<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
MDU COMMUNICATIONS INTERNATIONAL, INC.
-------------------------------------
(Name of small business issuer in its charter)
Delaware 84-1342898
- ------------------------------- --------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) I. D. Number)
108 - 11951 Hammersmith Way, Richmond, B.C., Canada V7A 5H9
- ---------------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(604) 277-8150
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
----------------------------------------
(Title of Class)
PART I
EXCHANGE RATES. All dollar amounts herein are stated in US dollars except where
otherwise indicated. The following table reflects the rate of exchange for
Canadian dollars per US$1.00 in effect at the end of the following periods and
the average rate of exchange during such periods, based on the Bank of Canada
average noon spot rate of exchange:
<TABLE>
<CAPTION>
Period From
12 Months Ended Inception, March 26, 1998,
September 30, 1999 to September 30, 1998
<S> <C> <C>
Rate at end of period: 1.4768 1.5213
Average rate for period: 1.4993 1.4831
</TABLE>
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
MDU Communications International, Inc., formerly known as Alpha Beta Holdings,
Ltd., was incorporated on July 14, 1995 as a Colorado corporation to engage in
the business of establishing and operating brew pubs. Through September 30,
1998, it had incurred net operating losses of approximately $26,500 and was no
longer conducting business activities. In November 1998, Alpha Beta Holdings,
Ltd. acquired all of the outstanding capital stock of MDU Communications Inc.
and changed its name to MDU Communications International, Inc. At the date of
acquisition, there was no affiliation between Alpha Beta Holdings, Ltd. and MDU
Communications Inc. On May 11, 1999, the state of incorporation of the Company
was changed to Delaware. It now operates as a holding company with MDU
Communications Inc. as its sole subsidiary.
MDU Communications Inc. is a Canadian corporation incorporated on March 26,
1998. MDU Communications International, Inc. and MDU Communications Inc. are
jointly referred to as the "Company." The Company's principal executive offices
are located at 108 - 11951 Hammersmith Way, Richmond, British Columbia, Canada
V7A 5H9.
BUSINESS DEVELOPMENT. MDU Communications Inc. commenced operations in August
1998 and is in a start-up phase. It provides home entertainment and information
technology to the residents of multi-dwelling units (MDUs) such as apartment
buildings, condominiums, gated communities, hotels and motels. The Company
establishes mutually beneficial relationships with owners and managers of MDUs
to facilitate delivery of these services. It has entered into a strategic
alliance with Star Choice Communications, Inc. ("Star Choice") to market Star
Choice programming to the Canadian MDU market.
The Company offers complete building wiring infrastructures, systems and
hardware and digital set-top receivers to MDU owners. It utilizes state of the
art wireless digital satellite equipment to receive scrambled broadcast signals
transmitted from satellites and decode them for viewing. Broadcast signals are
captured through a single master dish at the property and the signals are
distributed throughout the building to each unit using fiber or coaxial cable.
Each subscriber is equipped with a TV set-top box which decodes the signals. The
Company utilizes independent contractors to install satellites and building
wiring infrastructures and its commissioned salespersons to install TV set-top
boxes. Initially, the Company expects to realize revenues by sharing in the Star
Choice monthly fees charged to MDU residents for satellite TV service. Once a
building has been wired or the existing wiring has been upgraded, the
infrastructure is in place to provide other services such as home security,
local telephone services and high-speed Internet access for MDU residents which
could be the source of additional revenues. While security systems consisting of
closed circuit television cameras are installed at the time a building is wired,
to date the Company has not realized any revenues from the sale of home
security, local telephone or Internet access services.
The Company's normal policy is to pay no access fee to building owners.
Typically, access agreements do not require installation within a specified
time, but the Company generally tries to install satellite distribution
systems within 60 days following entering into an access agreement.
Cancellation of access agreements for failure to complete installation of
systems has occurred with respect to only approximately 2% of the Company's
access agreements. Installation of direct to home satellite services to MDU
subscribers requires the installation of a single one meter satellite dish on
each building, an off air antenna to receive local television signals, which
sometimes is not necessary, a new "cable backbone" which is channeled through
the existing building conduits and in turn can be connected to the existing
cable distribution to the individual units. The cost per unit (or subscriber)
for the satellite distribution system depends on the amount and quality of the
building's existing cable system. Generally, it has been the Company's
experience that in the normal building installation, the Company begins to
realize profits when approximately 23% of the building's residents subscribe
for the Company's services. As of September 30, 1999, the average number of
MDU residents subscribing for the Company's services was 67%.
The Company also designs and supplies satellite master antenna television
(SMATV) systems for multi-dwelling unit properties. An SMATV system is capable
of receiving and distributing satellite and local television programming to the
residents of multi-dwelling unit properties, thereby eliminating the need for a
cable television provider.
The Company is seeking CDN$15,000,000 in equity financing through private
placements in order to execute its business plan through the twelve-
<PAGE>
month period ending September 30, 2000. Approximately three quarters of that
amount will be used to defray subscriber acquisition costs which are primarily
the purchase of television set-top boxes, MDU rooftop equipment and wiring
costs. Approximately CDN$500,000 will be used to grow through the acquisition
of small satellite master antenna television (SMATV) systems whose subscribers
represent potential additions to the Company's Star Choice subscriber base.
The balance of the financing proceeds will be used to finance operating costs
and working capital needs. The success of the Company is dependent upon its
success in obtaining this financing.
Currently, there are only two satellite broadcasters licensed to operate in
Canada: Star Choice and ExpressVu. Star Choice is publicly traded on the
Vancouver Stock Exchange and is 43% owned by Shaw Communications, Inc. ExpressVu
is a wholly-owned subsidiary of BCE Inc. In the last few years, these two
companies have built a subscriber base of over 400,000 households, or
approximately 4% of the 11,000,000 Canadian households with television sets.
These two companies are focusing on single family dwellings and their marketing
and distribution efforts are primarily through retail and commercial stores. The
Company believes that the two companies have focused on the single family market
because of the favorable demographics, minimal technical challenges and
difficulty in effectively marketing services to MDU property owners, managers
and residents. By limiting their focus, the Company believes the two companies
have left a sizeable niche in the marketplace for distribution of direct-to-home
(DTH) systems to MDU residents. While the Company does not believe any other
companies are currently attempting to market satellite services to MDUs, it
recognizes that this window of opportunity may not remain open indefinitely.
STAR CHOICE STRATEGIC ALLIANCE. In August 1998, the Company entered into a
ten-year System Operation Agreement (with 5-year renewal options) with Star
Choice under which the Company will establish and maintain distribution systems
in MDUs throughout Canada and act as a commissioned sales representative for
Star Choice to market Star Choice programming to the residents of MDUs in which
the Company has installed systems. Residents that choose to subscribe to the
service pay a monthly access fee in addition to the program fees charged by Star
Choice for programming for use of a TV set-top box. Star Choice programming
subscribers are billed monthly by Star Choice. The Company is entitled to 100%
of the monthly access fee (which is currently CDN$5.95) and to a 30% share of
Star Choice's subscriber revenues. Through September 30, 1999, access fees
received by the Company totaled approximately CDN$61,675. Star Choice retains
responsibility for marketing its broadcasting packages, while the Company is
responsible for marketing its services to the MDU market. The Company will
incur only the cost associated with implementation of its services, and will
not share any of Star Choice's programming or broadcasting costs. Under the
agreement, the Company may not maintain distribution systems or market
direct-to-home satellite broadcast services for others. Consequently, the
Company is totally dependent on Star Choice for programming. During the year
ended September 30, 1999, revenues from Star Choice were 31% of the Company's
total revenues. Star Choice is not required to use the Company on an
exclusive basis and could either contract with others to install distribution
systems and market programming in MDUs or undertake such activities directly.
Consequently, events at Star Choice beyond the control of the Company could
adversely affect the Company.
MARKET. The Company is attempting to build a Canadian national infrastructure,
first focusing on major markets such as the Lower Mainland of British Columbia
and the greater Toronto metropolitan area, which together
<PAGE>
account for more than 50% of Canada's MDUs. Marketing efforts are directed at
property owners, building managers and real estate developers. As of September
30, 1999, Company had installed its systems in 135 buildings in Western Canada
and, as the result of an acquisition of over 8,500 satellite master antenna
television (SMATV) subscribers in approximately 50 buildings, currently serves
over 11,600 subscribers. As of September 30, the Company had entered into
additional access agreements that will allow it to wire and market to tenants
in approximately 280 buildings, providing an additional potential customer
base of over 18,000 subscribers. The cost to add these additional subscribers
is estimated to be CDN$9,000,000.
COMPETITION. The Company is not aware of any other companies currently focusing
on the Canadian MDU market. However, the Company faces competition from others
who are competing for a share of the Canadian subscriber base. These competitors
include cable companies, off-air broadcasters, gray market products and MMDS and
LMDS (multi-channel microwave or local distribution systems which transmit
digital audio/video over the air in scrambled form and subscribers receive the
signals through an antenna and decode the signal using a set top box analogous
to those used by satellite broadcasters).
CABLE COMPANIES. Traditional cable companies such as Rogers Communications,
Inc., Shaw Communications, Inc. and Le Groupe Videotron Ltee. currently dominate
the broadcasting market, serving an estimated 40% of the 11,000,000 Canadian
households with television sets. The balance of Canadian households are serviced
by individual off-air antennae systems or by private cable operators.
OFF-AIR BROADCASTERS. Off-air broadcasters send signals over the air which are
received by traditional television antennas in a local broadcast area. Signals
are accessible to anyone in the local area with an antenna. Given the limited
range of off-air broadcasting, it is suitable only for a local audience.
GRAY MARKET PRODUCTS. These are products and programming services that are not
licensed to be sold in Canada. Prior to the launch of the Canadian
direct-to-home digital satellite television services, some Canadians, including
MDU owners, purchased U.S. based systems and operated them in Canada. Canadian
digital satellite services offer much of the same programming, better reception,
warranty service and support, and do not operate in violation of Canadian law.
Also, many retailers of the U.S. based equipment have been subjected to legal
actions aimed at eliminating the sale of unauthorized equipment and reception of
unauthorized television programming. In the Company's opinion, these factors
have and will continue reduce the use of U.S based systems in Canada.
MMDS AND LMDS. MMDS and LMDS microwave technology is a hybrid of off-air
broadcasting and satellite broadcasting. Digital audio, video and, in some
cases, data are transmitted over the air in scrambled form. Subscribers receive
these signals through an antenna and decode the signal using a set-top box
analogous to those used by satellite broadcasters. Their drawback is that they
require a direct line of site from the transmission site to the customer which
limits their range.
GOVERNMENTAL REGULATION. MDU Communications Inc. is not regulated by the
Canadian Radio- television and Telecommunications Commission (CRTC) or any
other governmental regulatory agency. Star Choice and ExpressVu
<PAGE>
are the only two licensees that have been approved by the CRTC to distribute
television and information services by direct-to-home digital satellite
transmissions in Canada. Both must operate in accordance with CRTC imposed
"conditions of license" to maintain their licenses. Also, they must comply
with the Canadian Broadcasting Act. Since the Company is totally dependent
upon Star Choice for programming, it could be adversely affected if Star
Choice encountered regulatory problems.
EMPLOYEES. As of June 30, 1999 the Company had 19 full time salaried employees
and 46 commissioned sales persons, and as December 31, 1999 the work force had
been reduced to 19 full time salaried employees and 16 commissioned sales
persons. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are good.
