U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________.
Commission file number O-32345
Electronic Media Central Corporation
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization) | 33-0795854 (I.R.S. Employer Identification No.) |
413 Avenue G, #1 Redondo Beach, CA (Address of principal executive offices) | 90277 (Zip Code) |
Registrant’s telephone number, including area code (310) 493-2244
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.
Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o.
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 2, 2006, there were 1,300,000 shares of common stock, par value $0.02, issued and outstanding.
Electronic Media Central Corporation
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | 3 | |
ITEM 1. | Financial Statements | 4 |
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 |
ITEM 4. | Controls and Procedures | 18 |
PART II – OTHER INFORMATION | 19 | |
ITEM 1. | Legal proceedings | 19 |
ITEM 1A. | Risk Factors | 19 |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
ITEM 3. | Defaults Upon Senior Securities | 19 |
ITEM 4. | Submission of Matters to a Vote of Security Holders | 19 |
ITEM 5. | Other Information | 19 |
ITEM 6. | Exhibits | 19 |
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This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
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ELECTRONIC MEDIA CENTRAL CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 2006 and 2005
(Unaudited)
ASSETS | |||||||
2006 | 2005 | ||||||
CURRENT ASSETS: | |||||||
Cash & cash equivalents | $ | 10,052 | $ | 3,737 | |||
Accounts receivable, net of allowance for doubtful | |||||||
accounts of $3,700 | 20,363 | 11,538 | |||||
Due from related party | 63,635 | 9,027 | |||||
Total current assets | $ | 94,050 | $ | 24,302 | |||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
CURRENT LIABILITIES: | |||||||
Accounts payable & accrued expenses | $ | 70,297 | $ | 46,136 | |||
Notes payable - related parties | 115,560 | 109,200 | |||||
Due to related parties | 9,366 | 3,656 | |||||
Due to officer | 109,481 | 58,185 | |||||
Total current liabilities | 304,704 | 217,177 | |||||
STOCKHOLDERS’ DEFICIT | |||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; | |||||||
none issued and outstanding | — | — | |||||
Common stock, $0.02 par value; 40,000,000 shares authorized; | |||||||
1,300,000 shares issued and outstanding | 26,000 | 26,000 | |||||
Additional paid in capital | 42,600 | 42,600 | |||||
Accumulated deficit | (279,254 | ) | (261,475 | ) | |||
Total stockholders’ deficit | (210,654 | ) | (192,875 | ) | |||
$ | 94,050 | $ | 24,302 |
The accompanying notes are an integral part of these unaudited financial statements
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ELECTRONIC MEDIA CENTRAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Month Periods ended September 30, | For the Six Month Periods ended September 30, | ||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||
Net revenues | $ | 40,055 | $ | 68,032 | $ | 41,662 | $ | 123,286 | $ | 105,984 | $ | 108,228 | |||||||
Cost of revenues | 25,230 | 38,512 | 20,586 | 78,595 | 64,526 | 63,215 | |||||||||||||
Gross profit | 14,824 | 29,520 | 21,076 | 44,690 | 41,458 | 45,013 | |||||||||||||
Operating expenses | |||||||||||||||||||
Professional fees | 9,309 | 12,508 | 623 | 20,537 | 15,369 | 4,711 | |||||||||||||
Salaries and related expenses | 8,940 | 8,778 | 9,753 | 17,692 | 17,887 | 19,405 | |||||||||||||
Bad debts | — | — | — | 18,288 | |||||||||||||||
Other | 4,475 | 11,014 | 8,269 | 9,219 | 19,486 | ||||||||||||||
Total operating expenses | 22,725 | 32,301 | 18,645 | 47,449 | 52,742 | 42,404 | |||||||||||||
Income (Loss) from operations | (7,900 | ) | (2,781 | ) | 2,431 | (2,758 | ) | (11,284 | ) | 2,609 | |||||||||
Non-operating income (expense): | |||||||||||||||||||
Other income | — | — | — | 805 | — | — | |||||||||||||
Interest expense | (3,468 | ) | (2,860 | ) | (2,604 | ) | (7,010 | ) | (5,900 | ) | (5,071 | ) | |||||||
Total other expense | (3,468 | ) | (2,860 | ) | (2,604 | ) | (6,205 | ) | (5,900 | ) | (5,071 | ) | |||||||
