================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q/A2
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|X| SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING MARCH 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ -----------
COMMISSION FILE NUMBER 0 - 1325
MULTIBAND CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
-----------
(State or other jurisdiction of incorporation or organization)
41 - 1255001
(IRS Employer Identification No.)
9449 Science Center Drive, New Hope, Minnesota 55428
(Address of principal executive offices)
Telephone (763) 504-3000 Fax (763) 504-3060
Internet: www.multibandusa.com
(Registrant's telephone number, facsimile number, and Internet address)
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 and 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 |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes |_| No |X|
On May 13, 2005 there were 28,751,751 shares outstanding of the
registrant's common stock, par value $.01 per share, and 457,201 outstanding
shares of the registrant's convertible preferred stock.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
------------------
March 31, March 31,
2005 2004
------------ ------------
(unaudited) (unaudited)
REVENUES $ 3,706,876 $ 762,655
COSTS AND EXPENSES
Cost of products and services (exclusive of
depreciation and amortization 1,872,268 410,962
shown separately below)
Selling, general and administrative 2,146,912 828,153
Depreciation and amortization 1,148,867 352,245
------------ ------------
Total Costs and Expenses 5,168,047 1,591,360
------------ ------------
LOSS FROM OPERATIONS (1,468,411) (828,705)
------------ ------------
OTHER EXPENSE
Interest expense (685,701) (229,334)
Other Income (expense) 4,932 14,863
------------ ------------
Total Other Expense (680,769) (214,471)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,141,940) (1,043,176)
LOSS FROM DISCONTINUED OPERATIONS (441,268) (473,688)
NET LOSS (2,583,208) (1,516,864)
Preferred Stock Dividends 931,084 62,653
------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,514,292) $ (1,579,517)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
LOSS FROM CONTINUING OPERATIONS (.08) (.05)
LOSS FROM DISCONTINUED OPERATIONS (.01) (.03)
NET LOSS (.09) (.08)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (.13) (.08)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 27,216,574 19,280,632
See notes to condensed consolidated financial statements
2
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
(unaudited) (audited)
-------------------------------------------------------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 5,928,109 $ 726,553
-------------------------------------------------------------------------------------------------------------------------
Certificate of deposit 650,000 650,000
-------------------------------------------------------------------------------------------------------------------------
Accounts receivable, net 3,298,786 2,783,774
-------------------------------------------------------------------------------------------------------------------------
Inventories 234,052 231,993
-------------------------------------------------------------------------------------------------------------------------
Current assets of discontinued operations -- 634,307
-------------------------------------------------------------------------------------------------------------------------
Note receivable, net 339,051 --
-------------------------------------------------------------------------------------------------------------------------
Other Current Assets 208,586 146,334
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,658,584 5,172,961
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 4,203,454 4,372,474
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
-------------------------------------------------------------------------------------------------------------------------
Goodwill 812,366 812,366
-------------------------------------------------------------------------------------------------------------------------
Intangible assets, net 15,601,701 16,081,635
-------------------------------------------------------------------------------------------------------------------------
Other assets of discontinued operations 0 47,975
-------------------------------------------------------------------------------------------------------------------------
Other assets 145,397 146,301
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 16,559,464 17,088,277
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 31,421,502 $ 26,633,712
============ ============
-------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
-------------------------------------------------------------------------------------------------------------------------
Checks issued in excess of cash in bank $ 235,352 $ 234,348
-------------------------------------------------------------------------------------------------------------------------
Short-term debt 2,186,099 4,481,099
-------------------------------------------------------------------------------------------------------------------------
Wholesale line of credit -- 926,201
-------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 1,429,450 1,524,527
-------------------------------------------------------------------------------------------------------------------------
Current portion of note payable, stockholder 32,837 84,801
-------------------------------------------------------------------------------------------------------------------------
Current portion of capital lease obligations 202,355 201,530
-------------------------------------------------------------------------------------------------------------------------
Accounts payable 2,410,006 2,561,611
-------------------------------------------------------------------------------------------------------------------------
Accrued liabilities 3,304,055 3,030,024
-------------------------------------------------------------------------------------------------------------------------
Contingent liability 222,700 222,700
-------------------------------------------------------------------------------------------------------------------------
Customer deposits 325,125 59,875
-------------------------------------------------------------------------------------------------------------------------
Current liabilities of discontinued operations 545,381 370,921
-------------------------------------------------------------------------------------------------------------------------
Deferred subscription revenue 512,200 406,738
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,405,560 14,104,375
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
-------------------------------------------------------------------------------------------------------------------------
Long-term debt, net 1,481,754 3,498,657
-------------------------------------------------------------------------------------------------------------------------
Capital lease obligations, net of current portion 453,344 481,249
-------------------------------------------------------------------------------------------------------------------------
Long-term liabilities of discontinued operations 500,000 --
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 13,840,658 18,084,281
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------
Cumulative convertible preferred stock, no par value:
-------------------------------------------------------------------------------------------------------------------------
8% Class A (27,931 shares issued and outstanding, $293,276 liquidation
preference) 419,752 419,752
-------------------------------------------------------------------------------------------------------------------------
10% Class B (8,680 and 8,700 shares issued and outstanding, $91,140 and $91,350
liquidation preference) 61,800 62,000
-------------------------------------------------------------------------------------------------------------------------
10% Class C (125,340 and 125,400 shares issued and outstanding, $1,253,480 and
$1,254,000 liquidation preference 1,610,505 1,611,105
-------------------------------------------------------------------------------------------------------------------------
10% Class F (150,000 shares issues and outstanding, $1,500,000 liquidation
preference) 1,500,000 1,500,000
-------------------------------------------------------------------------------------------------------------------------
8% Class G (45,245 shares issued and outstanding, $452,450 liquidation
preference) 179,897 179,897
-------------------------------------------------------------------------------------------------------------------------
6% Class H (4.77 and 11.5 shares issued and outstanding, $477,000 and $1,150,000
liquidation preference) 0 0
-------------------------------------------------------------------------------------------------------------------------
Variable rate Class I (100,000 shares issued and outstanding , $10,000,000
liquidation preference) 0 0
-------------------------------------------------------------------------------------------------------------------------
Common stock, no par value (28,344,304 and 25,784,490 shares issued;
28,342,300 and 25,781,818 shares outstanding) 18,020,929 16,888,291
-------------------------------------------------------------------------------------------------------------------------
Stock subscriptions receivable (324,865) (391,264)