As the Company grows, it will rely on independent contractors to install
building wiring infrastructure and commission salespersons to install
subscribers' TV set-top boxes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MDU Communications International Inc., formerly known as Alpha Beta Holdings,
Ltd., was incorporated in July 1995 as a Colorado corporation to engage in the
business of establishing and operating brew pubs. Through September 1998, the
Company was essentially inactive. In November 1998, Alpha Beta Holdings, Ltd.
acquired all of the outstanding capital stock of MDU Communications Inc., an
unaffiliated company, and changed its name to MDU Communications International,
Inc. It now operates as a holding company with a fiscal year end of September
30th and has MDU Communications, Inc. as its sole subsidiary.
<PAGE>
MDU Communications, Inc. is a nationally authorized Star Choice System Operator
providing home entertainment and information technology to the residents of
multi-dwelling units (MDUs) such as apartment buildings, condominiums, gated
communities, hotels and motels. In August 1998, the Company entered into a ten
year System Operator Agreement (with 5 year renewal options) with Star Choice
under which the Company will establish and maintain distribution systems in
MDU's throughout Canada and act as a commissioned system operator for Star
Choice. Under this agreement, the Company is entitled to 100% of the monthly
"digital access fee" (currently CDN$5.95 per month) and a 30% share of Star
Choice's monthly subscriber revenue. The Company establishes mutually beneficial
relationships with owners and managers of MDUs to facilitate delivery of these
entertainment and technology services. The Company offers complete building
wiring infrastructures, systems and hardware and digital set-top receivers
required to bring digital satellite viewing to the residents and owners/managers
of MDUs in Canada. Revenue will initially result from sharing in the monthly
Star Choice programming fees charged to the residents for satellite TV service.
Once a building has been wired or the existing wiring has been upgraded, the
infrastructure is in place to provide other services such as home security,
local telephone services and high speed Internet access which may provide
additional revenue to the Company. The Company also designs and supplies
satellite master antennae television (SMATV) systems for multi-dwelling
properties. A SMATV system is capable of receiving and distributing satellite
and local television programming to the residents of MDUs, thereby eliminating
the need for a cable TV provider.
As of September 30, 1999, the Company had over 11,600 subscribers in 135
buildings. The Company has limited financial resources, has incurred operating
losses since inception and does not expect to generate profitable operations
until fiscal 2000 or later. The Company's funding of its initial operating
expenses, working capital needs and capital commitments is dependent upon its
ability to raise additional financing and the Company is currently pursuing
opportunities to raise financing through private placements of both equity and
debt securities.
BASIS OF PRESENTATION
The Consolidated Financial Statements for the fiscal year ended September 30,
1999 have been stated in Canadian dollars and the Company has designated the
Canadian dollar as its functional and reporting currency on the basis that the
principal business and activity of the Company is located and conducted in
Canada. The business combination of Alpha Beta Holdings, Ltd. and MDU
Communications Inc. has been accounted for as a reverse acquisition whereby MDU
Communications Inc. was identified as the acquirer and the assets and
liabilities of Alpha Beta Holdings, Ltd. were acquired at fair value. In
accordance with generally accepted accounting principles for reverse
acquisitions, the consolidated financial statements of the Company as at and for
the fiscal year ended September 30, 1999 reflect the historical results of MDU
Communications Inc. and the related assets and liabilities at their historic
cost. The operations of Alpha Beta Holdings, Ltd. being the legal parent and
accounting subsidiary are reflected in the consolidated financial statements
from November 22, 1998 and its assets and liabilities are reflected at their
fair value at the date of acquisition. As Alpha Beta Holdings, Ltd. was
essentially inactive prior to the business combination, management's discussion
and analysis will relate to the continuing Canadian operations of the Company.
YEAR 2000 ISSUES
The approach of the year 2000 presents significant issues for many financial,
information, and operational systems. Many systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000, from January 1, 1900, which could have adverse
consequences.
<PAGE>
The Company has designated specific individuals to identify and resolve the year
2000 issues associated with its internal information technology (IT) systems,
its internal non-IT systems, and material third party relationships. It has
completed the identification of and has implemented its plans to address its
year 2000 issues. The Company uses commercially available standard software for
its critical operating and accounting functions and the software vendors have
provided the Company with program updates that are intended to rectify the year
2000 issues related to their software. The total cost of the software upgrades
for the Company's operating and financial applications was not material.
The Company's greatest year 2000 exposure comes from its programming suppliers.
The worst case scenario would be if one or more critical suppliers failed to
become year 2000 compliant and failed to develop acceptable workaround
solutions. While the Company has received written communication from its
programming suppliers that they have developed an action plan to address their
year 2000 issues, the Company cannot be certain that these plans will be
implemented or be effective.
While the Company does not have a formal contingency plan, it is monitoring its
programming suppliers to ensure they complete their year 2000 plans as
scheduled. The Company will implement a formal contingency plan should any of
its critical suppliers indicate that there would be delays resulting from their
own year 2000 plans. Such a plan could entail contacting and qualifying other
potentially year 2000 compliant suppliers. There can be no assurance that this
contingency plan for Star Choice and SMATV suppliers would be effective or
completed in a timely manner as the Company may not be able to find a suitable
alternative.
GENERAL
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto of the Company included elsewhere in this
Amendment No. 2 to report.
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
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<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>
OPERATIONS
INCEPTION PERIOD (MARCH 26, 1998) TO SEPTEMBER 30,1998
Although the Canadian Company was incorporated in March 1998, the first six
months was spent as a planning period and the Company sustained an operating
loss of CDN$97,845. There were no revenues for this period and expenses such as
advertising and professional/management fees accounted for 73% of the total
expenses. Initial funding for the Company was through six private loans
(promissory notes) of various amounts all totaling CDN$275,000 and bearing
interest at 7.5%. These demand loans had no set terms of repayment or conversion
features and were paid on December 15, 1998. The proceeds of these monies were
spent supporting the operating loss and purchasing office furniture and
equipment.
YEAR ENDING SEPTEMBER 30,1999
The Company reported a net loss of CDN$2,525,660 for the year ended September
30, 1999. The increase in net loss compared to the six month inception period
is primarily attributable to the increased costs representing the beginning of
sales operations to add over 11,600 subscribers in over 135 buildings. These
costs were comprised of increased personnel, sales, general and administrative
expenses and non cash stock option compensation charges of CDN$116,149,
CDN$177,445 and CDN$222,000 which were recorded as sales expense, consulting
fees and wages expense, respectively.
The 1999 fiscal year's revenue of CDN$566,698 was comprised of 69% SMATV
revenue, 20% net programming revenue from Star Choice and 11% from digital
access fees. SMATV revenue represented approximately 8,700 subscribers, most
<PAGE>
of whom had been added by January 1999, and the Direct To Apartment Set Top
Box revenue represented approximately 2,900 subscribers who were acquired
over the last 9 months.
Direct costs are primarily comprised of SMATV programming and maintenance costs
and are 60% of net revenue.
Salaries, wages, commissions and benefits make up 35% of the total sales
expenses. In-suite installation of set top boxes represents 26% of the total
sales expenses and the balance of 39% is primarily travel, advertising and
telephone expenses.
General and administrative ("G&A") expenses of CDN$1,401,399 were as expected
for the Company's planned market expansion. Advertising, promotion, and
travel/vehicle costs were CDN$128,755 or 9.2% of the total G&A expense and
office, occupancy, repairs & maintenance and telephone costs were CDN$178,175 or
12.7% of the total. Wages, professional and consulting fees were CDN$827,393 or
59.0% of G&A expenses. CDN$399,445 of these expenses were non-cash items due to
stock option compensation charges. The Company accounts for its stock based
employee compensation plans under APB No. 25 whereby compensation cost is
recorded for the excess, if any, of the quoted market price of the common shares
over the exercise price at the date of the grant for all employee common stock
options issued. Compensation cost in the amount of CDN$222,000 was recorded for
300,000 directors'/officers' and employees' options granted at a weighted
average exercise price of US$1.00. At December 31, 1998, the Company granted
stock options to purchase 100,000 common shares of the Company at an option
price of US$1.50 for consultative and other services provided by a relative of
the Company. The fair value of these options in the amount of CDN$177,445 has
been recorded as a consulting expense (see note 7(c) on the Notes to the
Consolidated Financial Statements). Other non cash charges consisted of
amortization expense of CDN$195,260 or 13.9% of total G&A expenses. The balance
of the general and administrative expenses were made up of interest and foreign
exchange losses of CDN$71,816 or 5.1% of the total G&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of CDN$43,621
compared to CDN$19,506 at September 30, 1998. The increase in the Company's cash
position is mainly due to proceeds received from the exercise of warrants and
proceeds from share subscriptions and convertible notes.
Net cash of CDN$310,643 was used in operating activities during the fiscal year
ended September 30, 1999 which resulted from the Company's net loss of
CDN$2,525,660 being offset by CDN$820,916 of non cash charges of which
CDN$515,594 were stock option compensation charges. In addition the Company
recorded a source of cash in the amount of CDN$1,504,163 from changes in
working capital.
Net cash of CDN$3,662,251 was used in investing activities during the fiscal
year ended September 30, 1999, which was mainly comprised of purchases of
telecommunications equipment used in the reception of the digital satellite
signal. As of September 30, 1999, the Company did not have any additional
financing available for future capital expenditures but management is
considering the possibility of lease financing to fund the Company's future
short and long term plans. On November 18, 1999, the Company signed an Agreement
in Principal with MBT Capital to enter into a financing accommodation for a
leasing facility with a term to August 2008. While management believes that
leasing is an alternative to funding the Company's telecommunications
expenditure requirements, there is no certainty that the Company will be able to
successfully complete these leasing arrangements.
Net cash of CDN$3,997,009 was generated from financing activities during the
fiscal year ended September 30, 1999. This was mainly the result of the exercise
of warrants to issue 640,000 shares of common stock of the Company for
CDN$1,474,184 of net cash proceeds, receipt of subscriptions for 670,000
common shares of the Company for CDN$1,544,924 of net cash proceeds, and the
issuance of
<PAGE>
demand convertible notes payable for proceeds of CDN$829,644. The demand
convertible notes payable bear interest at various rates between 8.75 and
9.0% (all convertible at the option of the note holder into fully paid
non-assessable common shares of the Company) and at conversion prices between
US$1.75 and US$2.00. (see note 6 on the Notes to the Consolidated Financial
Statements). As of September 16, 1999, the Company was unable to repay the
notes as a result of a demand made by the note holders, but management
renegotiated extensions to these notes at the same interest rates to
February 28, 2000 and June 30,2000 with conversion prices between US$0.50
and US$0.625.
Management believes that the Company's cash on hand will not be sufficient to
provide funds necessary for the Company to expand its business and fund its
operating deficits for the next twelve months. As a result, management is
currently pursuing opportunities to raise CDN$15,000,000 in financing through
private placements of both equity and debt securities. On October 13, 1999, the
Company entered into an agreement with Canaccord Capital Corporation to assist
the Company with private placements and an initial public offering on the
Vancouver Stock Exchange. On November 26, 1999, the Company completed private
placements totaling 1,482,750 units, each unit consisting of one common share
and one common share purchase warrant. The net cash proceeds to the Company of
these private placements was CDN$883,719. Until additional funds have been
raised, the Company has put on hold its expansion plans and reduced its staff by
50% as a strategy to conserve capital.
