UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING JUNE 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0 - 1325
MULTIBAND CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
41 - 1255001
(IRS Employer Identification No.)
9449 SCIENCE CENTER DRIVE, NEW HOPE, MINNESOTA 55428
(Address of principal executive offices)
TELEPHONE (763) 504-3000 FAX (763) 504-3060
www.multibandusa.com Internet
(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 12, 2004 there were 25,687,670 shares outstanding of the
registrant's common stock, par value $.01 per share, and 362,031 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,
------------ ------------ ------------ ------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $ 7,918,362 $ 5,688,381 $ 13,665,836 $ 11,560,143
COSTS AND EXPENSES
Cost of products and services 5,445,895 3,914,420 9,794,744 8,225,122
Selling, general and administrative 2,401,641 2,127,689 4,532,260 4,029,363
Depreciation and Amortization 1,243,455 375,052 1,709,790 709,374
------------ ------------ ------------ ------------
Total Costs and Expenses 9,090,991 6,417,161 16,036,794 12,963,859
LOSS FROM OPERATIONS (1,172,629) (728,780) (2,370,958) (1,403,716)
OTHER EXPENSE
Interest expense (280,105) (219,723) (601,482) (445,410)
Other Income (expense) 1,260 15,232 4,101 (50,264)
------------ ------------ ------------ ------------
Total Other Expense (278,845) (204,491) (597,381) (495,674)
MINORITY INTEREST IN JOINT VENTURE 0 (1,393) 0 (1,393)
LOSS BEFORE INCOME TAXES (1,451,474) (934,664) (2,968,339) (1,900,783)
PROVISION FOR INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS (1,451,474) (934,664) (2,968,339) (1,900,783)
Preferred Stock Dividends (395,273) (38,580) (457,926) (95,051)
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,846,747) $ (973,244) $ (3,426,265) $ (1,995,834)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (.06) $ (.06) $ (.14) $ (.13)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 22,689,301 15,068,424 20,984,967 14,247,937
See notes to condensed consolidated financial statements
2
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
June 30, December 31,
2004 2003
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 1,514,779 $ 2,945,960
Certificate of deposit ......................................................... 250,000 250,000
Accounts receivable, net ....................................................... 2,929,708 1,658,114
Inventories, net ............................................................... 1,554,474 1,973,817
Other Current Assets ........................................................... 121,968 96,550
------------ ------------
TOTAL CURRENT ASSETS ........................................................ 6,370,928 6,924,441
------------ ------------
PROPERTY AND EQUIPMENT, NET ....................................................... 3,897,363 3,589,704
------------ ------------
OTHER ASSETS
Goodwill ....................................................................... 2,761,245 2,748,879
Intangible assets, net ......................................................... 17,352,854 503,625
Other .......................................................................... 131,985 136,236
------------ ------------
TOTAL OTHER ASSETS ......................................................... 20,246,084 3,388,740
------------ ------------
TOTAL ASSETS ...................................................................... $ 30,514,376 $ 13,902,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank ........................................ $ 355,055 $ 147,398
Wholesale line of credit ....................................................... 1,256,867 976,314
Short term debt................................................................. 6,119,999 0
Current portion of long term debt .............................................. 821,349 998,813
Current portion of note payable, stockholder ................................... 0 81,554
Current portion of capital lease obligations ................................... 56,975 54,939
Accounts payable ............................................................... 1,985,876 1,771,699
Accrued liabilities ............................................................ 3,512,978 1,459,705
Deferred service obligations and revenue ....................................... 339,615 315,227
------------ ------------
TOTAL CURRENT LIABILITIES ................................................... 14,448,714 5,805,649
LONG TERM DEBT, NET ............................................................... 2,070,880 2,087,156
OTHER LONG TERM DEBT .............................................................. 222,700 0
NOTE PAYABLE, STOCKHOLDER, NET OF CURRENT PORTION ................................. 64,421 32,837
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ................................. 290,191 142,898
------------ ------------
TOTAL LIABILITIES ................................................................. 17,096,906 8,068,540
------------ ------------
MINORITY INTEREST IN SUBSIDIARY ................................................... 0 26,634
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,931 shares issued and outstanding, $293,276 liquidation
preference) ....................................................................... 419,752 419,752
10% Class B (8,700 shares issued and outstanding, $91,350 liquidation preference) 62,000 62,000
10% Class C (125,400 shares issued and outstanding, $1,254,000 liquidation
preference) ....................................................................... 1,611,105 1,611,105
15% Class E (0 and 77,650 shares issued and outstanding,) ....................... 0 438,964
10% Class F (200,000 and 0 shares issued and outstanding, $2,000,000
liquidation preference) ........................................................... 2,000,000 0
Common stock, no par value (25,186,758 and 19,036,805 shares issued;
25,180,518 and 19,019,786 shares outstanding) ................................... 16,187,997 7,726,505
Stock subscriptions receivable .................................................. (371,415) (418,085)
Options and warrants ........................................................... 31,266,767 30,514,872
Unamortized compensation ....................................................... (2,277) (217,210)
Accumulated deficit ............................................................ (37,756,459) (34,330,192)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ........................................................ 13,417,470 5,807,711
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 30,514,376 $ 13,902,885
============ ============
See notes to condensed consolidated financial statements.