-------------------------------------------------------------------------------------------------------------------------
Options and warrants 44,528,600 32,985,983
-------------------------------------------------------------------------------------------------------------------------
Unamortized compensation (196,873) (1,724)
-------------------------------------------------------------------------------------------------------------------------
Accumulated deficit (48,218,901) (44,704,609)
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 17,580,844 8,549,431
------------ ------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,421,502 $ 26,633,712
============ ============
-------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
3
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
-----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------------------------------------------------------------------------------
2005 2004
-----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Net loss $ (2,583,208) $ (1,516,864)
-----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash flows from operating activities
-----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,273,112 363,327
-----------------------------------------------------------------------------------------------------------------------
Amortization of deferred compensation 17,761 112,641
-----------------------------------------------------------------------------------------------------------------------
Amortization of original issue discount 500,098 188,979
-----------------------------------------------------------------------------------------------------------------------
Gain on sale of business segment (103,491) --
-----------------------------------------------------------------------------------------------------------------------
Common stock issued for services 19,200 19,887
-----------------------------------------------------------------------------------------------------------------------
Accounts receivable, net (515,012) (385,460)
-----------------------------------------------------------------------------------------------------------------------
Inventories (323,069) 22,599
-----------------------------------------------------------------------------------------------------------------------
Other current assets (62,252) (10,028)
-----------------------------------------------------------------------------------------------------------------------
Other assets -- (37,171)
-----------------------------------------------------------------------------------------------------------------------
Wholesale line of credit (926,201) 477,411
-----------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities (288,664) (459,736)
-----------------------------------------------------------------------------------------------------------------------
Deferred service obligations and revenue 73,564 17,028
-----------------------------------------------------------------------------------------------------------------------
Customer deposits 265,249 --
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities (2,652,913) (1,207,387)
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Purchases of property and equipment (141,150) (39,659)
-----------------------------------------------------------------------------------------------------------------------
Purchases of intangible asset (120,000) --
-----------------------------------------------------------------------------------------------------------------------
Purchase of Ultravision (287,050) --
-----------------------------------------------------------------------------------------------------------------------
Proceeds from sale of business segment 1,682,184 --
-----------------------------------------------------------------------------------------------------------------------
Proceeds from sale of property and equipment -- 151
-----------------------------------------------------------------------------------------------------------------------
Collections on notes receivable -- 3,000
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 1,133,984 (36,508)
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Checks issued in excess of cash in bank 1,003 (4,623)
-----------------------------------------------------------------------------------------------------------------------
Payments on short-term debt (2,295,000) --
-----------------------------------------------------------------------------------------------------------------------
Payments on long-term debt (2,064,077) (31,867)
-----------------------------------------------------------------------------------------------------------------------
Payments on capital lease obligations (27,079) (19,723)
-----------------------------------------------------------------------------------------------------------------------
Payments on note payable to stockholder (51,964) (9,735)
-----------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of stock and warrants 11,116,458 --
-----------------------------------------------------------------------------------------------------------------------
Payments received on stock subscriptions receivable 66,399 --
-----------------------------------------------------------------------------------------------------------------------
Redemption of preferred stock (800) 0
-----------------------------------------------------------------------------------------------------------------------
Preferred stock dividends (24,455) (33,524)
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 6,720,485 (99,472)
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,201,556 (1,343,367)
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
-----------------------------------------------------------------------------------------------------------------------
Beginning of period 726,553 2,945,960
-----------------------------------------------------------------------------------------------------------------------
End of period 5,928,109 1,602,593
------------ ------------
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-----------------------------------------------------------------------------------------------------------------------
Cash paid for interest, net of amortization of original issue discount 255,060 128,405
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
Note receivable recorded on sale of discontinued operations 339,051 --
-----------------------------------------------------------------------------------------------------------------------
Issuance of common stock for acquisition of assets 0 274,800
-----------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock into common stock 673,335 0
-----------------------------------------------------------------------------------------------------------------------
Current liabilities converted to stock 10,603 36,223
-----------------------------------------------------------------------------------------------------------------------
Conversion of notes payable into common stock 548,001 190,000
-----------------------------------------------------------------------------------------------------------------------
Conversion of dividend into common stock 94,748 0
-----------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements
4
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
--------------------------------------------------------------------------------
Note 1 - Unaudited Consolidated Financial Statements
--------------------------------------------------------------------------------
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
--------------------------------------------------------------------------------
NOTE 2 - Summary of Significant Accounting Policies
--------------------------------------------------------------------------------
Nature of Business
Multiband Corporation and subsidiaries, formerly known as Vicom, Incorporated
and subsidiaries, (the Company) was incorporated in Minnesota in September 1975.
The Company provides voice, data and video services to multi-dwelling unit
customers. The Company's products and services are sold to customers located
throughout the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the three months ended March 31, 2005 and 2004, the Company incurred net losses
of $2,583,208, and $1,516,864, respectively. At March 31, 2005, the Company had
an accumulated deficit of $48,218,901. The Company's ability to continue as a
going concern is dependent on it ultimately achieving profitability and/or
raising additional capital. On February 3, 2005, the Company completed a $10
million private placement of the Company's Series I Convertible Preferred Stock
which includes $520,000 of offering costs. Management intends to obtain
additional debt or equity capital to meet all of its existing cash obligations
and fund commitments on planned Multiband projects; however, there can be no
assurance that the sources will be available or available on terms favorable to
the Company. Management anticipates that the impact of the actions listed below
will generate sufficient cash flows to pay current liabilities, long-term debt
and capital lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional equity investment in the Company by either issuing
preferred or common stock. The Company, in February 2005 issued $10,000,000
worth of Class I Preferred Stock to a group of accredited investors.
3. Continue to market Multiband services and acquire additional multi-dwelling
unit customers.
