10-Q 1 v049662_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-Q
 


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2006
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From ______________ to ______________
 
Commission File Number: 0-26053
 

 
MDU COMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 

 
Delaware
(State of incorporation)
84-1342898
(I.R.S. Employer Identification No.)
 
 
60-D Commerce Way, Totowa, New Jersey
(Address of principal executive offices)
07512
(Zip Code)
 
 
(973) 237-9499
(Registrant’s telephone number, including area code)
 
None
(Former name, former address and former fiscal year, if changed since last report)



 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes   x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:  
Large accelerated filer   o Accelerated filer   o   Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    
Yes o    No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at August 11, 2006
Common Stock, $0.001 par value per share
 
50,429,621
 

 

MDU Communications International, Inc. and Subsidiaries
 
 
 
 
Page
PARTI.
FINANCIAL INFORMATION
 
4
 
 
 
 
 
Item 1.
Financial Statements
 
4
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - June 30, 2006 (unaudited) and September 30, 2005
 
4
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations - Nine and Three Months Ended June 30, 2006 and 2005 (unaudited)
 
5
 
 
 
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity - Nine Months Ended June 30, 2006 (unaudited)
 
6
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Nine Months Ended June 30, 2006 and 2005 (unaudited)
 
7
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
8
 
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
12
 
 
   
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
21
 
 
 
 
 
 
Item 4.
Controls and Procedures
 
22
 
 
 
 
PARTII.
OTHER INFORMATION
 
22
 
 
 
 
 
Item 1.
Legal Proceedings
 
22
         
 
Item 1A.
Risk Factors
 
22
 
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
23
 
 
 
 
 
 
Item 3.
Defaults upon Senior Securities
 
23
 
 
 
 
 
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
23
 
 
 
 
 
 
Item 5.
Other Information
 
23
 
 
 
 
 
 
Item 6.
Exhibits
 
23
 

3

 


 
 
MDU COMMUNICATIONS INTERNATIONAL, INC.
June 30, 2006 (Unaudited) and September 30, 2005

   
June 30,
2006
 
September 30,
2005
 
ASSETS
         
CURRENT
         
Cash and cash equivalents
 
$
1,257,558
 
$
9,358,021
 
Accounts receivable- trade, net of an allowance of $125,004 and $151,045
   
1,362,884
   
1,562,398
 
Prepaid expenses and deposits
   
425,910
   
200,345
 
TOTAL CURRENT ASSETS
   
3,046,352
   
11,120,764
 
 
             
Telecommunications equipment inventory
   
1,229,259
   
963,081
 
Property and equipment, net of accumulated depreciation of $7,445,355 and $4,954,301
   
18,193,421
   
14,435,784
 
Intangible assets, net of accumulated amortization of $3,008,129 and $2,279,918
   
2,059,173
   
2,740,787
 
TOTAL ASSETS
 
$
24,528,205
 
$
29,260,416
 
 
             
LIABILITIES and STOCKHOLDERS’ EQUITY
             
CURRENT LIABILITIES
             
Accounts payable
 
$
1,477,966
 
$
1,196,504
 
Other accrued liabilities
   
779,846
   
1,114,343
 
Current portion of deferred revenue
   
661,812
   
934,270
 
Current portion of note payable
   
45,670
   
45,670
 
Current portion of capital lease obligations
   
75,478
   
45,156
 
TOTAL CURRENT LIABILITIES
   
3,040,772
   
3,335,943
 
 
             
Deferred revenue, net of current portion
   
269,442
   
 
Note payable, net of current portion
   
116,845
   
150,636
 
Capital lease obligations, net of current portion
   
96,092
   
24,575
 
TOTAL LIABILITIES
   
3,523,151
   
3,511,154
 
COMMITMENTS AND CONTINGENCIES
             
               
STOCKHOLDERS’ EQUITY
             
Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued
   
   
 
Common stock, par value $0.001; 70,000,000 shares authorized, 50,292,331 and 49,812,922 shares issued and outstanding
   
50,292
   
49,815
 
Additional paid-in capital
   
58,155,949
   
57,194,221
 
Unearned compensation
   
   
(549,475
)
Accumulated deficit
   
(37,201,187
)
 
(30,945,299
)
TOTAL STOCKHOLDERS’ EQUITY
   
21,005,054
   
25,749,262
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
24,528,205
 
$
29,260,416
 
               
  See accompanying notes to the unaudited condensed consolidated financial statements

4

 

 MDU COMMUNICATIONS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
Nine and Three Months Ended June 30, 2006 and 2005 (restated)
(Unaudited)

   
 Nine Months Ended June 30,
 
Three Months Ended June 30,
 
                   
   
2006
 
 2005
 
2006
 
 2005 (restated)
 
                   
                   
REVENUE
 
$
9,693,949
 
$
6,389,189
 
$
3,449,752
 
$
2,414,566
 
OPERATING EXPENSES
                 
Direct costs
   
3,875,512
   
2,538,449
   
1,410,099
   
958,347
 
Sales expenses
   
1,328,514
   
1,428,988
   
441,282
   
486,303
 
Customer service and operating expenses
   
3,676,776
   
1,898,569
   
1,241,451
   
711,859
 
General and administrative expenses (including non-cash charges (credits) of $1,426,748, $724,455, $491,518 and ($873,773))
   
3,961,891
   
2,468,633
   
1,428,448
   
(310,596
)
Depreciation and amortization
   
3,215,117
   
2,129,246
   
1,138,744
   
807,998
 
TOTALS
   
16,057,810
   
10,463,885
   
5,660,024
   
2,653,911
 
                   
OPERATING LOSS
   
(6,363,861
)
 
(4,074,696
)
 
(2,210,272
)
 
(239,345
)
                   
Other income (expense)
                 
Gain on sale of customers
   
   
715,696
         
634,380
 
Interest income
   
124,918
   
156,989
   
22,926
   
70,716
 
Interest expense
   
(16,945
)
 
(5,418
)
 
(7,173
)
 
(1,817
)
NET EARNINGS (LOSS)
 
$
(6,255,888
)
$
(3,207,429
)
$
(2,194,519
)
$
463,934
 
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
 
$
(0.12
)
$
(0.07
)
$
(0.04
)
$
0.01
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
   
50,135,794
   
48,080,873
   
50,252,146
   
49,610,854
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED (See Note 2)
   
50,135,794
   
48,080,873
   
50,252,146
   
57,818,136
 

See accompanying notes to the unaudited condensed consolidated financial statements

5

 

 
MDU COMMUNICATIONS INTERNATIONAL, INC.
Nine Months Ended June 30, 2006
(Unaudited)

   
 Common stock  
 
Additional paid-in
 
Unearned
 
Accumulated
      
   
 Shares
 
 Amount
 
 capital
 
 compensation
 
 deficit
 
 Total
 
Balance, October 1, 2005
   
49,812,922
 
$
49,815
 
$
57,194,221
 
$
(549,475
)
$
(30,945,299
)
$
25,749,262
 
Effect of adoption of SFAS 123R
                     
549,475
         
549,475
 
Issuance of common stock for employee stock purchases
   
25,388
   
24
   
38,191
               
38,215
 
Issuance of common stock for employee bonuses
   
56,385
   
56
   
78,777
               
78,833
 
Issuance of common stock for warrants exercised
   
350,000
   
350
   
87,150
               
87,500
 
Issuance of common stock for options exercised
   
47,636
   
47
   
15,672
               
15,719
 
Shared-based compensation expense - employees
               
831,222
               
831,222
 
Share-based compensation credit - nonemployees
               
(89,284
)
             
(89,284
)
Net loss
   
 
   
 
   
 
   
 
   
(6,255,888
)
 
(6,255,888
)
Balance, June 30, 2006
   
50,292,331
 
$
50,292
 
$
58,155,949
 
$
 
$
(37,201,187
)
$
21,005,054
 
    
See accompanying notes to the unaudited condensed consolidated financial statements
 
6

 

MDU COMMUNICATIONS INTERNATIONAL, INC.
Nine Months Ended June 30, 2006 and 2005
(Unaudited)

   
Nine Months
ended
June 30, 2006
 
 
Nine Months ended
June 30, 2005
 
  
 
  
 
 
 
OPERATING ACTIVITIES
         
Net loss
 
$
(6,255,888
)
$
(3,207,429
)
Adjustments to reconcile net loss to net cash used in operating activities:
         
