AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 2005
REGISTRATION NO. 333-122717
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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)
COPIES TO:
STEVEN M. BELL, ESQ.
MULTIBAND CORPORATION
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO PUBLIC: As soon as practicable after this
registration statement becomes effective.
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. |_|
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) OFFERING PRICE (1) REGISTRATION FEE
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Shares of Common Stock no par value 1,281,614 $1.35 $1,730,179 $219.05
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Shares of Common Stock, no par value,
underlying Warrants 4,431,619 $1.35 $5,982,685 $757.40
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Totals 5,713,233 $1.35 $7,712,864 $976.45
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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 October 19, 2005 as reported on the Nasdaq Stock
Market.
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.
TABLE OF CONTENTS
Page
----
Prospectus Summary 5
Risk Factors 8
Forward-Looking Statements 10
Use of Proceeds 10
Dividend Policy 11
Capitalization 11
Selected Financial Data 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Business 23
Management
Certain Transactions 33
Principal and Selling Shareholders 35
Plan of Distribution 37
Description of Securities 38
Legal Matters 40
Experts 40
Where You Can Find More Information 40
Index to Consolidated Financial Statements F1
MULTIBAND CORPORATION
COMMON STOCK
5,713,233 SHARES
PROSPECTUS
OCTOBER 25, 2005
Page 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 OCTOBER 25, 2005
MULTIBAND CORPORATION
5,713,233 SHARES OF COMMON STOCK
The selling shareholders are offering up to an aggregate of 5,713,233 shares of
our common stock. Of the shares of common stock being offered by the selling
shareholders, (i) 4,431,619 shares may be purchased upon exercise of outstanding
warrants and (ii) 1,281,614 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 the
exercise of the warrants. See "Use of Proceeds" on page 7.
Our common stock is traded on the Nasdaq Stock Market under the symbol "MBND."
On October 19, 2005, the closing price of our common stock as reported by NASDAQ
was $1.35 per share.
The selling shareholders may offer the shares through public or private
transactions, on or off the NASDAQ 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.
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.
THE DATE OF THIS PROSPECTUS IS OCTOBER 25, 2005.
Page 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 (Multiband), (f/k/a Vicom, Incorporated)., is a Minnesota
corporation formed in September 1975. Multiband has two operating segments: 1)
Multiband Consumer Services (MCS, legally known as Multiband Subscriber
Services, Inc., which encompasses the subsidiary corporations, Multiband USA,
Inc., URON, Inc., and Rainbow Satellite Group, LLC.; and 2) Minnesota Digital
Universe, Inc. (MDU).
Multiband completed an initial public offering in June 1984. In November 1992,
Multiband became a non-reporting company under the Securities Exchange Act of
1934. In July 2000, Multiband regained its reporting company status. In
December, 2000, Multiband stock began trading on the NASDAQ stock exchange under
the symbol VICM. In July 2004, the symbol was changed to MBND concurrent with
the Company's name change from Vicom, Incorporated to Multiband Corporation.
Multiband's website is located at: www.multibandusa.com.
From its inception until December 31, 1998, Multiband operated as a telephone
interconnect company only. Effective December 31, 1998, Multiband acquired the
assets of the Midwest region of Enstar Networking Corporation (ENC), a data
cabling and networking company. In late 1999, in the context of a forward
triangular merger, Multiband to expand its range of computer products and
related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (MBS). MBS provided voice, data
and video systems and services to business and government. The MBS business
segment was sold effective April 1, 2005. All referenced to financial
information and descriptions of business in this registration have been revised
to reflect only our continuing operations and all references to our now
discontinued Multiband Business Services have been eliminated. The MCS segment
began in February 2000. MCS, the Company's continuing operating division,
provides voice, data and video services to multiple dwelling units (MDU),
including apartment buildings, condominiums and time share resorts. During 2004
the Company purchased video subscribers in a number of separate transactions,
the largest one being Rainbow Satellite Group, LLC. During 2004 the Company also
purchased the stock of Minnesota Digital Universe, Inc. (MDU Segment), which
made the Company the largest master service operator in MDU's for DirecTV
satellite television in the United States.
Page 5
THE OFFERING
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Common stock offered 5,713,233(1)
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Common stock to be outstanding after the offering 33,463,654 (2)
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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".
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(1) The selling shareholders are offering up to an aggregate of 5,713,233 shares
of our common stock. Of the shares of common stock being offered by the selling
shareholders, (i) 4,431,619 shares may be purchased upon exercise of outstanding
warrants and (ii) 1,281,614 shares are currently owned by shareholders who
acquired such shares in private placements to accredited investors.
(2) The information is based on the number of shares of common stock outstanding
as of August 18, 2005 and assumes that all of the warrants to purchase 4,431,619
shares were exercised. The number of shares outstanding does not include the
following:
o 19,034,079 shares of common stock issuable upon the exercise of warrants
outstanding as of August 18, 2005 with a weighted average exercise price of
$1.66 per share;
o 668 shares of unvested restricted stock grants as of August 18, 2005 with a
weighted average grant price of $ .85 per share;
o 5,500,000 shares of common stock reserved for additional issuances under our
stock plans as of August 18, 2005 (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 8,332,764 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"), 6% Class H
Cumulative Convertible Preferred Stock ("Class H Preferred") and Class I
variable rate Cumulative Convertible Preferred Stock ("Class I Preferred")
outstanding as of August 18, 2005.
o 519,481 shares upon conversion of a note owed as of August 18, 2005.
Page 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.
SIX MONTHS SIX MONTHS
ENDED ENDED YEARS ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2005 2004 2004 2003 2002 2001 2000
---------------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues .................... $ 7,890,482 $ 3,673,916 $ 11,067,834 $ 1,441,118 $ 577,221 $ 265,996 $ 73,319
Cost of products and services
(exclusive of depreciation
and amortization shown
below) .................... $ 3,583,025 $ 2,123,242 $ 5,943,395 $ 884,536 $ 418,093 $ 226,432 $ 105,617
Selling, general and
administrative expenses ... $ 4,524,487 $ 1,965,933 $ 5,960,050 $ 2,647,870 $ 1,971,584 $ 2,555,144 $ 2,870,657
% of revenues ............... 57.3% 53.5% 53.9% 183.0% 641.6% 960.6% 3915.30%
Depreciation and amortization $ 2,367,734 $ 1,502,922 $ 3,432,779 $ 1,065,650 $ 1,193,306 $ 1,165,610 $ 830,181
Loss from Operations ........ $ (2,584,764) $ (1,918,181) $ (4,268,390) $ (3,156,938) $ (3,005,762) $ (3,681,190) $ (3,733,136)
Other expense net ........... $ (976,422) $ (396,607) $ (1,058,252) $ (548,476) $ (1,439,069) $ (1,070,802) $ (280,962)
Minority interest in
subsidiary ............... $ 0 $ 0 $ 0 $ 33,366 $ 0 $ 0 $ 0
Loss before income taxes .... $ (3,561,186) $ (2,314,788) $ (5,326,642) $ (3,672,048) $ (4,444,831) $ (4,751,992) $ (4,014,098)
Income tax provision ........ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 8,849
Loss from Continuing
Operations ............... $ (3,561,186) $ (2,314,788) $ (5,326,642) $ (3,672,048) $ (4,444,831) $ (4,751,992) $ (4,022,947)
Discontinued operations ..... $ (318,376) $ (653,551) $ (4,457,320) $ (692,956) 6,772 $ (573,560) (212,884)
Net Loss .................... $ (3,879,562) $ (2,968,339) $ (9,783,962) $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,235,831)
Loss attributable to common
stockholders ............. $ (5,480,280) $ (3,426,265) $(10,374,417) $ (4,613,693) $ (4,591,637) $ (5,758,221) $ (5,082,011)
Loss per common share-basic
and diluted .............. $ (.14) $ (.14) $ (.42) $ (.27) $ (.38) $ (.66) $ (0.72)
Weighted average shares
outstanding .............. 27,929,454 20,984,967 23,307,594 16,112,231 11,735,095 8,762,814 7,009,751
BALANCE SHEET DATA 2005 2004 2004 2003 2002 2001 2000
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Working capital
(deficiency) ............. $ 938,093 $ (8,077,786) $ (8,931,414) $ 1,118,792 $ (252,870) $ 426,549 $ 2,870,114
Total assets ................ $ 29,042,107 $ 30,514,376 26,653,712 $ 13,902,885 $ 10,347,316 $ 12,209,681 $ 15,614,573
Long-term debt .............. 3,907,832 2,070,880 3,498,657 $ 2,262,891 $ 3,273,350 $ 3,311,870 $ 3,362,083
Stockholders' equity ........ $ 16,278,403 $ 13,417,470 $ 8,549,431 $ 5,807,711 $ 2,642,285 $ 4,184,001 $ 5,876,352
Page 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 (MDUs) on one billing platform, which the Company
developed internally.
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 $9,783,962 for the fiscal year ended December 31,
2004, $4,365,004 for the fiscal year ended December 31, 2003, and $4,438,059 for
the fiscal year ended December 31, 2002. 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.
GOODWILL
In June 2001, the Financial Accounting Standards Board (FASB) adopted Statement
of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets" which changed the amortization rules on recorded goodwill from a monthly
amortization to a periodic "impairment" analysis for fiscal years beginning
after December 15, 2001. In 2004, the Company recorded an impairment charge of
$527,879 related to Multiband Business Services. In the fourth quarter of 2004,
the Company wrote off $2,221,000 worth of goodwill related to discontinued
operations. As of December 31, 2004, the Company had remaining recorded goodwill
of $812,366 related to the purchase of Rainbow Satellite Group, LLC.
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, 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 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.
Page 8
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. The Company is also highly dependent on its Master
System Operator agreement with DirecTV which expires in May 2006. Although an
alternate provider of satellite television services, Echostar, exists, the
termination of its agreements with DirecTV could have a material adverse effect
on Multiband's business.
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.
Competition for such personnel is intense and is expected to increase in the
future.
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. Multiband also
relies on agreements with owners of MDUs which grant the Company rights of
access for a specific period to MDU premises whereby Multiband is allowed to
offer its voice, data, and video services to individual residents of the MDUs.
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.
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.
Page 9
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.
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 $6,500,734 from the exercise of the warrants estimated at $6,480,734
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.
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. The holders of our Series H
Convertible Preferred Stock are entitled to receive a cumulative dividend of 6%
per year, payable semi-annually. The holders of our Series I Convertible
Preferred Stock receive a monthly dividend at a range between prime rate and
prime rate plus 10% for the first seven months and at prime rate thereafter.
Page 10
CAPITALIZATION
The following table sets forth our consolidated capitalization as of June 30,
2005 and our capitalization as adjusted to reflect the issuance and sale of
4,431,639 shares of common stock upon exercise of the warrants and the
historical financial statements and notes thereto included elsewhere in this
prospectus.
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AS OF JUNE 30, 2005
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ACTUAL AS ADJUSTED
(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 8,620 shares issued and outstanding 61,200 61,200
------------------------------------------------------------------------------------------------------------------------------------
10% Class C cumulative convertible - no par value 125,280 shares issued and outstanding 1,609,905 1,609,905
------------------------------------------------------------------------------------------------------------------------------------
10% Class F cumulative convertible - no par value 150,000 shares issued and outstanding 1,500,000 1,500,000
------------------------------------------------------------------------------------------------------------------------------------
10% Class G cumulative convertible - no par value 45,245 shares issued and outstanding 179,897 179,897
------------------------------------------------------------------------------------------------------------------------------------
6% Class H cumulative convertible - no par value 2.0 shares issued and outstanding 0 0
------------------------------------------------------------------------------------------------------------------------------------
Variable rate Class I cumulative convertible - no par value 100,000 shares issued and outstanding 0 *10,000,000
------------------------------------------------------------------------------------------------------------------------------------
Common stock - no par value 28,949,008 and 33,380,627 issued, 28,948,340 and 33,379,959
outstanding 18,651,632 25,132,366
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Stock Subscriptions receivable (324,865) (324,865)
------------------------------------------------------------------------------------------------------------------------------------
Options and Warrants 44,468,270 44,468,270
------------------------------------------------------------------------------------------------------------------------------------
Unamortized Compensation (102,499) (102,499)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated deficit (50,184,889) (50,184,889)
------------------------------------------------------------------------------------------------------------------------------------
*The Class I shares were issued in February 2005 for gross proceeds of
$10,000,000.
Page 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.
SIX MONTHS SIX MONTHS
ENDED ENDED YEARS ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2005 2004 2004 2003 2002 2001 2000
---------------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues .................... $ 7,890,482 $ 3,673,916 $ 11,067,834 $ 1,441,118 $ 577,221 $ 265,996 $ 73,319
Cost of products and services
(exclusive of depreciation
and amortization shown
below) .................... $ 3,583,025 $ 2,123,242 $ 5,943,395 $ 884,536 $ 418,093 $ 226,432 $ 105,617
Selling, general and
administrative expenses ... $ 4,524,487 $ 1,965,933 $ 5,960,050 $ 2,647,870 $ 1,971,584 $ 2,555,144 $ 2,870,657
% of revenues ............... 57.3% 53.5% 53.9% 183.0% 641.6% 960.6% 3915.30%
Depreciation and amortization $ 2,367,734 $ 1,502,922 $ 3,432,779 $ 1,065,650 $ 1,193,306 $ 1,165,610 $ 830,181
Loss from Operations ........ $ (2,584,764) $ (1,918,181) $ (4,268,390) $ (3,156,938) $ (3,005,762) $ (3,681,190) $ (3,733,136)
Other expense net ........... $ (976,422) $ (396,607) $ (1,058,252) $ (548,476) $ (1,439,069) $ (1,070,802) $ (280,962)
Minority interest in
subsidiary ............... $ 0 $ 0 $ 0 $ 33,366 $ 0 $ 0 $ 0
Loss before income taxes .... $ (3,561,186) $ (2,314,788) $ (5,326,642) $ (3,672,048) $ (4,444,831) $ (4,751,992) $ (4,014,098)
Income tax provision ........ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 8,849
Loss from Continuing
Operations ............... $ (3,561,186) $ (2,314,788) $ (5,326,642) $ (3,672,048) $ (4,444,831) $ (4,751,992) $ (4,022,947)
Discontinued operations ..... $ (318,376) $ (653,551) $ (4,457,320) $ (692,956) 6,772 $ (573,560) (212,884)
Net Loss .................... $ (3,879,562) $ (2,968,339) $ (9,783,962) $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,235,831)
Loss attributable to common
stockholders ............. $ (5,480,280) $ (3,426,265) $(10,374,417) $ (4,613,693) $ (4,591,637) $ (5,758,221) $ (5,082,011)
Loss per common share-basic
and diluted .............. $ (.14) $ (.14) $ (.42) $ (.27) $ (.38) $ (.66) $ (0.72)
Weighted average shares
outstanding .............. 27,929,454 20,984,967 23,307,594 16,112,231 11,735,095 8,762,814 7,009,751
BALANCE SHEET DATA 2005 2004 2004 2003 2002 2001 2000
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Working capital
(deficiency) ............. $ 938,093 $ (8,077,786) $ (8,931,414) $ 1,118,792 $ (252,870) $ 426,549 $ 2,870,114
Total assets ................ $ 29,042,107 $ 30,514,376 26,653,712 $ 13,902,885 $ 10,347,316 $ 12,209,681 $ 15,614,573
Long-term debt .............. 3,907,832 2,070,880 3,498,657 $ 2,262,891 $ 3,273,350 $ 3,311,870 $ 3,362,083
Stockholders' equity ........ $ 16,278,403 $ 13,417,470 $ 8,549,431 $ 5,807,711 $ 2,642,285 $ 4,184,001 $ 5,876,352
Page 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of the financial condition and results of operations of
Multiband should be read in conjunction with the Condensed Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
Six Months ended June 30, 2005 and June 30, 2004.
RESULTS OF OPERATIONS
The following table sets forth certain items
----------------------------------------------------------- ----------------------------------- -----------------------------------
DOLLAR AMOUNTS AS A PERCENTAGE OF DOLLAR AMOUNTS AS A PERCENTAGE OF
REVENUES REVENUES
----------------------------------------------------------- ----------------------------------- -----------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------- ----------------------------------- -----------------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
REVENUES 100% 100% 100% 100%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
COST OF PRODUCTS & SERVICES (Exclusive of depreciation and 40.7% 58.9% 45.4% 57.8%
amortization shown below)
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
SELLING, GENERAL & ADMINISTRATIVE 56.8% 39.1% 57.3% 53.5%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
DEPRECIATION & AMORTIZATION 29.1% 39.5% 30.0% 40.9%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
LOSS FROM OPERATIONS -26.6% -37.5% -32.7% -52.2%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
INTEREST EXPENSE & OTHER, NET -7.2% -6.2% -12.4% -10.8%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
LOSS FROM CONTINUING OPERATIONS -33.8% -43.7% -45.1% -63.0%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 2.9% -6.2% -4.0% -17.7%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
NET LOSS -30.9% -49.9% -49.1% -80.7%
----------------------------------------------------------- ------------------ ---------------- ----------------- -----------------
Revenues
Company revenues increased 43.7% to $4,183,606 for the quarter ended June 30,
2005 as compared to $2,911,261 for the quarter ended June 30, 2004. This
increase is primarily due to the acquisition of video subscribers throughout
2004.
Revenues in the second quarter of fiscal 2005 for the MCS segment increased
100.9 % to $2,081,147 as compared to $1,035,597 in the second quarter of fiscal
2004. This increase is primarily due to the acquisition of video subscribers
throughout 2004.
Revenues in the second quarter of 2005 for the MDU segment increased 12.3% to
$2,102,459 as compared to $1,875,664 in the second quarter of fiscal 2004. This
increase is primarily due to an increase in managed subscribers during the
period combined with price increases enacted by DirecTV in 2005 which led to
increased residual revenues (payments received as a result of recurring monthly
revenues) for MDU during the quarter versus the prior year's quarter. These
increased residual revenues for the second quarter of 2005 were material enough
to offset lower revenues for one-time activation fees during the second quarter
of 2005 which declined versus the prior period in 2004 due to DirecTV's
reduction in the payment amount per activation.
Revenues for the six month period ended June 30, 2005 increased 114.8% to
$7,890,482 from $3,673,916 for the same period in 2004. Again, this revenue
increase is primarily due to the acquisition of video subscribers throughout
2004 and DirecTV price increases.
Page 13
Cost of Products and Services (Exclusive of depreciation and amortization)
The Company's cost of products and services, exclusive of depreciation and
amortization, decreased slightly to $1,703,517 for the quarter ended June 30,
2005 as compared to $1,712,280 for the similar quarter last year.
Costs of products and services for the MCS segment for the quarter were
$1,209,389 compared to $539,436 in the same quarter last year, a 124.1%
increase. This increase in costs of services is directly related to a material
increase in revenues.
Costs of products and services for the MDU segment for the quarter were $494,128
compared to $1,172,844 in the same quarter last year, a 57.7% decrease. This
reduction in costs reflects reduced payments to system operators for activation
fees and decrease of $554,299 in the estimated liability for vendor chargebacks.
For the six month period ended June 30, 2005, costs of products and services,
exclusive of depreciation and amortization were $3,583,025 compared to
$2,123,242 in the prior year. This overall increase in costs of products and
services over the prior year resulted primarily from an increase in overall
revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 109.0% to $2,377,575 in
the quarter ended June 30, 2005, compared to $1,137,780 in the prior year
quarter. This increase is primarily a result of increased expenses related to
the acquisition of video subscribers throughout 2004. Selling, general and
administrative expenses were, as a percentage of revenues, 56.8% for the quarter
ended June 30, 2005 and 39.1% for the similar period a year ago.
For the six month period ended June 30, 2005, these expenses increased 130.1% to
$4,524,487 as compared to $1,965,933 for the six months ended June 30, 2004. As
a percentage of revenue, selling, general and administrative expenses are 57.3%
for the six-month period ended June 30, 2005 as compared to 53.5% for the same
period in 2004.