4. Control capital expenditures by contracting Multiband services and equipment
through a landlord-owned equipment program.
5. Establish market for wireless internet services.
6. Discontinuation of Multiband business services segment which was unprofitable
in 2004.
Page 5
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Principles of Consolidation
The consolidated financial statements include the accounts of Multiband
Corporation (MB) and its wholly owned subsidiaries, Corporate Technologies, USA,
Inc. (CTU), URON, Inc., Minnesota Digital, Inc. (MDU), Rainbow Satellite Group,
LLC (Rainbow) and Multiband Subscriber Services, Inc. (Multiband) which provides
voice, data and video services to residential multi-dwelling units. In February
2003, the Company formed a 50% owned subsidiary, Multiband USA, Inc. (MB USA)
with Pace Electronics, Inc. (PACE) a video wholesaler, and provides the same
services as Multiband). On January 1, 2004, the Company purchased the 50% PACE
interest in Multiband USA. All significant intercompany transactions and
balances have been eliminated in consolidation.
On January 1, 2004, the Company merged Multiband into CTU. On April 1, 2005, the
continuing operations of CTU terminated (see Note 7.)
Discontinued Operations
During the first quarter of 2005, the Company sold certain assets and
transferred certain liabilities related to its Multiband Business Services
(a/k/a CTU). The Company began discussions and efforts to sell these assets in
the fourth quarter of 2004. These assets met the requirements of Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" as being held for sale. Operations and cash flows will be
eliminated as a result of the sale and the Company will not have any significant
involvement in the operations after the sale. In accordance with appropriate
accounting rules, the Company has reclassified the previously reported financial
results to exclude the results of the Multiband Business Services (CTU) and
these results are presented on a historical basis as a separate line in the
consolidated statements of operations and the consolidated balance sheets
entitled "Discontinued Operations". All of the financial information in the
consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
(see Note 7). Based on the discussions and efforts to sell these assets, the
Company determined, based on the final purchase price which was arrived at in
the first quarter of 2005, it was required to take an impairment charge to the
goodwill of the Multiband Business Services division. As a result, an impairment
charge related to goodwill of $2,221,000 was recorded in the fourth quarter of
2004.
Revenues and Cost Recognition
The Company recognizes revenue in accordance with the Securities Exchange
Commission's Staff Accounting Bulletin No. 104 (SAB 104) "Revenue Recognition",
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectibility is reasonable assured; and (iv)
product delivery has occurred or services have been rendered. The Company
recognizes revenue (included in discontinued operations) as products are shipped
based on FOB shipping point terms when title passes to customers.
The Company earns revenues from six sources: 1) Video and computer technology
products which are sold but not installed, 2) Voice, video and data
communication products which are sold and installed, 3) Service revenues related
to communication products which are sold and both installed and not installed 4)
Multiband user charges to multiple dwelling units 5) Voice, data, and video
revenue directly generated by the Company as a principal to subscribers, and 6)
DirecTV master service operator revenue earned primarily through the activation
of and residual fees on video programming services.
Page 6
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms. Product returns and customer discounts
are netted against revenues. This revenue has been included with discontinued
operations.
Customer's contract for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenue is recognized when the products are
delivered and installed and the customer has accepted the terms and has the
ability to fulfill the terms. This revenue has been included with discontinued
operations.
Substantially all of the service revenue the Company had in the past was part of
the business segment, Multiband Business Services, which was sold effective
after business hours March 31, 2005. Service revenues for continuing operations
accounted for less than 10% of total revenues for the three months ended March
31, 2005 and 2004.
Revenue generated from activation on video programming services is earned in the
month of activation. According to the Company's agreement with DirecTV, in the
event that a customer cancels within the first 12 months of service, DirecTV has
the right to chargeback the Company for a portion of the activation fees
received. In accordance with Securities Exchange Commission SAB 104, the Company
has estimated the potential charge back of commissions received on activation
fees during the past 12 months based on historical percentages of customer
cancellations and has included that amount as a reduction of revenue. Residual
income is earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns a fixed
percentage based on net cash received by DirecTV for recurring monthly services
and a variable amount depending on the number of activations in a given month.
The Company's master system operator contract with DirecTV also permits the
Company to earn revenues through its control of other system operators who are
unable to provide DirecTV video programming services without the Company's
performance.
The Company has determined that the accounting policies for income recognition
described above were in accordance with the Financial Accounting Standards Board
Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as
a Principal versus Net as an Agent". EITF No. 99-19 employs multi-factor tests
to determine whether amounts charged to customers in respect of certain expenses
incurred should be included in revenues or netted against such expenses.
The Company reports the aforementioned voice, data and video programming
revenues on a gross basis based on the following factors: the Company has the
primary obligation in the arrangement with its customers; the Company controls
the pricing of its services; the Company performs customer service for the
agreements; the Company approves customers; and the Company assumes the risk of
payment for services provided. The Company reports DirecTV revenue on a net
basis.
Multiband, Rainbow, MDU and MB USA user charges are recognized as revenues in
the period the related services are provided in accordance with SAB 104.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Goodwill and Other Intangible Assets
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses.
Page 7
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Future events could cause us to conclude that impairment indicators exist and
that goodwill associated with our acquired businesses is impaired. Any resulting
impairment loss could have a material adverse impact on our financial condition
and results of operations. Goodwill related to continuing operations was
$812,366 as of March 31, 2005.
Components of intangible assets are as follows:
March 31, 2005 December 31, 2004
--------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- ----------- ----------- -----------
Intangible assets subject to
amortization Domain name $ 83,750 $ 60,021 $ 83,750 $ 55,833
Access contracts 60,000 38,333 60,000 33,333
Debt issuance costs 313,837 112,526 313,837 47,214
Right of entry 17,346,759 2,652,175 17,226,759 1,933,294
Customer cable lists 1,019,119 358,709 753,930 286,967
----------- ----------- ----------- -----------
Total $18,823,465 $ 3,221,764 $18,438,276 $ 2,356,641
=========== =========== =========== ===========
Intangible assets not subject to
amortization
Goodwill $ 812,366 $ 0 $ 812,366 $ 0
=========== =========== =========== ===========
The Company amortizes a domain name acquired during the year ended
December 31, 2001 over its estimated useful life of five years using the
straight-line method. The Company amortizes access contracts and customer cable
lists, over their useful estimated lives ranging from two to five years. The
Company is amortizing the right of entry contracts, over their estimated useful
lives ranging from 36 to 73 months. Debt issuance costs are amortized over the
life of the loan of approximately three years using the straight-line method
which approximates the interest method.