Bad debt provision
   
107,044
   
1,423
 
Inventory provision
   
57,977
     
Depreciation and amortization
   
3,215,117
   
2,129,246
 
Share-based compensation expense - employees
   
831,222
     
Share-based compensation expense - nonemployees
   
346,930
   
454,874
 
Effect of variable accounting for employee stock options
   
   
423,999
 
Effect of issuance of common stock in exchange for termination of agreement
   
   
270,200
 
Effect of cancellation of common stock and warrants in exchange for termination of agreement
   
   
(426,041
)
Compensation expense for issuance of common stock through employee stock purchase plan
   
4,742
   
 
Compensation expense for issuance of common stock for employee bonuses
   
78,833
   
 
Gain on sale of customers
   
   
(715,696
)
Changes in operating assets and liabilities:
         
Accounts receivable
   
92,470
   
(319,876
)
Prepaid expenses and deposits
   
(112,304
)
 
(54,948
)
Accounts payable
   
281,462
   
91,430
 
Other accrued liabilities
   
(301,024
)
 
200,388
 
Deferred revenue
   
(3,016
)
 
(53,332
)
Net cash used in operating activities
   
(1,656,435
)
 
(1,205,762
)
INVESTING ACTIVITIES
         
Purchase of property and equipment
   
(6,414,878
)
 
(8,452,300
)
Proceeds from sale of customers and property and equipment
   
   
1,232,648
 
Acquisition of intangible assets
   
(42,864
)
 
(178,515
)
Net cash used in investing activities
   
(6,457,742
)
 
(7,398,167
)
FINANCING ACTIVITIES
         
Payments of note payable
   
(33,791
)
 
 
Proceeds from private placement of common stock and warrants
   
   
15,045,444
 
Proceeds from options exercised
   
15,719
   
401,246
 
Proceeds from warrants exercised
   
87,500
   
374,708
 
Payments of capital lease obligations
   
(55,714
)
 
(48,700
)
Net cash provided by financing activities
   
13,714
   
15,772,698
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(8,100,463
)
 
7,168,769
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
9,358,021
   
4,705,722
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
1,257,558
 
$
11,874,491
 

See accompanying notes to the unaudited condensed consolidated financial statements
 
7

 

MDU COMMUNICATIONS INTERNATIONAL, INC.
(Unaudited)
 
1.
GENERAL

Basis of Presentation:
 
The accompanying unaudited condensed consolidated financial statements of MDU Communications International, Inc. and its subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“United States GAAP”) for interim financial information and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements include all material adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the financial statements for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto (the “Audited Financial Statements”) contained in the Company’s Annual Report for the fiscal year ended September 30, 2005 on Form 10-KSB filed with the Securities and Exchange Commission on December 23, 2005.  The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.
 
Description of Business:
 
The Company provides delivery of digital satellite television programming and high-speed (broadband) Internet service to residents of multi-dwelling unit properties such as apartment buildings, condominiums, gated communities, hotels and universities.
   
Share-Based Compensation:
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which revised SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and superseded the previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the portion of their grant date fair values expected to vest over the period during which the employees are required to provide services in exchange for the equity instruments. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition.

The Company was required to adopt the provisions of SFAS 123R effective October 1, 2005 and has selected the Black-Scholes method of valuation for share-based compensation. The Company used the modified prospective transition method which requires that compensation cost be recorded as earned for new share-based payments and for all unvested stock options outstanding at the beginning of the first quarter of adoption of SFAS 123R. The Company’s Condensed Consolidated Financial Statements as of and for the nine and three months ended June 30, 2006 reflect the impact of the adoption of SFAS 123R. In accordance with the modified prospective transition method, the Company’s Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.   The Company recognized share-based compensation expense of $831,222 and $272,030 for the nine and three months ended June 30, 2006, respectively, based upon the fair value at the grant dates (all of which were prior to October 1, 2005) for outstanding awards to employees using the cost originally calculated for pro forma disclosure purposes under SFAS 123.
 
Prior to the adoption of SFAS 123R, as explained in Notes 2 and 4 to the Audited Financial Statements, the Company accounted for its stock-based employee compensation plans under the intrinsic value method per APB 25, whereby compensation cost was only recorded for the excess, if any, of the quoted market price of the common shares over the exercise price at the date of grant for all employee stock options issued. SFAS 123 had established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. However, SFAS 123, and SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," permitted a company to elect to continue to apply the intrinsic-value-based method of accounting described above until it adopted SFAS 123R provided it made appropriate pro forma disclosures of the use of a method that estimated the fair value of the options at the grant date and then amortized the fair value to expense over the options' vesting period. For the nine and three months ended June 30, 2005, the Company has shown its historical results of operations using the intrinsic value method under the provisions of APB 25 and, accordingly, is required to present the additional pro forma information in the table that follows showing the effects on its historical results of operations of the use of a method that estimates the fair value of the options at the grant date and then amortizes the fair value to expense over the options’ vesting period:

8

 
 
   
 
Nine Months
Ended
June 30, 2005
 
 Three Months
Ended
June 30, 2005
(restated)
 
Net income (loss), as reported
 
$
(3,207,429
)
$
463,934
 
Add (deduct):
             
Total stock-based employee compensation expense (credits) determined under the intrinsic value method for all awards, net of related tax effects
   
456,599
   
(883,404
)
Total stock-based employee compensation expense (credits) determined under the fair value based method for all awards, net of related tax effects
   
(660,403
)
 
36,544
 
Pro forma net loss
 
$
(3,411,233
)
$
(382,926
)
 
             
Basic and diluted net earnings (loss) per share:
             
As reported
 
$
(0.07
)
$
0.01
 
Pro forma
 
$
(0.07
)
$
(0.01
)
 
No options were granted during the nine and three months ended June 30, 2006. The fair values of options granted during the nine and three months ended June 30, 2005 were determined using a Black-Scholes option pricing model in accordance with SFAS 123 based on the following assumptions:

   
 
Nine Months
Ended
June 30, 2005
 
Three Months
Ended
June 30, 2005
 
Expected volatility
   
76
%
 
76
%
Risk-free interest rate
   
4.00
%
 
4.00
%
Expected years of option life
   
1 to 5
   
1 to 5
 
Expected dividends
   
0
%
 
0
%

Additionally, as a result of the adoption of SFAS 123R, previously recorded unearned compensation was eliminated.

Change in Recognition of Certain Revenue Due to New DIRECTV Agreement:
 
In late December 2004, the Company executed an addendum to the September 29, 2003 System Operator Agreement with DIRECTV, Inc. effective as of November 15, 2004. The new addendum provides for an “Analog Commission” to the Company for the addition of a new Bulk Choice Advantage (“BCA”) subscriber. The commission is not subject to an annual commitment from a subscriber and there is no proportional “charge back” by DIRECTV if a subscriber disconnects at any time. Due to the fact that no portion of the BCA “Analog Commission” is subject to the annual commitment or “charge back” provision, the “Analog Commission” is recognizable immediately upon the approval and acceptance of the subscriber by DIRECTV. The addendum also offers the “Individual Subscriber PPC” (prepaid programming commission). Contrary to the “Analog Commission,” the payment of the “Individual Subscriber PPC” by DIRECTV requires an annual commitment for the individual services and is subject to a “charge back” if a subscriber disconnects within the annual commitment. The revenue from the “Individual Subscriber PPC” is comprised of two components, commission and equipment discount. The commission portion is recognized over one year in conjunction with the annual commitment. However, the portion of the “Individual Subscriber PPC” that relates to the equipment discount is recognized over seven years in conjunction with the depreciation of equipment over seven years.
  
2.
EARNINGS (LOSS) PER COMMON SHARE
 
9

 

Basic earnings (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issueable upon the exercise of stock options and warrants, were issued during the period and the treasury stock method was applied. For the nine and three months ended June 30, 2006 and the nine months ended June 30, 2005, basic and diluted loss per common share are equivalent as the Company had net losses for these periods and the effect of the assumed exercise of options or warrants would be anti-dilutive. For the three months ended June 30, 2005, the assumed exercise of options and warrants and the application of the treasury stock method increased the weighted average number of common shares for the computation of diluted earnings per share by 8,207,282 shares although basic and diluted earnings per share for the period were the same. As of June 30, 2006, the Company had potentially dilutive common shares attributable to options and warrants that were exercisable (or potentially exercisable) into 8,494,058 shares of common stock (5,298,884 from warrants and 3,195,174 from options) that were not included in the computation of net loss per share.
 