Interest Expense
Interest expense was $373,013 for the quarter ended June 30, 2005, versus
$188,986 for the similar period a year ago, reflecting an increase in the
Company's debt and original issue discount expense. Amortization of original
issue discount was $164,882 and $159,199 for the three months ended June 30,
2005 and 2004.
Interest expense was $1,058,714 for the six months ended June 30, 2005 and
$418,320 for the same period last year. Amortization of original issue discount
was $664,980 for the six months ended June 30, 2005 and $348,178 for the same
period last year.
Income(loss) from Operations
The Company, in the second quarter of 2005, incurred a loss from operations for
its combined operating business segments of $1,419,246 versus a loss of
$1,271,611 during the prior year's period. Loss from operations from said
segments was $3,561,186 during the first six months of 2005 versus $2,314,788
during the same period in 2004. The MDU segment showed a profit from operations
of $1,029,527 during the second quarter of 2005 and $1,339,296 for the six
months ended June 30, 2005 versus profits of $124,351 for the three and six
months ended June 30, 2004. For the second quarter of 2005, the MCS segment
showed a loss from operations of $1,390,278 versus a loss of $536,776 for the
prior year period. For the six months ended June 30, 2005, the MCS segment
showed a loss from operations of $2,620,190 versus a loss of $894,991 for the
prior year period. The Multiband Corporation segment, which has no revenues,
showed a loss from operations of $1,058,495 for the three months ended June 30,
2005 and $2,280,292 for the six months ended June 30, 2005 versus losses of
$859,186 and $1,544,148 for the same period last year.
Net Loss
In the second quarter of fiscal 2005, the Company incurred a net loss of
$1,296,354 compared to a net loss of $1,451,474 for the second fiscal quarter of
2004. For the six months ended June 30, 2005, the Company recorded a net loss of
$3,879,562 as compared to $2,968,339 for the six months ended June 30, 2004.
Page 14
Years Ended December 31, 2004 and December 31, 2003.
This discussion does not include the results of discontinued operations.
Results of Operations
The following table sets forth certain items.
2004 2003
------ ------
Revenues
Multiband 0% 0%
MCS 100% 100%
------ ------
Total Revenues 100% 100%
====== ======
Cost of Products and Services
(exclusive of depreciation and amortization)
Multiband 0% 0%
MCS 53.70% 61.38%
------ ------
Total Cost of Products and Services
(exclusive of depreciation and
amortization) 53.70% 61.38%
====== ======
Selling, General and Administrative expenses 53.85% 183.73%
Operating loss from continuing operations (48.12%) (254.81%)
Loss from discontinued operations (40.27%) (48.08%)
Net Loss (88.40%) (302.89%)
Revenues:
Total revenues from continuing operations increased 668.0% from $1,441,118 in
2003 to $11,067,834 in 2004. This significant increase in revenues is primarily
due to the Company's acquisition of subscriber related assets in 2004 which
produced a material increase in consumer recurring revenues. These acquisitions
led primarily to the Company in 2004 growing from approximately 6,800
subscribers to approximately 30,000 subscribers. The Company's revenues are
expected to increase in 2005, even without further acquisitions, as the Company
will experience a full year's worth of revenues from these acquisitions made in
2004.
Cost of Products and Services:
The cost of products and services was $5,943,395 in 2004 compared to $884,536 in
2003. The significant increase in costs of products and services resulted from
the revenue generated from acquisition of subscriber related assets. The Company
expects costs of products and services as a percentage of revenue to remain
stable in future periods due to the relative predictability of the costs.
Page 15
Selling, General and Administrative Expenses
These expenses from continuing operations increased 125.08% to $5,960,050 in
2004, compared to $2,647,870 in 2003.The increase in expenses was directly
related to the Company's increase in revenues. Furthermore, the Company's
integration of various accounting, information technology and customer service
activities from its 2004 acquisitions produced material start up and additional
expense. Selling, general and administrative expenses were, as a percentage of
revenues, 53.85 % for 2004 and 183.73% for 2003. The Company expects these
expenses to decline as a percentage of revenues throughout 2005 as the
aforementioned integration expenses should be mitigated.
Interest Expense
Interest expense was $1,055,488 for 2004 versus $488,156 for 2003, reflecting an
increase in debt related to acquisitions.
Net Loss
The Company, in 2004, showed a net loss of $9,783,962, inclusive of the loss
from discontinued operations, which totaled $4,457,320. The Company's net loss
in 2003 totaled $4,365,004 which included a discontinued operations loss of
$692,956. Included in the loss from discontinued operations was an impairment of
goodwill of $2,748,879 for the year ended December 31, 2004 (see Note 1 to the
consolidated financial statements for further detail).
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%
MCS 100.0% 100.0%
------ ------
Total Revenues 100.0% 100.0%
====== ======
Cost of Products and Services
(exclusive of depreciation and amortization)
Multiband 0% 0%
MCS 61.38% 72.43%
------ ------
Total Cost of Products and services
(exclusive of depreciation and
amortization) 61.38% 72.43%
====== ======
Selling, General and Administrative 183.73% 341.56%
expenses
Operating loss from continuing operations (254.81%) (770.04%)
Loss from discontinued operations (48.08%) (1.17%)
Net Loss (302.89%) (768.87%)
REVENUES
Total revenues 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.
COSTS OF PRODUCTS AND SERVICES
The cost of products and services was $884,536 in 2003 compared to $418,093 in
2002. The increase is due to the expansion of MCS services to nineteen apartment
properties and eighteen timeshare properties.
Page 16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 34.3% to $2,647,870,
compared to $1,971,584 in 2002. This increase in expenses is primarily related
to increased payroll and facility expense and costs incurred for re-branding
Vicom 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, 183.7% for 2003 and 341.5% for 2002.
INTEREST EXPENSE
Interest expense was $488,156 for 2003, versus $1,256,965 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.
Page 17
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, 2004.
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.
--------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2004 2004 2004 2004 2003 2003 2003 2003
--------------------------------------------------------------------------------------------------------------------------------
Revenues:
--------------------------------------------------------------------------------------------------------------------------------
Vicom 0 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------
MCS 3,475,576 3,918,342 2,911,261 762,655 429,141 418,897 357,961 235,120
--------------------------------------------------------------------------------------------------------------------------------
Total
Revenues 3,475,576 3,918,342 2,911,261 762,655 429,141 418,897 357,961 235,120
--------------------------------------------------------------------------------------------------------------------------------
Cost of Products
and Services
(exclusive of
depreciation and
amortization
shown below) 1,889,980 1,952,631 1,712,280 410,962 290,391 238,336 202,065 153,647
--------------------------------------------------------------------------------------------------------------------------------
SG&A Expense 2,148,570 1,845,547 1,137,780 828,153 931,304 592,868 649,768 474,136
--------------------------------------------------------------------------------------------------------------------------------
Depreciation &
Amortization 881,826 1,048,031 1,150,677 352,245 295,131 279,812 263,330 227,379
--------------------------------------------------------------------------------------------------------------------------------
Operating Loss (1,444,800) (927,867) (1,089,476) (828,705) (1,087,685) (692,119) (757,202) (620,042)
--------------------------------------------------------------------------------------------------------------------------------
Interest Expense (382,854) (254,314) (188,986) (229,334) (135,411) (97,977) (113,580) (131,795)
--------------------------------------------------------------------------------------------------------------------------------
Other Income
(Expenses) 13,403 (15,423) 6,851 14,863 (12,136) 323 5,548 (63,290)
--------------------------------------------------------------------------------------------------------------------------------
Minority
Interest 38,170 (3,460) (1,392) 0
--------------------------------------------------------------------------------------------------------------------------------
Net Loss Before
Taxes (1,814,251) (1,197,604) (1,271,611) (1,043,176) (1,197,062) (793,233) (866,626) (815,127)
--------------------------------------------------------------------------------------------------------------------------------
Income Tax
(Benefit)
Provision 0 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------
Income (loss)
from continuing
operations (1,814,251) (1,197,604) (1,271,611) (1,043,176) (1,197,062) (793,233) (866,626) (815,127)
--------------------------------------------------------------------------------------------------------------------------------
Discontinued
Operations (3,149,780) (653,989) (179,863) (473,688) (434,537) (39,389) (68,038) (150,992)
--------------------------------------------------------------------------------------------------------------------------------
Net Loss (4,964,031) (1,851,593) (1,451,474) (1,516,864) (1,631,599) (832,622) (934,664) (966,119)
--------------------------------------------------------------------------------------------------------------------------------
Net Loss Per
Common Share
Basic and
Diluted (.20) (.07) (.06) (.08) (.09) (.05) (.06) (.07)
--------------------------------------------------------------------------------------------------------------------------------
Page 18
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 2005
During the six months ended June 30, 2005 and 2004, the Company recorded a net
loss of $3,879,562 and $2,968,339, respectively. We had negative cash flows from
operating activities of $2,842,499 and $1,517,424 during the period ended June
30, 2005 and 2004, respectively. Reduction of accounts payables and accrued
liabilities and retirement of a wholesale line of credit totaled $2,613,829 for
the period ended June 30, 2005. Management believes that over the next 12 months
there will be no significant reduction in accounts payable or the wholesale line
of credit which had a zero balance at June 30, 2005.
Cash and cash equivalents totaled $5,407,000 at June 30, 2005 versus $726,553 at
December 31, 2004. Available working capital, for the six months ended June 30,
2005 increased significantly compared to December 31, 2004 primarily due to the
10 million dollar sale of Class I preferred stock. Short term debts were reduced
in the six months ended June 30, 2005 as the Company continued to retire
financing debt and debt related to acquisitions. Long term debt increased two
million dollars as the Company re-borrowed two million dollars from Convergent
Capital under an existing debt facility. The Company had a material decrease in
both accounts receivables and accounts payable for the period ended June 30,
2005 reflecting the sale and wind down of the Multiband business services
segment. Net cash flows from investing activities totaled $770,844 for the
period ended June 30, 2005.
The Company continues to experience significant growth, primarily due to
increased subscriber related recurring revenues acquired via various
transactions previously mentioned herein.
Management of Multiband believes that, for the near future, cash on hand, as of
June 30, 2005, is adequate to meet the anticipated liquidity and capital
resource requirements of its business for the next 12 months. Capital
Expenditures
The Company used $415,065 for capital expenditures during the six months ended
June 30, 2005, as compared to $240,413 in the similar period last year. Capital
expenditures consisted of equipment acquired for internal use. We estimate
capitalized expenditures for the remainder of 2005 will be approximately
$300,000.
YEAR ENDED DECEMBER 31, 2004
Available working capital for 2004 decreased to $8,931,414 primarily due to
acquisition related debt load. Accounts receivable increased by $ 1,125,668 in
2004 due to a significant increase in consumer revenues. Current liabilities
increased in 2004 $8,298,728 due primarily to higher accounts payable and
accrued liabilities directly related to the increase in consumer revenues. In
addition, current maturities to long-term debt increased $500,000 and short-term
debt increased $4.5 million as of December 31, 2004 versus December 31, 2003 due
to the short-term debt issued related to the 2004 acquisitions. Inventories
decreased by $135,024 due to the Company's need to carry fewer inventories in
its consumer services division versus its discontinued business services
division.
Page 19
Total long term debt and capital lease obligations increased by $1,717,015
during the year ended December 31, 2004. Multiband paid out $74,902 related to
capital lease obligations and $345,578 related to long term debt during the year
ended December 31, 2004 versus $276,069 paid out in 2003.
The Company used $748,704 for capital expenditures during 2004, as compared to
$526,936 in 2003. This increase was related to additional purchases required as
a result of the business acquisitions made during 2004. Capital expenditures in
2005 are expected to be consistent with those in 2004.
In November 2004, the Company borrowed $2,166,667 from a group of accredited
institutional investors. The notes are convertible into shares of common stock
at $1.00 per share. The notes accrue interest at the rate of 6% per annum, which
interest is payable semi-annual in cash or common stock at the Company's
election.
Net cash used by operations in 2004 was $2,289,645 as compared to cash used by
operations in 2003 of $2,580,248. This reduction reflects improved performance
from operations, exclusive of non cash expenses. During the years ended December
31, 2004 and December 31, 2003, the Company incurred significant net losses.
Although the majority of those losses were due to non-cash expenses, the Company
in 2004 still continued to incur cash losses as well due to general corporate
expense. However, those cash losses decreased significantly in 2004 versus 2003
by the on-going additions of MCS properties in the Company's portfolio which
provided improved cash flows.
In February 2005, the Company sold ten million dollars worth of Class I
convertible preferred stock. With this investment and the Company's anticipated
financial results for 2005 based on 2004 trends, Multiband management believes
that it can meet the anticipated liquidity and capital resource requirements of
its business in 2005.
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.
Page 20
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.
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.
Page 21
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.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvement. At June 30, 2005, the Company had net property and equipment of
$4,075,534, which represents approximately 14% of the Company's total assets.
The estimated fair value of these assets is dependent on the Company's future
performance. In assessing for potential impairment for these assets, the Company
considers future performance. If these forecasts are not met, the Company may
have to record an impairment charge not previously recognized, which may be
material. During the three and six months ended June 30, 2005 and 2004, the
Company did not record any impairment losses related to long-lived assets.
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations. During the three and six
months ended June 30, 2005 and 2004, the Company did not record any impairment
losses related to goodwill.
Amortization of Intangible Assets
The Company amortizes a domain name 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 ranging
from two to five years. The Company is amortizing the right of entry contracts,
on an average, over their estimated useful lives ranging from 36 to 73 months.
Page 22
DESCRIPTION OF BUSINESS
Multiband Corporation (Multiband), (f/k/a Vicom, Incorporated)., is a Minnesota
corporation formed in September 1975. Multiband has two operating segments: 1)
Multiband Consumer Services (MCS, legally known as Multiband Subscriber
Services, Inc., which encompasses the subsidiary corporations, Multiband USA,
Inc., URON, Inc., and Rainbow Satellite Group, LLC.; and 2) Minnesota Digital
Universe, Inc. (MDU).
Multiband completed an initial public offering in June 1984. In November 1992,
Multiband became a non-reporting company under the Securities Exchange Act of
1934. In July 2000, Multiband regained its reporting company status. In
December, 2000, Multiband stock began trading on the NASDAQ stock exchange under
the symbol VICM. In July 2004, the symbol was changed to MBND concurrent with
the Company's name change from Vicom, Incorporated to Multiband Corporation.
Multiband's website is located at: www.multibandusa.com.
From its inception until December 31, 1998, Multiband operated as a telephone
interconnect company only. Effective December 31, 1998, Multiband acquired the
assets of the Midwest region of Enstar Networking Corporation (ENC), a data
cabling and networking company. In late 1999, in the context of a forward
triangular merger, Multiband to expand its range of computer products and
related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (MBS). MBS provided voice, data
and video systems and services to business and government. The MBS business
segment was sold effective April 1, 2005. All referenced to financial
information and descriptions of business in this Form 10-K have been revised to
reflect only our continuing operations and all references to our now
discontinued Multiband Business Services have been eliminated. The MCS segment
began in February 2000. MCS, the Company's continuing operating division,
provides voice, data and video services to multiple dwelling units (MDU),
including apartment buildings, condominiums and time share resorts. During 2004
the Company purchased video subscribers in a number of separate transactions,
the largest one being Rainbow Satellite Group, LLC. During 2004 the Company also
purchased the stock of Minnesota Digital Universe, Inc. (MDU Segment), which
made the Company the largest master service operator in MDU's for DirecTV
satellite television in the United States.
MULTIBAND CONSUMER SERVICES
Since 2000, Multiband has offered voice, data and video services to residents 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 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 includes annual reviews and 10 year terms as service providers on the
property. The secondary customer is the end-user. We 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.
Page 23
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, with an estimated 26
million households living in MDUs. 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
New York, California, Minnesota, Florida, Illinois, Missouri and North Dakota.
Our primary competition will come from the local incumbent providers of
telephone and cable television services.
Local Telephone Service
We compete with the former Bell System companies such as Verizon Communications
(Verizon) and Qwest Communications International, Inc. (Qwest) for local
telephone services. Although those companies have become the standard for local
telephone service, we believe we have the ability to underprice their service
while maintaining high levels of customer satisfaction.
Cable Television Service
We compete with Comcast Corporation (Comcast), Time Warner and others for pay-TV
customers. Comcast and Time-Warner are national cable television service
providers. 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. The pricing of our service is also untariffed which allows for
flexible and competitive "bundling" of services.
Long Distance Telephone Service
Cingular-Wireless, LLC (Cingular), 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, Florida, New York, California and
Illinois. 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.
Page 24
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.
Minnesota Digital Universe, Inc. (MDU, Inc.)
The Company, through its MDU, Inc. subsidiary, also serves as a master service
operator for DirecTV, a provider of satellite television service. DirecTV is the
largest provider of satellite television services in the United States with
approximately 13 million subscribers. DirecTV competes with the leading cable
companies and with Echostar, America's second largest provider of satellite
television. The Company, through its direct operations, markets DirecTV
services. The MDU, Inc. subsidiary allows the Company to offer satellite
television services to residents of Multi-dwelling-units through a network of
affiliated operators.
Number of Units/Customers
At August 15, 2005, MCS had 36,268 subscriptions for its services, (1,424 voice
subscriptions, 30,792 video subscriptions and 4,052 internet subscriptions). At
August 15, 2005, MDU had approximately 72,000 video subscriptions managed
through its network of system operations.
Employees
As of August 18, 2005, Multiband employed three full-time management employees,
four accounting personnel, and six information technology employees. As of that
same date, MCS had 36 full-time employees, consisting of eight in sales and
marketing, seven in technical positions, nineteen in customer service and
related support, and two in management.
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.
Multiband is 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.
The Company, in June 2005, settled its legal action with Private Investor's
Equity Group (PIEG). The terms of the settlement require Multiband to pay PIEG
$150,000 over eleven month period and issue PIEG 33,334 shares of restricted
Multiband common stock. The shares were valued at $36,000 using the market value
on the settlement date. As of June 30, 2005, with the exclusion of the
aforementioned PIEG matter, Multiband was not engaged in any pending legal
proceedings where, in the opinion of the Company, the outcome is likely to have
a material adverse effect upon the business, operating results and financial
condition of the Company.
DIRECTORS AND OFFICERS
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
Steven Bell............... 46 President & CFO, Multiband Incorporated 1994
Frank Bennett............. 48 President, Artesian Capital 2002
Jonathan Dodge............ 54 Partner, Dodge & Fox C.P.A. Firm 1997
David Ekman............... 44 Chief Information Officer, Corporate Technologies USA, Inc. 1999
Page 25
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
Eugene Harris............. 40 Director, Flagstone Securities 2004
James L. Mandel........... 49 Chief Executive Officer, Multiband Corporation 1998
Donald Miller............. 65 Chairman, Multiband Corporation 2001
David Weiss............... 42 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 managing director of Flagstone Securities, a St. Louis based
registered investment bank. He had been with Eidelman, Finger, Harris & Co. to
2004. 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.
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.
Page 26
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 and Donald Miller.
The Board of Directors met four times on a regular basis in 2004. As permitted
by Minnesota Law, the Board of Directors also acted from time to time during
2004 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.
Our audit committee met four times during 2004. 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, 2004, 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.
Page 27
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 31,2004 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, 2004 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 consisting of Frank Bennett, Donald Miller and Eugene
Harris:
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 2004. 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.
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.
