UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|X| AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING June 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ___________
COMMISSION FILE NUMBER 0 - 1325
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MULTIBAND CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
41 - 1255001
(IRS Employer Identification No.)
9449 Science Center Drive, New Hope, Minnesota 55428
(Address of principal executive offices)
Telephone (763) 504-3000 Fax (763) 504-3060
Internet: www.multibandusa.com
(Registrant's telephone number, facsimile number, and Internet address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes |_| No |X|
On August 18, 2005 there were 29,092,035 shares outstanding of the
registrant's common stock, par value $.01 per share, and 456,999 outstanding
shares of the registrant's convertible preferred stock.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended 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
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June 30, 2005 December 31, 2004
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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
============ ============
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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
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Note 1 - Unaudited Consolidated Financial Statements
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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.
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NOTE 2 - Summary of Significant Accounting Policies
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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
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, product pricing, management for growth, integration of acquisitions,
technological developments, new products, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements including those made in this statement. In order to
comply with the terms of the Private Securities Litigation Reform Act, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or Company's
forward-looking statements.
The risks and uncertainties that may affect the operations,
performance, developments and results of the Company's business include the
following: national and regional economic conditions; pending and future
legislation affecting IT and telecommunications industries; market acceptance of
the Company's products and services; the Company's products and services; the
Company's continued ability to provide integrated communication solutions for
customers in a dynamic industry; and other competitive factors.
Because these and other factors could affect the Company's operating
results, past financial performance should not necessarily be considered as a
reliable indicator of future performance and anticipated future period results.
Page 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OUR COMPANY
Multiband Corporation (Multiband), (f/k/a Vicom, Incorporated), is a
Minnesota corporation formed in September 1975. Multiband has two operating
segments: 1) Multiband Consumer Services (MCS, legally known as Multiband
Subscriber Services, Inc.), which encompasses the subsidiary corporations,
Multiband USA, Inc., URON, Inc., and Rainbow Satellite Group, LLC; and 2)
Minnesota Digital Universe, Inc. (MDU)
Multiband completed an initial public offering in June 1984. In
November 1992, Multiband became a non-reporting company under the Securities
Exchange Act of 1934. In July 2000, Multiband regained its reporting company
status. In December, 2000, Multiband stock began trading on the NASDAQ stock
exchange under the symbol VICM. In July 2004, the symbol was changed to MBND
concurrent with the Company's name change from Vicom, Incorporated to Multiband
Corporation.
Multiband's website is located at: www.multibandusa.com.
From its inception until December 31, 1998, Multiband operated as a
telephone interconnect company only. Effective December 31, 1998, Multiband
acquired the assets of the Midwest region of Enstar Networking Corporation
(ENC), a data cabling and networking company. In late 1999, in the context of a
forward triangular merger, Multiband to expand its range of computer products
and related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (MBS). MBS provided voice, data
and video systems and services to business and government. The MBS business
segment was sold effective April 1, 2005. All references to financial
information and descriptions of business in this registration have been revised
to reflect only our continuing operations and all references to our now
discontinued Multiband Business Services have been eliminated. MCS 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.
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 operators. The Company provides its services to
approximately 20 mobile home parks in Florida. Due to the seasonal residency of
the mobile home parks, the Company's revenues generated from the mobile home
parks decreased by approximately 53% between the first and second quarters of
2005. The Company anticipates regaining these subscriptions during the winter
months. However, there is no guarantee these subscriptions will be recovered.
Page 20
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE OF 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%
RESULTS OF OPERATIONS
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 21
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 a decrease of $554,299 in accrued liabilities 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 personnel
expenses related to the acquisition of video subscribers throughout 2004 and
resulting subscriber growth. 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.
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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.
Liquidity and Capital Resources
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.
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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.
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.
ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
Multiband is subject to interest rate variations related to its note
payable with Laurus Master Fund, Ltd. The Laurus note payable has interest tied
to the prime lending rate.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14(c) of the Securities Exchange Act of 1934. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
alerting them in a timely basis to material information relating to the Company
required to be disclosed in the Company's periodic SEC reports. There have been
no significant changes in the Company's internal controls or in other factors
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the second quarter of 2005, settled its legal action
with Private Investor's Equity Group (PIEG) which was brought in the third
quarter of 2004. 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 fair 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.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14 and 15d-14 of the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14 and 15d-14 of the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MULTIBAND CORPORATION
Registrant
Date: August 22, 2005 By:
/s/ James L. Mandel
Chief Executive Officer
Date: August 22, 2005 By:
/s/ Steven M. Bell
Chief Executive Officer
(Principal Financial and Accounting Officer)
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