AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 4, 2005
REGISTRATION NO. 333-121775
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MULTIBAND CORPORATION
(Exact name of registration as specified in its charter)
MINNESOTA 4813 41-1255001
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
JAMES L. MANDEL
CHIEF EXECUTIVE OFFICER
MULTIBAND CORPORATION
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
STEVEN M. BELL, ESQ.
MULTIBAND CORPORATION
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective date registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
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Shares of Common Stock
par value $0.01 per share 4,099,787 $1.45 $5,944,691 $753.00
Shares of Common Stock,
par value $0.01 per share,
underlying Warrants 4,087,915 $1.45 $5,927,476 $751.00
Totals 8,187,702 $1.45 $11,872,167 $1,504.00 (2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. Based on the closing
price for the common stock on December 22, 2004 as reported on the Nasdaq Stock
Market.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
2
TABLE OF CONTENTS
Page
Prospectus Summary 4
Risk Factors 7
Forward-Looking Statements 9
Use of Proceeds 10
Dividend Policy 10
Capitalization 10
Selected Financial Data 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Business 19
Management 24
Certain Transactions 31
Principal and Selling Shareholders 33
Plan of Distribution 36
Description of Securities 37
Legal Matters 39
Experts 39
Where You Can Find More Information 39
Index to Financial Statements F1
MULTIBAND CORPORATION
COMMON STOCK
8,187,702 SHARES
PROSPECTUS
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DECEMBER 30, 2004
3
(Subject to Completion) THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND WE ARE NOT SOLICITING OFFERS
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS ISSUED DECEMBER 30, 2004
MULTIBAND CORPORATION
8,187,702 SHARES OF COMMON STOCK
The selling shareholders are offering up to an aggregate of 8,187,702
shares of our common stock. Of the shares of common stock being offered by the
selling shareholders, (i) 4,087,915 shares may be purchased upon exercise of
outstanding warrants and (ii) 4,099,787 shares are currently owned by
shareholders who acquired such shares in private placements to accredited
investors.
We will not receive any proceeds from the sale of common stock by the
selling shareholders under this prospectus. However, we will receive proceeds
upon any exercise of the warrants. See "Use of Proceeds" on page 7.
Our common stock is traded on the Nasdaq Small Cap Stock Market under the
symbol "MBND." On December 22, 2004, the closing price of our common stock as
reported by NASDAQ was $1.45 per share.
The selling shareholders may offer the shares through public or private
transactions, on or off the NASDAQ Small Cap Stock Market exchange, at
prevailing market prices or at privately negotiated prices. The selling
shareholders may make sales directly to purchasers or through agents, dealers or
underwriters.
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YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS
CONTAINED IN THIS PROSPECTUS. A HIGH DEGREE OF RISK
EXISTS WITH REGARDS TO THE OFFERING.
-----------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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THE DATE OF THIS PROSPECTUS IS DECEMBER 30, 2004.
4
PROSPECTUS SUMMARY
This summary highlights selected information and does not contain all the
information that is important to you. You should carefully read this prospectus
and the documents we have referred you to in "Where You Can Find More
Information" for more information about Multiband and our financial statements.
In this prospectus, references to "Multiband," "we," "us" "our" and "Company"
refer to Multiband Corporation and its subsidiaries.
OUR COMPANY
Multiband Corporation (formerly named Vicom, Inc.) is a Minnesota
corporation formed in September 1975. Multiband has two operating divisions: 1)
Multiband Business Services (MBS, legally known as Corporate Technologies, USA,
Inc dba Multiband), and Multiband Consumer Services (MCS), which encompasses the
subsidiary corporations, Multiband USA, Inc., URON, Inc., Minnesota Digital
Universe, Inc., and Rainbow Satellite Group, LLC.
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, concurrent with the name change to Multiband
Corporation, the Company's NASDAQ symbol changed to MBND.
Multiband's website is located at: www.multibandusa.com.
As of September 30, 2004, MBS was providing telephone equipment and
service to approximately 600 customers, with approximately 10,000 telephones in
service. In addition, MBS provided computer products and services to
approximately 1,800 customers. Telecommunications systems distributed by MBS are
intended to provide users with flexible, cost-effective alternatives as compared
to systems available from major telephone companies, including those formerly
comprising the Bell System and from other interconnect telephone companies.
MBS provides a full range of voice, data and video communications systems
and service, system integrations, training and related communication sales and
support activities for commercial, professional and institutional customers,
most of which are located in Minnesota and North Dakota. MBS purchases products
and equipment from NEC America, Inc. (NEC), Cisco Systems, Inc. (Cisco), Nortel
Networks Corp (Nortel), Tadiran Telecommunications, Inc. (Tadiran), and other
manufacturers of communications and electronic products and equipment. MBS uses
these products to design telecommunications and computer systems to fit its
customers' specific needs and demands.
MCS provides satellite television, local and long distance services and
internet services to residents of multi-dwelling units (MDUs), such as apartment
buildings and time share resorts. The Company obtains access agreements with the
owners of MDU properties permitting us the rights to provide the aforementioned
services.
At September 30, 2004, MCS had 32,336 subscribers using its services
(3,299 using voice services, 25,357 using video services and 3,680 using
internet services).
5
THE OFFERING
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Common stock offered 8,187,702 (1)
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Common stock to be outstanding after the offering 32,939,152 (2)
Use of proceeds We intend to use the
net proceeds from
the exercise of the
warrants for working
capital and other
general corporate
purposes. See"Use of
Proceeds".
--------------------------------------------------------------------------------
(1) The selling shareholders are offering up to an aggregate of 8,187,702 shares
of our common stock. Of the shares of common stock being offered by the selling
shareholders, (i) 4,087,915 shares may be purchased upon exercise of outstanding
warrants and (ii) 4,099,787 shares are currently owned by shareholders who
acquired such shares in private placements to accredited investors.
The offering shares include 282,781 common shares related to the Company's 8%
Class G Cumulative Convertible Preferred Stock, which converts into common stock
at $1.60 per share; and 84,838 one year warrants at an exercise price of $1.25
per share and 84,838 five year warrants at an exercise price of $1.50 per share.
The offering shares also include the following shares.
On November 12, 2004 Multiband Corporation entered into a Note Purchase
Agreement and other related agreements with a number of accredited institutional
investors. In summary, under the terms of the debt offering, the Company issued
secured convertible promissory notes in the aggregate principal amount of
$2,100,003. The convertible notes accrue interest at the rate of 6% per annum,
payable semi-annually at the option of the company in cash or shares of the
company's common stock, and are convertible into shares of common stock at the
rate of $1.00 per share.
On November 16, 2004, Multiband Corporation finalized a private placement of the
company's Series H convertible Preferred Stock. The Series H Preferred stock
offering was funded by a group of institutional and accredited investors.
Under the terms of the preferred stock offering, the Company issued shares of
its Series H Convertible Preferred Stock in the aggregate offering amount of
$1,050,002. The shares of Series H Convertible Preferred Stock accrue dividends
at the rate of 6% per annum, are payable semi-annually at the option of the
Company in cash or shares of the Company's common stock at the rate of $1.00 per
share. In addition, the investors received five-year warrants to purchase an
aggregate of approximately 3,150,005 shares of common stock at an exercise price
of $1.25 per share.
(2) The information is based on the number of shares of common stock outstanding
as of November 24, 2004 and assumes that all of the warrants to purchase
4,087,915 shares were exercised. The number of shares outstanding does not
include the following:
o 11,849,085 shares of common stock issuable upon the exercise of warrants
outstanding as of November 24, 2004 with a weighted average exercise price
of $1.68 per share;
o 3,339 shares of unvested restricted stock grants as of November 24, 2004
with a weighted average grant price of $ .88 per share;
o 5,500,000 shares of common stock reserved for additional issuances under
our stock plans as of November 24, 2004 (4.3 million shares reserved in
our employee stock option plan, 400,000 shares reserved in our employee
stock purchase plan and 800,000 shares reserved in our Director's option
plan.)
o 2,866,736 shares of common stock issuable upon the conversion of shares of
our 8% Class A Cumulative Convertible Preferred Stock ("Class A
Preferred"), 10% Class B Cumulative Convertible Preferred Stock ("Class B
Preferred"), 10% Class C Cumulative Convertible Preferred Stock ("Class C
Preferred"), 10% Class F Cumulative Convertible Preferred Stock ("Class F
Preferred"), 8% Class G Cumulative Convertible Preferred Stock ("Class G
Preferred") and 6% Class H Cumulative Convertible Preferred Stock ("Class
H Preferred") outstanding as of November 24, 2004.
o 811,688 shares upon conversion of a note owed as of November 24, 2004.
6
SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial data for
Multiband Corporation and should be read in conjunction with the Consolidated
financial Statements of Multiband Corporation included in this Prospectus
Supplement.
NINE MONTHS
STATEMENT OF OPERATIONS DATA: YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------- ----------------------------
2003 2002 2001 2004 2003
------------ ------------ ------------ ------------ ------------
Revenues $ 22,640,421 $ 24,540,969 $ 32,260,777 $ 22,734,594 $ 17,843,508
------------ ------------ ------------ ------------ ------------
Loss from operations $ (3,496,307) $ (2,833,073) $ (3,997,148) $ (3,861,799) $ (2,023,408)
------------ ------------ ------------ ------------ ------------
Loss $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,819,931) $ (2,733,406)
------------ ------------ ------------ ------------ ------------
Loss per share-basic and diluted $ (0.29) $ (0.39) $ (0.66) $ (0.21) $ (0.18)
------------ ------------ ------------ ------------ ------------
Weighted average shares
outstanding basic and diluted 16,112,231 11,735,095 8,762,814 $ 22,494,250 $ 15,168,069
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:: YEARS ENDED DECEMBER 31, AS OF SEPTEMBER 30, 2004
------------------------------------------ ----------------------------
ACTUAL AS ADJUSTED (1)
2003 2002 2001 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------ ------------
Cash $ 2,945,960 $ 540,375 $ 624,845 $ 465,885 $ 4,530,648
------------ ------------ ------------ ------------ ------------
Total assets $ 13,902,885 $ 10,347,316 $ 12,209,681 $ 30,014,118 $ 34,078,881
------------ ------------ ------------ ------------ ------------
Working capital (deficit) $ 1,118,792 $ (252,870) $ 426,549 $ (8,565,266) $ (4,500,503)
------------ ------------ ------------ ------------ ------------
Total liabilities $ 8,068,540 $ 7,705,031 $ 8,025,680 $ 17,854,443 $ 17,854,443
------------ ------------ ------------ ------------ ------------
Total stockholders' equity $ 5,807,711 $ 2,642,285 $ 4,184,001 $ 12,159,675 $ 16,224,438
------------ ------------ ------------ ------------ ------------
(1) The As Adjusted column gives effect to the exercise of all warrants to
purchase the shares of common stock covered by this prospectus and the
application of the net proceeds from the exercise of the warrants, after
deducting our estimated offering expenses.
7
RISK FACTORS
Our operations and our securities are subject to a number of risks,
including but not limited to those described below. If any of the following
risks actually occur, the business, financial condition or operating results of
Multiband and the trading price or value of our common stock could be materially
adversely affected.
General
Multiband, since 1998, has taken several significant steps to reinvent and
reposition itself to take advantage of opportunities presented by a shifting
economy and industry environment.
Recognizing that voice, data and video technologies in the late twentieth
century were beginning to systematically integrate as industry manufacturers
were evolving technological standards from "closed" proprietary networking
architectures to a more "open" flexible and integrated approach, Multiband,
between 1998 and 2001, purchased three competitors which, in the aggregate,
possessed expertise in data networking, voice and data cabling and video
distribution technologies.
In early 2000, Multiband created its MCS division, employing the
aforementioned expertise, to provide communications and entertainment services
(local dial tone, long distance, high-speed internet and expanded satellite
television services) to residents in Multi-Dwelling-Unit properties (MDU's) on
one billing platform. Although MCS revenues (recurring subscriber fees)
accounted for less than 6% of overall Multiband revenues in 2003, Multiband
expects MCS related revenues to increase significantly in 2004 as a percentage
of overall revenues. These revenues are expected to provide higher gross margins
than the Company's more traditional sales to commercial enterprises.
The specific risk factors, as detailed below, should be analyzed in the
context of the Company's anticipated MCS related growth.
NET LOSSES
The Company had net losses of $4,365,004 for the fiscal year ended
December 31, 2003, $4,438,059 for the fiscal year ended December 31, 2002, and
$5,325,552 for the fiscal year ended December 31, 2001. Multiband may never be
profitable.
The prolonged effects of generating losses without additional funding may
restrict our ability to pursue our business strategy. Unless our business plan
is successful, an investment in our common stock may result in a complete loss
of an investor's capital.
If we cannot achieve profitability from operating activities, we may not
be able to meet:
o our capital expenditure objectives;
o our debt service obligations; or
o our working capital needs.
DEPENDENCE ON ASSET-BASED FINANCING
Multiband currently depends on asset-based financing to purchase product,
and we cannot guarantee that such financing will be available in the future.
Furthermore, we need additional financing to support the anticipated growth of
our MCS subsidiary. We cannot guarantee that we will be able to obtain this
additional financing.
However, the Company recently introduced a program where it can control
capital expenditures by contracting Multiband services and equipment through a
landlord or third party investor owned equipment program. This program both
significantly reduces any Company expenditures in a Multi-dwelling-unit
installation and permits the Company to record revenues and profits from the
third party sale of said equipment. The program also provides the owner of the
equipment with an ongoing variable fee based on net revenues generated by the
MDU's Subscriber Services.
GOODWILL
In June 2001, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other
Intangible Assets" which changes the amortization rules on recorded goodwill
from a monthly amortization to a periodic "impairment" analysis for fiscal years
beginning after December 15, 2001. In 2003, the Company retained an independent
outside expert to evaluate the impact of this new accounting standard and the
expert concluded there was no impairment to goodwill. As of September 30, 2004,
the Company had recorded goodwill of approximately $2.2 million. In 2004, the
Company recorded goodwill impairment of $527,879 as a result of an independent
appraisal.
8
DEREGULATION
Several regulatory and judicial proceedings have recently concluded, are
underway or may soon be commenced that address issues affecting operations and
those of our competitors such as ownership of and access to inside wiring at
MDU's and requirements related to high definition television broadcast, which
may cause significant changes to our industry. We cannot predict the outcome of
these developments, nor can we assure you that these changes will not have a
material adverse effect on us. Historically, we have been a reseller of products
and services, not a manufacturer or carrier requiring regulation of its
activities. Pursuant to Minnesota statutes, our Multiband activity is
specifically exempt from the need to tariff our services in multiple dwelling
units (MDU's). However, the Telecommunications Act of 1996 provides for
significant deregulation of the telecommunications industry, including the local
telecommunications and long-distance industries. This federal statute and the
related regulations remain subject to judicial review and additional
rule-makings of the Federal Communications Commission, making it difficult to
predict what effect the legislation will have on us, our operations, and our
competitors.
DEPENDENCE ON STRATEGIC ALLIANCES
Several suppliers, or potential suppliers of Multiband, such as McLeod,
WorldCom, WS Net, XO Communications and others have filed for bankruptcy in
recent years. While the financial distress of its suppliers or potential
suppliers could have a material adverse effect on Multiband's business,
Multiband believes that enough alternate suppliers exist to allow the Company to
execute its business plans.
CHANGES IN TECHNOLOGY
A portion of our projected future revenue is dependent on public
acceptance of broadband, and expanded satellite television services. Acceptance
of these services is partially dependent on the infrastructure of the internet
and satellite television which is beyond Multiband's control. In addition, newer
technologies, such as video-on-demand, are being developed which could have a
material adverse effect on the Company's competitiveness in the marketplace if
Multiband is unable to adopt or deploy such technologies.
ATTRACTION AND RETENTION OF EMPLOYEES
Multiband's success depends on the continued employment of certain key
personnel, including executive officers. If Multiband were unable to continue to
attract and retain a sufficient number of qualified key personnel, its business,
operating results and financial condition could be materially and adversely
affected. In addition, Multiband's success depends on its ability to attract,
develop, motivate and retain highly skilled and educated professionals with a
wide variety of management, marketing, selling and technical capabilities.
INTELLECTUAL PROPERTY RIGHTS
Multiband relies on a combination of trade secret, copyright, and
trademark laws, license agreements, and contractual arrangements with certain
key employees to protect its proprietary rights and the proprietary rights of
third parties from which Multiband licenses intellectual property. If it was
determined that Multiband infringed the intellectual property rights of others,
it could be required to pay substantial damages or stop selling products and
services that contain the infringing intellectual property, which could have a
material adverse effect on Multiband's business, financial condition and results
of operations. Also, there can be no assurance that Multiband would be able to
develop non-infringing technology or that it could obtain a license on
commercially reasonable terms, or at all. Multiband's success depends in part on
its ability to protect the proprietary and confidential aspects of its
technology and the products and services it sells. There can be no assurance
that the legal protections afforded to Multiband or the steps taken by Multiband
will be adequate to prevent misappropriation of Multiband's intellectual
property.
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
Variations in Multiband's revenues and operating results occur from
quarter to quarter as a result of a number of factors, including customer
engagements commenced and completed during a quarter, the number of business
days in a quarter, employee hiring and utilization rates, the ability of
customers to terminate engagements without penalty, the size and scope of
assignments and general economic conditions. Because a significant portion of
Multiband's expenses are relatively fixed, a variation in the number of customer
projects or the timing of the initiation or completion of projects could cause
significant fluctuations in operating results from quarter to quarter. Further,
Multiband has historically experienced a seasonal fluctuation in its operating
results, with a larger proportion of its revenues and operating income occurring
during the third quarter of the fiscal year.
9
CERTAIN ANTI-TAKEOVER EFFECTS
Multiband is subject to Minnesota statutes regulating business
combinations and restricting voting rights of certain persons acquiring shares
of Multiband. These anti-takeover statutes may render more difficult or tend to
discourage a merger, tender offer or proxy contest, the assumption of control by
a holder of a large block of Multiband's securities, or the removal of incumbent
management.
VOLATILITY OF MULTIBAND'S COMMON STOCK
The trading price of our common stock has been and is likely to be
volatile. The stock market has experienced extreme volatility, and this
volatility has often been unrelated to the operating performance of particular
companies. We cannot be sure that an active public market for our common stock
will continue after this offering. Investors may not be able to sell the common
stock at or above the price they paid for their common stock, or at all. Prices
for the common stock will be determined in the marketplace and may be influenced
by many factors, including variations in our financial results, changes in
earnings estimates by industry research analysts, investors' perceptions of us
and general economic, industry and market conditions.
FUTURE SALES OF OUR COMMON STOCK MAY LOWER OUR STOCK PRICE
If our existing shareholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly. The
perception in the public market that our existing shareholders might sell shares
of common stock could depress our market price. The exercise of outstanding
options or warrants could also lead to future sales of our common stock which
could depress our market price.
COMPETITION
We face competition from others who are competing for a share of the MDU
market, including other satellite companies and cable companies. Some of these
companies have significantly greater assets and resources than we do.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of
federal securities law. Terminology such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue," "predict," or other similar
words, identify forward-looking statements. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other forward-looking information. Forward-looking statements
appear in a number of places in this prospectus and include statements regarding
our intent, belief or current expectation about, among other things, trends
affecting the industries in which we operate, as well as the industries we
service, and our business and growth strategies. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those predicted in the forward-looking statements as a result of
various factors, including those set forth in "Risk Factors."
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of common
stock by the selling shareholders under this prospectus. However, we will
receive proceeds of $4,064,763 from the exercise of the warrants estimated at
$4,044,763 after payment of the offering expenses. We have agreed to pay all of
the expenses related to this offer, estimated to be approximately $20,000.
We expect to use the net proceeds from the exercise of the warrants
primarily for working capital and other general corporate purposes, including
expenditures for sales and marketing and fixed assets and inventory. No specific
amount has been allocated to any particular purpose. Pending these uses, we
intend to invest the net proceeds of this offering in investment grade,
interest-bearing securities.
10
DIVIDEND POLICY
We have never paid cash dividends on our common stock, nor do we have
plans to do so in the foreseeable future. The declaration and payment of any
cash dividends on our common stock in the future will be determined by our Board
of Directors, in its discretion, and will depend on a number of factors,
including our earnings, capital requirements and overall financial condition.
The holders of our Series A Cumulative Convertible Preferred Stock are
entitled to receive a cumulative dividend of 8% per year, payable quarterly, and
the holders of our Series B Convertible and Series C Convertible Preferred Stock
are entitled to receive cumulative dividends of 10% per year, payable monthly,
the holders of our Series E Convertible Preferred Stock are entitled to receive
a cumulative dividend of 15% per year, payable in kind quarterly. The holders of
our Series F Convertible Preferred Stock are entitled to receive a cumulative
dividend of 10% per year, payable in kind quarterly, and the holders of our
Series G Convertible Preferred Stock are entitled to receive a cumulative
dividend of 6% per year, payable in kind quarterly.
CAPITALIZATION
The following table sets forth our consolidated capitalization as of September
30, 2004 and our capitalization as adjusted to reflect the issuance and sale of
4,087,915 shares of common stock upon exercise of the warrants and the
historical financial statements and notes thereto included elsewhere in this
prospectus.
AS OF SEPTEMBER 30, 2004
ACTUAL AS ADJUSTED
(UNAUDITED) (UNAUDITED)
----------- -----------
Preferred stock:
8% Class A cumulative convertible - no par value 27,931 shares issued and outstanding 419,752 419,752
----------- -----------
10% Class B cumulative convertible - no par value 8,700 shares issued and outstanding 62,000 62,000
----------- -----------
10% Class C cumulative convertible - no par value 125,400 shares issued and outstanding 1,611,105 1,611,105
----------- -----------
10% Class F cumulative convertible - no par value 200,000 shares issued and outstanding 2,000,000 2,000,000
----------- -----------
10% Class G cumulative convertible - no par value 7,500 shares issued and outstanding 70,672 452,540
----------- -----------
6% Class H cumulative convertible - no par value 11.5 shares issued and outstanding 0 *1,150,002
----------- -----------
Common stock - no par value 25,621,084 and 29,708,999 issued, 25,617,745 and 29,705,660
outstanding 16,678,538 20,849,349
----------- -----------
Stock Subscription receivable (368,243) (368,243)
----------- -----------
Options and Warrants 31,379,338 31,379,338
----------- -----------
Unamortized Compensation (1,724) (1,724)
----------- -----------
Accumulated deficit (39,691,763) (39,691,763)
----------- -----------
* The Class H shares were issued in November 2004.
11
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
consolidated financial statements including the accompanying notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data as of December 31, 2003 and 2002 and the nine months ended
September 30, 2004 and for each of the three years in the period ended December
31, 2003 and the nine months ended September 30, 2004 and 2003 have been derived
from our consolidated financial statements and accompanying notes contained in
this prospectus. The Statement of Operations Data for the years ended December
31, 2000 and 1999 and the Balance Sheet Data at December 31, 2001, 2000 and 1999
have been derived from our audited financial statements which are not contained
in this prospectus.
STATEMENT OF
OPERATIONS DATA YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------- ------------------------------
2003 2002 2001 2000 1999 2004 2003
------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues $ 22,640,421 $ 24,540,969 $ 32,260,777 $ 39,781,846 $ 20,388,870 $ 22,734,594 $ 17,843,508
------------ ------------ ------------ ------------ ------------ ------------ ------------
Cost of products
and services $ 15,952,019 $ 18,036,750 $ 25,295,186 $ 31,698,569 $ 16,247,898 $ 15,580,482 $ 12,718,951
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross Profit $ 6,688,402 $ 6,504,219 $ 6,965,591 $ 8,083,277 $ 4,140,972 $ 7,154,112 $ 5,124,557
------------ ------------ ------------ ------------ ------------ ------------ ------------
%of revenues 29.5% 26.5% 21.6% 20.3% 20.3% 31.5% 28.7%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Selling, general
& administrative
expenses $ 10,184,709 $ 9,337,292 $ 10,962,739 $ 11,852,041 $ 5,823,945 $ 7,930,244 $ 6,097,989
------------ ------------ ------------ ------------ ------------ ------------ ------------
% of revenues 45.0% 38.0% 34.0% 29.8% 28.6% 34.8% 34.2%
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss from
operations $ (3,496,307) $ (2,833,073) $ (3,997,148) $ (3,768,764) $ (1,682,973) $ (3,861,799) $ (2,023,408)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Other
expense, net $ (902,063) $ (1,604,986) $ (1,328,404) $ (458,067) $ (139,461) $ (958,132) $ (705,145)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before
income taxes $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,226,831) $ (1,822,434) $ (4,819,931) $ (2,733,406)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income tax
provision $ 0 $ 0 $ 0 $ 9,000 $ 241,200 $ 0 $ 0
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net Loss $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,235,831) $ (2,063,634) $ (4,819,931) $ (2,733,406)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss per
share basic
and diluted $ (0.29) $ (0.39) $ (0.66) $ (0.72) $ (0.55) $ (0.21) $ (0.18)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Weighted average
shares
outstanding 16,112,231 11,735,095 8,762,814 7,009,751 3,821,978 22,494,250 15,168,069
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE SHEET
DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
SEPTEMBER 30,
2003 2002 2001 2000 1999 2004
------------ ------------ ------------ ------------ ------------ ------------
Working
capital
(deficiency) $ 1,118,792 $ (252,870) $ 426,549 $ 2,870,114 $ (2,882,907) $ (8,565,266)
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 13,902,885 $ 10,347,316 $ 12,209,681 $ 15,614,573 $ 12,598,745 $ 30,014,118
------------ ------------ ------------ ------------ ------------ ------------
Long-term debt $ 2,262,891 $ 3,273,350 $ 3,316,870 $ 3,362,083 $ 926,821 $ 2,519,530
------------ ------------ ------------ ------------ ------------ ------------
Stockholders'
equity $ 5,807,711 $ 2,642,285 $ 4,184,001 $ 5,876,352 $ 1,026,344 $ 12,159,675
------------ ------------ ------------ ------------ ------------ ------------
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERTIONS
The following discussion of the financial condition and results of Operations of
Multiband Corporation should be read in conjunction with the Condensed
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
Revenues
Revenues increased 44.3% to $9,068,758 in the quarter ended September 30,
2004, as compared to $6,283,365 for the quarter ended September 30, 2003.