Page 28
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 $100,000 during the
Company's last three fiscal years ending December 31, 2004.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
POSITION ($) ($) ANNUAL STOCK UNDERLYING PAYOUTS COMPENSATION
COMPENSATION AWARD(S) OPTIONS/ ($) ($)
($) ($) SARS
(#)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
AWARDS PAYOUTS
James L. Mandel 2004 $201,731 $125,000 -0- -0- 100,000 -0- -0-
Chief Executive Officer 2003 $250,727 $125,000 -0- -0- 300,000 -0- -0-
2002 $149,874 -0- -0- -0- -0- -0- -0-
Steven Bell 2004 $135,521 -0- -0- -0- 75,000 -0- -0-
Chief Financial Officer 2002 $120,484 -0- -0- -0- 50,000 -0- -0-
2002 $99,014 -0- -0- -0- 10,500 -0- -0-
Dave Ekman 2004 $120,380 -0- -0- -0- -0- -0- -0-
Chief Information Officer 2002 $111,154 -0- -0- -0- -0- -0- -0-
2002 $93,695 -0- -0- -0- -0- -0- -0-
DIRECTORS FEES
There were no cash fees paid to Directors in 2004. Outside Directors receive a
stock option of 30,000 shares at market price upon joining the Multiband Board.
Additional awards or options to Directors are determined by the Board's
Compensation Committee.
Page 29
STOCK OPTION GRANTS DURING 2004
THE FOLLOWING TABLE PROVIDES INFORMATION REGARDING STOCK OPTIONS GRANTED DURING
FISCAL 2004 TO THE NAMED EXECUTIVE OFFICERS IN THE SUMMARY COMPENSATION TABLE.
Potential Realizable Value at
Number of Percent of Assumed Annual Rates of Stock
Securities Total Options Price Appreciation for Option
Underlying Granted to Exercise or Term (1)
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year (%) ($/Share) Date
---------------- ----------- --------------- ----------- ---------- -------------------------------
5% 10%
----------- -----------
James L. Mandel 100,000 16.4 $1.45 6/18/2014 $86,190 $226,093
Steven M. Bell 25,000 4.1 $1.89 4/23/2014 $39,465 $95,054
Steven M. Bell 50,000 8.2 $1.45 6/18/2014 $63,095 $133,046
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 Vicom is not the surviving corporation, a transfer of all
shares of stock of Vicom, a sale of substantially all the assets, or a
dissolution or liquidation, of Vicom.
AGGREGATED OPTION EXERCISES IN 2004 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 2004 and the
number and value of options at December 31, 2004.
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, 2004 DECEMBER 31, 2004
James L. Mandel............ -0- -0- 550,500 -0- $200,535 $0
Steven M. Bell............. -0- -0- 135,500 -0- $ 33,555 $0
David Ekman................ -0- -0- 150,500 -0- $0 $0
(1) Value is calculated on the basis of the difference between the option
exercise price and $1.61, the fair market value of the Company's common stock at
December 31, 2004 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 2004.
Page 30
The Company has an employment agreement with Mr. Steven Bell, President, for the
term beginning January 2005 and expiring September 2008. 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 $195,000.00 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 400,000 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 2005 to
December 2007, with James L. Mandel, Chief Executive Officer, the terms of which
involve an annual base salary of $250,000 and a stock option of 600,000 shares
at $1.47 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.
Page 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 $ $1.27 on August 23, 2005.
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.
Page 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 $1.27 on
August 23, 2005.
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, 2004.
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,
$1,124,000 and $636,000 for the years ended December 31, 2004, 2003, and 2002,
respectively. In addition, the Company had accounts receivable outstanding from
these companies of approximately $140,000, $142,000, and $171,000 at December
31, 2004, 2003, and 2002, respectively.
Page 33
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.
Interest and dividend expense paid by Multiband to related parties was
approximately $9,995 in 2004, $225,966 in 2003, and $228,000 in 2002. Related
parties include the Company's Chairman, Chief Executive Officer, President and
the President's mother.
Page 34
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information as of August 18, 2005 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 following table also
provides information as of August 18, 2005 regarding the beneficial ownership of
shares of Multiband's common stock which can be obtained by the selling
shareholders by exercising 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.
------------------------------------------------------------------------------------------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO OFFERING (1) TO BE SOLD OFFERING (20)
------------------------------------------------------------------------------------------------------------------------------------
SHARES TOTAL
UNDERLYING NUMBER OF TOTAL
BENEFICIAL OWNER SHARES(2) WARRANTS SHARES PERCENT(3) NUMBER PERCENT
------------------------------------------------------------------------------------------------------------------------------------
Steven Bell 0 0 689,063(4) 2.0 0 689,063(5) 2.0%
9449 Science Center Drive
New Hope, MN 55428
0 0 232,500(6) * 0 232,500(7) *
Frank Bennett
301 Carlson Parkway - Suite 120
Minnetonka, Minnesota 55305
0 0 80,500(8) * 0 80,500(9) *
Jonathan Dodge
715 Florida Avenue South - Suite 402
Golden Valley, MN 55426
0 0 1,751,583(10) 5.4 0 1,751,583(11) 5.4
David Ekman
2000 44th Street SW
Fargo, ND 58103
0 0 111,220(12) * 0 111,220(13) *
Eugene Harris
225 South Meramec - Suite 722
St. Louis, MO 63105
0 0 714,133(14) 2.0 0 714,133(15) 2.0%
James L. Mandel
9449 Science Center Drive
New Hope, MN 55428
0 0 1,860,287(16) 4.6% 4.0 0 1,860,287(17) 4.0%
Donald Miller
1924 Cocoplum Way
Naples, FL 34105
0 0 222,744(18) * 0 222,744(19) *
David Weiss
10829 Olive Blvd.
Suite 203
St. Louis, MO 63141
All Directors and executive officers 0 0 5,662,030 18% 0 5,662,030 18%
as a group (eight persons)
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 29,092,035 shares outstanding at August 18, 2005, and
33,463,654 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 135,500 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 105,000 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. Also includes
75,000 vested options.
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 550,500 shares of common stock.
15 Includes vested options to purchase 550,500 shares of common stock.
16 Includes warrants and vested options to purchase 829,500 shares of common
stock.
17 Includes warrants and vested options to purchase 829,500 shares of common
stock.
18 Includes vested options to purchase 105,000 shares of common stock.
19 Includes vested options to purchase 105,000 shares of common stock.
*Less than one percent
Page 35
----------------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------------------
Bushido Capitol Master Fund, LP 0 300,000 300,000 * 300,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Carlson, Larry 17,900 17,900 35,800 * 35,800 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Cassell, John 18,000 18,000 36,000 * 36,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Enable Growth Partners L.P. 0 300,000 300,000 * 300,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Gamma Opportunity Capitol Partners, 0 300,000 300,000 * 300,000 0 0
LP
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Granberg, Roger IRA 32,000 32,000 64,000 * 64,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Gryphon Master Fund, LP 0 500,001 500,001 1.5% 500,001 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
GSSF Master Fund LP 0 500,001 500,001 1.5% 500,001 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Hendricks, Denise 17,857 17,857 35,714 * 35,714 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Hendricks, Randy 18,000 18,000 36,000 * 36,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Iroquois Capital LP 0 425,001 425,001 1.2% 425,001 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Kuekenhof Equity Fund 250,000 250,000 500,000 1.5% 500,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Maletis Partners 10,000 10,000 20,000 * 20,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
May, James 87,857 87,857 175,714 * 175,714 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Poppel, Harry 300,000 300,000 600,000 1.8% 600,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
RHP Master Fund, Ltd. 0 300,000 300,000 * 300,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Sams, Bill 250,000 250,000 500,000 1.5% 500,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
SRG Capital, LLC 0 150,000 150,000 * 150,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Stonestreet LP 0 250,001 250,001 * 250,001 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Tilton, Ted 180,000 180,000 360,000 1.0% 360,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Welling Family Trust 100,000 100,000 200,000 * 200,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
Whalehaven Capital Fund Limited 0 125,001 125,001 * 125,001 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
TOTAL 1,281,614 4,431,619 5,713,233 5,713,233 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- ------------- --------
* Less than one percent
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 29,092,035 shares outstanding at August 18, 2005, and
33,463,654 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).
Page 36
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledges, assignees and
successors-in-interest 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. Currently, the company is listed
only on the NASDAQ exchange where the shares will be offered. These sales may be
at fixed or negotiated prices. The Selling Stockholders 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 Settlement of short sales;
o Broker-dealers may agree with the Selling Stockholders 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 Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders 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 pledges or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under 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 Stockholders to include the pledgee, transferee or other successors in
interest as Selling Stockholders under this prospectus.
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. Oak Ridge Financial, one of the
Selling Shareholders is a broker-dealer. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. The Selling Stockholders have informed the Company
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the Common Stock.
The Company is required to pay all fees and expenses incident to the
registration of the shares. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Page 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 August 18, 2005 there were 29,092,035 shares of common stock outstanding,
5.5 million shares reserved for issuance under our stock plans, 19,034,079
shares of common stock reserved for issuance under outstanding warrants,
8,332,764 shares of common stock issuable upon the conversion of shares of our
Classes A through I cumulative convertible Preferred Stock and 519,481 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 Class G Preferred, Class H Preferred and Class I
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 one half of
the warrants allowing the warrant holder to purchase one share of Multiband
common stock for $1.575 per share and one half of the warrants allowing the
warrant holder to purchase one share of Multiband common stock for $1.725 per
share.
MARKET PRICE OF MULTIBAND'S COMMON 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 symbol was changed to MBND in July, 2004. 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, 2004 and December 31, 2003, as provided by
Nasdaq.
QUARTER ENDED HIGH BID LOW BID
------------------------------------------------------- -------- -------
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.......................................... 2.70 1.30
September 30, 2004..................................... 1.45 .96
December 31, 2004...................................... 1.78 1.01
March 31, 2005......................................... 1.75 1.22
June 30, 2005.......................................... 1.49 .95
As of August 18, 2005, Multiband had 698 shareholders of record of its common
stock and 29,092,035 shares of common stock outstanding. As of that date, eight
shareholders held a total of 27,931 of Class A Preferred, two shareholders held
8,620 shares of Class B Preferred, five shareholders held a total of 125,280
shares of Class C Preferred, one shareholder held a total of 150,000 shares of
Class F Preferred, 14 shareholders held a total of 45,245 shares of Class G
Preferred, 2 shareholders held a total 3.0 shares of Class H Preferred, and four
shareholders held a total of 100,000 shares of Class I Preferred.
Page 38
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.
In the fourth quarter of 2004, the Company issued $452,540 worth of Class G
Preferred Stock. In the same quarter, the Company issued $1,150,002 worth of
Class H Preferred Stock.
In the first quarter of 2005, the Company issued $10,000,000 worth of Class I
Preferred Stock.
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 six percent (6%) for
the Class H Preferred and a variable rate for the Class I 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 and Class I
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.
Page 39
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 and
Class I 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.
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, 2004, 2003 and 2002 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
Page 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.
Page 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 and 10-K/A for the fiscal year ended December
31, 2004;
o our proxy statement for the 2004 Annual Meeting of Shareholders;
o our quarterly reports on Form 10-Q for the quarters ended June 30, 2005 and
March 31, 2005 and Form 10-Q/A for the quarter ended March 31, 2005;
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.
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.
Page 42
MULTIBAND CORPORATION AND SUBSIDIARIES
FKA: VICOM, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4 - 13
Consolidated Statements of Cash Flows 14
Notes to Consolidated Financial Statements 15 - 41
SUPPLEMENTAL INFORMATION
Report of Independent Registered Public Accounting Firm on
Supplementary Information 42
Valuation and Qualifying Accounts 43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Stockholders, Board of Directors, and Audit Committee Multiband Corporation
and subsidiaries (formerly known as Vicom, Incorporated and subsidiaries)
We have audited the accompanying consolidated balance sheets of Multiband
Corporation and subsidiaries (formerly known as Vicom, Incorporated and
subsidiaries) as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2004. 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 audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 (formerly known as: Vicom, Incorporated
and subsidiaries) as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
March 8, 2005 (except as to Note 17, as to which the date is April 8, 2005 and
except as to Notes 1, 2 and 16 as to which the date is July 19, 2005).
Page 1
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
ASSETS
2004 2003
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 726,553 $ 2,945,960
Certificate of deposit 650,000 250,000
Accounts receivable, net 2,783,774 1,658,114
Inventories, net 231,993 367,017
Current assets of discontinued operations 634,307 1,606,800
Other current assets 146,334 96,550
----------- ------------
Total Current Assets 5,172,961 6,924,441
----------- ------------
PROPERTY AND EQUIPMENT, NET 4,372,474 3,538,415
----------- ------------
OTHER ASSETS
Goodwill 812,366 0
Intangible assets, net 16,081,635 503,625
Other assets of discontinued operations 47,975 2,800,168
Other assets 146,301 136,236
----------- ------------
Total Other Assets 17,088,277 3,440,029
----------- ------------
TOTAL ASSETS $26,633,712 $ 13,902,885
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $ 234,348 $ 147,398
Short-term debt 4,481,099 0
Wholesale line of credit 926,201 976,314
Current portion of long-term debt 1,524,527 998,813
Current portion of note payable - stockholder 84,801 81,554
Current portion of capital lease obligations 201,530 54,939
Accounts payable 2,561,611 1,771,699
Accrued liabilities 3,030,024 1,308,838
Contingent liability 222,700 0
Customer deposits 59,875 0
Current liabilities of discontinued operations 370,921 421,275
Deferred service obligations and revenue 406,738 44,819
----------- ------------
Total Current Liabilities 14,104,375 5,805,649
LONG-TERM LIABILITIES
Long-term debt, net 3,498,657 2,087,156
Note payable - stockholder, net of current portion -- 32,837
Capital lease obligations, net of current portion 481,249 142,898
----------- ------------
Total Liabilities 18,084,281 8,068,540
----------- ------------
MINORITY INTEREST IN SUBSIDIARY -- 26,634
----------- ------------
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A ( 27,931 and 27,931 shares issued and outstanding, 419,752 419,752
$293,276 and $293,276 liquidation preference)
10% Class B (8,700 and 8,700 shares issued and outstanding, 62,000 62,000
$91,350 and $91,350 liquidation preference)
10% Class C (125,400 and 125,400 shares issued and outstanding, 1,611,105 1,611,105
$1,254,000 and $1,254,000 liquidation preference)
15% Class E (0 and 77,650 shares issued and outstanding, $0 and 0 438,964
$776,500 liquidation preference)
10% Class F (150,000 and 0 shares issues and outstanding, 1,500,000 0
$1,500,000 and $0 liquidation preference)
8% Class G (45,245 and 0 shares issued and outstanding, $452,450 179,897 0
and $0 liquidation preference)
6% Class H (11.5 and 0 shares issued and outstanding, $1,150,000 0 0
and $0 liquidation preference)
Common stock, no par value (25,784,490 and 19,036,805 shares issued; 16,888,291 7,726,505
25,781,818 and 19,019,786 shares outstanding)
Stock subscriptions receivable (391,264) (418,085)
Options and warrants 32,985,983 30,514,872
Unamortized compensation (1,724) (217,210)
Accumulated deficit (44,704,609) (34,330,192)
----------- ------------
Total Stockholders' Equity 8,549,431 5,807,711
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,633,712 $ 13,902,885
=========== ============
See accompanying notes to consolidated financial statements.
Page 2
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
REVENUES $ 11,067,834 $ 1,441,118 $ 577,221
------------ ------------ ------------
COST AND EXPENSES
Cost of products and services
(exclusive of depreciation and
amortization shown separately below) 5,943,395 884,536 418,093
Selling, general and administrative 5,960,050 2,647,870 1,971,584
Depreciation and amortization 3,432,779 1,065,650 1,193,306
------------ ------------ ------------
Total costs and expenses 15,336,224 4,598,056 3,582,983
------------ ------------ ------------
LOSS FROM OPERATIONS (4,268,390) (3,156,938) (3,005,762)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (1,055,488) (488,156) (1,256,965)
Interest income 8,805 10,406 52,174
Loss on sale of assets (26,217) 0 0
Other income 14,648 (70,726) (234,278)
------------ ------------ ------------
Total Other Expense (1,058,252) (548,476) (1,439,069)
------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST IN SUBSIDIARY (5,326,642) (3,705,414) (4,444,831)
Minority interest in subsidiary 0 33,366 0
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (5,326,642) (3,672,048) (4,444,831)
LOSS FROM DISCONTINUED OPERATIONS (4,457,320) (692,956) 6,772
------------ ------------ ------------
NET LOSS (9,783,962) (4,365,004) (4,438,059)
Preferred stock dividends 590,455 248,689 153,578
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(10,374,471) $ (4,613,693) $ (4,591,637)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
LOSS FROM CONTINUING OPERATIONS $ (.23) $ (.23) $ (.38)
============ ============ ============
LOSS FROM DISCONTINUED OPERATIONS $ (.19) $ (.04) $ (.00)
============ ============ ============
NET LOSS $ (.42) $ (.27) $ (.38)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND
DILUTED 23,307,594 16,112,231 11,735,095
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 3
MULTIBAND COPORATION AND SUSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003, and 2002
Cumulative Convertible Preferred Stock
8% Class A 10% Class B 10% Class C 14% Class D 15% Class E
--------------------- --------------------- ---------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
BALANCES,
December 31,
2001 28,872 $433,867 8,700 $ 87,000 139,510 $1,800,447 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 1,859 18,590 - - - - - - - -
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 - - (2,500) (25,000) (2,500) (25,000) (10,000) (100,000) - -
Redemption of
preferred
stock (2,900) (29,000) - - (5,500) (55,000) - - - -
Discount on
preferred
stock
related to
warrants
issued - (5,205) - - - (21,040) - (17,500) - (304,222)
Interest
receivable
on stock
subscription - - - - - - - - - -
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 0 0 70,000 395,778
See accompanying notes to consolidated financial statements.
Page 4
MULTIBAND COPORATION AND SUSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Cumulative Convertible Preferred Stock
8% Class A 10% Class B 10% Class C 14% Class D 15% Class E
--------------------- --------------------- ---------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
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 - - - - - - - - 7,650 76,500
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) - - - - - (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
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 0 0 77,650 438,964
Stock issued: - - - -
Cash - -
Exercise of
warrants - - - - - - - - - -
Cashless
exercise of
warrants - - - - - - - - - -
Reduction of
stock
subscriptions - - - - - - - - - -
receivable for
fees related
to equity
transactions
Acquisition of
assets -
remaining 50% - - - - - - - - - -
ownership of
MBUSA
Acquisition of
assets -
URON, Inc. - - - - - - - - - -
Acquisition of
assets -
Satellite - - - -
Broadcasting
Corporation
and
affiliates
See accompanying notes to consolidated financial statements.
Page 5
MULTIBAND COPORATION AND SUSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Cumulative Convertible Preferred Stock
8% Class A 10% Class B 10% Class C 14% Class D 15% Class E
--------------------- --------------------- ---------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
Acquisition of
assets -
Minnesota
Digital - - - - - - - - - -
Universe, Inc.
Acquisition of
assets -
Rainbow
Satellite - - - - - - - - - -
Group, LLC.
Acquisition of
assets - 21st
Century - - - - - - - - - -
Satellite
Communications
Property and
equipment - - - - - - - - - -
Conversion of
notes payable - - - -
Conversion of
accrued
interest - - - - - - - - -
(77,650) (438,964)
Conversion of
preferred
stock - - - - - - -
- -
Conversion of
dividends
payable - - - - - - - -
In lieu of
cash
for services - - - - - - - - - -
In lieu of
cash
for other
current
assets - - - - - - - - - -
Stock
repurchase - - - - - - - - - -
Conversion of
preferred
stock
into note - - - - - - - - - -
payable
Intrinsic
value
of
convertible
feature
Discount on
preferred
stock
related to - - - - - - - - - -
warrants
issued
Stock
subscriptions
receivable: - - - - - - - - - -
Cash payments - - - - - - - - - -
Interest
collected - - - - - - - - - -
Warrants issued
for debt
modification - - - - - - - - - -
Deferred
compensation
expense
related to - - - - - - - - - -
stock options
issued below
fair market
value
Deferred
compensation
expense - - - - - - - - - -
Restricted
stock: - -
Forfeited - - - - - - - - - -
Amortization
expense - - - - - - - - - -
Preferred
stock
dividends - - - - - - - - - -
Net loss - - - - - - - - - -
---------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------
BALANCES,
December 31,
2004 27,931 $ 419,752 8,700 $ 62,000 125,400 $1,611,105 $ 0 $ 0 $ 0 $ 0
========== ========== ========= ========== ========= ========== ========= ========== ========= =========
See accompanying notes to consolidated financial statements.
