate for the other's breach, bankruptcy
or unapproved assignment of the agreement. Under this
agreement, the Company will establish and maintain MDU
distribution systems in non-rural states of the United States,
as defined in the agreement, and act as a commissioned sales
agent for the marketing of DirecTV programming to residents of
MDU properties.
As this agreement was recently executed, as of this date the
Company has not derived any revenue from its alliance with
DirecTV. DirecTV is not required to use the Company on an
exclusive basis and could either contract with others to
install distribution systems and market programming in MDUs or
undertake such activities directly through retail stores, as
it does for single-family television households.
(b) In May 2000 the Company entered into a Master Purchase Sales
Agreement with 3Com Corporation ("3Com") to become part of its
preferred Visitor Based Network. Under this agreement, the
Company will receive preferred pricing and discounts for
equipment purchased to support the Company's high-speed
Internet services.
This is not an exclusive agreement, however, a portion of the
Company's discount is based on purchase volume. The agreement
has an initial one-year term, with automatic yearly renewals
at the option of both parties with associated yearly price and
discount adjustments.
(c) In May 2000 the Company entered into a management agreement
with a senior executive which provides for annual
compensation, excluding bonuses, of approximately US$120,000.
The Company can terminate this agreement at any time upon
reasonable notice and the payment of an amount equal to 6
months of salary.
(d) On May 12, 2000 the Company granted options to its newly
appointed directors and to certain employees to purchase
347,500 common shares of the Company, of which 150,000 have an
exercise price of U.S.$2.50 per share (the "Directors'
options"), being a premium to the prior day's closing price of
the Company's stock. The first 75,000 of the Directors'
options vest immediately at the grant date and the remaining
75,000 vest one year after the grant date. The 197,500 options
granted to certain employees have an exercise price of
U.S.$5.00 and vest quarterly over a three year period from the
grant date. All of the options granted at May 12, 2000 expire
May 11, 2005.
(e) In May 2000, the Company determined that it would not be
receiving a receipt for its final prospectus from each of
the Commissions, prior to June 26, 2000, as specified in Note
7(c), in connection with its issue of 3,637,200 Preferred
Shares. As a result, effective June 26, 2000, each such
preferred share will be convertible into common shares of the
Company at a ratio of 1.15 common shares for each Preferred
Share.
F-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation includes provisions that
limit the personal liability of the directors for monetary damages for breach of
their fiduciary duty of directors. The Certificate of Incorporation provides
that, to the fullest extent provided by the Delaware General Corporation Law
("DGCL"), the directors will not be personally liable for monetary damages for
breach of their fiduciary duty as directors. The DGCL does not permit a
provision in a corporation's certificate of incorporation that would eliminate
such liability (1) for any breach of a director's duty of loyalty to the
corporation or its stockholders, (2) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (3) for any
unlawful payment of a dividend or unlawful stock repurchase or redemption, as
provided in Section 174 of the DGCL, or (4) for any transaction from which a
director derived an improper personal benefit.
While these provisions provide the directors with protection from
awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's breach of his or her duty of care. The provisions described above
apply to an officer of our Company only if he or she is a director of the
Company and is acting in his or her capacity as director, and do not apply to
the officers of the Company who are not directors.
The Company's Bylaws provide that, to the fullest extent permitted by
the DGCL, it shall indemnify the directors and officers, and may indemnify its
employees and agents. Such indemnification may be made only if the person to be
indemnified acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Company, and with respect
to any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful. The Bylaws further provide that the Company may
enter into an indemnification agreement pursuant to which the Company will
indemnify a director, officer, employee or agent to the fullest extent permitted
by the DGCL. At present, there is no pending litigation or proceeding involving
any directors, officers, employees or agents in which indemnification is
required or permitted, and the Company is not aware of any threatened litigation
or proceeding that may result in a claim for such indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses incurred in connection with
the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee....................................................... $ 8,280.24
Printing expenses.......................................................... 10,000
Legal fees and expenses.................................................... 150,000
Accounting fees and expenses............................................... 30,000
Blue sky fees and expenses, including legal fees........................... 15,000
Miscellaneous.............................................................. 5,000
------
TOTAL............................................................. $218,280.24
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Sales of securities within the past three years without registration
under the Securities Act were as follows (all amounts in US dollars, except as
otherwise noted):
A. PREFERRED STOCK
In January 2000, the Company issued 3,090,000 shares of Series A
convertible preferred stock for $7,725,000 to 37 institutional and
accredited investors. Haywood Securities Inc. acted as placement agent and
received (a) 247,200 shares of Series A convertible preferred stock as
payment of a $618,000 commission, (b) 300,000 shares of Series A
convertible preferred stock as a $750,000 corporate finance fee, and (c)
warrants to acquire 309,000 shares of
<PAGE>
common stock for a period of one year at a price of $2.50 per share. Each
of these issuances were made without registration under Rule 506 under
Regulation D ("Rule 506").