Loss before income taxes | (11,369 | ) | (5,641 | ) | (173 | ) | (8,964 | ) | (17,184 | ) | (2,462 | ) | |||||||
Provision for income taxes | — | — | — | (800 | ) | (800 | ) | (800 | ) | ||||||||||
Net loss | $ | (11,369 | ) | $ | (5,641 | ) | $ | (173 | ) | $ | (9,764 | ) | $ | (17,984 | ) | $ | (3,262 | ) | |
Basic weighted average number of | |||||||||||||||||||
common stock outstanding | 1,300,000 | 1,127,174 | 1,000,000 | 1,300,000 | 1,063,934 | 1,000,000 | |||||||||||||
Loss per share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.00 | ) |
The accompanying notes are an integral part of these unaudited financial statements
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ELECTRONIC MEDIA CENTRAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 2006, 2005, AND 2004
(Unaudited)
2006 | 2005 | 2004 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net loss | $ | (9,764 | ) | $ | (17,985 | ) | $ | (3,262 | ) | |
Adjustments to reconcile net loss to net cash provided by | ||||||||||
(used in) operating activities: | ||||||||||
Decrease in accounts receivable | 104,404 | 50,507 | 6,386 | |||||||
Increase in account receivable - related party | — | (9,026 | ) | (18,701 | ) | |||||
Decrease in accounts payable | (60,222 | ) | (31,590 | ) | (655 | ) | ||||
Increase in accounts payable-related parties | 2,760 | — | 977 | |||||||
Net cash provided by (used in) operating activities | 37,178 | (8,094 | ) | (15,255 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Stock issued for cash | — | 45,000 | — | |||||||
Receipts from (payments to) officer | 14,925 | (14,633 | ) | 15,313 | ||||||
Payments to affiliates | (48,499 | ) | (25,401 | ) | — | |||||
Net cash provided by (used in) financing activities | (33,574 | ) | 4,966 | 15,313 | ||||||
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS | 3,604 | (3,128 | ) | 58 | ||||||
CASH & CASH EQUIVALENTS, BEGINNING BALANCE | 6,448 | 6,865 | 1,001 | |||||||
CASH & CASH EQUIVALENTS, ENDING BALANCE | $ | 10,052 | $ | 3,737 | $ | 1,059 | ||||
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||
Interest paid during the year | $ | — | $ | — | $ | — | ||||
Taxes paid during the year | $ | — | $ | — | $ | — |
The accompanying notes are an integral part of these unaudited financial statements
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ELECTRONIC MEDIA CENTRAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 | ORGANIZATION |
On April 1, 1998, Electronic Media Central Corporation (the Company or EMC) was incorporated in California (formerly a division of Internet Infinity, Inc. (III)). The Company has historically been engaged in providing services for duplication, replication and packaging of DVDs and CDs.
As of May 12, 2006 the Company filed Form N-54A with the United States Securities Exchange Commission to become a business development company by certifying that it is a closed-end company (mutual fund) organized and operated for the purpose of making investments in securities described in section 55 (a)(1) through (3) of the Investment Company Act of 1940; and that it will make available significant managerial assistance with respect to issuers of such securities to the extent required by the act.
The Company has commenced the development of new management consulting services to assist client companies in complying with the reporting requirements to the government and in communicating with shareholders, customers and the public and the accessing of needed growth capital.
NOTE 2 | BASES OF PRESENTATION AND BUSINESS |
The accompanying financial statements have been prepared by EMC (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. The unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary to fairly state the financial position as of September 30, 2006 and 2005, and the results of operations and cash flows for the related three month and six month periods ended September 30, 2006, 2005, and 2004. The results of operations for the six month period ended September 30, 2006, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2007, or any other period.