Page 6
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003, and 2002
Cumulative Convertible Preferred Stock
--------------------------------------------------------------------
10% Class F 8% Class G 6% Class H
--------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- --------- ----------
BALANCES, December 31, 2001 - $ - - $ - - $ -
Stock issued:
Cash - - - - - -
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 - - - - - -
Conversion of accrued interest - - - - - -
Conversion of preferred stock - -
Redemption of preferred stock - -
Discount on preferred stock related to
warrants issued - - - -
Interest receivable on stock subscription - - - - - -
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 0 0 0 0 0 0
Stock issued:
Cash - -
Exercise of warrants - - - - - -
See accompanying notes to consolidated financial statements.
Page 7
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Cumulative Convertible Preferred Stock
--------------------------------------------------------------------
10% Class F 8% Class G 6% Class H
--------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- --------- ----------
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 -
- - - - -
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 - - - - -
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 0 0 0 0 0 0
Stock issued:
Cash - - 40,245 353,382 11.5 984,173
Exercise of warrants - - - - - -
Cashless exercise of warrants - - - - - -
Reduction of stock subscriptions
receivable for fees related to equity
transactions - - - - - -
Acquisition of assets - remaining 50%
ownership - - - - - -
Acquisition of assets - URON, Inc. - - - - - -
Acquisition of assets - Satellite
Broadcasting Corporation and affiliates - - - - - -
Acquisition of assets - Minnesota Digital
Universe, Inc. - - - - - -
See accompanying notes to consolidated financial statements.
Page 8
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Cumulative Convertible Preferred Stock
--------------------------------------------------------------------
10% Class F 8% Class G 6% Class H
--------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- --------- ----------
Acquisition of assets - Rainbow Satellite
Group, LLC. 200,000 2,000,000 - - - -
Acquisition of assets - 21st Century
Satellite Communications - - - - - -
Property and equipment
- - - - - -
Conversion of notes payable - - 5,000 50,000 - -
Conversion of accrued interest - - - - - -
Conversion of preferred stock - - - - - -
Conversion of dividends payable - - - - - -
In lieu of cash for services - - - - - -
In lieu of cash for other current assets - - - - - -
Stock repurchase - - - - - -
Conversion of preferred stock into note
payable (50,000) (500,000) - - - (500,000)
Intrinsic value of convertible feature - - - (54,182) - -
Discount on preferred stock related to
warrants issued - - - (169,303) - (984,173)
Stock subscriptions receivable: - - - - - -
Cash payments - - - - - -
Interest collected - - - - - -
Warrants issued for debt modification - - - - - -
Deferred compensation expense related to
stock options issued below fair market
value - - - - - -
Deferred compensation expense - - - - - -
Restricted stock: - - - - - -
Forfeited - - - - - -
Amortization expense - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
---------- ---------- --------- ---------- --------- ----------
BALANCES, December 31, 2004 150,000 $1,500,000 45,245 $ 179,897 11.5 $ 0
========== ========== ========= ========== ========= ==========
See accompanying notes to consolidated financial statements.
Page 9
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003, and 2002
Common Stock Stock Options
---------------------- Subscriptions and Unamortized Accumulated
Shares Amount Receivable Warrants Compensation Deficit Total
---------- ----------- ------------- ----------- ------------ ------------ ----------
BALANCES, December 31, 2001 10,679,450 $ 3,443,104 $ (631,619) $24,957,912 $(1,209,143) $(25,115,067) $4,184,001
Stock issued:
Cash 1,548,120 274,414 7,850 - - - 382,264
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 - - - - 14,750
Services rendered 35,214 27,700 - - - - 27,700
Conversion of accounts payable 7,500 7,255 - - - - 7,255
Conversion of notes payable and
accrued interest 554,569 460,001 - - - - 760,001
Conversion of accrued interest 117,787 119,881 - - - - 119,881
Conversion of preferred stock 140,000 150,000 - - - - -
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) - - - (49,989)
Warrants issued: - - - - -
Preferred stock - - - 324,324 - - 324,324
Common stock - - - 575,119 - - 575,119
Debt - - - 879,382 - - 879,382
Deferred compensation expense
related to stock options issued
below fair market value - 53,745 - (53,345) 4,307 - 4,707
See accompanying notes to consolidated financial statements.
Page 10
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Common Stock Stock Options
---------------------- Subscriptions and Unamortized Accumulated
Shares Amount Receivable Warrants Compensation Deficit Total
---------- ----------- ------------- ----------- ------------ ------------ ----------
Deferred compensation expense - - - - 78,292 - 78,292
Restricted stock:
Issued and outstanding 22,434 21,255 - - (21,255) - -
Forfeited (19,597) (65,710) - - 65,710 - -
Amortization expense - - - - 400,000 - 400,000
Embedded value with Pyramid Trading
warrants - - - (32,503) - - (32,503)
Preferred stock dividends - - - - - (153,578) (153,578)
Net loss - - - - - (4,438,059) 4,438,059)
---------- ----------- ------------- ----------- ------------ ------------ ----------
BALANCES, December 31, 2002 13,110,477 4,465,832 (633,195) 26,632,299 (682,089) (29,715,999) 2,642,285
Stock issued:
Cash
4,477,279 1,947,197 - - - - 1,973,197
Exercise of warrants
258,790 262,030 - - - - 262,030
Cashless exercise of warrants
141,529 - - - - - -
Exercise of stock options
3,000 3,750 - - - - 3,750
Reduction of stock subscriptions
receivable for fees related
to equity transactions - (36,977) 36,977 - - - -
Acquisition of assets
- - - - - - 76,500
Conversion of accounts payable
85,000 120,690 - - - - 192,690
Conversion of notes payable
654,202 762,000 - - - - 762,000
Conversion of accrued interest
63,539 66,172 - - - - 66,172
Conversion of preferred stock
66,666 40,000 - - - - -
Conversion of dividends payable
187,164 113,209 - - - - 113,209
Conversion of preferred stock
into notes payable - - - - - - -
Redemption of preferred stock
- - - - - - (93,100)
Intrinsic value of convertible
feature - - - - - (500) (27,202)
Discount on preferred stock related
to warrants issued - - - - - - (58,314)
Stock subscriptions receivable:
Cash payments - - 105,806 - - - 105,806
See accompanying notes to consolidated financial statements.
Page 11
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Common Stock Stock Options
---------------------- Subscriptions and Unamortized Accumulated
Shares Amount Receivable Warrants Compensation Deficit Total
---------- ----------- ------------- ----------- ------------ ------------ ----------
Increase reserve
- - 71,000 - - - 71,000
Interest collected
- - 1,327 - - - 1,327
Warrants issued:
Preferred stock - - - 58,314 - - 58,314
Common stock - - - 2,050,507 - - 2,050,507
Debt - - - 883,711 - - 883,711
Services rendered - - - 321,920 - - 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 (10,841) (17,398) - - 17,398 - -
Amortization expense - - - - 400,000 - 400,000
Embedded value with Laurus warrants - - - 568,121 - - 568,121
Preferred stock dividends - - - - - (248,689) (248,689)
Net loss - - - - - (4,365,004) (4,365,004)
---------- ----------- ------------- ----------- ------------ ------------ ----------
BALANCES, December 31, 2003 19,036,805 7,726,505 (418,085) 30,514,872 (217,210) (34,330,192) 5,807,711
Stock issued:
Cash
2,001,832 2,059,093 - 791,483 - - 4,188,131
Exercise of warrants 273,403 390,279 - - - - 390,279
Cashless exercise of warrants 133,742 - - - - - -
Reduction of stock subscriptions
receivable for fees related
to equity transactions - (17,320) 17,320 - - - -
Acquisition of assets -
remaining 50% ownership of
MBUSA 30,000 39,000 - - - - 39,000
Acquisition of assets - URON,
Inc. 180,000 235,800 - - - - 235,800
Acquisition of assets -
Satellite Broadcasting
Corporation and affiliates 135,076 270,152 - - - - 270,152
Acquisition of assets -
Minnesota Digital Universe,
Inc. 2,300,000 3,960,000 - - - - 3,960,000
Acquisition of assets - Rainbow
Satellite Group, LLC. - - - - - - 2,000,000
Acquisition of assets - 21st
Century Satellite
Communications 230,333 364,584 - - - - 364,584
Property and equipment 11,800 15,530 - - - - 15,530
Conversion of notes payable 407,051 580,909 - - - - 630,909
Conversion of accrued interest 47,393 56,687 - - - - 56,687
Conversion of preferred stock
621,200 776,500 - - - (337,536) -
Conversion of dividends payable
156,110 124,618 - - - - 124,618
In lieu of cash for services 213,464 329,581 - - - - 329,581
See accompanying notes to consolidated financial statements.
Page 12
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS' EQUITY - (CONTINUED)
Years Ended December 31, 2004, 2003, and 2002
Common Stock Stock Options
---------------------- Subscriptions and Unamortized Accumulated
Shares Amount Receivable Warrants Compensation Deficit Total
---------- ----------- ------------- ----------- ------------ ------------ ----------
In lieu of cash for other
current assets 36,000 42,120 - - - - 42,120
Conversion of preferred stock
into notes payable - - - - - - -
Stock repurchase
(27,500) (62,975) - - - - (62,975)
Intrinsic value of convertible
feature - - - 457,500 - 54,182 457,500
Discount on preferred stock related
to warrants issued - - - 1,153,476 - - (500,000)
Stock subscriptions receivable:
- - - - - - -
Cash payments - - 6,731 - - - 6,731
Interest collected - - 2,770 - - - 2,770
Warrants issued for debt
modification - - - 68,652 - - 68,652
Deferred compensation expense
related to stock options issued
below fair market value - - - - 115 - 115
Deferred compensation expense - - - - 12,599 - 12,599
Restricted stock: - - - - - - -
Forfeited (2,219) (2,772) - - 2,772 - -
Amortization expense
- - - - 200,000 - 200,000
Preferred stock dividends - - - - - (307,101) (307,101)
Net loss - - - - - (9,783,962) (9,783,962)
---------- ----------- ------------- ----------- ------------ ------------ ----------
BALANCES, December 31, 2004 25,784,490 $16,888,291 $ (391,264) $32,985,983 $ (1,724) $(44,704,609) $8,549,431
========== =========== ============= =========== ============ ============ ==========
See accompanying notes to consolidated financial statements.
Page 13
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA: VICOM, INCORPORATED AND SUBSIDIARIES)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,783,962) $(4,365,004) $(4,438,059)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 1,305,431 948,796 981,985
Amortization 2,304,626 47,583 133,472
Amortization of deferred compensation 212,714 447,481 482,999
Impairment of goodwill 2,748,879 -- --
Amortization of original issue discount 718,166 405,248 1,103,314
Write off of notes receivable and investment -- 19,069 60,000
Reserve for stock subscriptions and interest receivable -- 71,000 --
Impairment reserve on property and equipment -- -- 119,480
Common stock issued for services 329,581 -- 27,700
Loss on sale of property and equipment 26,217 79,394 31,412
Interest receivable on stock subscription receivable -- 1,327 (49,989)
Warrants issued for( services -- 321,920 --
Warrants issued with debt conversion -- -- 183,903
Minority interest in subsidiary -- (33,366) --
Changes in operating assets and liabilities: -- -- --
Accounts receivable, net (1,158,198) 289,890 576,509
Inventories, net 1,105,372 (509,762) 182,783
Other current assets (7,664) 70,264 (205,483)
Other assets (13,675) (143,101) 43,210
Wholesale line of credit (50,113) (314,069) (34,424)
Accounts payable and accrued liabilities (229,855) 122,403 38,344
Deferred service obligations and revenue 198,361 (39,321) (106,877)
Customer deposits 4,475 -- --
------------ ----------- -----------
Net Cash Flows from Operating Activities (2,289,645) (2,580,248) (869,721)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 2,712 15,492 1,239,313
Purchases of property and equipment (748,704) (526,936) (1,275,434)
Purchase of SBC (221,624) -- --
Purchase of MDU (1,009,730) -- --
Purchase of Rainbow (1,000,000) -- --
Purchase of 21st Century (250,000) -- --
Payments for investment in joint venture -- (64,878) --
Purchase of certificate of deposit (400,000) (250,000) --
------------ ----------- -----------
Net Cash Flows from Investing Activities (3,627,346) (826,322) (36,121)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in checks issued in excess of cash in bank 83,558 147,398 --
Proceeds from long-term debt and warrants issued with
long-term debt 2,471,688 1,659,726 1,172,064
Net payments on short-term debt (2,688,900) -- --
Proceeds from note payable - stockholder -- 124,000 --
Payments received on stock subscriptions receivable 9,501 105,806 6,786
Payments on long-term debt (345,578) (200,768) (131,605)
Payments on note payable - stockholder (29,590) (9,609) --
Payments on capital lease obligations (74,902) (75,301) (937,828)
Proceeds from issuance of stock and warrants 4,188,131 4,023,704 949,533
Payments for debt issuance costs (198,337) -- --
Redemption of preferred stock -- (93,100) (84,000)
Preferred dividends (45,291) (135,481) (153,578)
Redemption of common stock (62,975) -- --
Exercise of stock options -- 3,750 --
Exercise of warrants 390,279 262,030 --
------------ ----------- -----------
Net Cash Flows from Financing Activities 3,697,584 5,812,155 821,372
------------ ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,219,407) 2,405,585 (84,470)
CASH AND CASH EQUIVALENTS - Beginning of Year 2,945,960 540,375 624,845
------------ ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 726,553 $ 2,945,960 $ 540,375
============ =========== ===========
See accompanying notes to consolidated financial statements.
Page 14
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Multiband Corporation and subsidiaries, formerly known as Vicom, Incorporated
and subsidiaries, (the Company) was incorporated in Minnesota in September 1975.
The Company provides voice, data and video services to multi-dwelling unit
customers. The Company's products and services are sold to customers located
throughout the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the years ended December 31, 2004, 2003, and 2002, the Company incurred net
losses of $ 9,783,962, $4,365,004 and $4,438,059, respectively. At December 31,
2004, the Company had an accumulated deficit of $44,704,609. The Company's
ability to continue as a going concern is dependent on it ultimately achieving
profitability and/or raising additional capital. On February 3, 2005, the
Company completed a $10 million private placement of the Company's Series I
Convertible Preferred Stock. Management intends to obtain additional debt or
equity capital to meet all of its existing cash obligations and fund commitments
on planned Multiband projects; however, there can be no assurance that the
sources will be available or available on terms favorable to the Company.
Management anticipates that the impact of the actions listed below will generate
sufficient cash flows to pay current liabilities, long-term debt and capital
lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional equity investment in the Company by either issuing
preferred or common stock. The Company, in February 2005 issued $10,000,000
worth of Class I Preferred Stock to a group of accredited investors.
3. Continue to market Multiband services and acquire additional multi-dwelling
unit customers.
4. Control capital expenditures by contracting Multiband services and equipment
through a landlord-owned equipment program.
5. Establish market for wireless internet services.
6. Discontinuation of Multiband business services segment which was unprofitable
in 2004. This segment was sold effective April 1, 2005.
Principles of Consolidation
The consolidated financial statements include the accounts of Multiband
Corporation (MB) and its wholly owned subsidiaries, Corporate Technologies, USA,
Inc. (CTU), URON, Inc., Minnesota Digital, Inc. (MDU), Rainbow Satellite Group,
LLC (Rainbow) and Multiband, Inc. (Multiband) which provides voice, data and
video services to residential multi-dwelling units. In February 2003, the
Company formed a 50% owned subsidiary, Multiband USA, Inc. (MB USA) with Pace
Electronics, Inc. (PACE) a video wholesaler, and provides the same services as
Multiband). On January 1, 2004, the Company purchased the 50% PACE interest in
Multiband USA. All significant intercompany transactions and balances have been
eliminated in consolidation.
On January 1, 2004, the Company merged Multiband into CTU.
Page 15
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Discontinued Operations
During the first quarter of 2005, the Company sold certain assets and
transferred certain liabilities related to its Multiband Business Services
(a/k/a CTU). The Company began discussions and efforts to sell these assets in
the fourth quarter of 2004. These assets met the requirements of Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" as being held for sale. Operations and cash flows will be
eliminated as a result of the sale and the Company will not have any significant
involvement in the operations after the sale. In accordance with appropriate
accounting rules, the Company has reclassified the previously reported financial
results to exclude the results of the Multiband Business Services (CTU) and
these results are presented on a historical basis as a separate line in the
consolidated statement of operations and the consolidated balance sheets
entitled "Discontinued Operations". All of the financial information in the
consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
(see Note 16). Based on the discussions and efforts to sell these assets, the
Company determined, based on the final purchase price which was arrived at in
the first quarter of 2005, it was required to take an impairment charge to the
goodwill of the Multiband Business Services division. As a result, an impairment
charge related to goodwill of $2,221,000 was recorded in the fourth quarter of
2004.
Revenues and Cost Recognition
The Company recognizes revenue in accordance with the Securities Exchange
Commission's Staff Accounting Bulletin No. 104 (SAB 104) "Revenue Recognition",
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectibility is reasonable assured; and (iv)
product delivery has occurred or services have been rendered. The Company
recognizes revenue (included in discontinued operations) as products are shipped
based on FOB shipping point terms when title passes to customers.
The Company earns revenues from six sources: 1) Video and computer technology
products which are sold but not installed, 2) Voice, video and data
communication products which are sold and installed, 3) Service revenues related
to communication products which are sold and both installed and not installed 4)
Multiband user charges to multiple dwelling units 5) Voice, data, and video
revenue directly generated by the Company as a principal to subscribers, and 6)
DirecTV master system operator revenue earned primarily through the activation
of and residual fees on video programming services.
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms. Product returns and customer discounts
are netted against revenues. This revenue has been included with discontinued
operations.
Customer's contract for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenue is recognized when the products are
delivered and installed and the customer has accepted the terms and has the
ability to fulfill the terms. This revenue has been revenues related to
Page 16
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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, 2004, 2003 and 2002. 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. This revenue has been included with discontinued
operations.
Revenue generated from activation on video programming services is earned in the
month of activation. According to the Company's agreement with DirecTV, in the
event that a customer cancels within the first 12 months of service, DirecTV has
the right to chargeback the Company for a portion of the activation fees
received. In accordance with Securities Exchange Commission SAB 104, the Company
has estimated the potential charge back of commissions received on activation
fees during the past 12 months based on historical percentages of customer
cancellations and has included that amount as a reduction of revenue. Residual
income is earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns a fixed
percentage based on net cash received by DirecTV for recurring monthly services
and a variable amount depending on the number of activations in a given month.
The Company's master system operator contract with DirecTV also permits the
Company to earn revenues through its control of other system operators who are
unable to provide DirecTV video programming services without the Company's
performance.
The Company has determined that the accounting policies for income recognition
described above were in accordance with the Financial Accounting Standards Board
Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as
a Principal versus Net as an Agent". EITF No. 99-19 employs multi-factor tests
to determine whether amounts charged to customers in respect of certain expenses
incurred should be included in revenues or netted against such expenses.
The Company reports the aforementioned voice, data and video programming
revenues on a gross basis based on the following factors: the Company has the
primary obligation in the arrangement with its customers; the Company controls
the pricing of its services; the Company performs customer service for the
agreements; the Company approves customers; and the Company assumes the risk of
payment for services provided. The Company reports DirecTV revenue on a net
basis.
Multiband, Rainbow, MDU and MB USA user charges are recognized as revenues in
the period the related services are provided in accordance with SAB 104.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
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 December 2005.
Page 17
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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
$225,000 and $223,000 at December 31, 2004 and 2003, respectively. Accounts
receivable over 90 days were $559,000 and $433,000 at December 31, 2004 and
2003, respectively.
Inventories
Inventories, included as inventories and current assets of discontinued
operations on the balance sheet, 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.