3
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 (Unaudited)
SIX MONTHS ENDED
JUNE 30, (UNAUDITED)
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss .................................................................... $(2,968,339) $(1,900,783)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization ............................................ 1,531,783 449,729
Amortization of deferred compensation .................................... 197,487 240,381
Amortization of original issue discount .................................. 348,178 199,980
Common stock issued for services ......................................... 19,887 321,920
Loss on sales of property and equipment .................................. 0 76,269
Interest receivable on stock subscription receivable ..................... 0 (10,272)
Minority interest in subsidiary........................................... 0 1,393
Changes in operating assets and liabilities:
Accounts receivable, net ............................................... (1,243,338) (241,014)
Inventories, net ....................................................... 419,343 (541,581)
Other current assets ................................................... 15,931 (107,742)
Other assets ........................................................... (36,980) (801)
Wholesale line of credit ............................................... 280,533 (31,082)
Accounts payable and accrued liabilities ............................... (106,407) 283,974
Deferred service obligations and revenue ............................... 24,388 (11,352)
----------- -----------
Net cash flows from operating activities ............................ (1,517,424) (1,270,981)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment ......................................... (240,413) (307,982)
Purchase of Satellite Broadcasting Corporation .............................. (187,424) 0
Purchase of Minnesota Digital Universe Inc. ................................. (1,100,000) 0
Purchase of Rainbow Satellite Group LLC ..................................... (1,000,000) 0
Payment for investment in subsidiary ........................................ 0 (64,878)
Proceeds from sale of property and equipment ................................ 649 6,145
Collections on notes receivable ............................................. 5,320 5,000
----------- -----------
Net cash flows from investing activities ............................ (2,521,868) (361,715)
----------- -----------
FINANCING ACTIVITIES
Checks issued in excess of cash in bank ..................................... 324,037 0
Payments on long term debt .................................................. (701,308) (97,896)
Payments on capital lease obligations ....................................... (38,093) (47,344)
Proceeds from issuance of long term debt .................................... 0 133,726
Payments on note payable to stockholder ..................................... (49,970) 0
Proceeds from issuance of stock and warrants ................................ 2,724,965 1,917,998
Exercise of warrants ........................................................ 390,279 199,530
Redemption of preferred stock ............................................... 0 (2,100)
Preferred stock dividends ................................................... (41,799) (40,080)
----------- -----------
Net cash flows from financing activities ............................ 2,608,111 2,063,834
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (1,431,180) 431,138
CASH AND CASH EQUIVALENTS
Beginning of period ......................................................... 2,945,960 540,375
----------- -----------
End of period ............................................................... $ 1,514,779 $ 971,513
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount ...... 249,471 259,391
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of preferred stock for acquisition of assets ....................... 0 76,500
Issuance of common stock for acquisition of assets MBUSA and URON............ 274,800 0
Warrants issued with debt ................................................... 0 208,447
Conversion of preferred stock and accrued dividends into common stock ....... 0 40,000
Current liabilities converted to stock ...................................... 48,001 173,148
Conversion of notes payable into common stock .......... .................... 510,908 522,000
Conversion of dividend into common stock .................................... 78,591 54,971
Reduction of stock subscription receivable .................................. 0 17,852
Issuance of common stock for acquisition of assets-MDU and SBC ............. 4,120,152 0
Issuance of preferred stock for acquisition of assets-Rainbow .............. 2,000,000 0
Common stock issued for services ............................................ 307,571 0
Stock subscription receivable for issuance of common stock .................. 0 40,000
Issuance of common stock for acquisition of assets- SBC ............. ...... 270,152 0
Issuance of common stock and notes payable for acquisition of assets-MDU.... 6,600,000 0
Issuance of preferred stock and notes payable for acquisition
of assets-Rainbow .............. ........................................... 6,519,999 0
See notes to condensed consolidated financial statements
4
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2004 and 2003
NOTE 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues and Cost Recognition
Multiband Corporation and subsidiaries (the Company) earns revenues from 6
sources: 1) Video and computer technology products which are sold but not
installed, 2) Voice, video and data communication products which are sold and
installed, 3) Service revenues related to communication products which are sold
and both installed and not installed, 4) Multiband user charges to multiple
dwelling units, 5) MB USA user charges to timeshares, 6) DirecTV fees.