Amortization of intangible assets was $865,123, and $91,454 for the three months
ended March 31, 2005 and 2004, respectively. Amortization of debt issuance costs
of $65,312 is included in interest expense. Estimated amortization expense of
intangible assets for the years ending December 31, 2005, 2006, 2007, 2008, 2009
and 2010 is $3,297,005, $3,047,921, $2,974,281, $2,908,666, $2,817,297 and
$1,036,464, respectively. The weighted average remaining life of the intangibles
is 5.5 years with right of entry average life of 6.0 years and customer cable
lists of 2.6 years.
Page 8
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant date
over the amount the employee must pay for the stock. The Company's general
policy is to grant stock options at fair value at the date of grant. Options and
warrants issued to nonemployees are recorded at fair value, as required by SFAS
No. 123 "Accounting for Stock-Based Compensation," (SFAS No. 123), using the
Black Scholes pricing model. The Company has adopted the disclosure only
provision of SFAS No. 148, "Accounting for Stock-Based Compensation."
Pursuant to APB No. 25 and related interpretations, $0 and $112,641 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended March 31, 2005 and 2004,
respectively. Had compensation cost been recognized based on the fair values of
options at the grant dates consistent with the provisions of SFAS No. 123, the
Company's loss attributable to common stockholders and basic and diluted loss
per common share would have increased to the following pro forma amounts for the
three months ended March 31:
2005 2004
----------- -----------
Loss attributable to common stockholders $(3,514,292) $(1,579,517)
Pro forma loss attributable to common shares $(3,814,386) $(1,708,825)
Basic and diluted loss attributable to
common shareholders:
As reported $ (.13) $ (0.08)
Pro forma loss attributable to common shares $ (.14) $ (0.09)
Stock-based compensation:
As reported $ 0 $ 112,641
Pro forma $ 300,094 $ 129,308
In determining the compensation cost of the options granted during the three
months ended March 31, 2005 and 2004, as specified by SFAS No. 123, the fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used in
these calculations are summarized as follows:
2005 2004
----------- -----------
Risk-free interest rate 3.38% 3.50%
Expected life of options granted 10 years 10 years
Expected volatility range 203% 184%
Expected dividend yield 0% 0%
Net Loss per Common Share
Page 9
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Basic net loss per common share is computed by dividing the loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net loss per common share is computed by
dividing loss attributable to common stockholders by the sum of the weighted
average number of common shares outstanding plus all additional common stock
that would have been outstanding if potentially dilutive common shares related
to common share equivalents (stock options, stock warrants, convertible
preferred shares, and issued but not outstanding restricted stock) had been
issued. All options, warrants, convertible preferred shares, and restricted
stock outstanding during the three months ended March 31, 2005 and 2004 were
anti-dilutive.
Segment Reporting
A business segment is a distinguishable component of an enterprise that is
engaged in providing an individual product or service or a group of related
products or services and that is subject to risks and returns that are different
from those of other business segments. Management believes that the Company has
two operating segments: 1) MCS, which acts as a principal in billing voice, data
and cable revenues to subscribers; and 2) MDU, Inc. which collects net revenue
from DirecTV.
Reclassifications
Certain accounts in the prior quarters' consolidated financial statements have
been reclassified for comparative purposes to conform to the presentation in the
current quarter consolidated financial statements. These reclassifications had
no effect on net loss or stockholders' equity.
--------------------------------------------------------------------------------
NOTE 3 - Business Acquisitions
--------------------------------------------------------------------------------
On January 1, 2004, the Company entered into a stock purchase agreement with
URON, Inc. (URON) to purchase all of the outstanding capital stock of URON for a
total purchase price of 350,000 shares of the Company's common stock to be
issued in installments as follows: a) 180,000 shares issued at closing, b)
170,000 shares held in escrow. The common shares were valued at fair market
value on the date of agreement which was $1.31 per share for a purchase price of
$458,500. The terms of the escrow are as follows: 50,000 shares to be released
upon URON providing the Company with documentation satisfactory to the Company
of a release from a certain vendor or any related entity of all liabilities
incurred to a certain vendor by URON; 120,000 shares to be released in 40,000
share increments upon the Company's receipt of distributable gross profits,
generated by certain customers, in increments of $75,000 cash. The escrow shall
be terminated 24 months after the date of the agreement and any shares not
released will be rescinded to the Company. The Company must register all shares
issued within one year from the date of issuance. The reason for the purchase of
URON is to continue to expand the Company's services related to voice, data, and
video services. The purchase price of $458,500 was allocated to customer list of
$453,930 and property and equipment of $4,570. The customer list will be
amortized over its estimated useful lives of two years and the property and
equipment for fifteen months. At March 31, 2005 and December 31, 2004, the
Company was not obligated to issue any of the contingent shares of common stock.
In April 2004, the Company purchased certain assets consisting of data and video
subscribers and systems from Satellite Broadcasting Corporation and affiliates
(SBC). The total purchase price for said assets was approximately $679,200.