The Company is exposed to market risk related to changes in interest and foreign
exchange rates, each of which could adversely affect the value of the Company's
current assets and liabilities. The Company has not entered into any forward
currency contracts or other financial derivatives to hedge foreign exchange
risk, hence, the Company is subject to such risk from foreign currency
transactions and translation gains and losses. The Company does not currently
engage in significant operating transactions denominated in foreign currencies
so any change in the CDN/US dollar exchange rate would not have a material
effect on its future operating cash flows. The Company is subject to foreign
currency risk on the interest and repayment provisions of its U.S. denominated
convertible notes payable which are in the process of being re-negotiated. Based
on the US$392,000 of US dollar convertible notes outstanding at September 30,
1999, an immediate decline of 10% in the value of the Canadian dollar relative
to the US dollar would result in an additional exchange loss of US$26,533 and
additional interest expense of approximately US$2,300 on an annualized basis.
The Company does not currently have an interest bearing investment portfolio nor
liabilities subject to variable interest rates. As a result, any change in the
prime interest rate would also not have a material impact on the Company's
future operating results or cash flows based on the terms of existing
liabilities. Changes in interest rates could have an impact on future
indebtedness to the extent that the terms and conditions of the indebtedness
had to be renegotiated.
The Company has signed agreements with building owners to supply the home
entertainment and information technology to the residents of buildings but the
Company has no capital expenditure commitments to commence the installation of
these services until the appropriate funding has been obtained.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located at 108 - 11951
Hammersmith Way, Richmond, British Columbia, Canada. The premises consist of
four offices totalling 6,070 square feet leased for various terms ending May
31, 2001 through December 31, 2001. Monthly lease and occupancy costs are
approximately CDN$4,500. In addition, the Company leases three sales offices
across Canada with aggregate monthly lease and occupancy costs of
approximately CDN$2,900. The
<PAGE>
Company does not require any significant warehouse space because its
suppliers deliver on an "as needed" basis.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 30, 1999 as to the
number of shares of the Company's Common Stock, which is the only outstanding
class of voting securities, beneficially owned by (i) each person (including
any "group") known to own more than 5% of the outstanding Common Stock, (ii)
each Director, (iii) the executive officers named in the Summary Compensation
Table, and (iv) all Directors and executive officers as a group. Except as
otherwise specified, each named beneficial owner has sole voting and
investment power with respect to the shares set forth opposite his or its name.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
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Sheldon Nelson, President, Chief Executive 869,640(1) 9.26%
Officer and Director
1504 - 170 Hargrave Street
Winnipeg, Manitoba R3C 3H4
Douglas J. Irving, Treasurer, Chief Financial 819,640(2) 8.77%
Officer, Secretary and Director
4331 Candlewood Drive
Richmond, British Columbia V7C 4V9
Paul Andreola 694,640(3) 7.53%
2590 Trinity Street
Vancouver, British Columbia V5K 1E2
Pat Gleeson 694,640(4) 7.53%
214 - 6280 Willingdon
Burnaby, British Columbia V5H 2E3
Gary Monaghan 694,640(5) 7.53%
913 Purcell Court
Kelowna, British Columbia V1V 1N6
Anthony I. Tanti 694,640(6) 7.53%
1709 - 24th Street
West Vancouver, British Columbia V7V 4H7
Wistaria Trust 694,640 7.53%
Moore Stephens International
Services (BVI) Limited,
in trust for the Wistaria Trust
Abbot Building, P.O. Box 3186
Road Town Tortola,
British Virgin Islands
All officers and directors as a group 1,689,280 17.74%
</TABLE>
- ----------------------
(1) Includes 694,600 shares held of record by 567780 BC Ltd., a British
Columbia corporation wholly owned by The Sheldon Nelson Family Trust
<PAGE>
whose trustees are Sheldon Nelson and his sister, Nicole Nelson, and
175,000 shares subject to options exercisable within 60 days.
(2) Includes 694,600 shares held of record by 571321 BC Ltd., a British
Columbia corporation wholly owned by Mr. Irving, his spouse and children,
and 125,000 shares subject to options exercisable within 60 days.
(3) Held of record by Andreola Holdings Ltd., a British Columbia corporation
wholly owned by Mr. Andreola.
(4) Held of record by Gleeson Enterprises, a British Columbia corporation
wholly owned by Mr. Gleeson.
(5) Held of record by 565423 BC Ltd., a British Columbia corporation wholly
owned by Mr. Monaghan, his spouse and trusts for minor children.
(6) Held of record by 571324 BC Ltd., a British Columbia corporation wholly
owned by Mr. Tanti, his spouse and trusts for minor children.
Management is not aware of any current arrangements which could result in a
change of control of the Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
SHELDON NELSON, age 37, has been the President, Chief Executive Officer and a
Director since November 1998. Before joining the Company in 1998, Mr. Nelson
held various positions with 4-12 Electronics Corporation and became its
President in 1996. 4-12 Electronics Corporation is a provider of products and
services to the Canadian satellite, cable, broadcasting and SMATV industries.
DOUGLAS J. IRVING, age 48, has been the Treasurer, Chief Financial Officer,
Secretary and a Director since November 1998. Mr. Irving was a partner in
Vistawest Capital Group, a venture capital company, from 1997 to 1998, and from
1989 to 1996 was Operations Controller of The Loewen Group Inc., the second
largest funeral home operator in North America.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid during
the fiscal period ended September 30, 1998 and the year ended September 30,
1999, which was the Company's last completed fiscal year, to the Company's
chief executive officer. None of the Company's other most highly compensated
executive officers had annual salaries and bonuses exceeding $100,000.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND FISCAL SALARY BONUS OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR (CDN$) (CDN$) (IN SHARES) COMPENSATION
------------------ ------ ------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sheldon Nelson 1998 $48,000 -0- 175,000 -0-
President and Chief Executive
Officer 1999 $48,000 -0- -0- $9,000
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
4-12 Electronics Corporation is a Manitoba corporation owned by Chris Nelson who
is Sheldon Nelson's brother. Sheldon Nelson served as president of 4-12
Electronics Corporation until December 31, 1998.
In December 1998, the Company purchased from 4-12 Electronics Corporation for
CDN$200,000 certain contracts to supply monthly satellite television services to
multi-dwelling unit properties. The purchase included the related equipment
leases, licenses and satellite reception equipment located at the SMATV
properties. The Company believes that the amount paid represented the fair
market value of the acquired assets.
In December 1998, the Company granted Chris Nelson a five-year option to
purchase 100,000 shares of the Company's common stock at a purchase price of
$1.50 per share in consideration for consulting services.
ITEM 8. DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of (i) 50,000,000 shares of
common stock, $0.001 par value per share, and (ii) 5,000,000 shares of preferred
stock, $0.001 par value per share. As of September 30, 1999, 9,221,335 shares of
common stock were outstanding and no shares of preferred stock were outstanding.
The following summary is qualified in its entirety by reference to the
Certificate of Incorporation, which is filed as an exhibit hereto.
COMMON STOCK. Under the Delaware General Corporation Law and the Company's
Certificate of Incorporation, 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 funds legally available therefor. Upon the Company's
liquidation, dissolution or winding up, the holders of common stock are entitled
to ratably receive the Company's net assets available after payment or provision
for payment of all debts and other liabilities subject to prior rights of
holders of preferred
<PAGE>
stock then outstanding, if any. All outstanding shares of common stock are
fully paid and nonassessable.
PREFERRED STOCK. The Certificate of Incorporation authorizes the issuance of
5,000,000 shares of preferred stock, none of which were issued and outstanding
as of September 30, 1999. The preferred stock may be issued from time to time
in one or more series, and the Board of Directors, without further approval of
the stockholders, is authorized to fix the dividend rights and terms,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences, sinking funds and any other rights, preferences, privileges and
restrictions applicable to each such series of preferred stock. The issuance
of shares of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
adversely affect the voting power of the holders of common stock and, under
certain circumstances, make it more difficult for a third party to gain
control of the Company, discourage bids for the common stock at a premium, or
otherwise adversely affect the market price of the common stock.
SHARES ELIGIBLE FOR FUTURE SALE. As of September 30, 1999, the Company had
9,221,335 shares of common stock outstanding. Of these shares, approximately
170,100 shares (2%) were freely tradable without restriction or registration
under the Securities Act of 1933, as amended ("1933 Act"). The remaining
9,051,235 shares (98%) held by existing stockholders are "restricted"
securities within the meaning of Rule 144 under the 1933 Act and are eligible
for sale in the public market only in compliance with Rule 144.
In general, under Rule 144, a stockholder who has beneficially owned shares
privately acquired, directly or indirectly, from the Company or from an
affiliate of the Company for more than one year but less than two years, and
stockholders who are "affiliates" of the Company, as that term is defined in
Rule 144, are entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the outstanding shares of the
common stock (approximately 92,200 shares) or (ii) the average weekly trading
volume in the common stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements relating to the
manner and notice of sale and the availability of current public information
about the Company.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company's Common Stock is not traded on a national securities exchange or
the Nasdaq Stock Market; however, the Common Stock has been quoted on the OTC
Bulletin Board under the symbol "MDTV" since December 2, 1998. The range of high
and low bid prices on the OTC Bulletin Board as quoted by Bloomberg L.P. during
each fiscal quarter since December 2, 1998 is as follows:
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1999
----------------
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
December 31 $1.56 $1.31
March 31 $2.69 $1.44
June 30 $2.38 $1.06
September 30 $1.72 $0.63
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
As of September 30, 1999, the Company had approximately 122 holders of record
of its shares of Common Stock.
The Company has not paid any cash dividends and does not anticipate that it will
pay cash dividends on its Common Stock in the foreseeable future. Payment of
cash dividends is within the discretion of the Company's Board of Directors and
will depend, among other factors, upon the Company's earnings, financial
condition and capital requirements.
The Company's common stock is a "penny stock" which is subject to Rule 15g-9
under the Securities Exchange Act of 1934. It is considered penny stock because
it is not listed on a national exchange or Nasdaq, its bid price is below $5.00
per share, the Company has been in business less than three years and has net
tangible assets of less than $5,000,000, and average annual revenue has not
exceeded $6,000,000 in the past three years.
As a result, broker-dealers must comply with additional sales practices
requirements. Broker-dealers must determine that the investment is suitable for
the buyer and receive the buyer's written agreement to the transaction, before
they can sell the Company's common stock to buyers who are not the
broker-dealer's established customers or institutional accredited investors. In
addition, broker-dealers must deliver to the buyer before the transaction a
disclosure schedule which explains the penny stock market and its risks,
discloses the commissions to be paid to the broker-dealer, discloses the stock's
bid and offer quotations, and discloses if the broker-dealer is the sole market
maker in the stock.
ITEM 2. 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. 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. 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.
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The following changes of independent accountants have occurred:
1. Kish, Leake & Associates, P.C. were principal independent accountants for
Alpha Beta Holdings, Ltd. and audited its balance sheet as at September 30, 1997
and the related statements of operations, cash flows and stockholders' equity
for the years ended September 30, 1997 and 1996 and the period July 14, 1995
(inception) through September 30, 1997.
2. Nelson, Mayoka & Company, P.C. were principal independent accountants for
Alpha Beta Holdings, Ltd. and audited its balance sheet at September 30, 1998
and the related statements of operations, stockholders' equity and cash flows
for the year ended September 30, 1998.
3. Deloitte & Touche LLP were principal independent accountants for MDU
Communications International Inc. and audited its balance sheet as at
September 30, 1999 and September 30, 1998 and the related consolidated
statements of operations, shareholders' deficit and cash flows for the year
ended September 30, 1999 and the period from inception, March 26, 1998 to
September 30, 1998, and is expected to continue as the principal independent
accountant. Deloitte & Touche LLP were engaged to be the principal independent
accountants on or about August 18, 1999.