Revenues for MBS decreased 11.2% in the third quarter of fiscal 2004 to
$5,203,269 as compared to $5,864,468 in the third quarter of fiscal 2003
primarily as a result of reduced spending by a few larger MBS customers. The
Company is diversifying its customer base to add medium and small businesses and
as a result the Company hopes revenues will stabilize in future quarters.
Revenues for MCS increased 822.8% to $3,865,489 as compared to $418,897 in
the third quarter of fiscal 2003. This increase is due to expansion of MCS as a
result of the acquisitions of MDU, Rainbow and 21st Century.
Revenues for the nine month period ended September 30, 2004 increased
27.4% to $22,734,594 from $17,843,508 for the same period in 2003, due to the
aforementioned increase in MCS revenues obtained as a result of the acquisitions
noted above.
Gross Margin
The Company's gross margin increased 82.8% or $1,483,195 to $3,272,731 for
the quarter ended September 30, 2004 as compared to $1,789,536 for the similar
quarter last year. For the quarter ended September30, 2004, as a percent of
total revenues, gross margin was 36.0% as compared to 28.5% for the similar
period last year.
Gross margin for MBS decreased by 18.1% to $1,318,270 for the quarter
ended September 30, 2004, as compared to $1,608,975 in the third quarter of
fiscal 2003 due to lower MBS sales and lower profits on those sales.
Gross margin for MCS for the quarter ended September 30, 2004 increased
977.2% to $1,945,065 as compared to $180,561 in the second quarter of fiscal
2003 reflecting on the increase of revenue being billed.
For the nine month period ended September 30, 2004, as a percent of total
revenues, gross margin was 31.5% as compared to 28.7% for the same period in
2003. For the remainder of fiscal year 2004, gross margin percentages are
expected to remain constant as the Company continues to enhance recurring
subscriber revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses including depreciation and
amortization increased 76.2% to $4,245,983 in the quarter ended September 30,
2004, compared to $2,409,227 in the prior year quarter. This increase is
primarily a result of increased operating and amortization expenses related to
the purchase and addition of new MDU property assets in the MCS division.
Selling, general and administrative expenses were, as a percentage of revenues,
46.8% for the quarter ended September 30, 2004 and 38.4.1% for the similar
period a year ago.
For the nine month period ended September 30, 2004 these expenses
increased 46.1% to $10,488,032 as compared to $7,147,965 for the nine months
ended September 30, 2003. As a percentage of revenues, selling, general and
administrative expenses are 46.1% for the period ended September 30, 2004 as
compared to 40.0% for the same period 2003.
Interest Expense
Interest expense was $347,647 for the quarter ended September 30, 2004,
versus $202,958 for the similar period a year ago, reflecting an increase in the
Company's long term debt as a result of financing the acquisitions noted above.
Amortization of original issue discount was $171,773 and $85,364 for the three
months ended September 30, 2004 and 2003, respectively.
13
Interest expense was $949,129 for the nine months ended September 30, 2004
and $648,368 for the same period last year. For the nine months ended September
30, 2004 amortization of original issue discount was $483,787 and $285,345 in
the same period last year, respectively.
Net Loss
In the third quarter of fiscal 2004, the Company incurred a net loss of
$1,851,593 compared to a net loss of $832,622 for the third fiscal quarter of
2003. This includes a goodwill impairment charge of $527,879 and amortization
primarily related to identifiable intangible assets obtained in acquisitions of
$754,971.
For the nine months ended September 30, 2004, the Company recorded a net
loss of $4,819,931 as compared to $2,733,406 for the nine months ended September
30, 2003.
YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
Results of Operations
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2003 2002
---- ----
Revenues
Multiband 0% 0%
MBS 93.63% 97.65%
MCS 6.37% 2.35%
----- -----
Total Revenues 100.0% 100.0%
====== ======
Cost of Sales
Multiband 0% 0%
MBS 66.55% 71.89%
MCS 3.91% 1.61%
----- -----
Total Cost of Sales 70.46% 73.50%
====== ======
Gross Margin 29.54% 26.5%
Selling, General and 44.98% 37.39%
Administrative expenses
Operating Loss (15.44%) (11.34%)
Net Loss (19.28%) (17.78%)
REVENUES
Total revenues decreased 7.7% to $22,640,421 in 2003 from $24,540,969 in
2002.
Revenues from the MBS segment which traditionally sells telephone and
computer technologies products and services decreased 11.5% to $21,199,303 in
2003 from $23,963,748 in 2002. This decrease in MBS segment revenues resulted
primarily from weaker economic conditions in 2003 and from MBS's desire to
increase gross margins versus maintaining top line revenues. MBS is increasing
margins by focusing more on sales of services versus sales of product.
Multiband segment had no revenues.
Revenues from MCS increased 149.7% to $1,441,118 in 2003 from $577,221 in
2002. This increase is due to the expansion of MCS services to nineteen
apartment properties and eighteen timeshare properties.
GROSS MARGIN
The Company's gross margin was $6,688,402 for 2003, as compared to
$6,504,219 for 2002. The increase of 2.8% in 2003 was primarily due to an
increase in consumer recurring revenues comprising a greater percentage of
overall revenues. For 2003, gross margin, as a percentage of total revenues, was
29.5% versus 26.5% for 2002. The Company expects gross margins to maintain or
even slightly increase in future periods as recurring revenues become a greater
percentage of the Company's overall revenue mix.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 9.1% to $10,184,709
in 2003, compared to $9,337,292 in 2002. This increase in expenses is primarily
related to increased payroll and facility expense and costs incurred for
re-branding Multiband operating divisions as Multiband. Increased payroll
primarily resulted from acquisition related payroll expense and increase in
officer compensation in 2003. Selling, general and administrative expenses were,
as a percentage of revenues, 45.0% for 2003 and 38.0% for 2002. The Company
expects these expenses to remain stable or even slightly decrease as a
percentage of revenues in 2004.
INTEREST EXPENSE
Interest expense was $897,704 for 2003, versus $1,604,512 for 2002
reflecting a substantial decrease in Original Issue Discount expense associated
with long term debt and a significant decrease in cash interest expense
associated with notes payable.
NET LOSS
In 2003, the Company incurred a net loss of $4,365,004 compared to a net
loss of $4,438,059 for 2002.
YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Results of Operations
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2002 2001
---- ----
Revenues
Multiband and VMTS 0% 0%
MBS 97.65% 99.2%
MCS 2.35% .78%
------ -----
Total Revenues 100.0% 100.0%
===== =====
Cost of Sales
Multiband and VMTS 0% .02%
MBS 71.89% 77.39%
MCS 1.61% .69%
----- -----
Total Cost of Sales 73.50% 78.10%
===== =====
Gross Margin 26.5% 21.88%
Selling, General and 37.39% 34.45%
Administrative expenses
Operating Loss (11.34%) (12.56%)
Net Income Loss (17.78%) (16.73%)
REVENUES
Total revenues decreased 23.9% to $24,540,969 in 2002 from $32,260,777 in
2001.
Revenues from the MBS segment which traditionally sells computer
technologies products and services decreased 25.1% to $23,963,748 in 2002 from
$31,994,781 in 2001. This decrease in MBS segment revenues resulted primarily
from weaker economic conditions in 2002 and from MBS's desire to increase gross
margins versus maintaining top line revenues.
Multiband segment had no revenues.
Revenues from Multiband increased 131% to $577,221 in 2002 from $249,590
in 2001. This increase is due to the expansion of Multiband services to ten
properties.
15
GROSS MARGIN
The Company's gross margin was $6,504,219 for 2002, as compared to
$6,965,591 for 2001. The decrease of 6.6% in 2002 was due to reduced revenues.
For 2002, gross margin, as a percentage of total revenues, was 26.50% versus
21.5% for 2001. This increase in gross margin revenues is primarily due to an
increase in sale of services constituting a greater percentage of overall
revenues than in the prior year. As the Company continues to strive for bundled
sales of services, and bundled sales of equipment and services, the Company
anticipates that it will maintain its gross margin percentages in fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 14.83% to
$9,337,292 in 2002, compared to $10,962,739 in 2001. This decrease in expenses
is primarily related to reductions in payroll, benefits and vehicle expenses.
Selling, general and administrative expenses were, as a percentage of revenues,
38.0% for 2002 and 33.9% for 2001.
INTEREST EXPENSE
Interest expense was $1,604,512 for 2002, versus $1,446,868 for 2001
reflecting an increase in debt due to capital raising efforts, valuation of
warrants issued with Preferred Stock and convertible notes, and additional
borrowings.
NET LOSS
In 2002, the Company incurred a net loss of $4,438,059 compared to a net
loss of $5,325,552 for 2001. The decrease in net loss is primarily due to a
significant reduction in payroll and benefit related expenses from the prior
year.
16
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two-year period ending
December 31, 2003. This data includes, in the opinion of management, all normal
recurring adjustments necessary for the fair presentation of the information for
the periods presented when read in conjunction with the Company's consolidated
financial statements and related notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter. The Company has historically experienced a seasonal fluctuation
in its operating results, with a larger proportion of its revenues in the third
quarter of the fiscal year.
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003 2002 2002 2002 2002
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Multiband 0 0 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
MBS 4,367,773 5,864,468 5,330,420 5,636,642 5,758,953 6,227,683 5,815,531 6,161,581
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
MCS 429,140 418,897 357,961 235,120 192,771 154,950 128,893 100,607
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
Revenues 4,796,913 6,283,365 5,688,381 5,871,762 5,951,724 6,382,633 5,944,424 6,262,188
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of Sales 3,233,068 4,493,829 3,914,420 4,310,702 4,212,240 4,680,582 4,354,714 4,789,214
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Margin 1,563,845 1,789,536 1,773,961 1,561,060 1,739,484 1,702,051 1,589,710 1,472,974
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SG&A Expense 3,036,745 2,409,227 2,502,741 2,235,996 2,484,108 2,376,225 2,240,223 2,236,736
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Loss (1,472,900) (619,691) (728,780) (674,936) (744,624) (674,174) (650,513) (763,762)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Expense (249,336) (202,958) (219,723) (225,687) (462,420) (349,388) (426,869) (365,835)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other Income
(Expenses) 52,418 (6,513) 15,232 (65,496) 47,740 (93,171) 25,281 19,676
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Minority
Interest 38,219 (3,460) (1,393) 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Loss
Before
Taxes (1,631,599) (832,622) (934,664) (966,119) (1,159,304) (1,116,733) (1,052,101) (1,109,921)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Tax
(Benefit)
Provision 0 0 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Loss (1,631,599) (832,622) (934,664) (966,119) (1,159,304) (1,116,733) (1,052,101) (1,109,921)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss Per Common
Share Basic and
Diluted (.10) (.05) (.06) (.08) (.11) (.09) (.09) (.10)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
17
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 2004
Available working capital, at September 30, 2004 decreased significantly
over the similar period last year primarily due to short term notes payable
issued during the third quarter and in the course of the second quarter
acquisitions.
The Company continues to face a very competitive environment in its MBS
division which in the second quarter of 2004 produced both declining revenues
and margins versus the same period a year ago. The Company's MCS division
continues to experience significant growth, primarily due to increased
subscriber related recurring revenues acquired via various transactions
previously mentioned herein.
The Company, between September 30, 2004 and January 1, 2005, is obligated
to pay approximately $5.8 million to retire the notes payable related to its MDU
Inc. and Rainbow acquisitions. The Company as of September 30, 2004 did not have
available cash on hand sufficient to retire said notes payable. Nonetheless,
management of Multiband believes that, for the near future, cash generated by
sales of stock, and existing credit facilities, in aggregate, are adequate to
meet the anticipated liquidity and capital resource requirements of its
business. The Company also believes, although it cannot guarantee, that it will
continue to be able to raise money for the purposes of financing acquisitions.
During the nine months ended September 30, 2004, the Company raised
approximately $3.2 million via sales of its common stock to accredited investors
primarily for such purposes. In addition, for the quarter ended September 30,
2004, the Company achieved positive earnings before interest, taxes,
depreciation, amortization and a non cash goodwill impairment charge ("EBITDA")
of $146,314.
The Company, as is common in the cable and telecommunications industries,
uses EBITDA as a measure of performance to demonstrate earnings exclusive of
interest and non cash events. EBITDA is not, and should not be considered, an
alternative to net income, income from operations, or any other measure for
determining operating performance or liquidity, as determined under accounting
principles generally accepted in the United States. The most directly comparable
GAAP reference in the Company's case is the removal of interest, depreciation,
amortization and other non cash charges. The following table reconciles Company
EBITDA to our consolidated net loss as computed under GAAP.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
EBITDA $ 146,314 $ (239,706) $ (504,564) $(1,035,062)
----------- ----------- ----------- -----------
Interest Expense, other (350,462) (212,931) (958,132) (648,368)
----------- ----------- ----------- -----------
Depreciation and Amortization (1,119,566) (379,985) (2,557,788) (1,049,976)
----------- ----------- ----------- -----------
Goodwill Impairment (527,879) 0 (527,879) 0
----------- ----------- ----------- -----------
Other Non-Cash Expense associated
with Common stock issuance 0 0 (271,568) 0
Net Loss $(1,851,593) $ (832,622) $(4,819,931) $(2,733,406)
=========== =========== =========== ===========
CAPITAL EXPENDITURES
The Company used $483,810 for capital expenditures during the nine months
ended September 30, 2004, as compared to $356,291 in the similar period last
year. Capital expenditures consisted of equipment acquired for internal use. The
Company anticipates future capital purchases will remain consistent with current
year expenditures.
YEAR ENDED DECEMBER 31, 2003
Available working capital for 2003 increased $1,3771,662 primarily to a
stronger cash position due to investing activities. Multiband successfully
completed an offering of institutional financing in the second half of 2003
raising net proceeds of $2,223,150. Multiband had a decrease of $289,890 in
accounts receivable as a result of a reduction in sales. Current liabilities
increased in 2003 by $1,373,968 as a result of higher current portion of long
term debt and accrued liabilities. Inventories increased by $509,762 primarily
due to a planned expansion to provide wireless intranet service.
Total long term debt and capital lease obligation decreased by $1,010,459
during the year ended December 31, 2003. Multiband paid out $75,301 related to
capital lease obligations and $200,768 related to long term debt during the year
ended December 31, 2003 versus $1,069,433 paid out in 2002.
18
The Company used $526,936 for capital expenditures during 2003, as
compared to $1,275,434 in 2002. The decrease was primarily attributed to a
reduction in self-financed MCS construction. In 2004 capital expenditures are
expected to be limited to the Company's internal information technology
infrastructure and are expected to be less than 2003 expenditures.
In 2003, the Company reached an agreement to convert the remaining
$962,000 of a Note Payable to equity. Terms of the conversion state the note
will be converted to equity over a 14 month period at a price generally
equivalent to a 10% discount to market price.
In November of 2003, the Company borrowed $1,500,000 and issued a
three-year warrant to the lender to purchase 535,000 common shares at $2.21 per
share through November 2006. The debt is also convertible into common stock of
the Company at a conversion rate of $1.40 per share through November 2006.
On June 30, 2003, the Company borrowed $124,000 as an unsecured note from
a stockholder of the Company, with monthly payments of $5,600 at an interest
rate of 7.85%.
Net cash used by operations in 2003 was $2,580,248 as compared to cash
used by operations in 2002 of $869,721. The cash used by operations in 2003 is
due primarily to net operating losses and a reduction in the wholesale line of
credit. During the years ended December 31, 2003, and December 31, 2002, the
Company incurred significant net losses. Although the majority of these losses
were due to non-cash expenses, The Company still continued to incur cash losses
as well due to general corporate expense. The on-going addition of MCS
properties in the Company's portfolio provided additional cash flows in 2003 and
those cash flows are projected to improve in 2004 with additional expansions.
Management of Multiband believes that, for the near future, cash generated from
new investments combined with existing credit facilities are adequate to meet
the anticipated liquidity in capital resource requirements of its business,
contingent upon Company operating results for the next twelve months.
YEAR ENDED DECEMBER 31, 2002
Available working capital, for 2002, decreased $679,419 due to Multiband's
net operating loss and net cash used in operating activities of $869,721.
Proceeds from issuance of long term debt, stock and warrants totaling $2,121,597
helped offset Multiband's net operating loss. Multiband had a decrease of
$38,344 in accounts payable and other current liabilities for 2002 versus last
year's period, primarily due to significant reductions in accounts receivables
which were used to reduce payables.
Inventories year to date decreased net of reserves $182,783 over last
year's prior period inventories due to a decrease in revenues. The
aforementioned decrease in revenues also led to a decrease in accounts
receivable net of reserves of $576,509.
Total long term debt and capital lease obligation decreased by $102,631
during the year ended December 31, 2002. The Company paid out $937,828 related
to capital lease obligations and $131,605 related to long term debt during the
year ended December 31, 2002 versus $777,578 paid out in 2001.
In 2001, the Company entered into a long-term debt agreement, expiring in
2003, with an investment fund. The fund, in exchange for its $1.5 million
investment, also received 375,000 warrants and the right to convert its
investment into Multiband common stock at a predetermined price. The effect of
recording the beneficial conversion feature and warrants associated with the
convertible loan resulted in a $1,500,000 discount attributable to the warrants
in accordance with the Black-Scholes pricing model. The Company is expensing the
aforementioned warrant discount in eight quarterly installments over the two
year term of the loan. $460,000 of the debt was converted to stock in 2002
pursuant to a formula tied to the trading price of the Company's Common Stock.
In 2002, the Company borrowed $600,000 from a Director. This investment
was later converted into Class E Preferred Stock. Also in 2002, the Company
restructured its debenture with Convergent Capital, resetting the date of
principal repayment to begin in August 2005.
The Company used $1,275,434 for capital expenditures during 2002, as
compared to $1,884,945 in 2001. The decrease was primarily attributed to a
reduction in self-financed MCS construction.
In 2002, the Company extinguished $937,828 worth of capital lease
obligations, reduced its principal indebtedness $460,000 to a note holder, and
converted another $600,000 worth of debt to Preferred Stock. All these events,
combined, with the aforementioned refinancing and delayed principal repayment to
its largest debt holder, should materially improve projected cash flows
throughout 2003 provided Company operating losses continue to diminish.
19
Net cash used by operations was approximately $869,721 in 2002 versus net
cash used by operations of $502,110 in 2001. The cash used by operations in 2002
is due primarily to net operating losses, and reductions in accounts payable and
wholesale line of credit balances in that year. During the years ended December
31, 2002 and December 31, 2001, the Company incurred significant net losses.
Although the majority of these losses were due to non-cash expenses, the Company
still continued to incur cash losses as well due to general corporate expense
and continuing expenses related to the building out of its MCS network. The
Company in 2002 significantly cut its selling, general and administrative
expenses which led to a material decrease in cash losses. The on-going addition
of MCS properties in the Company's portfolio also generated additional cash
flows in 2002 and these MCS cash flows are projected to improve meaningfully in
2003. Management of Multiband believes that, for the near future, cash generated
from new investments combined with existing credit facilities are adequate to
meet the anticipated liquidity in capital resource requirements of its business,
contingent upon Company operating results for the next twelve months.
20
DESCRIPTION OF BUSINESS
Multiband Corporation (formerly named Vicom, Inc.) is a Minnesota
corporation formed in September 1975. Multiband has two operating divisions: 1)
Multiband Business Services (MBS, legally known as Corporate Technologies, USA,
Inc dba Multiband), and Multiband Consumer Services (MCS), which encompasses the
subsidiary corporations, Multiband USA, Inc., URON, Inc., Minnesota Digital
Universe, Inc., and Rainbow Satellite Group, LLC.
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, concurrent with the name change to Multiband
Corporation, the Company's NASDAQ symbol changed to MBND.
Multiband's website is located at: www.multibandusa.com.
As of September 30, 2004, MBS was providing telephone equipment and
service to approximately 600 customers, with approximately 10,000 telephones in
service. In addition, MBS provided computer products and services to
approximately 1,800 customers. Telecommunications systems distributed by MBS are
intended to provide users with flexible, cost-effective alternatives as compared
to systems available from major telephone companies, including those formerly
comprising the Bell System and from other interconnect telephone companies.
MBS provides a full range of voice, data and video communications systems
and service, system integrations, training and related communication sales and
support activities for commercial, professional and institutional customers,
most of which are located in Minnesota and North Dakota. MBS purchases products
and equipment from NEC America, Inc. (NEC), Cisco Systems, Inc. (Cisco), Nortel
Networks Corp (Nortel), Tadiran Telecommunications, Inc. (Tadiran), and other
manufacturers of communications and electronic products and equipment. MBS uses
these products to design telecommunications and computer systems to fit its
customers' specific needs and demands.
MCS provides satellite television, local and long distance services and
internet services to residents of multi-dwelling units (MDUs), such as apartment
buildings and time share resorts. The Company obtains access agreements with the
owners of MDU properties permitting us the rights to provide the aforementioned
services.
At September 30, 2004, MCS had 32,336 subscribers using its services
(3,299 using voice services, 25,357 using video services and 3,680 using
internet services).
MULTIBAND BUSINESS INDUSTRY OVERVIEW
MBS recently expanded its efforts to establish itself within the rapidly
evolving telecommunications and computer industries.
In the current climate of intense global competition and accelerating
technological change, businesses increasingly depend upon technology-based
solutions to enhance their competitive position, and to improve their
productivity and the quality of their products and services. Today's business
environment mandates the availability of efficient voice and video communication
channels and information in formats suited to a wide variety of users.
Businesses are looking to a variety of new technologies to enhance the
performance of their communication systems and to allow Information Technology
(IT) systems to collect, analyze and communicate information within the
enterprise and among customers and suppliers. An organization's ability to
integrate and deploy new communication and IT technologies in a unified and
cost-effective manner has become critical to competing successfully in today's
rapidly changing business environment.
The markets and technologies for communication equipment and IT
applications and systems continue to converge as communication equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating their
communication and IT systems. As previously separate communication and IT
technologies converge and their interoperability increases, more organizations
will seek a unified technology solution. MBS believes that these organizations
will attempt to reduce costs and management complexity by establishing
relationships with a small number of providers that offer a broad range of both
communication and IT products and services throughout the full life-cycle of a
project. MBS believes it has positioned itself to be one of those providers
through expertise gained in its historical operations and via acquisitions. MBS
has personnel that understand the voice and data sides of the equation. MBS is
able to provide a consultative selling approach whereby it is able to match the
appropriate technology solution to its customers needs; whether that solution is
an IP telephony application, a traditional PBX application, or a hybrid of both.
21
While customers continue to rely heavily on technology to reduce
transaction costs by increasing operational efficiencies, the bias toward
software-centric solutions in lieu of hardware continues. Notwithstanding the
slow economic conditions, growth continues to occur in areas such as customer
contact solutions, CTI (computer telephony integration), unified media,
convergence (IP telephony), and mobility.
Current financial pressures also are making it increasingly difficult for
communications equipment manufacturers to support a direct distribution model.
Most independent distribution channels lack an adequate geographic footprint,
infrastructure, processes, and resources to effectively fulfill the
manufacturer's need to deploy complex high-end technology solutions. This has
resulted in the need for systems integration and support services through third
party providers. A key competency being driven by the market is the ability to
effectively integrate disparate technology platforms into enterprise-wide
applications solutions. Again, the range and depth of MBS's experience enables
MBS to provide businesses with overall technology solutions.
As a result of these factors, demand for communication services and
products has been relatively flat. InfoTech , a market research firm
specializing in telecommunications market information, estimates that the U.S.
market for traditional voice PBX systems will continue to decline over the next
three years as enterprises shift to converged solutions, a combined form of
voice and data, also referred to as IP Telephony. IP shipments are expected to
surpass traditional PBX shipments sometime in 2006. Recent slowdowns in
technology spending may delay this development, however. Overall revenues in the
U.S. marketplace for voice and convergence are projected to reach $5.5 billion
by 2006. Field maintenance and repair is the largest, but slowest growing
segment in services associated with the voice marketplace. This includes the
maintenance and repair of PBX, Key/Hybrid, Voice Processing: IVR, CTI, ACD and
fax.
PRODUCTS AND SERVICES
CORPORATE TECHNOLOGIES, USA (MBS)
MBS provides other technical and customer services as described hereafter.
PRICING AND AVAILABILITY
We use our volume and purchasing power to achieve competitive pricing of
goods for our clients. We have the ability to provide a web-based client site
that allows clients to see availability and costs of hardware and software in
real time through the Internet by accessing current pricing and availability
from our manufacturers' Internet websites. This Internet-based model allows us
to extend product procurement services beyond the traditional 8 a.m. to 5 p.m.
schedule and into a 7 days a week, 24 hours a day service, providing a high
level of client flexibility.
WARRANTY POLICY
We strongly believe in the philosophy of "Service what you sell." We do
not knowingly sell any hardware product that we do not have authorized service
personnel to facilitate any warranty work that needs to be done. We are
committed to fulfill all warranty service calls in accordance with the
manufacturer's warranty, which range in length from 30 days to one year from the
date of sale. Warranty costs incurred to date are minimal.
ON SITE AND DEPOT REPAIR
MBS is authorized for depot and on site warranty repair for many
manufacturers, including Apple Computers, Nortel, Inc., Cisco, Hewlett Packard
Co., International Business Machines Corp. (IBM), Sun Microsystems, Inc., Compaq
Computer Corp., Xerox Corp., and Okidata Corp. With over $500,000 in spare parts
inventory, we have made a conscious effort to have the part clients need, when
they need it.
WIDE AREA NETWORK CONNECTIVITY
Our staff of Cisco and Nortel Wide Area Network (WAN) trained engineers
assist organizations with integrating their multiple sites, allowing the
exchange of information between geographically separated sites. Our association
with local Internet Service Providers (ISPs) gives us the opportunity to offer
organizations with multiple locations a single source provider providing a
cost-effective solution to WAN needs.
22
TECHNICAL SUPPORT FOR NETWORKING
We are committed to obtaining the highest vendor authorizations available
to indicate our knowledge and expertise to today's complex technological
environment. Becoming the only Microsoft Solution Partner, Novell Platinum
Reseller and Sun Microsystems Competency 2000 Certified reseller in North Dakota
is an indication of this commitment. Our staff of Certified Novell Engineers
(CNEs), Microsoft Certified System Engineers (MCSEs), Sun Microsystems System
Engineers, as well as certified personnel in products such as Nortel and Cisco
routers, gives MBS an advantage over other resellers in North Dakota. The
knowledge and skills of our system engineers helps organizations meet today's
challenges and maintain a market advantage. Our close relationships and
certification levels with our vendors gives our staff access to resources that
few other value added resellers can provide.
