UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB/A
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 2004
Commission file Number 0-28416
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
==============================================================================
VALCOM, INC.
(Name of small business issuer specified in its charter)
==============================================================================
Delaware 58-1700840
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
28309 Ave. Crocker, Valencia, California 91355
---------------------------------------------------------
(Address of Principal executive offices) (Zip code)
(661) 257-8000
-----------------------
Issuer's telephone number
Securities registered pursuant to 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK $0.001 PAR VALUE
-----------------------------
(Title of Class)
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 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 [ ]
As of March 31, 2004 the issuer had 15,182,553 shares of its $0.001 par value
common stock outstanding.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying financial statements are unaudited and are prepared in
accordance with rules and regulations of the Securities and Exchange Commission
for interim quarterly reporting. Accordingly, these financial statements do not
include all disclosures required under generally accepted accounting principles.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of ValCom, Inc. and
subsidiaries as of March 31, 2004, and the results of their operations and their
cash flows for the three months ended March 31, 2004. These consolidated
financial statements include the accounts of ValCom, Inc. and its subsidiary
companies (together "the Company"). Results for the three months ended March
31, 2004, are not necessarily indicative of the operations, which may occur
during the year ending September 30, 2004. Refer to the Company's Annual Report
on Form 10-KSB for the year ended September 30, 2003 for further information.
-2-
VALCOM, INC.
FORM 10-QSB
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of
March 31, 2004 (unaudited)
3
Condensed Consolidated Statements of Operations
for the three and six months ended March 31, 2004
and 2003 (unaudited)
5
Condensed Consolidated Statements of Cash Flows
for the six months ended March 31, 2004 and
2003 (unaudited) 6
Notes to Condensed Consolidated Financial State-
ments (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Disclosure Controls and Procedures 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Part III. EXHIBITS
-3-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
2004
------
ASSETS (Unaudited)
------
Current assets:
Cash & Cash equivalents $ 229,723
Accounts receivable, net 51,827
Note receivable, current 17,590
-----------
Total current assets 299,140
Property and equipment - net 12,965,255
Deferred Compensation 225,658
Prepaid development costs 440,739
Deposits and other assets 300,684
------------
Total assets $ 14,231,476
============
See accompanying notes to the condensed consolidated financial statements
-4-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities not subject to compromise
Current liabilities:
Accounts payable $ 354,756
Accrued interest 324,753
Accrued expenses 293,892
Advanced rent 272,100
Due to related parties 431,538
Notes payable 14,043
Notes payable - Laurus 9,812,966
- -------------------------------------------------------------
Liabilities subject to compromise
- ----------------------------------
Prepetition trade accounts payable 206,249
Prepetition payable due to related parties 95,000
Prepetition accured expenses 131,902
-------------
Total current liabilities 11,937,199
- -------------------------------------------------------------
Mortgage payable-nevada 2,519,536
Total lablilties 14,456,536
- -------------------------------------------------------------
Commitments and contingencies
Stockholders' deficit:
Convertible preferred stock: all with par value
$0.001;
Series B, 1,000,000 shares authorized; 38,000
shares issued and outstanding 38
Series C, 5,000,000 shares authorized; 1,480,000
shares issued and outstanding 1,480
Series D, 1,250,000 shares authorized;1,250,000
shares issued and outstanding -
Common stock, par value $.001; 100,000,000 shares
authorized; 21,144,913
shares issued and outstanding 21,144
Additional paid-in capital 15,354,666
Preferred stock to be issued
Accumulated deficit (15,602,388)
Total Stockholders' deficit (225,060)
-----------
Total Liabilities and Stockholders' deficit $14,231,476
===========
See accompanying notes to the condensed consolidated financial statements
-5-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three For the three
months ended months ended
March 31, 2004 March 31, 2003
Revenue:
Rental . . . . . . . . . . . . .$ 1,093,775 $1,023,027
Production . . . . . . . . . . . . 59,185 202,969
Other. . . . . . . . . . . . . . . 5,837 76,573
-----------------------------------------
. . . . . . . . 1,158,797 1,302,569
-----------------------------------------
Cost and expenses:
Production . . . . . . . . . . 16,703 255,716
Impairment of property & equipment 1,438,250 -
Litigation accrual 1,405,656 -
Selling and promotion 29,564 14,468
Depreciation and amortization. 470,167 176,275
General and administrative . . 1,702,150 2,065,744
Consulting and professional services 14,519
----------------- ------------
Total Cost and Expenses. . . 5,577,150 2,512,203
-----------------------------------------
Operating loss . . . . . . . (4,418,212) (1,209,634)
Other income (expense):
Interest expense net (681,377) (571,413)
Gain on sale of assets 60,230 27,642
Loss on equity investment (6,679) -
Other income - 50,000
-----------------------------------------
Total other income (expense) . . (627,826) (493,771)
-----------------------------------------------
Net loss . . . . . . . . . . .$ (5,046,038) $ (1,703,405
===============================================
Basic and diluted loss per share from continuing
operations . . . . . . . . .