3.
COMMON STOCK, STOCK OPTION AND WARRANT ACTIVITY

Employee Stock Option Plan:
 
Stock options awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of the grant. The option awards vest quarterly over three years and have a five year contractual life. The following table summarizes information about all of the Company’s stock options outstanding and exercisable for the nine months ended June 30, 2006:

   
Number of Options Outstanding
 
Weighted Average Exercise Price per Share
 
Weighted Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value
 
Outstanding at September 30, 2005
   
3,300,342
 
$
1.79
             
Expired
   
(57,532
)
$
2.44
             
Exercised
   
(47,636
)
$
0.33
             
Outstanding at June 30, 2006
   
3,195,174
 
$
1.80
   
3.1
 
$
419,453
 
Exercisable at June 30, 2006
   
2,025,577
 
$
1.48
   
2.6
 
$
411,584
 

As of June 30, 2006, options to purchase 101,392 shares were available for grant.

As explained above, during the nine and three months ended June 30, 2006, the Company adopted the provisions of SFAS 123R and recognized a charge to general and administrative expenses for share-based employee compensation of $831,222 and $272,030, respectively. Additionally, the Company recognized share-based compensation expense for non-employees of $346,930 and $154,222 for the nine and three months ended June 30, 2006, respectively.

An additional charge of approximately $1,700,000 is expected to vest and be recognized subsequent to June 30, 2006 over a weighted average period of 27 months. The charge will be amortized to general and administrative expenses as the options vest in subsequent periods.

As discussed in Note 4 to the Audited Financial Statements, the Company re-priced certain employee options prior to October 1, 2004 and, as a result, such options were subject to variable accounting prior to the adoption of SFAS 123R.  The Company recognized a charge for the effect of variable accounting of $423,999 and a credit of $883,404 for the nine and three months ended June 30, 2005, respectively.

Employee Stock Purchase Plan:

On October 23, 2001, the Company established, and the stockholders approved, the 2001 Employee Stock Purchase Plan (the “Purchase Plan”). See Note 4 to the Audited Financial Statements. During the nine months ended June 30, 2006, the Company issued 25,388 shares of common stock for aggregate proceeds of $38,215 from employees who purchased shares under the Purchase Plan.   The Purchase Plan allows for a discount of 15% from the market value for shares purchased, which is deemed to be compensation under generally accepted accounting standards. As a result, the Company recognized expense for the full discount of $4,742 and $1,480 for the nine and three months ended June 30, 2006, respectively.
 
10

 

Employee Stock Bonuses:

During the nine and three months ended June 30, 2006, the Company recognized compensation expense of $78,833 and $41,665 for the issuance of 56,385 and 33,962 shares of common stock for employee bonuses, respectively.

Warrants:
 
During the nine months ended June 30, 2006, no warrants were exercised or expired. Warrants to purchase 5,298,884 shares at prices ranging from $0.33 to $3.40 per share remained outstanding at June 30, 2006.

4.
COMMITMENTS AND CONTINGENCIES

Litigation:

On or about March 11, 2005, the Company brought suit against Star Choice Communications Inc. for (i) a dispute over the amount of goods and services tax that was owed to the Company’s Canadian subsidiary on associated programming commissions from 2000 and 2001, and (ii) non-payment of programming commissions on a specific property site for 2004 and 2005. Pursuant to a verbal settlement in September 2005, the Company expects to receive $73,500 (CDN). As of June 30, 2006, the parties were in the final process of drafting formal settlement and dismissal documents. The Company will not recognize any gain until payment is received.

Contracts:

On February 1, 2000, the Company entered into a management agreement (subsequently amended) with a senior executive that provides for annual compensation, excluding bonuses, of $250,000. The Company can terminate this agreement at any time upon reasonable notice and the payment of an amount equal to 24 months of salary. In the event of a change in control of the Company, either party may, during a period of 12 months from the date of the change of control, terminate the agreement upon reasonable notice and the payment by the Company of an amount equal to 36 months of salary.

On April 30, 2005, the Company entered into an additional management agreement with another senior executive that provides for annual compensation, excluding bonuses, of $225,000. The Company can terminate this agreement at any time upon reasonable notice and the payment of an amount equal to 12 to 18 months of salary, depending on timing. In the event of a change in control of the Company, either party may, during a period of 12 months from the date of the change of control, terminate the agreement upon reasonable notice and the payment by the Company of an amount equal to 12 months of salary.

5.
CAPITAL LEASES

During the quarter ended June 30, 2006, the company entered into two lease agreements for new equipment having a total cost basis of approximately $150,000. The leases expire on September 30, 2008 and November 30, 2008, respectively, and bear interest at 14.74%.
   
6. FUNDING OF CURRENT OPERATIONS AND GROWTH
 
As of June 30, 2006, the Company had cash and cash equivalents of $1,257,558 and working capital of approximately $6,000. In addition, the Company has had recurring losses and negative cash flows from operating activities. On an ongoing basis the Company expects that its monthly generated revenues will fund its monthly general operating expenses.  However, the monthly generated revenues do not currently also fund the Companys capital growth objectives. The Company is currently in negotiations with several groups to secure a significant source of debt financing to continue and even accelerate its growth and expects to close such a financing prior to its fiscal year ending September 30, 2006. However, there can be no assurance that the Company will be successful in any attempt to secure additional financing. If the Company is unsuccessful in securing additional financing, it may have to operate in a no growth mode, or, to fund a slower growth plan or operations if necessary, it may sell certain noncore assets to raise capital.
 
7.
SUBSEQUENT EVENTS

From July 1, 2006 through August 11, 2006, 10,570 shares of common stock were issued through the Employee Stock Purchase Plan for employee contributions of $8,245 in the period ended June 30, 2006.
 
8.
RESTATEMENT OF UNAUDITED QUARTERLY FINANCIAL INFORMATION

As reported on Form 10-KSB for the year ended September 30, 2005, in connection with its review of our financial statements for the quarter ended June 30, 2005, J.H. Cohn LLP, our independent registered public accounting firm, brought to the attention of management that although the Company had been accounting for options with cashless exercise provisions and options that had been repriced by using variable accounting in accordance with the Financial Accounting Standards Board’s Interpretation 44, “Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25,” it had not calculated the related adjustments appropriately during the quarters ended December 31, 2004 and March 31, 2005. J.H. Cohn LLP had informed the management of the Company that the calculation of the adjustment was based on the average stock price for each of the quarters instead of the lowest price on the last day of each quarter. After reviewing the matter, management agreed that the calculation had been based on the incorrect stock prices and determined that such calculation had understated the decrease in the market value of the options and, as a result, had overstated noncash compensation costs and net losses during those quarters by a total of $250,467. Management believed that the amount of the error applicable to compensation expense in each of the affected quarterly periods was not material and that the quarterly reports previously issued for each period did not have to be restated. Instead of initially restating the quarters ended December 31, 2004 and March 31, 2005, the Company chose to recognize the entire $250,467 decrease in compensation expense resulting from the previous use of incorrect stock prices in applying variable accounting in the financial statements for the quarter ended June 30, 2005, which resulted in initially reporting an understatement of compensation expense in that quarter.

11

 
 
Although management believes that the errors in each of the affected quarterly reports were not material, the accompanying Statement of Operations for the three months ended June 30, 2005 has been restated to eliminate the understatement of compensation expense for that period as previously reported. Presented below are the general and administrative expenses, the net income and the basic and diluted loss per common share before adjustment as previously reported and the general and administrative expenses, the net income and the basic and diluted earnings per common share as restated for the three months ended June 30, 2005. Since the understatement of compensation expense for that period equaled the aggregate overstatement for the three month periods ended December 31, 2004 and March 31, 2005, no adjustments were required to the amounts initially reported for the nine months ended June 30, 2005.
 
   
As Previously
Reported for
the Three Months
Ended
6/30/2005
 
As Restated for
the Three Months Ended
6/30/2005
 
Statement of Operations:
         
General and administrative expenses
 
$
(60,129
)
$
(310,596
)
Net Income
 
$
213,467
 
$
463,934
 
Basic and diluted earnings per common share
 
$
0.00
 
$
0.01
 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
The statements contained in this Management’s Discussion and Analysis that are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. In some cases, you can identify forward-looking statements by our use of words such as “may,”  “will,”  “should,”  “could,”  “expect,” “plan,”  “intend,”  “anticipate,”  “believe,”  “estimate,”  “potential” or “continue” or the negative or other variations of these words, or other comparable words or phrases. Factors that could cause or contribute to such differences include, but are not limited to, the fact that we are dependent on our program providers for satellite signals and programming, our ability to successfully expand our sales force and marketing programs, the need for additional funds to meet business plan expectations, changes in our suppliers’ or competitors’ pricing policies, the risks that competition, technological change or evolving customer preferences could adversely affect the sale of our products, unexpected changes in regulatory requirements and other factors identified from time to time in the Company’s reports filed with the Securities and Exchange Commission, including, but not limited to our Annual Report on Form 10-KSB filed on December 23, 2005.
 