CONSULTING
As a multi-service, multi-vendor, multi-site integrator, MBS has the
extensive infrastructure to offer solutions to complex technical challenges
through our consulting service. With years of experience in Local Area Networks
(LAN) and WAN technology, our consultants are dedicated to finding the solution
that will solve our customers' needs now and in the future. We specialize in
providing an integrated cost-effective, single source solution.
SALES AND MARKETING
As of November 16, 2004, we had 25 sales and marketing personnel with
expertise in telecommunications, computers and network services. MBS has a
consultative approach to selling, in which the salesperson analyzes the
customer's operations and then designs an application-oriented technical
solution to make the customer more efficient and profitable. MBS uses several
techniques to pursue new customer opportunities, including advertising,
participation in trade shows, seminars and telemarketing.
CUSTOMERS
MBS provides its products and services to commercial, professional and
government users within the states of Minnesota and North Dakota. MBS's
customers are diverse and represent various industries such as financial
services, hospitality, legal, manufacturing, and education. In the year ended
December 31, 2003, MBS received 17.5% of its revenues from Meritcare Health
System and 6.0% of its revenues from Noridian (Blue Cross Blue Shield). In its
year ended December 31, 2002, MBS received approximately 22.8% of its revenues
from two customers, Merit Care and Microsoft Great Plains. In its year ended
December 31, 2001, MBS received approximately 21.7 % of all revenues from two
customers. Those two customers were Microsoft Great Plains and the State of
North Dakota.
CUSTOMER SERVICE
MBS has 20 full-time customer service and related support personnel who
assist in project management duties, post-sale communications (which include
site surveys), coordinated network services, and end-user training. Each key
account is assigned its own individual customer service representative to ensure
efficient implementation. The customer service representative works closely with
the sales representative and main technician assigned to the project to
facilitate the utmost in customer satisfaction.
BACK OFFICE
Back office refers to the hardware and software systems that support the
primary functions of our operations, including sales support, order entry and
provisioning, and billing.
Order entry involves the initial loading of customer data into our
information system. Currently our sales representatives take orders and our
customer service and purchasing representatives load the initial customer
information into our ILS (Integrated Logistic System) billing and accounting
system. We use the ILS to manage and track the timely completion of each step in
the provisioning and installation process. Our system is designed to enable the
sales or customer service representative to keep an installation on schedule and
notify the customer of any potential delays. Once an order has been completed,
we update our billing system to initiate billing of installed products or
services.
SUPPLIERS
As previously mentioned, MBS purchases products and equipment from NEC,
Tadiran, Cisco, Nortel, and other manufacturers of communications and computer
products. The telecommunication products are purchased directly from the
manufacturers. The computer products are purchased both directly from the
manufacturer and also indirectly from major wholesalers such as Ingram Micro and
Tech Data Corporation.
23
In 2003, Ingram Micro supplied 60.55% and Dell computer supplied 8.35% of
total products purchased. In 2002, Ingram Micro supplied 57.7% and Dell Computer
11.8% of total products purchased. In 2001, Ingram Micro supplied 37.8% and Tech
Data provided 18.9% of total products purchased.
The products MBS purchase are off-the-shelf products. MBS has several
alternate suppliers of computer products and could substitute any one of these
suppliers with an alternate supplier fairly quickly on the same or similar
terms.
MBS has a distribution agreement with NEC, its main supplier of
telecommunication products, which expires June 30, 2004. MBS could replace NEC
with an alternate supplier fairly quickly, but with a less competitive product.
However, MBS's replacement of NEC could have a material adverse effect on
Multiband's business, operating results and financial condition.
MULTIBAND CONSUMER SERVICES
We have expanded our strategy to include the vast potential of the multi
dwelling unit (MDU) market. Our experience in this market suggests that property
owners and managers are currently looking for a solution that will satisfy two
problems. The first problem that they are dealing with is how to satisfy the
residents who desire to bring satellite television service to the unit without
being visually unattractive or a structural/maintenance problem. The second is
how to provide competitive access for local and long distance telephone cable
television and Internet services. Our MCS offering addresses these problems and
provides the consumer several benefits, including:
o Lower Cost Per Service
o Blended Satellite and Cable Television Package
o Multiple Feature Local Phone Services (features such as call
waiting, call forwarding and three-way calling)
o Better than Industry Average Response Times
o One Number for Billing and Service Needs
o One Bill for Local, Long Distance Cable Television and Internet
o "Instant On" Service Availability
As we develop and market this package, we will keep a marketing focus on
two levels of customer for this product. The primary decision-makers are the
property owners/managers. Their concerns are focused on delivering their
residents reliability, quality of service, short response times, minimized
disruptions on the property, minimized alterations to the property and value
added services. Each of these concerns is addressed in our contracts with the
property owner, which include annual reviews and 10 to 15 year terms as service
providers on the property. The secondary customer is the end-user. We will
provide the property with on-going marketing support for their leasing agents to
deliver clear, concise and timely information on our services. This will include
simple sign up options that should maximize our penetration of the property.
When taken as a whole, and based on Multiband's interpretations of U.S.
Census Bureau statistics, cable television, telephone and internet services
currently generate over $170 billion of revenues annually in the U.S. These
statistics indicate stable growing markets with demand that is likely to deliver
significant values to businesses that can obtain a subscriber base of any
meaningful size.
MULTIBAND CONSUMER INDUSTRY ANALYSIS
Strategy
For the near future, the services described below will be offered
primarily in Midwestern states. Our primary competition will come from the local
incumbent providers of telephone and cable television services.
Local Telephone Service
In Minnesota, we expect to compete with Qwest Communications
International, Inc. (Qwest) for local telephone services. Although Qwest has
become the standard for local telephone service, we believe we have the ability
to underprice their service while maintaining high levels of customer
satisfaction.
24
Cable Television Service
In Minnesota, we expect to compete with Comcast Corporation (Comcast) for
pay-TV customers. Comcast is the cable television service provider that has
resulted from the merger and acquisition of two competitive cable providers.
This actually has improved the overall continuity of service. However, we have a
significant consumer benefit in that we are establishing private rather than
public television systems, which allows us to deliver a package that is not
laden with local "public access" stations that clog the basic service package.
In essence, we will be able to deliver a customized service offering to each
property based upon pre-installation market research that we perform.
Long Distance Telephone Service
AT&T Corporation (AT&T), WorldCom Inc. dba MCI (MCI), and Sprint
Corporation (Sprint) are our principal competitors in providing long distance
telephone service. They offer new products almost weekly. Our primary concern in
this marketplace is to assure that we are competitive with the most recent
advertised offerings in the "long distance wars." We will meet this challenge by
staying within a penny of the most current offering, while still maintaining a
high gross margin on our product. We accomplish this through various carrier
agency associations. We expect to generate a high penetration in our long
distance services amongst our local service subscribers because private property
owners in the shared tenant environment (similar to a hotel environment) are not
required to offer multiple long distance carriers to their tenants.
Internet Access Service
The clear frontrunners in this highly unregulated market are America
Online, Inc. and CompuServe Corp. They compete with local exchange carriers,
long distance carriers, Internet backbone companies and many local ISPs
(Internet Service Providers). Competition has driven this to a flat rate
unlimited access dial-up service market. The general concern among consumers is
the quality of the connection and the speed of the download. Our design provides
the highest connection speeds that are currently available. The approach that we
will market is "blocks of service." Essentially, we deliver the same high bit
rate service in small, medium and large packages, with an appropriate per unit
cost reduction for those customers that will commit to a higher monthly
expenditure.
Market Description
We are currently marketing Multiband services to MDU properties primarily
throughout Minnesota, North Dakota, Missouri and Florida and California. We are
focusing on properties that consist of 50 or more units. We will target
properties that range from 50 to 150 units on a contiguous MDU property for
television and Internet access only. We will survey properties that exceed 150
units for the feasibility of local and long distance telephone services.
We are initially concentrating on middle to high-end rental complexes. We
are also pursuing resort area condominiums. A recent U.S. Census Bureau table
indicates that there are more than 65,000 properties in the United States that
fit this profile. Assuming an average of 100 units per complex, our focus is on
a potential subscriber base of 6,500,000.
A recent Property Owners and Manager Survey, published by the U.S. Census
Bureau , shows that the rental properties are focusing on improving services and
amenities that are available to their tenants. These improvements are being
undertaken to reduce tenant turnover, relieve pricing pressures on rents and
attract tenants from competing properties. We believe that most of these owners
or managers are not interested in being "in the technology business" and will
use the services that we are offering. Various iterations of this package will
allow the owners to share in the residual income stream from the subscriber
base.
Number of Units/Customers
At September 30, 2004, MCS had 32,336 subscribers using its services
(3,299 using voice services, 25,357 using video services and 3,680 using
internet services).
Employees
As of November 24, 2004, Multiband employed five full-time management
employees. As of that same date, MBS had 57 full-time employees, consisting of
19 in sales and marketing, 26 in technical positions, 5 in management and 7 in
administration and finance. As of November 24, 2004, MCS had 49 full-time
employees, 8 in sales and the rest in customer service and operations.
25
PROPERTIES
Multiband and its subsidiaries lease principal offices located at 2000
44th Street SW, Fargo, ND 58103 and 9449 Science Center Drive, New Hope,
Minnesota 55428. We have no foreign operations. The main Fargo office lease
expires in 2017 and covers approximately 22,500 square feet. The Fargo base rent
ranges from $23,565 to $30,377 per month. The New Hope office lease expires in
2013 and covers approximately 47,000 square feet. The New Hope base rent ranges
from $18,389 to $25,166 per month. Both the New Hope and Fargo leases have
provisions that call for the tenants to pay net operating expenses, including
property taxes, related to the facilities. Both offices have office, warehouse
and training facilities.
Multiband considers its current facilities adequate for its current needs and
believes that suitable additional space would be available as needed.
LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
business. However, as of November 24, 2004, 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.
DIRECTORS AND OFFICERS
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
Steven Bell....... 45 President & CFO, Multiband Incorporated 1994
Frank Bennett..... 47 President, Artesian Capital 2002
Jonathan Dodge.... 53 Partner, Dodge & Fox C.P.A. Firm 1997
David Ekman....... 43 Chief Information Officer, Corporate Technologies USA, Inc. 1999
Eugene Harris..... 39 Shareholder, Eidelman, Finger, Harris & Co. 2004
James L. Mandel... 47 Chief Executive Officer, Multiband Corporation 1998
Donald Miller..... 64 Chairman, Multiband Corporation 2001
David Weiss....... 41 Principal, Rangeline Capital, LLC 2002
STEVEN BELL was general counsel and Vice President of the Company from June 1985
through October 1994, at which time he became Chief Financial Officer. He was
also named President in July 1997. He is a graduate of the William Mitchell
College of Law.
FRANK BENNETT has been a Director of Multiband Corporation since 2002 and is
currently a member of the Audit Committee. Mr. Bennett is President of Artesian
Management, Inc., which manages Artesian Capital, a private equity investment
firm based in Minneapolis. Artesian Capital invests in companies in the
communications, consumer, financial services and health care industries. Prior
to founding Artesian Capital in 1989, he was a Vice President of Mayfield
Corporation, and a Vice President of Corporate Finance of Piper Jaffray &
Hopwood and a Vice President of Piper Jaffray Ventures, Inc. He is currently a
director of Fairfax Financial Holdings Limited, Odyssey Re Holdings Corp.,
Multiband Corporation, Northbridge Financial Corporation and Crum & Forster
Holdings, Inc. Mr. Bennett currently serves on the boards of several non-profit
organizations including the Social Enterprise Fund, American Federation of Arts,
St. David's Child Development and Family Services, PACER Center and Wayzata
Community Church. Mr. Bennett, a graduate of the University of Oregon, lives
with his wife and five children in Long Lake, MN.
JONATHAN DODGE has been the Senior Partner of the C.P.A. firm of Dodge & Fox
since its inception in March 1997. Prior to that, he was a partner in the CPA
firm of Misukanis and Dodge from 1992 to March 1997. Mr. Dodge is a member of
both the AICPA and the Minnesota Society of CPA's.
DAVID EKMAN is Chief Information Officer of Corporate Technologies, USA, Inc., a
wholly owned subsidiary of Multiband. He has worked continuously in the computer
business since 1981, initially as a franchisee of Computerland, a personal
computer dealer and subsequently from 1996 to December 1999 as President of
Ekman, Inc., a value-added computer reseller and the predecessor company to
Corporate Technologies, USA, Inc.
EUGENE HARRIS is a Vice President and major shareholder of Eidelman, Finger,
Harris & Co., a St. Louis based registered investment advisor. He has been with
Eidelman, Finger, Harris & Co. since 1994. Prior to joining Eidelman, Finger,
Harris & Co., Mr. Harris held positions in general management and new business
development for the Monsanto Company from 1990-1994. He also was an Associate
Consultant with Bain and Co. from 1996-1998. Mr. Harris received a B.S. in
Industrial Engineering from Stanford University in 1996 and an M.S. in
Management from the Sloan School of Management at the Massachusetts Institute of
Technology in 1990. He is a Chartered Financial Analyst and a member of the
Financial Analysts Federation. Mr. Harris was appointed to Multiband's Board of
Directors in April 2004.
26
JAMES MANDEL has been the Chief Executive Officer and a Director of the Company
since October 1, 1998. From October 1991 to October 1996, he was Vice President
of Systems for Grand Casinos, Inc., where his duties included managing the
design, development, installation and on-going maintenance for the 2,000 room,
$507 million Stratosphere Hotel, Casino and Tower in Las Vegas. Mr. Mandel also
managed the systems development of Grand Casino Mille Lacs, in Onamia,
Minnesota, Grand Casino Hinckley in Hinckley, Minnesota and six other casinos
nationwide. He also serves as Chairman of the Board of CorVu Corporation and is
a trustee of the Boys and Girls Club of Minneapolis.
DONALD MILLER worked for Schwan's enterprises between 1962 and 2001, primarily
as Chief Financial Officer. He is currently employed by Schwan's as Special
Assistant to the CEO. He was appointed to Multiband's Board of Directors in
September 2001 and was elected Chairman of the Board in April 2002. Mr. Miller
is also Chairman of Multiband's Audit Committee.
DAVID WEISS has been a Director of Multiband since 2002. He is currently
Managing Principal for Rangeline Capital, LLC, a real estate investment banking
company. Prior to forming Rangeline in 2002, Mr. Weiss was Managing Director for
the St. Louis office of Northland/Marquette Capital Group.
The Company knows of no arrangements or understandings between a Director or
nominee and any other person pursuant to which any person has been selected as a
Director or nominee. There is no family relationship between any of the
nominees, Directors or executive officers of the company.
BOARD OF DIRECTORS AND ITS COMMITTEES
The Board has determined that a majority of its members are "independent" as
defined by the listing standards of the NASDAQ Stock Market. The independent
Directors are Messrs. Frank Bennett, Eugene Harris, Donald Miller and David
Weiss.
The Board of Directors met four times on a regular basis in 2003. As permitted
by Minnesota Law, the Board of Directors also acted from time to time during
2003 by unanimous written consent in lieu of conducting formal meetings. Last
year, there were four such actions and accompanying Board Resolutions passed.
The Board has designated an audit committee consisting of Jonathan Dodge, Donald
Miller and Frank Bennett. The Board also designated a compensation committee
consisting of Frank Bennett and David Weiss.
Shareholder communication with the Board
Our Board welcomes your questions and comments. If you would like to communicate
directly to our Board, or if you have a concern related to the Company's
business ethics or conduct, financial statements, accounting practices or
internal controls, then you may contact our website via www.multibandusa.com,
section Investor Relations. All communications will be forwarded to our audit
committee.
Directors' attendance at Annual Meetings can provide shareholders with an
opportunity to communicate with directors about issues affecting the Company.
The Company does not have a policy regarding director attendance, but all
directors are encouraged to attend the Annual Meeting of Shareholders. Six of
our directors attended our Annual Meeting in 2003.
AUDIT COMMITTEE
Our audit committee:
o recommends to our Board of Directors the independent auditors to conduct
the annual audit of our books and records;
o reviews the proposed scope and results of the audit;
o approves the audit fees to be paid;
o reviews accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
o reviews and approves transactions between us and our Directors, officers
and affiliates.
Our audit committee has a formal charter that is an exhibit to our most recent
annual report on Form 10K.
27
Our audit committee met four times during 2003. The Audit Committee is comprised
entirely of individuals who meet the independence and financial literacy
requirements of NASDAQ listing standards. Our Board has determined that all
three members qualify as an "audit committee financial expert" independent from
management as defined by Item 401(h)(2) of Regulation S-K under the Securities
Act of 1933, as amended. Multiband acknowledges that the designation of the
members of the audit committee as financial experts does not impose on them any
duties, obligations or liability that are greater than the duties, obligations
and liability imposed on them as a member of the audit committee and the Board
of Directors in the absence of such designation.
REPORT OF THE AUDIT COMMITTEE
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board in fulfilling its responsibility for
oversight of the quality and integrity of the accounting, auditing, and
financial reporting practices of the Company. During the year ended December 31,
2003, the Committee met four times, and Donald Miller, as the Audit Committee
chair and representative of the Audit Committee, discussed the interim financial
information contained in quarterly earnings announcement with the Company's
Chief Financial Officer and the Company's independent auditors prior to public
release.
In discharging its oversight responsibility as to the audit process, the
Audit Committee obtained from the independent auditors a formal written
statement describing all relationships between the auditors and the Company that
might bear on the auditors' independence consistent with Independence Standards
Board Standard No. 1, "Independence Discussions with Audit Committees,"
discussed with the auditors any relationships that may affect their objectivity
and independence and satisfied itself as to the auditors' independence. The
Audit Committee also discussed with management and the independent auditors the
quality and adequacy of the Company's internal controls. The Audit Committee
reviewed with both the independent auditors their audit plans, audit scope, and
identification of audit risks.
The Audit Committee discussed and reviewed with the Company's independent
auditors all communications required by generally accepted auditing standards,
including those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees" and, both with and without management
present, discussed and reviewed the results of the independent auditors'
examination of the Company's financial statements. The Audit Committee reviewed
the audited consolidated financial statements of the Company as of and for the
fiscal year ended December 31, 2003 with management and the independent
auditors. Management has the responsibility for the preparation of the Company's
consolidated financial statements and the Company's independent auditors have
the responsibility for the examination of those statements.
Based on the review referred to above and discussions with management and
the independent auditors, the Audit Committee recommended to the Board of
Directors that the Company's audited consolidated financial statements be
included in its Annual Report on Form 10-K for the fiscal year ended December
31, 2003 for filing with the Securities and Exchange Commission. The Audit
Committee also recommended the reappointment, subject to shareholder approval,
of the independent auditors and the Board of Directors concurred in such
recommendation.
COMPENSATION COMMITTEE
Our compensation committee
o reviews and recommends the compensation arrangements for management,
including the compensation for our chief executive officer; and
o establishes and reviews general compensation policies with the objective
to attract and retain superior talent, to reward individual performance
and to achieve our financial goals.
Our compensation committee met four times during 2003. The compensation
committee is comprised entirely of Directors who meet the independence
requirements of the NASDAQ listing standards.
NOMINATING COMMITTEE
The Nominating Committee (the "Nominating Committee") was formed by our Board in
April 2004 and consists of Frank Bennett and David Weiss. The Nominating
Committee's duties include adopting criteria for recommending candidates for
election or re-election to our Board and its committees, considering issues and
making recommendations considering the size and composition of our Board. The
Nominating Committee will also consider nominees for Director suggested by
shareholders in written submissions to the Company's Secretary.
The Nominating Committee met in April 2004 to decide upon the nominees for
Director at the Annual Meeting.
28
DIRECTOR NOMINATION PROCEDURES
DIRECTOR MANAGER QUALIFICATIONS. The Company's Nominating Committee has
established policies for the desired attributes of our Board as a whole. The
Board will seek to ensure that a majority of its members are independent as
defined in the NASDAQ listing standards. Each member of our Board must possess
the individual qualities of integrity and accountability, informed judgment,
financial literacy, high performance standards and must be committed to
representing the long-term interests of the Company and the shareholders. In
addition, Directors must be committed to devoting the time and effort necessary
to be responsible and productive members of our Board. Our Board values
diversity, in its broadest sense, reflecting, but not limited to, profession,
geography, gender, ethnicity, skills and experience.
IDENTIFYING AND EVALUATING NOMINEES. The Nominating Committee regularly
assesses the appropriate number of Directors comprising our Board, and whether
any vacancies on our Board are expected due to retirement or otherwise. The
Nominating Committee may consider those factors it deems appropriate in
evaluating Director candidates including judgment, skill, diversity, strength of
character, experience with businesses and organizations comparable in size or
scope to the Company, experience and skill relative to other Board members, and
specialized knowledge or experience. Depending upon the current needs of our
Board, certain factors may be weighed more or less heavily by the Nominating
Committee. In considering candidates for our Board, the Nominating Committee
evaluates the entirety of each candidate's credentials and, other than the
eligibility requirements established by the Nominating Committee, does not have
any specific minimum qualifications that must be met by a nominee. The
Nominating Committee considers candidates for the Board from any reasonable
source, including current Board members, shareholders, professional search firms
or other persons. The Nominating Committee does not evaluate candidates
differently based on who has made the recommendation. The Nominating Committee
has the authority under its charter to hire and pay a fee to consultants or
search firms to assist in the process of identifying and evaluating candidates.
CHARTER OF THE NOMINATING COMMITTEE. A copy of the charter of the
Nominating Committee is available on our website at www.multibandusa.com.
EXECUTIVE COMPENSATION
The following table sets forth certain information relating to the
remuneration paid by the Company to its executive officers whose aggregate cash
and cash-equivalent remuneration approximated or exceeded $100,000 during the
Company's last three fiscal years ending December 31, 2003.
29
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
POSITION ($) ($) ANNUAL STOCK UNDERLYING PAYOUTS COMPENSATION
COMPENSATION AWARD(S) OPTIONS/ ($) ($)
($) ($) SARS
(#)
(A) (B) (C) (D) (E) (F) (G) (H) (I)
AWARDS PAYOUTS
James L. Mandel 2003 $250,727 $125,000 -0- -0- 300,000 -0- -0-
Chief Executive Officer 2002 $149,874 $100,000 -0- -0- -0 -0- -0-
2001 $131,346 -0- -0- -0- 500 -0- -0-
Steven Bell 2003 $120,484 -0- -0- -0- 50,000 -0- -0-
Chief Financial Officer 2002 $99,014 -0- -0- -0- 10,500 -0- -0-
2001 $108,365 -0- -0- -0- 500 -0- -0-
Dave Ekman 2003 $111,154 -0- -0- -0- -0- -0- -0-
Chief Information Officer 2002 $93,695 -0- -0- -0- -0- -0- -0-
2001 $100,614 -0- -0- -0- 500 -0- -0-
DIRECTORS FEES
There were no cash fees paid to Directors in 2003. Outside Directors
receive a stock option of 30,000 shares at market price upon joining the
Multiband Board. Additional awards or options to Directors are determined by the
Board's Compensation Committee.
OPTION GRANTS DURING 2003
THE FOLLOWING TABLE PROVIDES INFORMATION REGARDING STOCK OPTIONS GRANTED
DURING FISCAL 2003 TO THE NAMED EXECUTIVE OFFICERS IN THE SUMMARY COMPENSATION
TABLE.
Potential Realizable Value at
Number of Percent of Assumed Annual Rates of Stock
Securities Total Options Price Appreciation for Option
Underlying Granted to Exercise or Term (1)
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year (%) ($/Share) Date 5% 10%
---- ----------- --------------- ----------- ---------- ---- ----
James L. Mandel 300,000 46.3 $1.50 1/8/2013 -0- $258,092
Steven M. Bell 50,000 7.7 $1.10 1/8/2013 $19,115 $ 63,015
Dave Ekman -0- -0- - - - -
(1) The "potential realizable value" shown represents the potential gains
based on annual compound stock price appreciation of 5% and 10% from the
date of grant through the full option terms, net of exercise price, but
before taxes associated with exercise. The amounts represent certain
assumed rates of appreciation only, based on the Securities and Exchange
Commission rules. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock, overall market
conditions and the option holders, continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved and do not reflect the Company's estimate of future stock price
growth.
Each option represents the right to purchase one share of common stock.
The options shown in this table are all non-qualified stock options. To the
extent not already exercisable, the options generally become exercisable in the
event of a merger in which Multiband is not the surviving corporation, a
transfer of all shares of stock of Multiband, a sale of substantially all the
assets, or a dissolution or liquidation, of Multiband.
30
AGGREGATED OPTION EXERCISES IN 2003 AND YEAR END OPTION VALUES
The following table provides information as to options exercised by the
named executive officers in the Summary Compensation Table during fiscal 2003
and the number and value of options at December 31, 2003.
SHARES ACQUIRED
ON EXERCISE VALUE (1)
NAME REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2003 DECEMBER 31, 2003
----------------- -----------------
James L. Mandel........ -0- -0- 450,500 -0- $554,115 $0
Steven M. Bell......... -0- -0- 57,166 3,334 $70,314 $4,100
David Ekman............ -0- -0- 150,500 -0- $185,115 $0
(1) Value is calculated on the basis of the difference between the option
exercise price and $1.23, the fair market value of the Company's common
stock at December 31, 2003 as quoted on the NASDAQ, multiplied by the
number of shares underlying the option.
OTHER COMPENSATION AND LONG-TERM INCENTIVE PLANS
The Company has no long-term incentive plans and issued no long-term
incentive awards during 2003.
The Company has an employment agreement with Mr. Steven Bell, President,
for the term beginning January 2002 and expiring December 2004. Mr. Bell's
compensation is not directly tied to the Company's performance. The agreement
states that annual base salary for Mr. Bell will be between $125,000 and
$135,000 per year. Other key provisions of the contract include an agreement by
Mr. Bell to keep confidential information secret both during and after
employment by the Company and covenants not to compete with the Company for one
year from the date of termination of employment. The contract also provides Mr.
Bell with 75,000 stock options at market price, vested over a three year period.
The Company maintains key man life insurance policies in the amount of
$1,000,000 each on the lives of Steven Bell and Marvin Frieman, former Director.