On April 2, 2004, Multiband Corporation and subsidiaries (the Company), (fka
Vicom, Incorporated and subsidiaries), completed its acquisition of Minnesota
Digital Universe, Inc. (MDU) for approximately 7.7 million dollars, half of
which was paid for in Multiband Corporation common stock, valued at $1.75 per
share, ($3,850,000), $1.1 million paid in cash and the balance in promissory
notes due by January 2005. Included in the purchase price is $700,000 related to
a finder's fee. In December 2004, the notes with an outstanding balance of
$990,000 were extended through May 2005; with $200,000 of the outstanding note
balance being extended to July 2006. These notes are unsecured and bear no
interest. The stock value was a negotiated price between the Seller and the
Buyer. The consideration paid was based on the Company's analysis of likely
future net income to be generated over a six year period by the acquired
company. The cash was provided by funds the Company had previously raised in a
private placement. The assets were acquired from Pace Electronics. Prior to the
transaction, there was no material relationship between the owners of MDU and
the Company other than the fact that Pace Electronics previously owned a 50%
interest in a company subsidiary, Multiband USA, Inc., which Multiband bought
out the remaining 50% of ownership from Pace Electronics in January 2004 for
30,000 shares of the Company's common stock valued at $39,000.
Page 10
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
With the MDU acquisition, the Company became a nationwide agent for DirecTV. MDU
services nearly 40,000 video subscribers through a network of private cable
operators located throughout the United States. The purchase also permits the
Company to receive ongoing residual payments from DirecTV, during the term of
the master system operator agreement with DirecTV, which initially had
approximately 25 months remaining at the time of purchase.
On July 9, 2004, Multiband (the Company) completed its acquisition, which had an
acquisition date of June 1, 2004, of the outstanding membership interests of
Rainbow Satellite Group, LLC (Rainbow), a provider of Satellite television
services to multi dwelling units, for approximately 7.5 million dollars, two
million of which was paid for in Multiband Preferred Stock, valued at $2.00 per
share on a conversion formula to Multiband common stock, one million dollars of
which was paid for in cash and the balance in promissory notes due by January
2005. In December 2004, these notes were extended to May 31, 2005. Included in
the purchase price is $321,850 related to a finders fee. These notes are
collateralized by Rainbow assets and bear interest at the prime rate (5.75 and
5.25% at March 31, 2005 and December 31, 2004.) In connection with the debt
extension, the Company issued 75,000 two year warrants with an exercise price of
$1.35 valued at $68,652 using the Black Scholes pricing model. The stock value
was a negotiated price between the Buyer and Seller. In the event Multiband
defaults in the payment of said promissory notes, the former owners of Rainbow
have certain rights to repurchase the aforementioned membership interests for
20% less than any sums Multiband has paid prior to the date of the default. The
consideration paid was based on the Company's analysis of likely future net
incomes to be generated over a six year period by the acquired Company. The cash
was provided by funds Multiband had previously raised in a private placement.
The aforementioned purchase price is subject to adjustment pursuant to the
parties agreement if the number of Rainbow subscribers increases or decreases as
of an adjustment date. The assets were acquired from the members/owners of
Rainbow. Prior to the transaction, there was no material relationship between
the owners of sellers and the Company. With this acquisition, the Company
acquired over 16,000 video subscribers which are primarily located in
California, Colorado, Texas, Florida, Illinois and New York.
Page 11
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
On August 9, 2004, Multiband Corporation (the Company) completed its acquisition
of certain assets of 21st Century Satellite Communications, Inc. (21st Century)
for $1,080,754, $333,333 of which was paid for in Company stock, valued at $1.60
per share, $250,000 of which was paid for in cash and the balance in equipment
lease payments due by August 2007. The stock value was a negotiated price
between the Buyer and Seller. Included in the purchase price is $86,750 related
to a finders fee. The purchase price was based on the Company's analysis of the
value of the acquired video equipment and related video subscribers totaling
approximately 5,000. The cash was provided by funds Multiband had previously
raised in a private placement. In connection with the acquisition, the Company
incurred a $125,000 finder's fee which was paid for in Company stock, valued at
$1.42 for a total of $31,250, and the remaining $93,750 was paid in cash by
December 31, 2004.
With these acquisitions, the Company has substantially increased its subscriber
base.
MDU Rainbow 21st Century
---------- ---------- ------------
Allocation of Purchase Price:
-----------------------------
Total Cash/Stock Consideration $7,000,000 $7,219,999 $ 987,000
Add: Transaction Costs 726,550 361,850 93,754
Add: Liabilities assumed 2,030,373 319,921 --
---------- ---------- ----------
Total Consideration 9,756,923 7,901,770 1,080,754
Less: Cash and accounts receivable 59,044 -- --
Less: Tangible assets -- 773,000 372,420
Less: Goodwill -- 800,000 --
---------- ---------- ----------
Intangible assets, net $9,697,879 $6,328,770 $ 708,334
========== ========== ==========
Goodwill was recorded on the Rainbow transaction based on a six year future
projection of cash flows which indicated that those future cash flows would not
equal or exceed total consideration paid for all intangible Rainbow assets. The
goodwill is anticipated to be deductible for tax purposes.
The following unaudited pro forma condensed results of operations for
the three months ended March 31, 2005 and 2004 give effect to the acquisition of
MDU, Rainbow, and 21st Century as if such transactions had occurred on January
1, 2004. Ultravision was purchased March 15, 2005 with an effective date of
April 1, 2005. Therefore, proforma results for the three months ended March 31,
2005 have not been included for the Ultravision acquisition.
Page 12
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
The unaudited pro forma information does not purport to represent what
the Company's results of operations would actually have been if such
transactions in fact had occurred at such date or to project the Company's
results of future operations.
For the three months ended March 31:
2005 2004
-----------------------------------------------------------
Consolidated Consolidated
as reported Pro Forma as reported Pro Forma
per I/S Disclosed per I/S Disclosed
----------- --------- ----------- ---------
Revenues $ 3,706,876 $ 3,706,876 $ 762,655 $ 3,730,170
Loss from continuing operations (2,141,940) (2,141,940) (1,043,176) (880,050)
Loss from discontinued operations (441,268) (441,268) (473,688) (473,688)
Net loss $ (2,583,208) $ (2,583,208) $ (1,516,864) $ (1,353,738)
Basic and diluted loss per share:
Loss from continuing operations $ (.08) $ (.08) $ (.03) $ (.05)
Loss from discontinued operations $ (.01) $ (.01) $ (.03) $ (.02)
Net loss $ (.09) $ (.09) $ (.08) $ (.07)
Weighted average shares outstanding
- basic and diluted 27,216,574 27,216,574 19,280,632 19,280,632
The unaudited pro forma results of operations for the three months ended March
31, 2005 and 2004 as a result of the SBC and Florida Cable acquisitions of video
subscribers and video equipment is not material to the historical financial
statements.