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms. Product returns and customer discounts
are netted against revenues.
Customer contracts for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenues are recognized when the products are
delivered and installed, and the customer has accepted the terms and has the
ability to fulfill the terms.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. Service revenues are
expected to account for less than 10% of total revenues for the year ending
December 31, 2004. Service revenues were less than 10% of total revenues for the
year ended December 31, 2003. The Company, if the customer elects, enters into
equipment maintenance agreements for products sold once the original
manufacturer's warranty has expired. Revenues from all equipment maintenance
agreements are recognized on a straight-line basis over the terms of each
contract. Costs for services are expensed as incurred.
MultiBand and MBUSA user charges are recognized as revenues in the period the
related services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Intangible Assets
The Company amortizes a domain name acquired during the year ended December 31,
2001 over its estimated useful life of five years using the straight-line
method. The Company amortizes access contracts over the estimate useful life of
three years using the straight-line method. The Company began amortizing the
customer cable lists over two to six years effective January 1, 2004. The
Company is also amortizing the value of its DirecTV agent agreement obtained via
MDU over a 73 month period beginning April 2004. The Rainbow Satellite
amortization is over a period of 72 months.
Amortization of intangible assets was $969,185 and $8,732 for the three months
ended June 30, 2004 and 2003, respectively. For the six month period ended June
30, 2004 and 2003, amortization on intangible assets was $1,163,648 and $17,464,
respectively. Estimated amortization expense of intangible assets for the years
ending December 31, 2004, 2005, 2006, 2007, and 2008 is $1,505,559, $3,217,848,
$2,968,762, $2,910,622 and $2,895,616, respectively.
AMORTIZATION TABLE
JUNE 30, 2004 DECEMBER 31, 2003
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMOTIZATION AMOUNT AMOTIZATION
---------------------------------------------------------------------
Intangible assets subject to amortization
Florida Cable 300,000 30,000 300,000 0
URON 453,930 113,484 0 0
Satellite Broadcasting 457,576 22,878 0 0
Minnesota Digital 9,551,831 392,541 0 0
Rainbow Satellite 7,043,641 97,471 0 0
Multiband Domain Name 83,750 47,458 83,750 39,083
MDU Subscriber rights 60,042 5,004 0 0
Access contract-MBUSA 60,000 45,332 60,000 13,334
Debt issuance costs 115,500 19,248 115,500 3,208
Total $18,126,270 $773,416 $ 559,250 $ 55,625
=====================================================================
Intangible assets not subject to
amortization
Goodwill $ 3,543,523 $782,278 $3,531,157 $782,278
=====================================================================
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was originally amortized using the
straight-line method over ten years. Due to changes in accounting standards, the
carrying value of goodwill is now reviewed annually to see if the facts and
circumstances suggest that it may be impaired. If the review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the assets acquired over the remaining amortization period, the
Company's carrying value of goodwill is reduced by the estimated shortfall of
cash flows. The Company did not record any impairment charges related to
goodwill during the three or six months ended June 30, 2004 and 2003.
5
Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant date
over the amount the employee must pay for the stock. The Company's general
policy is to grant stock options at fair value at the date of grant.
Pursuant to APB No. 25 and related interpretations, $99,774 and $120,191 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended June 30, 2004 and 2003,
respectively. For the six months ended June 30, 2004 and 2003, $212,415 and
$240,381 of compensation cost has been recognized. Had compensation cost been
recognized based on the fair values of options at the grant dates consistent
with the provisions of Statements of Financial Accounting Standards (SFAS) No.
123 "Accounting for Stock-Based Compensation", the Company's net loss and loss
attributable to common stockholders and basic and diluted loss per common share
would have been increased to the pro forma amounts:
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
----------- ----------- ----------- -----------
Loss attributable to common stockholders $(1,846,747) $ (973,244) $(3,426,265) $(1,995,834)
Pro forma loss attributable to common shares $(2,212,473) $(1,138,822) $(3,921,299) $(2,572,409)
Basic and diluted net loss per share:
As reported $ (.08) $ (0.06) $ (.16) $ (0.14)
Pro forma loss attributable to common shares $ (.10) $ (0.08) $ (.19) $ (0.18)
Stock-based compensation:
As reported $ 99,774 $ 120,191 $ 212,415 $ 240,381
Pro forma $ 365,726 $ 165,578 $ 495,034 $ 576,575
In determining the compensation cost of the options granted during the three
months ended June 30, 2004 and 2003, as specified by SFAS No. 123, the fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used in
these calculations are summarized as follows for June 30:
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
-------- -------- -------- --------
Risk-free interest rate 3.50% 3.62% 3.50% 3.31%
Expected life of options granted 10 years 10 years 10 years 10 years
Expected volatility range 184% 170% 184% 170%
Expected dividend yield 0% 0% 0% 0%
Net Loss per Share
Basic net loss per common share is computed by dividing the loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net loss per common share is computed by
dividing loss attributable to common stockholders by the sum of the weighted
average number of common shares outstanding plus all additional common stock
that would have been outstanding if potentially dilutive common shares related
to common share equivalents (stock options, stock warrants, convertible
preferred shares, and issued but not outstanding restricted stock) had been
issued. All options, warrants, convertible preferred shares, and issued but not
outstanding restricted stock during the three and six months ended June 30, 2004
and 2003 were anti-dilutive.