In each of the foregoing changes of principal independent accountants:
(i) The former accountant was dismissed. The date of dismissal of Kish,
Leake & Associates, P.C. is unknown. Nelson, Mayoka & Company, P.C.
were dismissed on or about November 2, 1998, the date Alpha Beta
Holdings, Ltd. completed the acquisition of all of the issued and
outstanding stock of MDU Communications, Inc.
(ii) None of the principal accountant's reports on the financial statements
described above contained an adverse opinion or disclaimer of opinion
and none were modified as to uncertainty, audit scope, or accounting
principles.
(iii) The decision to change accountants was approved by the board of directors.
<PAGE>
(iv) There were no disagreements with the former accountants on any matter
of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Sales of securities within the past three years without registration under the
Securities Act of 1933 ("1933 Act") were as follows:
A. PREFERRED STOCK
1. May 1996: 100,000 shares of preferred stock were sold for cash in the
aggregate amount of $10,000 without an underwriter to the following three
purchasers: Tudor Trading Limited, Denver, Colorado; Casa Bella Holdings,
Inc., Incline Village, Nevada; and EDR Financial, Inc., Denver Colorado.
2. May 1997: 15,000 shares of additional preferred stock were sold for cash in
the aggregate amount of $15,000 without an underwriter to the holders of
the preferred stock identified in item A-1 above.
3. October 1998: All of the preferred stock then outstanding, consisting of
115,000 shares described in items A-1 and A-2 above, were cancelled and
returned to the Company.
4. The sales of the preferred stock were made in reliance on the exemption
from registration afforded to private placements by Section 4(2) of the
1933 Act.
B. COMMON STOCK (shares adjusted to reflect a 1-for-10 reverse stock split
which occurred in October 1998).
1. June 1996: 170,100 shares of common stock were sold for cash in the
aggregate amount of $851 without underwriters to 25 purchasers, most of
whom were individuals. The sales were made in reliance upon the exemption
from registration afforded by Section 4(2) of the 1933 Act and Rule 504 of
Regulation D thereunder.
2. October 1998: 2,997,400 shares of common stock were sold for cash in the
aggregate amount of $29,974 without an underwriter to 10 offshore
institutional investors. The sales were made in reliance upon exemptions
from registration afforded to offshore transactions.
3. November 1998: 200,000 shares of common stock were sold for cash in the
aggregate amount of $2,000 without underwriters to 1 offshore institutional
investor and 6 individual investors. The sales were made in reliance upon
exemptions from registration afforded to offshore transactions.
4. November 1998: 5,213,835 shares of common stock were
<PAGE>
exchanged for all of the outstanding capital stock of MDU Communications
Inc., a Canadian corporation ("MDU"), which is now a wholly owned
subsidiary of the Company. The former MDU stockholders are the holders of
those shares. No underwriter was involved in the transaction. The sales
were made in reliance upon the exemption from registration afforded by
Section 4(2) of the 1933 Act.
The business combination of the Company and MDU has been accounted for as a
reverse acquisition in which MDU was identified as the acquirer and the
assets and liabilities of the Company were acquired at their fair value. As
a result, the 5,213,835 shares of the Company's common stock issued to the
former MDU stockholders were valued at the fair value of the Company's
assets as of the acquisition date in the amount of $23,482. As the net
assets of the Company consisted solely of cash on the acquisition date, and
the amount of cash has been determined to represent the fair value of the
acquired assets.
5. December 1998: 640,000 shares of common stock were issued for cash in the
aggregate amount of $960,000 upon exercise of options held by two
investors. The options and the common stock issued upon exercise of the
options involved no underwriters and were done in reliance upon the
exemption from registration afforded by Section 4(2) of the 1933 Act and
Rule 504 of Regulation D thereunder.
6. June 1999: A subscription for 670,000 shares of common stock for cash in
the aggregate amount of $1,172,500 was received from two offshore
institutional investors. This transaction is being made in reliance upon
exemptions from registration afforded to offshore transactions.
C. OPTIONS
1. November 1998: One year options to purchase 640,000 shares of common stock
for cash at $1.50 per share were issued to two investors. These options
were exercised in December 1998, as described in Item 4B.5 above.
2. November 1998: Five-year options to purchase 175,000 shares of common stock
at $1.00 per share were granted to Sheldon Nelson pursuant to the Company's
1998 Directors'/Officers' Non-Qualified Stock Option Plan.
3. November 1998: Five-year options to purchase 125,000 shares of common stock
at $1.00 per share were granted to Douglas J. Irving pursuant to the
Company's 1998 Directors'/Officers' Non-Qualified Stock Option Plan.
4. December 1998: Five-year options to purchase 100,000 shares of common stock
at $1.50 per share were issued as consideration for consulting services. No
underwriter was involved and the Company relied upon the exemption from
registration afforded by Section 4(2) of the 1933 Act.
<PAGE>
5. March/April 1999: Five-year options to purchase 73,885 shares of common
stock at $1.50 per share were issued to two key suppliers. No underwriter
was involved and the Company relied upon the exemption from registration
afforded by Section 4(2) of the 1933 Act.
D. CONVERTIBLE PROMISSORY NOTES
1. April/June 1999: Two Convertible Promissory Notes, one in the principal
amount of CDN$250,000, due August 15, 1999 and the other in the principal
amount of US$327,500 due September 15, 1999, were issued to one offshore
investor. Both Notes bear interest at 8.75%. The CDN$250,000 Note is
convertible into common stock at any time prior to the maturity date at a
conversion price of US$2.00 per share and the CDN$327,500 Note is
convertible into common stock at a conversion price of US$1.75 per share.
Both Notes are past due and the Company is negotiating for an extension.
The Company was unable to repay the notes on their respective due dates
and on October 19, 1999, it negotiated an extension to the repayment date
to June 30, 2000. Both notes are now convertible into common stock at any
time prior to the maturity at a conversion price of US$0.625. The
Notes were issued in reliance upon exemption from registration afforded to
offshore transactions.
2. May/June 1999: Two Convertible Promissory Notes in the aggregate principal
amount of US$65,000 and both due on August 31, 1999 were issued to one
accredited, sophisticated investor. The two Notes were replaced by a
Replacement Convertible Promissory Note in the principal amount of
US$65,000 due on February 28, 2000 and bearing interest at 9%. The
Replacement Note is convertible into common stock at any time prior to
maturity at a conversion price of US$0.50 per share. No underwriter was
involved and the Company relied upon the exemption from regulation afforded
by Section 4(2) of the 1933 Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation includes provisions that limit the personal
liability of the Company's 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 Company's 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 (i) for any breach of a director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for any
unlawful payment of a dividend or unlawful stock repurchase or redemption, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which a
director derived an improper personal benefit.
While these provisions provide 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 the 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.
<PAGE>
The Bylaws provide that, to the fullest extent permitted by the DGCL, the
Company shall indemnify the Company's 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 of the Company's 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.
PART F/S
FINANCIAL STATEMENTS
Audited Financial Statements of MDU Communications International, Inc. as
at September 30, 1999 and September 30, 1998.
- Independent Auditor's Report
- Consolidated Balance Sheets - September 30, 1999 and September 30, 1998
- Consolidated Statement of Operations for the period from inception of
the development stage to September 30, 1999, for the year ended
September 30, 1999, and for the period from inception, March 26, 1998,
to September 30, 1998
- Consolidated Statement of Cash Flows for the period from inception of
the development stage to September 30, 1999, for the year ended
<PAGE>
September 30, 1999 and the period from inception, March 26, 1998, to
September 30, 1998
- Consolidated Statement of Shareholders' Equity (Deficit)
- Notes to the Consolidated Financial Statements
<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 financial statements present fairly, in all material
respects, the financial position of the Company (a development stage company)
as at September 30, 1999 and 1998 and the results of its operations and cash
flows for the year ended September 30, 1999 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.
(Signed) Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia, Canada
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 DIFFERENCE
To the Shareholders of
MDU Communications International Inc.
(A development stage company)
In the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
the financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern,
such as those described in Note 2 to the consolidated financial statements.
Our report to the shareholders dated December 3, 1999 (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.
(Signed) Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia, Canada
December 3, 1999 (except for Note 16
for which the date is February 3, 2000)
<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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTINUING OPERATIONS (Note 2)
COMMITMENTS AND CONTINGENCIES (Note 9)
APPROVED BY THE DIRECTORS:
Director
- --------------------------------------------
Director
- --------------------------------------------
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
For the period from inception
from inception (March 26,
of the development For the 1998)
stage to year ended to
September 30, September 30, September 30,
1999 1999 1998
------------------------- ------------------- --------------------
(as restated- (as restated-see
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
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM INCEPTION
FROM INCEPTION (MARCH 26,
OF THE DEVELOPMENT FOR THE YEAR 1998)
STAGE TO ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998
--------------------- ----------------- -----------------
(as restated-see (as restated-see
Note 16) Note 16)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $ (2,623,505) $ (2,525,660) $ (97,845)
Adjustments 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 $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended September 30, 1999, the Company recorded non-cash
additions to property and equipment in the amount of $133,851 representing
the fair value of share purchase options issued to suppliers. See Note 7
(c)(i).
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARE
SUBSCRIPTIONS
COMMON STOCK RECEIVED
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------------------------- -----------------
<S> <C> <C> <C> <C>
Issued for cash at inception,
March 26, 1998 160 $ 160 - $ -
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - - -
- ----------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 160 160 - -
Issued for cash 5,213,675 50,155 - -
Issued on business acquisition
(Note 7) 3,367,500 35,222
Exercise of warrants 640,000 1,474,183 - -
Issue of employees' options - - - -
Suppliers' options issued and issuable - - - -
Issue of options to consultant - - - -
Issued for cash (net of expenses
of the issue of $176,437) - - 670,000 1,544,924
Issued for cash (net of expenses) - - 420,000 248,102
Net loss for the year
ended September 30, 1999 - - - -
- ----------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 $1,559,720 1,090,000 $ 1,793,026
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
WARRANTS/OPTIONS ACCUMULATED
TO PURCHASE SHARES DURING THE
---------------------------- DEVELOPMENT
NUMBER AMOUNT STAGE TOTAL
-------------- -------------- --------------- --------------
<S> <C>
Issued for cash at inception,
March 26, 1998 - $ - $ - $ 160
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - (97,845) (97,845)
- --------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 - - (97,845) (97,685)
Issued for cash - - - 50,155
Issued on business acquisition
(Note 7) 35,222
Exercise of warrants - - - 1,474,183
Issue of employees' options 300,000 222,000 - 222,000
Suppliers' options issued and issuable 73,885 250,000 - 250,000
Issue of options to consultant 100,000 177,445 - 177,445
Issued for cash (net of expenses
of the issue of $176,437) - - - 1,544,924
Issued for cash (net of expenses) - - - 248,102
Net loss for the year -
ended September 30, 1999 (as restated-
see Note 16) - - (2,525,660) (2,525,660)
- --------------------------------------------------------------------------------------------------------
-
Balance, September 30, 1999 (as restated-
see Note 16) 473,885 $ 649,445 $(2,623,505) $ 1,378,686
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Prior to the acquisition described in Note 4 below, MDU Communications
International, Inc. (formerly Alpha Beta Holdings, Ltd.) ("International"
or the "Company") was essentially inactive. On November 2, 1998 the
Company acquired all of the issued and outstanding common shares of MDU
Communications Inc. ("MDU") and on November 24, 1998, the Company changed
its name from Alpha Beta Holdings, Ltd. to MDU Communications
International, Inc. MDU, a Canadian incorporated telecommunications
company is a national system operator for "Star Choice Communications,
Inc." and provides delivery of home entertainment and information
technology to residents of multi-dwelling units such as apartment
buildings, condominiums, gated communities, hotels and motels.