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this report. You should not place undue reliance on forward-looking statements.
  
OVERVIEW
 
In this discussion, the words “MDU Communications,”  “the Company,”  “we,” “our,” and “us” refer to MDU Communications International, Inc. together with its subsidiaries, where appropriate.

MDU Communications International, Inc. concentrates exclusively on delivering state-of-the-art digital satellite television and high-speed Internet solutions to the United States multi-dwelling unit (“MDU”) residential market, estimated to include 26 million residences. MDUs include apartment buildings, condominiums, gated communities, universities, nursing homes, hospitals and other properties having multiple units located within a defined area. We seek to differentiate ourselves from other service providers through a unique strategy of balancing the information and communication needs of today’s MDU residents with the technology concerns of property managers and owners and providing the best overall service to both. To accomplish this objective, we have partnered with DIRECTV and have been working with large U.S. property owners and real estate investment trusts (“REITs”) such as AvalonBay Communities, Trammell Crow Residential, Roseland Property Company, KSI Services, The Related Companies, as well as many others, to understand and meet the technology needs of these groups.

12

 
 
The Company earns its revenue through the sale of digital satellite television programming and high-speed Internet services to owners and residents of MDUs. We negotiate long-term access agreements with the owners and managers of MDU properties allowing us the right to provide digital satellite television and high-speed Internet services, and potentially other services, to their residents, resulting in monthly annuity-like revenue streams. We offer two types of satellite television service - DBS and Private Cable. First, we offer Direct Broadcast Satellite (“DBS”), which uses a set-top digital receiver for residents to receive state-of-the-art digital satellite and local channel programming. For DBS, we exclusively offer DIRECTVÒ programming packages.  From our DBS offerings we receive the following revenue: (i) a substantial upfront subscriber commission from DIRECTV for each new subscriber, (ii) a percentage of the fees charged by DIRECTV to the subscriber each month for programming, (iii) a per subscriber monthly digital access fee we bill subscribers for rental of the set-top box and connection to the property satellite network system, and (iv) occasional other marketing incentives from DIRECTV. Second, we offer a Private Cable video service, where analog or digital satellite television programming can be tailored to the needs of an individual property and received through normal cable-ready televisions. Our net revenues from Private Cable result from the difference between the wholesale prices charged to us by programming providers and the price we charge subscribers for the private cable programming package. We provide the DBS and Private Cable services on an individual subscriber basis, but in many properties we provide these services in bulk, directly to the property owner, resulting in one invoice and thus minimizing churn, collection and bad debt exposure. From subscribers to our Internet service, we earn a monthly Internet access service fee.  Again, in many properties, we provide this service in bulk. 

The Company continued to produce over one million dollars of revenue per month. The Company’s revenue for the quarter was $3,449,752, an increase of 43% over the same period ended June 30, 2005. The Company’s revenue per subscriber at June 30, 2006 was $26.05, an increase of 7% over the same quarter ended June 30, 2005. At June 30, 2006, the Company had cash and cash equivalents of $1,257,558 and total assets of $24,528,205.
 
The Company reports 45,084 total billable subscribers for the period ending June 30, 2006, a 35% increase in total billable subscribers reported one year ago, however, only a marginal increase as compared to the total billable subscribers in the previous fiscal quarter. The primary reasons for slower billable subscriber growth in the third quarter were due to financial constraints, the prioritization of allocating capital necessary for the completion of the Company’s current work-in-process, managed delays in new property deployments and the termination of certain “choice type” subscribers from the Company’s database. The Company’s breakdown of total subscribers by type and kind is outlined in the following chart:

Service Type
 
 Subscribers
as of
June 30, 2005
 
 Subscribers
as of
Sept. 30, 2005
 
 Subscribers
as of
Dec. 31, 2005
 
 Subscribers
as of
March 31, 2006
 
 Subscribers
as of
June 30, 2006
Bulk DTH
   
3,963
   
5,470
   
6,213
   
7,226
   
7,830
DTH Choice / Exclusive
   
5,833
   
6,860
   
7,498
   
7,857
   
7,703
Bulk PC
   
16,869
   
16,587
   
16,894
   
18,011
   
17,778
PC Choice / Exclusive
   
1,370
   
1,399
   
1,318
   
1,303
   
1,230
Bulk Choice Advantage
   
2,175
   
2,941
   
3,689
   
4,627
   
4,818
Bulk ISP
   
1,771
   
1,823
   
2,267
   
3,116
   
3,100
ISP Choice / Exclusive
   
1,525
   
2,044
   
2,392
   
2,586
   
2,625
Total Subscribers
   
33,506
   
37,124
   
40,271
   
44,726
   
45,084

As of June 30, 2006, the Company’s Midwest regional office served 11,764 subscribers; the Southeast regional office served 9,987 subscribers, and the Company’s well-established Northeast regional office, which is served by offices in New Jersey, Connecticut and Maryland, served 23,333 subscribers. As of June 30, 2006, the Company had 115 full-time employees.

As of June 30, 2006, the Company had 74 properties and 33,932 units in work-in-progress (“WIP”). During the quarter, the Company completed work on 7,409 units that moved out of WIP and started construction on 7,733 units that entered WIP. Of the current WIP, 15,540 units (or 46%) are in new construction properties and 18,392 units (or 54%) are in existing conversion properties. The Company’s breakdown of WIP units by type of service is as follows: (i) DIRECTV (bulk) 2,990; (ii) DIRECTV (choice/exclusive) 10,892; (iii) DIRECTV BCA Program (bulk/choice) 2,341; (iv) Private Cable (bulk) 747; (v) Private Cable (choice/exclusive) 4,619; (vi) Internet (bulk) 982; and (vii) Internet (choice/exclusive) 11,361. The Company defines its WIP as the number of units in properties where it has planned construction on a signed access agreement property, up through the conclusion of a billing phase in schedule, marketing campaign, or 120 days after property construction completion, whichever is later, at which time the property exits WIP. WIP is not reduced by the number of units turned billable in WIP properties during any given quarter.

13

 

As of June 30, 2006, the Company had 10,884 “under contract” subscribers in WIP that the Company expects will become “billable” subscribers in the next few quarters. In many competitive properties, the Company is now charging the property owner for installation of the satellite distribution system. Under contract is defined in actual potential subscribers, not as units being constructed. The under contract subscribers are an important component of the Company’s subscriber base evaluation in that they represent the number of remaining "billable" subscribers the Company expects to realize from WIP. The Company breaks down and reports its under contract subscribers into new construction and existing conversion properties, due to the time differential that new construction properties remain in under contract. A breakdown of these “under contract” subscribers for new construction and existing conversion properties (already reduced to reflect appropriate property type and penetration rate) shows the following:
  
 
Bulk
Subscribers
 
Exclusive
Subscribers
 
Competitive
Subscribers
 
Total
Subscribers
New construction “under contract” subscribers as of June 30, 2006:
 
3,557
 
 
843
 
 
2,319
 
 
6,719
Existing conversion “under contract” subscribers as of June 30, 2006:
 
1,359
 
 
512
 
 
2,294
 
 
4,165
Total “under contract” subscribers:
 
4,916
 
 
1,355
 
 
4,613
 
 
10,884
 
The Company’s backlog for the quarter remained fairly constant at 147,875 units, of which 33,932 units are in WIP. The Company’s approximate breakdown of backlog units by type of service is as follows: (i) “BCA” DIRECTV (bulk) 12%; (ii) DIRECTV or Private Cable (bulk) 27%; (iii) Broadband (bulk) 9%; (iv) DIRECTV or Private Cable (exclusive) 2%; (v) Broadband (exclusive) 1%; (vi) DIRECTV or Private Cable (choice) 32%; and (vii) Broadband (choice) 17%.

Additionally, apart from backlog, the number of properties in the proposal stage of negotiation in the Southeast region that are part of the Company’s Southeast emerging market strategy increased to represent approximately 45,000 units, most of which represent potential bulk and exclusive contracts for the provision of DIRECTV services. Currently, the Company is focusing its efforts on expansion in this region as much of its subscriber acquisition costs for these bulk and exclusive properties are funded through its agreements with BellSouth and DIRECTV, thus providing the Company with greater cash flow to fund additional growth.
 