--------------------------------------------------------------------------------
NOTE 4 - Stockholder Equity
--------------------------------------------------------------------------------
Stock Warrants
Stock warrants activity is as follows for the three months ended March 31, 2005:
Number of Warrants Weighted - Average Exercise Price
------------------ ---------------------------------
Outstanding, December 31, 2004 11,795,641 1.64
Granted 8,882,723 1.70
Exercised (20,000) .85
Forfeited -- --
----------- -----------
Outstanding, March 31, 2005 20,658,364 1.67
=========== ===========
The warrants granted during the three months ended March 31, 2005 were for
common and preferred stock purchased and for services rendered.
Private Placement
On February 3, 2005, Multiband Corporation completed a $10 million private
placement of the company's Series I Convertible Preferred Stock. The offering
was made by Mercator Advisor Group, LLC of Los Angeles, California, though its
designated funds, Monarch Pointe Fund, Ltd, Mercator Momentum Fund, LP. Mercator
Momentum Fund III, LP., and certain investors.
Under the terms of the preferred stock offering, the Company issued 100.000
shares of its Series I Convertible Preferred stock in the aggregate offering
amount of $10 million. The shares of Series I Convertible Preferred Stock
contain a monthly dividend that is payable at prime plus 10% through August 31,
2005, at prime rate from September 1, 2005 through August 31, 2006, and at prime
rate plus 1% thereafter. The preferred shares are convertible into 7,142,858
shares of common stock at the fixed rate of $1.50 per share. In addition, the
investors received three-year warrants to purchase shares of Common Stock at
exercise prices of $1.57 and $1.73 per share. The Company is also required to
file a registration statement providing for the resale of shares issuable upon
the conversion of the Series I Convertible Preferred stock and upon exercise of
the warrants.
Page 13
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
--------------------------------------------------------------------------------
NOTE 5 - Accrued Liabilities
--------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
-------------- -----------------
Payroll and related taxes $ 424,892 $ 389,394
Accrued preferred stock dividends $ 580,926 $ 415,120
Accrued liability-vendor charge backs $ 1,901,972 $ 1,901,972
Other $ 396,265 $ 323,538
----------- -----------
Total $ 3,304,055 $ 3,030,024
=========== ===========
--------------------------------------------------------------------------------
NOTE 6 - Business Segments
--------------------------------------------------------------------------------
The Company has the following business segments. Multiband Corp. includes
corporate expenses (e.g. corporate administrative costs), interest income,
interest expense, depreciation and amortization. The MDU segment represents
results as the master service operator for DirecTV. The MCS segment provides
voice, data and video services to residential multi-dwelling units as the
principal to subscribers. The discontinued operations segment includes the
Multiband Business Services segment which was sold subsequent to year-end (see
Note 9).
Segment disclosures are as follows:
Multiband Discontinued
Corp. MDU MCS Operations Total
----------- ----------- ----------- ------------ -----------
Three months ended March 31, 2005:
Revenues $ -- 1,828,559 1,878,317 $ -- $ 3,706,876
Income (loss) from oerations (1,221,797) 258,832 (1,178,975) -- (2,141,940
Identifiable assets 9,653,316 9,377,707 12,390,479 -- 31,421,502
Depreciation and amortization 7,843 401,079 739,945 -- 1,148,867
Capital expenditures -- -- 102,792 -- 141,150
Multiband Discontinued
Corp. MDU MCS Operations Total
----------- ----------- ----------- ------------ -----------
Three months ended March 31, 2004:
Revenues $ -- -- $ 762,655 $ -- $ 762,655
Income (loss) from oerations (459,823) -- (583,353) -- (1,043,176)
Identifiable assets 7,928,115 -- 3,511,975 1,676,535 13,116,625
Depreciation and amortization 17,979 -- 345,348 -- 363,327
Capital expenditures 28,769 -- 6,135 4,755 39,659
Segment disclosures are provided by entity to the extent practicable under the
Company's accounting system. Depreciation and amortization above does not
include depreciation and amortization related to discontinued operations. The
cash flow statements presentation of depreciation and amortization includes the
depreciation and amortization from discontinued operations.
--------------------------------------------------------------------------------
NOTE 7 - Commitments and Contingencies
--------------------------------------------------------------------------------
Legal Proceedings
The Company is involved in legal actions in the ordinary course of its
business, including an action brought by Private Investor's Equity Group (PIEG)
in the third quarter of 2004, which seeks damages in excess of $75,000 over an
alleged financing fee owed. The Company believes the claim is without merit and
is vigorously defending the action. As of March 31, 2005, with the possible
exception of the aforementioned PIEG matter, management believes that there are
no pending legal proceedings against or involving the Company for which the
outcome is likely to have a material adverse effect upon the Company's
consolidated financial position, results of operations, or cash flows.
Significant Relationship
The Company is a master agent for DirecTV pursuant to a system operator
agreement with DirecTV dated May 22, 2003. The initial term of the agreement is
for three years and provides for two additional two-year renewals if the Company
has a minimum number of paying video subscribers in its system operator network.
Termination of the Company's DirecTV agreement would have a material adverse
impact on the Company's on-going operations. Revenues generated from DirecTV
were 40.7% of total revenue for the three months ended March 31, 2005. There was
no revenue from DirecTV for the three months ended March 31, 2004.
--------------------------------------------------------------------------------
NOTE 8 - Related Party
--------------------------------------------------------------------------------
The Company, during the quarter ended March 31, 2005 received payment for
accounts receivable of approximately $119,000 from companies that are associated
with a board director. In addition, the Company had accounts receivable
outstanding from these companies of approximately $20,000, and $140,000 at March
31, 2005, and December 31, 2004, respectively. Furthermore, the Company, during
the quarter ended March 31, 2005 paid the aforementioned companies $120,000 for
a subscriber right of entry agreement. A third party appraisal was performed
related to said right of entry purchase.