$ ( 0.26) $ ( 0.14)
-------------------- -----------------
Weighted average shares outstanding
basic and diluted 19,170,824 11,487,280
See accompanying notes to the condensed consolidated financial statements
-6-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three For the three
months ended months ended
March 31, 2004 March 31, 2003
<c>
Net revenue:
Rental . . . . . . . . . . . . $ 494,137 $ 459,372
Production . . . . . . . . . . 28,948 80,077
Other. . . . . . . . . . . . . 3,497 1,809
-----------------------------------------
Total net revenues 526,582 537,640
-----------------------------------------
Cost and expenses:
Production . . . . . . . . . . 5,761 64,693
Impairment of property & equipment 1,438,250 -
Litigation accrual 1,405,656 -
Selling and promotion 15,592 2,051
Depreciation and amortization. 382,329 88,535
General and administrative . . 1,021,366 982,107
Consulting and professional services 371,950 -
Total cost and expenses. . . 4,640,902 1,137,386
-----------------------------------------
Operating loss . . . . . . . (4,114,320) (599,746)e
Other income (expense):
Interest expense . (413,785) (376,933)
Impairment of property (53,950) 19,642
Loss on equity Investment 0 50,000
Other income
-----------------------------------------
Total other income (expense) net (413,785) (396,575)
Gain on sale of assets 6,280 19,642
-----------------------------------------------
Net loss . . . . . . . . . $ (4,521,825) $ (926,679)
===============================================
Basic and diluted loss per share from continuing
operations . . . . . . . .
$ ( 0.23) $ ( 0.08)
Weighted average shares outstanding
basic and diluted. 19,018,382 11,816,467
See accompanying notes to the condensed consolidated financial statements
-7-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six For the six
months ended months ended
March 31, 2004 March 31, 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(5,046,038) $(1,703,405)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of property and equipment 1,438,250
Depreciation and amortization 470,176 176,275
Bad debt expense - 70,313
Gain on sale of fixed assets (60,230) (27,642)
Stock issued for retirement debt . . . . . . . . . . . . . . . . . . . . . . 57,959
Stock issued for interest payable 3,000
Stock issued for compensation. . . . . . . . . . . . . . . . 715,458 170,351
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,080 (14,952)
Prepaid expenses (287,679) (31,897)
Other assets 195,987
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . 33,022 112,846
Deposits (185,146) ( 875)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 1,964,469 549,904
------------ --------------
Net Cash Used by Operating Activities . . . . . . . . . . . . . . . . ( 876,688) ( 503,240)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . ( 332,047) (3,899)
Repayments of note receivable . . . . . . . . . . . . . . . . . . . . . . 35,178 55,179
Proceeds from sale property and equipment . . . . . . . . . . . . . . . . 63,700 50,179
------------- --------------
Net Cash Provided by Investing Activities. . . . . . . . . . . . . . . . ( 233,169) 101,439
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from sale of stock 467,500
Stock issued for options exercised 232,000
Principal repayment of notes payable . . . . . . . . . . . . . . . . ( 68,883) (107,827)
Principal borrowings on notes payable and mortgages . . . . . . . . 100,000 234,463
Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . 397,281 (28,539)
Net cash provided by financing activities . . . . . . . . . (1,127,898 98,097
-------------- -----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . 18,041 (303,704)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 211,682 343,374
------------- ---------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . .. $ 229,723 $ 39,670
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 347,824 $ 193,250
-------------- -------------
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0
-------------- --------------
See accompanying notes to the condensed consolidated financial statements
-8-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BANKRUPTCY PROCEEDINGS,DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
on April 7, 2003, the Company filed on an emergency basis a voluntary Chapter 11
bankruptcy petition.