B. COMMON STOCK
1. OCTOBER 1998: Prior to the business combination of the Company and MDU
Communications, Inc. ("MDU Canada"), the Company issued 2,997,400 shares of
common stock in exchange for cash in the aggregate amount of $29,974 to ten
non-U.S. institutional investors. These sales were made without
registration under Rule 504 under Regulation D ("Rule 504"). No commissions
were paid in connection with these transactions.
2. NOVEMBER 1998: Prior to the business combination of the Company and MDU
Canada, the Company issued 200,000 shares of common stock in exchange for
cash in the aggregate amount of $2,000 to one non-U.S. institutional
investor and six non-U.S. individual investors. These sales were made
without registration under Rule 504. No commissions were paid in
connection with these transactions.
3. NOVEMBER 1998: In connection with the business combination of the Company
and MDU Canada, the Company exchanged 5,213,835 shares of its common stock
for all of the outstanding capital stock of MDU Canada, which is now our
wholly-owned subsidiary. The former MDU Canada stockholders are the holders
of those shares. The exchange was made without registration under Section
4(2) of the 1933 Act. No commissions were paid in connection with this
transaction.
4. MAY 1999: The Company sold 670,000 shares of common stock for cash in the
aggregate amount of $1,172,500 from two non-U.S. institutional investors
under subscription agreements executed in May 1999. These transactions were
made without registration under Section 4(2) of the 1933 Act. No
commissions were paid in connection with these transactions.
5. OCTOBER 1999/JANUARY 2000: Pursuant to an agency agreement with Canaccord
Capital Corporation, the Company issued 100,000 shares of common stock as a
corporate finance fee. When the agency agreement was terminated in January
2000, the Company cancelled the previously issued shares and issued 50,000
shares of common stock to Canaccord as final settlement for their services.
These issuances were made without registration under Section 4(2) of the
1933 Act. No commissions were paid in connection with these transactions.
6. NOVEMBER 1999 (UNIT OFFERING): The Company sold 1,482,750 units comprised
of one share of common stock and a two-year warrant to purchase one share
of common stock for $0.75 per share, for $0.40 per unit. These sales were
made without registration under Regulation S of the 1933 Act ("Regulation
S"). Commissions totaling $19,520 were paid to National Bank Financial and
Claymore Holdings.
7. FEBRUARY 2000: The Company sold 125,000 shares of common stock for $0.80
per share under subscription agreements executed in December 1999 for gross
proceeds of $100,000. These sales were made without registration under
Regulation S. No commissions were paid in connection with these
transactions.
8. FEBRUARY 2000 (UNIT OFFERING): The Company sold 699,999 units comprised of
one share of common stock and a two-year warrant to purchase one share of
common stock for $1.00 per share, for $0.75 per unit, for gross proceeds of
$525,000, under subscription agreements executed in December 1999 and
January 2000. These transactions were made without registration under
Regulation S. No commissions were paid in connection with these
transactions.
C. WARRANTS
MARCH 2000: The Company issued a warrant for 750,000 shares of common stock
exercisable at $2.50 per share for two years pursuant to a mutual release
and agreement to Gibralt Capital Corporation. This issuance was made
without registration under Section 4(2) of the 1933 Act. No commission was
paid in connection with this warrant.
D. OPTIONS
1. NOVEMBER 1998: Prior to the business combination of the Company and MDU
Canada, the Company issued one-year options to purchase 640,000 shares of
common stock for cash at $1.50 per share to two non-U.S. investors.
<PAGE>
These options were exercised in December 1998. These issuances were made
without registration under Section 4(2) of the 1933 Act. No commissions
were paid in connection with these issuances.
2. 1998 DIRECTORS'/OFFICERS' NON-QUALIFIED STOCK OPTION PLAN: In November
1998, we granted five-year options under our 1998 Directors'/Officers'
Non-Qualified Stock Option Plan as follows: (a) options to purchase 175,000
shares of common stock at $1.00 per share were granted to Sheldon B.
Nelson, which have now been consolidated into our 2000 Plan, and (b)
options to purchase 125,000 shares of common stock at $1.00 per share were
granted to Douglas J. Irving, all of which he has now exercised. These
grants were made to non-U.S. persons in reliance upon the exemption from
registration offered by Section 4(2) of the 1933 Act.