The accounting policies followed by the Company and other information are contained in the notes to the Company’s financial statements filed on March 31, 2006, as part of the Company’s annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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ELECTRONIC MEDIA CENTRAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 2 | BASES OF PRESENTATION AND BUSINESS, continued |
Reclassifications
Certain comparative amounts have been reclassified to conform to the current year’s presentation.
Recent Pronouncements
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. SFAS No. 155 is not expected to have a material effect on the financial position or results of operations of the Company.
In March 2006 FASB issued SFAS 156, “Accounting for Servicing of Financial Assets.” This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1. | Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; |
2. | Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; |
3. | Permits an entity to choose ‘Amortization method’ or ‘Fair value measurement method’ for each class of separately recognized servicing assets and servicing liabilities; |
4. | At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and |
5. | Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the Balance Sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. |
This Statement is effective as of the beginning of the Company’s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statements.
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ELECTRONIC MEDIA CENTRAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 2 | BASES OF PRESENTATION AND BUSINESS, continued |
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on the financial statements.
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
a. | A brief description of the provisions of this Statement; |
b. | The date that adoption is required; and |
c. | The date the employer plans to adopt the recognition provisions of this Statement, if earlier. |
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on the financial statements.
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ELECTRONIC MEDIA CENTRAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 3 | UNCERTAINTY OF ABILITY TO CONTINUE AS A GOING CONCERN |
The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has accumulated deficit of $279,254 and $261,475, and its total liabilities exceeds its total assets by $210,654 and $192,875 at September 30, 2006 and 2005, respectively
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is actively pursuing additional funding and potential merger or acquisition candidates and strategic partners, which would enhance stockholders’ investment. Management believes that the above actions will allow the Company to continue operations through the next fiscal year.
NOTE 4 | ACCOUNT PAYABLE AND ACCRUED EXPENSES |
Accrued expenses consisted of the following at September 30, 2006 and 2005, respectively:
2006 | 2005 | ||||||
Account payable | $ | 34,572 | $ | 17,474 | |||
Accrued taxes | 2,357 | 1,600 | |||||
Accrued interest | 30,868 | 24,562 | |||||
Accrued fees | 2,500 | 2,500 | |||||
$ | 70,297 | $ | 46,136 |
NOTE 5 | RELATED PARTY TRANSACTIONS |
The Company has receivables of $63,635 and $9,027 from and payables of $9,366 and $3,656 to parties related through common shareholder and officer of the Company at September 30, 2006 and 2005, respectively. The amounts are temporary loans in normal course of business, interest free, unsecured and due on demand.
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ELECTRONIC MEDIA CENTRAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 5 | RELATED PARTY TRANSACTIONS, continued |
The Company has a note payable to a related party through common shareholder and officer. The note amounts to $115,560 and $109,200 at September 30, 2006 and 2005, respectively which due on demand, and are secured by assets of EMC. Interest shall accrue at 6% per annum, due and payable upon demand. This note is the remaining unpaid consulting fees and office expense provided by the related party. During the three month period ended September 30, 2006, $300 of unpaid office expense was added to the note. The company recorded interest of $2,160, $1,977 and $1,663 for the three month periods ended September 30, 2006, 2005 and 2004, respectively. Interest expenses for the six month periods ended September 30, 2006, 2005, and 2004 were $4,283, $ 3,925, and $3,301, respectively. The interest payable amounting to $30,868 and $24,562 at September 30, 2006 and 2005, respectively, is included in the accompanying financial statements.
The Company has a payable to the Company’s chairman. The loan amounting $97,368 and $58,185 at September 30, 2006 and 2005, respectively, carries an interest rate of 6 % per annum, is unsecured and due on March 31, 2007. The company recorded interest of $1,309, $884 and $779 for the three month periods ended September 30, 2006, 2005 and 2004, respectively. Interest expenses for the six month periods ended September 30, 2006, 2005, and 2004 were $2,717, $1,976, and $1,429, respectively. The total interest payable on the loan amounted to $12,113 and $7,436 at September 30, 2006 and 2005, respectively, and has been included in due to officer in the accompanying financial statements.