The Company's requires the use of its secured creditor's
cash collateral to operate. Throughout the pendency of this case, the Company
has worked with its two real estate secured lenders, Finance Unlimited, LLC and
Laurus Master Fund, Limited on the details of cash collateral stipulation. An
order approving a global interim cash collateral stipulation with Finance
Unlimited Finance and Laurus was entered on August 26, 2003. This stipulation
permitted the Company's use of the lenders' cash collateral through
March 31, 2004.
On January 15, 2004, the Court approved two additional cash collateral
stipulations, one each with Finance Unlimited and Laurus, authorizing the
Company's continued use of cash collateral through March 31, 2004 (Second
Interim Stipulation). The Second Interim Stipulation generally grants Finance
Unlimited and Laurus relief from the automatic bankruptcy stay effective March
31, 2004, and the right to hold foreclosures sales on their real and personal
property collateral as early as April 1, 2004.
In May 2004, Laurus paid off Finance Unlimited and was subrogated to Finance's
$6,565,998 claim, which became included in the senior of Laurus' two claims.
Laurus then sought to conduct a non-judicial foreclosure sale of the Property,
and VEI objected. The Bankruptcy Court issued an order on June 3, 2004, that
while Laurus could conduct a non-judicial foreclosure sale of the Property,
Laurus would not be entitled to any deficiency claim against either VEI or
ValCom, or any other assets other than the Property itself (and the rents and
leases appurtenant thereto).
On June 10, 2004, the court ordered the Property to be sold. At this sale,
Laurus claimed that its senior note had a balance of $7,407,873 and its junior
note a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the $6,565,998
million subrogated from the Finance claim. The sale was conducted through the
junior note, and the Property was sold for $2.9 million to a third party. An
affiliate of this third party then purchased the senior note directly from
Laurus, without a second sale.
As a result of the Bankruptcy Court's order and the subsequent trustee's sale of
the Property, neither VEI nor ValCom are subject to any further liabilities on
account of the notes and deeds of trust previously held by Finance and Laurus.
Even though the senior note still technically exists, it has been rendered
non-recourse by the Bankruptcy Court's order, and could only be enforced against
the Property itself (which no longer belongs to VEI). Any liability owed to the
third party, which purchased the Property with regard to the rents, collected
for June 2004 has been resolved by settlement with that party.
DESCRIPTION OF BUSINESS
- -------------------------
ValCom, Inc. and subsidiaries (the "Company"), formerly SBI Communications,
Inc., was originally organized in the State of Utah on September 23, 1983, under
the corporate name of Alpine Survival Products, Inc. Its name was subsequently
changed to Supermin, Inc. on November 20, 1985. On September 29, 1986,
Satellite Bingo, Inc. became the surviving corporate entity in a statutory
merger with Supermin, Inc. In connection with the above merger, the former
shareholders of Satellite Bingo, Inc. acquired control of the merged entity and
changed the corporate name to Satellite Bingo, Inc. On January 1, 1993, the
Company executed a plan of merger that effectively changed the Company's state
of domicile from Utah to Delaware. Through shareholder approval dated March 10,
1998, the name was changed to SBI Communications, Inc.
In October 2000, the Company was issued 7,570,997 shares by SBI for 100% of the
shares outstanding in Valencia Entertainment International, LLC ("VEI"), a
California limited liability company. This acquisition has been accounted for as
a reverse acquisition merger with VEI as the surviving entity. The corporate
name was changed to ValCom, Inc. effective March 21, 2001.
The Company is a diversified entertainment company with the following operating
activities:
a) Studio rental - The Company and its subsidiary, Valencia Entertainment
International, LLC, operated eight sound stages in Valencia, California until
June 10,2004 when six of the sound stages were sold off to pay the debts of
Laurus and Finance Unlimited. The Company leases the other two sound stages.
Beginning June 2003, the Company and its subsidiary signed one-year lease with
five one-year options for its sound stages. The Company has acquired seven and
one half acres of property in Nevada with 162,000 square feet of buildings,
which are being renovated into seven sound stages for rental. The Company's
subsidiary, Half Day Video, Inc., supplies personnel, cameras, and other
production equipment to various production companies on a short-term basis.
b) Film, TV, & Animation Production -The Company, in addition to producing its
own television and motion picture
programming, has an exclusive facilities agreement in place for productions in
Los Angeles County for a three-year term with Woody Fraser/Woody Fraser
Productions.
c) Broadcast Television - The Company owns a 45% equity interest in ValCom
Broadcasting, LLC, a New York limited liability company, which operates KVPS
(Channel 8), an independent television broadcaster in the Palm Springs,
California market, which is strategically located in the middle of four major
markets including Los Angeles, Phoenix, Las Vegas and San Diego.