On November 9, 2005, the Company and BellSouth Corporation announced the signing of a Sales Teaming Agreement to jointly market and deploy services to the residential multi-dwelling unit market in the BellSouth territory. Through the terms of the Sales Teaming Agreement, BellSouth and MDU Communications are offering innovative bundles of voice, data and DIRECTV digital satellite programming packages specifically designed for the multi-dwelling unit market. Joint proposals and coordinated deployment of services will provide multi-family property owners and condominium boards with a full menu of premium residential technology services that will result in time and cost savings to residents. BellSouth and the Company are training and leveraging each other’s sales force for the cross-selling of products and qualifying prospective property leads for both types of services, which should accelerate the negotiation and deployment process. On June 20, 2006, the Company and BellSouth executed an amendment to Sales Teaming Agreement under which BellSouth will now fund a portion of the Company’s capital costs to install DIRECTV digital satellite systems in certain multi-dwelling unit properties in which both BellSouth and the Company agree to deploy their respective services. In return, BellSouth will participate in a revenue share from the Company’s revenue derived from subscribers in such properties.
 
Of primary importance to the Company is the goal of achieving positive EBITDA for the quarter ending September 30, 2006. To accelerate the move toward positive EBITDA, the Company is (i) allocating resources to regions and to properties offering the greatest rates of return, (ii) redeploying equipment in underperforming choice type properties to bulk and exclusive type properties in its work-in-process and allocating resources accordingly, (iii) renegotiating a lower monthly rate on a significant number of its broadband circuits, and (iv) implementing cost and personnel reductions as deemed appropriate. Additionally, the Company continues to convert low revenue producing private cable bulk properties to the DIRECTV platform and has implemented moderate price increases for certain subscribers and for certain bulk properties. In order to achieve the Company’s goal of increased subscriber growth in the fourth fiscal quarter, the Company is also undertaking several initiatives, including implementing a new marketing program in several exclusive and choice properties designed to encourage customers to subscribe to DIRECTV services, and in many instances, bundle the Company’s broadband services with the DIRECTV service; focusing its efforts on converting its under contract bulk and exclusive subscribers to billable subscribers; and prioritizing deployments in the Southeast region where it can leverage its agreement with BellSouth.

14

 
 
Other measures taken by the Company intended to provide growth capital are the identification and potential sale of non-core properties for subscriber values in the range of those obtained over the past few years and the unanimous participation of senior management in contributing a significant percentage (30%-50%) of their monthly salary to the Company’s Employee Stock Purchase Plan. This contribution not only allows the Company to use these funds for general corporate purposes, but is a signal of support and commitment by management in the Company’s long-term success, as well as a belief that the current market price for the common stock does not reflect its fair value. Leading by example, both Sheldon Nelson and Tom Tracey are taking one-half of their monthly salary in Company common stock.

Taking effect in July, the Company has implemented a few organizational changes. Sheldon Nelson will resume the role of President as well as remaining Chief Executive Officer, Tom Tracey will assume the role of Vice President of Business Development and Special Projects, and Joe Nassau will assume the role of Vice President of Operations. Patrick Cunningham will continue in the role of Vice President of Sales and Marketing which includes the management of the BellSouth relationship.

For the three months ended June 30, 2006, the Company reports negative earnings before interest, taxes, depreciation, amortization and noncash stock option charges (“EBITDA”) of $557,084. The Company uses the common performance gauge of EBITDA to evidence earnings exclusive of mainly noncash events, as is common in the technology, and particularly the cable and telecommunications, industries. EBITDA is an important gauge because investors who follow this industry frequently use it as a measure of financial performance.  The most comparable GAAP reference is simply the removal from net income or loss of - in the Company’s case - interest, depreciation, amortization and noncash charges related to its warrants and stock options. EBITDA is not, and should not be considered, an alternative to income from operations, net income, net cash provided by operating activities, or any other measure for determining our operating performance or liquidity, as determined under accounting principles generally accepted in the Unites States of America. EBITDA also does not necessarily indicate whether our cash flow will be sufficient to fund working capital, capital expenditures or to react to changes in our industry or the economy generally. The following table reconciles the comparative EBITDA of the Company to our consolidated net loss as computed under accounting principles generally accepted in the United States of America:
 
  
 
Nine Months Ended
June 30,
 
Three Months Ended
June 30,
 
  
 
2006
 
2005
 
2006
 
2005 (restated)
 
EBITDA
 
$
(1,597,078
)
$
(348,310
)
$
(557,084
)
$
399,976
 
Interest expense
   
(16,945
)
 
(5,418
)
 
(7,173
)
 
(1,817
)
Provision for doubtful accounts
   
(107,044
)
 
(1,423
)
 
(22,121
)
 
(5,395
)
Provision for inventory reserve
   
(57,977
)
 
   
   
 
Depreciation and amortization
   
(3,215,117
)
 
(2,129,246
)
 
(1,138,744
)
 
(807,998
)
Effect of shares and warrants issued for termination of professional service agreement
   
   
(270,200
)
 
   
(117,700
)
Effect of cancellation of shares and warrants issued for termination of professional service agreement
   
   
426,041
   
   
206,250
 
Effect of variable accounting for employee options
   
   
(423,999
)
 
   
883,404
 
Share-based compensation expense - employees
   
(831,222
)
 
   
(272,030
)
 
 
Compensation expense for issuance of common stock through employee stock purchase plan
   
(4,742
)
 
   
(1,480
)
 
 
Compensation expense for issuance of common stock for employee bonuses
   
(78,833
)
 
   
(41,665
)
 
 
Share-based compensation expense - nonemployees
   
(346,930
)
 
(454,874
)
 
(154,222
)
 
(92,786
)
Net Income (Loss)
 
$
(6,255,888
)
$
(3,207,429
)
$
(2,194,519
)
$
463,934
 
 
15

 

Our common stock trades under the symbol “MDTV” on the OTC Bulletin Board. Our principal executive offices are located at 60-D Commerce Way, Totowa, New Jersey 07512 and our telephone number is (973) 237-9499. Our website is located at www.mduc.com.

GENERAL
 
The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the Company’s Condensed Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q.

Critical Accounting Policies and Estimates
 
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Significant estimates are used for, but not limited to, revenue recognition with respect to the deferral of revenue from the new subscriber activation subsidy prior to the change in the agreement described below, allowance for doubtful accounts, fair value of equity instruments and valuation of deferred tax assets and long-lived assets. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from these estimates under different assumptions or conditions. During the three months ended June 30, 2006, there were no material changes to accounting estimates or judgments.
 
In late December 2004, the Company executed an addendum to the September 29, 2003 System Operator Agreement with DIRECTV, Inc. effective November 15, 2004. The new addendum provides for an “Analog Commission” to the Company for the addition of a new Bulk Choice Advantage (“BCA”) subscriber. The commission is not subject to an annual commitment from a subscriber and there is no proportional “charge back” by DIRECTV if a subscriber disconnects at any time. Due to the fact that no portion of the BCA “Analog Commission” is subject to the annual commitment or “charge back” provision, the “Analog Commission” is recognizable immediately upon the approval and acceptance of the subscriber by DIRECTV. The addendum also offers the “Individual Subscriber PPC” (prepaid programming commission). Contrary to the “Analog Commission,” the payment of the “Individual Subscriber PPC” by DIRECTV requires an annual commitment for the individual services and is subject to a “charge back” if a subscriber disconnects within the annual commitment. The revenue from the “Individual Subscriber PPC” is comprised of two components - commission and equipment discount. The commission portion is recognized over one year in conjunction with the annual commitment. However, the portion of the “Individual Subscriber PPC” that relates to the equipment discount is recognized over seven years in conjunction with the depreciation of equipment over seven years.
 
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment,” which revised SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and superseded the previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the portion of their grant date fair values expected to vest over the period during which the employees are required to provide services in exchange for the equity instruments. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition.

The Company was required to adopt the provisions of SFAS 123R effective October 1, 2005 and has selected the Black-Scholes method of valuation for share-based compensation. The Company is using the modified prospective transition method which requires that compensation cost be recorded as earned for new share-based payments and for all unvested stock options outstanding at the beginning of the first quarter of adoption of SFAS 123R. The Company’s Condensed Consolidated Financial Statements as of and for the nine and three months ended June 30, 2006 reflect the impact of the adoption of SFAS 123R. In accordance with the modified prospective transition method, the Company’s Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.   The Company recognized stock-based compensation expense for the nine and three months ended June 30, 2006 of $831,222 and $272,030, respectively, based upon the fair value at the grant dates (all of which were prior to October 1, 2005) for outstanding awards to employees using the cost originally calculated for pro forma disclosure purposes under SFAS 123. An additional charge of approximately $1,700,000 is expected to vest and be recognized over a weighted average period of 27 months. The charge will be amortized to general and administrative expense as the options vest in subsequent periods.