3. DECEMBER 1998: A five-year option to purchase 100,000 shares of common
stock at $1.50 per share was issued to Chris Nelson, a non-U.S. person, for
consulting services. This grant was made without registration under Section
4(2) of the 1933 Act. No commission was paid in connection with this grant.
4. SUPPLIER PLAN: In March and April 1999, we issued five-year options to
purchase 73,885 shares of common stock at $1.50 per share to two key
suppliers. In March 2000 we issued five-year options to purchase 26,115
shares of common stock at prices from $1.75 to $2.00 per share to a
supplier pursuant to the 1998/99 Suppliers Option Plan earned to September
30, 1999. These options were made to non-U.S. persons without registration
under Section 4(2) of the 1933 Act.
5. 2000 PLAN: In February 2000, we granted five-year options under our 2000
Plan as follows: (a) options to purchase 90,276 shares of common stock at
$1.00 per share were granted to employees for services rendered up to
September 30, 1999, and (b) options to purchase 2,785,084 shares of common
stock at $5.00 per share were granted to directors, officers, employees and
consultants. In May 2000, we granted a total of 347,500 options to newly
elected independent directors and to certain officers and employees at
exercise prices ranging from US$2.50 to US$5.00 for a period of five years.
The 2000 Plan will be registered under a Form S-8 registration statement in
the near future.
E. 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 $327,500 due September 15, 1999, were issued to one non-U.S.
investor. Both notes accrued interest at 8.75%. The Cdn$250,000 note was
convertible into common stock at any time prior to the maturity date at a
conversion price of $2.00 per share. The $327,500 note was convertible into
common stock at a conversion price of $1.75 per share. Both notes were
extended on October 19, 1999 until June 30, 2000, on similar terms except
the conversion price on both notes was amended to $0.625 per share. In
March 2000, outstanding principal of Cdn$250,000 and $327,500, together
with interest of Cdn$20,293.50 and $21,313.40, was converted into 855,337
shares of common stock at a conversion price of $0.625 per share. These
issuances were made without registration under Section 4(2) of the 1933
Act. No commissions were paid in connection with these issuances.
2. MAY/JUNE 1999: Two convertible promissory notes in the aggregate principal
amount of $65,000 and both due on August 31, 1999, were issued to one
accredited, sophisticated investor. The two notes were replaced by a single
convertible promissory note in the principal amount of $65,000 due on
February 28, 2000 and bearing interest at 9%. The replacement note is
convertible into common stock at any time prior to maturity at a conversion
price of $0.50 per share. In February 2000, these notes were converted into
142,399 shares of common stock upon conversion of the $65,000 promissory
note plus interest of $6,199.70, at a conversion price of $0.50 per share.
These issuances were made without registration under Section 4(2) of the
1933 Act. No commissions were paid in connection with these issuances.
ITEM 27. EXHIBITS.
See "Index to Exhibits."
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
<PAGE>
1. To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information set forth in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
2. That, for determining liability under the Securities Act, it
will treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
3. To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 24, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, MDU Communications International, Inc. certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form SB-2
and authorized this Amendment No. 1 to Form SB-2 to be signed on its behalf by
the undersigned, thereunto duly authorized, in Richmond, British Columbia,
Canada on June 30, 2000.
MDU COMMUNICATIONS INTERNATIONAL, INC.
By /s/ Robert A. Biagioni
---------------------------------
Chief Financial Officer
(principal financial officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below hereby authorizes and appoints Sheldon B. Nelson and Robert A. Biagioni,
and each of them, with full power of substitution and full power to act without
the other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments.