6
NOTE 3 - LIQUIDITY
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the six months ended June 30, 2004 and 2003, the Company incurred net losses of
$2,968,339 and $1,900,783, respectively. At June 30, 2004, the Company had an
accumulated deficit of $37,756,459. The Company's ability to continue as a going
concern is dependent on it ultimately achieving profitability and/or raising
additional capital. Management intends to obtain additional debt or equity
capital to meet all of its existing cash obligations and fund commitments on
planned MultiBand projects however, there can be no assurance that the sources
will be available or available on terms favorable to the Company. Management
anticipates that the impact of the actions listed below, will generate
sufficient cash flows to pay current liabilities, long-term debt and capital
lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional equity investment in the Company by either issuing
preferred or common stock.
3. Continue to market MultiBand services and acquire additional
multi-dwelling unit customers.
4. Control capital expenditures by contracting MultiBand services and
equipment through a landlord-owned equipment program.
5. Establish market for wireless internet services.
NOTE 4 - STOCK WARRANTS
Stock warrants activity is as follows for the six months ended June 30, 2004.
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
WARRANTS PRICE
--------- ---------
Warrants outstanding - December 31, 2003 7,421,874 1.87
Granted 704,500 2.04
Canceled or expired 0 0
Exercised (475,503) 1.52
--------- ---------
Warrants outstanding - June 30, 2004 7,650,871 1.86
========= =========
The warrants granted during the six months ended June 30, 2004 were awarded for
common stock and for services rendered.
During the six months ended June 30, 2004, the Company had 171,500 warrants
exercised as cashless.
NOTE 5 - BUSINESS SEGMENTS
Following is Company business segment information for the three months ended
June 30, 2004 and 2003:
Multiband Multiband
Business Consumer
Multiband Services Services Total
------------ ------------ ------------ ------------
Quarter ended June 30, 2004
Revenues $ 0 $ 5,074,651 $ 2,843,711 $ 7,918,362
Income (Loss) from operations (672,363) (89,324) (410,942) (1,172,629)
Identifiable assets 4,322,547 4,977,004 21,214,824 30,514,376
Depreciation and amortization 389,663 92,788 770,851 1,253,302
Capital expenditures 0 71,807 128,947 200,754
Quarter ended June 30, 2003
Revenues $ 0 $ 5,330,420 $ 357,961 $ 5,688,381
Income (Loss) from operations (502,859) 28,463 (254,384) (728,780)
Identifiable assets 3,627,690 5,711,347 2,955,839 12,294,876
Depreciation and amortization 11,726 111,722 112,149 235,597
Capital expenditures 0 194,123 21,574 215,697
7
Following is Company business segment information for the six months ended June
30, 2004 and 2003:
Multiband Multiband
Business Consumer
Multiband Services Services Total
------------ ------------ ------------ ------------
Six months ended June 30, 2004
Revenues $ 0 $ 10,142,592 $ 3,523,244 $ 13,665,836
Loss from operations (1,132,186) (463,854) (774,917) (2,370,958)
Identifiable assets 4,322,547 4,977,004 21,214,824 30,514,375
Depreciation and amortization 520,294 206,868 1,002,108 1,729,270
Capital expenditures 6,690 98,641 135,082 240,413
Six months ended June 30, 2003
Revenues $ 0 $ 10,967,062 $ 593,081 $ 11,560,143
Loss from operations (909,280) (26,431) (468,005) (1,403,716)
Identifiable assets 3,627,690 5,711,347 2,955,839 12,294,876
Depreciation and amortization 23,451 218,666 207,612 449,729
Capital expenditures 0 230,768 77,214 307,982
NOTE 6 - RELATED PARTIES
The Company had revenues from companies that are associated with a
director, who was elected to the board of directors during 2003, of
approximately $0 and $17,000 for the three and six months ended June 30, 2004
and 2003, respectively. In addition, the Company had accounts receivable
outstanding from these companies of approximately $147,000 and $142,000 at June
30, 2004 and December 31, 2003, respectively.