The Company is the beneficiary of these policies and has adopted a plan to pay
fifty percent of all life insurance proceeds to the spouse or surviving children
of each such individual.
The Company also has a three year employment agreement, from January 2002
to December 2004, with James L. Mandel, Chief Executive Officer, the terms of
which involve an annual base salary of $200,000 and a stock option of 300,000
shares at $1.50 per share, vested over a three year period. Mr. Mandel's job
responsibilities involve developing company business plans, developing expansion
and growth opportunities and directing other executive officers.
31
1999 STOCK COMPENSATION PLAN
1999 STOCK COMPENSATION PLAN
The total number of shares of stock reserved for awards to employees under
the Plan is 4.3 million shares. The purpose of the plan is to promote the
interest of the Company and its shareholders by providing employees of the
company with an opportunity to receive a proprietary interest in the Company and
thereby develop a stronger incentive to contribute to the Company's continued
success and growth. The plan is administered by a Committee of the Board of
Directors. Awards pursuant to the 1999 plan may be in the form of either a
restricted stock grant, which means that stock issued will vest over a three
year vesting period, or stock options.
Options granted under the Plan may be either "incentive" stock options
within the meaning of Section 422 of the Internal Revenue Code ("IRC") or
"nonqualified" stock options that do not qualify for special tax treatment under
the IRC. No incentive stock option may be granted with a per share exercise
price less than the fair market value of a share of the Company's common stock
on the date the option is granted; in the case of any shareholder owning 10
percent or more of the common stock to whom an incentive stock option has been
granted under the Plan, the exercise price thereof is required to be not less
than 110 percent of the fair market value of the common stock on the date the
option is granted. Options are not transferable. An optionee, or his or her
personal representative, may exercise his or her option for a period of ninety
(90) days following termination of employment, disability or death. The term of
each option, which is fixed by the Committee, may not exceed 10 years from the
date the option is granted, or 5 years in the case of incentive stock options
granted to shareholder owing 10 percent or more of the common stock to whom
options have been granted. Options may be made exercisable in whole or in
installments as determined by the Committee or Board. The Committee or Board may
cancel an option of an employee who has been terminated for cause or takes
employment with a competitor. The closing sale price of a share of the Company's
common stock was $1.18 on November 16, 2004.
Federal Income Tax Matters
Options. Incentive stock options granted under the 1999 plan are intended
to qualify for favorable tax treatment under Section 422 of the Internal Revenue
Code of 1986, as amended. Under Section 422, an optionee recognizes no taxable
income when the option is granted. Further, the optionee generally will not
recognize any taxable income when the option is exercised if he or she has at
all times from the date of the option's grant until three months before the date
of exercise been an employee of the Company. The Company ordinarily is not
entitled to any income tax deduction upon the grant or exercise of an incentive
stock option. Certain other favorable tax consequences may be available to the
optionee if he or she does not dispose of the shares acquired upon the exercise
of an incentive stock option for a period of two years from the granting of the
option and one year from the receipt of the shares.
Under present law, an optionee will not realize any taxable income on the
date a nonqualified option is granted pursuant to the 1999 plan. Upon exercise
of the option, however, the optionee must recognize, in the year of exercise,
ordinary income equal to the difference between the option price and the fair
market value of the Company's common stock on the date of exercise. Upon the
sale of the shares, any resulting gain or loss will be treated as capital gain
or loss. The Company will receive an income tax deduction in its fiscal year in
which nonqualified options are exercised equal to the amount of ordinary income
recognized by those optionees exercising options, and must withhold income and
other employment related taxes on such ordinary income.
Restricted Stock Awards. Generally, no income is taxable to the recipient
of a restricted stock award in the year the award is granted. Instead, the
recipient will recognize compensation taxable as ordinary income equal to the
fair market value of the shares in the year in which the transfer restrictions
lapse. Alternatively, if a recipient makes a "Section 83(b)" election, the
recipient will, in the year that the restricted stock award is granted,
recognize compensation taxable as ordinary income equal to the fair market value
of the shares on the date of the award. The Company normally will receive a
deduction equal to the amount of compensation the recipient is required to
recognize as ordinary taxable income, and must comply with applicable tax
withholding requirements.
2000 NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
The total number of shares reserved for awards under the Plan is 800,000
shares. The purpose of the 2000 Directors' Plan is to enable the Company,
through the grant of non-qualified stock options to non-employee ("outside")
Directors of the Company, to attract and retain highly-qualified outside
Directors and, by providing them with such a stock-based incentive, to motivate
them to promote the best interests of the Company and its shareholders. For the
purposes of the Plan, outside Directors are Directors who, at the time of
granting of options under the Plan, are not and for the prior twelve months have
not been employees of the Company or any of its subsidiaries.
32
All grants will provide for an exercise price equal to 100% of the fair
market value of a Share at the date of the grant. Options will become
exercisable approximately one year after date of grant and will expire ten years
after date of grant, subject to earlier exercise and termination in certain
circumstances. If an outside Director ceases to be a Director due to death, any
of his outstanding options that have not yet become exercisable will accelerate,
and all of his outstanding Options will remain exercisable for various specified
periods of time up to a maximum of approximately one year. If an outside
Director ceases to be a Director due to disability, all of his or her
outstanding options not fully vested will immediately terminate, and those that
are fully vested will remain exercisable for various specified periods of time
up to a maximum of approximately one year. If an outside Director ceases to be a
Director for any other reason, all of his or her outstanding options not fully
vested will immediately terminate, and those that are fully vested will remain
exercisable for 90 days.
The closing sale price of a share of the Company's common stock was $1.18 on
November 16, 2004.
Federal Income Tax Matters
Under present law, an optionee will not realize any taxable income on the
date a nonqualified option is granted pursuant to the 2000 Directors' Plan. Upon
exercise of the option, however, the optionee must recognize, in the year of
exercise, ordinary income equal to the difference between the option price and
the fair market value of the Company's common stock on the date of exercise.
Upon the sale of the shares, any resulting gain or loss will be treated as
capital gain or loss. The Company will receive an income tax deduction in its
fiscal year in which nonqualified options are exercised equal to the amount of
ordinary income recognized by those optionees exercising options, and must
withhold income and other employment related taxes on such ordinary income.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan ("the ESPP") was adopted by the
Multiband shareholders in August 2000. The purpose of the ESPP is to provide
eligible employees with an opportunity to increase their proprietary interest in
the success of Multiband by purchasing Common Stock from Multiband on favorable
terms and to pay for such purchase through payroll deductions. The aggregate
number of shares of stock available for purchase under the ESPP is 400,000. The
ESPP is intended to qualify under section 423 of the Internal Revenue Code. The
provisions of the ESPP shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
The ESPP is administered by a committee of Multiband's board of directors.
The committee consists exclusively of one or more directors of Multiband who are
appointed by the Board. The committee interprets the ESPP and makes all other
policy decisions relating to the operation of the ESPP. The committee may adopt
such rules, guidelines and forms as it deems appropriate to implement the ESPP.
The committee's determination under the ESPP are final and binding on all
persons.
The ESPP Year consists of a twelve-month period commencing on January 1
and ending on December 31. Notwithstanding the foregoing, the first ESPP Year
will be a short year commencing on the effective date of the ESPP and ending on
December 31, 2000.
EMPLOYEE BENEFITS PLANS
Multiband has 401(k) profit sharing plans covering substantially all
full-time employees. Employee contributions are limited to the maximum amount
allowable by the Internal Revenue Code of 1986, as amended. Multiband made no
significant discretionary contributions in years 1999, 1998 and 1997.
CERTAIN TRANSACTIONS
The following is a summary of all significant related party transactions
for the three years ended December 31, 2003.
Rangeline Capital is an entity managed and co-owned by David Weiss,
Director. In 2002 and 2003, Rangeline made equipment purchases from the Company.
In both years, those purchases comprised less than 5% of Company annual revenues
($636,477 and $1,124,232).
Multiband and its subsidiaries lease principal offices located at 2000
44th Street SW, Fargo, ND 58013 and 9449 Science Center Drive, New Hope,
Minnesota 55428. The Fargo office lease expires in 2017 and covers approximately
22,500 square feet. The Fargo base rent ranges from $21,577 to $24,360 per
month. The New Hope office lease expires in 2006 and covers approximately 47,000
square feet. The New Hope base rent ranges from $16,000 to $17,653 per month.
Both the New Hope and main Fargo leases have provisions that call for the
tenants to pay net operating expenses, including property taxes, related to the
facilities. Both offices have office, warehouse and training facilities. The
main Fargo property is owned in part by David Ekman. The New Hope property was
owned jointly by Steven Bell and Marvin Frieman prior to its sale in August,
2003 to an independent third party.
33
Interest and dividend expense paid by Multiband to related parties was
approximately $225,966 in 2003, $228,000 in 2002 and $3,000 in 2001. Related
parties include the Company's Chairman, Chief Executive Officer, President and
the President's mother.
34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of November 24, 2004
concerning the beneficial ownership of Multiband's common stock by (i) each
director of Multiband, (ii) the Named Executive Officers, (iii) the persons
known by Multiband to own more than 5% of Multiband's outstanding common stock,
and (iv) all directors and executive officers as a group. Except as otherwise
indicated, the persons named in the table have sole voting and investment power
with respect to all shares of common stock owned by them. (The selling
shareholders may actually sell all, some or none of the shares held by them.)
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES TO OWNED AFTER
TO OFFERING (1) BE SOLD OFFERING (20)
---------------------------------------------------- -------- ------------------
SHARES TOTAL
UNDERLYING NUMBER OF TOTAL
BENEFICIAL OWNER SHARES(2) WARRANTS SHARES PERCENT(3) NUMBER PERCENT
---------------- --------- ----------- --------- ---------- ------- --------- -------
Steven Bell 0 0 589,063(4) 2.2% 0 589,063(5) 2.2
9449 Science Center Drive
New Hope, MN 55428
0 0 89,600(6) * 0 89,600(7) *
Frank Bennett
301 Carlson Parkway - Suite 120
Minnetonka, Minnesota 55305
0 0 70,100(8) * 0 70,100(9) *
Jonathan Dodge
715 Florida Avenue South - Suite 402
Golden Valley, MN 55426
0 0 1,751,583(10) 6.4% 0 1,751,583(11) 6.4%
David Ekman
2000 44th Street SW
Fargo, ND 58103
0 0 19,000(12) * 0 19,000(13) *
Eugene Harris
225 South Meramec - Suite 722
St. Louis, MO 63105
0 0 464,133(14) 1.7% 0 464,133(15) 1.7%
James L. Mandel
9449 Science Center Drive
New Hope, MN 55428
0 0 1,369,686(16) 5.0% 0 1,369,686(17) 5.0%
Donald Miller
1924 Cocoplum Way
Naples, FL 34105
0 0 122,726(18) * 0 122,726(19) *
David Weiss
10829 Olive Blvd.
Suite 203
St. Louis, MO 63141
All Directors and
executive officers
as a group
(eight persons) 0 0 4,475,891 15.3% 0 4,475,891 15.3%
--------
* Less than one percent
(1) Each person has sole voting and sole dispositive power with respect to all
outstanding shares, except as noted.
(2) Excludes shares underlying warrants.
(3) Based on an average of 25,773,767 shares outstanding at November 24, 2004,
and 29,861,682 shares outstanding after the exercise of warrants. Each
figure showing the percentage of outstanding shares owned beneficially has
been calculated by treating as outstanding and owned the shares which
could be purchased by the indicated person upon the exercise of stock
options and warrants (including the warrants).
(4) Includes vested options to acquire 35,500 shares of common stock. Mr.
Bell's Beneficial Ownership does include 31,250 shares of common stock
owned by his spouse as to which Mr. Bell disclaims his beneficial
ownership.
(5) Includes vested options to acquire 35,500 shares of common stock. Mr.
Bell's Beneficial Ownership does include 31,250 shares of common stock
owned by his spouse as to which Mr. Bell disclaims his beneficial
ownership.
(6) Includes vested options to purchase 69,600 shares of common stock.
(7) Includes vested options to purchase 69,600 shares of common stock.
(8) Includes vested options to acquire 69,600 shares of common stock.
(9) Includes vested options to acquire 69,600 shares of common stock.
(10) Includes vested options to purchase 150,500 shares of common stock.
(11) Includes vested options to purchase 150,500 shares of common stock.
(12) Mr. Harris's beneficial ownership does include 19,000 shares owned by his
spouse as to which Mr. Harris disclaims his beneficial ownership.
(13) Mr. Harris's beneficial ownership does include 19,000 shares owned by his
spouse as to which Mr. Harris disclaims his beneficial ownership.
(14) Includes vested options to purchase 300,500 shares of common stock.
(15) Includes vested options to purchase 300,500 shares of common stock.
(16) Includes warrants and vested options to purchase 878,700 shares of common
stock.
(17) Includes warrants and vested options to purchase 878,700 shares of common
stock.
(18) Includes vested options to purchase 69,600 shares of common stock.
(19) Includes vested options to purchase 69,600 shares of common stock.
35
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information as of November 24, 2004
concerning the beneficial ownership of Multiband's common stock by which can be
obtained by the selling shareholders upon conversion of the convertible notes
and Series H preferred stock and upon exercise of the warrants held by them and
is adjusted to reflect the sale of all their shares. The information regarding
ownership of shares of common stock after the offering assumes that all of the
shares registered under this prospectus have been sold. The selling shareholders
may actually sell all, some or none of the shares held by them.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally includes
voting or investment power with respect to securities. In computing the number
of shares beneficially owned by the holder and the percentage ownership of the
holder, shares of common stock issuable upon conversion of the convertible notes
and preferred stock and upon exercise of the warrants held by the holders that
are currently convertible or are exercisable or convertible or exercisable
within 60 days after the date of the table are deemed outstanding.
To our knowledge, each of the selling shareholders has sole voting and
investment power with respect to all of the shares of common stock beneficially
owned by it, except as noted below. None of the selling shareholders has held or
had any material relationship with us within the past three years.
The terms of the convertible notes, Series H preferred stock and warrants
issued to the selling shareholders whose underlying shares of common stock are
included for resale under this prospectus prohibit conversion of the notes and
preferred stock or exercise of the warrants to the extent that such conversion
and/or exercise would result in the holder, together with its affiliates,
beneficially owning in excess of 4.9% of our outstanding shares of common stock.
A holder may waive the 4.9% limitation upon 61 days' prior written notice to us.
Also, this limitation does not preclude the holder from converting or exercising
the notes, preferred stock or warrants and selling shares underlying the notes,
preferred stock or warrants in stages over time where each stage does not cause
the holder and its affiliates to beneficially own shares in excess of the
limitation amount.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO OFFERING(20) TO BE SOLD OFFERING(20)
------------------------------------------ --------- --------------------
SHARES TOTAL
UNDERLYING NUMBER OF TOTAL
BENEFICIAL OWNER SHARES(21) WARRANTS SHARES PERCENT(22) NUMBER PERCENT
---------------- --------- --------- --------- ---- --------- --------- ---------
Broyer, Judd L 44,063 26,438 70,501 * 70,501 0 0
--------- --------- --------- ---- --------- --------- ---------
Bushido Capital Master Fund, LP 354,000 300,000 654,000 2.6% 654,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Clarke, John R 0 141,750 141,750 * 141,750 0 0
--------- --------- --------- ---- --------- --------- ---------
Cooke, Carlene 0 1,907 1,907 * 1,907 0 0
--------- --------- --------- ---- --------- --------- ---------
Dain Rauscher, Inc. Custodian,
Charlean M. Steller (IRA) 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Dain Rauscher, Inc. Custodian,
Morris W. Steller (IRA) 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Dain Rauscher, Inc.
Custodian, Robert P. Reiter 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Dain Rauscher, Inc.
Custodian, Donna Zastrow 2,781 1,669 4,450 * 4,450 0 0
--------- --------- --------- ---- --------- --------- ---------
Dain Rauscher, Inc.
Custodian, Irvin F. Zastrow (IRA) 7,188 4,313 11,501 * 11,501 0 0
--------- --------- --------- ---- --------- --------- ---------
Dain Rauscher, Inc.
Custodian, Doug Pietig (IRA) 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Enable Growth Partners L.P. 354,000 300,000 654,000 2.6% 654,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Fuchs, Ari J 0 31,500 31,500 * 31,500 0 0
--------- --------- --------- ---- --------- --------- ---------
Gamma Opportunity
Capital Partners, LP 354,000 300,000 654,000 2.6% 654,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Gryphon Master Fund, LP 590,001 500,001 1,090,002 4.2% 1,090,002 0 0
--------- --------- --------- ---- --------- --------- ---------
GSSF Master Fund, LP 590,001 500,001 1,090,002 4.2% 1,090,002 0 0
--------- --------- --------- ---- --------- --------- ---------
H.C. Wainwright & Co. (23) 0 315,000 315,000 1.3% 315,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Heinzen, Tom 0 5,469 5,469 * 5,469 0 0
--------- --------- --------- ---- --------- --------- ---------
Hendricks, Randy J 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Iroquois Capital LP 501,501 425,001 926,502 3.6% 926,502 0 0
--------- --------- --------- ---- --------- --------- ---------
Koch, Scott F 0 141,750 141,750 * 141,750 0 0
--------- --------- --------- ---- --------- --------- ---------
Luethmers, Howard 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
McKelvey, Robert 5,900 5,000 10,900 * 10,900 0 0
--------- --------- --------- ---- --------- --------- ---------
McKelvey, Robert 0 3,582 3,582 * 3,582 0 0
--------- --------- --------- ---- --------- --------- ---------
McNab, Daryl R 29,500 25,000 54,500 * 54,500 0 0
--------- --------- --------- ---- --------- --------- ---------
Mutschler, John or Faye 29,500 25,000 54,500 * 54,500 0 0
--------- --------- --------- ---- --------- --------- ---------
Nelson, Diane Lea 16,250 9,750 26,000 * 26,000 0 0
--------- --------- --------- ---- --------- --------- ---------
RHP Master Fund, Ltd. 354,000 342,857 696,857 2.6% 654,000 42,857 *
--------- --------- --------- ---- --------- --------- ---------
Savitski, Donald or Anne 62,500 37,500 100,000 * 100,000 0 0
--------- --------- --------- ---- --------- --------- ---------
SRG Capital, LLC 159,000 150,000 309,000 1.2% 309,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Steller, Morris W 15,625 9,375 25,000 * 25,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Stonestreet LP 295,001 250,001 545,002 * 545,002 0 0
--------- --------- --------- ---- --------- --------- ---------
Tilton, Theodore 29,500 25,000 54,500 * 54,500 0 0
--------- --------- --------- ---- --------- --------- ---------
Tilton, Theodore 31,250 18,750 50,000 * 50,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Tilton, Theodore 0 1,582 1,582 * 1,582 0 0
--------- --------- --------- ---- --------- --------- ---------
Tutewohl, Leo or Sharon 23,600 20,000 43,600 * 43,600 0 0
--------- --------- --------- ---- --------- --------- ---------
Voldness, Peter 0 25,700 25,700 * 25,700 0 0
--------- --------- --------- ---- --------- --------- ---------
Wesolek, Gregory or Patricia 9,375 5,625 15,000 * 15,000 0 0
--------- --------- --------- ---- --------- --------- ---------
Whalehaven Capital Fund Limited 147,501 125,001 272,502 1.0% 272,502 0 0
--------- --------- --------- ---- --------- --------- ---------
TOTAL 4,099,787 4,130,772 8,230,559 24.8% 8,187,702 42,857 0
--------- --------- --------- ---- --------- --------- ---------
(20) Each person has sole voting and sole dispositive power with respect to all
outstanding shares, except as noted.
(21) Excludes shares underlying warrants.
(22) Based on an average of 25,773,767 shares outstanding at November 24, 2004,
and 29,861,682 shares outstanding after the exercise of warrants. Each
figure showing the percentage of outstanding shares owned beneficially has
been calculated by treating as outstanding and owned the shares which
could be purchased by the indicated person within 60 days upon the
exercise of stock options and warrants (including the warrants).
23) Warrants were issued to the firm of H.C. Wainwright and its employees,
John R Clarke, Ari J Fuchs and Scott F. Koch for services provided to the
Company related to the private placement transactions.
36
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling shareholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling shareholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling shareholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
shareholder. The selling shareholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
The selling shareholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling shareholders to include the pledgee, transferee or other
successors in interest as selling shareholders under this prospectus.
The selling shareholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus and may sell the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling shareholders to include the pledgee, transferee or other
successors in interest as selling shareholders under this prospectus.
The selling shareholders and any broker-dealers or agents that are
involved in selling the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares of common stock purchased by them may
be deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares of common stock. We have agreed to indemnify the selling
shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The selling shareholders have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling shareholder. If we are notified by any
selling shareholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus. If the selling shareholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our common stock and activities of the selling
shareholders.
37
DESCRIPTION OF SECURITIES
CAPITAL STRUCTURE
The Articles of Incorporation of Multiband authorize Multiband to issue
100 million shares of capital stock, which have no par value. However, the
shares have a par value of one cent per share for the purpose of a statute or
regulation imposing a tax or fee based upon the capitalization of a corporation.
As of November 16, 2004 there were 24,763,322 shares of common stock
outstanding, 5.5 million shares reserved for issuance under our stock plans,
11,849,085 shares of common stock reserved for issuance under outstanding
warrants, 2,866,736 shares of common stock issuable upon the conversion of
shares of our Classes A through H cumulative convertible Preferred Stock and
811,688 shares upon conversion of a note payable.
COMMON STOCK
Holders of common stock are entitled to one vote per share in all matters
to be voted upon by shareholders. There is no cumulative voting for the election
of directors, which means that the holders of shares entitled to exercise more
than 50% of the voting rights in the election of directors are able to elect all
of the directors. Multiband's Articles of Incorporation provide that holders of
the Company's common stock do not have preemptive rights to subscribe for and to
purchase additional shares of common stock or other obligations convertible into
shares of common stock which may be issued by the Company.
Holders of common stock are entitled to receive such dividends as are
declared by Multiband's Board of Directors out of funds legally available for
the payment of dividends. Multiband presently intends not to pay any dividends
on the common stock for the foreseeable future. Any future determination as to
the declaration and payment of dividends will be made at the discretion of the
Board of Directors. In the event of any liquidation, dissolution or winding up
of Multiband, and subject to the preferential rights of the holders of the Class
A Preferred, Class B Preferred, Class C Preferred, Class D Preferred, Class E
Preferred, Class F Preferred and Class G Preferred, the holders of common stock
will be entitled to receive a pro rata share of the net assets of Multiband
remaining after payment or provision for payment of the debts and other
liabilities of Multiband.
All of the outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock of Multiband are not liable for further
calls or assessments.
WARRANTS
The warrants being registered hereunder have a three year term with each
warrant allowing the warrant holder to purchase one share of Multiband common
stock for $1.25 per share.
MARKET PRICE OF MULTIBAND'S COMON AND RELATED STOCKHOLDER MATTERS
Through May 17, 2000, Multiband's common stock was traded and quoted on
the OTC Bulletin Board(R) ("OTCBB") under the symbol "VICM." From May 18, 2000
until August 21, 2000, the common stock was quoted under the VICM symbol on the
Pink Sheets(R) operated by Pink Sheets LLC. From August 21, 2000, to December
12, 2000, Multiband's common stock was traded and quoted on the OTCBB under the
VICM symbol. Since then, the stock has been traded and quoted on the Nasdaq
Smallcap market system. The table below sets forth the high and low bid prices
for the common stock during each quarter in the two years ended December 31,
2002 and December 31, 2003, and for the quarters ended March 31, June 30 and
September 30, 2004, as provided by Nasdaq.
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
March 31, 2002.................................. 1.90 1.37
June 30, 2002................................... 1.75 .80
September 30, 2002.............................. .92 .52
December 31, 2002............................... 1.12 .50
March 31, 2003.................................. 1.37 .77
June 30, 2003................................... 2.49 1.03
September 30, 2003.............................. 2.20 1.52
December 31, 2003............................... 1.85 1.23
March 31, 2004.................................. 1.68 1.04
June 30, 2004................................... 2.54 1.30
September 30, 2004.............................. 1.45 .96
38
As of November 12, 2004, Multiband had 679 shareholders of record of its
common stock and 24,763,322 shares of common stock outstanding. As of that date,
eight shareholders held a total of 27,931 of Class A Preferred, two shareholders
held 8,700 shares of Class B Preferred, five shareholders held a total of
125,400 shares of Class C Preferred, and eight shareholders held a total of
77,650 shares of Class E Preferred.
PREFERRED STOCK
In December 1998, Multiband issued 2,550 shares of Class A Preferred for
$23,638 and 37,550 shares of Class B Preferred for $359,893. The Class B
Preferred was offered to certain note holders at a conversion rate of $10.00 per
share of Class B Preferred. Each share of Class A Preferred and Class B
Preferred is non-voting (except as otherwise required by law) and convertible
into five shares of common stock, subject to adjustment in certain
circumstances. Each holder of a share of Class A Preferred or Class B Preferred
has a five-year warrant to purchase one share of common stock at $3.00 per
share, subject to adjustment. During 2001, Multiband issued 67,655 shares of
Class A Preferred for $676,556.
In June 2000, Multiband issued 80,500 shares of Class C Preferred for
$805,000. The Class C Preferred was offered to certain note holders at a
conversion rate of $10.00 a share. In September 2000, Multiband issued an
additional 72,810 shares of Class C Preferred for $728,100. Each share of Class
C Preferred is non-voting (except as otherwise required by law) and convertible
into two shares of Multiband common stock, subject to adjustment in certain
circumstances.
In November 2000, Multiband issued 72,500 shares of Class D Preferred for
$490,332. The Class D Preferred was sold to eight accredited investors at $10.00
per share. Each share of Class D Preferred is non-voting (except as otherwise
required by law) and convertible into two and one-half shares of Multiband
Common Stock, subject to adjustment in certain circumstances.
In the second quarter of 2002, Preferred Class D stocks were redeemed;
$100,000 converted to Common Stock, and $300,000 converted to a Note Payable.
In the fourth quarter of 2002, Multiband issued 70,000 shares of Class E
Preferred for $700,000, with $600,000 related to conversion of a note payable
from a director of the Company into Preferred Stock.
In the first quarter of 2003, $72,000 worth of Class C Preferred Stock was
issued to an officer of the Company in a conversion of accounts payable. Also in
the first quarter of 2003, $76,500 worth of Class E Preferred Stock was issued
to a member of the Board for his purchase of Multiband assets.