No other recently issued accounting pronouncement that became effective during the nine months ended June 30, 2006 or that will become effective in a subsequent period has had or is expected to have a material impact on the Company’s consolidated financial statements.

16

 
 
RESULTS OF OPERATIONS

NINE MONTHS ENDED JUNE 30, 2006 COMPARED TO NINE MONTHS ENDED JUNE 30, 2005

The following table sets forth for the nine months ended June 30, 2006 and 2005, the percentages which selected items in the Statement of Operations bear to total revenue and respective dollar and percentages changes between the periods:
 
   
Nine Months Ended June 30, 2006
 
Nine Months Ended June 30, 2005
 
Change
($)
 
Change
 (%)
 
REVENUE
 
$
 9,693,949
   
100
%
$
6,389,189
   
100
%
$
3 ,304,760
   
52
%
Direct costs
   
3,875,512
   
40
%
 
2,538,449
   
40
%
 
1,337,063
   
53
%
Sales expenses
   
1,328,514
   
14
%
 
1,428,998
   
22
%
 
(100,484
)
 
-7
%
Customer service and operating expenses
   
3,676,776
   
38
%
 
1,898,569
   
30
%
 
1,778,207
   
94
%
General and administrative expenses
   
3,961,891
   
41
%
 
2,468,633
   
39
%
 
1,493,258
   
60
%
Depreciation and amortization
   
3,215,117
   
33
%
 
2,129,246
   
33
%
 
1,085,871
   
51
%
OPERATING LOSS
   
(6,363,861
)
 
-66
%
 
(4,074,706
)
 
-64
%
 
(2,289,155
)
 
56
%
Total other income
   
107,973
   
1
%
 
867,267
   
14
%
 
(759,294
)
 
-88
%
NET LOSS
 
$
(6,255,888
)
 
-65
%
$
(3,207,439
)
 
-50
%
$
(3,048,449
)
 
95
%

Revenue.   Revenue for the nine months ended June 30, 2006 increased 52% to $9,693,949 compared to revenue of $6,389,189 for the nine months ended June 30, 2005. The revenue increase is directly attributable to the (i) 35% increase in the number of subscribers between the two periods, (ii) shift in subscribers to higher earning revenue streams, (iii) increase in the number of subscribers to Internet services, and (iv) increase in installation revenue. We expect an increase in revenue as our subscriber growth and conversion to DTH from private cable continues.  Our nine months revenue has been derived, as a percent, from the following sources:

 
 
Nine Months Ended
June 30,
 
 
 
2006
 
2005
 
Private Cable Programming Revenue
   
29
%
 
43
%
DTH Programming Revenue and Subsidy
   
54
%
 
46
%
Internet Access Fees
   
11
%
 
8
%
Installation Fees, Wiring and other Sales
   
6
%
 
3
%

The shift between the revenue streams is the result of the Company continuing to emphasize the conversion of low average revenue private cable subscribers to DIRECTV service subscribers. This emphasis is expected to continue in fiscal 2006 and 2007.

Direct Costs.   Direct costs are comprised of private cable programming costs, monthly recurring Internet T-1 line connections and costs relating directly to installation services. Direct costs stayed fairly constant as a percent of revenue, however, direct costs increased to $3,875,512 for the period ended June 30, 2006, as compared to $2,538,449 for the period ended June 30, 2005, primarily as a result of the increase in the number of subscribers over the nine months as a whole from the prior period.  While we expect a proportionate increase in direct costs as our subscriber growth continues, direct costs are linked to the type of subscribers we add. We expect to continue to increase the number of DIRECTV and broadband subscribers in 2006 and convert certain private cable subscribers to DIRECTV services, therefore, direct costs as a percentage of revenue are expected to decline.

Sales Expenses.   Sales expenses were $1,328,514 for the nine months ended June 30, 2006, compared to $1,428,988 in the nine months ended June 30, 2005. The decrease in sales expenses primarily results from the elimination of one time charges from the expansion into the Midwest, Southeast and Mid-Atlantic regions. New marketing initiatives to increase our subscriber base, including expansion into the Midwest, Southeast, inclusive of expansion into the Atlanta area, and Mid-Atlantic regions are continuing, however, we anticipate sales expenses as a percent of revenue will continue to decline.

17

 
 
Customer Service and Operating Expenses.  Customer service and operating expenses are comprised of expenses related to the Company’s call center, technical support, project management and general operations. Customer service and operating expenses were $3,676,776 for the nine months ended June 30, 2006, as compared to $1,898,569 in the nine months ended June 30, 2005, an 8% increase as a percent of revenues. This increase is primarily the result of (i) the 35% increase in number of subscribers the Company serviced during these time periods, (ii) the utilization of contractors in new regions to assist with service, maintenance and project management, (iii) an increase in our customer service quality levels, and (iv) positioning the Company to expand its services to a larger subscriber base in the future. Certain personnel and expense reduction initiatives towards positive EBITDA are expected to reduce the expenses as a percentage of revenue from its current level. A breakdown of customer service and operating expenses is as follows:

 
 
Nine Months Ended
June 30, 2006
 
 
 
($)
 
(%)
 
Call Center Expenses
 
$
1,303,436
   
35
%
General Operations Expenses
 
$
1,147,175
   
31
%
Property System Maintenance Expenses
 
$
1,226,165
   
34
%

General and Administrative Expenses.   General and administrative expenses increased to $3,961,891 for the nine months ended June 30, 2006, from $2,468,633 for the nine months ended June 30, 2005.  

Of the general and administrative expenses for the nine months ended June 30, 2006, the Company had total noncash charges included of $1,426,748, including $346,930 for the share based compensation for nonemployees attributable to the fair value of options and warrants issued for services, $4,742 for excess discount for the issuance of stock through the employee stock purchase plan, compensation expense of $78,833 for the issuance of common stock for bonuses, a provision of $107,044 for bad debt expense, and $57,977 for an inventory provision. Additionally, effective October 1, 2005, the Company was required to adopt the provisions of SFAS 123R which revised SFAS 123 and eliminated the option the Company had been using to account for options under the intrinsic value method pursuant to APB 25 in its historical financial statements. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition. As a result of adopting the provisions of SFAS 123R, the Company recognized noncash share-based compensation expense of $831,222 based upon the fair value at the grant dates for awards to employees for the nine months ended June 30, 2006. The total stock-based compensation expense not yet recognized and expected to vest over the next 27 months is approximately $1,700,000.

Excluding these noncash charges from both periods, general and administrative expenses were $2,535,143 (26% of revenue), compared to the period ended June 30, 2005 of $1,744,178 (27% of revenue), with the increase due primarily to (i) the expenses associated with the Chicago, South Florida and Washington, DC offices, (ii) expansion of the New Jersey headquarters, (iii) increased professional fees relating to insurance and regulatory filings, and (iv) Sarbanes-Oxley preparation and compliance.
 
Other Non-Cash Charges.   Depreciation and amortization expenses increased from $2,129,246 during the nine months ended June 30, 2005, to $3,215,117 during the nine months ended June 30, 2006, but remained constant at 33% of revenue.  The increase in depreciation and amortization is associated with the additional equipment being deployed and other intangible assets being acquired over the prior period.     
 
Net Loss.   Primarily as a result of the above, and noncash charges of $4,641,865, we report a net loss of $6,255,888 for the nine months ended June 30, 2006, compared to a net loss of $3,207,429 for the nine months ended June 30, 2005 an increase as a percent of revenue from 50% to 65%. However, if we had accounted for employee stock options using the fair value method required by SFAS 123, we would have a pro forma net loss of $3,411,232 as of June 30, 2005. Combine the pro forma net loss with removing the impact of the recognition of a one time gain on the sale of assets, the net loss as a percent of revenue for the nine months ended June 30, 2005 increases from 50% to 65% compared to the 64% for the nine months ended June 30, 2006.
 