The acquisition of MDU has been accounted for as a reverse acquisition on
the basis that the former shareholders of MDU now control the affairs of
the Company. As a result, these consolidated financial statements of the
Company include the accounts of International (the accounting subsidiary)
and MDU (the accounting parent), for the period subsequent to the
effective date of the reverse acquisition described in Note 4. The
comparative figures as at September 30, 1998 and for the period from
inception (March 26, 1998) to September 30, 1998 represent the historical
results of operations, cash flows and financial position of the
accounting parent, MDU.
2. CONTINUING OPERATIONS
The financial statements have been prepared on the going concern basis of
accounting which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has limited
financial resources, has incurred operating losses since inception and
does not expect to generate profitable operations until fiscal 2000 or
later. In addition, on September 20, 1999, the Company received a demand
for payment with respect to outstanding notes payable with a principal
value of $733,652. The Company has negotiated an extension to the
repayment terms of these notes to June 30, 2000. The Company has also
negotiated an extension to the repayment terms of notes payable in the
amount of $95,992 until February 28, 2000. The Company's funding of its
initial operating expenses, working capital needs and capital commitments
is dependent upon its ability to raise additional financing. The Company
is currently pursuing opportunities to raise financing through private
placements of both equity and debt securities and has engaged an
investment banker to assist it in raising financing through a public
equity offering. There can be no assurance that the Company will be
successful in its efforts to raise additional financing through these
offerings or, if available, that the Company will be able to obtain it on
acceptable terms and continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. Adjustments, if any, would affect the
carrying value and classification of assets and liabilities and the
amount of the net loss and accumulated deficit.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
and reflect the following significant accounting polices.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are issued under the name of
the Company, being the legal parent, but are considered a
continuation of the activities and operations of MDU
Communications Inc. (see Note 4). All inter-company balances and
transactions are eliminated.
(b) DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage enterprise as defined in
Statement of Financial Accounting Standards No. 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 consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements,
and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
amortization. Costs of connecting and disconnecting service are
expensed. Amortization of property and equipment is provided using
the declining balance method at the following rates:
<TABLE>
<S> <C>
Telecommunications equipment, installed 14.5%
Computer equipment 20.0%
Furniture and fixtures 20.0%
</TABLE>
Direct costs of placing telecommunications equipment into service
and major improvements are capitalized.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) PROPERTY AND EQUIPMENT (CONTINUED)
Amortization of telecommunications equipment commences once the
equipment has been installed at the customer's premises.
The Company performs a review for the impairment of long-lived
assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Under
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the impairment of long lived assets..." an
impairment loss is recognized when estimates of future cash flows
expected to result from the use of an asset and its eventual
disposition are less than its carrying amount. No impairment
losses have been identified by the Company for the year ended
September 30, 1999 and the period from inception, March 26, 1998
to September 30, 1998.
(e) INTANGIBLE ASSETS
Intangible assets consist of a customer list and related contracts
which were acquired from a relative of the President of the
Company and are being amortized on the straight-line basis over
five years. Management regularly reviews the carrying value of
intangible assets based upon future expected cash flows. To date,
no impairment has been indicated.
(f) REVENUE RECOGNITION
The Company recognizes revenue on provision of satellite
programming to customers in the period the related services are
provided.
(g) LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities by including other
common share equivalents, including stock options and redeemable
convertible notes payable, in the weighted average number of
common shares outstanding for a period, if dilutive. For both the
year 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.
(h) FOREIGN EXCHANGE
The accounts of the Company and its foreign subsidiary are
expressed in Canadian dollars, its functional currency. Monetary
assets and liabilities denominated in foreign currencies are
translated at the rate in effect at the balance sheet date. Other
balance sheet items and revenues and expenses are translated at
the rates prevailing on the respective transaction dates.
Translation
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
gains and losses relating to current monetary items
and revenue and expenses denominated in foreign currencies are
included in income.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) STOCK-BASED COMPENSATION
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has accounted for employee and director
stock options in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and has made the pro forma disclosures required by
SFAS No. 123 in Note 7.
Under APB No. 25, compensation charges arise from those situations
where options are granted at an exercise price lower than the fair
value of the underlying common shares. These amounts are amortized
as a charge to operations over the vesting periods of the stock
options.
Stock-based compensation charges to other than employees is
recorded over the period that the related stock option or
warrant is earned. The amount of the compensation is based on the
fair value of the option or warrant at the applicable measurement
date.
(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, 1999 and
1998 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.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) CREDIT CONCENTRATION
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts
receivable. Accounts receivable from Star Choice Communications,
Inc. (Note 10) at September 30, 1999, represented 76% of total
trade accounts receivable (September 30, 1998 - Nil%). The balance
of trade receivables are dispersed across a wide customer base.
The Company provides an allowance for bad debts based on
historical experience and specifically identified risk. At
September 30, 1999 and September 30, 1998 there was no allowance
for doubtful accounts.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AcSEC issued 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 incurred. The Company expects that the adoption of
SOP 98-5 will not have a material impact on its financial
position, results of operations. The Company will be required
to adopt SOP 98-5 in fiscal 2000.
In June 1998, the 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 (other than
certain derivatives which qualify for hedge accounting treatment)
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In 1999,
SFAS No. 137 delayed the required implementation by the Company
of SFAS No. 133 to fiscal year 2001. The effect of implementation
of SFAS No. 133 on the Company's financial position or results of
operations has not been determined.
4. ACQUISITION OF SUBSIDIARY
On November 22, 1998, the Company completed the acquisition of all of the
issued and outstanding common shares of MDU in exchange for 5,213,835
common shares of the Company.
The business combination of the Company and MDU has been accounted for as
a reverse acquisition whereby MDU was identified as the acquirer and the
assets and liabilities of the Company were acquired by MDU at fair value.
Fair value has been estimated as $35,222 being the amount of the sole
asset, cash, of International at the date of acquisition. In accordance
with generally accepted accounting principles for reverse acquisitions
these consolidated financial statements reflect the historical results of
MDU since its formation, and the MDU assets and liabilities at their
historic cost. The operations of the Company, being the legal parent and
accounting subsidiary, are reflected from November 22, 1998 and its
assets and liabilities are reflected at their fair value at the date of
acquisition.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
4. ACQUISITION OF SUBSIDIARY (CONTINUED)
<TABLE>
<S> <C>
Net assets of the Company at date of
acquisition are as follows:
Assets
Cash $ 35,222
Liabilities -
--------------------------------------------------------------
Net assets acquired $ 35,222
--------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
----------------- ------------------
(as restated-
see Note 16)
<S> <C> <C>
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>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
6. NOTES PAYABLE
The notes payable outstanding at September 30, 1999 and September 30,
1998 are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
i) Demand convertible note payable with a maturity
value of $250,000, bearing interest at 8.75%, per
annum compounded monthly and past due as of
August 15, 1999. $ 250,000 $ -
ii) Demand convertible note payable with a
maturity value of U.S. $40,000, bearing
interest at 9.00% per annum compounded
monthly and past due as of August 31, 1999. 59,072 -
iii) Demand convertible note payable with a maturity
value of U.S. $25,000, bearing interest at 9.00%
per annum compounded monthly and past due as of
August 31, 1999. 36,920 -
iv) Demand convertible note payable with a maturity
value of U.S. $327,500, bearing interest at 8.75%
per annum compounded monthly and past due as of
September 15, 1999. 483,652 -
v) Notes payable with an aggregate maturity value of
Cdn. $150,000, bearing interest at 7.5% per annum
compounded monthly and repayable on demand. - 150,000
------------------------------------------------------------------------------------------------
$ 829,644 $ 150,000
------------------------------------------------------------------------------------------------
</TABLE>
All or any part of the principal amount of the notes outstanding at
September 30, 1999 and any interest thereon is convertible, at the
option of the holder, on or before the due date, into fully paid and
non-assessable common shares of the Company at a conversion price of
US$2.00 per common share in the case of the notes described in Notes 6
(ii) and (iii), above, and at a conversion price of US$1.75 in the case
of those described in Notes 6 (i) and (iv). The notes are unsecured. The
Company was unable to repay the notes on their respective due dates and
on September 16, 1999 the Company received a demand for payment with
respect to outstanding notes payable with a principal value of $733,652
(Notes 6(i) and (iv)). The Company is in default at September 30, 1999.
6. NOTES PAYABLE (CONTINUED)
On October 19, 1999, the Company negotiated an extension to the repayment
terms of the notes payable in the amount of $733,652 to June 30, 2000. The
renegotiated demand, unsecured, convertible notes bear interest at 8.75%.
All or any portion of the principal, and any interest thereon, is
convertible, at the option of the holder, on or before the due date, into
fully paid and non-assessable common shares of the Company at a conversion
price of U.S.$0.625 per common share. On October 19, 1999 the Company also
negotiated an extension to the repayment terms of the notes payable in the
amount of $95,992 (Notes 6 (ii) and (iii), above) to February 28, 2000.
The renegotiated demand, unsecured, convertible notes bear interest at 9%.
All or any portion of the principal, and any interest thereon, is
convertible, at the option of the holder, on or before the due date, into
fully paid and non-assessable common shares of the Company at a conversion
price U.S.$0.50 per common share.
7. SHARE CAPITAL
(a) AUTHORIZED
The Company's authorized share capital consists of 50,000,000
common shares with a par value of $0.001 per share and 5,000,000
non-voting preferred stock also with a par value of $0.001 per
share.
(b) A reconciliation of issued and outstanding share capital of the
Company to amounts previously reported in Alpha Beta Holdings Ltd.
at September 30, 1998 is as follows:
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Amount
shares Cdn $
---------- --------
<S> <C> <C>
Common shares:
Balance, September 30, 1998 1,701,000 $ 1,277
Share consolidation on a 10 for 1 basis (1,530,900) --
- -----------------------------------------------------------------------------
Balance, September 30, 1998, post share
consolidation 170,100 1,277
Issued for cash 3,197,400 49,879
- -----------------------------------------------------------------------------
Balance prior to business combination 3,367,500 51,156
Adjustment of stated value of common
shares at reverse acquisition to value
of common shares of MDU (Note 4) - (841)
Issued on acquisition of the Company
(Note 4) 5,213,835 35,222
- -----------------------------------------------------------------------------
Balance subsequent to reverse
acquisition 8,581,335 85,537
Exercise of warrants 640,000 1,474,183
- -----------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 $1,559,720
- -----------------------------------------------------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS
(i) Suppliers' Stock Option Plan ("Suppliers' Plan")
On December 31, 1998 the Company established a stock option
plan pursuant to which certain key suppliers of the Company
will be granted options on completion of specified
activities. Under the terms of the Suppliers' Plan, eligible
suppliers can earn options to purchase an aggregate of
215,135 common shares of the Company. Details of options
issued to date under the Suppliers' Plan are as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise price
options U.S.$
----------- ----------------
<S> <C> <C>
Outstanding at inception of the Company (March 26,
1998) and at September 30, 1998 - $ -
Granted and fully vested 73,885 1.50
Exercised - -
----------------------------------------------------------------------------------------
Outstanding and exercisable at September 30, 1999 73,885 $1.50
----------------------------------------------------------------------------------------
</TABLE>
In addition to the stock options under the Suppliers' Plan
issued to September 30, 1999, the Company is obligated to
issue an additional 19,429 options to purchase common
shares of the Company at exercise prices between US$1.75
and US$2.00 per share and exercisable for five years from
the date of issue. These options had not been issued at
September 30, 1999.