Goodwill and Other Intangible Assets
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, 2004, 2003 and 2002.
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, 2004 and 2003. For the quarter ended
Page 18
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
September 30, 2004 and 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. During the three months ended September 30, 2004, the
Company completed its review of goodwill through an independent appraisal and
determined it was partially impaired. The Company recorded impairment charges to
goodwill of $527,879 related to the Corporate Technologies (CTU) acquisition
during the quarter ended September 30, 2004. Under the discounted future returns
method, future benefits over a period of time are estimated and then discounted
back to present value. The independent appraiser used a discount factor of 15.8%
and 16.8% for the years ended December 31, 2004 and 2003, respectively. Based
upon the 2003 independent appraisal, the Company determined that its current
goodwill balances were not impaired as of December 31, 2003. As of December 31,
2004, goodwill related to discontinued operations of $2,221,000 was entirely
written off and was included in discontinued operations. Goodwill related to
continuing operations was $812,366 as of December 31, 2004.
Components of intangible assets are as follows:
December 31, 2004 December 31, 2003
------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- ----------- ----------- -----------
Intangible assets subject to amortization
Domain name $ 83,750 $ 55,833 $ 83,750 $ 39,083
Access contracts $ 60,000 $ 33,333 60,000 13,334
Debt issuance costs $ 313,837 $ 47,214 115,500 3,208
Right of entry $17,226,759 $ 1,933,294 -- --
Customer cable lists $ 753,930 $ 286,967 300,000 --
----------- ----------- ----------- -----------
Total $18,438,276 $ 2,356,641 $ 559,250 $ 55,625
=========== =========== =========== ===========
Intangible assets not subject to amortization
Goodwill $ 812,366 $ 0 $ 3,531,157 $ 782,278
=========== =========== =========== ===========
Amortization of intangible assets was $2,301,016, $33,291 and $16,750 for the
years ended December 31, 2004, 2003 and 2002, respectively. Estimated
amortization expense of intangible assets for the years ending December 31,
2005, 2006, 2007, 2008, 2009 and 2010 is $3,297,005, $3,047,921, $2,974,281,
$2,908,666, $2,817,297 and $1,036,464, respectively. The weighted average
remaining life of the intangibles is 5.5 years with right of entry average life
of 6.0 years and customer cable lists of 2.6 years. The Company believes the
goodwill recorded of $812,366 will be deductible for tax purposes.
Page 19
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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 ranging from two to five years. The
Company is amortizing the right of entry contracts, on an average, over their
estimated useful lives ranging from 36 to 73 months.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were
$176,592, $146,906, $104,788 for the years ended December 31, 2004, 2003 and
2002, 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 $212,714, $447,481, and
$482,999 of compensation cost has been recognized in the accompanying
consolidated statements of operations for the years ended December 31, 2004,
2003 and 2002, 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:
Page 20
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
Loss attributable to common stockholders $(10,374,417) $ (4,613,693) $ (4,591,637)
Pro forma loss attributable to common shares $(10,984,354) $ (5,363,381) $ (4,915,649)
Basic and diluted loss attributable to common shareholders:
As reported $ (.45) $ (0.29) $ (0.39)
Pro forma loss attributable to common shares $ (.47) $ (0.33) $ (0.42)
Stock-based compensation:
As reported $ 212,714 $ 447,481 $ 482,999
Pro forma $ 609,937 $ 749,688 $ 324,012
In determining the compensation cost of the options granted during fiscal 2004,
2003, and 2002, 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:
2004 2003 2002
------------ ------------ ------------
Risk-free interest rate 3.31% 3.00% 4.40%
Expected life of options granted 10 years 10 years 10 years
Expected volatility range 184% 170% 170%
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, 2004, 2003 and 2002 were
anti-dilutive.
Segment Reporting
A business segment is a distinguishable component of an enterprise that is
engaged in providing an individual product or service or a group of related
products or services and that is subject to risks and returns that are different
from those of other business segments. Management believes that the Company has
two operating segments, MCS, where the Company bills voice, data and video
subscribers as a principal; and MDU where the Company as a master service
operator for DirecTV receives net cash payments for managing video subscribers
through its network of system operators. These video subscribers are billed by
DirecTV.
Recently Issued Accounting Pronouncements
In November 2004, FASB issued SFAS No. 151 "Inventory Costs" which amends the
guidance in ARB No. 43, Chapter 4 "Inventory Pricing," to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated
that under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. SFAS No. 151 requires that those items be
Page 21
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, SFAS No, 151 requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 shall be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after the date SFAS No. 151 was issued. SFAS No. 151 shall be
applied prospectively. The Company does not expect the adoption of SFAS No. 151
to have a material effect on its consolidated financial statements.
In December 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets"
which amends APB Opinion No. 29, "Accounting for Nonmonetary Transactions." APB
No. 29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that
Opinion, however, included certain exceptions to that principle. SFAS No. 153
amends APB No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 shall
be effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted for nonmonetary
asset exchanges occurring in fiscal periods beginning after the date SFAS No.
153 was issued. SFAS No. 153 shall be applied prospectively. The Company does
not expect the adoption of SFAS No. 153 to have a material effect on its
consolidated financial statements.
In December 2004, FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment", which focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Beginning with the quarterly period that begins July 1, 2005, the Company will
be required to expense the fair value of employee stock options and similar
awards. As a public company, the Company is allowed to select from two
alternative transition methods, each having different reporting implications.
The impact of SFAS No. 123R for the year ending December 31, 2005 is estimated
to range from approximately $150,000 and $200,000 based on the value of the
options outstanding as of December 31, 2004 that will vest during the third and
fourth quarters of 2005. This estimate does not include any expenses for options
that may be granted and vested during 2005.
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 adoption of FIN 46R
did not 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.
Page 22
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Financial Instruments
The carrying amounts for all financial instruments approximate fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, and short-term debt 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.
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. The
remaining 50% ownership was purchased January 1, 2004.
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.
On January 1, 2004, the Company entered into a stock purchase agreement with
URON, Inc. (URON) to purchase all of the outstanding capital stock of URON for a
total purchase price of 350,000 shares of the Company's common stock to be
issued in installments as follows: a) 180,000 shares issued at closing, b)
170,000 shares held in escrow. The common shares were valued at fair market
value on the date of agreement which was $1.31 per share for a purchase price of
$458,500. The terms of the escrow are as follows: 50,000 shares to be released
upon URON providing the Company with documentation satisfactory to the Company
Page 23
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
of a release from a certain vendor or any related entity of all liabilities
incurred to a certain vendor by URON; 120,000 shares to be released in 40,000
share increments upon the Company's receipt of distributable gross profits,
generated by certain customers, in increments of $75,000 cash. The escrow shall
be terminated 24 months after the date of the agreement and any shares not
released will be rescinded to the Company. The Company must register all shares
issued within one year from the date of issuance. The reason for the purchase of
URON is to continue to expand the Company's services related to voice, data, and
video services. The purchase price of $458,500 was allocated to customer list of
$453,930 and property and equipment of $4,570. The customer list will be
amortized over its estimated useful lives of two years and the property and
equipment for fifteen months. At December 31, 2004, the Company was not
obligated to issue any of the contingent shares of common stock.
In April 2004, the Company purchased certain assets consisting of data and video
subscribers and systems from Satellite Broadcasting Corporation and affiliates
(SBC). The total purchase price for said assets was approximately $679,200.
On April 2, 2004, Multiband Corporation and subsidiaries (the Company), (fka
Vicom, Incorporated and subsidiaries), completed its acquisition of Minnesota
Digital Universe, Inc. (MDU) for approximately 7.7 million dollars, half of
which was paid for in Multiband Corporation common stock, valued at $1.75 per
share, ($3,850,000), $1.1 million paid in cash and the balance in promissory
notes due by January 2005. Included in the purchase price is $700,000 related to
a finder's fee. In December 2004, the notes with an outstanding balance of
$990,000 were extended through May 2005; with $200,000 of the outstanding note
balance being extended to July 2006. These notes are unsecured and bear no
interest. The stock value was a negotiated price between the Seller and the
Buyer. The consideration paid was based on the Company's analysis of likely
future net income to be generated over a six year period by the acquired
company. The cash was provided by funds the Company had previously raised in a
private placement. The assets were acquired from Pace Electronics. Prior to the
transaction, there was no material relationship between the owners of MDU and
the Company other than the fact that Pace Electronics previously owned a 50%
interest in a company subsidiary, Multiband USA, Inc., which Multiband bought
out the remaining 50% of ownership from Pace Electronics in January 2004 for
30,000 shares of the Company's common stock valued at $39,000.
With the MDU acquisition, the Company became a nationwide agent for DirecTV. MDU
services nearly 40,000 video subscribers through a network of private cable
operators located throughout the United States. The purchase also permits the
Company to receive ongoing residual payments from DirecTV, during the term of
the master system operator agreement with DirecTV, which initially had
approximately 25 months remaining at the time of purchase.
On July 9, 2004, Multiband (the Company) completed its acquisition, which had an
acquisition date of June 1, 2004, of the outstanding membership interests of
Rainbow Satellite Group, LLC (Rainbow), a provider of Satellite television
services to multi dwelling units, for approximately 7.5 million dollars, two
million of which was paid for in Multiband Preferred Stock, valued at $2.00 per
share on a conversion formula to Multiband common stock, one million dollars of
which was paid for in cash and the balance in promissory notes due by January
2005. In December 2004 these notes were extended to May 1, 2005. Included in the
purchase price is $321,850 related to a finders fee. These notes are
collateralized by Rainbow assets and bear interest at the prime rate (5.25% at
December 31, 2004.) In connection with the debt extension, the Company issued
75,000 two year warrants with an exercise price of $1.35 valued at $68,652 using
the Black Scholes pricing model. The stock value was a negotiated price between
the Buyer and Seller. In the event Multiband defaults in the payment of said
promissory notes, the former owners of Rainbow have certain rights to repurchase
the aforementioned membership interests for 20% less than any sums Multiband has
paid prior to the date of the default. The consideration paid was based on the
Company's analysis of likely future net incomes to be generated over a six year
period by the acquired Company. The cash was provided by funds Multiband had
Page 24
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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.
On August 9, 2004, Multiband Corporation (the Company) completed its acquisition
of certain assets of 21st Century Satellite Communications, Inc. (21st Century)
for $1,080,754, $333,333 of which was paid for in Company stock, valued at $1.60
per share, $250,000 of which was paid for in cash and the balance in equipment
lease payments due by August 2007. The stock value was a negotiated price
between the Buyer and Seller. Included in the purchase price is $86,750 related
to a finders fee. The 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 Multiband had previously
raised in a private placement. In connection with the acquisition, the Company
incurred a $125,000 finder's fee which was paid for in Company stock, valued at
$1.42 for a total of $31,250, and the remaining $93,750 was paid by December 31,
2004.
With these acquisitions, the Company has substantially increased its subscriber
base.
MDU RAINBOW 21ST CENTURY
---------- ---------- ----------
Allocation of Purchase Price:
Total Cash/Stock Consideration $7,000,000 $7,219,999 $ 987,000
Add: Transaction Costs 726,550 361,850 93,754
Add: Liabilities assumed 2,030,373 319,921
---------- ---------- ----------
Total Consideration 9,756,923 7,901,770 1,080,754
Less: Cash and accounts receivable 59,044 -- --
Less: Tangible assets -- 773,000 372,420
Less: Goodwill -- 800,000 --
---------- ---------- ----------
Intangible assets, net $9,697,879 $6,328,770 $ 708,334
========== ========== ==========
Goodwill was recorded on the Rainbow transaction based on a six year future
projection of cash flows which indicated that those future cash flows would not
equal or exceed total consideration paid for all intangible Rainbow assets. The
goodwill is anticipated to be deductible for tax purposes.
The following unaudited pro forma condensed results of operations for the years
ended December 31, 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.
Page 25
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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
------------ ------------ ------------ ------------
Revenues $ 11,067,834 $ 14,562,983 $ 1,441,118 $ 13,625,488
Loss from continuing operations (5,326,642) (5,292,789) (3,672,048) (3,423,888)
Loss from discontinued operations (4,457,320) (4,457,320) (692,956) (692,956)
Net loss $ (9,783,962) $ (9,750,109) $ (4,365,004) $ (4,116,844)
Basic and diluted loss per share:
Loss from continuing operations $ (.23) $ (.23) $ (.23) $ (.21)
Loss from discontinued operations $ (.19) $ (.19) $ (.04) $ (.04)
Net loss $ (.42) $ (.42) $ (.27) $ (.25)
Weighted average shares outstanding - basic and
diluted 23,307,594 23,307,594 16,112,231 16,112,231
The unaudited pro forma results of operations for the years ended December 31,
2004 and 2003 as a result of the SBC and Florida Cable acquisitions of video
subscribers and video equipment is not material to the historical financial
statements.
Page 26
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2004 2003
----------- -----------
Leasehold improvements $ 767,146 $ 764,064
Property and equipment - owned 7,035,911 5,100,984
Property and equipment under capital lease
obligations 428,749 428,749
----------- -----------
8,231,806 6,293,797
Less accumulated depreciation and amortization (3,859,332) (2,755,382)
----------- -----------
$ 4,372,474 $ 3,538,415
=========== ===========
Depreciation and amortization expense on property and equipment for continuing
operations was $959,447, $516,432, and $499,598 for the years ended December 31,
2004, 2003 and 2002, respectively.
Depreciation and amortization expense on property and equipment for the
discontinued operations was $345,985, $432,366 and $482,387 for the years ended
December 31, 2004, 2003 and 2002, respectively.
NOTE 4 - OTHER ASSETS
Other assets consisted of the following at December 31:
2004 2003
-------- --------
Other current assets:
Current portion of notes receivable $ -- $ 2,983
Prepaid expenses and other 146,334 93,567
-------- --------
Total other current assets $146,334 $ 96,550
========
Noncurrent assets:
Prepaid expenses and other $146,301 136,236
-------- --------
Total other assets $146,301 $136,236
======== ========
At December 31, 2004 and 2003, the Company had notes receivable of $0 and
$2,983, respectively. The remaining note was due in December 2003 with interest
of 12% was unsecured and was paid during 2004.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
2004 2003
---------- ----------
Payroll and related taxes $ 389,394 $ 363,649
Accrued preferred stock dividends 415,120 277,928
Payable - Florida Cable -- 465,000
Accrued liability - Vendor
Chargeback 1,901,972 --
Other 323,538 202,261
---------- ----------
$3,030,024 $1,308,838
========== ==========
Page 27
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 6 - WHOLESALE LINE OF CREDIT
At December 31, 2004 and 2003, the Company had a $1,750,000 wholesale line of
credit agreement with a financial institution, 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 which expire through
April 2006. 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 $926,201
and $976,314 at December 31, 2004 and 2003, respectively. The line of credit was
paid off in full on March 31, 2005 (see Note 16).
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
2004 2003
------------ ------------
Note payable - Pyramid Trading Limited Partnership, LLC.
This note was converted to stock in 2004. $ -- $ 140,443
Debenture payable - Convergent Capital Partners I, L.P., net of original
issue discount of $269,714 and $432,504 at December 31, 2004 and 2003,
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, collateralized by substantially all
of the assets of the Company. 2,130,286 1,967,496
Demand debenture payable - Convergent Capital Partners I, L.P., monthly
interest only payments at 14% through May 2007, due on demand or May
2007, collateralized 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, collateralized by
certain assets of the Company. 336,486 379,332
Note payable - Laurus Master Fund LTD, net of unamortized original issue
discount and beneficial conversion of note payable into common stock of
$794,391 and $1,208,847 at December 31, 2004 and 2003, monthly
installments of $45,455 beginning in March 2004, including interest at
prime rate plus 3% but not less than 7% (8.25% and 7% at December 31,
2004 and 2003) (effective interest rate of 174.6%), due through November
2006, collateralized by certain assets of the Company. 226,518 291,153
Page 28
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Notes payable, net of original issue discount and beneficial conversion
of note payable into common stock of $444,792 at December 31, 2004.
Interest is 6% payable semi-annually in cash or common stock at the
Company's election, due in November 2007, collateralized by certain
assets of the Company and subordinated. 1,721,875 --
Note payable - Dell Marketing C.P., monthly installments
of $10,000 beginning in September 2004 through August
2006, with a final payment of $65,021. This note does notbear interest
and is unsecured. -- 265,021
Note payable - Vern Swedin, Note payable in 18 monthly
installments, beginning January 30, 2005 with an interest
rate of 6%, unsecured and due in July 2006. 200,000 --
Notes payable, interest at 5.25% to 20% due through May 2007,
collateralized by certain assets of the Company. 42,998 207,545
------------ ------------
Total long-term debt 5,023,184 3,085,969
Less: current portion (1,524,527) (998,813)
------------ ------------
Long-term debt, net $ 3,498,657 $ 2,087,156
============ ============
Future maturities of long-term debt are as follows for the years ending December
31:
2005 $ 1,524,527
2006 2,036,024
2007 2,786,295
2008 59,072
2009 64,011
Thereafter 62,152
------------
Total future minimum payments 6,532,081
Less: original issue discounts and
beneficial conversion feature (1,508,897)
------------
Total long-term debt 5,023,184
Less: current portion (1,524,527)
------------
Long-term debt, net $ 3,498,657
============
Page 29
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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 collateralized 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 was 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. This note was
converted into stock during 2004.
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 the year ended December 31,
2004, the Company converted principal and accrued interest totaling $212,111
into 153,034 shares of common stock.
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. During the year
ended December 31, 2004, the Company converted principal of $230,909 into
164,836 shares of common stock.
Page 30
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
In November 2004, the Company borrowed $2,166,667 from a group of accredited
institutional investors. The notes are convertible into shares of common stock
at a conversion rate of $1.00 per share through November 2007. The notes accrue
interest at the rate of 6% per annum, which interest is payable semi-annually in
cash or common stock at the Company's election. The proceeds of $2,166,667 were
allocated between the notes and the intrinsic value of the conversion option.
The resulting original issue discount 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. These notes are collateralized by certain assets and are subordinated.
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 7.67% and expire through June 2009. The obligations are secured
by the property under lease. Total cost and accumulated amortization of the
leased equipment was $988,593 and $349,647 at December 31, 2004 and $428,749 and
$221,432 at December 31, 2003. Amortization expense related to these obligations
is included in depreciation expense.
Future minimum capital lease payments are as follows for the years ending
December 31:
2005 $ 247,531
2006 151,099
2007 313,210
2008 44,532
2009 22,268
------------
Total 778,640
Less: amounts representing interest (95,861)
------------
Present value of future minimum lease payments 682,779
Less: current portion (201,530)
------------
Capital lease obligations, net of current portion $ 481,249
============
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, 2004 and 2003 is $84,801
and $114,391, respectively. Interest expense related to this note payable was
$4,709 and $1,592 for the years ended December 31, 2004 and 2003, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
Capital Stock Authorized
The articles of incorporation authorize the Company to issue 100,000,000 shares
of no par capital stock. Authorization to individual classes of stock is
determined by a Board of Directors resolution. The authorized classes of stock
Page 31
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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, 500,000 shares of Class F cumulative
convertible preferred stock, 600,000 shares of Class G cumulative convertible
preferred stock, 15 Shares of Class H cumulative convertible preferred stock and
100 shares of Class I cumulative convertible preferred stock.
Cumulative Convertible Preferred Stock
Dividends on Class A, Class B, Class C, Class D, Class E, Class F, Class G and
Class H cumulative convertible preferred stock are cumulative and payable
quarterly at 8%, 10%, 10%, 14%, 15%, 10%, 8%, and 6% 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, Class E - eight shares, Class F- five shares,
Class G- six and one quarter shares, and Class H is convertible at $1.00 per
share. 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, Class E, Class G and Class H 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, Class E, Class F, and Class G
whenever the Company's common stock price exceeds certain defined criteria as
defined in the preferred stock agreements. The Class H shares can be redeemed
for $100,000 per share. 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
continues until all agreements have expired. There are 4,300,000 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 800,000 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, 2004 and 2003, no shares were issued under the Plan.