See accompanying notes to the condensed consolidated financial statements
-9-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
- -----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and related
notes included in the Company's Form 10-KSB.
The audited consolidated financial statements of the Company for the year ended
September 30, 2003 were filed on February 13, 2004 with the Securities and
Exchange Commission and are hereby referenced. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) considered necessary
for fair presentation has been included. The results of operations for the six
months ended March 31, 2004 are not necessarily indicative of the results to be
expected for the entire year.
Following is a summary of the significant accounting policies followed in the
prepartion of these consolidated financial statements, which policies are in
accordanc with accounting principles generally accepted in the United States of
America.
PRINCIPLES OF CONSOLIDATION
- -----------------------------
The consolidated financial statements include the accounts of ValCom, Inc. and
two wholly-owned subsidiaries, Valencia Entertainment International, LLC, which
was acquired effective February 2001 and Half Day Video, Inc., which was
acquired effective March 2001.
Investments in affiliated companies over which the Company has a significant
influence or ownership of more than 20% but less than or equal to 50% are
accounted for under the equity method.
USE OF ESTIMATES
- ------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America.
Management is required 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 consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could materially differ from those estimates.
CONCENTRATIONS AND CREDIT RISK
- ---------------------------------
The Company has two customers who accounted for approximately 99% of total
rental revenues for the six months ended March 31, 2004 and 2003, respectively.
As of March 31, 2004, all eight sound and production stages were under
non-cancelable operating leases for one year from two major production
companies.
Financial instruments that potentially subject the Company to concentrations of
risk consist of trade receivables principally arising from monthly leases from
television producers. The Company continuously monitors the credit-worthiness
of its customers to minimize its credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the
statements of financial position for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair value.
See accompanying notes to the condensed consolidated financial statements
-10-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
IMPAIRMENT OF LONG-LIVED ASSETS
- ----------------------------------
Effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal.
REVENUE RECOGNITION
- --------------------
Revenues from studio and equipment rentals are recognized ratably over the
contract terms. Revenues from the production and licensing of television
programming are recognized when the films or series are available for telecast
and certain contractual terms of the related production and licensing agreements
have been met.
EQUITY INVESTMENT
- ------------------
The Company accounts for its investments in companies over which the Company has
significant influence or ownership of more than 20% but less than or equal to
50% under the equity method.
GOING CONCERN
- -------------------------------------------------------
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a net loss
to date of $5,046,083 and a working capital deficiency of $11,638,059 and
an accumulated deficit of $15,602,388 at March 31, 2004. The Company had a
net loss of $5,046,038 for the three months ended March 31, 2004.
Valencia Entertainment International, LLC, a California limited liability
company and the Registrant's subsidiary filed on April 7, 2003, a voluntary
petition in bankruptcy for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of California (note 8). The main income of the Registrant is from the
operations of Valencia Entertainment International. These conditions raise doubt
about the Company's ability to continue as a going concern if suitable remedies
are not undertaken.
Management has taken varioussteps to revise its operating and financial
requirments, which it believes are sufdficient to provide the Company with
the ability to continue on in twelve months. Management devoted considerable
effort during the period ended March 31, 2004, towards management of liablities
and improving the operations. The management believes that the above actions
will allow the Company to continue its operations through the next twelve
months.
See accompanying notes to the condensed consolidated financial statements
-11-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
-----------
NEW ACCOUNTING PRONOUNCEMENTS
- -------------------------------
On May 15 2003, the FASB issued FASB Statement No. 150 ("SFAS 150"), Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments: a) Mandatorily redeemable instruments b) Financial
instruments to repurchase an entity's own equity instruments c) Financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (i) a fixed monetary amount known at inception or (ii) something other
than changes in its own equity instruments d) SFAS 150 does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety. The guidance in SFAS 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. For private companies, mandatorily redeemable financial instruments are
subject to the provisions of SFAS 150 for the fiscal period beginning after
December 15, 2003. The adoption of SFAS No. 150 does not have a material
impact on the Company's financial position or results of operations or
cash flows.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46R). FIN 46R addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities.