In the third quarter of 2003 $25,000 worth of Class B Preferred Stock was
purchased by an accredited investor.
In addition, during 2003 $133,100 worth of Class C Preferred Stock was
redeemed.
During the second quarter of 2004, $776,500 worth of Class E Preferred
Stock was converted into Common Stock at a price of $1.25 per share. During the
third quarter of 2004, two million dollars worth of Class F Preferred Stock was
issued. During the fourth quarter of 2004, $452,450 worth of Class G Preferred
Stock was issued and $1,050,002 worth of Class H Preferred Stock was issued.
The holders of the Class A Preferred, Class B Preferred, Class C
Preferred, Class D Preferred, Class E Preferred, Class F Preferred, Class G
Preferred and Class H Preferred (collectively, "Preferred Stock") are entitled
to receive, as and when declared by the Board, out of the assets of the Company
legally available for payment thereof, cumulative cash dividends calculated
based on the per share stated value of the Preferred Stock. The per annum
dividend rate is eight percent (8%) for the Class A Preferred and ten percent
(10%) for the Class B Preferred, Class C Preferred and Class F Preferred,
fourteen percent (14%) for the Class D Preferred, fifteen percent (15%) for the
Class E Preferred, to be paid in kind, eight percent (8%) for the Class G
Preferred and six percent (6%) for the Class H Preferred. Dividends on the Class
A Preferred, Class C Preferred, Class D Preferred, Class F Preferred and Class G
Preferred are payable quarterly on March 31, June 30, September 30, and December
31 of each year. Dividends on the Class B Preferred are payable monthly on the
first day of each calendar month. Dividends on the Class H Preferred are payable
semiannually on June 30 and December 31 of each year. Dividends on the Preferred
Stock accrue cumulatively on a daily basis until the Preferred Stock is redeemed
or converted.
In the event of any liquidation, dissolution or winding up of Multiband,
the holders of the Class A Preferred and Class B Preferred will be entitled to
receive a liquidation preference of $10.50 per share, and the holders of the
Class C Preferred, Class D Preferred, Class E Preferred, Class F Preferred and
Class G Preferred will be entitled to receive a liquidation preference of $10.00
per share, each subject to adjustment. Holders of the Class H Preferred will be
entitled to receive a liquidation preference of $100,000 per share. Any
liquidation preference shall be payable out of any net assets of Multiband
remaining after payment or provision for payment of the debts and other
liabilities of Multiband.
39
Multiband may redeem the Preferred Stock, in whole or in part, at a
redemption price of $10.50 per share for the Class A Preferred and the Class B
Preferred and $10.00 per share for the Class C Preferred, Class D Preferred,
Class E Preferred, Class F Preferred and Class G Preferred (subject to
adjustment, plus any earned and unpaid dividends) on not less than thirty days'
notice to the holders of the Preferred Stock, provided that the closing bid
price of the common stock exceeds $4.00 per share (subject to adjustment) for
any ten consecutive trading days prior to such notice. Upon Multiband's call for
redemption, the holders of the Preferred Stock called for redemption will have
the option to convert each share of Preferred Stock into shares of common stock
until the close of business on the date fixed for redemption, unless extended by
Multiband in its sole discretion. Preferred Stock not so converted will be
redeemed. No holder of Preferred Stock can require Multiband to redeem his or
her shares.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 302A.251 of the Minnesota statutes, a corporation shall,
unless prohibited or limited by its Articles of Incorporation or Bylaws,
indemnify its directors, officers, employees and agents against judgments,
penalties, fines, settlements and reasonable expenses, including attorneys' fees
and disbursements, incurred by such person who was, or is threatened to be, made
a party to a proceeding by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation if generally, with
respect to the acts or omissions of the person complained of in the proceeding,
the person (i) has not been indemnified by another organization with respect to
the same acts or omissions; (ii) acted in good faith; (iii) received no improper
personal benefit; (iv) in the case of a criminal proceeding, had no reasonable
cause to believe the conduct was unlawful; and (v) reasonably believed the
conduct was in the best interest of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the best
interests of the corporation. Minnesota corporate law also provides that a
corporation may purchase and maintain insurance on behalf of any indemnified
party against any liability asserted against such person, whether or not the
corporation would have been required to indemnify the person against liability
under the provisions of Minnesota corporate law. Multiband's Articles of
Incorporation provide for indemnification pursuant to Minnesota statutes. We
also have directors' and officers' insurance in the amount of $3,000,000 per
occurrence.
LEGAL MATTERS
The validity of the shares of common stock being offered by this
prospectus will be passed upon for us by Steven M. Bell, Esq. of New Hope,
Minnesota.
EXPERTS
Financial statements of Multiband included in this prospectus for the
years ended December 31, 2003, 2002 and 2001 have been audited by Virchow,
Krause & Company, LLP, independent certified public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of such firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We will be filing annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission under File No.
0-13529. You may read and copy any document in our public files at the SEC's
offices at:
o Judiciary Plaza
450 Fifth Street, NW
Room 1024
Washington, D.C. 20549
o 500 West Madison Street
Suite 1400
Chicago, Illinois 60606
o 3475 Lenox, N.E.
Suite 1000
Atlanta, Georgia 30326
40
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
the SEC's website at http://www.sec.gov, through the SEC's electronic data
gathering analysis and retrieval system, EDGAR. Our common stock is traded on
the NASDAQ Stock Market under the symbol "MBND." Information about us is also
available from the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement that we filed with the
SEC. You should rely only on the information provided in this prospectus or any
supplement. We have not authorized anyone else to provide you with different
information. You should not assume that the information in this prospectus or
any supplement is accurate as of any date other than the date on the front of
that document.
41
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which we have filed with the Commission, are
incorporated by reference in this Prospectus:
o our Annual Report on Form 10-K for the fiscal year ended December
31, 2003;
o our proxy statement for the 2004 Annual Meeting of Shareholders;
o our quarterly reports on Form 10-Q for the quarters ended September
30, 2004, June 30, 2004 and March 31, 2004;
o our Forms 8-K filed with the Commission; and
o the description of our common stock contained in our Registration
Statement on Form 10.
All documents we file in the future pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering are also incorporated by reference and are an
important part of this Prospectus. Any statement contained in a document
incorporated by reference in this Prospectus shall be modified or superseded for
purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which is incorporated by
reference modifies or supersedes such statement.
We will provide without charge to each person to whom this Prospectus is
delivered, upon request, a copy of any or all documents that have been or may be
incorporated by reference in the Prospectus (other than exhibits to such
documents which are not specifically incorporated by reference into such
documents). Your requests should be directed to our Chief Financial Officer at
our principal executive offices at:
9449 Science Center Drive
New Hope, Minnesota 55428
Telephone Number (763) 504-3000
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
All statements contained in this Prospectus and the documents we
incorporate be reference that are not statements of historical fact are
"forward-looking statements". Sometimes these statements contain words like
"believe", "belief", "plan", "anticipate", "expect", "estimate", "may", "will",
or similar terms. Forward-looking statements involve known or unknown
uncertainties and other factors that could cause actual results to be materially
different from historical results or from any future results expressed or
implied by the forward-looking statements. The "Risk Factors" section summarizes
certain of the material risks and uncertainties that could cause our actual
results, performance or achievements to differ materially from what we have said
in this Prospectus and the documents we incorporate by reference. The Risk
Factors apply to all of our forward-looking statements. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements, which speak only as of the date of this Prospectus. We will not
revise these forward-looking statements to reflect events or circumstances after
the date of this Prospectus or to reflect the occurrence of unanticipated
events.
42
INDEX TO FINANCIAL STATEMENTS.
MULTIBAND CORPORATION AND SUBSIDIARIES - CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2004, DECEMBER 31, 2003 AND 2002 AND CONSOLIDATED STATEMENTS OF
OPERATIONS, CONSOLIDATED STOCKHOLDERS' EQUITY AND CONSOLIDATED CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER, 2004 AND 2003.
DESCRIPTION PAGES
----------- -----
Report of Independent Registered Public Accounting Firm F2
Consolidated Balance Sheets F3
Consolidated Statements of Operations F4
Consolidated Statements of Stockholders' Equity F5
Consolidated Statements of Cash Flows F9
Notes to Consolidated Financial Statements F10
F-1
INDEPENDENT AUDITOR'S REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Stockholders, Board of Directors, and Audit Committee
Multiband Corporation and subsidiaries (fka Vicom, Incorporated and
subsidiaries)
We have audited the accompanying consolidated balance sheets of Multiband
Corporation and subsidiaries (fka Vicom, Incorporated and subsidiaries) as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Multiband Corporation and subsidiaries (fka Vicom, Incorporated and
subsidiaries) as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
Minneapolis, Minnesota
February 16, 2004
F-2
MULTIBAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
NINE MONTHS ENDED
YEARS ENDED DECEMBER SEPTEMBER 30,
2003 2002 2004
------------ ------------ ------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 2,945,960 $ 540,375 $ 465,885
Certificate of deposit 250,000 -- 250,000
Accounts receivable, net 1,658,114 1,948,004 3,752,302
Inventories, net 1,973,817 1,463,658 1,363,698
Other current assets 96,550 226,774 78,563
------------ ------------ ------------
Total Current Assets 6,924,441 4,178,811 5,910,448
------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET 3,589,704 3,248,973 4,269,736
------------ ------------ ------------
OTHER ASSETS
Goodwill 2,748,879 2,748,879 2,233,366
Intangible assets, net -- -- 17,270,536
Other assets 639,861 170,653 330,032
------------ ------------ ------------
Total Other Assets 3,388,740 2,919,532 19,833,934
------------ ------------ ------------
TOTAL ASSETS $ 13,902,885 $ 10,347,316 $ 30,014,118
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $ 147,398 -- $ 32,969
Wholesale line of credit 976,314 1,290,383 1,069,359
Short term debt -- -- 5,849,906
Current portion of long-term debt 998,813 321,589 637,254
Current portion of note payable - stockholder 81,554 -- 94,794
Current portion of capital lease obligations 54,939 59,570 102,362
Accounts payable 1,771,699 1,735,931 2,575,675
Accrued liabilities 1,459,705 714,479 3,700,035
Deferred service obligations and revenue 315,227 309,729 413,360
------------ ------------ ------------
Total Current Liabilities 5,805,649 4,431,681 14,475,714
LONG-TERM LIABILITIES
Long-term debt, net 2,087,156 3,114,006 2,519,530
Other long term debt -- -- 222,700
Note payable - stockholder, net of current portion 32,837 -- --
Capital lease obligations, net of current portion 142,898 159,344 636,499
------------ ------------ ------------
Total Liabilities 8,068,540 7,705,031 17,854,443
------------ ------------ ------------
MINORITY INTEREST IN SUBSIDIARY 26,634 -- --
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,931, 27,831, and 27,931 shares issued
and outstanding, $293,276, $292,226 and $293,276
liquidation preference) 419,752 418,252 419,752
10% Class B (8,700, 6,200 and 8,700 shares issued and
outstanding, $91,350, $65,100 and $91,350 liquidation
preference) 62,000 62,000 62,000
10% Class C (125,400, 131,510 and 125,400 shares
issued and outstanding, $1,254,000, $1,315,100 and
$1,254,000 liquidation preference) 1,611,105 1,699,407 1,611,105
15% Class E (77,650, 70,000 and 77,650 shares issued
and outstanding, $776,500, $700,000 and $776,500
liquidation preference) 438,964 395,778 --
10% Class F (200,000 and 0 shares issued and
outstanding, $2,000,000 liquidation preference) -- -- 2,000,000
10$ Class G (7,500 and 0 shares issued and
outstanding, $75,000 liquidation preference) -- -- 70,672
Common stock, no par value (19,036,805, 13,110,477and
19,450,294 shares issued; 19,019,786, 13,065,410 and
19,440,150 shares outstanding) 7,726,505 4,465,832 16,678,538
Stock subscriptions receivable (418,085) (633,195) (368,243)
Options and warrants 30,514,872 26,632,299 31,379,338
Unamortized compensation (217,210) (682,089) (1,724)
Accumulated deficit (34,330,192) (29,715,999) (39,691,763)
------------ ------------ ------------
Total Stockholders' Equity 5,807,711 2,642,285 12,159,675
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,902,885 $ 10,347,316 $ 30,014,118
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2003, 2002 and 2001, Nine Months Ended
September 30, 2004 and 2003 (unaudited)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------- ----------------------------
2003 2002 2001 2004 2003
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES $ 22,640,421 $ 24,540,969 $ 32,260,777 $ 22,734,594 $ 17,843,508
============ ============ ============ ============ ============
COST AND EXPENSES
Cost of products and services 15,952,019 18,036,750 25,295,186 15,580,482 12,718,951
Selling, general and administrative 10,184,709 9,337,292 10,962,739 10,488,032 7,147,965
Impairment of goodwill -- -- -- 527,879 --
============ ============ ============ ============ ============
Total costs and expenses 26,136,728 27,374,042 36,257,925 26,596,393 19,866,916
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (3,496,307) (2,833,073) (3,997,148) (3,861,799) (2,023,408)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (897,704) (1,604,512) (1,446,868) (949,129) (643,368)
Other income (4,359) (474) 118,464 (9,003) (56,777)
------------ ------------
Total Other Expense (902,063) (1,604,986) (1,328,404) (958,132) (705,145)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST IN SUBSIDIARY (4,398,370) (4,438,059) (5,325,552) (4,819,931) (2,728,553)
Minority interest in subsidiary 33,366 -- -- -- (4,853)
NET LOSS (4,365,004) (4,438,059) (5,325,552) (4,819,931) (2,733,406)
-Preferred stock dividends 248,689 153,578 432,669 541,640 135,353
------------ ------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,613,693) $ 4,591,637) $ (5,758,221) $ (5,361,571) $ (2,868,759)
============ ============ ============ ============ ============
LOSS PER COMMON SHARE- BASIC AND DILUTED $ (0.29) $ (0.39) $ (0.66) $ (0.21) $ (0.18)
============ ============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 16,112,231 11,735,095 8,762,814 22,494,250 15,168,069
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
MULTIBAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
Cumulative Convertible Preferred Stock
8% Class A 10% Class B 10% Class C
---------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- -----------
BALANCES, December 31, 2000 - $ - 22,836 $ 218,869 150,810 $ 1,951,003
Stock issued:
Cash 32,050 320,500 - - - -
Stock subscriptions receivable - - - - - -
Acquisition of assets 10,640 106,400 - - - -
Purchase of intangible asset - - - - - -
Guarantee of debt financing - - - - - -
Conversion of accounts payable 3,500 35,000 - - - -
Conversion of accrued liabilities 9,631 96,306 - - - -
Conversion of notes payable 5,804 58,044 - - - -
Conversion of preferred stock (31,000) (310,000) (13,150) (131,500) (7,800) (78,000)
Conversion of dividends payable 6,030 60,300 - - - -
Redemption of preferred stock (7,783) (77,830) (986) (369) (3,500) (35,000)
Discount on preferred stock related to - 145,147 - - - (37,556)
warrants
Interest receivable on stock subscription - - - - - -
receivable
Warrants issued:
Preferred stock - - - - - -
Common stock - - - - - -
Debt - - - - - -
Deferred compensation expense related to
stock options issued below fair market value - - - - - -
Deferred compensation expense - - - - - -
Restricted stock:
Issued - - - - - -
Forfeited - - - - - -
Amortization expense - - - - - -
Repricing of warrants - - - - - -
Embedded value with Pyramid Trading warrants - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
---------- ---------- ---------- ---------- ---------- -----------
BALANCES, December 31, 2001 28,872 433,867 8,700 87,000 139,510 1,800,447
Stock issued:
Cash - - - - - -
Reduction of stock subscriptions - - - - - -
receivable for fees related to equity
transactions
Acquisition of assets 1,859 18,590 - - - -
Guarantee of debt financing - - - - - -
Services rendered - - - - - -
Conversion of accounts payable - - - - - -
Conversion of notes payable and accrued
interest - - - - - -
Conversion of accrued interest - - - - - -
Conversion of preferred stock - - (2,500) (25,000) (2,500) (25,000)
Redemption of preferred stock (2,900) (29,000) - - (5,500) (55,000)
Discount on preferred stock related to
warrants issued - (5,205) - - - (21,040)
Interest receivable on stock subscription - - - - - -
receivable
Warrants issued:
Preferred stock - - - - - -
Common stock - - - - - -
Debt - - - - - -
Deferred compensation expense related to
stock options issued below fair market value - - - - - -
Deferred compensation expense - - - - - -
Restricted stock:
Issued and outstanding - - - - - -
Forfeited - - - - - -
Amortization expense - - - - - -
Embedded value with Pyramid Trading warrants - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
---------- ---------- ---------- ---------- ---------- -----------
BALANCES, December 31, 2002 27,831 418,252 6,200 62,000 131,510 1,699,407
Stock issued:
Cash 100 1,000 2,500 25,000 - -
Exercise of warrants - - - - - -
Cashless exercise of warrants - - - - - -
Exercise of stock options - - - - - -
Reduction of stock subscriptions - - - - - -
receivable for fees related to equity
transactions
Acquisition of assets - - - - - -
Conversion of accounts payable - - - - 7,200 72,000
Conversion of notes payable - - - - - -
Conversion of accrued interest - - - - - -
Conversion of preferred stock - - - - (4,000) (40,000)
Conversion of dividends payable - - - - - -
Redemption of preferred stock - - - - (9,310) (93,100)
Intrinsic value of convertible feature - 500 - - - (27,202)
Discount on preferred stock related to
warrants issued - - - (25,000) - -
Stock subscriptions receivable:
Cash payments - - - - - -
Increase reserve - - - - - -
Interest collected - - - - - -
Warrants issued:
Preferred stock - - - - - -
Common stock - - - - - -
Debt - - - - - -
Services rendered - - - - - -
Deferred compensation expense related to
stock options issued below fair market value - - - - - -
Deferred compensation expense - - - - - -
Restricted stock:
Forfeited - - - - - -
Amortization expense - - - - - -
Embedded value with Laurus warrants - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
---------- ---------- ---------- ---------- ---------- -----------
BALANCES, December 31, 2003 27,931 $ 419,752 8,700 $ 62,000 125,400 $ 1,611,105
========== ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
F-5
Cumulative Convertible Preferred Stock
14% Class D 15% Class E
--------------------- --------------------
Shares Amount Shares Amount
---------- ---------- ---------- --------
BALANCES, December 31, 2000 72,500 $ 802,813 - $ -
Stock issued:
Cash - - - -
Stock subscriptions receivable - - - -
Acquisition of assets - - - -
Purchase of intangible asset - - - -
Guarantee of debt financing - - - -
Conversion of accounts payable - - - -
Conversion of accrued liabilities - - - -
Conversion of notes payable 10,000 100,000 - -
Conversion of preferred stock - - - -
Conversion of dividends payable - - - -
Redemption of preferred stock (42,500) (425,000) - -
Discount on preferred stock related to - (60,313) - -
warrants
Interest receivable on stock subscription - - - -
receivable
Warrants issued: - -
Preferred stock - - - -
Common stock - - - -
Debt - - - -
Deferred compensation expense related to
stock options issued below fair market valu - - - -
Deferred compensation expense - - - -
Restricted stock: - -
Issued - - - -
Forfeited - - - -
Amortization expense - - - -
Repricing of warrants - - - -
Embedded value with Pyramid Trading warrants - - - -
Preferred stock dividends - - - -
Net loss - - - -
---------- ---------- ---------- ---------
BALANCES, December 31, 2001 40,000 417,500 - -
Stock issued:
Cash - - 10,000 100,000
Reduction of stock subscriptions - - - -
receivable for fees related to equity
transactions
Acquisition of assets - - - -
Guarantee of debt financing - - - -
Services rendered - - - -
Conversion of accounts payable - - - -
Conversion of notes payable and accrued
interest (30,000) (300,000) 60,000 600,000
Conversion of accrued interest - - - -
Conversion of preferred stock (10,000) (100,000) - -
Redemption of preferred stock - - - -
Discount on preferred stock related to
warrants issued - (17,500) - (304,222)
Interest receivable on stock subscription - - - -
receivable
Warrants issued:
Preferred stock - - - -
Common stock - - - -
Debt - - - -
Deferred compensation expense related to
stock options issued below fair market valu - - - -
Deferred compensation expense - - - -
Restricted stock:
Issued and outstanding - - - -
Forfeited - - - -
Amortization expense - - - -
Embedded value with Pyramid Trading warrants - - - -
Preferred stock dividends - - - -
Net loss - - - -
---------- ---------- ---------- ---------
BALANCES, December 31, 2002 - - 70,000 395,778
Stock issued:
Cash - - - -
Exercise of warrants - - - -
Cashless exercise of warrants - - - -
Exercise of stock options - - - -
Reduction of stock subscriptions - - - -
receivable for fees related to equity
transactions
Acquisition of assets - - 7,650 76,500
Conversion of accounts payable - - - -
Conversion of notes payable - - - -
Conversion of accrued interest - - - -
Conversion of preferred stock - - - -
Conversion of dividends payable - - - -
Redemption of preferred stock - - - -
Intrinsic value of convertible feature - - - -
Discount on preferred stock related to
warrants issued - - - (33,314)
Stock subscriptions receivable:
Cash payments - - - -
Increase reserve - - - -
Interest collected - - - -
Warrants issued:
Preferred stock - - - -
Common stock - - - -
Debt - - - -
Services rendered - - - -
Deferred compensation expense related to
stock options issued below fair market val - - - -
Deferred compensation expense - - - -
Restricted stock:
Forfeited - - - -
Amortization expense - - - -
Embedded value with Laurus warrants - - - -
Preferred stock dividends - - - -
Net loss - - - -
---------- ---------- ---------- ---------
BALANCES, December 31, 2003 - $ - 77,650 $ 438,964
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
MULTIBAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
Stock Options
Common Stock Subscriptions and
Shares Amount Receivable Warrants
-------------- ------------- ------------- --------------
BALANCES, December 31, 2000 8,137,181 $ 1,340,074 $ - $ 14,347,833
Stock issued:
Cash 1,092,953 421,566 - -
Stock subscriptions receivable 800,000 610,000 (610,000) -
Acquisition of assets 87,000 261,000 - -
Purchase of intangible assets 50,000 83,750 - -
Guarantee of debt financing 100,000 120,000 - -
Conversion of accounts payable - - - -
Conversion of accrued liabilities 10,000 9,007 - -
Conversion of notes payable 20,000 50,000 - -
Conversion of preferred stock 382,027 528,742 - -
Conversion of dividends payable - - - -
Redemption of preferred stock - - - -
Discount on preferred stock related to warrants - - - -
Interest receivable on stock subscription receivable - - (21,619) -
Warrants issued:
Preferred stock - - - 87,403
Common stock - - - 544,683
Debt - - - 1,382,126
Deferred compensation expense related to stock
options issued below fair market value 1,244,250
Deferred compensation expense - - - -
Restricted stock
Issued 83,000 308,145 - -
Forfeited (82,711) (289,180) - -
Amortization expense - - - -
Repricing of warrants - - - 6,919,692
Embedded value with Pyramid Trading warrants - - - 431,925
Preferred stock dividends - - - -
Net loss - - - -
-------------- ------------- ------------ -------------
BALANCES, December 31, 2001 10,679,450 3,443,104 (631,619) 24,957,912
Stock issued:
Cash 1,548,120 274,414 7,850 -
Reduction of stock subscriptions receivable for
fees related to equity transactions - (40,563) 40,563 -
Acquisition of assets - - - (18,590)
Guarantee of debt financing 25,000 14,750 - -
Services rendered 35,214 27,700 - -
Conversion of accounts payable 7,500 7,255 - -
Conversion of notes payable and accrued interest 554,569 460,001 - -
Conversion of accrued interest 117,787 119,881 - -
Conversion of preferred stock 140,000 150,000 - -
Redemption of preferred stock - - - -
Discount on preferred stock related to warrants
issued - - - -
Interest receivable on stock subscription
receivable - - (49,989) -
Warrants issued:
Preferred stock - - - 324,324
Common stock - - - 575,119
Debt - - - 879,382
Deferred compensation expense related to stock
options issued below fair market value - 53,745 - (53,345)
Deferred compensation expense - - - -
Restricted stock:
Issued and outstanding 22,434 21,255 - -
Forfeited (19,597) (65,710) - -
Amortization expense - - - -
Embedded value with Pyramid Trading warrants - - - (32,503)
Preferred stock dividends - - - -
Net loss - - - -
-------------- ------------- ------------ --------------
BALANCES, December 31, 2002 13,110,477 4,465,832 (633,195) 26,632,299
Stock issued:
Cash 4,477,279 1,947,197 - -
Exercise of warrants 258,790 262,030 - -
Cashless exercise of warrants 141,529 - - -
Exercise of stock options 3,000 3,750 - -
Reduction of stock subscriptions receivable - (36,977) 36,977 -
for fees related to equity transactions
Acquisition of assets - - - -
Conversion of accounts payable 85,000 120,690 - -
Conversion of notes payable 654,202 762,000 - -
Conversion of accrued interest 63,539 66,172 - -
Conversion of preferred stock 66,666 40,000 - -
Conversion of dividends payable 187,164 113,209 - -
Redemption of preferred stock - - - -
Intrinsic value of convertible feature - - - -
Discount on preferred stock related to warrants - - - -
issued
Stock subscriptions receivable:
Cash payments - - 105,806 -
Increase reserve - - 71,000 -
Interest collected - - 1,327 -
Warrants issued:
Preferred stock - - - 58,314
Common stock - - - 2,050,507
Debt - - - 883,711
Services rendered - - - 321,920
Deferred compensation expense related to stock
options issued below fair market value - - - -
Deferred compensation expense - - - -
Restricted stock:
Forfeited (10,841) (17,398) - -
Amortization expense - - - -
Embedded value with Laurus warrants - - - 568,121
Preferred stock dividends - - - -
Net loss - - - -
-------------- ------------- ------------ --------------
BALANCES, December 31, 2003 19,036,805 $ 7,726,505 $ (418,085) $ 30,514,872
============== ============= ============ ==============
See accompanying notes to consolidated financial statements.