Under the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) the Company has
recorded additional 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 $116,149 as sales expense). These charges are
based on the fair value of the stock options issued and
issuable to suppliers calculated on the date an eligible
supplier completes the performance required to earn the
options. This amount is determined using a Black Scholes
option pricing model assuming a weighted average annualized
volatility of the Company's share price of approximately
114%. For details of the other material assumptions used in
determination of the fair value of these options see Note 7
(c)(ii).
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans")
On November 24, 1998 the Company established Employee Plans
whereby certain employees, officers and directors will be
granted options to purchase up to an aggregate of 600,000
common shares of the Company. Details of options issued to
date under the Employee Plans are as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise price
options U.S.$
----------- ----------------
<S> <C> <C>
Outstanding at inception of the Company (March 26,
1998) and at September 30, 1998 - $ -
Granted and fully vested 300,000 1.00
Exercised - -
----------------------------------------------------------------------------------------
Outstanding and exercisable at September 30, 1999 300,000 $1.00
----------------------------------------------------------------------------------------
</TABLE>
The Company accounts for its stock-based employee
compensation plans under APB No. 25 whereby compensation
cost is recorded for the excess, if any, of the quoted
market price of the common shares over the exercise price at
the date of grant for all employee common stock options
issued. For the year ended September 30, 1999, compensation
cost in the amount of $222,000 has been recorded under this
method.
An alternative method of accounting for employee stock
options is SFAS No. 123. Under SFAS No. 123 employee stock
options are valued at the grant date using a fair value
method and the estimated fair value of the options is
amortized to expense over the options' vesting period. The
following pro forma financial information presents the net
loss for the period and loss per common share had the
Company adopted SFAS No. 123.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans") (continued)
<TABLE>
<CAPTION>
For the period
from inception of
the development Year ended Year Ended
stage to September 30, September 30,
September 30, 1999 1999 1998
------------------ --------------- ---------------
(as restated-
see Note 16)
<S> <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>
Using the fair value method for stock-based compensation, as
described in SFAS No. 123, additional compensation costs of
approximately $383,390 would have been recorded for the year
ended September 30, 1999 (period from March 26, 1998 to
September 30, 1998 - $Nil). This amount is determined using
a Black Scholes option pricing model assuming no dividends
are to be paid, vesting on date of grant, an expected term
of 5 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 the determination of the fair value of these
options, see Note 7(c)(ii).
Prior to the acquisition of the Company as described in Note
4, Alpha Beta Holdings, Ltd. had issued options to purchase
640,000 shares of common stock of the Company at an exercise
price of U.S.$1.50 and an expiry date of November 5, 1999.
In December 1998, these options were exercised resulting in
proceeds to the Company of U.S.$960,000 ($1,474,184).
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning stock
options outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Exercise
Number of price
options U.S.$ Expiry date
--------- -------- --------------------
<S> <C> <C>
300,000 $1.00 November 24, 2003
100,000 1.50 December 31, 2003
40,000 1.50 March 1, 2004
33,885 1.50 April 1, 2004
</TABLE>
The weighted average exercise price of all options outstanding at
September 30, 1999 is U.S. $1.18.
8. SHARE SUBSCRIPTIONS RECEIVED
On May 28, 1999, the Company received subscriptions to purchase 670,000
shares for net proceeds after expenses of the issue of $1,544,924.
These shares were issued on November 19,1999. On September 15, 1999 the
Company received additional subscriptions to purchase 420,000 shares for
net proceeds after expenses of the issue of $248,102.
9. COMMITMENTS AND CONTINGENCIES
(i) Under the terms of certain operating leases for equipment and
premises, the Company is obligated to make annual net rental
payments as follows:
<TABLE>
<CAPTION>
Fiscal year ended
September 30, Amount
--------------------- -----------------
<S> <C>
2000 $ 87,698
2001 82,217
2002 38,048
2003 13,644
2004 and thereafter 11,690
------------------------------------------------------------------------
$ 233,297
------------------------------------------------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(ii) The Company has been named as the Defendant in an action by Shaw
Cable Systems Ltd. ("Shaw") in which Shaw seeks an injunction and
$2 million in damages as a result of alleged trespass and loss of
business as a result of certain activities allegedly carried out
by the Company. Shaw and the Company have jointly agreed that no
further steps will be taken in this action by either party until
the parties have completed their current negotiations with respect
to customer connection procedures. Given the preliminary stage of
the proceedings, it is not presently possible to estimate or
determine whether there will be any loss to the Company, and the
amount, if any, of such loss will be recorded in the period in
which it becomes determinable. 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.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
10. STRATEGIC ALLIANCE (CONTINUED)
The Company will incur only the cost associated with the implementation
of its services, and will not share any of Star Choice's programming or
broadcasting costs. Under the agreement, the Company may not maintain
distribution systems or market direct-to-home satellite broadcast
services for other satellite operators in Canada.
The Company's revenues are significantly dependent on its strategic
alliance with Star Choice. During the year ended September 30, 1999,
revenues from Star Choice accounted for 36% of total recorded revenues of
the Company (period from inception, March 26, 1998 to September 30, 1998
- $Nil).
11. GOVERNMENT REGULATION
Satellite broadcasting and distribution of Canadian television signals to
cable operators in Canada are regulated by the Canadian Radio Television
and Telecommunications Commission (CRTC). Star Choice and Express Vu are
the only two licensees that have been approved by the CRTC to distribute
television and information services by direct-to-home digital satellite
transmissions in Canada. Both must operate in accordance with CRTC
imposed "conditions of license" to maintain their licenses. Also, they
must comply with the Canadian Broadcasting Act. Since the Company in its
role as a system operator for Star Choice is significantly dependent on
Star Choice for programming, it would be adversely affected if Star
Choice encountered regulatory problems.
12. INCOME TAXES
A reconciliation of the statutory federal Canadian income tax rate and
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
For the period Period from
from inception March 26,
of the development Year ended 1998 to
stage to September 30, September 30,
September 30, 1999 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>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
12. INCOME TAXES (CONTINUED)
The Company had no income tax expense for the year ended September 30,
1999 or for the period from inception, March 26, 1998, to September 30,
1998 as a result of significant incurred losses. Additionally, the
Company has provided a full valuation allowance for net deferred tax
assets at September 30, 1999 and September 30, 1998, since realization of
these benefits cannot be reasonable assured. At September 30, 1999 and
September 30, 1998, deferred tax (liabilities) assets are comprised of
the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
---------------- ------------------
<S> <C> <C>
Gross deferred tax liabilities:
Amortization $ (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's president to
purchase 100,000 common shares of the Company at an exercise price of
U.S. $1.50 until December 21, 2003, in exchange for consultative
services. See Note 7 (c)(iii).
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS
(a) On October 13, 1999, the Company entered into an agreement with
Canaccord Capital Corporation ("Canaccord) which will provide a
basis for Canaccord and other investors to participate in a private
placement and subsequent initial public offering ("IPO") on a
Canadian Stock Exchange. The agreement is subject to: the Company
completing specified reorganization activities, including a creditor
arrangement plan which will result in a deferral of payments
otherwise due, an equipment lease finance arrangement, and further
due diligence by Canaccord. Canaccord is entitled to a corporate
finance fee of 200,000 shares of the Company, 100,000 payable on
October 13, 1999, and 100,000 upon completion of the private
placement. To December 3, 1999, 100,000 shares of the Company have
been issued in connection with this agreement.
(b) On November 11, 1999, the Company signed a Memorandum of
Understanding ("MOU") with Antech (Hong Kong) Ltd. to enter into a
joint venture relationship by December 31, 1999 to seek strategic
relationships to capture certain market and operational synergies
for Satellite TV, High Speed Internet, Telephony, and Security
products in the geographic areas of Honk Kong, SAR, Macau, Taiwan
and the People's Republic of China. The proposed 25% joint venture
interest will require an initial subscription by the Company for
25,000 common shares in Hong Kong corporation at a consideration of
HK$25,000 ($4,720). Failure to achieve a joint venture agreement by
December 31, 1999 will allow the parties to terminate their
involvement in the MOU.
(c) On November 26, 1999, the Company completed a series of private
placements totalling 1,482,750 units, each unit consisting of one
common share and one common share purchase warrant for aggregate
cash consideration of U.S.$593,100 ($883,719). The unit price of
U.S.$0.40 was based on a premium to market value of the Company's
common shares when the subscription program was undertaken on
October 21, 1999. The warrants have a term of 2 years from the date
of closing of the private placement at an exercise price of
U.S.$0.75.
(d) On November 19, 1999 the Company signed an Agreement in Principal
with MBT Capital to enter into lease financing transactions relating
to certain telecommunications equipment of the Company. Under the
terms of the proposed financing, MBT Capital would initially acquire
approximately 4,000 set top boxes currently in the hands of active
subscribers in exchange for $1,520,000 and then rent those boxes
back to the Company. The Agreement in Principal is subject to
receipt and acceptance of a formal commitment from MBT Capital, the
appointment of two MBT Capital nominees to the Company's Board of
Directors and completion of due diligence by Star Choice among
other conditions of closing.
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:
<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>
<PAGE>
PART III
<TABLE>
<CAPTION>
ITEM 1. INDEX TO EXHIBITS
DESCRIPTION OF EXHIBITS EXHIBIT NO.
----------------------- -----------
<S> <C>
Certificate of Incorporation (1) 2.1
Bylaws (1) 2.2
See Article IV of Certificate of Incorporation 3.1
filed as Exhibit 2.1
Acquisition Agreement dated November 2, 1998 6.1
between Alpha Beta Holdings, Ltd. and
MDU Communications Inc. (1)
System Operator Agreement dated August 27, 1998 6.2
between Star Choice Communications
Inc. and MDU Communications Inc. (1)
Agreement dated December 31, 1998 between 4-12 6.3
Electronics Corporation and MDU Communications Inc. (1)
Sheldon Nelson Stock Option Agreement dated 6.4
November 24, 1998 (1)
Douglas Irving Stock Option Agreement dated 6.5
November 24, 1998 (1)
Chris Nelson Stock Option Agreement dated 6.6
December 31, 1998 (1)
Letter of Nelson, Mayoka & Company on change 16.1
of certifying accountant (3)
Letter of Kish, Leake & Associates P.C. on 16.2
change of certifying accountant (3)
Restated Audited Financial Statements of MDU
Communications International, Inc. as at June 30, 18.0
1999 and September 30, 1998
Financial Data Schedule (2) 27.0
</TABLE>
- ----------------------
(1) Incorporated by reference from Form 10-SB filed on May 12, 1999
(2) Filed herewith
(3) Filed previously.