Page 32
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Stock Subscriptions Receivable
The Company has stock subscriptions receivable including interest receivable
totaling $391,264 and $418,085 due to the Company at December 31, 2004 and 2003,
respectively, from the issuance of common stock. Monthly interest only payments
at interest ranging from 9% to 10% were required through December 2003, with one
note being extended until March 2006, at which time any unpaid stock
subscription receivable was due. The receivables are secured by the common stock
issued. At both December 31, 2004 and 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, 2004, 2003, and 2002 in connection with the amortization of the
award cost was $8,404, $47,119, and $78,292 respectively.
Restricted stock activity is as follows for the years ended December 31:
2004 2003 2002
------- ------- -------
Outstanding, January 1 17,019 45,066 75,337
Issued -- -- 22,434
Vested (12,128) (17,204) (33,107)
Forfeited (2,219) (10,843) (19,598)
------- ------- -------
Outstanding, December 31 2,672 17,019 45,066
======= ======= =======
Stock Options
Stock option activity is as follows for the years ended December 31:
Options Weighted-Average Exercise Price
-------------------------------------- ------------------------------
2004 2003 2002 2004 2003 2002
---------- ---------- ---------- -------- -------- --------
Outstanding, January 1 1,657,432 1,093,157 1,050,024 $ 1.81 $ 2.45 $ 2.55
Granted 621,500 747,775 249,300 1.48 1.35 0.96
Exercised -- (3,000) -- -- 1.25 --
Forfeited (90,500) (180,500) (206,167) 2.21 4.49 1.86
---------- ---------- ---------- -------- -------- --------
Outstanding, December 31 2,188,432 1,657,432 1,093,157 $ 1.71 $ 1.81 $ 2.45
========== ========== ========== ======== ======== ========
The weighted-average grant-date fair value of options granted during the years
ended December 31, 2004, 2003, and 2002 was $1.48, $1.20 and $0.86 respectively.
Options outstanding and exercisable as of December 31, 2004, are as follows:
Page 33
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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 5.43 255,000 $ 0.60
$.93 to $1.38 588,500 1.21 8.58 456,500 1.24
$1.43 to $2.08 1,076,266 1.64 7.83 880,582 1.62
$2.50 to $2.88 118,000 2.64 5.93 118,000 2.64
$3.98 to $5.38 99,666 4.52 5.48 92,916 4.56
$6.00 to $6.75 51,000 6.59 5.21 51,000 6.59
----------------- ---------- ------------- ----------------- --------------
$.60 to $6.75 2,188,432 $ 1.71 7.48 1,853,998 $ 1.74
================= ========== ============= ================= ==============
Page 34
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Stock Warrants
Stock warrants activity is as follows for the years ended December 31:
Outstanding Weighted - Average Exercise Price
------------------------------------------ ---------------------------------------
2004 2003 2002 2004 2003 2002
------------- ------------ ------------ ---------- ----------- ------------
Outstanding, January 1 7,421,874 4,327,396 9,564,450 $ 1.83 $ 2.05 $ 2.37
Granted 4,902,658 3,687,447 2,546,690 1.35 1.53 1.46
Exercised (528,891) (556,881) - 1.46 1.53 -
Forfeited - (36,088) (7,783,744) - 3.59 2.25
------------- ------------ ------------ ---------- ----------- ------------
Outstanding, December 31 11,795,641 7,421,874 4,327,396 $ 1.64 $ 1.83 $ 2.05
============= ============ ============ ========== =========== ============
The weighted-average grant-date fair value of warrants granted during the years
ended December 31, 2004, 2003 and 2002 was $1.16, $1.10 and $1.00, respectively.
Warrants outstanding and exercisable as of December 31, 2004, are as follows:
Weighted - Average
--------------------------------
Remaining
Range of Exercise Exercise Price Contractual
Prices Warrants Life-Years
------------------------ ------------------- --------------- --------------
$.85 to $1.25 6,170,185 $ 1.17 4.30
$1.35 to $2.00 2,545,341 1.63 1.59
$2.20 to $3.00 2,521,695 2.25 1.85
$3.56 to $5.20 558,420 4.11 1.51
----------------- ------------- --------------
$.85 to $5.20 11,795,641 $ 1.64 3.06
================= ============= ==============
Stock warrants issued for the years ended December 31 were awarded for:
2004 2003 2002
------------- ------------ ------------
Common stock 579,799 1,812,259 728,357
Services rendered 828,278 941,288 103,333
Preferred stock 3,419,581 145,900 420,000
Debt issuance and guarantees 75,000 788,000 1,295,000
------------- ------------ ------------
4,902,658 3,687,447 2,546,690
============= ============ ============
During the year ended December 31, 2004, the Company issued to common stock
investors 579,799 two to five year warrants with a weighted average exercise
price of $2.21.
During the year ended December 31, 2004, The Company issued 828,278 three to
five year warrants for services related to equity financing with a weighted
average exercise price of $1.11.
During the year ended December 31, 2004, the Company issued to preferred stock
investors 3,419,581 two to five year warrants with a weighted average exercise
price of $1.26.
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.
Page 35
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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.
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:
2004 2003 2002
------------- ------------ ------------
Risk-free interest rate 2.96% 2.37% 3.90%
Expected life 3.35 years 3.4 years 4.5 years
Expected volatility 184% 170% 151.3%
Expected dividend rate 0% 0% 0%
NOTE 11 - INCOME TAXES
The Company has generated federal and state net operating losses of
approximately $27,857,000 and $10,827,000, respectively, which, if not used,
will begin to expire in 2005. 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 $3,329,000, $1,722,000 and $402,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Components of net deferred income taxes are as follows at December 31:
2004 2003
------------ ------------
Deferred income tax assets:
Net operating loss carryforwards $ 11,143,000 $ 9,387,000
Goodwill, including impairment 1,145,000 65,000
Amortization of intangibles 559,000 -
Asset valuation reserves 577,000 285,000
Accrued liabilities 69,000 55,000
------------ ------------
13,493,000 9,792,000
Less valuation allowance (13,203,000) (9,674,000)
------------ ------------
290,000 118,000
Deferred income tax liabilities - depreciation (290,000) (118,000)
------------ ------------
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:
2004 2003 2002
----- ----- -----
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 36.1 39.6 36.1
Other 3.9 0.4 3.9
----- ----- -----
Effective tax rate 0.0% 0.0% 0.0%
===== ===== =====
Page 36
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
The Company has the following net operating loss carryforwards at December 31,
2004, for income tax purposes:
Federal Net State Net
Year of Expiration Operating Loss Operating Loss
------------------ ----------------- -----------------
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 4,275,000 1,239,000
2024 5,156,000 1,494,000
----------------- -----------------
$ 27,857,000 $ 10,827,000
================= =================
Under Internal Revenue Code Section 382, utilization of federal losses expiring
prior to 2019 are limited to approximately $375,000 each year.
NOTE 12 - SUPPLEMENTAL CASH FLOWS INFORMATION
2004 2003 2002
---------- ---------- ----------
Cash paid for interest $1,409,095 $ 436,061 $ 512,167
Noncash investing and financing transactions:
Property and equipment in lieu of cash for
accounts receivable 61,312 -- --
Stock options issued for commissions earned -- -- 53,745
Issuance of preferred and common stock for
acquisition of assets 57,650 76,500 18,590
Current liabilities converted to stock -- 192,690 59,755
Common stock issued for guarantee of debt -- -- 14,750
Purchase of customer lists and equipment
through payable to Florida Cable -- 465,000 --
Notes payable and accrued interest converted
to common and preferred stock 637,596 828,172 1,164,882
Capitalized lease equipment purchases -- -- 174,986
Conversion of preferred stock to common stock 776,500 40,000 150,000
Conversion of preferred stock into note payable -- -- 400,000
Page 37
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
2004 2003 2002
---------- ---------- ----------
Conversion of note payable into preferred stock 50,000 -- --
Conversion of preferred stock into short-term debt 500,000 -- --
Reduction of stock subscription receivable
related to commission earned on equity transactions 17,320 36,977 40,563
Warrants issued related to modifications of
long-term debt -- 208,447 528,650
Warrants issued for modification of short-term debt 68,652 -- --
Conversion of preferred stock dividends into
common stock 124,618 113,209 --
Issuance of common stock for acquisition of
assets - SBC 270,152 -- --
Capital lease assumed in acquisition of
equipment from SBC 187,424 -- --
Issuance of common stock, short-term debt, and
long-term debt for acquisition of MDU 6,660,000 -- --
Issuance of preferred stock, short-term debt
and accrued expenses for acquisition of Rainbow 6,541,849
Issuance of common stock and accrued expenses
for acquisition of assets - 21st Century 364,584 -- --
Capital lease assumed in acquisition of
equipment from 21st Century 372,420 -- --
Issuance of common stock and contingent
liability for acquisition of assets - URON, Inc. 458,500 -- --
Issuance of common stock for remaining 50%
ownership of MBUSA 39,000 -- --
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.
Page 38
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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, 2004 and
2003, accrued rent of $19,500 and $56,560, respectively, was owed to this
related party. In August 2003, the Company signed a new lease agreement with an
unrelated party.
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 $84,321 to $97,910, 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, 2004, 2003 and 2002
including common area costs and real estate taxes was approximately $634,000,
$578,000 and $566,000, respectively. Rent expense with related parties for
December 31, 2004, 2003, 2002 was approximately $0, $59,000 and $462,000,
respectively.
Future minimum rental payments, net of payments received from subleases, are as
follows for the years ending December 31:
Year Amount
---------- ------------
2005 $ 530,000
2006 $ 516,000
2007 $ 541,000
2008 $ 587,000
2009 $ 638,000
Thereafter $ 3,872,000
------------
$ 6,684,000
============
Legal proceedings
The Company is involved in legal actions in the ordinary course of its business,
including an action brought by Private Investor's Equity Group (PIEG) brought in
the third quarter of 2004, 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.
Significant Relationship
The Company is master agent for DirecTV pursuant to a system operator agreement
with DirecTV dated May 22, 2003. The initial term of the agreement is for three
years and provides for two additional two-year renewals if the Company has a
minimum number of paying video subscribers in its system operator network.
Termination of the Company's DirecTV agreement would have a material adverse
impact on the Company's on-going operations. Revenues generated from DirecTV
amounted to 44.3% of total revenue in 2004.
Page 39
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 15 - RELATED PARTY
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,
$1,124,000 and $636,000 for the years ended December 31, 2004, 2003, and 2002,
respectively. In addition, the Company had accounts receivable outstanding from
these companies of approximately $140,000, $142,000, and $171,000 at December
31, 2004, 2003, and 2002, respectively.
NOTE 16 - BUSINESS SEGMENTS
The Company has the following business segments. Multiband Corp. includes
corporate expenses (e.g. corporate administrative costs), interest income,
interest expense, depreciation and amortization. The MDU segment represents
results as the master service operator for DirecTV. The MCS segment provides
voice, data and video services to residential multi-dwelling units as the
principal to subscribers. The discontinued operations segment includes the
Multiband Business Services segment which was sold subsequent to year-end (see
note 17).
Segment disclosures are as follows:
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2004:
Revenues $ -- $ 5,840,138 $ 5,227,696 -- $ 11,067,834
Income (loss) from operations (1,842,957) 863,149 (3,288,582) -- (4,268,390)
Identifiable assets 775,708 9,708,448 15,467,274 682,282 26,633,712
Depreciation and amortization 244,967 1,203,236 1,984,576 -- 3,432,779
Capital expenditures 9,772 -- 481,252 257,680 748,704
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2003:
Revenues $ -- $ -- $ 1,441,118 -- $ 1,441,118
Loss from operations (1,941,271) -- (1,215,667) -- (3,156,938)
Identifiable assets 3,112,904 -- 6,383,013 4,406,968 13,902,885
Depreciation and amortization 547,423 -- 518,227 -- 1,065,650
Capital expenditures 13,342 -- 89,547 424,047 526,936
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2002:
Revenues $ -- $ -- $ 577,221 $ -- $ 577,221
Loss from operations (1,810,241) -- (1,195,521) -- (3,005,762)
Identifiable assets 572,928 -- 5,685,879 4,088,509 10,347,316
Depreciation and amortization 702,665 -- 490,641 -- 1,193,306
Capital expenditures 2,126 -- 458,844 814,464 1,275,434
Segment disclosures are provided by entity to the extent practicable under the
Company's accounting system. Depreciation and amortization above does not
include depreciation and amortization related to discontinued operations. The
cash flow statements presentation of depreciation and amortization includes the
depreciation and amortization from discontinued operations.
NOTE 17 - SUBSEQUENT EVENTS
Private Placement
On February 3, 2005, Multiband Corporation completed a $10 million private
placement of the company's Series I Convertible Preferred Stock.
The offering was made by Mercator Advisor Group, LLC of Los Angeles, California,
through its designated funds, Monarch Pointe Fund, Ltd, Mercator Momentum Fund,
LP. Mercator Momentum Fund III, LP., and certain investors.
Under the terms of the preferred stock offering, the Company issued 100,000
shares of its Series I Convertible Preferred Stock in the aggregate offering
amount of $10 million. The shares of Series I Convertible Preferred Stock
contain a monthly dividend that is payable at prime plus 10% through August 31,
2005, at prime rate from September 1, 2005 through August 31, 2006, and at prime
rate plus 1% thereafter. The preferred shares are convertible into 7,142,858
shares of common stock at the fixed rate of $1.50 per share. In addition, the
investors received three-year warrants to purchase shares of Common Stock at
exercise prices of $1.57 and $1.73 per share. The Company is also required to
file a registration statement providing for the resale of shares issuable upon
the conversion of the Series I Convertible Preferred Stock and upon exercise of
the warrants.
Acquisition of Assets
Effective April 1, 2005, the Company purchased certain video assets (equipment
and video subscribers) from Ultravision, Inc. for $275,000.
Page 40
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Sale of Multiband Business Services segment
Effective April 1, 2005, the Company completed the sale of certain assets and
liabilities relating to its Multiband Business Services (MBS, a/k/a Corporate
Technologies USA) division. The buyer was North Central Equity, LLC ("Buyer").
The purchase price paid by the Buyer was $2,650,000 which consisted of
$1,683,184 in cash at closing, $366,816 in assumed vacation pay and warranty
liabilities, and the balance of $600,000 in a note receivable at 7% interest due
on December 31, 2005. The amount of the note receivable is subject to adjustment
based on certain representations and warranties provided by the Company in the
purchase agreement. The Company anticipates a reserve of $178,948 against this
note receivable due to uncertainty of collectibility of the note.
In connection with the purchase agreement, the Company entered into an interim
services agreement whereby the Buyer is able to sublease space at no charge at
Seller's Minneapolis and Fargo locations and obtain access to certain aspects of
Seller's information technology resources for one year. Services provided will
be charged by either party at fair value and is estimated by management to be
insignificant. In addition the services agreement is explicit that the Company
has no control over the buyer's operations. The buyer may receive additional
free rent for part or all of a second year depending on the results of a post
closing inventory appraisal. It is indeterminable at this time the results of
this appraisal, however, the Company estimates the second year option will be
exercised and will be accruing the liability as part of the sale transaction.
In conjunction with the sale, the Company reduced its indebtedness to Convergent
Capital $2,000,000. Estimated gain on sale of MBS Business:
SALE PRICE
Cash proceeds $ 1,700,183
Note receivable, net of reserve of $300,000 300,000
Assumed liabilities 349,817
------------
Total sale price 2,350,000
ASSETS SOLD
Inventory, net of reserve 1,053,661
Property and equipment 60,120
------------
Net assets sold 1,113,781
LESS COSTS AND EXPENSES
Broker's fee 100,000
Sublease for one year at no charge 500,000
Additional estimated free rent related to potential
inventory adjustment 500,000
Legal and accounting costs 30,000
------------
Total costs 1,130,100
------------
NET GAIN ON SALE $ 106,219
============
The following are condensed statements of operations of the discontinued
operations:
SIX MONTHS
ENDED
JUNE 30,
STATEMENT OF OPERATIONS 2005 2004 2003 2002
------------ ------------ ------------ ------------
Revenues $ 3,698,927 $ 18,604,855 $ 21,199,303 $ 23,963,748
Cost of products and services
(exclusive of depreciation
and amortization shown below) 2,701,664 14,564,286 15,067,483 17,618,617
Selling, general and
administrative 1,307,502 5,092,867 6,038,823 5,690,015
Depreciation and amortization 56,188 345,985 432,366 482,387
Income (loss) from operations (366,427) (1,398,283) (399.369) 172,689
Impairment of goodwill -- (2,748,879) -- --
Other income (expense) (55,440) (310,158) (353,587 (165,917)
Net Loss $ (421,867) $ (4,457,320) $ (692,956) $ 6,772
Gain on Sale 103,491 -- -- --
Income (loss) from ------------ ------------ ------------ ------------
discontinued operations $ 318,376 $ (4,457,320) $ (692,956) $ 6,772
============ ============ ============ ============
Page 41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTARY
INFORMATION
To Stockholders, Board of Directors, and Audit Committee Multiband Corporation
and Subsidiaries (formerly known as Vicom, Incorporated and subsidiaries)
New Hope, Minnesota
Our report on our audits of the basic consolidated financial statements of
Multiband Corporation and Subsidiaries (formerly known as Vicom, Incorporated
and subsidiaries) for the years ended December 31, 2004, 2003 and 2002 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 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
March 8, 2005 (except as to Note 17 as to which the date is April 8, 2005 and
except to Notes 1, 2 and 16 as to which the date is July 19, 2005)
Page 42
MULTIBAND CORPORATION AND SUBSIDIARIES
(FKA VICOM INCORPORATED AND SUBSIDIARIES)
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------------------------------------------------------------- ----------------- ---------------- ------------ --------------
Additions
Charged to
Balance at Costs and Balance at End
Description Beginning of Year Expenses Deductions of Year
-------------------------------------------------------------- ----------------- ---------------- ------------ --------------
ALLOWANCE DEDUCTED FROM ASSET TO WHICH IT APPLIES
Allowance for doubtful accounts receivable:
2004 $ 223,000 $ 2,000 $ 13,000 $ 225,000
2003 236,000 - 13,000(A) 223,000
2002 178,000 58,000 - 236,000
Notes receivable:
2004 - - - -
2003 30,000 - 30,000(A) -
2002 - 30,000 - 30,000
Stock subscriptions and interest receivable
2004 71,000 71,000
2003 - 71,000 - 71,000
2002 - - - -
(A) Write-off uncollectible receivables
Page 43
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $ 4,183,606 $ 2,911,261 $ 7,890,482 $ 3,673,916
COSTS AND EXPENSES
Cost of products and services (exclusive of
depreciation and amortization shown
separately below) 1,703,517 1,712,280 3,583,025 2,123,242
Selling, general and administrative 2,377,575 1,137,780 4,524,487 1,965,933
Depreciation and amortization 1,218,867 1,150,677 2,367,734 1,502,922
------------ ------------ ------------ ------------
Total Costs and Expenses 5,299,959 4,000,737 10,475,246 5,592,097
LOSS FROM OPERATIONS (1,116,353) (1,089,476) (2,584,764) (1,918,181)
OTHER EXPENSE
Interest expense (373,013) (188,986) (1,058,714) (418,320)
Other income (expense) 70,120 6,851 82,292 21,713
------------ ------------ ------------ ------------
Total Other Expense (302,893) (182,135) (976,422) (396,607)
LOSS FROM CONTINUING OPERATIONS (1,419,246) (1,271,611) (3,561,186) (2,314,788)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 122,892 (179,863) (318,376) (653,551)
NET LOSS (1,296,354) (1,451,474) (3,879,562) (2,968,339)
Preferred Stock Dividends (669,634) (395,273) (1,600,718) (457,926)
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,965,988) $ (1,846,747) $ (5,480,280) $ (3,426,265)
============ ============ ============ ============
BASIC AND DILUTED - LOSS PER COMMON SHARE
Loss from continuing operations (.05) (.06) (.13) (.11)
Income (loss) from discontinued operations (.00) (.00) (.01) (.03)
Net Loss (.05) (.06) (.14) (.14)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (.07) (.08) (.20) (.16)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 28,634,502 22,689,301 27,929,454 20,984,967
See notes to condensed consolidated financial statements
Page 2
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 December 31, 2004
------------- -----------------
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 5,407,000 $ 726,553
Certificate of deposit 650,000 650,000
Accounts receivable, net 1,874,989 2,783,774
Inventories 285,189 231,993
Current assets of discontinued operations -- 634,307
Note receivable, net 339,051 --
Other current assets 425,385 146,334
------------ ------------
TOTAL CURRENT ASSETS 8,981,614 5,172,961
------------ ------------
PROPERTY AND EQUIPMENT, NET 4,075,534 4,372,474
------------ ------------
OTHER ASSETS
Goodwill 812,366 812,366
Intangible assets, net 15,027,195 16,081,635
Other assets of discontinued operations -- 47,975
Other assets 145,398 146,301
------------ ------------
TOTAL OTHER ASSETS 15,984,959 17,088,277
------------ ------------
TOTAL ASSETS $ 29,042,107 $ 26,633,712
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $ 196,571 $ 234,348
Short-term debt 510,000 4,481,099
Wholesale line of credit -- 926,201
Current portion of long-term debt 886,497 1,524,527
Current portion of note payable, stockholder 32,837 84,801
Current portion of capital lease obligations 200,592 201,530
Accounts payable 1,885,826 2,561,611
Accrued liabilities 3,042,456 3,030,024
Contingent liability 222,700 222,700
Customer deposits 62,314 59,875
Current liabilities of discontinued operations 500,000 370,921
Deferred subscription revenue 503,728 406,738
------------ ------------
TOTAL CURRENT LIABILITIES 8,043,521 14,104,375
LONG-TERM LIABILITIES
Long-term debt, net 3,907,832 3,498,657
Capital lease obligations, net of current portion 437,351 481,249
Long term liabilities of discontinued operations 375,000 --
------------ ------------
TOTAL LIABILITIES 12,763,704 18,084,281
------------ ------------
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value: -- --
8% Class A (27,931 shares issued and outstanding, $293,276 liquidation preference) 419,752 419,752
10% Class B (8,620 and 8,700 shares issued and outstanding, $90,510 and $91,350
liquidation preference) 61,200 62,000
10% Class C (125,280 and 125,400 shares issued and outstanding, $1,252,800 and
$1,254,000 liquidation preference) 1,609,905 1,611,105
10% Class F (150,000 shares issued and outstanding, $1,500,000 liquidation
preference) 1,500,000 1,500,000
8% Class G (45,245 shares issued and outstanding, $452,450 liquidation preference) 179,897 179,897
6% Class H (3.0 and 11.5 shares issued and outstanding, $300,000 and $1,150,000
liquidation preference) -- --
Variable rate Class I (100,000 shares issued and outstanding , $10,000,000
liquidation preference) -- --
Common stock, no par value (28,949,008 and 25,784,490 shares issued;
28,948,340 and 25,781,818 shares outstanding) 18,651,632 16,888,291
Stock subscriptions receivable (324,865) (391,264)
Options and warrants 44,468,270 32,985,983
Unamortized compensation (102,499) (1,724)
Accumulated deficit (50,184,889) (44,704,609)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,278,403 8,549,431
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,042,107 $ 26,633,712
============ ============
See notes to condensed consolidated financial statements.