F-7
Unamortized Accumulated
Compensation Deficit Total
--------------- ------------- ----------
BALANCES, December 31, 2000 $ (278,138) $(12,506,102) $ 5,876,352
Stock issued:
Cash - - 742,066
Stock subscriptions receivable - - -
Acquisition of assets - - 367,400
Purchase of intangible assets - - 83,750
Guarantee of debt financing - - 120,000
Conversion of accounts payable - - 35,000
Conversion of accrued liabilities - - 105,313
Conversion of notes payable - - 208,044
Conversion of preferred stock - - 9,242
Conversion of dividends payable - - 60,300
Redemption of preferred stock - - (538,199)
Discount on preferred stock related to warrants - 68,948 116,226
Interest receivable on stock subscription receivable - - (21,619)
Warrants issued:
Preferred stock - - 87,403
Common stock - - 544,683
Debt - - 1,382,126
Deferred compensation expense related to stock
options issued below fair market value (1,244,250) - -
Deferred compensation expense 239,461 - 239,461
Restricted stock
Issued (308,145) - -
Forfeited 289,180 - -
Amortization expense 92,749 - 92,749
Repricing of warrants - (6,919,692) -
Embedded value with Pyramid Trading warrants - - 431,925
Preferred stock dividends - (432,669) (432,669)
Net loss - (5,325,552) (5,325,552)
--------------- ------------- ------------
BALANCES, December 31, 2001 (1,209,143) (25,115,067) 4,184,001
Stock issued:
Cash - - 382,264
Reduction of stock subscriptions receivable for
fees related to equity transactions - - -
Acquisition of assets - - -
Guarantee of debt financing - - 14,750
Services rendered - - 27,700
Conversion of accounts payable - - 7,255
Conversion of notes payable and accrued interest - - 760,001
Conversion of accrued interest - - 119,881
Conversion of preferred stock - - -
Redemption of preferred stock - - (84,000)
Discount on preferred stock related to warrants
issued - (9,295) (357,262)
Interest receivable on stock subscription
receivable - - (49,989)
Warrants issued:
Preferred stock - - 324,324
Common stock - - 575,119
Debt - - 879,382
Deferred compensation expense related to stock
options issued below fair market value 4,307 - 4,707
Deferred compensation expense 78,292 - 78,292
Restricted stock:
Issued and outstanding (21,255) - -
Forfeited 65,710 - -
Amortization expense 400,000 - 400,000
Embedded value with Pyramid Trading warrants - - (32,503)
Preferred stock dividends - (153,578) (153,578)
Net loss - (4,438,059) (4,438,059)
--------------- ------------- -------------
BALANCES, December 31, 2002 (682,089) (29,715,999) 2,642,285
Stock issued:
Cash - - 1,973,197
Exercise of warrants - - 262,030
Cashless exercise of warrants - - -
Exercise of stock options - - 3,750
Reduction of stock subscriptions receivable - - -
for fees related to equity transactions
Acquisition of assets - - 76,500
Conversion of accounts payable - - 192,690
Conversion of notes payable - - 762,000
Conversion of accrued interest - - 66,172
Conversion of preferred stock - - -
Conversion of dividends payable - - 113,209
Redemption of preferred stock - - (93,100)
Intrinsic value of convertible feature - (500) (27,202)
Discount on preferred stock related to warrants - - (58,314)
issued
Stock subscriptions receivable:
Cash payments - - 105,806
Increase reserve - - 71,000
Interest collected - - 1,327
Warrants issued:
Preferred stock - - 58,314
Common stock - - 2,050,507
Debt - - 883,711
Services rendered - - 321,920
Deferred compensation expense related to stock
options issued below fair market value 367 - 367
Deferred compensation expense 47,114 - 47,114
Restricted stock:
Forfeited 17,398 - -
Amortization expense 400,000 - 400,000
Embedded value with Laurus warrants - - 568,121
Preferred stock dividends - (248,689) (248,689)
Net loss - (4,365,004) (4,365,004)
--------------- ------------- -------------
BALANCES, December 31, 2003 $ (217,210) $(34,330,192) $ 5,807,711
=============== ============= =============
See accompanying notes to consolidated financial statements.
F-8
MULTIBAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
2003 2002 2001 2004 2003
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,365,004) $(4,438,059) $(5,325,552) $(4,819,931) $(2,733,406)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 996,379 1,115,457 1,410,764 2,344,853 709,404
Amortization of deferred compensation 447,481 482,999 332,210 212,935 340,572
Amortization of original issue discount 405,248 1,103,314 797,169 541,873 285,345
Write off of notes receivable and investment 19,069 60,000 0 0 0
Reserve for stock subscriptions and interest 0 0
receivable 71,000 0 0
Impairment reserve on property and equipment -- 119,480 0 0 0
Impairment of goodwill 0 0 0 527,879 0
Common stock issued for services -- 27,700 0 291,220 321,920
Loss on sale of property and equipment 79,394 31,412 846 26,217 76,269
Interest receivable on stock subscription
receivable 1,327 (49,989) (21,619) (273,900) 13,452
Warrants issued for services 321,920 0 87,403 0 0
Warrants issued with debt conversion 0 183,903 0 0 0
Discount on preferred stock related to warrants 0 0 (33,178) 0 0
Minority interest in subsidiary (33,366) 0 0 0 4,853
Changes in operating assets and liabilities:
Accounts receivable, net 289,890 576,509 3,087,313 (2,134,902) (329,189)
Inventories, net (509,762) 182,783 705,050 610,119 (411,092)
Other current assets 70,264 (205,483) 47,031 17,987 (6,026)
Other assets (143,101) 43,210 0 (87,135) (21,531)
Wholesale line of credit (314,069) (34,424) (708,533) 93,045 33,384
Accounts payable and accrued liabilities 122,403 38,344 (978,479) 620,817 (388,208
Deferred service obligations and revenue (39,321) (106,877) 97,465 98,133 26,246
----------- ----------- ----------- ----------- -----------
Net Cash Flows from Operating Activities (2,580,248) (869,721) (502,110) (1,930,790) (2,078,007)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 15,492 1,239,313 60,019 649 6,145
Purchases of property and equipment (526,936) (1,275,434) (1,884,945) (483,810) (356,291)
Purchase of Satellite Broadcasting Corporation 0 0 0 (187,424) 0
Purchase of Minnesota Digital Universe Inc. 0 0 0 (1,100,000) 0
Purchase of Rainbow Satellite Group LLC 0 0 0 (1,000,000) 0
Purchase of 21st Century Satellite Communications Inc. 0 0 0 (250,000) 0
Payments received on notes receivable -- 0 59,084 3,172 5,806
Payments for investment in joint venture (64,878) 0 0 0 (64,878)
Purchase of certificate of deposit (250,000) 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net Cash Flows from Investing Activities (826,322) (36,121) (1,765,842) (3,017,413) (409,218)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in checks issued in excess of cash in bank 147,398 -- -- (74,068) 0
Proceeds from long-term debt and warrants issued
with long-term debt 1,659,726 1,172,064 1,919,650 750,021 133,726
Proceeds from note payable - stockholder 124,000 -- -- 0 0
Payments received on stock subscriptions receivable 105,806 6,786 -- 0 0
Payments on long-term debt (200,768) (131,605) (461,808) (1,215,788) (183,936)
Payments on note payable - stockholder (9,609) -- -- (19,598) 0
Payments on capital lease obligations (75,301) (937,828) (315,770) (63,066) (69,252)
Proceeds from issuance of stock and warrants 4,023,704 949,533 1,270,612 2,888,836 3,654,388
Redemption of preferred stock (93,100) (84,000) (538,199) 0 (2,100)
Redemption of common stock 0 0 0 (62,975) 0
Preferred dividends (135,481) (153,578) (143,167) (125,513) (51,263)
Exercise of stock options 3,750 -- -- 0 0
Exercise of warrants 262,030 -- -- 390,279 312,030
----------- ----------- ----------- ----------- -----------
Net Cash Flows from Financing Activities 5,812,155 821,372 1,731,318 (2,468,128) 3,793,593
----------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,405,585 (84,470) (536,634) (2,480,075) 1,306,368
CASH AND CASH EQUIVALENTS - Beginning of Year 540,375 624,845 1,161,479 2,945,960 540,375
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,945,960 $ 540,375 $ 624,845 $ 465,885 $ 1,846,743
=========== =========== =========== =========== ===========
F-9
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Multiband Corporation (the Company) was incorporated in Minnesota in September
1975. The Company provides voice, data and video services to business,
government and multi-dwelling 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 years ended December 31, 2003, 2002, and 2001, the Company incurred net
losses of $4,365,004, $4,438,059 and $5,325,552, respectively. At December 31,
2003, the Company had an accumulated deficit of $34,330,192. The Company's
ability to continue as a going concern is dependent on it ultimately achieving
profitability and/or raising additional capital. 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.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of Multiband
Corporation (Multiband) and its wholly owned subsidiaries, Corporate
Technologies, USA, Inc. (CTU), and Multiband, 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). As part of the subsidiary agreement, the Company has the
right to elect two of the three board of directors and, at its sole option and
discretion, shall have the right, but not the obligation to convert one
Multiband common share for every ten shares of Multiband USA issued to PACE
(Notes 2 and 17). Based on the Company's control of the subsidiary, the
operating results have been consolidated. All significant intercompany
transactions and balances have been eliminated in consolidation.
On January 1, 2004, the Company merged Multiband into CTU.
Revenues and Cost Recognition
The Company earns revenues from five 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, and 5) MB USA user charges to
timeshares.
F-10
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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.
Customers 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. Revenues are recognized when the products are
delivered and installed and the customer has accepted the terms and has the
ability to fulfill the terms.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. Service revenues
accounted for less than 10% of total revenues for the years ended December 31,
2003, 2002 and 2001. The Company, if the customer elects, enters into equipment
maintenance agreements for products sold once the original manufacturer's
warranty has expired. Revenues from all equipment maintenance agreements are
recognized on a straight-line basis over the terms of each contract. Costs for
services are expensed as incurred.
Multiband and MB USA user charges are recognized as revenues in the period the
related services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Cash and Cash Equivalents
The Company includes as cash equivalents, investments with original maturities
of three months or less when purchased, which are readily convertible into known
amounts of cash. The Company deposits its cash in high credit quality financial
institutions. The balances, at times, may exceed federally insured limits.
Certificate of Deposit
The Company has a certificate of deposit which matures in October 2004.
Accounts Receivable
The Company reviews customers' credit history before extending unsecured credit
and establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers and other information. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Invoices are due 30 days after
presentation. Accounts receivable over 30 days are considered past due. The
Company does not accrue interest on past due accounts receivable. Receivables
are written off only after all collection attempts have failed and are based on
individual credit evaluation and specific circumstances of the customer.
Accounts receivable are shown net of an allowance for uncollectible accounts of
$223,000 and $236,000 at December 31, 2003 and 2002, respectively. Accounts
receivable over 90 days were $433,000 and $331,000 at December 31, 2003 and
2002, respectively.
F-11
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Inventories
Inventories, consisting principally of purchased telecommunication, networking
and computer equipment and parts, are stated at the lower of cost or market.
Cost is determined using an average cost method for telecommunication and
networking equipment and the first-in, first-out (FIFO) method for computer
equipment. Nonmonetary exchanges of inventory items with third parties are
recorded at the net book value of the items exchanged with no gains or losses
recognized.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost.
Improvements are capitalized while repairs and maintenance costs are charged to
operations when incurred. Property and equipment is depreciated or amortized
using the straight-line method over estimated useful lives ranging from three to
seven years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the assets.
Debt Issuance Costs
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.
Goodwilll and Other Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was being amortized using the straight-line
method over ten years. Accumulated amortization was $782,278 at December 31,
2003 and 2002.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations",
effective for acquisitions initiated on or after July 1, 2001, and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations. SFAS No. 142
indicates that goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted SFAS No. 142 effective January 1, 2002. The Company
performed the required goodwill impairment test during the years ended December
31, 2003 and 2002.
F-12
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
As part of compliance with this standard, the Company obtained an independent
appraisal to assess the fair value of its business units to determine whether
goodwill carried on its books was impaired and the extent of such impairment, if
any for the years ended December 31, 2003 and 2002. For the year ended December
31, 2003, the independent appraisal used the discounted future returns method to
measure the fair value of its business units rather than the income method which
was used for 2002. The method of valuation was changed due to the Company
changing its business model and historical results, which are used for the
income method, would not accurately evaluate the value of future economic
benefits. Under the discounted future returns method, future benefits over a
period of time are estimated and then discounted back to present value. For the
year ended December 31, 2002, the independent appraisal used the income method
to measure the fair value of its business units. Under the income method, value
is dependent on the present value of future economic benefits to be derived from
ownership. Future net cash flows available for distribution are discounted at
market-based rates of return to provide indications of value. The independent
appraiser used a discount factor of 16.8% and 18.35% for the years ended
December 31, 2003 and 2002, respectively. Based upon this independent appraisal,
the Company determined that its current goodwill balances were not impaired as
of December 31, 2003 and 2002.
Components of intangible assets are as follows:
December 31, 2003 December 31, 2002
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ---------- ---------- ----------
Intangible assets
subject to amortization
Domain name $ 83,750 $ 39,083 $ 83,750 $ 22,333
Access contracts 60,000 13,334 -- --
Debt issuance costs 115,500 3,208 -- --
Customer cable lists 300,000 -- -- --
---------- ---------- ---------- ----------
Total $ 559,250 $ 55,625 $ 83,750 $ 22,333
========== ========== ========== ==========
Intangible assets
not subject to
amortization Goodwill $3,531,157 $ 782,278 $3,531,157 $ 782,278
========== ========== ========== ==========
Amortization of intangible assets was $33,291, $16,750 and $5,583 for the years
ended December 31, 2003, 2002 and 2001, respectively. Estimated amortization
expense of intangible assets for the years ending December 31, 2004, 2005, 2006,
2007, and 2008 is $135,250, $135,250, $113,125, $60,000 and $60,000,
respectively. The Company's loss attributable to common stockholders, excluding
goodwill amortization expense, for the years ended December 31, 2003, 2002 and
2001 would have been as follows had we adopted SFAS No. 142 on January 1, 2000:
2003 2002 2001
------------- ------------- -----------
Loss attributable to common stockholders - as reported $ (4,613,693) $ (4,591,637) $(5,758,221)
SFAS No. 142 amortization adjustment -- -- 345,600
Loss attributable to common stockholders - as adjusted (4,613,693) (4,591,637) (5,412,621)
Basic and diluted net loss per share - as reported (0.29) (0.39) (0.66)
Basic and diluted net loss per share - adjusted (0.29) (0.39) (0.62)
F-13
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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 acquired during the year ended
December 31, 2003 over the estimate useful life of three years using the
straight-line method. The Company will amortize the customer cable lists
acquired on December 31, 2003 over five years beginning January 1, 2004.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were
$146,906, $104,788 and $230,629 for the years ended December 31, 2003, 2002 and
2001, respectively, and are included in selling, general and administrative
expenses in the consolidated statements of operations.
Shipping and Handling Costs
In accordance with Emerging Issues Task Force (EITF) Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs," the Company is including shipping and
handling revenues in revenues and shipping and handling costs in cost of
products and services.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement and income tax reporting bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to the extent that
realization is not assured.
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, $447,481, $482,999 and
$332,210 of compensation cost has been recognized in the accompanying
consolidated statements of operations for the years ended December 31, 2003,
2002 and 2001, 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 years ended December 31:
F-14
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Loss attributable to common stockholders $(4,613,693) $(4,591,637) $(5,758,221)
Pro forma loss attributable to common shares $(5,363,381) $(4,915,649) $(6,131,692)
Basic and diluted net loss per share:
As reported $ (0.29) $ (0.39) $ (0.66)
Pro forma loss attributable to common shares $ (0.33) $ (0.42) $ (0.70)
Stock-based compensation:
As reported $ 447,481 $ 482,999 $ 332,210
Pro forma $ 749,688 $ 324,012 $ 373,471
In determining the compensation cost of the options granted during fiscal 2003,
2002, and 2001, 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:
2003 2002 2001
----------- ----------- -----------
Risk-free interest rate 3.00% 4.40% 5.00%
Expected life of options granted 10 years 10 years 10 years
Expected volatility range 170% 170% 110%
Expected dividend yield 0% 0% 0%
Net Loss per Common Share
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 years ended December 31, 2003, 2002 and 2001 were
anti-dilutive.
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," effective for contracts entered
into or modified after June 30, 2003. This amendment clarifies when a contract
meets the characteristics of a derivative, clarifies when a derivative contains
a financing component and amends certain other existing pronouncements. The
adoption of SFAS No. 149 did not have a material effect on the Company's
consolidated financial statements.
F-15
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
lnstruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 requires the classification as a
liability of any financial instruments with a mandatory redemption feature, an
obligation to repurchase equity shares, or a conditional obligation based on the
issuance of a variable number of its equity shares. The Company does not have
any financial instruments as defined by SFAS No. 150. The adoption of SFAS No.
150 did not have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements for periods ending after December 15, 2002. The adoption of
FIN 45 did not effect the Company's consolidated financial statements.
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" (FIN 46R). This standard
replaces FIN 46, Consolidation of Variable Interest Entities" that was issued in
January 2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN
46R addresses the consolidation of business enterprises of variable interest
entities (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities from
its requirements and provides for special effective dates for entities that have
fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise,
application of FIN 46R is required in financial statements of public entities
that have interest in structures commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application by the Company
for all other types of VIEs is required in financial statements for periods
ending no later than the quarter ended January 31, 2005. The Company does not
expect the adoption of FIN 46R to have a material effect on the Company's
consolidated financial statements.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant management estimates relate to the allowances for doubtful accounts,
inventory obsolescence, and stock subscriptions and interest receivable,
property and equipment estimated useful lives, goodwill carrying value and the
valuation of deferred income tax assets.
Financial Instruments
The carrying amounts for all financial instruments approximates fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments. The fair value of capital lease obligations, note
payable-stockholder and long-term debt approximates the carrying amounts based
upon the Company's expected borrowing rate for debt with similar remaining
maturities and comparable risk.
F-16
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Reclassifications
Certain accounts in the prior years' consolidated financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year consolidated financial statements. These reclassifications had no
effect on net loss or stockholders' equity.
NOTE 2 - BUSINESS ACQUISITIONS
During February 2003, the Company incorporated a new subsidiary, MB USA. This
subsidiary was formed as a 50% owned joint venture agreement with PACE (Note 1).
The reason for the joint venture with PACE is to continue to expand the
Company's services related to multi-users of voice, data and video services.
On April 25, 2003, the Company, through MB USA, purchased certain video
equipment assets, related rights to video subscribers and rights of access
agreements from Suncoast Automation, Inc. (Suncoast). The purchase price was
allocated to the acquired assets and assumed certain liabilities based on the
estimated fair values as of the acquisition date. The purchase price was
allocated to assets and liabilities acquired as follows:
Property and equipment $ 504,224
Access contracts 60,000
Capital lease obligations (54,224)
-----------------
Net purchase price $ 510,000
=================
The net purchase price of $510,000 consisted entirely of cash paid. The
consolidated results of operations on an unaudited pro forma basis are not
presented separately as the results do not differ significantly from historical
amounts presented herein.
On December 31, 2003, the Company purchased certain customer lists from Florida
Cable, Inc. (Florida Cable) for $300,000 which was paid to Florida Cable on
January 2, 2004. In addition, the Company agreed to lease from Florida Cable
equipment used in the operation of the cable television systems for six months
for $1.00. After the six month lease period has expired, the Company has agreed
to purchase the equipment for $165,000. If the Company fails to pay the $165,000
in full, all rights and title of the customer lists mentioned above will revert
back to Florida Cable. At December 31, 2003, the Company has recorded the
$165,000 liability associated with the contingent purchase of equipment.
F-17
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2003 2002
----------- -----------
Leasehold improvements $ 764,064 $ 732,931
Property and equipment - owned 5,318,243 4,230,560
Property and equipment under capital lease obligations
428,749 456,124
----------- -----------
6,511,056 5,419,615
Less accumulated depreciation and amortization (2,921,352) (2,170,642)
----------- -----------
$ 3,589,704 $ 3,248,973
=========== ===========
Depreciation and amortization expense on property and equipment was $948,796,
$981,985 and $1,019,581 for the years ended December 31, 2003, 2002 and 2001,
respectively.
NOTE 4 - OTHER ASSETS
Other assets consisted of the following at December 31:
2003 2002
-------- --------
Other current assets:
Current portion of notes receivable $ 2,983 $ 52,977
Prepaid expenses and other 93,567 173,797
-------- --------
Total other current assets $ 96,550 $226,774
======== ========
Noncurrent assets:
Debt issuance costs, net $112,292 $ --
Access contracts, net 46,666 --
Domain name, net 44,667 61,417
Customer cable lists 300,000 --
Prepaid expenses and other 136,236 109,236
-------- --------
Total other assets $639,861 $170,653
======== ========
At December 31, 2003 and 2002, the Company had notes receivable of $2,983 and
$52,977, respectively. The remaining note was due in December 2003 with interest
of 12% and was unsecured.
F-18
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
2003 2002
---------- ----------
Payroll and related taxes $ 514,516 $ 398,415
Accrued preferred stock dividends 277,928 138,288
Payable - Florida Cable 465,000 --
Other 202,261 177,776
---------- ----------
$1,459,705 $ 714,479
========== ==========
NOTE 6 - WHOLESALE LINE OF CREDIT
At December 31, 2003, the Company has a $1,750,000 wholesale line of credit
agreement with a financial institution, which expires on December 1, 2004, for
the purchase of certain resale merchandise from certain suppliers. Interest is
generally at 0% (if paid within certain terms of up to 45 days), and the
wholesale line of credit is collateralized by the accounts receivable up to
$300,000 as well as all of the inventory financed and the $1,450,000 letters of
credit. The wholesale line of credit agreement is an agreement between the
Company, financial institution, and certain vendors of the Company. The Company
receives no funds from the financial institution, but pays the financial
institution rather than certain vendors. The balance outstanding was $976,314 at
December 31, 2003.
At December 31, 2002, the Company had a $1,450,000 wholesale line of credit
agreement with a different financial institution, which expired with 30 day
notice by either party, for the purchase of certain resale merchandise from
certain suppliers. Interest was generally at 0% (if paid within certain terms,
generally 30 days), and the wholesale line of credit was collateralized by the
related inventories, accounts receivable and the $1,450,000 letters of credit.
The wholesale line of credit agreement was an agreement between the Company,
financial institution, and certain vendors of the Company. The Company received
no funds from the financial institution, but paid the financial institution
rather than certain vendors The balance outstanding was $1,290,383 at December
31, 2002.
F-19
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
2003 2002
---------- ----------
Note payable - Pyramid Trading Limited Partnership, net of unamortized
original issue discount and beneficial conversion of note payable into
common stock of $59,557 and $59,250 at December 31, 2003 and 2002,
respectively, quarterly interest payments at 10% (effective interest rate
of 54.2%) through May 2004, monthly principal payments of $40,000, due
May 2004, unsecured. $ 140,443 $ 902,971
Debenture payable - Convergent Capital Partners I, L.P., net of original
issue discount of $432,504 and $595,295 at December 31, 2003 and 2002,
respectively, monthly interest only payments through July 2005, monthly
installments of $102,273 including interest at 14% (effective interest
rate 18.4%) thereafter, due May 2007, secured by substantially all of the
assets of the Company. 1,967,496 1,804,705
Demand debenture payable - Convergent Capital Partners I, L.P., monthly
interest only payments at 14% through May 2007, due on demand or May
2007, secured by substantially all of the assets of the Company. 100,000 100,000
Note payable - Lexus Tower Limited Partnership, monthly installments of
$5,987 including interest at 8.4%, due November 2010, secured by certain
assets of the Company. 379,332 418,872
Note payable - Laurus Master Fund LTD, net of unamortized original issue
discount and beneficial conversion of note payable into common stock of
$1,208,847 at December 31, 2003, monthly installments of $45,455
beginning in March 2004, including interest at prime rate plus 3% but not
less than 7% (7% at December 31, 2003) (effective interest rate of
174.6%), due through November 2006, secured by certain assets of the
Company. 291,153 -
Notes payable, interest at 5.25% to 20% due through May
2007, secured by certain assets of the Company. 207,545 209,047
---------- ----------
Total long-term debt 3,085,969 3,435,595
Less: current portion (998,813) (321,589)
---------- ----------
Long-term debt, net $2,087,156 $3,114,006
========== ==========
F-20
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Future maturities of long-term debt are as follows for the years ending December
31:
2004 $ 998,813
2005 1,113,898
2006 1,838,008
2007 650,923
2008 59,072
Thereafter 126,163
-------------
Total future minimum payments 4,786,877
Less: original issue discounts and beneficial
conversion feature (1,700,908)
-------------
Total long-term debt 3,085,969
Less: current portion (998,813)
-------------
Long-term debt, net $ 2,087,156
=============
In 2000, the Company entered into a $2,250,000 debenture agreement with
Convergent Capital Partners I, L.P., with interest at 14% payable monthly and
monthly payments of $102,273 from August 1, 2003 through June 1, 2005. The
timing of repayment was changed to August 2005 through May 2007 as part of the
amendment made in 2002. The debenture is secured by substantially all Company
assets. In connection with this debenture, the Company issued 150,000 five-year
warrants to purchase common stock at prices ranging from $1.50 to $5.20 per
share. The proceeds of $2,250,000 were allocated between the debenture and the
warrant based on the relative fair values of the securities at the time of
issuance. The warrants were valued using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrants, is being
amortized over the life of the debenture using the straight-line method, which
approximates the interest method.
In 2002, the Company amended the debenture agreement with Convergent Capital
Partners I, L.P., and borrowed an additional $150,000 with interest at 14%
payable monthly and monthly principal payments from August 2005 through May
2007. In connection with this debenture, the Company issued an additional
500,000 seven-year warrants to purchase common stock at $1.10 per share. The
additional warrants were valued using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrants, is being
amortized over the life of the debenture using the straight-line method, which
approximates the interest method. The Company was in violation of certain
covenants of this debt agreement. A waiver was obtained from the lender. The
debenture payable may be redeemed at the Company's option at a premium declining
ratably thereafter to par value in April 2005.