George Morris is the chairman of EMC. As of September 30, 2006 and 2005, Mr. Morris’ beneficial ownership percentages of related companies’ common stock is as follows:
2006 | 2005 | ||||||
Electronic Media Central Corporation (the Company) | 82.87 | % | 82.80 | % | |||
Internet Infinity, Inc. | 77.23 | % | 77.10 | % | |||
Morris & Associates, Inc. | 71.30 | % | 71.30 | % | |||
Apple Realty, Inc. | 100.00 | % | 100.00 | % |
NOTE 6 | CONCENTRATION OF CREDIT RISK |
For the six month periods ended September 30, 2006, 2005 and 2004, revenue from one customer represents 44%, 90% and 96% of the Company’s total revenue, respectively. Accounts receivable balance outstanding from this customer as of September 30, 2006 was $5,354.
For the six month periods ended September 30, 2006, 2005 and 2004, the Company had two vendors who represent 85%, 82% and 83% of total purchases, respectively. Accounts payable balance outstanding as of September 30, 2006 for theses vendors was $8,138
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Disclaimer Regarding Forward Looking Statements
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
We focus on the development of opportunities to invest in eligible portfolio companies providing early stage capital, strategic guidance and operational support.
Our principal objective is long-term capital appreciation. We may invest in debt securities of these companies, or may acquire an equity interest in the form of common or preferred stock, warrants or options to acquire stock or the right to convert the debt securities into stock. We may invest alone, or as part of a larger investment group. Consistent with our status as a BDC and the purposes of the regulatory framework for BDC’s under the 1940 Act, we will offer to provide managerial assistance, potentially in the form of a consulting agreement or in the form of a board of director’s seat, to the developing companies in which we invest.
In addition, we may acquire either a minority or controlling interest in mature companies in a roll-up strategy. It is anticipated that any acquisitions will be primarily in exchange for our common stock, or a combination of cash and stock. The principal objective of acquisitions pursuant to a roll-up strategy would be to consolidate an industry and either sell the acquired entities as a larger unit, or take the unit public through an initial public offering, spin-off to our shareholders, or reverse merger into a publicly traded shell corporation.
We operate as an externally managed investment company. Our operations will be governed by an Investment Advisory Management Agreement to be entered into between us and a new investment advisory limited liability company which will be formed and wholly-owned by our Chairman, George Morris. We have not elected to qualify to be taxed as a regulated investment company as defined under Subchapter M of the Internal Revenue Code.
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Our common stock trades on the over the counter bulletin board under the symbol “EMEC.”
Our financial statements have been prepared assuming we will continue as a going concern. Because we have historically incurred operating losses, and expect those losses to continue in the future, our Certified Public Accountants included an explanatory paragraph in their report raising substantial doubt about our ability to continue as a going concern.
Regulation as a BDC
Although the 1940 Act exempts a BDC from registration under that Act, it contains significant limitations on the operations of BDC’s. Among other things, the 1940 Act contains prohibitions and restrictions relating to transactions between a BDC and its affiliates, principal underwriters and affiliates of its affiliates or underwriters, and it requires that a majority of the BDC’s directors be persons other than “interested persons,” as defined under the 1940 Act. The 1940 Act also prohibits a BDC from changing the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by the vote of the holders of a majority of its outstanding voting securities. BDC’s are not required to maintain fundamental investment policies relating to diversification and concentration of investments within a single industry.
Generally, a BDC must be primarily engaged in the business of furnishing capital and providing managerial expertise to companies that do not have ready access to capital through conventional financial channels. Such portfolio companies are termed “eligible portfolio companies.” More specifically, in order to qualify as a BDC, a company must (1) be a domestic company; (2) have registered a class of its equity securities or have filed a registration statement with the Securities and Exchange Commission pursuant to Section 12 of the Securities Exchange Act of 1934; (3) operate for the purpose of investing in the securities of certain types of portfolio companies, namely immature or emerging companies and businesses suffering or just recovering from financial distress; (4) extend significant managerial assistance to such portfolio companies; and (5) have a majority of “disinterested” directors (as defined in the 1940 Act).