18

 

THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005

The following table sets forth for the three months ended June 30, 2006 and 2005, the percentages which selected items in the Statement of Operations bear to total revenue and respective dollar and percentages changes between the periods:
 
   
Three Months
Ended June 30, 2006
 
Three Months Ended June 30, 2005 (restated)
 
Change
($)
 
Change (%)
 
REVENUE
 
$
3,449,752
   
100
%
$
2,414,566
   
100
%
$
1,035,186
   
43
%
Direct costs
   
1,410,099
   
41
%
 
958,347
   
40
%
 
451,752
   
47
%
Sales expenses
   
441,282
   
13
%
 
486,303
   
20
%
 
(45,021
)
 
-9
%
Customer service and operating expenses
   
1,241,451
   
36
%
 
711,859
   
29
%
 
529,592
   
74
%
General and administrative expenses
   
1,428,448
   
41
%
 
(310,596
)
 
-13
%
 
1,739,044
   
560
%
Depreciation and amortization
   
1,138,744
   
33
%
 
807,998
   
33
%
 
330,746
   
41
%
OPERATING LOSS
   
(2,210,272
)
 
-64
%
 
(239,345
)
 
-9
%
 
(1,970,927
)
 
823
%
Total other income
   
15,753
   
1
%
 
703,279
   
29
%
 
(687,526
)
 
-98
%
NET INCOME (LOSS)
 
$
(2,194,519
)
 
-63
%
$
463,934
   
20
%
$
(2,658,453
)
 
-573
%

Revenue.   Revenue for the three months ended June 30, 2006 increased 43% to $3,449,752, compared to revenue of $2,414,566 for the three months ended June 30, 2005. The revenue increase is directly attributable to the (i) 35% increase in the number of subscribers between the two periods, (ii) shift in subscribers to higher earning revenue streams, (iii) increase in the number of subscribers to Internet services, and (iv) increase in installation revenue. We expect an increase in revenue as our subscriber growth and conversion to DTH from private cable continues.  The three months revenue has been derived, as a percent, from the following sources:

 
 
Three Months Ended
June 30,
 
 
 
2006
 
2005
 
Private Cable Programming Revenue
   
28
%
 
41
%
DTH Programming Revenue and Subsidy
   
54
%
 
48
%
Internet Access Fees
   
12
%
 
8
%
Installation Fees, Wiring and other Sales
   
6
%
 
3
%
 
The shift between the revenue streams is the result of the Company continuing to emphasize the conversion of low average revenue private cable subscribers to DIRECTV service subscribers. This emphasis is expected to continue in fiscal 2006 and 2007.

Direct Costs.   Direct costs are comprised of satellite and private cable programming costs, monthly recurring Internet T-1 line connections and costs relating directly to installation services. Direct costs stayed fairly constant as a percent of revenue, however, direct costs increased to $1,410,099 for the period ended June 30, 2006, as compared to $958,347 for the period ended June 30, 2005, primarily attributable to the 35% increase in number of subscribers between the two periods.  We expect a proportionate increase in direct costs as our subscriber growth continues.
 
Sales Expenses.   Sales expenses were $441,282 for the three months ended June 30, 2006, compared to $486,303 in the three months ended June 30, 2005, which is a decrease as a percentage of revenue between the periods from 20% to 13%. The decrease in sales expenses, as a percent of revenue, primarily results from the elimination of one time charges from the expansion into the Midwest, Southeast and Mid-Atlantic regions and the transfer of certain personnel into operational roles. New marketing initiatives to increase our subscriber base, including continued efforts to expand into the aforementioned regions, will result in increased sales expenses. We expect this trend of a reduction as a percent of revenue to continue as our subscriber growth and regional expansion continues.
 
Customer Service and Operating Expenses.   Customer service and operating expenses are comprised of expenses related to the Company’s call center, technical support, project management and general operations. Customer service and operating expenses were $1,241,451 for the three months ended June 30, 2006, as compared to $711,859 in the three months ended June 30, 2005, but resulted in only a 7% increase as a percent of revenue. This increase is primarily the result of (i) the 35% increase in number of subscribers the Company serviced during these time periods, (ii) the utilization of contractors to perform service, maintenance and project management functions, (iii) an increase in our customer service quality levels, and (iv) positioning the Company to expand its services to a larger subscriber base in the future. Certain personnel and expense reduction initiatives towards positive EBITDA for the quarter ending September 30, 2006 are expected to reduce the expenses as a percentage of revenue from its current level. A breakdown of customer service and operating expenses is as follows:

19

 
 
 
 
Three Months Ended
June 30, 2006
 
 
 
($)
 
(%)
 
Call Center Expenses
 
$
455,463
   
37
%
General Operations Expenses
 
$
404,170
   
33
%
Property System Maintenance Expenses
 
$
381,818
   
30
%

General and Administrative Expenses.   General and administrative expenses increased to $1,428,448 for the three months ended June 30, 2006, from a credit of $310,596 for the three months ended June 30, 2005, primarily the result of noncash charges.  

The Company had total noncash charges included in general and administrative expenses in the three months ended June 30, 2006 of $491,518, including $154,222 for share-based compensation for nonemployees attributable to the fair value of options and warrants issued for services, $1,480 for excess discount for the issuance of stock through the employee stock purchase plan, compensation expense of $41,665 for the issuance of common stock for bonuses and a provision of $22,121 for bad debt expense. Additionally, effective October 1, 2005, the Company was required to adopt the provisions of SFAS 123R which revised SFAS 123 and eliminated the option the Company had been using to account for options under the intrinsic value method pursuant to APB 25 in its historical financial statements. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition. As a result of adopting the provisions of SFAS 123R, the Company recognized noncash share-based compensation expense of $272,030 based upon the fair value at the grant dates for awards to employees for the quarter ended June 30, 2006. The total stock-based compensation expense not yet recognized and expected to vest over the next 27 months is approximately $1,700,000.

Excluding these noncash charges from both periods, general and administrative expenses were $936,930 (27% of revenue), compared to the period ended June 30, 2005 of $563,177 (23% of revenue), with the increase due primarily to (i) the expenses associated with the Chicago, South Florida and Washington, DC offices, (ii) expansion of the New Jersey headquarters, (iii) increased professional fees relating to insurance and regulatory filings, and (iv) Sarbanes-Oxley preparation and compliance.
 
Other Non-Cash Charges.   Depreciation and amortization expenses increased from $807,998 during the three months ended June 30, 2005 to $1,138,744 during the three months ended June 30, 2006.  The increase in depreciation and amortization is associated with the additional equipment being deployed. 
 
Net Income (Loss).   Primarily as a result of the above, and primarily noncash charges of $1,630,262, the Company reports a net loss of $2,194,519 for the three months ended June 30, 2006, compared to net income of $463,934 for the three months ended June 30, 2005. However, if the Company had accounted for employee stock options using the fair value method required by SFAS 123, it would have had a pro forma net loss of $382,926 for the three months ended June 30, 2005. If the net income for the three months ended June 30, 2005 was adjusted to reflect the pro forma impact of the fair value method of accounting for options and the elimination of the one time gain on the sale of fixed assets of $634,380, the net income reported for the period would become a net loss of $1,017,306.

LIQUIDITY AND CAPITAL RESOURCES
 
NINE MONTHS ENDED JUNE 30, 2006
 
During the nine months ended June 30, 2006 and 2005, the Company recorded a net loss of $6,255,888 and $3,207,429, respectively. At June 30, 2006, the Company had an accumulated deficit of $37,201,187.

The Company believes that it has adequate financial resources as of June 30, 2006 to fund its operations and material commitments through the end of the fiscal year. On an ongoing basis the Company expects that its monthly generated revenues will fund its monthly general operating expenses. However, the monthly generated revenues do not currently also fund the Companys capital growth objectives. The Company is currently in negotiations with several groups to secure a significant source of debt financing to continue or even accelerate its growth and expects to close such a financing prior to its fiscal year end on September 30, 2006. However, there can be no assurance that the Company will be successful in any attempt to secure additional financing. If the Company is unsuccessful in securing additional financing, it may have to operate in a no growth mode or, to fund a slower growth plan or operations if necessary, it may sell certain noncore assets to raise capital. 
 
The Company also believes a convergence of three factors will reduce the cash burn.  First, a continued shift in the type of subscriber additions from private cable services to DIRECTV services, which increases gross revenue and the Company’s ARPU and requires less “net” cash due to receipt of offsetting activation fees.  Second, a significant portion of the Company’s subscriber acquisition cost is for digital set-top receivers which cost has recently been offset by equipment incentives for DIRECTV bulk deployments, which the Company is reasonably confident that negotiations surrounding an extension of these incentives will be successful, thereby reducing future cash requirements.  Third, the Company’s significant investment of capital in prior periods into work-in-progress properties should begin to materialize into billable subscribers in upcoming quarters with less additional capital required to activate these subscribers, thus increasing revenue with a less than proportionate increase in cash required.  These factors, in addition to an increasing subscriber and revenue base, and achieving positive EBITDA by September 30, 2006, should result in many of the Company’s expenses declining as a percentage of revenue, thus improving the Company’s operating margin.
 