In January 2001, the Company borrowed $1,500,000 from Pyramid Trading Limited
Partnership and issued a five-year warrant to the lender to purchase 375,000
common shares at $4.00 per share through January 2003. The debt is also
convertible into common stock of the Company at a conversion rate of $4.75 per
share through January 2003. The proceeds of $1,500,000 were allocated between
the note and the fair value of the warrants using the Black Scholes pricing
model. An additional 375,000 five-year warrants were issued in April 2002 and
the fair value of the warrants was expensed as additional interest expense as of
December 31, 2002. The resulting original issue discount, the fair value of the
warrants, and the beneficial conversion of the note payable into common stock as
defined in EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments"(EITF 00-27), is being amortized over the life of the note using the
straight-line method, which approximates the interest method.
F-21
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
In February 2003, the Company reached an agreement to convert $962,000 of its
note payable with Pyramid Trading Limited Partnership to equity and to extend
the due date to May 2004. Terms of the conversion state that the note will be
converted to equity over a 14 month period at a price generally equivalent to a
10% discount to market price. The Company issued an additional 253,000 five-year
warrants at an exercise price of $1.00 with the note payable extension. These
warrants, valued at $208,447 using the Black Scholes pricing model, are being
expensed over the remaining term of the note agreement. During the year ended
December 31, 2003, the Company converted principal and accrued interest totaling
$828,172 into 717,741 shares of common stock.
During 2002, the Company borrowed $600,000 and issued a five-year warrant to one
of its directors to purchase 120,000 common shares at $1.50 per share. The
proceeds of $600,000 were allocated between the note and the fair value of the
warrants using the Black Scholes pricing model. The resulting original issue
discount, the fair value of the warrants, was being amortized over the life of
the note using the straight-line method which approximates the interest method.
In December 2002, the lender converted the note payable into 60,000 shares of
Class E convertible preferred stock. The remaining unamortized original issue
discount amount was expensed at the time of the conversion.
In November 2003, the Company borrowed $1,500,000 and issued a three-year
warrant to the lender to purchase 535,000 common shares at $2.21 per share
through November 2006. The debt is also convertible into common stock of the
Company at a conversion rate of $1.40 per share through November 2006. The
proceeds of $1,500,000 were allocated between the note, the intrinsic value of
the conversion option, and the fair value of the warrants using the Black
Scholes pricing model. The resulting original issue discount, the fair value of
the warrant, and the beneficial conversion of the note payable into common stock
as defined in EITF 00-27 is being amortized over the life of the note using the
straight-line method, which approximates the interest method.
Interest expense related to long-term debt with related parties for the years
ended December 31, 2003, 2002, and 2001 was approximately $0, $228,000 and
$3,000, respectively.
NOTE 8 - CAPITAL LEASE OBLIGATIONS
The Company has lease financing facilities for property, equipment and leasehold
improvements. Leases outstanding under these agreements bear interest at an
average rate of 8.25% and expires through October 2007. The obligations are
secured by the property under lease. Total cost and accumulated amortization of
the leased equipment was $428,749 and $221,432 at December 31, 2003 and $456,124
and $219,332 at December 31, 2002. Amortization expense related to these
obligations is included in depreciation expense.
F-22
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Future minimum capital lease payments are as follows for the years ending
December 31:
2004 $ 69,556
2005 69,556
2006 56,457
2007 34,610
----------
Total 230,179
Less: amounts representing interest (32,342)
----------
Present value of future minimum lease payments 197,837
Less: current portion (54,939)
----------
Capital lease obligations, net of current portion $ 142,898
==========
NOTE 9 - NOTE PAYABLE - STOCKHOLDER
On June 30, 2003, the Company borrowed $124,000 from a stockholder of the
Company with monthly payments of $5,600 including interest at 7.85%, due in June
2005, and unsecured. The balance due at December 31, 2003 is $114,391 of which
$81,554 is due in 2004 and $32,837 is due in 2005. Interest expense related to
this note payable - stockholder for the year ended December 31, 2003 was
approximately $1,600.
NOTE 10 - STOCKHOLDERS' EQUITY
Capital Stock Authorized
The articles of incorporation authorize the Company to issue 50,000,000 shares
of no par capital stock. Authorization to individual classes of stock are
determined by a Board of Directors resolution. The authorized classes of stock
at December 31, 2003 are the following: 275,000 shares of Class A cumulative
convertible preferred stock, 60,000 shares of Class B cumulative convertible
preferred stock, 250,000 shares of Class C cumulative convertible preferred
stock, 250,000 shares of Class D cumulative convertible preferred stock, and
400,000 shares of Class E cumulative convertible preferred stock.
F-23
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Cumulative Convertible Preferred Stock
Dividends on Class A, Class B, Class C, Class D, and Class E cumulative
convertible preferred stock are cumulative and payable quarterly at 8%, 10%,
10%, 14%, and 15% per annum, respectively. Cumulative convertible preferred
stock can be converted into common shares at any time as follows: Class A and
Class B - five shares, Class C - two shares, Class D - two and one-half shares,
and Class E - eight shares. The intrinsic value of any beneficial conversion
option is recorded as preferred stock dividends at the time of preferred stock
issuance. Dividends on Class B preferred are cumulative and payable monthly at
10% per annum. The dividends are based on $10 per share for all preferred
shares. The Class B preferred was offered to certain note payable holders at a
conversion of $10 per Class B preferred share. All preferred stock is
non-voting. Warrants to purchase shares of the Company's common stock were given
with the issuance of Class A, Class B, Class D, and Class E preferred stock and
were valued at fair value using the Black Scholes pricing model. The Company
may, but is not obligated to, redeem the preferred stock at $10.50 per share for
Class A and Class B and $10.00 per share for Class C, Class D, and Class E,
whenever the Company's common stock price exceeds certain defined criteria as
defined in the preferred stock agreements. Upon the Company's call for
redemption, the holders of the preferred stock called for redemption have the
option to convert each preferred share into shares of the Company's common
stock. Holders of preferred stock cannot require the Company to redeem their
shares. The liquidation preference is the same as the redemption price for each
class of preferred stock.
Stock Compensation Plans
The Company has a 1999 Stock Compensation Plan, which permits the issuance of
restricted stock and stock options to key employees and agents. All outstanding
incentive stock options granted under the prior 1997 Stock Options Plan continue
until all agreements have expired. There are 2,500,000 shares of common stock
reserved for issuance through restricted stock, non-qualified stock option
awards and incentive stock option awards. The Plans also provide that the term
of each award be determined by the Board of Directors. Under the Plans, the
exercise price of incentive stock options may not be less than the fair market
value of the stock on the award date, and the options are exercisable for a
period not to exceed ten years from award date.
The Company also has a 2000 Non-employee Director Stock Compensation Plan, which
permits the issuance of stock options for 300,000 shares of common stock to
non-employee directors. The exercise price of the stock options is the fair
market value of the stock on the award date, and the options are exercisable for
a period not to exceed ten years from award date.
Employee Stock Purchase Plan
The Company has a 2000 Employee Stock Purchase Plan, which allows for the sale
of 400,000 shares of Company common stock to qualified employees. At December
31, 2003, no shares were issued under the Plan.
F-24
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Stock Subscriptions Receivable
The Company has stock subscriptions receivable including interest receivable
totaling $418,085 and $633,195 due to the Company at December 31, 2003 and 2002,
respectively, from the issuance of common stock. Monthly interest only payments
at interest ranging from 9% to 10% were required through December 2003 at which
time any unpaid stock subscription receivable was due. The receivables are
secured by the common stock issued. At December 31, 2003, the Company has
reserved $71,000 related to stock subscriptions and interest receivable deemed
to be uncollectible. The Company does not record interest receivable on the
outstanding receivable balance once they have determined it to be uncollectible.
Restricted Stock
The Company awards restricted common shares to selected employees. Recipients
are not required to provide any consideration other than services. Company share
awards are subject to certain restrictions on transfer, and all or part of the
shares awarded may be subject to forfeiture upon the occurrence of certain
events, including employment termination. The intrinsic value at the date of
grant related to the shares awarded is generally amortized over three years, the
vesting term of the awards. Compensation expense recorded during the years ended
December 31, 2003, 2002, and 2001 in connection with the amortization of the
award cost was $47,119, $78,292 and $92,749, respectively.
Restricted stock activity is as follows for the years ended December 31:
2003 2002 2001
-------- -------- --------
Outstanding, January 1 45,066 75,337 113,829
Issued -- 22,434 83,000
Vested (17,204) (33,107) (38,781)
Forfeited (10,843) (19,598) (82,711)
-------- -------- --------
Outstanding, December 31 17,019 45,066 75,337
======== ======== ========
Stock Options
Stock option activity is as follows for the years ended December 31:
Options Weighted-Average Exercise Price
-------------------------------------------- ----------------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------ ------------ ------------ ----------- ----------
Outstanding, January 1 1,093,157 1,050,024 1,145,507 $ 2.45 $ 2.55 $ 2.31
Granted 747,775 249,300 839,500 1.35 0.96 1.20
Exercised (3,000) - (615,933) 1.25 -- 0.51
Forfeited (180,500) (206,167) (319,050) 4.49 1.86 2.11
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, December 31 1,657,432 1,093,157 1,050,024 $ 1.81 $ 2.45 $ 2.55
============= ============ ============ ============ =========== ===========
The weighted-average grant-date fair value of options granted during the years
ended December 31, 2003, 2002, and 2001 was $1.20, $0.86 and $2.94,
respectively.
F-25
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Options outstanding and exercisable as of December 31, 2003, are as follows:
Outstanding Exercisable
---------------------------------------------------- -------------------------------------
Weighted - Average
----------------------------
Remaining Weighted-
Exercise Contractual Average
Range of Exercise Prices Options Price Life-Years Options Exercise Price
--------------------------- ------------------- ----------- -------------- ----------------- ----------------
$.60 255,000 $ 0.60 6.43 255,000 $ 0.60
$.93 to $1.38 409,800 1.15 9.18 256,433 1.24
$1.43 to $2.08 688,766 1.67 7.90 620,658 1.68
$2.50 to $2.88 140,000 2.67 6.81 140,000 2.67
$3.98 to $5.38 109,666 4.48 6.67 92,166 4.57
$6.00 to $6.75 54,200 6.60 6.24 46,900 6.57
----------------- ---------- ------------- ----------------- --------------
$.60 to $6.75 1,657,432 $ 1.81 7.76 1,411,157 $ 1.85
================= ========== ============= ================= ==============
Stock Warrants
Stock warrants activity is as follows for the years ended December 31:
Outstanding Weighted - Average Exercise Price
-------------------------------------------- -----------------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, January 1 4,327,396 9,564,450 8,093,464 $ 2.05 $ 2.37 $ 8.71
Granted 3,687,447 2,546,690 9,483,530 1.53 1.46 2.32
Exercised (556,881) - - 1.53 - -
Forfeited (36,088) (7,783,744) (8,012,544) 3.59 2.25 8.75
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, December 31 7,421,874 4,327,396 9,564,450 $ 1.83 $ 2.05 $ 2.37
============= ============ ============ ============ =========== ===========
The weighted-average grant-date fair value of warrants granted during the years
ended December 31, 2003, 2002 and 2001 was $1.10, $1.00 and $1.79, respectively.
Warrants outstanding and exercisable as of December 31, 2003, are as follows:
Weighted - Average
--------------------------------
Remaining
Range of Exercise Contractual
Prices Warrants Exercise Price Life-Years
------------------------ ------------------- --------------- --------------
$.85 to $1.25 2,465,997 $ 1.02 4.13
$1.50 to $2.25 3,946,432 1.90 2.49
$2.40 to $3.56 501,025 2.52 3.15
$4.00 to $5.20 508,420 4.16 2.45
----------------- ------------- --------------
$.85 to $5.20 7,421,874 $ 1.83 3.08
================= ============= ==============
F-26
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Stock warrants issued for the years ended December 31 were awarded for:
2003 2002 2001
--------- --------- ---------
Warrant repricing -- -- 8,012,544
Common stock 1,812,259 728,357 441,642
Services rendered 941,288 103,333 455,756
Preferred stock 145,900 420,000 48,588
Debt issuance and guarantees 788,000 1,295,000 525,000
--------- --------- ---------
3,687,447 2,546,690 9,483,530
========= ========= =========
During the year ended December 31, 2003, 298,091 warrants were exercised with a
weighted average exercise price of $1.05. Based on the warrant agreements, these
warrants were exercised in lieu of cash with the warrant holder receiving
141,529 shares of common stock.
During the year ended December 31, 2003, the Company issued 400,000 five-year
warrants with a weighted-average exercise price of $0.85 for services related to
investor relations. These warrants were valued at $321,920 using the Black
Scholes pricing model. During 2003, the Company issued 541,288 five-year
warrants with a weighted-average exercise price of $1.02 for services related to
equity financing.
During the year ended December 31, 2002, the Company issued 103,333 three-to
five-year warrants with a weighted-average exercise price of $1.56 for services
related to equity financing.
During the year ended December 31, 2001, the Company issued 455,756 one-to
five-year warrants with a weighted-average exercise price of $2.16 for services
related to equity financing. During 2001, the Company issued 48,588 two-to
five-year warrants with a weighted-average exercise price of $3.69 for services
related to preferred stock financing which were valued at $87,403 using the
Black Scholes pricing model.
On August 2, 2001, the Company approved the repricing of all outstanding
warrants issued at $8.75 to $2.25. The expiration date of these warrants was
extended to October 11, 2002. The Company recorded $6,919,692 to the accumulated
deficit related to the change in warrant value using the Black Scholes pricing
model.
All warrants were recorded at fair value using the Black Scholes pricing model.
The fair value of stock warrants is the estimated present value at grant date
using the Black Scholes pricing model with the following weighted-average
assumptions:
2003 2002 2001
--------- --------- ---------
Risk-free interest rate 2.37% 3.90% 5.30%
Expected life 3.4 years 4.5 years 4.5 years
Expected volatility 170% 151.3% 94.3%
Expected dividend rate 0% 0% 0%
F-27
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 11 - INCOME TAXES
The Company has generated federal and state net operating losses of
approximately $23,469,000 and $10,382,000, respectively, which, if not used,
will begin to expire in 2004. Future changes in the ownership of the Company may
place limitations on the use of these net operating loss carryforwards.
The Company has recorded a full valuation allowance against its deferred tax
asset due to the uncertainty of realizing the related benefits. The change in
the valuation allowance was $1,722,000, $402,000, and $1,757,200 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Components of net deferred income taxes are as follows at December 31:
2003 2002
----------- -----------
Deferred income tax assets:
Net operating loss carryforwards $ 9,387,000 $ 7,633,000
Goodwill 65,000 90,000
Asset valuation reserves 285,000 231,000
Accrued liabilities 55,000 69,000
----------- -----------
9,792,000 8,023,000
Less valuation allowance (9,674,000) (7,952,000)
----------- -----------
118,000 71,000
Deferred income tax liabilities - depreciation (118,000) (71,000)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
Income tax computed at the federal statutory rate reconciled to the effective
tax rate is as follows for the years ended December 31:
2003 2002 2001
----- ----- -----
Federal statutory tax rate benefits (35.0)% (35.0)% (35.0)%
State tax, net of federal benefit (5.0) (5.0) (5.0)
Change in valuation allowance 39.6 36.1 33.0
Other 0.4 3.9 7.0
----- ----- -----
Effective tax rate 0.0% 0.0% 0.0%
===== ===== =====
F-28
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
The Company has the following net operating loss carryforwards at December 31,
2003, for income tax purposes:
Year of Federal Net State Net
Expiration Operating Loss Operating Loss
---------- -------------- --------------
2004 $ 1,050,000 $ 1,050,000
2005 599,000 599,000
2007 501,000 501,000
2008 59,000 57,000
2009 22,000 22,000
2011 595,000 575,000
2012 25,000 --
2018 1,122,000 1,096,000
2019 1,585,000 992,000
2020 4,839,000 1,587,000
2021 4,726,000 1,435,000
2022 4,353,000 1,230,000
2023 3,993,000 1,238,000
----------- -----------
$23,469,000 $10,382,000
=========== ===========
Under Internal Revenue Code Section 382, utilization of federal losses expiring
prior to 2019 are limited to approximately $375,000 each year.
F-29
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 12 - SUPPLEMENTAL CASH FLOWS INFORMATION
2003 2002 2001
---------- ---------- ----------
Cash paid for interest $ 436,061 $ 512,167 $1,286,155
Noncash investing and financing transactions:
Repricing of warrants -- -- 6,919,692
Stock options issued below fair market value
-- -- 1,244,250
Stock options issued for commissions earned
-- 53,745 --
Stock subscriptions receivable received for
stock -- -- 610,000
Issuance of preferred and common stock for
acquisition of assets 76,500 18,590 386,000
Current liabilities converted to stock 192,690 59,755 225,613
Common stock issued for guarantee of debt
-- 14,750 120,000
Issuance of stock for intangible asset -- -- 83,750
Purchase of customer lists and equipment
through payable to Florida Cable 465,000 -- --
Notes payable and accrued interest converted
to common and preferred stock
828,172 1,164,882 227,009
Capitalized lease equipment purchases -- 174,986 --
Conversion of preferred stock to common stock
40,000 150,000 528,742
Conversion of preferred stock into note payable
-- 400,000 --
Reduction of stock subscription receivable
related to commission earned on equity
transactions 36,977 40,563 --
Warrants issued related to modifications of
long-term debt 208,447 528,650 --
Conversion of preferred stock dividends into
common stock 113,209 -- --
NOTE 13 - RETIREMENT SAVINGS PLAN
The Company has 401(k) profit sharing plan covering substantially all full-time
employees. Employee contributions are limited to the maximum amount allowable by
the Internal Revenue Code. The Company made no discretionary contributions for
any of the years presented.
F-30
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Operating leases
Office space was leased from an LLC which an officer of the Company was partial
owner of through August 2003. In addition to basic monthly rents ranging from
$16,640 to $17,653, the Company paid building maintenance costs, real estate
taxes and assessments. During 2003, the Company converted $72,000 of accrued
rent into 7,200 shares of Class C preferred stock. At December 31, 2003 and
2002, accrued rent of $56,560 and $141,060, respectively, was owed to this
related party. In August 2003, the Company signed a new lease agreement with an
unrelated party disclosed below.
The Company has various other operating leases for its corporate office space,
vehicles and various equipment with lease terms expiring in August 2017. The
monthly base rents range from $69,736 to $83,325, net of payments received from
subleases. In July 2003, the Company entered into an agreement to sublease a
portion of their office space through August 2008 for approximately $5,000 per
month.The leases contain provisions for payments of real estate taxes, insurance
and common area costs.
Total rent expense for the years ended December 31, 2003, 2002 and 2001
including common area costs and real estate taxes was approximately $578,000,
$566,000 and $689,000, respectively. Rent expense with related parties for
December 31, 2003, 2002, 2001 was approximately $59,000, $462,000 and $561,000,
respectively.
Future minimum rental payments, net of payments received from subleases, are as
follows for the years ending December 31:
Year Amount
---- ------------
2004 $ 534,000
2005 512,000
2006 516,000
2007 541,000
2008 587,000
Thereafter 4,509,000
------------
$ 7,199,000
Legal proceedings
The Company is involved in legal actions in the ordinary course of its business.
Although the outcome of any such legal actions cannot be predicted, management
believes that there is 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.
F-31
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 15 - SIGNIFICANT CUSTOMERS AND SUPPLIERS
One customer represented approximately 16%, 13%, and 15% of revenues for the
years ended December 31, 2003, 2002, and 2001, respectively.
The Company purchased materials from major suppliers approximately as follows
for the years ended December 31:
Supplier
----------------------------------------------
A B C
------------- -------------- -------------
2003 61% 4% 8%
2002 58% 6% 12%
2001 38% 19% 12%
The Company had revenues from companies that are associated with a director, who
was elected to the board of directors during 2003, of approximately $1,124,000,
$636,000, and $0 for the years ended December 31, 2003, 2002, and 2001,
respectively. In addition, the Company had accounts receivable outstanding from
these companies of approximately $142,000, $171,000, and $0 at December 31,
2003, 2002, and 2001, respectively.
NOTE 16 - BUSINESS SEGMENTS
The CTU subsidiary functions as one segment for integrated voice, video, data
networking and computer technologies products and services, under one management
structure, with one management financial reporting system, and having one
unified marketing name.
With the start up of Multiband in February 2000, the Company added the segment
providing voice, data, and video services to residential multi-dwelling units.
MB USA's business model is similar to Multiband.
Segment disclosures are as follows:
Multiband/
Multiband CTU MB USA Total
------------ ------------ ------------ ------------
Year Ended December 31, 2003:
Revenues $ -- $ 21,199,303 $ 1,441,118 $ 22,640,421
Loss from operations (1,941,271) (339,369) (1,215,667) (3,496,307)
Identifiable assets 5,691,867 5,254,221 2,956,797 13,902,885
Depreciation and amortization 45,789 432,364 518,226 996,379
Capital expenditures 13,342 424,047 89,547 526,936
F-32
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Multiband CTU Multiband Total
------------ ------------ ------------ ------------
Year Ended December 31, 2002:
Revenues $ -- $ 23,963,748 $ 577,221 $ 24,540,969
Income (loss) from operations (1,810,241) 172,689 (1,195,521) (2,833,073)
Identifiable assets 3,151,891 5,282,233 1,913,192 10,347,316
Depreciation and amortization 142,426 482,390 490,641 1,115,457
Capital expenditures 2,126 814,464 458,844 1,275,434
Multiband CTU Multiband Total
------------ ------------ ------------ ------------
Year Ended December 31, 2001:
Revenues $ -- $ 32,011,187 $ 249,590 $ 32,260,777
Loss from operations (2,079,592) (299,553) (1,618,003) (3,997,148)
Identifiable assets 3,171,968 5,786,796 3,250,917 12,209,681
Depreciation and amortization 418,655 550,075 442,034 1,410,764
Capital expenditures 6,900 491,532 1,386,513 1,884,945
Segment disclosures are provided by entity to the extent practicable under the
Company's accounting system.
NOTE 17 - SUBSEQUENT EVENTS
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 issued to URON were valued at
fair market value on the date of the 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 Company is
acquiring the customer lists of URON and will be amortizing them over their
estimated useful lives of three years.
In January 2004, the Company purchased the remaining 50% ownership of MB USA
from Pace, by issuing 30,000 shares of common stock valued at $39,300 (Note 2).
F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON SUPPLEMENTARY INFORMATION
To Stockholders, Board of Directors, and Audit Committee
Multiband Corporation and subsidiaries
New Hope, Minnesota
Our report on our audits of the basic consolidated financial statements of
Multiband Corporation and subsidiaries for the years ended December 31, 2003,
2002 and 2001 appears on page 1. The audits were made for the purpose of forming
an opinion on the basic consolidated financial statements taken as a whole. The
supplementary information on page 36 is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 16, 2004
F-34
MULTIBAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------- ----------------- -------- ---------- ----------
ADDITIONS CHARGED
BALANCE AT TO COSTS AND LANCE AT END
DESCRIPTION BEGINNING OF YEAR EXPENSES DEDUCTION OF YEAR
----------- ----------------- -------- ---------- ----------
ALLOWANCE DEDUCTED FROM
ASSET TO WHICH IT APPLIES
Allowance for doubtful accounts receivable :
2003 $236,000 - $13,000 (A) $223,000
---------- ---------- ---------- ----------
2002 178,000 58,000 - $236,000
---------- ---------- ---------- ----------
2001 159,000 141,000 122,000 (A) $178,000
---------- ---------- ---------- ----------
Notes receivable:
2003 30,000 - $30,000 (A) -
---------- ---------- ---------- ----------
2002 - $30,000 - $30,000
---------- ---------- ---------- ----------
2001 - - - -
---------- ---------- ---------- ----------
Stock subscriptions and interest receivable:
2003 - $71,000 - $71,000
---------- ---------- ---------- ----------
2002 - - - -
---------- ---------- ---------- ----------
2001 - - - -
---------- ---------- ---------- ----------
(A) Write-off uncollectible receivables
F-35
CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
------------ ------------ ------------ ------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $ 9,068,758 $ 6,283,365 $ 22,734,594 $ 17,843,508
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of products and services 5,796,027 4,493,829 15,580,482 12,718,951
------------ ------------ ------------ ------------
Selling, general and administrative 3,126,417 2,029,242 7,930,244 6,097,989
------------ ------------ ------------ ------------
Depreciation and amortization 1,119,566 379,985 2,557,788 1,049,976
------------ ------------ ------------ ------------
Impairment of goodwill 527,879 0 527,879 0
------------ ------------ ------------ ------------
Total Costs and Expenses $ 10,569,889 $ 6,903,056 $ 26,596,393 $ 19,866,916
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,501,131) (619,691) (3,861,799) (2,023,408)
------------ ------------ ------------ ------------
OTHER EXPENSE
Interest expense (347,647) (202,958) (949,129) (648,368)
------------ ------------ ------------ ------------
Other Income (expense) (2,815) (6,513) (9,003) (56,777)
------------ ------------ ------------ ------------
Total Other Expense (350,462) (209,471) (958,132) (705,145)
------------ ------------ ------------ ------------
MINORITY INTEREST IN JOINT VENTURE 0 (3,460) 0 (4,853)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,851,593) (832,622) (4,819,931) (2,733,406)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS (1,851,593) (832,622) (4,819,931) (2,733,406)
------------ ------------ ------------ ------------
Preferred Stock Dividends (83,714) (43,301) (541,640) (135,353)
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,935,307) $ (875,923) $ (5,361,571) $ (2,868,759)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (.07) $ (.05) $ (.21) $ (.18)
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
25,480,007 16,981,266 22,494,250 15,168,069
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements
F-36
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
September 30, 2004 December 31, 2003
(unaudited) (audited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 465,885 $ 2,945,960
Certificate of deposit 250,000 250,000
Accounts receivable, net 3,752,302 1,658,114
Inventories, net 1,363,698 1,973,817
Other Current Assets 78,563 96,550
------------ ------------
TOTAL CURRENT ASSETS 5,910,448 6,924,441
------------ ------------
PROPERTY AND EQUIPMENT, NET 4,269,736 3,589,704
------------ ------------
OTHER ASSETS
Goodwill 2,233,366 2,748,879
Intangible assets, net 17,270,536 503,625
Other 330,032 136,236
------------ ------------
TOTAL OTHER ASSETS 19,833,934 3,388,740
------------ ------------
TOTAL ASSETS $ 30,014,118 $ 13,902,885
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $ 32,969 $ 147,398
Wholesale line of credit 1,069,359 976,314
Short term debt 5,849,906 0
Current portion of long term debt 637,254 998,813
Current portion of note payable, stockholder 94,794 81,554
Current portion of capital lease obligations 102,362 54,939
Accounts payable 2,575,675 1,771,699
Accrued liabilities 3,700,035 1,459,705
Deferred service obligations and revenue 413,360 315,227
------------ ------------
TOTAL CURRENT LIABILITIES 14,475,714 5,805,649
LONG TERM DEBT, NET 2,519,530 2,087,156
OTHER LONG TERM DEBT 222,700 0
------------
NOTE PAYABLE, STOCKHOLDER, NET OF CURRENT PORTION 0 32,837
------------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 636,499 142,898
------------ ------------
TOTAL LIABILITIES 17,854,443 8,068,540
------------ ------------
MINORITY INTEREST IN JOINT VENTURE 0 26,634
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 (8,700 shares issued and outstanding, $91,350 liquidation preference) 62,000 62,000
10% Class C (125,400 shares issued and outstanding, $1,254,000 liquidation preference) 1,611,105 1,611,105
15% Class E (0 and 77,650 shares issued and outstanding,) 0 438,964
10% Class F (200,000 and 0 shares issued and outstanding, $2,000,000 liquidation
preference) 2,000,000 0
10% Class G (7,500 and 0 shares issued and outstanding, $75,000 liquidation
preference) 70,672 0
Common stock, no par value (25,621,084 and 19,036,805 shares issued;
25,617,745 and 19,819,786 shares outstanding) 16,678,538 7,726,505
Stock subscriptions receivable (368,243) (418,085)
Options and warrants 31,379,338 30,514,872
Unamortized compensation (1,724) (217,210)
Accumulated deficit (39,691,763) (34,330,192)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,159,675 5,807,711
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,014,118 $ 13,902,885
See notes to condensed consolidated financial statements.