An eligible portfolio company is, generally, a U.S. company that is not an investment company and that (1) does not have a class of securities registered on an exchange or included in the Federal Reserve Board’s over-the-counter margin list; or (2) is actively controlled by a BDC and has an affiliate of a BDC on its board of directors; or (3) meets such other criteria as may be established by the Securities and Exchange Commission. Control under the 1940 Act is generally presumed to exist where a BDC owns 25% of the outstanding voting securities of the company.
The 1940 Act prohibits or restricts companies subject to the 1940 Act from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms and investment companies. Moreover, the 1940 Act limits the type of assets that BDC’s may acquire to “qualifying assets” and certain assets necessary for its operations (such as office furniture, equipment and facilities) if, at the time of acquisition, less than 70% of the value of the BDC’s assets consist of qualifying assets. Qualifying assets include: (1) securities of companies that were eligible portfolio companies at the time the BDC acquired their securities; (2) securities of bankrupt or insolvent companies that were eligible at the time of the BDC’s initial acquisition of their securities but are no longer eligible, provided that the BDC has maintained a substantial portion of its initial investment in those companies; (3) securities received in exchange for or distributed in or with respect to any of the foregoing; and (4) cash items, government securities and high-quality short-term debt. The 1940 Act also places restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased in order for the securities to be considered qualifying assets. These restrictions include limiting purchases to transactions not involving a public offering and acquiring securities from either the portfolio company or its officers, directors, or affiliates.
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A BDC is permitted to invest in the securities of public companies and other investments that are not qualifying assets, but those kinds of investments may not exceed 30% of the BDC’s total asset value at the time of the investment.
A BDC must make significant managerial assistance available to the issuers of eligible portfolio securities in which it invests. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted does provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. The portfolio company does not have to accept the BDC’s offer of managerial assistance, and if they do accept may be required to pay prevailing market rates for the services.
We do not currently have any subsidiaries or EPC’s, however we do have an operating division that provides services for the duplication, replication, and packaging of DVD’s and CD’s. We are actively seeking quality eligible portfolio companies in which to make an investment and provide managerial assistance.
Three Months ended September 30, 2006 compared to the Three Months ended September 30, 2005 and 2004
Results of Operations
Introduction
During the three months ended June 30, 2006, we elected to become subject to certain sections of the Investment Company Act of 1940 by becoming a Business Development Company. During that quarter, and the quarter ended September 30, 2006, our DVD and CD division continued to be our sole source of revenues.
Revenues and Income (Loss) from Operations
Our revenue, cost of revenue, total operating expenses and income (loss) from operations for the three months ended September 30, 2006, as compared to the three months ended September 30, 2005 and 2004, and June 30, 2006, are as follows:
3 Months Ended September 30, 2006 | 3 Months Ended September 30, 2005 | Percentage Change Increase (Decrease) | 3 Months Ended September 30, 2004 | 3 Months Ended June 30, 2006 | ||||||||||||
Revenue | $ | 40,055 | $ | 68,032 | (41 | )% | $ | 41,662 | $ | 83,231 | ||||||
Cost of revenue | 25,230 | 38,512 | (21 | )% | 20,586 | 53,365 | ||||||||||
Total operating expenses | 22,725 | 32,301 | (30 | )% | 18,645 | 24,724 | ||||||||||
Income (loss) from operations | $ | (7,900 | ) | $ | (2,781 | ) | 65 | % | $ | 2,431 | $ | 5,141 |
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Our revenues for the three months ended September 30, 2006 decreased to $40,055 compared to $68,032 for the three months ended September 30, 2005, $41,662 for the three months ended September 30, 2004, and $83,231 for the three months ended June 30, 2006. The decrease in revenues for the second quarter of 2006 compared to the second quarter of 2005 was due to reduced purchases of replication services. The increase in revenues for the quarter ended June 30, 2006 was a result of special sales to our largest customer.