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<S> <C> <C>
/s/ Sheldon B. Nelson* Director and principal June 30, 2000
-------------------------------------------- executive officer
Sheldon B. Nelson
/s/ Robert A. Biagioni Director and principal June 30, 2000
-------------------------------------------- financial officer
Robert A. Biagioni
/s/ J.E. (Ted) Boyle * Director June 30, 2000
--------------------------------------------
/s/ Douglas Hooper * Director June 30, 2000
--------------------------------------------
/s/ Robert Dyck * Director June 30, 2000
--------------------------------------------
</TABLE>
*By /s/ Robert A. Biagioni
--------------------------------
Robert A. Biagioni
(Attorney-in-Fact)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
2.1 Acquisition Agreement dated November 2, 1998 between Alpha
Beta Holdings, Ltd. and MDU Communications Inc. (1)
3.1 Certificate of Incorporation (1)
3.2 Certificate of Designations of the Preferences and Relative
Participating, Optional and Other Special Rights of Series A
Convertible Preferred Stock and Qualifications, Limitations
and Restrictions Thereof (4)
3.3 Bylaws (1)
3.4 Amendment to Bylaws (2)
4.1 See Article IV of Certificate of Incorporation filed as
Exhibit 3.1 and Exhibit 3.2
4.2 Sheldon Nelson Stock Option Agreement dated November 24, 1998
(1)
4.3 Douglas Irving Stock Option Agreement dated November 24, 1998
(fully exercised) (1)
4.4 Chris Nelson Stock Option Agreement dated December 31, 1998
(1)
4.5 Form of Warrant to Purchase Common Stock used in Winter
1999/2000 Unit offerings (4)
4.6 Warrant to Purchase Common Stock, dated January 28, 2000 to
Haywood Securities Inc. from the Company (4)
4.7 Warrant to Purchase Common Stock, dated March 1, 2000, from
the Company to Gibralt Capital Corporation (4)
5.1 Legal Opinion of Davis Wright Tremaine LLP (5)
10.1 System Operator Agreement dated August 27, 1998 between Star
Choice Communications Inc. and MDU Communications Inc. (1)
10.2 Agreement dated December 31, 1998 between 4-12 Electronics
Corporation and MDU Communications Inc. (1)
10.3 Suppliers' Stock Option Plan for 1998/99 (4)
10.4 2000 Incentive Stock Option Plan (ISO & Non-ISO) (4)
10.5 Registration Rights Agreement, dated January 28, 2000, between
the Company and Haywood Securities Inc. (4)
10.6 Agency Letter, dated January 28, 2000, between the Company and
Haywood Securities Inc. (4)
10.7 Form of Replacement Convertible Promissory Note and Loan
Agreement, dated October 19, 1999, issued by MDU Canada to
National Day Corporation for US$250,000 and 327,500, and to
David Lawrence for US$65,000 (each fully converted and
cancelled in February and March 2000, respectively) (4)
10.8 Letter Agreement, dated October 13, 1999, and Mutual Release,
dated January 5, 2000, between the Company and Canaccord
Capital Corporation (4)
10.9 Letter Agreement, dated November 18, 1999, between MDU Canada
and MBT Capital, and Assignment Agreement, dated January 14,
2000, between MBT Capital, Merbanco Capital Inc., 33678652
Canada Inc. and Gibralt Capital Corporation (4)
10.10 Letter Agreement dated February 16, 2000, Mutual Release dated
March 1, 2000, and Letter Agreement regarding registration
rights, dated March 16, 2000, between the Company, MDU Canada
and Gibralt Capital Corporation (4)
10.11 Management Employment Agreement, dated February 1, 2000,
between the Company and Sheldon Nelson (4)
<PAGE>
10.12 Management Services Agreement, dated January 31, 2000, between
the Company and Corus Financial Corp. (4)
10.13 Management Employment Agreement, dated February 1, 2000,
between the Company and Gary Monaghan (4)
10.14 Headquarters Facility Leases (4)
10.15 MDU System Operator Agreement dated May 2000, between
DIRECTV, Inc. and MDU Communications (USA) Inc. (5)
10.16 VBN Application Service Provider Master Purchase Sales
Agreement dated May 16, 2000, between 3Com Corporation and
MDU Communications International, Inc. (5)
10.17 Mutual Release between MDU Communications International,
Inc. and Britcom Communications Ltd. dated March 1, 2000 (5)
10.18 MDU Communications International, Inc. Suppliers'
Non-Qualified Stock Option authorized on March 13, 2000
granting Britcom Communications Ltd. an option to purchase
12,375 shares of common stock.
10.19 MDU Communications International, Inc. Suppliers'
Non-Qualified Stock Option authorized on March 13, 2000
granting Britcom Communications Ltd. an option to purchase
13,740 shares of common stock.
16.1 Letter of Nelson, Mayoka & Company, P.C. on change in
Certifying Accountant (3)
21 Subsidiaries of the Company (4)
23.1 Consent of Deloitte & Touche LLP (5)
23.2 Consent of Davis Wright Tremaine LLP - see Exhibit 5.1
24 Power of Attorney (included on signature page). (5)
27 Financial Data Schedule (5)
</TABLE>
---------------------
(1) Incorporated by reference from Form 10-SB filed on May 12, 1999
(2) Incorporated by reference from Form 10-KSB filed on December 27, 1999
(3) Incorporated by reference from Form 10-SB/A, Amendment No. 2 filed on
February 4, 2000
(4)
(5) Incorporated by reference from our Registration Statement on Form SB-2
filed on April 28, 2000.
(6)
(7) Filed with this Amendment No. 1 to Registration Statement on Form SB-2