NOTE 7- ACQUISITIONS
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
$645,000.
On April 2, 2004, Multiband Corporation (the Company), f/k/a Vicom,
Incorporated, 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. These notes are unsecured and bear no interest. The stock value was a
negotiated price between Seller and Buyer. 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 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 Vicom repurchased 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 this 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.
ALLOCATION OF PURCHASE PRICE-MDU AND RAINBOW
Total Cash/Stock Consideration 14,519,999
Add: Transaction costs 1,030,000
Add: Liabilities assumed 1,912,153
----------
Total Consideration 17,462,152
Less tangible assets (566,680)
Less goodwill 0
----------
Intangible assets, net 16,895,472
==========
MDU's results of operations for April, May, and June 2004 are included in
the Company's income statement for the quarter ended June 30, 2004.
8
On July 9, 2004, Multiband (the Company) completed its acquisition, which had an
effective date of June 1, 2004, of the outstanding membership interests of
Rainbow Satellite Group, LLC (Rainbow), a provider of satellite television
services to multi-dwelling units, for approximately 6.9 million dollars, two
million of which was paid for in Multiband Preferred Stock, valued at $2.00 per
share on a conversion formula to Multiband common stock, one million dollars of
which was paid for in cash and the balance in promissory notes due by January
2005. These notes are unsecured and bear no interest. The stock value was a
negotiated price between Buyer and Seller. In the event Multiband defaults in
the payment of said promissory notes, the former owners of Rainbow have certain
rights to repurchase the aforementioned membership interests for 20% less than
any sums Multiband has paid prior to the date of default. The consideration paid
was based on the Company's analysis of likely future net incomes to be generated
over a six year period by the acquired Company. The cash was provided by funds
Multiband had previously raised in a private placement. The aforementioned
purchase price is subject to adjustment pursuant to the parties agreement if the
number of Rainbow subscribers increases or decreases as of an adjustment date.
The assets were acquired from the members/owners of Rainbow. Prior to the
transaction, there was no material relationship between the owners of sellers
and the Company.
With this acquisition, the effective date of which was June 1, 2004, the Company
acquired over 16,000 video subscribers which are primarily located in
California, Colorado, Texas, Florida, Illinois and New York. Rainbow's results
of operations for June, 2004 are included in the Company's Statement of
Operations for the quarter ended June 30, 2004.
A final determination of the required purchase accounting adjustments relating
to the MDU and Rainbow acquisitions including the allocation of the purchase
price to the asset required and liabilities assumed based on their respective
fair values, had not yet been made.
The following unaudited pro forma condensed results of operations for the
three and six months ended June 30, 2004 and 2003 give effect to the acquisition
of URON, MDU and Rainbow as if such transactions had occurred on January 1,
2003.
The unaudited pro forma information does not purport to represent what the
Company's results of operations would actually have been if such transactions in
fact had occurred at such date or to project the Company's results of future
operations.
2004 2003
---------------------------- ----------------------------
PRO FORMA PRO FORMA
CONSOLIDATED CONSOLIDATED
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
PER I/S DISCLOSED PER I/S DISCLOSED
------------ ------------ ------------ ------------
THREE MONTHS - Ended June 30, 2004 and 2003
Revenues $ 7,918,362 $ 8,755,440 $ 5,688,381 $ 8,278,302
Loss from operations $ (1,172,629) $ (1,153,363) $ (728,780) $ (705,379)
Net loss $ (1,451,474) $ (1,432,208) $ (934,664) $ (907,182)
Net loss per share - basic and diluted $ (.06) $ (.06) $ (.06) $ (.06)
Weighted average shares outstanding - basic and diluted 22,689,301 22,689,301 15,068,424 15,068,424
CONSOLIDATED CONSOLIDATED
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
PER I/S DISCLOSED PER I/S DISCLOSED
------------ ------------ ------------ ------------
SIX MONTHS - Ended June 30, 2004 and 2003
Revenues $ 13,665,836 $ 1,616,537 $ 11,560,143 $ 16,468,213
Loss from operations $ (2,370,958) $ (2,335,047) $ (1,403,716) $ (1,304,110)
Net loss $ (2,968,339) $ (2,968,239) $ (1,900,783) $ (1,793,159)
Net loss per share - basic and diluted $ (.14) $ (.14) $ (.013) $ (.013)
Weighted average shares outstanding - basic and diluted 20,984,967 20,984,967 14,247,937 14,247,937
The unaudited pro forma results of operations for the three and six months ended
June 30, 2004 and 2003 as a result of the SBC acquisition is not material to the
historical financial statements.