While our revenues for the current quarter decreased by 41% compared to a year earlier (and 52% compared to last quarter), our total operating expenses decreased by 30% (8% compared to last quarter), resulting in our loss from operations for the three months ended September 30, 2006 being $(7,900) as compared to $(2,781) for the three months ended September 30, 2005 and income from operations of $2,431 for the three months ended September 30, 2004 and $5,141 for the three months ended June 30, 2006.
Our cost of revenue as a percentage of revenue has increased at 63%, 57%, and 49% for the three month periods ending September 30, 2006, 2005, and 2004, respectively. Our cost of revenue as a percentage of revenue for the three months ended June 30, 2006 was 64%. The increase in our cost of revenue as a percentage of revenue in recent periods is attributed to higher prices for a different product mix.
Non-Operating Income (Expense) and Net Income (Loss)
Our other income, interest expense, and net income (loss) for the three months ended September 30, 2006, as compared to the three months ended September 30, 2005 and 2004, and June 30, 2006, are as follows:
3 Months Ended September 30, 2006 | 3 Months Ended September 30, 2005 | Percentage Change Increase (Decrease) | 3 Months Ended September 30, 2004 | 3 Months Ended June 30, 2006 | ||||||||||||
Other income | $ | — | $ | — | — | % | $ | — | $ | 805 | ||||||
Interest expense | (3,468 | ) | (2,860 | ) | 23 | % | (2,604 | ) | (3,542 | ) | ||||||
Net income (loss) | $ | (11,369 | ) | $ | (5,641 | ) | 50 | % | $ | (173 | ) | $ | 1,605 |
The interest expense for each of the quarters presented is related to notes owed to our Chairman George Morris.
Six Months ended September 30, 2006 compared to the Six Months ended September 30, 2005 and 2004
Results of Operations
Introduction
During the six months ended September 30, 2006, we elected to become subject to certain sections of the Investment Company Act of 1940 by becoming a Business Development Company. During that period, our DVD and CD division continued to be our sole source of revenues.
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Revenues and Income (Loss) from Operations
Our revenue, cost of revenue, total operating expenses and income (loss) from operations for the six months ended September 30, 2006, as compared to the six months ended September 30, 2005 and 2004, are as follows:
6 Months Ended September 30, 2006 | 6 Months Ended September 30, 2005 | Percentage Change Increase (Decrease) | 6 Months Ended September 30, 2004 | ||||||||||
Revenue | $ | 123,286 | $ | 105,984 | 16 | % | $ | 108,228 | |||||
Cost of revenue | 78,595 | 64,526 | 22 | % | 63,215 | ||||||||
Total operating expenses | 47,449 | 52,742 | (10 | )% | 42,404 | ||||||||
Income (loss) from operations | $ | (2,758 | ) | $ | (11,284 | ) | (76 | )% | $ | 2,609 |
Our revenues for the six months ended September 30, 2006 increased to $123,286 compared to $105,984 for the six months ended September 30, 2005 and $108,228 for the six months ended September 30, 2004. The increase in revenues for 2006 compared to 2005 was due to special sales to our largest customer in the first quarter.
While our revenues for the current six month period increased by 16% compared to a year earlier, our total operating expenses decreased by $5,293, or 10%, resulting in a smaller loss from operations for the six months ended September 30, 2006 of $(2,758) as compared to $(11,284) for the six months ended September 30, 2005. We had income from operations of $2,609 for the six months ended September 30, 2004, primarily because of smaller total operating expenses.
Our cost of revenue as a percentage of revenue has increased at 64%, 61%, and 58% for the six month periods ending September 30, 2006, 2005, and 2004, respectively. The increase in our cost of revenue as a percentage of revenue in recent periods is attributed to increased price competition.