20

 

The Company has scaled back its growth and is only funding projects where construction has already begun and projects that will provide an immediate return on investment. Future growth will be dependent on raising additional financing, potentially from debt or private equity sources.
 
Cash Balance.   At June 30, 2006, we had cash and cash equivalents of $1,257,558, compared to $9,358,021 at September 30, 2005. The decrease in our cash balance was primarily due to the purchase of property and equipment and cash used in operations.
 
Operating Activities.   Our operations used net cash of $1,656,435 during the nine months ended June 30, 2006, including a net loss of $6,255,888.  Our net loss of $6,255,888 for the same period was offset by net noncash charges associated primarily with depreciation and amortization, and other non-cash charges associated with stock options and warrants of $4,641,865.
 
Investing Activities.   During the nine months ended June 30, 2006, we purchased $6,414,878 of equipment relating to subscriber additions during the period and for future periods and paid $42,864 for the acquisition of intangible assets. Continuation of this rate of subscriber growth may be dependent on raising additional financing, potentially from debt or private equity sources. The Company is currently reviewing alternatives and evaluating proposals from a few select sources to fund this growth. No assurances can be made that the Company will be successful in any attempt to secure additional financing, and therefore the Company may have to scale back its growth accordingly.
 
Financing Activities.   During the nine months ended June 30, 2006, we used $89,505 for the repayment of certain notes payable and capital lease obligations.  Regarding equity financing activities, we issued 350,000 common shares upon the exercise of previously issued warrants to purchase common shares, which resulted in net proceeds to the Company of $87,500. The Company is currently reviewing and evaluating financing alternatives in order to fund more robust growth. No assurances can be made that the Company will be successful in any attempt to secure additional financing, and therefore the Company may have to scale back its growth accordingly.
 
Working Capital.   As at June 30, 2006, we had working capital of approximately $6,000, compared to working capital of approximately $7,785,000 as at September 30, 2005, primarily as a result of the consumption of cash for the purchase of property and equipment.
 
As of June 30, 2006, approximately $662,000 of the current liability represents deferred revenue from activation fees, compared to deferred revenue of approximately $934,000 as at September 30, 2005, for which the cash has been received prior to the revenue being recognized.
 
Capital Commitments and Contingencies.   We have access agreements with the owners of multiple dwelling unit properties to supply our digital satellite programming and Internet systems and services to the residents of those properties; however, we have no obligation to build out those properties and no penalties will accrue if we elect not to do so.
 
Future Commitments and Contingencies.   We believe that we have sufficient cash resources to cover current levels of operating expenses and working capital needs. However, this is a capital-intensive business and continued growth is dependent partially on raising additional financing. We are currently reviewing proposals for additional financing. There is no assurance that we will be successful in any of these initiatives.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our operating results and cash flows are subject to minor fluctuations from changes in foreign currency exchange rates and interest rates.

21

 

We maintain relationships with certain suppliers in Canada and have employees that we pay in Canadian dollars. However, if the quarterly average of the ratio of the value of the Canadian dollar as a percentage of the United States dollar increases or decreases by even 10%, the impact of such currency fluctuations upon our operating results or financial position would be immaterial.

The Company has no significant long-term debt and therefore market interest rates do not impact the operating results or financial position. All Company notes payable are at a fixed interest rate.

Our interest income is immaterially exposed to interest rate fluctuations on our short-term investments that are comprised of United States government treasury notes, which we hold on an available-for-sale basis. We have not entered into derivative financial instruments.

CONTROLS AND PROCEDURES
 
Our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Vice President of Finance and Administration, to allow timely decisions regarding required disclosure.
 
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer, who is also the Chief Financial Officer, as well as the Vice President of Finance and Administration, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Annual Report on Form 10-K and quarterly reports on Form 10-Q.

Based on that evaluation, the Chief Executive Officer, who is also the Chief Financial Officer, and the Vice President of Finance and Administration, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2006. There has been no change in the Company’s internal control over financial reporting during the three months ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II - OTHER INFORMATION

LEGAL PROCEEDINGS

From time to time, the Company may be subject to legal proceedings, which could have a material adverse effect on its business. At June 30, 2006 and through the date of this filing, the Company was a party to one litigation matter.

On or about March 11, 2005, the Company brought suit against Star Choice Communications Inc. for (i) a dispute over the amount of goods and services tax that was owed to the Company’s Canadian subsidiary on associated programming commissions from 2000 and 2001, and (ii) non-payment of programming commissions on a specific property site for 2004 and 2005. Pursuant to a verbal settlement in September 2005, the Company expects to receive $73,500 (CDN). As of June 30, 2006, the parties were in the final process of drafting formal settlement and dismissal documents.
 
RISK FACTORS

The Company supplements its Risk Factors, previously set forth in its Annual Report on Form 10-KSB filed on December 23, 2005, with the following:

We Require Additional Funding for Continued Growth

To continue funding subscriber growth, the Company must raise additional debt or equity financing, or enter into alliances or collaborative agreements with third parties providing for net proceeds to the Company.  No assurance can be given that the Company will be successful in obtaining any such financing or in securing collaborative agreements with third parties on acceptable terms, if at all, or if secured, that such financing or collaborative agreements will provide for payments to the Company sufficient to continue to fund operations.  In the absence of such financing or third-party collaborative agreements, the Company will be required to scale back operations and growth and may have an issue as to our ability to continue as a going concern. 
  
22

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

DEFAULTS UPON SENIOR NOTES

None.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 1, 2006, the Company held its Annual General Meeting of Shareholders in Totowa, New Jersey. Three issues were put forth to the shareholders: (i) election of directors, (ii) ratification of appointment of Independent Registered Public Accounting Firm; and (iii) extension of the 2001 Employee Stock Purchase Plan for an additional five year period.
 
On the issue of election of directors, out of the 35,296,187 shares voted at the meeting: 33,875,296 voted in favor of Doug Hooper and 1,420,891 withheld; 33,875,296 voted in favor of Ted Boyle and 1,420,891 withheld; 33,640,296 voted in favor of Steve Cox and 1,655,891 withheld; and 34,875,196 voted in favor of Carolyn Howard and 420,991 withheld. All directors were elected for their respective terms. For a list of directors and short biography of each, please reference the Proxy Statement mailed to stockholders on or about May 5, 2005 and filed with the Securities and Exchange on April 27, 2006.
 
On the issue of voting on the appointment of the Independent Registered Public Accounting Firm, out of the 35,296,187 shares voted at the meeting, 34,911,341 shares have been voted in favor, 383,446 shares against, with 1,400 abstaining. The Independent Registered Public Accounting Firm was appointed for fiscal 2005.

On the issue of voting on the extension of the 2001 Employee Stock Purchase Plan, out of the 16,979,559 shares represented today (broker non-votes excluded), 16,401,259 shares have been voted in favor, 562,650 shares against, with 15,650 abstaining. The issue passed.
 
OTHER INFORMATION

None.

EXHIBITS

31.1- Rule 13a-14(a)/15d-14(a) Certification, executed by Sheldon Nelson, Chairman, Board of Directors, Chief Executive Officer and Chief Financial Officer of MDU Communications International, Inc.

31.2- Rule 13a-14(a)/15d-14(a) Certification, executed by Carmen Ragusa, Jr., Vice President of Finance of MDU Communications International, Inc.
 
32.1- Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Sheldon Nelson, Chairman, Board of Directors, Chief Executive Officer and Chief Financial Officer of MDU Communications International, Inc.

32.2- Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Carmen Ragusa, Jr., Vice President of Finance of MDU Communications International, Inc.

23

 

SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
MDU COMMUNICATIONS INTERNATIONAL, INC.
 
  
 
 
 
 
Date: August 14, 2006
By:
/s/ SHELDON NELSON
 

Sheldon Nelson
Chief Financial Officer
 
 
 
 
 
 
MDU COMMUNICATIONS INTERNATIONAL, INC.
 
 
 
 
 
 
Date: August 14, 2006
By:
/s/ CARMEN RAGUSA, JR.
 

Carmen Ragusa, Jr.
Vice President of Finance
 
 
 
24