9
NOTE 8 - SUBSEQUENT EVENT
On August 9, 2004, Multiband Corporation (the Company) completed its
acquisition of certain assets of 21st Century Satellite Communications,
Inc.(MDU) for one million dollars, $333,333 of which was paid for in Company
stock, valued at $1.60 per share, $250,000 of which was paid for in cash and the
balance in equipment lease payments due by August 2007. The consideration paid
was based on the Company's analysis of the value of the acquired video equipment
and related video subscribers totaling approximately 5,000. The cash was
provided by funds Vicom had previously raised in a private placement.
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.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Multiband Corporation (formerly named Vicom, Inc.) is a Minnesota
corporation formed in September 1975. Multiband has two operating divisions: 1)
Multiband Business Services (MBS, legally known as Corporate Technologies, USA,
Inc dba Multiband), and Multiband Consumer Services (MCS), which encompasses the
subsidiary corporations, Multiband USA, Inc., URON, Inc., Minnesota Digital
Universe, Inc., and Rainbow Satellite Group, LLC.
Multiband completed an initial public offering in June 1984. In November
1992, Multiband became a non-reporting company under the Securities Exchange Act
of 1934. In July 2000, Multiband regained its reporting company status. In
December, 2000, Multiband stock began trading on the NASDAQ stock exchange under
the symbol VICM. In July, 2004, concurrent with the name change to Multiband
Corporation, the Company's NASDAQ symbol changed to MBND.
Multiband's website is located at: www.multibandusa.com.
As of June 30, 2004, MBS was providing telephone equipment and service to
approximately 800 customers, with approximately 17,000 telephones in service. In
addition, MBS provided computer products and services to approximately 1,800
customers. Telecommunications systems distributed by MBS are intended to provide
users with flexible, cost-effective alternatives as compared to systems
available from major telephone companies, including those formerly comprising
the Bell System and from other interconnect telephone companies.
MBS provides a full range of voice, data and video communications systems
and service, system integrations, training and related communication sales and
support activities for commercial, professional and institutional customers,
most of which are located in Minnesota and North Dakota. MBS purchases products
and equipment from NEC America, Inc. (NEC), Cisco Systems, Inc. (Cisco), Nortel
Networks Corp (Nortel), Tadiran Telecommunications, Inc. (Tadiran), and other
manufacturers of communications and electronic products and equipment. MBS uses
these products to design telecommunications and computer systems to fit its
customers' specific needs and demands.
MCS provides satellite television, local and long distance services and
internet services to residents of multi-dwelling units (MDUs), such as apartment
buildings and time share resorts. The Company obtains access agreements with the
owners of MDU properties permitting us the rights to provide the aforementioned
services.
At June 30, 2004, MCS had 27,897 subscribers using its services (3,248
using voice services, 21,763 using video services and 2,886 using internet
services).
11
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAE OF REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ----------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
------------- ------------- ------------- -------------
REVENUES 100% 100% 100.% 100%
COST OF PRODUCTS & SERVICES 68.7% 68.8% 71.6% 71.2%
GROSS MARGIN 31.2% 31.2% 28.3% 28.8%
SELLING, GENERAL & ADMINISTRATIVE 46.0% 44.0% 45.6% 41.0%
OPERATING LOSS -14.1% -12.8% -17.3% -12.1%
INTEREST EXPENSE & OTHER, NET -3.5% -3.6% -4.3% -4.3%
LOSS BEFORE TAXES -18.3% -16.4% -21.7% -16.4%
INCOME TAX 0 0 0 0
NET LOSS -18.3% -16.4% -21.7% -16.4%
The following table sets forth, for the period indicated, the gross margin
percentages for Corporate Technologies USA, Inc. and MultiBand, Inc.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
GROSS MARGIN PERCENTAGES:
MBS 25.7% 30.4% 23.6% 28.2%
MCS 41.1% 43.6% 41.8% 55.65
RESULTS OF OPERATIONS
Revenues
Revenues increased 39.2% to $7,918,362 in the quarter ended June 30, 2004,
as compared to $5,688,381 for the quarter ended June 30, 2003.
Revenues for (MBS) decreased 4.7% in the second quarter of fiscal 2004 to
$5,074,651 as compared to $5,330,420 in the second quarter of fiscal 2003
primarily as a result of reduced spending by a few larger MBS customers. The
Company is diversifying its customer base to add medium and small businesses and
as a result the Company expects revenues will stabilize in future quarters.
Revenues for MCS increased 694.1% to $2,843,711 as compared to $357,961 in
the second quarter of fiscal 2003. This increase is due to expansion of MCS as a
result of the acquisitions of MDU and Rainbow.
Revenues for the six month period ended June 30, 2004 increased 18.2% to
$13,665,836 from $11,560,143 for the same period in 2003, due to the
aforementioned increase in MCS revenues obtained via acquisitions.