Non-Operating Income (Expense) and Net Income (Loss)
Our other income, interest expense, and net income (loss) for the six months ended September 30, 2006, as compared to the six months ended September 30, 2005 and 2004, are as follows:
6 Months Ended September 30, 2006 | 6 Months Ended September 30, 2005 | Percentage Change Increase (Decrease) | 6 Months Ended September 30, 2004 | ||||||||||
Other income | $ | 805 | $ | — | 100 | % | $ | — | |||||
Interest expense | (7,010 | ) | (5,900 | ) | 18 | % | (5,071 | ) | |||||
Net income (loss) | $ | (9,764 | ) | $ | (17,984 | ) | (46 | )% | $ | (3,262 | ) |
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The interest expense for each of the six-month periods presented is related to notes owed to our Chairman, George Morris.
Liquidity and Capital Resources
Introduction
During the six months ended September 30, 2006, we had a net loss of $(9,764), but a positive cash flow from operations of $37,178. During our first quarter, we had both a small net profit and a small positive cash flow from operations. Because our revenues are small, almost any change in our revenues or operating expenses has a material effect, and we anticipate that our net profit or loss, and operating profit or loss, will continue to vary widely from time period to time period.
Our cash and cash equivalents, accounts receivable, total current assets, total current liabilities, and total liabilities as of September 30, 2006, compared to September 30, 2005 and June 30, 2006, are as follows:
September 30, 2006 | September 30, 2005 | June 30, 2006 | ||||||||
Cash | $ | 10,052 | $ | 3,737 | $ | 10,205 | ||||
Accounts receivable | 20,363 | 11,538 | 22,695 | |||||||
Total current assets | 94,050 | 24,302 | 81,260 | |||||||
Total assets | 94,050 | 24,302 | 81,260 | |||||||
Total current liabilities | 304,704 | 217,177 | 280,546 | |||||||
Total liabilities | 304,704 | 217,177 | 280,546 |
Cash Requirements
Our cash requirements are expected to remain stable over the next 12 months. Our cash is utilized primarily for professional fees associated with being a public, reporting company and with the acquisition of eligible portfolio companies.
Sources and Uses of Cash
Operations and Financing
During the six months ended September 30, 2006, we generated positive cash flow of $3,604. This was a result of net cash provided by operating activities of $37,178, offset by net cash used in financing activities of $(33,574). Net cash provided by operating activities consisted primarily of a decrease in accounts receivable of $104,404, offset by a decrease in accounts payable of $(60,222). We anticipate that we will continue to operate at approximately break-even and generate a small positive cash flow from the operations of our DVD and CD division.
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Critical Accounting Policies
Our accounting policies are fully described in Note 2 to our consolidated financial statements. The following describes the general application of accounting principles that impact our consolidated financial statements.
Our results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debt, inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Since we have very few assets and only one operating division there is no quantitative information, as of September 30, 2006, about market risk that has any impact on our present business. Once we begin making investments in additional eligible portfolio companies we anticipate there will be market risk sensitive instruments and we will disclose the applicable market risk information at that time.
Our primary financial instruments are cash in banks and money market instruments. We do not believe that these instruments are subject to material potential near-term losses in future earnings from reasonably possible near-term changes in market rates or prices. We do not have derivative financial instruments for speculative or trading purposes. We are not currently exposed to any material currency exchange risk.
Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2006. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.
There were no significant changes in our internal controls or other factors that could significantly affect our internal controls subsequent to the date of our evaluation.
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In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
At the time we filed our Annual Report on Form 10-KSB, we were a Small Business Issuer as defined in Regulation S-B, and thus did not include risk factors in our filing.
There have been no events which are required to be reported under this Item.
There have been no events which are required to be reported under this Item.
There have been no events which are required to be reported under this Item.
There have been no events which are required to be reported under this Item.
(a) | Exhibits |
3.1 (1) | Articles of Incorporation of Electronic Media Central Corporation | |
3.2 (1) | Bylaws of Electronic Media Central Corporation | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32.1 | Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference to our Form 10-SB, Commission file number 000-32345, filed with the Commission on February 13, 2001. |
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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.
Dated: November 13, 2006 | /s/ Roger Casas | |
By: Roger Casas Its: Chief Executive Officer |
Dated: November 13, 2006 | /s/ George P. Morris | |
By: George P. Morris Its: Chief Financial Officer |
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