Page 3
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004
SIX MONTHS ENDED JUNE 30,
------------------------------
2005 2004
------------ ------------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss $ (3,879,562) $ (2,968,339)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization 2,521,933 1,531,783
Amortization of deferred compensation 50,930 197,487
Amortization of original issue discount 667,350 348,178
Gain on sale of business segment (103,491) --
Common stock issued for services 20,580 19,887
Changes in operating assets and liabilities:
Accounts receivable, net 908,785 (1,243,338)
Inventories (371,461) 419,343
Other current assets 13,735 15,931
Other assets -- (36,870)
Wholesale line of credit (1,000,987) 280,533
Accounts payable and accrued liabilities (1,612,842) (106,407)
Deferred service obligations and revenue 65,092 24,388
Liabilities of discontinued operations (125,000) --
Customer deposits 2,439 --
------------ ------------
Net cash flows from operating activities (2,842,499) (1,517,424)
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (415,065) (240,413)
Purchases of intangible asset (209,225) --
Purchase of Ultravision (287,050) --
Purchase of Satellite Broadcasting Corporation -- (187,424)
Purchase of Minnesota Digital Universe, Inc. -- (1,100,000)
Purchase of Rainbow Satellite Group, LLC -- (1,000,000)
Proceeds from sale of business segment 1,682,184 --
Proceeds from sale of property and equipment -- 649
Collections on notes receivable -- 5,320
------------ ------------
Net cash flows from investing activities 770,844 (2,521,868)
------------ ------------
FINANCING ACTIVITIES
Checks issued in excess of cash in bank (37,773) 324,037
Payments on short-term debt (3,971,099) --
Payments on long-term debt (2,248,204) (701,308)
Payments on capital lease obligations (44,836) (38,093)
Payments on note payable to stockholder (51,964) (49,970)
Payments for debt issuance costs (25,000) --
Proceeds from issuance of stock and warrants 11,090,843 2,724,965
Proceeds from issuance of long term debt 2,000,000 --
Exercise of warrants 6,960 390,279
Payments received on stock subscriptions receivable 66,399 --
Redemption of preferred stock (2,000) --
Preferred stock dividends (31,224) (41,799)
------------ ------------
Net cash flows from financing activities 6,752,102 2,608,111
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,680,447 (1,431,181)
CASH AND CASH EQUIVALENTS
Beginning of period 726,553 2,945,960
------------ ------------
End of period $ 5,407,000 $ 1,514,779
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount $ 417,870 249,471
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Note receivable recorded on sale of discontinued operations 339,051 --
Issuance of common stock for acquisition of assets -- 274,800
Conversion of preferred stock into common stock 850,001 --
Current liabilities converted to common stock 46,603 48,001
Conversion of notes payable into common stock 648,001 510,908
Conversion of dividend into common stock 176,935 78,591
Common stock issued in lieu of cash for other current assets 218,000 --
Issuance of common stock for deferred financing costs 36,000 --
Issuance of common stock for acquisition of assets - MDU -- 4,120,152
Issuance of preferred stock for acquisition of assets - Rainbow -- 2,000,000
Issuance of preferred stock for acquisition of assets - SBC -- 270,152
Issuance of common stock and notes payable for acquisition of assets - MDU -- 6,600,000
Issuance of preferred stock and notes payable for acquisition of assets - Rainbow -- 6,519,999
Common stock issued for services -- 307,571
See notes to condensed consolidated financial statements
Page 4
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Unaudited Consolidated Financial Statements
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2 - Summary of Significant Accounting Policies
Nature of Business
Multiband Corporation and subsidiaries, formerly known as Vicom, Incorporated
and subsidiaries, (the Company) was incorporated in Minnesota in September 1975.
The Company provides voice, data and video services to multi-dwelling unit
customers. The Company's products and services are sold to customers located
throughout the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the six months ended June 30, 2005 and 2004, the Company incurred net losses of
$3,879,562 and $2,968,339 respectively. At June 30, 2005, the Company had an
accumulated deficit of $50,184,889. The Company's ability to continue as a going
concern is dependent on it ultimately achieving profitability and/or raising
additional capital. On February 3, 2005, the Company completed a $10 million
private placement of the Company's Series I Convertible Preferred Stock which
includes $520,000 of offering costs. Management intends to obtain additional
debt or equity capital to meet all of its existing cash obligations and fund
commitments on planned Multiband projects; however, there can be no assurance
that the sources will be available or available on terms favorable to the
Company. Management anticipates that the impact of the actions listed below will
generate sufficient cash flows to pay current liabilities, long-term debt and
capital lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional equity investment in the Company by either issuing
preferred or common stock. The Company, in February 2005 issued $10,000,000
worth of Class I Preferred Stock to a group of accredited investors.
3. Continue to market Multiband services and acquire additional multi-dwelling
unit customers.
4. Control capital expenditures by contracting Multiband services and equipment
through a landlord-owned equipment program.
5. Establish market for wireless internet services.
6. Discontinuation of Multiband business services segment which was unprofitable
in 2004. This segment was sold effective after the close of business March 31,
2004.
Page 5
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Principles of Consolidation
The consolidated financial statements include the accounts of Multiband
Corporation (MB) and its wholly owned subsidiaries, Corporate Technologies, USA,
Inc. (CTU), URON, Inc., Minnesota Digital, Inc. (MDU), Rainbow Satellite Group,
LLC (Rainbow) and Multiband Subscriber Services, Inc. (Multiband) which provides
voice, data and video services to residential multi-dwelling units. In February
2003, the Company formed a 50% owned subsidiary, Multiband USA, Inc. (MB USA)
with Pace Electronics, Inc. (PACE) a video wholesaler, and provides the same
services as Multiband). On January 1, 2004, the Company purchased the 50% PACE
interest in Multiband USA. All significant intercompany transactions and
balances have been eliminated in consolidation.
On January 1, 2004, the Company merged Multiband into CTU. On April 1, 2005, the
continuing operations of CTU terminated (see Note 9.)
Discontinued Operations
During the first quarter of 2005, the Company sold certain assets and
transferred certain liabilities related to its Multiband Business Services
(a/k/a CTU). The Company began discussions and efforts to sell these assets in
the fourth quarter of 2004. These assets met the requirements of Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" as being held for sale. Operations and cash flows were
eliminated as a result of the sale and the Company will not have any significant
involvement in the operations after the sale. In accordance with appropriate
accounting rules, the Company has reclassified the previously reported financial
results to exclude the results of the Multiband Business Services (CTU) and
these results are presented on a historical basis as a separate line in the
consolidated statements of operations and the consolidated balance sheets
entitled "Discontinued Operations". All of the financial information in the
consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
(see Note 9). Based on the discussions and efforts to sell these assets, the
Company determined, based on the final purchase price which was arrived at in
the first quarter of 2005, it was required to take an impairment charge to the
goodwill of the Multiband Business Services division. As a result, an impairment
charge related to goodwill of $2,221,000 was recorded in the fourth quarter of
2004.
Revenues and Cost Recognition
The Company recognizes revenue in accordance with the Securities Exchange
Commission's Staff Accounting Bulletin No. 104 (SAB 104) "Revenue Recognition",
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectibility is reasonably assured; and (iv)
product delivery has occurred or services have been rendered. The Company
recognizes revenue (included in discontinued operations) as products are shipped
based on FOB shipping point terms when title passes to customers.
The Company earns revenues from six sources: 1) Video and computer technology
products which are sold but not installed, 2) Voice, video and data
communication products which are sold and installed, 3) Service revenues related
to communication products which are sold and both installed and not installed 4)
Multiband user charges to multiple dwelling units 5) voice, data and video
revenue directly generated by the Company as a principal to subscribers, and 6)
DirecTV master service operator revenue earned primarily through the activation
of and residual fees on video programming services.
Page 6
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms. Product returns and customer discounts
are netted against revenues. This revenue has been included with discontinued
operations.
Customer's contract for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenue is recognized when the products are
delivered and installed and the customer has accepted the terms and has the
ability to fulfill the terms. This revenue has been included with discontinued
operations.
Substantially all of the service revenue the Company had in the past was part of
the business segment, Multiband Business Services, which was sold effective
after business hours on March 31, 2005. Service revenues for continuing
operations accounted for less than 10% of total revenues for the three and six
months ended June 30, 2005 and 2004.
Revenue generated from activation on video programming services is earned in the
month of activation. According to the Company's agreement with DirecTV, in the
event that a customer cancels within the first 12 months of service, DirecTV has
the right to chargeback the Company for a portion of the activation fees
received. In accordance with Securities Exchange Commission SAB 104, the Company
has estimated the potential charge back of commissions received on activation
fees during the past 12 months based on historical percentages of customer
cancellations and has included that amount as a reduction of revenue. Residual
income is earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns a fixed
percentage based on net cash received by DirecTV for recurring monthly services
and a variable amount depending on the number of activations in a given month.
The Company's master system operator contract with DirecTV also permits the
Company to earn revenues through its control of other system operators who are
unable to provide DirecTV video programming services without the Company's
performance.
The Company has determined that the accounting policies for income recognition
described above were in accordance with the Financial Accounting Standards Board
Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as
a Principal versus Net as an Agent". EITF No. 99-19 employs multi-factor tests
to determine whether amounts charged to customers in respect of certain expenses
incurred should be included in revenues or netted against such expenses.
The Company reports the aforementioned voice, data and video programming
revenues on a gross basis based on the following factors: the Company has the
primary obligation in the arrangement with its customers; the Company controls
the pricing of its services; the Company performs customer service for the
agreements; the Company approves customers; and the Company assumes the risk of
payment for services provided. The Company reports DirecTV revenue on a net
basis.
Multiband, Rainbow, MDU and MB USA user charges are recognized as revenues in
the period the related services are provided in accordance with SAB 104.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Goodwill and Other Intangible Assets
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations. Goodwill related to
continuing operations was $812,366 at both June 30, 2005 and December 31, 2004.
Page 7
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Components of intangible assets are as follows:
June 30, 2005 December 31, 2004
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- ------------ ----------- ------------
Intangible assets subject to amortization
Domain name $ 83,750 $ 64,207 $ 83,750 $ 55,833
Access contracts 60,000 43,333 60,000 33,333
Debt issuance costs 499,837 145,225 313,837 47,214
Right of entry 17,435,984 3,375,020 17,226,759 1,933,294
Customer cable lists 1,019,119 443,710 753,930 286,967
----------- ----------- ----------- -----------
Total $19,098,690 $ 4,071,495 $18,438,276 $ 2,356,641
=========== =========== =========== ===========
Intangible assets not subject to amortization
Goodwill $ 812,366 $ -- $ 812,366 $ --
=========== =========== =========== ===========
The Company amortizes a domain name over its estimated useful life of five years
using the straight-line method. The Company amortizes access contracts and
customer cable lists over their useful estimated lives ranging from two to five
years. The Company is amortizing the right of entry contracts over their
estimated useful lives ranging from 36 to 73 months. Debt issuance costs are
amortized over the life of the loan of approximately three years using the
straight-line method, which approximates the interest method.
Amortization of intangible assets was $849,730 and $969,185 for the three months
ended June 30, 2005 and 2004, respectively. For the six months ended June 30,
2005 and 2004, amortization of intangible assets was $1,714,854 and $1,163,648,
respectively. Amortization of debt issuance costs of $98,011, is included in
interest expense. Estimated amortization expense of intangible assets for the
years ending December 31, 2005, 2006, 2007, 2008, 2009 and 2010 is $3,459,762,
$3,217,718, $3,036,976, $2,986,738, $2,895,384 and $1,070,429, respectively. The
weighted average remaining life of the intangibles is 5.5 years with right of
entry average life of 6.0 years and customer cable lists of 2.6 years.
Page 8
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant date
over the amount the employee must pay for the stock. The Company's general
policy is to grant stock options at fair value at the date of grant. Options and
warrants issued to nonemployees are recorded at fair value, as required by SFAS
No. 123 "Accounting for Stock-Based Compensation," (SFAS No. 123), using the
Black Scholes pricing model. The Company has adopted the disclosure only
provision of SFAS No. 148, "Accounting for Stock-Based Compensation."
Pursuant to APB No. 25 and related interpretations, $0 and $99,774 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended June 30, 2005 and 2004,
respectively. For the six months ended June 30, 2005 and 2004, $0 and $212,415
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 SFAS No. 123, the Company's loss attributable to common
stockholders and basic and diluted loss per common share would have increased to
the following pro forma amounts for the three and six months ended June 30:
Three months Three months Six months Six months
ended ended ended ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Loss attributable to common stockholders $(1,965,988) $(1,846,747) $(5,480,280) $(3,426,265)
Pro forma loss attributable to common shares $(2,050,813) $(2,212,473) $(5,865,199) $(3,921,299)
Basic and diluted loss attributable to
common shareholders:
As reported $ (.07) $ (0.08) $ (.20) $ (.16)
Pro forma loss attributable to common shares $ (.07) $ (0.10) $ (.21) $ (.19)
Stock-based compensation:
As reported $ 0 $ 99,774 $ 0 $ 212,415
Pro forma $ 84,825 $ 365,726 $ 384,919 $ 495,034
In determining the compensation cost of the options granted during the three and
six months ended June 30, 2005 and 2004, as specified by SFAS No. 123, the fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used in
these calculations are summarized as follows:
Three months Three months Six months Six months
ended ended ended ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Risk-free interest rate 3.75% 3.50% 3.57% 3.50%
Expected life of options granted 10 Years 10 Years 10 years 10 years
Expected volatility range 208% 184% 211% 184%
Expected dividend yield 0% 0% 0% 0%
Page 9
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
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 three and six months ended June 30, 2005 and 2004
were anti-dilutive.
Segment Reporting
A business segment is a distinguishable component of an enterprise that is
engaged in providing an individual product or service or a group of related
products or services and that is subject to risks and returns that are different
from those of other business segments. Management believes that the Company has
two operating segments: 1) MCS, which acts as a principal in billing voice, data
and cable revenues to subscribers; and 2) MDU, Inc. which collects net revenue
from DirecTV.
Reclassifications
Certain accounts in the prior quarters' consolidated financial statements have
been reclassified for comparative purposes to conform to the presentation in the
current quarter consolidated financial statements. These reclassifications had
no effect on net loss or stockholders' equity.
Recent Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. Earlier
application is permitted for accounting changes and corrections of errors made
occurring in fiscal years beginning after June 1, 2005. The statement does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
statement. The Company does not expect the adoption of SFAS No. 154 to have a
material effect on its consolidated financial statements.
In December 2004, FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment", which focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Beginning with the quarterly period that begins July 1, 2005, the Company will
be required to expense the fair value of employee stock options and similar
awards. As a public company, the Company is allowed to select from two
alternative transition methods, each having different reporting implications.
The impact of SFAS No. 123R for the year ending December 31, 2005 is estimated
to range from approximately $150,000 and $200,000 based on the value of the
options outstanding as of December 31, 2004 that will vest during the third and
fourth quarters of 2005. This estimate does not include any expenses for options
that may be granted and vested during 2005.
NOTE 3 - Business Acquisitions
On January 1, 2004, the Company entered into a stock purchase agreement with
URON, Inc. (URON) to purchase all of the outstanding capital stock of URON for a
total purchase price of 350,000 shares of the Company's common stock to be
issued in installments as follows: a) 180,000 shares issued at closing, b)
170,000 shares held in escrow. The common shares were valued at fair market
value on the date of agreement which was $1.31 per share for a purchase price of
$458,500. The terms of the escrow are as follows: 50,000 shares to be released
upon URON providing the Company with documentation satisfactory to the Company
of a release from a certain vendor or any related entity of all liabilities
incurred to a certain vendor by URON; 120,000 shares to be released in 40,000
share increments upon the Company's receipt of distributable gross profits,
generated by certain customers, in increments of $75,000 cash. The escrow shall
be terminated 24 months after the date of the agreement and any shares not
released will be rescinded to the Company. The Company must register all shares
issued within one year from the date of issuance. The reason for the purchase of
URON is to continue to expand the Company's services related to voice, data, and
video services. The purchase price of $458,500 was allocated to customer list of
$453,930 and property and equipment of $4,570. The customer list will be
amortized over its estimated useful lives of two years and the property and
equipment for fifteen months. At June 30, 2005 and December 31, 2004, the
Company was not obligated to issue any of the contingent shares of common stock.
Page 10
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
In April 2004, the Company purchased certain assets consisting of data and video
subscribers and systems from Satellite Broadcasting Corporation and affiliates
(SBC). The total purchase price for said assets was approximately $679,200.