Gross Margin
The Company's gross margin increased 39.3% or $698,506 to $2,472,467 for
the quarter ended June 30, 2004 as compared to $1,773,961 for the similar
quarter last year. For the quarter ended June 30, 2003, as a percent of total
revenues, gross margin was 31.5% as compared to 31.1% for the similar period
last year.
12
Gross margin for MBS decreased by 26.2% to $1,303,471 for the quarter
ended June 30, 2004, as compared to $1,618,065 in the second quarter of fiscal
2003 due to lower MBS sales and lower profits on those sales.
Gross margin for MCS for the quarter ended June 30, 2004 increased 649.5%
to $1,168,996 as compared to $155,896 in the second quarter of fiscal 2003
reflecting on the increase of revenue being billed.
For the six month period ended June 30, 2004, as a percent of total
revenues, gross margin was 28.5% as compared to 28.8% for the same period in
2003. For the second half of fiscal year 2004, gross margin percentages are
expected to remain constant or increase slightly as the company continues to
enhance recurring subscriber revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses including depreciation and
amortization increased 45.6% to $3,645,096 in the quarter ended June 30, 2004,
compared to $2,502,741 in the prior year quarter. This increase is primarily a
result of increased operating and amortization expenses related to the purchase
and addition of new MDU property assets in the MCS division. Selling, general
and administrative expenses were, as a percentage of revenues, 46.0% for the
quarter ended June 30, 2004 and 43.9% for the similar period a year ago.
For the six month period ended June 30, 2004 these expenses increased
31.7% to $6,242,050 as compared to $4,738,737 for the six months ended June 30,
2003. As a percentage of revenues, selling, general and administrative expenses
are 45.3% for the period ended June 30, 2004 as compared to 45.2% for the same
period 2003.
Interest Expense
Interest expense was $280,105 for the quarter ended June 30, 2004, versus
$219,723 for the similar period a year ago, reflecting an increase in the
Company's long term debt. Amortization of original issue discount was $159,199
and $85,364 for the three months ended June 30, 2004 and 2003. For the six
months ended June 30, 2004 amortization of original issue discount was $348,178
and $199,980 in the same period last year.
Interest expense was $601,482 for the six months ended June 30, 2004 and
$445,410 for the same period last year.
Net Loss
In the second quarter of fiscal 2004, the Company incurred a net loss of
$1,451,474 compared to a net loss of $934,664 for the second fiscal quarter of
2003.
For the six months ended June 30, 2004, the Company recorded a net loss of
$2,968,339 as compared to $1,900,783 for the six months ended June 30, 2003.
Liquidity and Capital Resources
Available working capital, at June 30, 2004 decreased significantly over
the similar period last year primarily due to short term notes payable issued in
the course of the second quarter acquisitions.
The Company continues to face a very competitive environment in its MBS
division which in the second quarter of 2004 produced both declining revenues
and margins versus the same period a year ago. The Company's MCS division
continues to experience significant growth, primarily due to increased
subscriber related recurring revenues acquired via various transactions
previously mentioned herein.
The Company, between June 30, 2004 and January 1, 2005, is obligated to
pay approximately $6.9 million to retire the notes payable related to its MDU
Inc. and Rainbow acquisitions. The Company as of June 30, 2004 did not have
available cash on hand sufficient to retire said notes payable. Nonetheless,
management of Multiband believes that, for the near future, cash generated by
sales of stock, and existing credit facilities, in aggregate, are adequate to
meet the anticipated liquidity and capital resource requirements of its
business. The Company also believes, although it cannot guarantee, that it will
continue to be able to raise money for the purposes of financing acquisitions.
During the six months ended June 30, 2004, the Company raised approximately $3.1
million via sales of its common stock to accredited investors primarily for such
purposes. In addition, for the quarter ended June 30, 2004, the Company achieved
positive earnings before interest, taxes, depreciation, and amortization
("EBITDA") of $70,826.
13
The Company, as is common in the cable and telecommunications industries,
uses EBITDA as a measure of performance to demonstrate earnings exclusive of
interest and non cash events. EBITDA is not, and should not be considered, an
alternative to net income, income from operations, or any other measure for
determining operating performance or liquidity, as determined under accounting
principles generally accepted in the United States. The most directly comparable
accounting principles generally accepted in the United States of America
reference in the Company's case is the removal of interest, depreciation, and
amortization expenses. The following table reconciles Company EBITDA to our
consolidated net loss as computed under GAAP.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
EBITDA $ 70,826 $(353,728) $ (661,168) $ (674,500)
Interest Expense and other (278,845) (205,884) (597,380) (516,908)
Depreciation and Amortization (1,243,455) (375,052) (1,709,790) (709,375)
----------- ----------- ----------- -----------
Net Loss $(1,451,474) $(934,664) $(2,968,339) $(1,900,783)
=========== =========== =========== ===========
Capital Expenditures
The Company used $196,347 for capital expenditures during the six months
ended June 30, 2004, as compared to $307,982 in the similar period last year.