F-37
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 (Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30, (UNAUDITED)
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss $(4,819,931) $(2,733,406)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization 2,344,853 709,404
Amortization of deferred compensation 212,935 340,572
Amortization of original issue discount 541,873 285,345
Common stock issued for services 291,220 321,920
Impairment of goodwill 527,879 0
Loss on sales of property and equipment 26,217 76,269
Reduction of note payable in connection with reimbursement of seller expenses (273,900) 0
Interest receivable on stock subscription receivable 0 13,452
Minority interest in joint venture 0 4,853
Changes in operating assets and liabilities:
Accounts receivable, net (2,134,902) (329,189)
Inventories, net 610,119 (411,092)
Other current assets 17,987 (6,026)
Other assets (87,135) (21,531)
Wholesale line of credit 93,045 33,384
Accounts payable and accrued liabilities 620,817 (388,208)
Deferred service obligations and revenue 98,133 26,246
----------- -----------
Net cash flows from operating activities (1,930,790) (2,078,007)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (483,810) (356,291)
Purchase of Satellite Broadcasting Corporation (187,424) 0
Purchase of Minnesota Digital Universe, Inc. (1,100,000) 0
Purchase of Rainbow Satellite Group, LLC (1,000,000) 0
Purchase of 21st Century Satellite Communications Inc (250,000) 0
Payment for investment in joint venture 0 (64,878)
Proceeds from sale of property and equipment 649 6,145
Collections on notes receivable 3,172 5,806
----------- -----------
Net cash flows from investing activities (3,017,413) (409,218)
----------- -----------
FINANCING ACTIVITIES
Checks issued in excess of cash in bank (74,068) 0
Payments on long term debt (1,215,788) (183,936)
Payments on capital lease obligations (63,066) (69,252)
Proceeds from issuance of long term debt 750,021 133,726
Payments on note payable to stockholder (19,598) 0
Proceeds from issuance of stock and warrants 2,888,836 3,654,388
Redemption of common stock (62,975) 0
Exercise of warrants 390,279 312,030
Redemption of preferred stock 0 (2,100)
Preferred stock dividends (125,513) (51,263)
----------- -----------
Net cash flows from financing activities (2,468,128) 3,793,593
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,480,075) 1,306,368
CASH AND CASH EQUIVALENTS
Beginning of period 2,945,960 540,375
----------- -----------
End of period 465,885 $ 1,846,743
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount 447,548 280,148
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of preferred stock for acquisition of assets 0 76,500
Issuance of common stock for acquisition of assets, MBUSA and URON 274,800 0
Warrants issued with debt 0 208,447
Conversion of preferred stock and accrued dividends into common stock 776,500 40,000
Current liabilities converted to stock 136,581 248,623
Conversion of notes payable into common stock 510,908 642,000
Conversion of dividend into common stock 78,591 84,090
Reduction of stock subscription receivable 0 26,602
Issuance of common stock for acquisition of 21st Century 364,583 0
Issuance of preferred stock and notes payable for acquisition of assets, Rainbow 6,519,999 0
Purchase of property and equipment as a reduction of accounts receivable 40,714 0
Capitalized construction costs in accrued expenses 20,000 0
Issuance of common stock of $3,850,00 and notes payable of $2,750,000 for acquisition of
assets, MDU 6,600,000 0
Stock subscription receivable for issuance of common stock 0 40,000
Capital lease assumed in acquisition of equipment from 21st Century 416,666 0
See notes to condensed consolidated financial statements
F-38
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2004 and 2003
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
Revenues and Cost Recognition
Multiband Corporation and subsidiaries (the Company) earns revenues from 6
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) MB USA user charges to timeshares, 6) DirecTV fees.
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.
Customer contracts 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. Revenues are recognized when the products are
delivered and installed, and the customer has accepted the terms and has the
ability to fulfill the terms.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. Service revenues are
expected to account for approximately 20% of total revenues for the year ending
December 31, 2004. Service revenues were less than 10% of total revenues for the
year ended December 31, 2003. The Company, if the customer elects, enters into
equipment maintenance agreements for products sold once the original
manufacturer's warranty has expired. Revenues from all equipment maintenance
agreements are recognized on a straight-line basis over the terms of each
contract. Costs for services are expensed as incurred.
MultiBand and MBUSA user charges are recognized as revenues in the period the
related services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
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 an
average, over their useful estimated lives which usually range from two to six
years. The Company is also amortizing the value of its DirecTV agent agreement
obtained via MDU over a 73 month period beginning April 2004. The Rainbow
Satellite amortization of cable lists is over a period of 73 months, beginning
June, 2004.
Amortization of intangible assets was $810,097 and $19,188 for the three months
ended September 30, 2004 and 2003, respectively. For the nine month period ended
September 30, 2004 and 2003, amortization of intangible assets was $1,489,242
and $36,652 respectively. Estimated amortization expense on intangible assets
for the quarter ending December 31, 2004 and the years ended December 31, 2005,
2006, 2007 and 2008 is $1,554,749, $3,335,904, $3,086,818, $3,028,678, and
$3,013,672 respectively.
F-39
AMORTIZATION -INTANGIBLE ASSETS
SEPTEMBER 30, 2004 DECEMBER 31, 2003
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------- ---------- ---------- ----------
Intangible assets subject to amortization
Florida Cable 300,000 45,000 300,000 0
URON 453,930 170,225 0 0
Satellite Broadcasting 457,576 38,131 0 0
Minnesota Digital Universe 9,551,831 785,082 0 0
Rainbow Satellite 7,043,641 391,313 0 0
Multiband Domain Name 83,750 51,645 83,750 39,083
MDU Subscriber Rights 60,042 10,008 0 0
Access Contracts 60,000 28,333 60,000 13,334
21st Century 708,334 19,675 0 0
Debt Issuance Costs 130,333 39,489 115,500 3,208
---------- ---------- ---------- ----------
Total 18,849,437 1,578,901 559,250 55,625
========== ========== ========== ==========
Intangible assets not subject to amortization
---------- ---------- ---------- ----------
Goodwill 3,543,523 1,310,157 3,531,157 782,278
========== ========== ========== ==========
GOODWILL
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was originally amortized using the
straight-line method over ten years. Due to changes in accounting standards, the
carrying value of goodwill is now reviewed at least annually to see if the facts
and circumstances suggest that it may be impaired. If the review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the assets acquired over the remaining amortization period, the
Company's carrying value of goodwill is reduced by the estimated shortfall of
cash flows. During the three months ended September 30, 2004, the Company
completed its review of goodwill and determined it was partially impaired. The
Company recorded impairment charges to goodwill of $527,879 related to the
Corporate Technologies acquisition during the three and nine months ended
September, 2004 and $0 during the three and nine months ended September 30,
2003.
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.
Pursuant to APB No. 25 and related interpretations, $15,448 and $100,191 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended September 30, 2004 and 2003,
respectively. For the nine months ended September 30, 2004 and 2003, $212,935
and $340,572 of compensation cost has been recognized. Had compensation cost
been recognized based on the fair values of options at the grant dates
consistent with the provisions of Statements of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation", the Company's net loss
and loss attributable to common stockholders and basic and diluted loss per
common share would have been increased to the pro forma amounts:
F-40
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Loss attributable to common stockholders $(1,935,307) $ (875,923) $(5,361,571) $(2,868,759)
Pro forma loss attributable to common shares $(1,965,795) $(1,013,109) $(5,887,093) $(3,582,520)
Basic and diluted net loss per share:
As reported $ (.08) $ (0.05) $ (.24) $ (0.19)
Pro forma loss attributable to common shares $ (.08) $ (0.06) $ (.26) $ (0.24)
Stock-based compensation:
As reported $ 15,448 $ 100,191 $ 212,935 $ 340,572
Proforma $ 30,488 $ 137,186 $ 525,522 $ 713,761
In determining the compensation cost of the options granted during the three
months ended September 30, 2004 and 2003, 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 for September 30:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Risk-free interest rate 3.50% 3.62% 3.50% 3.41%
Expected life of options granted 10 years 10 years 10 years 10 years
Expected volatility range 184% 170% 184% 170%
Expected dividend yield 0% 0% 0% 0%
NET LOSS PER SHARE
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 issued but not
outstanding restricted stock during the three and nine months ended September
30, 2004 and 2003 were anti-dilutive.
Reclassifications
Certain accounts in the prior quarters' consolidated financial statements have
been reclassified for comparative purposes to conform with the presentation in
the current quarter consolidated financial statements. These reclassifications
had no effect on the net loss or stockholders' equity.
NOTE 3 - LIQUIDITY
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 nine months ended September 30, 2004 and 2003, the Company incurred net
losses of $4,819,931 and $2,733,406, respectively. At September 30, 2004, the
Company had an accumulated deficit of $39,691,763. The Company's ability to
continue as a going concern is dependent on it ultimately achieving
profitability and/or raising additional capital. 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:
F-41
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional debt or equity investment in the Company by either issuing
notes payable or preferred or common stock ( on November 12, 2004 Multiband
obtained a secured debt financing of approximately $2.1 million and on November
16, 2004 Multiband finalized a private placement of the Company's Series H
Preferred stock of approximately $1 million.)
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.
NOTE 4 - STOCK WARRANTS
Stock warrants activity is as follows for the nine months ended September 30,
2004.
NUMBER OF WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE
-------- --------------
Warrants outstanding - December 31, 2003 7,421,874 1.87
Granted 814,799 1.98
Canceled or expired 0 0
Exercised (475,503) 1.52
Warrants outstanding - SEPTEMBER 30, 2004 7,761,170 1.86
The warrants granted during the nine months ended September 30, 2004 were
awarded with common stock and for services rendered.
NOTE 5 - BUSINESS SEGMENTS
Following is Company business segment information for the three months ended
September 30, 2004 and 2003:
Multiband Multiband
Business Consumer
Multiband Services Services Total
------------ ------------ ------------ ------------
Quarter ended September 30, 2004
Revenues $ 0 $ 5,203,269 $ 3,865,489 $ 9,068,758
Income (Loss) from operations (936,075) 62,682 (627,738) (1,501,131)
Identifiable assets 2,402,401 4,946,792 22,664,925 30,014,118
Depreciation and amortization 7,636 71,537 1,040,393 1,119,566
Capital expenditures 3,083 37,201 203,113 243,397
Quarter ended September 30, 2003
Revenues $ 0 $ 5,864,468 $ 418,897 $ 6,283,365
Income (Loss) from operations (370,645) 72,428 (321,474) (619,691)
Identifiable assets 4,543,772 5,601,468 2,803,524 12,948,764
Depreciation and amortization 129,950 100,173 149,862 379,985
Capital expenditures 0 41,698 6,611 48,309
F-42
Following is Company business segment information for the nine months ended
September 30, 2004 and 2003:
Multiband Multiband
Business Consumer
Multiband Services Services Total
------------ ------------ ------------ ------------
Nine months ended September 30, 2004
Revenues $ 0 $ 15,345,871 $ 7,388,723 $ 22,734,594
Loss from operations (2,068,241) (401,172) (1,392,366) (3,861,799)
Identifiable assets 2,402,401 4,946,792 22,664,925 30,014,118
Depreciation and amortization 236,882 278,405 2,042,501 2,557,788
Capital expenditures 9,773 135,842 338,195 483,810
Nine months ended September 30, 2003
Revenues $ 0 $ 16,831,531 $ 1,011,977 $ 17,843,508
Loss from operations (1,279,925) 45,997 (789,480) (2,023,408)
Identifiable assets 4,543,772 5,601,468 2,803,524 12,948,764
Depreciation and amortization 373,662 318,839 357,475 1,049,976
Capital expenditures 0 272,466 83,825 356,291
NOTE 6 - RELATED PARTIES
The Company had revenues from companies that are associated with a
director, who was elected to the board of directors during 2003, of
approximately $0 and $17,000 for the nine months ended September 30, 2004 and
2003, respectively. In addition, the Company had accounts receivable outstanding
from these companies of approximately $140,000 and $142,000 at September 30,
2004 and 2003, respectively.
NOTE 7- ACQUISITIONS
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 6.9 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. These notes are secured by Rainbow company assets and bear interest at the
prime rate. The stock value was a negotiated price between 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 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. In connection with the acquisition, the Company incurred a $300,000
finder's fee.
F-43
On August 9, 2004, Multiband Corporation (the Company) completed its
acquisition of certain assets of 21st Century Satellite Communications, Inc.
(21st Century) for one million dollars, $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
consideration paid 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 Vicom 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 is included in accrued liabilities at
September 30, 2004.
With these acquisitions, the Company has substantially increased its
subscriber base.
ALLOCATION OF PURCHASE PRICE
-21ST CENTURY RAINBOW
---------- ----------
Total cash/stock consideration 1,000,000 7,219,999
Add: Transaction costs 125,000 300,000
Add: Liabilities assumed 0 0
---------- ----------
Total Consideration 1,125,000 7,519,999
Less Tangible assets (416,666) (476,358)
---------- ----------
Intangible assets, net 708,334 7,043,641
---------- ----------
The following unaudited pro forma condensed results of operations for the
three and nine months ended September 30, 2004 and 2003 give effect to the
acquisition of URON, MDU, Rainbow, and 21st Century as if such transactions had
occurred on January 1, 2003.
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.
2004 2003
----------------------------- ----------------------------
CONSOLIDATED CONSOLIDATED
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
PER I/S DISCLOSED PER I/S DISCLOSED
------------ ------------ ------------ ------------
THREE MONTHS - JULY TO SEPTEMBER
Revenues $ 9,068,758 $ 9,134,591 $ 6,283,365 $ 9,297,729
Loss from operations $ (1,501,131) $ (1,501,425) $ (619,691) $ (404,990)
Net loss $ (1,851,593) $ (1,851,887) $ (832,622) $ (750,189)
Net loss per share - basic and diluted $ (.07) $ (.07) $ (.05) $ (.04)
Weighted average shares
outstanding - basic and diluted 25,480,007 25,480,007 16,981,266 16,981,266
2004 2003
----------------------------- ----------------------------
CONSOLIDATED CONSOLIDATED
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
PER I/S DISCLOSED PER I/S DISCLOSED
------------ ------------ ------------ ------------
NINE MONTHS - JANUARY TO SEPTEMBER
Revenues $ 22,734,594 $ 26,229,743 $ 17,843,508 $ 26,320,653
Loss from operations $ (3,861,799) $ (3,827,946) $ (2,023,408) $ (1,136,437)
Net loss $ (4,819,931) $ (4,821,889) $ (2,733,406) $ (2,233,074)
Net loss per share - basic and diluted $ (.21) $ (.21) $ (.19) $ (.14)
Weighted average shares
outstanding - basic and diluted 22,494,250 22,494,250 15,168,069 15,168,069
F-44
The unaudited pro forma results of operations for the three and nine months
ended September 30, 2004 and 2003 as a result of the SBC acquisition of video
subscribers and video equipment is not material to the historical financial
statements.
NOTE 8 - LEGAL PROCEEDINGS
In the third quarter of 2004, the Company was named as a defendant in an
action brought by Private Investor's Equity Group (PIEG) who is seeking damages
in excess of $75,000 over an alleged financing fee owed. The Company has raised
numerous defenses to said action including a release executed by PIEG related to
said financing fee.
NOTE 9 - SUBSEQUENT EVENTS
a) On November 12, 2004, Multiband Corporation finalized a secured
convertible debt financing.
The offering was funded by a group of institutional and accredited investors.
Multiband intends on utilizing the new long-term debt facility to restructure
existing short-term debt obtained through the firm's extensive acquisition
activities and for general working capital purposes.
Under the terms of the debt offering, the Company will issue junior secured
thirty-six month term convertible promissory notes in the aggregate principal
amount of approximately $2,100,000. The Company assets secure the notes via
junior lien. The convertible notes accrue interest at the rate of 6% per annum,
are payable semi-annually at the option of the Company in cash or shares of the
Company's common stock, and are convertible into shares of common stock at the
rate of $1.00 per share. The Company also is required to file a registration
statement providing for the resale of the shares issuable upon the conversion of
the notes.
b) On November 16, 2004, Multiband Corporation finalized a private
placement of the company's Series H Convertible Preferred Stock. The Series H
Preferred Stock offering was funded by a group of institutional and accredited
investors. Multiband intends on utilizing the proceeds received from the
offering to retire short-term debt and for general working capital purposes.
Under the terms of the preferred stock offering, the Company will issue shares
of its Series H Convertible Preferred Stock in the aggregate offering amount of
approximately $1,050,000. The shares of Series H Convertible Preferred Stock
accrue dividends at the rate of 6% per annum, are payable semi-annually at the
option of the Company in cash or shares of the Company's common stock, and are
convertible into shares of common stock at the rate of $1.00 per share (one
million fifty thousand shares). In addition, the investors will also receive
five-year warrants to purchase an aggregate of approximately 3,150,000 shares of
Common Stock at an exercise price of $1.25 per share. The Company also is
required to file a registration statement providing for the resale of the shares
issuable upon the conversion of the Series H Convertible Preferred Stock and
upon exercise of the warrants.
F-45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by the
Registrant expected to be incurred in connection with the issuance and
distribution of the securities described in this registration statement. All
amounts are estimated except for the Securities and Exchange Commission's
registration fee.
AMOUNT
------
Registration fee under Securities Act $ 1,504.00
Selling Agent's commissions $ 0.00
Legal fees and expenses $ 12,216.00
Accounting fees and expenses $ 4,410.00
Printing expenses $ 1,870.00
Registrar and transfer agent fees $ 0.00
Miscellaneous expenses $ 10.00.00
Total $ 20,000.00
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Statutes empowers a Minnesota
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
Article VII of the Registrant's Articles of Incorporation eliminates the
liability of directors of the Registrant to the Registrant or its shareholders
for monetary damages for breach of fiduciary duty except for any breach of a
director's duty of loyalty to the Registrant or its shareholders, for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, under Sections 302A.559 of the Minnesota Statutes (relating to
illegal distributions) or Section 80A.23 of the Minnesota Statutes (relating to
securities law violations), for any transaction from which the director derived
an improper personal benefit; or for any act or omission occurring prior to May
22, 1987, which is the date that this provision in the Registrant's Articles
became effective.
The above discussion of Section 302A.521 and of the Registrant's Articles
of Incorporation is not intended to be exhaustive and is respectively qualified
in its entirety by such statute and the Articles of Incorporation. The
Registrant has insurance in the amount of $1,000,000 per occurrence insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years the registrant has issued various securities,
described in more detail in the Company's forms 10Q and 10K filed during those
periods that were not registered under the Securities Act. The Securities were
offered and sold by us in reliance upon the exemptions provided under Section
4(2) under the Securities Act relating to sales not involving any public
offering, and/or Rule 506 of Regulation D under the Securities Act. The
certificates representing the Securities sold bear a restrictive legend that
prohibits transfer without registration or an applicable exemption. All
purchasers signed agreements stating that they were purchasing for investment
purposes only in which contain restrictions on the transfer of the Securities
sold.
43
ITEM 16. EXHIBITS
The following documents are filed as exhibits to this registration
statement:
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Asset Purchase Agreement and related documents with Enstar Networking Corporation dated December 31, 1998(1)
2.2 Agreement and Plan of Merger with Ekman, Inc. dated December 29, 1999(1)
3.1 Amended and Restated Articles of Incorporation of Multiband Corporation(1)
3.2 Restated Bylaws of Multiband Corporation(1)
3.3 Articles of Incorporation of Corporate Technologies, USA, Inc.(1)
3.4 Bylaws of Corporate Technologies, USA, Inc.(1)
4.1 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 8% Class A Cumulative
Convertible Preferred Stock and 10% Class B Cumulative Convertible Preferred Stock dated December 9, 1998(1)
4.2 Form of Warrant Agreement(1)
4.3 Warrant Agreement with James Mandel dated December 29, 1999(1)
4.4 Warrant Agreement with Marvin Frieman dated December 29, 1999(1)
4.5 Warrant Agreement with Pierce McNally dated December 29, 1999(1)
4.6 Warrant Agreement with Enstar, Inc. dated December 29, 1999(1)
4.7 Warrant Agreement with David Ekman dated December 29, 1999(1)
4.8 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 10% Class C Cumulative
Convertible Stock(6)
4.9 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 14% Class D Cumulative
Convertible Stock(2)
4.10 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 15% Class E Cumulative
Convertible Stock(2)
4.11 Securities Purchase Agreement Dated September 18, 2003(6)
4.12 Secured Convertible Note Agreement (7)
5.1 Opinion of Steven M. Bell, Esq.(12)
10.1 Multiband Lease with Marbell Realty dated June 20, 1996(1)
10.2 Employment Agreement with Marvin Frieman dated October 1, 1996(1)
10.3 Employment Agreement with Steven Bell dated October 1, 1996(1)
10.4 Employment Agreement with James Mandel dated August 14, 1998(1)
10.5 Multiband Associate Agreement with NEC America, Inc. dated June 1999(1)
10.6 Loan Agreement with Wells Fargo dated June 17, 1999(1)
10.7 Employment Agreement with David Ekman dated December 29, 1999(1)
10.8 Debenture Loan Agreement with Convergent Capital dated March 9, 2000(1)
10.9 Corporate Technologies, USA, Inc. lease with David Ekman dated January 19, 2000(1)
10.10 Amendment dated July 11, 2000 to debenture loan agreement with Convergent Capital dated March 9, 2000.(2)
10.11 Corporate Technologies agreement with Siemens dated December 14, 2001(4)
10.12 Note with Pyramid Trading, L.P. (4)
10.14 Employment Agreement of Steven M. Bell dated January, 1, 2002(5)
10.15 Employment Agreement of James Mandel dated January 1, 2002(5)
10.16 Acquisition Agreement with Minnesota Digital Universe (8)
10.17 Acquisition Agreement with Rainbow Satellite Group (9)
10.18 Note Purchase Agreement (10)
10.19 Securities Purchase Agreement (11)
19.1 2000 Non-Employee Director Stock Compensation Plan(3)
19.2 2000 Employee Stock Purchase Plan(3)
21.1 List of subsidiaries of the registrant(1)
23.1 Consent of Virchow, Krause & Company, LLP(12)
24.1 Power of Attorney (included on signature page of original registration statement)
31 Section 906 of Sarbanes-Oxley Act of 2002 - James Mandel
32 Section 906 of Sarbanes-Oxley Act of 2002 - Steven Bell
44
(1) Previously filed as the same exhibit to the Registrant's Registration Statement on Form 10, as amended.
(2) Previously filed as the same exhibit to the original Registration Statement on Form S-1 filed on August 11, 2000
and declared effective on August 18, 2000.
(3) Previously filed as the same exhibit to Registrant's Proxy Statement on Form 14A, filed on July 31, 2000.
(4) Previously filed as the same exhibit to the original Registration Statement on Form S-1 filed on August 15, 2001
and declared effective on August 20, 2001.
(5) Previously filed as the same exhibit to Registrant's Form 10-Q, filed May 15, 2002.
(6) Previously filed as the same exhibit to registrant's Form 8-K filed September 24, 2003.
(7) Previously filed as the same exhibit to Registrant's Form 8-K filed December 16, 2003.
(8) Previously filed as the same exhibit to Registrant's Form 8-K filed April 2, 2004.
(9) Previously filed as the same exhibit to Registrant's Form 8-K filed July 9, 2004.
(10) Previously filed as the same exhibit to Registrant's Form 8-K filed November 19, 2004.
(11) Previously filed as the same exhibit to Registrant's Form 8-K filed November 24, 2004.
(12) Filed herewith.
45
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1993, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1993, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
46
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement on Form S-1/A to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New Hope,
State of Minnesota, on January 4, 2005.
MULTIBAND CORPORATION
By: /s/ Steven M. Bell
President and Chief Financial Officer
Pursuant to the requirements of the Securities Act, this registration
statement on Form S-1/A has been signed by the following persons in their
capacities indicated as of January 4, 2005
SIGNATURE TITLE
--------- -----
Steven. M. Bell President, Chief Financial Officer and Director
----------------------- (Principal Financial and Accounting Officer)
/s/ Steven M. Bell
Frank Bennett Director
-----------------------
/s/ Frank Bennett
Jonathan Dodge Director
-----------------------
/s/ Jonathan Dodge
David Ekman Director
-----------------------
/s/ David Ekman
Eugene Harris Director
-----------------------
/s/ Eugene Harris
James L. Mandel Chief Executive Officer and Director (Principal
----------------------- Executive Officer)
/s/ James L. Mandel
Donald Miller Director and Chairman
-----------------------
/s/ Donald Miller
David Weiss Director
-----------------------
/s/ David Weiss
*By:
Steven M. Bell
Attorney-in-Fact
47