On April 2, 2004, Multiband Corporation and subsidiaries (the Company), (fka
Vicom, Incorporated and subsidiaries), completed its acquisition of Minnesota
Digital Universe, Inc. (MDU) for approximately 7.7 million dollars, half of
which was paid for in Multiband Corporation common stock, valued at $1.75 per
share, ($3,850,000), $1.1 million paid in cash and the balance in promissory
notes due by January 2005. Included in the purchase price is $700,000 related to
a finder's fee. In December 2004, the notes with an outstanding balance of
$990,000 were extended through May 2005; with $200,000 of the outstanding note
balance being extended to July 2006. These notes are unsecured and bear no
interest. The stock value was a negotiated price between the Seller and the
Buyer. The consideration paid was based on the Company's analysis of likely
future net income to be generated over a six year period by the acquired
company. The cash was provided by funds the Company had previously raised in a
private placement. The assets were acquired from Pace Electronics. Prior to the
transaction, there was no material relationship between the owners of MDU and
the Company other than the fact that Pace Electronics previously owned a 50%
interest in a company subsidiary, Multiband USA, Inc., which Multiband bought
out the remaining 50% of ownership from Pace Electronics in January 2004 for
30,000 shares of the Company's common stock valued at $39,000.
With the MDU acquisition, the Company became a nationwide agent for DirecTV. MDU
services nearly 40,000 video subscribers through a network of private cable
operators located throughout the United States. The purchase also permits the
Company to receive ongoing residual payments from DirecTV, during the term of
the master system operator agreement with DirecTV, which initially had
approximately 25 months remaining at the time of purchase.
On July 9, 2004, Multiband (the Company) completed its acquisition, which had an
acquisition date of June 1, 2004, of the outstanding membership interests of
Rainbow Satellite Group, LLC (Rainbow), a provider of Satellite television
services to multi dwelling units, for approximately 7.5 million dollars, two
million of which was paid for in Multiband Preferred Stock, valued at $2.00 per
share on a conversion formula to Multiband common stock, one million dollars of
which was paid for in cash and the balance in promissory notes due by January
2005. In December 2004, these notes were extended to May 31, 2005 and paid off
in full as of that date. Included in the purchase price is $321,850 related to a
finders fee. These notes are collateralized by Rainbow assets and bear interest
at the prime rate. In connection with the debt extension, the Company issued
75,000 two year warrants with an exercise price of $1.35 valued at $68,652 using
the Black Scholes pricing model. The stock value was a negotiated price between
the Buyer and Seller. In the event Multiband defaults in the payment of said
promissory notes, the former owners of Rainbow have certain rights to repurchase
the aforementioned membership interests for 20% less than any sums Multiband has
paid prior to the date of the default. The consideration paid was based on the
Company's analysis of likely future net incomes to be generated over a six year
period by the acquired Company. The cash was provided by funds Multiband had
previously raised in a private placement. The aforementioned purchase price is
subject to adjustment pursuant to the parties agreement if the number of Rainbow
subscribers increases or decreases as of an adjustment date. The assets were
acquired from the members/owners of Rainbow. Prior to the transaction, there was
no material relationship between the owners of sellers and the Company. With
this acquisition, the Company acquired over 16,000 video subscribers which are
primarily located in California, Colorado, Texas, Florida, Illinois and New
York.
Page 11
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
On August 9, 2004, Multiband Corporation (the Company) completed its acquisition
of certain assets of 21st Century Satellite Communications, Inc. (21st Century)
for $1,080,754, $333,333 of which was paid for in Company stock, valued at $1.60
per share, $250,000 of which was paid for in cash and the balance in equipment
lease payments due by August 2007. The stock value was a negotiated price
between the Buyer and Seller. 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
Multiband had previously raised in a private placement. In connection with the
acquisition, the Company incurred a $125,000 finder's fee which was partially
paid for in Company stock, valued at $1.42 for a total of $31,250, and the
remaining $93,750 was paid in cash by December 31, 2004.
Effective April 1, 2005, the Company purchased certain video assets (equipment
and video subscribers) from Ultravision, Inc. for $287,050 cash including a
finder's fee of $12,050.
With these acquisitions, the Company has substantially increased its subscriber
base.
MDU Rainbow 21st Century
---------- ---------- ------------
Allocation of Purchase Price:
Total Cash/Stock Consideration $7,000,000 $7,219,999 $ 987,000
Add: Transaction Costs 726,550 361,850 93,754
Add: Liabilities assumed 2,030,373 319,921 --
---------- ---------- ----------
Total Consideration 9,756,923 7,901,770 1,080,754
Less: Cash and accounts receivable 59,044 -- --
Less: Tangible assets -- 773,000 372,420
Less: Goodwill -- 800,000 --
---------- ---------- ----------
Intangible assets, net $9,697,879 $6,328,770 $ 708,334
========== ========== ==========
Goodwill was recorded on the Rainbow transaction based on a six year future
projection of cash flows which indicated that those future cash flows would not
equal or exceed total consideration paid for all intangible Rainbow assets. The
goodwill is anticipated to be deductible for tax purposes.
The following unaudited pro forma condensed results of operations for the three
and six months ended June 30, 2005 and 2004 give effect to the acquisition of
MDU, Rainbow, and 21st Century as if such transactions had occurred on January
1, 2004.
Page 12
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
The unaudited pro forma information does not purport to represent what the
Company's results of operations would actually have been if such transactions in
fact had occurred at such date or to project the Company's results of future
operations.
2005 2005 2004 2004
Consolidated Pro Forma Consolidated Pro Forma
as reported Disclosed as reported Disclosed
------------ ------------ ------------ ------------
Three months ended June 30, 2005 and 2004
Revenues $ 4,183,606 $ 5,187,466 $ 2,911,261 $ 3,748,339
Loss from continuing operations (1,419,246) (1,438,471) (1,271,611) (1,252,345)
Income (loss) from discontinued operations 122,892 122,892 (179,863) (179,863)
Net loss $ (1,296,354) $ (1,315,579) $ (1,451,474) $ (1,432,208)
Basic and diluted loss per share:
Loss from continuing operations $ (.05) $ (.05) $ (.06) $ (.05)
Loss from discontinued operations $ (.00) $ (.00) $ (.00) $ (.01)
Net loss $ (.05) $ (.05) $ (.06) $ (.06)
Weighted average shares outstanding - basic and
diluted 28,634,502 28,634,502 22,689,301 22,689,301
2005 2005 2004 2004
Consolidated Pro Forma Consolidated Pro Forma
as reported Disclosed as reported Disclosed
------------ ---------- ------------ ------------
Six months ended June 30, 2005 and 2004
Revenues $ 7,890,482 11,861,857 $ 3,673,916 $ 6,708,234
Loss from continuing operations (3,561,186) (3,417,285) (2,314,788) (2,278,876)
Loss from discontinued operations (318,376) (318,376) (653,551) (653,551)
Net loss $ (3,879,562) (3,735,661) $ (2,968,339) $ (2,968,239)
Basic and diluted loss per share:
Loss from continuing operations $ (.13) $ (.12) $ (.11) $ (.11)
Loss from discontinued operations $ (.01) $ (.01) $ (.03) $ (.03)
Net loss $ (.14) $ (.13) $ (.14) $ (.14)
Weighted average shares outstanding - basic and
diluted 27,929,454 27,929,454 20,984,967 20,984,967
Page 13
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
The unaudited pro forma results of operations for the three and six months ended
June 30, 2005 and 2004 as a result of the SBC, Florida Cable and Ultravision
acquisitions of video subscribers and video equipment is not material to the
historical financial statements.
NOTE 4 - Stockholder Equity
Stock warrants activity is as follows for the six months ended June 30, 2005:
Number of Warrants Weighted - Average Exercise Price
------------------ ---------------------------------
Outstanding, December 31, 2004 11,795,641 1.64
Granted 8,882,723 1.70
Exercised (33,066) .91
Cancelled (1,611,219) 1.80
------------ ------
Outstanding, June 30, 2005 19,034,079 1.66
============ ======
The warrants granted during the six months ended June 30, 2005 were for common
and preferred stock purchased and for services rendered.
NOTE 5 - Accrued Liabilities
Accrued liabilities consisted of the following:
June 30, 2005 December 31, 2004
------------- -----------------
Payroll and related taxes $ 320,387 $ 389,394
Accrued preferred stock dividends $ 975,858 $ 415,120
Accrued liability-vendor charge backs $1,347,673 $1,901,972
Other $ 398,538 $ 323,538
---------- ----------
Total $3,042,456 $3,030,024
========== ==========
Page 14
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
NOTE 6 - Business Segments
The Company has the following business segments. Multiband Corp. includes
corporate expenses (e.g. corporate administrative costs), interest income,
interest expense, depreciation and amortization. The MDU segment represents
results as the master service operator for DirecTV. The MCS segment provides
voice, data and video services to residential multi-dwelling units as the
principal to subscribers. The discontinued operations segment includes the
Multiband Business Services segment which was sold effective after the close of
business March 31, 2005 (see note 9).
Segment disclosures are as follows:
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Three months ended June 30, 2005:
Revenues $ -- $ 2,102,459 $ 2,081,147 $ -- $ 4,183,606
Income (loss) from operations (1,058,495) 1,029,527 (1,390,278) -- (1,419,246)
Identifiable assets 8,072,968 8,807,922 12,072,166 -- 28,953,056
Depreciation and amortization 63,927 401,079 753,861 -- 1,218,867
Capital expenditures 5,429 -- 268,486 -- 273,915
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Three months ended June 30, 2004:
Revenues $ -- $ 1,875,664 $ 1,035,597 $ -- $ 2,911,261
Income (loss) from operations (859,186) 124,351 (536,776) -- (1,271,611)
Identifiable assets 4,322,547 10,271,773 10,943,051 4,977,005 30,514,376
Depreciation and amortization 389,663 400,495 360,519 -- 1,150,677
Capital expenditures -- -- 128,947 71,807 200,754
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Six months ended June 30, 2005:
Revenues $ $ 4,013,963 $ 3,876,519 $ -- 7,890,482
Income (loss) from operations (2,280,292) 1,339,296 (2,620,190) -- (3,561,186)
Identifiable assets 8,072,968 8,807,922 12,072,166 -- 28,953,056
Depreciation and amortization 71,771 802,158 1,493,805 -- 2,367,734
Capital expenditures 5,429 -- 371,278 38,358 415,065
Multiband Discontinued
Corp. MDU MCS Operations Total
------------ ------------ ------------ ------------ ------------
Six months ended June 30, 2004:
Revenues $ -- 1,875,664 1,798,252 $ -- 3,673,916
Income (loss) from operations (1,544,148) 124,351 (894,991) -- (2,314,788)
Identifiable assets 4,322,547 10,271,773 10,943,051 4,977,005 30,514,376
Depreciation and amortization 520,294 400,495 582,133 -- 1,502,922
Capital expenditures 6,690 -- 135,082 98,641 240,413
Page 15
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Segment disclosures are provided by entity to the extent practicable under the
Company's accounting system. Depreciation and amortization above does not
include depreciation and amortization related to discontinued operations. The
cash flow statements presentation of depreciation and amortization includes the
depreciation and amortization from discontinued operations.
NOTE 7 - Commitments and Contingencies
Legal Proceedings
The Company, in June 2005, settled its legal action with Private Investor's
Equity Group (PIEG). The terms of the settlement require Multiband to pay PIEG
$150,000 over an eleven month period and issue PIEG 33,334 shares of restricted
Multiband common stock. The shares were valued at $36,000 using the market value
on the settlement date. As of June 30, 2005, with the exclusion of the
aforementioned PIEG matter, Multiband was not engaged in any pending legal
proceedings where, in the opinion of the Company, the outcome is likely to have
a material adverse effect upon the business, operating results and financial
condition of the Company.
The Company is involved in legal actions in the ordinary course of its business.
Management believes that there are no pending legal proceedings against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the Company's consolidated financial position, results of
operations, or cash flows.
Significant Relationship
The Company is a master agent for DirecTV pursuant to a system operator
agreement with DirecTV dated May 22, 2003. The initial term of the agreement is
for three years and provides for two additional two-year renewals if the Company
has a minimum number of paying video subscribers in its system operator network.
Termination of the Company's DirecTV agreement would have a material adverse
impact on the Company's on-going operations. Revenues generated from DirecTV
were 50.3 % and 50.9% of total revenues for the three and six months ended June
30, 2005, respectively. Revenues generated from DirecTV for the three and six
months ended June 30, 2004 were 64.4% and 51.0% of total revenues.
NOTE 8 - Related Party
The Company, during the six months ended June 30, 2005 received payment for
accounts receivable of approximately $131,000 from companies that are associated
with a board director. In addition, the Company had accounts receivable
outstanding from these companies of approximately $9,000, and $140,000 at June
30, 2005, and December 31, 2004, respectively.
NOTE 9 -Sale of Multiband Business Services segment
After the close of business on March 31, 2005, the Company completed the sale of
certain assets and liabilities relating to its Multiband Business Services (MBS,
a/k/a Corporate Technologies USA) division. The buyer was North Central Equity,
LLC ("Buyer").
Page 16
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
The purchase price paid by the Buyer was $2,550,000 which consisted of
$1,682,184 in cash at closing, $349,817 in assumed vacation pay and warranty
liabilities, and the balance of $517,999 in a note receivable at 7% interest due
on December 31, 2005. The amount of the note receivable is subject to adjustment
based on certain representations and warranties provided by the Company in the
purchase agreement. The Company has recorded a reserve of $178,948 against this
note receivable due to uncertainty of collectibility of the note.
In connection with the purchase agreement, the Company entered into an interim
services agreement whereby the Buyer is able to sublease space at no charge at
the Company's Minneapolis and Fargo locations and obtain access to certain
aspects of the Company's information technology resources for one year. Services
provided will be charged by either party at fair value and is estimated by
management to be insignificant. In addition the services agreement is explicit
that the Company has no control over the buyer's operations. The buyer may
receive additional free rent for part or all of a second year depending on the
results of a post closing inventory appraisal. It is indeterminable at this time
the results of this appraisal, however, the Company estimates the second year
option will be exercised and will be accruing the liability as part of the sale
transaction.
In conjunction with the sale, the Company reduced its indebtedness to Convergent
Capital by $2,000,000 since part of the collateral of this note payable relates
to the assets sold. This $2,000,000 was borrowed back from Convergent in the 2nd
quarter of fiscal 2005. The gain on sale of MBS business services segment is as
follows:
Sale Price
Cash proceeds $1,682,184
Note receivable, net of reserve of $178,948 339,051
Assumed liabilities 349,817
----------
Total sale price, net of reserve of $178,948 2,371,052
Assets sold
Inventory, net of reserve 1,045,110
Property and equipment 52,351
----------
Net assets sold 1,097,461
Less costs and expenses
Broker's fee 132,500
Sublease for one year at no charge 500,000
Additional free rent related to inventory adjustment 500,000
Legal and accounting costs 37,600
----------
Total costs 1,170,100
----------
Net gain on sale $ 103,491
==========
Page 17
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
The following are condensed statements of operations of the discontinued
operations for the three and six months ended June 30:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
Statement of Operations 2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues $ 14,052 $ 4,997,608 $ 3,698,927 $ 9,982,426
Cost of sales (11,117) 3,733,614 2,701,664 7,672,328
Selling, general and administrative (106,903) 1,255,069 1,307,502 2,562,190
Depreciation and amortization -- 92,778 56,188 206,868
----------- ----------- ----------- -----------
Income (loss) from operations 132,072 (83,853) (366,427) (458,960)
Other income (expense) (9,180) (96,010) (55,440) (194,591)
----------- ----------- ----------- -----------
Net income (loss) 122,892 (179,863) (421,867) (653,551)
Gain on sale -- -- 103,491 --
----------- ----------- ----------- -----------
Income (loss) from discontinued operations $ 122,892 $ (179,863) $ (318,376) $ (659,273)
=========== =========== =========== ===========
The Company has recorded $1 million in deferred rent liability in relation to
the sale of the MBS business segment. This liability is amortized over the 24
month term of the sublease. Amortization has been netted with rent expense and
the resulting income of $29,197 is included in other income (expense) for the
three and six months ended June 30, 2005.
Page 18
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......................... $ 976.45
Selling Agent's commissions................................... $ 0.00
Legal fees and expenses....................................... $10,062.00
Accounting fees and expenses.................................. $ 4,410.00
Printing expenses............................................. $ 1,870.00
Registrar and transfer agent fees............................. $ 0.00
Miscellaneous expenses........................................ $ 2,681.55
----------
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.
Page 44
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)
2.3 Asset Purchase Agreement with Vicom Systems (14)
3.1 Amended and Restated Articles of Incorporation of Vicom,
Inc.(1)
3.2 Restated Bylaws of Vicom, Incorporated(1)
3.3 Articles of Incorporation of Corporate Technologies, USA,
Inc.(1)
3.5 Audit Committee Charter (9)
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(2)
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)
4.13 Wholesale Services Agreement Dated March 4, 2004 (8)
4.14 Note Purchase Agreement (11)
4.15 Series H Preferred Documents (12)
4.16 Series I Preferred Documents (13)
5.1 Opinion of Steven M. Bell, Esq.(6)
10.1 Vicom 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 Vicom 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 of Minnesota Digital Universe (9)
10.17 Acquisition of Rainbow Satellite Group, LLC (10)
14 Vicom Code of Ethics for Senior Officers (9)
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 Consent of Virchow, Krause & Company, LLP (15)
24.1 Power of Attorney (included on signature page of original
registration statement)
31.1 Rule 13a-14 (s) Certification of Chief Executive Officer -
James Mandel (15)
31.2 Rule 13a-14 (s) Certification of Chief Financial Officer -
Steven Bell (15)
32.1 Section 1350 of Sarbanes-Oxley Act of 2002 - James Mandel
(15)
32.2 Section 1350of Sarbanes-Oxley Act of 2002 - Steven Bell (15)
Page 45
(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 MARCH
17, 2004.
(9) PREVIOUSLY FILED AS THE SAME EXHIBIT TO REGISTRANTS FORM 8-K FILED JUNE 9,
2004.
(10) PREVIOUSLY FILED AS THE SAME EXHIBIT TO REGISTRANTS FORM 8-K FILED JULY 9,
2004.
(11) PREVIOUSLY FILED AS THE SAME EXHIBIT TO REGISTRANTS FORM 8-K FILED NOVEMBER
19, 2004.
(12) PREVIOUSLY FILED AS THE SAME EXHIBIT TO REGISTRANTS FORM 8-K FILED NOVEMBER
24, 2004.
(13) PREVIOUSLY FILED AS THE SAME EXHIBIT TO REGISTRANTS FORM 8-K FILED FEBRUARY
3, 2005.
(14) PREVIOUSLY FILED AS THE SAME EXHIBIT TO REGISTRANTS FORM 8K FILED APRIL 6,
2005
(15) FILED HEREWITH
Page 46
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.
Page 47
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this registration statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New Hope, State of
Minnesota, on October 25 2005.
MULTIBAND CORPORATION
By: /s/ Steven M. Bell
------------------------------------------
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Act, this registration statement
on Form S-1 has been signed by the following persons in their capacities
indicated as of October 25 2005.
SIGNATURE TITLE
-------------------- -------------------------------------------------------
Steven M. Bell President, Chief Financial Officer and Director
-------------------- (Principal Financial and Accounting Officer)
/s/ Steven M. Bell
Frank Bennett
--------------------
/s/ Frank Bennett Director
Jonathan Dodge
--------------------
/s/ Jonathan Dodge Director
Eugene Harris
--------------------
/s/ Eugene Harris Director
James L. Mandel
--------------------
/s/ James L. Mandel Chief Executive Officer and Director
(Principal Executive Officer)
Donald Miller
--------------------
/s/ Donald Miller Director and Chairman
David Weiss
--------------------
/s/ David Weiss Director
*By: Steven M. Bell
--------------
Attorney-in-Fact
Page 48