Capital expenditures consisted of equipment acquired for internal use. The
Company anticipates that for the second half of fiscal year 2004 capital
purchases will remain somewhat consistent with first half capital expenditures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvements. 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 six months ended June 30, 2004 and
2003, 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, 2004 and 2003, the Company did not record any impairment
losses related to goodwill.
Inventories
We value our inventory at the lower of the actual cost or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand characterize our industry.
14
ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
Multiband is subject to interest rate variations related to its notes
payable with Raibow and Laurus Master Fund Ltd., both of which have interest
tied to the prime lending rate.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer, and its President and Chief Financial Officer, of the
effectiveness of the Company's "disclosure controls and procedures" as of the
end of the period covered by this report, pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act. Based upon that evaluation, the Company's
Chief Executive Officer and its President and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic SEC filings. However, due to the limited number of
Company employees engaged in the authorization, recording, processing and
reporting of transactions, there is inherently a lack of segregation of duties.
The Company periodically assesses the cost versus benefit of adding the
resources that would remedy or mitigate this situation and currently, does not
consider the benefits to outweigh the costs of adding additional staff in light
of the limited number of transactions related to the Company's operations.
Internal Control Over Financial Reporting
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal quarter covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
business. However, as of June 30, 2004, Multiband was not engaged in any pending
legal proceedings where, in the opinion of the Company, the outcome is likely to
have a material adverse effect upon the business, operating results and
financial condition of the Company.
ITEM 2. ISSUANCE OF COMMON AND PREFERRED STOCK
The Company, during the second quarter, issued 1,650,000 common shares to
various accredited investors for net proceeds of approximately $3.1 million. The
securities were offered and sold by the Company in reliance upon the exemptions
provided under Section 4(2) of the Securities Act relating to sales not
involving any public offering, and/or Rule 506 of Regulation D under the
Securities Act.
In the second quarter of 2004, the Company issued common and preferred
stock in connection with the acquisitions as itemized in Note 7 in the condensed
footnotes herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of Vicom (now Multiband Corporation) shareholders
was held on June 17, 2004. There were present or present by proxy at
the meeting 12,438,122 votes, the majority necessary to hold a
quorum.
(b) The meeting resulted in the following votes related to the following
proxy items:
1. Election of Directors:
Steven Bell Frank Bennett Jonathan Dodge
David Ekman Eugene Harris James Mandel
Donald Miller David Weiss
15
For Against Abstain
Ekman 12,368,122 70,000 0
Bennett 12,368,122 70,000 0
Mandel 12,366,872 70,000 0
Bell 12,436,872 1,250 0
Miller, Dodge, Harris, Weiss 12,438,122 0 0
2. To approve an amendment to Vicom's 1999 Employee Stock
Compensation Plan to increase the total number of stock
shares reserved for awards to employees under the Plan from
1.8 million to 4.3 million.
For Against Abstain
12,102,441 328,181 7,500
3. To approve an amendment to Vicom's 2000 Non-Employee
Director Stock Compensation Plan to increase the total
number of stock shares reserved for awards to Directors
under the Plan from 300,000 to 800,000.
For Against Abstain
12,094,229 338,008 5,885
4. To approve an amendment to Vicom's bylaws to lower the
percentage of the outstanding shares needed to achieve a
quorum for a shareholder meeting from 50.1% to 34%.
For Against Abstain
12,078,698 290,206 69,218
5. To approve an amendment to the Company's Articles of
Incorporation to change the Company's name from VICOM,
Incorporated to Multiband Corporation.
For Against Abstain
12,436,171 0 1,951
6. To approve an amendment to Vicom's Articles of
Incorporation to increase the authorized number of Vicom
shares from 50 million to 100 million.
For Against Abstain
12,043,941 313,181 81,000
7. Ratify the election of Virchow, Krause & Company, LLP as
independent auditors of the Company for Fiscal Year 2003.
For Against Abstain
11,438,122 0 1 million
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(s) Certification of Chief Executive Officer - James Mandel
31.2 Rule 13a-14(s) Certification of Chief Financial Officer - Steven Bell
32.1 Section 1350 of Sarbanes-Oxley Act of 2002 - James Mandel and Steven Bell
(b) Reports on Form 8-K. Filed June 9, 2004
16
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 19, 2004 By:
-----------------------
/s/ James L. Mandel
Chief Executive Officer
Date: August 19, 2004 By:
-----------------------
/s/ Steven M. Bell
Chief Executive Officer
(Principal Financial and Accounting Officer)
17