<TABLE>
<CAPTION>
ITEM 2. DESCRIPTION OF EXHIBITS
EXHIBIT NO. DESCRIPTION
---------- -----------
<S> <C>
2.1 Certificate of Incorporation (1)
2.2 Bylaws (1)
3.1 See Article IV of Certificate of Incorporation
filed as Exhibit 2.1
6.1 Acquisition Agreement dated November 2,
1998 between Alpha Beta Holdings, Ltd.
and MDU Communications Inc. (1)
6.2 System Operator Agreement dated August 27,
1998 between Star Choice Communications Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 2. DESCRIPTION OF EXHIBITS
EXHIBIT NO. DESCRIPTION
---------- -----------
<S> <C>
and MDU Communications Inc. (1)
6.3 Agreement dated December 31, 1998 between 4-12
Electronics Corporation and MDU Communications Inc. (1)
6.4 Sheldon Nelson Stock Option Agreement dated
November 24, 1998 (1)
6.5 Douglas Irving Stock Option Agreement dated
November 24, 1998 (1)
6.6 Chris Nelson Stock Option Agreement dated
December 31, 1998 (1)
16.1 Letter of Nelson, Mayoka & Company on change
of certifying accountant (2)
16.2 Letter of Kish, Leake & Associates P.C. on
change of certifying accountant (2)
18.0 Restated Audited Financial Statements of MDU
Communications International, Inc. as at June 30,
1999 and September 30, 1998
27.0 Financial Data Schedule (2)
</TABLE>
- ----------------------
(1) Incorporated by reference from Form 10-SB filed on May 12, 1999
(2) Filed herewith
(3) Filed previously.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
MDU Communications International, Inc.
By: /s/ Robert A. Biagioni
----------------------------------
Robert A. Biagioni
Chief Financial Officer
Dated: April 13, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors 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 June 30,
1999 and September 30, 1998, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the nine months
ended June 30, 1999, the period from inception of the development stage to
June 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 financial statements present fairly, in all material
respects, the financial position of the Company (a development stage company)
as at June 30, 1999 and September 30, 1998 and the results of its operations
and cash flows for the nine months ended June 30, 1999, the period from
inception of the development stage to June 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 June 30, 1999 consolidated
financial statements have been restated.
(SIGNED) DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia, Canada
August 20, 1999 (except for Notes 2, 3 and 15 for which
the date is October 19, 1999 and Note 16 for which
the date is February 3, 2000)
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt
on the Company's ability to continue as a going concern, such as those
described in Note 2 to the consolidated financial statements. Our report to
the shareholders dated August 20, 1999 (except for Notes 2, 3 and 15 for which
the date is October 19, 1999 and Note 16 for which the date is February 3,
2000) is expressed in accordance with Canadian reporting standards which do
not permit reference to such an uncertainty in the Auditors' Report when the
undertainty is adequately disclosed in the financial statements.
(SIGNED) DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia, Canada
August 20, 1999 (except for Notes 2, 3 and 15 for which
the date is October 19, 1999 and Note 16 for which
the date is February 3, 2000)
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
JUNE 30, September 30,
1999 1998
----------------- --------------------
(as restated-
see Note 16)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 593,267 $ 19,506
Prepaid expenses and deposits 13,606 7,593
Accounts receivable
Trade 58,568 -
Sales tax and other 105,989 -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 771,430 27,099
PROPERTY AND EQUIPMENT, net (Note 5) 2,494,897 47,033
INTANGIBLE ASSETS
(net of accumulated amortization of $14,908) 134,163 -
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,400,490 $ 74,132
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 642,485 $ 15,867
Accrued liabilities 44,965 5,950
Notes payable (Note 6) 826,622 150,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,514,072 171,817
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
Share capital (Note 7) 1,560,801 160
Share purchase options 649,445 -
Share subscriptions received (Note 8) 1,544,924 -
Deficit accumulated during the development stage (1,868,752) (97,845)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,886,418 (97,685)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 3,400,490 $ 74,132
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTINUING OPERATIONS (Note 2)
COMMITMENTS AND CONTINGENCIES (Note 9)
APPROVED BY THE DIRECTORS
................................. Director
................................. Director
See accompanying notes to the consolidated financial statements
<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 (March 26,
of the development For the nine 1998)
stage to months ended to
June 30, June 30, September 30,
1999 1999 1998
------------------------- ------------------- --------------------
(as restated- (as restated-
see Note 16) see Note 16)
<S> <C> <C> <C>
REVENUE $ 310,012 $ 310,012 $ -
DIRECT COSTS 214,186 214,186 -
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 95,826 95,826 -
- ---------------------------------------------------------------------------------------------------------------------
SALES EXPENSE 791,325 791,325 -
- ---------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 83,580 52,422 31,158
Amortization 169,143 169,143 -
Consulting 177,445 177,445 -
Foreign exchange loss 36,496 36,496 -
Interest 16,412 14,384 2,028
Management fees 26,500 - 26,500
Office 34,391 31,326 3,065
Occupancy 37,124 31,724 5,400
Professional fees 68,906 55,323 13,583
Repairs and maintenance 6,277 6,277 -
Telephone 26,189 23,477 2,712
Travel 46,636 35,811 10,825
Vehicle 11,097 8,523 2,574
Wages 433,057 433,057 -
- ---------------------------------------------------------------------------------------------------------------------
1,173,253 1,075,408 97,845
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (1,868,752) $ (1,770,907) $ (97,845)
- ---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.19) $ (0.01)
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - 9,097,085 8,581,335
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
For the period
For the period from inception
from inception (March 26,
of the development For the nine 1998)
stage to months ended to
June 30, June 30, September 30,
1999 1999 1998
--------------------- ----------------- -----------------
(as restated- (as restated-
see Note 16) see Note 16)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $ (1,868,752) $ (1,770,907) $ (97,845)
Adjustments to reconcile net loss for the
period to cash utilized in operating activities
Amortization 169,143 169,143 -
Non-cash portion of sales expenses
(Note 7 (c)(i)) 116,149 116,149 -
Non-cash portion of wages expense
(Note 7 (c)(ii) 222,000 222,000 -
Non-cash consulting expense
(Note 7 (c)(iii) 177,445 177,445 -
Change in operating assets and liabilities:
Prepaid expenses and deposits (13,606) (6,013) (7,593)
Accounts receivable (164,557) (164,557) -
Accounts payable 642,485 626,618 15,867
Accrued liabilities 44,965 39,015 5,950
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (674,728) (591,107) (83,621)
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on acquisition of subsidiary (Note 4) 35,223 35,223 -
Purchase of property and equipment (2,515,282) (2,468,249) (47,033)
Purchase of intangible assets (149,071) (149,071) -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,629,130) (2,582,097) (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 826,622 826,622 -
Proceeds from issue of common stock 50,315 50,155 160
Proceeds from exercise of warrants 1,475,264 1,475,264 -
Proceeds from share subscriptions received 1,544,924 1,544,924 -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,897,125 3,746,965 150,160
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 593,267 573,761 19,506
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - 19,506 -
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 593,267 $ 593,267 $ 19,506
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 8,233 $ 8,233 $ -
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Interest received $ 5,319 $ 5,319 $ -
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended June 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).
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Share
Subscriptions Warrants/options
Common stock Received to purchase shares
----------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Number Amount
-------------- -------------------------- ------------------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Issued for cash at inception,
March 26, 1998 160 $ 160 - $ - - $ -
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 160 160 - - - -
Issued for cash 5,213,675 50,155 - - - -
Issued on business acquisition
(Note 7) 3,367,500 35,222
Exercise of warrants 640,000 1,475,264 - - - -
Issue of employees' options - - - - 300,000 222,000
Suppliers' options issued and issuable - - - - 73,885 250,000
Issue of options to consultant - - - - 100,000 177,445
Issued for cash (net of expenses
of the issue of $176,437) - - 670,000 1,544,924 - -
Net loss for the nine months
ended June 30, 1999 (as restated -
see Note 16) - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (as restated -
see Note 16) 9,221,335 $1,560,801 670,000 $ 1,544,924 473,885 $ 649,445
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
<TABLE>
<CAPTION>
Deficit
accumulated
during the
development
stage Total
- ------------------------------
<C> <C>
$ - $ 160
(97,845) (97,845)
- -------------------------------
(97,845) (97,685)
- 50,155
35,222
- 1,475,264
- 222,000
- 250,000
- 177,445
- 1,544,924
-
(1,770,907) (1,770,907)
- -------------------------------
-
$(1,868,752) $ 1,886,418
- -------------------------------
- -------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Prior to the acquisition described in Note 4 below, MDU Communications
International Inc. (formerly Alpha Beta Holdings, Ltd.)
("International" or the "Company") was essentially inactive. On
November 2, 1998 the Company acquired all of the issued and
outstanding common shares of MDU Communications Inc. ("MDU") and on
November 24, 1998, the Company changed its name from Alpha Beta
Holdings, Ltd. to MDU Communications International Inc. MDU, a
Canadian incorporated telecommunications company is a national system
operator for "Star Choice Television" and provides delivery of home
entertainment and information technology to residents of
multi-dwelling units such as apartment buildings, condominiums, gated
communities, hotels and motels.
The acquisition of MDU has been accounted for as a reverse acquisition
on the basis that the former shareholders of MDU now control the
affairs of the Company. As a result, these interim consolidated
financial statements of the Company include the accounts of the
Company (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 $731,130. The Company has negotiated
an extension to the repayment terms of notes payable in the amount of
$95,493 until February 28, 2000 and is in discussions with the lenders
to extend the repayment terms on the balance. The Company's funding of
its initial operating expenses, working capital needs and capital
commitments is dependent upon its ability to successfully conclude
these discussions and to raise additional financing. The Company is
currently pursuing opportunities to raise financing through private
placements of both equity and debt securities and has engaged an
investment banker to assist it in raising financing through a public
equity offering. There can be no assurance that the Company will be
successful in its efforts to raise additional financing through these
offerings or, if available, that the Company will be able to obtain it
on acceptable terms and continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. Adjustments, if any, would affect the
carrying value and classification of assets and liabilities and the
amount of the net loss and accumulated deficit.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
and reflect the following significant accounting polices.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are issued under the name
of the Company, being the legal parent, but are considered a
continuation of the financial statements of MDU Communications
Inc. (see Note 4). All inter-company balances and transactions
are eliminated.
(B) DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage enterprise as defined in
Statement of Financial Accounting Standards No 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 its high speed internet
service to multi-dwelling unit properties and developing
customer markets. The financial statements have been prepared
on the going concern basis of accounting.
(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 disconnecting and reconnecting service
are expensed. Amortization of property and equipment is
provided using the declining balance method at the following
rates:
Telecommunications equipment, installed 14.5%
Computer equipment 20%
Furniture and fixtures 20%
Direct costs of placing telecommunications equipment into
service and major improvements are capitalized.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) PROPERTY AND EQUIPMENT (CONTINUED)
Amortization of telecommunications equipment not yet placed in
service commences once the equipment has been installed at the
customer's premises.
The Company makes reviews 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. . ." 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 such impairment
losses have been identified by the Company for the periods ended
June 30, 1999 and September 30, 1998.
(E) INTANGIBLE ASSETS
Intangible assets consist of a customer list and related
contracts 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 preferred shares, in the weighted
average number of common shares outstanding for a period, if
dilutive. For both the periods ended June 30, 1999 and 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 at October 19,
1999 the Company had outstanding securities which were convertible
into 1,398,157 common shares which could 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 expenses
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.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) STOCK-BASED COMPENSATION
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has accounted for employee 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 deemed fair value of the underlying common
shares. These amounts are amortized as charges to operations
over the vesting periods of the individual stock options.
Stock-based compensation charges to other than employees is
recorded over the period that the related stock option or
warrant is earned. The amount of the compensation is based on
the fair value of the option or warrant at the applicable
measurement date.
(J) INCOME TAXES
The Company accounts for income taxes using a liability
approach under which deferred income taxes are provided based
upon enacted tax laws and rates applicable to the periods in
which the taxes become payable.
(K) 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.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable,
accounts payable, accrued liabilities at June 30, 1999 and
September 30, 1998 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 demand nature 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 June 30, 1999.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) 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 (Note 9) at
June 30, 1999, represented 35% 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 June 30, 1999
and September 30, 1998 there was no allowance for doubtful
accounts outstanding.