--------------------------------------------------------------------------------
NOTE 7 -Subsequent Events
--------------------------------------------------------------------------------
Acquisition of Assets
Effective April 1, 2005, the Company purchased certain video assets (equipment
and video subscribers) from Ultravision, Inc. for $287,050 including a finders
fee of $12,050.
Sale of Multiband Business Services segment
After the close of business on March 31, 2005, the Company completed the sale of
certain assets and liabilities relating to its Multiband Business Services (MBS,
a/k/a Corporate Technologies USA) division. The buyer was North Central Equity,
LLC ("Buyer").
The purchase price paid by the Buyer was $2,550,000 which consisted of
$1,682,184 in cash at closing, $349,817 in assumed vacation pay and warranty
liabilities, and the balance of $517,999 in a note receivable at 7% interest due
on December 31, 2005. The amount of the note receivable is subject to adjustment
based on certain representations and warranties provided by the Company in the
purchase agreement. The Company has recorded a reserve of $178,948 against this
note receivable due to uncertainty of collectibility of the note.
Page 14
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
In connection with the purchase agreement, the Company entered into an interim
services agreement whereby the Buyer is able to sublease space at no charge at
the Company's Minneapolis and Fargo locations and obtain access to certain
aspects of the Company's information technology resources for one year. Services
provided will be charged by either party at fair value and is estimated by
management to be insignificant. In addition the services agreement is explicit
that the Company has no control over the buyer's operations. The buyer may
receive additional free rent for part or all of a second year depending on the
results of a post closing inventory appraisal. It is indeterminable at this time
the results of this appraisal, however, the Company estimates the second year
option will be exercised and will be accruing the liability as part of the sale
transaction.
In conjunction with the sale, the Company reduced its indebtedness to Convergent
Capital $2,000,000 since part of the collateral of this note payable relates to
the assets sold. Estimated gain on sale of MBS Business:
Sale Price
----------
Cash proceeds $1,682,184
Note receivable, net of reserve of $178,948 339,051
Assumed liabilities 349,817
----------
Total sale price, net of reserve
of $178,948 2,371,052
Assets sold
-----------
Inventory, net of reserve 1,045,110
Property and equipment 52,351
----------
Net assets sold 1,097,461
Less costs and expenses
-----------------------
Broker's fee 132,500
Sublease for one year at no charge 500,000
Additional free rent related to inventory adjustment 500,000
Legal and accounting costs 37,600
----------
Total costs 1,170,100
----------
Net gain on sale $ 103,491
==========
The following are condensed statements of operations of the discontinued
operations for the three months ended March 31:
Statement of Operations 2005 2004
----------- -----------
Revenues $ 3,815,681 $ 4,984,818
Cost of sales 2,843,587 3,937,886
Selling, general and administrative 1,105,808 1,307,121
Depreciation and amortization 56,188 114,090
Income (loss) from operations (189,902) (374,279)
Other income (expense) (354,855) (99,409)
----------- -----------
Net Loss $ (544,757) $ (473,688)
Gain on Sale 103,491 --
----------- -----------
Loss From Discontinued Operations (441,268) (473,688)
=========== ===========
Page 15
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, product pricing, management for growth, integration of acquisitions,
technological developments, new products, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements including those made in this statement. In order to
comply with the terms of the Private Securities Litigation Reform Act, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or Company's
forward-looking statements.
The risks and uncertainties that may affect the operations,
performance, developments and results of the Company's business include the
following: national and regional economic conditions; pending and future
legislation affecting IT and telecommunications industries; market acceptance of
the Company's products and services; the Company's products and services; the
Company's continued ability to provide integrated communication solutions for
customers in a dynamic industry; and other competitive factors.
Because these and other factors could affect the Company's operating
results, past financial performance should not necessarily be considered as a
reliable indicator of future performance and anticipated future period results.
Page 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OUR COMPANY
Multiband Corporation (Multiband), (f/k/a Vicom, Incorporated), is a
Minnesota corporation formed in September 1975. Multiband has two operating
segments: 1) Multiband Consumer Services (MCS, legally known as Multiband
Subscriber Services, Inc.), which encompasses the subsidiary corporations,
Multiband USA, Inc., URON, Inc., and Rainbow Satellite Group, LLC; and 2)
Minnesota Digital Universe, Inc. (MDU).
Multiband completed an initial public offering in June 1984. In
November 1992, Multiband became a non-reporting company under the Securities
Exchange Act of 1934. In July 2000, Multiband regained its reporting company
status. In December, 2000, Multiband stock began trading on the NASDAQ stock
exchange under the symbol VICM. In July 2004, the symbol was changed to MBND
concurrent with the Company's name change from Vicom, Incorporated to Multiband
Corporation.
Multiband's website is located at: www.multibandusa.com.
--------------------
From its inception until December 31, 1998, Multiband operated as a
telephone interconnect company only. Effective December 31, 1998, Multiband
acquired the assets of the Midwest region of Enstar Networking Corporation
(ENC), a data cabling and networking company. In late 1999, in the context of a
forward triangular merger, Multiband to expand its range of computer products
and related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (MBS). MBS provided voice, data
and video systems and services to business and government. The MBS business
segment was sold effective April 1, 2005. All referenced to financial
information and descriptions of business in this registration have been revised
to reflect only our continuing operations and all references to our now
discontinued Multiband Business Services have been eliminated. MCS began in
February 2000. MCS, the Company's continuing operating division, provides voice,
data and video services to multiple dwelling units (MDU), including apartment
buildings, condominiums and time share resorts. During 2004 the Company
purchased video subscribers in a number of separate transactions, the largest
one being Rainbow Satellite Group, LLC. During 2004 the Company also purchased
the stock of Minnesota Digital Universe, Inc., which made the Company the
largest master service operator in MDU's for DirecTV satellite television in the
United States.
At March 31, 2005, MCS had 36,816 subscriptions for its services (1,386 voice
subscriptions, 31,177 video subscriptions and 4,253 internet subscriptions).
Page 17
SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------------------------------------------
DOLLAR AMOUNTS AS A PERCENTAGE OF
REVENUES
--------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------------------------------------
March 31, 2005 March 31, 2004
(unaudited) (unaudited)
--------------------------------------------------------------------------------
REVENUES 100% 100%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COST OF PRODUCTS & SERVICES (exclusive
of depreciation and amortization
shown below) 50.7% 53.9%
--------------------------------------------------------------------------------
SELLING, GENERAL & ADMINISTRATIVE 57.9% 108.6%
--------------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION 31.0% 46.2%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LOSS FROM OPERATIONS -39.6% -108.7%
--------------------------------------------------------------------------------
INTEREST EXPENSE & OTHER, NET -18.2% -28.1%
--------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS -57.8% -136.8%
--------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS -11.9 -62.1%
--------------------------------------------------------------------------------
INCOME TAX 0 0
--------------------------------------------------------------------------------
NET LOSS -69.7% -198.9%
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues
Revenues in the first quarter of fiscal 2005 for MCS increased 135.4%
to $1,795,371 as compared to $762,655 in the first quarter of fiscal 2004. This
increase is primarily due to the acquisition of video subscribers throughout
2004.
The MDU segment had revenues of $1,911,505 in the first quarter of
2005 and no revenues in the first quarter of 2004. The Company purchased MDU
Inc. in the second quarter of 2004.
Cost of Products and Services (exclusive of depreciation and amortization)
The Company's cost of products and services (exclusive of depreciation
and amortization) increased 355.6% or $1,461,306 to $1,872,268 for the quarter
ended March 31, 2005 as compared to $410,962 for the similar quarter last year.
This increase is primarily due to the acquisition of video subscribers
throughout 2004.
Costs of products and sevices for the MCS segment for the quarter were
$905,726 compared to $410,962 in the same quarter last year, a 120.4% increase.
The increase is due to the increase in revenues.
Costs of products and services for the MDU segment were $966,542 and
$0 for the first quarter of 2005 and 2004, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 159.2% to
$2,146,912 in the quarter ended March 31, 2005, compared to $828,153 in the
prior year quarter. This increase is primarily a result of increased expenses
related to the acquisition of video subscribers throughout 2004. Selling,
general and administrative expenses were, as a percentage of revenues, 57.9% for
the quarter ended March 31, 2005 and 108.6% for the similar period a year ago.
Interest Expense
Interest expense was $685,701 for the quarter ended March 31, 2005,
versus $229,334 for the similar period a year ago, reflecting an increase in the
Company's debt and original issue discount expense. Amortization of original
issue discount was $500,098 and $188,979 for the three months ended March 31,
2005 and 2004.
Page 18
Net Loss
In the first quarter of fiscal 2005, the Company incurred a net loss of
$2,583,208 compared to a net loss of $1,516,864 for the first fiscal quarter of
2004.
Liquidity and Capital Resources
Available working capital, for the three months ended March 31, 2005
increased significantly compared to December 31, 2004 primarily due to the 10
million dollar sale of Class I preferred stock. Accounts receivables and cash
increased, while current liabilities decreased. The increases in receivables are
directly related to increases in revenues. Both short and long term debts were
reduced in the first quarter of 2005 as the Company continued to retire
financing debt and debt related to acquisitions.
The Company continues to experience significant growth, primarily due
to increased subscriber related recurring revenues acquired via various
transactions previously mentioned herein.
Page 19
Management of Multiband believes that, for the near future, cash
generated by sales of stock, and existing credit agreements, in aggregate, are
adequate to meet the anticipated liquidity and capital resource requirements of
its business for at least the next 12 months.
Capital Expenditures
The Company used $141,150 for capital expenditures during the three
months ended March 31, 2005, as compared to $39,659 in the similar period last
year. Capital expenditures consisted of equipment acquired for internal use. We
estimate capitalized expenditures for the remainder of 2005 will approximate
$300,000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvement. At March 31, 2005, the Company had net property and equipment of
$4,203,454, which represents approximately 13% of the Company's total assets.
The estimated fair value of these assets is dependent on the Company's future
performance. In assessing for potential impairment for these assets, the Company
considers future performance. If these forecasts are not met, the Company may
have to record an impairment charge not previously recognized, which may be
material. During the three months ended March 31, 2005 and 2004, the Company did
not record any impairment losses related to long-lived assets.
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations. During the three months ended
March 31, 2005 and 2004, the Company did not record any impairment losses
related to goodwill.
Amortization of Intangible Assets
The Company amortizes a domain name acquired during the year ended
December 31, 2001 over its estimated useful life of five years using the
straight-line method. The Company amortizes access contracts and customer cable
lists, on the average, over their useful estimated lives ranging from two to
five years. The Company is amortizing the right of entry contracts, on an
average, over their estimated useful lives ranging from 36 to 73 months. Debt
issuance costs are amortized over the life of the loan of approximately three
years using the straight-line method which approximates the interest method.
Inventories
We value our inventory at the lower of the actual cost or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand characterize our industry.
ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
Multiband is not subject to any material interest rate risk as any
current lending agreements are at a fixed rate of interest.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14(c) of the Securities Exchange Act of 1934. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
alerting them in a timely basis to material information relating to the Company
required to be disclosed in the Company's periodic SEC reports. There have been
no significant changes in the Company's internal controls or in other factors
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
Page 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
business, including an action brought by Private Investor's Equity Group (PIEG)
in the third quarter of 2004, which seeks damages in excess of $75,000 over an
alleged financing fee owed. The Company believes the claims are without merit
and is vigorously defending the action. However, as of March 31, 2005, with the
possible exception of the aforementioned PIEG matter, Multiband was not engaged
in any pending legal proceedings where, in the opinion of the Company, the
outcome is likely to have a material adverse effect upon the business, operating
results and financial condition of the Company.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14 and 15d-14 of the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14 and 15d-14 of the Exchange Act.
32 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350. Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
Page 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MULTIBAND CORPORATION
Registrant
Date: September 1, 2005 By:
/s/ James L. Mandel
Chief Executive Officer
Date: September 1, 2005 By:
/s/ Steven M. Bell
Chief Executive Officer
(Principal Financial and Accounting Officer)
Page 22