(N) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AcSEC 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 incurred. The Company expects that the adoption of SOP 98-5
will not have a material impact on its financial position, results
of operations. The Company will be required to adopt SOP 98-5 in
fiscal 2000.
In June 1998, the 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 effects of implementation of SFAS No. 133
on the Company's financial position or results of operations
has not been determined.
4. ACQUISITION
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 $35,223 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 date of acquisition.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4. ACQUISITION (CONTINUED)
<S> <C>
Net assets of the Company at date of
acquisition are as follows:
Assets
Cash $ 35,223
Liabilities -
- -------------------------------------------------------------------------------------------------------------------------
Net assets acquired $ 35,223
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------------- ------------------
(as restated -
see Note 16)
<S> <C> <C>
Telecommunications equipment, installed $ 2,006,125 $ 8,308
Telecommunications equipment, not yet placed in service 533,030 -
Computer equipment 35,867 11,308
Furniture and fixtures 74,111 27,417
---------------------------------------------------------------------------------------------------------------------
2,649,133 47,033
Less: accumulated amortization (154,236) -
---------------------------------------------------------------------------------------------------------------------
$ 2,494,897 $ 47,033
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
6. NOTES PAYABLE
The notes payable outstanding at June 30, 1999 and September 30, 1998
are summarized as follow:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------------- -------------------
<S> <C> <C>
i) Demand convertible note payable with a maturity value of Cdn.
$250,000, bearing interest at 8.75%, per annum compounded
monthly and due August 15, 1999. $ 250,000 $ -
ii) Demand convertible note payable with a maturity value of U.S.
$40,000, bearing interest at 9.00% per annum compounded
monthly and due August 31, 1999. 58,764 -
iii) Demand convertible note payable with a maturity value of U.S.
$25,000 bearing interest at 9.00% per annum compounded
monthly and due August 31, 1999. 36,728 -
iv) Demand convertible note payable with a maturity value of
U.S.$327,500, bearing interest at 8.75% per annum compounded
monthly and due September 16, 1999. 481,130 -
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
-------------------------------------------------------------------------------------------------------------
$ 826,622 $ 150,000
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
All or any part of the principal amount of Notes i) through iv) above, 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 Notes 6 (i) through (iii) and at a conversion price of U.S. $1.75
in the case of Note 6 (iv). The Notes are unsecured.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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 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 1,475,264
- -------------------------------------------------------------------------------------------------
Balance, June 30, 1999 9,221,335 $ 1,560,801
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(C) STOCK OPTION PLANS
i) Suppliers' Stock Option Plan ("Suppliers' Plan")
On December 31, 1998 the Company established a stock option
plan pursuant to which certain key suppliers of the Company
will be granted options on completion of specified
activities. Under the terms of the Suppliers' Plan, eligible
suppliers can earn options to purchase an aggregate of
215,135 common shares of the Company. Details of options
issued to date under the Suppliers' Plan are as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise price
shares U.S.$
---------------- -----------------
<S> <C> <C>
Outstanding at inception of the Company (March 26,
1998) and at September 30, 1998 - $ -
Granted 73,885 1.50
Exercised - -
- -------------------------------------------------------------------------------------------------
Outstanding and exercisable at June 30, 1999 73,885 $ 1.50
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
In addition to the stock options under the Suppliers' Plan
issued to June 30, 1999, the Company is obligated to issue
an additional 19,429 options to purchase common shares of
the Company at exercise prices between U.S.$1.75 and
US$2.00 per share and exercisable for five years from date
of issue. These options had not been issued at
June 30, 1999.
Under the requirements of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) the Company has recorded
additional stock-based compensation charges in the amount of
$250,000 during the nine months ended June 30, 1999,
($133,851 as additional costs of telecommunications
equipment and $116,149 as sales expense). These charges are
based on the fair value of the stock options issued to
suppliers. This amount is determined using a Black Scholes
option pricing model assuming a weighted average annualized
volatility of the Company's share price of approximately
114%. For details of the other material assumptions used in
determination of the fair value of these options see Note
7(c)(ii).
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(C) STOCK OPTION PLANS (CONTINUED)
ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans")
On November 24, 1998 the Company established Employee Plans
whereby certain employees, officers and directors will be
granted options to purchase up to an aggregate of 600,000
common shares of the Company. Details of options issued to
date under the Employee Plans are as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise price
shares U.S.$
---------------- -----------------
<S> <C> <C>
Outstanding at inception of the Company (March 26,
1998) and at September 30, 1998 - $ -
Granted 300,000 1.00
Exercised - -
- -------------------------------------------------------------------------------------------------
Outstanding and exercisable at June 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 nine months ended June 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.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(C) STOCK OPTION PLANS (CONTINUED)
ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans") (continued)
<TABLE>
<CAPTION>
Period from
For the period from Nine months March 26,
inception of the ended 1998 to
development stage to June 30, September 30,
June 30, 1999 1999 1998
--------------------- ---------------- -----------------
(as restated -
see Note 16)
<S> <C> <C> <C>
Pro forma net loss for the period $(2,252,142) $(2,154,297) $ (97,845)
- -------------------------------------------------------------------------------------------------
Pro forma loss per common share $ (0.24) $ (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 nine
months ended June 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 5 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 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 nine months ended June 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 $1.50 U.S. and an expiry date of November 5, 1999.
In December 1998 these options were exercised resulting in
proceeds to the Company of $960,000 U.S. (Cdn. $1,475,264).
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED)
(C) STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning stock
options outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Exercise
Number of price
options U.S. $ Expiry date
------------------ ----------------- -----------------------------
<S> <C> <C>
300,000 $ 1.00 November 24, 2003
100,000 1.50 December 31, 2003
40,000 1.50 March 1, 2004
33,885 1.50 April 1, 2004
</TABLE>
The weighted average exercise price of all options outstanding at June
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.
9. COMMITMENTS AND CONTINGENCIES
(i) Under the terms of certain operating leases for equipment and
premises the Company is obligated to make annual net rental
payments as follows:
<TABLE>
<CAPTION>
Fiscal year ended
September 30, Amount
---------------------- ----------
<S> <C>
2000 $ 33,719
2001 24,205
2002 -
2003 -
2004 and thereafter -
------------------------------------------------------------
$ 57,924
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(ii) The Company has been named as the Defendant in an action by Shaw
Cable Systems Ltd. ("Shaw") in which Shaw seeks an injunction and
$2 million in damages as a result of alleged trespass and loss of
business as a result of certain activities allegedly carried out
by the Company. Shaw and the Company have jointly agreed that
no further steps will be taken in this action by either party
until the parties have completed their current negotiations with
respect to customer connection procedures. Given the preliminary
stage of the proceedings, it is not presently possible to
estimate or determine whether there will be any loss to the
Company, and the amount, if any, of such loss will be recorded in
the period in which it becomes determinable. 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. 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 within the multi-unit dwellings for a period of 10 years, with
renewal clauses.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
10. STRATEGIC ALLIANCE (CONTINUED)
The Company will incur only the cost associated with the implementation
of its services, and will not share any of Star Choice's programming or
broadcasting costs. Under the agreement, the Company may not maintain
distribution systems or market direct-to-home satellite broadcast
services for other satellite operators in Canada.
The Company's revenues are significantly dependent on its strategic
alliance with Star Choice. During the nine months ended June 30, 1999,
revenues from Star Choice accounted for 21% of total recorded revenues of
the Company (period from inception, March 26, 1998 to June 30, 1999 -
$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 ExpressVu are
the only two licensees that have been approved by the CRTC to distribute
television and information services by direct-to-home digital satellite
transmissions in Canada. Both must operate in accordance with CRTC
imposed "conditions of license" to maintain their licenses. Also, they
must comply with the Canadian Broadcasting Act. Since the Company in its
role as a system operator for Star Choice is significantly dependent on
Star Choice for programming, it would be adversely affected if Star
Choice encountered regulatory problems.
12. INCOME TAXES
A reconciliation of the statutory federal Canadian income tax rate and
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Period from
For the period from Nine months March 26,
inception of the ended 1998 to
development stage to June 30, September 30,
June 30, 1999 1999 1998
--------------------- ---------------- -----------------
<S> <C> <C> <C>
Canadian statutory income tax rate 45.6% 45.6% 45.6%
Non-deductible expenses (12.0) (13.5) (1.0)
Tax loss carry forwards not recognized
in period of loss (33.6) (32.1) (44.6)
- ------------------------------------------------------------------------------------------------------
Actual tax rate - - -
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
12. INCOME TAXES (CONTINUED)
The Company had no income tax expense for the nine months ended June 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 June 30, 1999 and September 30, 1998, since realization of
these benefits cannot be reasonable assured. At June 30, 1999 and
September 30, 1998, deferred tax (liabilities) assets are comprised of
the following:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Gross deferred tax liabilities:
Amortization $ (18,235) $ (854)
Gross deferred tax assets:
Operating loss carry forwards 629,252 44,568
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 611,017 43,714
Less: valuation allowance (611,017) (43,714)
- -----------------------------------------------------------------------------------------------------------------------
$ - $ -
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, the Company had loss carry forwards available to be
applied against future years' taxable income in the amount of $1,379,940,
$97,738 of which 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 President. In addition, the Company granted stock
options to a relative of the President to purchase 100,000 common shares
of the Company at an exercise price of U.S. $1.50 until December 21,
2003, in exchange for consultative services. See Note 7 (c)(iii).
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company was unable to repay the demand
convertible notes payable (described in Note 6) in the amount of $826,622
at their respective maturity dates. On September 20, 1999 the Company
received a demand for payment with respect to notes with a principal
value of $731,130.
On October 19, 1999 the Company negotiated an extension to the repayment
terms of notes payable in the amount of $95,493 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. The Company is in
discussions with the lenders of the balance of the notes to also extend
repayment terms.
16. RESTATEMENT
Subsequent to the issuance of the Company's June 30, 1999 consolidated
financial statements, the Company's management determined that the fair
value of certain options issued to 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
June 30, 1999 consolidated financial statements have been restated from
the amounts previously reported to recognize an additional $116,149 of
sales expense and a corresponding reduction to property and equipment. A
summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
<S> <C> <C>
At June 30, 1999
Property and equipment $ 2,611,046 $ 2,494,897
Accumulated deficit (1,752,603) (1,868,762)
For the nine months ended
June 30, 1999
Sales expense 675,176 791,325
Net loss (1,654,758) (1,770,907)
Basic and diluted loss per share $ (0.18) $ (0.19)
</TABLE>
<TABLE>
<CAPTION>
For the period from
inception of the
development stage to
June 30, 1999
---------------------
<S> <C> <C>
Sales expense $ 675,176 $ 791,325
Net loss (1,752,603) (1,868,752)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CURRENCY> CDN
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 43,621
<SECURITIES> 0
<RECEIVABLES> 178,607
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 317,482
<PP&E> 3,556,386
<DEPRECIATION> 172,900
<TOTAL-ASSETS> 4,000,578
<CURRENT-LIABILITIES> 2,621,892
<BONDS> 0
0
0
<COMMON> 1,559,720
<OTHER-SE> (181,034)
<TOTAL-LIABILITY-AND-EQUITY> 4,000,578
<SALES> 566,698
<TOTAL-REVENUES> 566,698
<CGS> 339,570
<TOTAL-COSTS> 3,092,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,321
<INCOME-PRETAX> (2,525,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,525,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,525,660)
<EPS-BASIC> (.280)
<EPS-DILUTED> (.280)
</TABLE>