-13-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
RECLASSIFICATION
- ----------------
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
NOTE 2 NET INCOME (LOSS) PER SHARE
- ----------------------------------------
The Company's net loss per share was calculated using weighted average shares
outstanding of 19,018,382 and 19,170,824 the three and six months ended March
31, 2004 and 11,816,467 and 11,487,280 for the three and six months ended
March 31, 2003, respectively. Although convertible preferred stock,
convertible debt, and warrants are common stock equivalents, they are not
included in the calculation of diluted earnings per share as their effect
would be anti-dilutive or their conversion price was greater than the
average market price of the Company's common stock.
NOTE 3 EQUITY INVESTMENT
- ---------------------------
As of March 31, 2004, ValCom has a 45% interest in a broadcasting company in
Palm Springs, California, which had assets of $766,000, net worth of $740,000,
and a net loss of $64,444.
NOTE 4 SEGMENT INFORMATION
- -----------------------------
Studio & Equip Film & TV Magazine
Rental Production Puvlication Total
------- ---------- ------------ -----
As of and for the six months
ended March 31,
2004
- ----
Revenues $ 1,093,775 $ 65,022 - $1,158,797
Operating (Loss) Income (4,293,893) ( 124,319) - (4,418,212)
Total Assets 14,231,467 - - 14,231,476
Depreciation and Amortization 470,167 - - 470,167
Interest Expense 681,377 - - 681,377
Capital Expenditures 2,925,514 - - 2,925,514
2003
- ----
Revenues $ 1,225,996 $ - $ 76,573 $ 1,302,569
Operating loss ( 957,165) (144,926) (107,543) ( 1,209,634)
Total Assets 12,362,562 - - 12,362,562
Depreciation and Amortization 176,275 - - 176,275
-14-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LITIGATION
- -------------------
On April 7, 2003, Valencia Entertainment International (VEI) a 100% subsidiary
of ValCom, Inc., Delaware filed on an emergency basis, a voluntary Chapter
11 bankruptcy petition. The case is pending in the United States Bankruptcy
Court, Central District of California, San Fernando Valley Division, as Case No.
SV 03-12998-GM. As of March 31, 2004, the Company was in compliance of all of
its duties under the Bankruptcy Code and all applicable guidelines of the Office
of the United States Trustee.
VEI requires the use of its secured creditor's cash
collateral to operate. Throughout the pendency of this case, the Company has
worked with its two real estate secured lenders, Finance Unlimited, LLC and
Laurus Master Fund, Limited on the details of cash collateral stipulation. An
order approving a global interim cash collateral stipulation with Finance
Unlimited and Laurus was entered on August 26, 2003. This stipulation permitted
VEI's use of the lenders' cash collateral through March 31, 2004.
On April 28, 2004 the court approved two additional cash collateral
stipulations, one each with Finance Unlimited and Laurus, authorizing the
Company's continued use of cash collateral through May 31, 2004. The court
approved an extension and granted the restructuring of notes/debt with Finance
Unlimited and Laurus for settlement and to be discharged from bankruptcy.
In May 2004, Laurus paid off Finance and was subrogated to Finance's $6,565,998
claim, which became included in the senior of Laurus' two claims. Laurus then
sought to conduct a non-judicial foreclosure sale of the Property, and VEI
objected. The Bankruptcy Court issued an order on June 3, 2004, that while
Laurus could conduct a non-judicial foreclosure sale of the Property, Laurus
would not be entitled to any deficiency claim against either VEI or ValCom, or
any other assets other than the Property itself (and the rents and leases
appurtenant thereto).
On June 10, 2004, the court ordered the Property to be sold. At this sale,
Laurus claimed that its senior note had a balance of $7,407,873 and its junior
note a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the $6,565,998
million subrogated from the Finance claim. The sale was conducted through the
junior note, and the Property was sold for $2.9 million to a third party. An
affiliate of this third party then purchased the senior note directly from
Laurus, without a second sale.
As a result of the Bankruptcy Court's order and the subsequent trustee's sale of
the Property, neither VEI nor ValCom are subject to any further liabilities on
account of the notes and deeds of trust previously held by Finance and Laurus.
Even though the senior note still technically exists, it has been rendered
non-recourse by the Bankruptcy Court's order, and could only be enforced against
the Property itself (which no longer belongs to VEI). Any liability owed to the
third party, which purchased the Property with regard to the rents, collected
for June 2004 has been resolved by settlement with that party.
The Company had recorded liability of $ 8,407,310 for the Laurus loan
(including Finance Unlimited loan) as of March 31, 2004 but the bankruptcy
court valued the liability at $ 9,812,966 for the loans due to Laurus
(including subrogation from Finance Unlimited loan). The Company recorded
difference of $ 1,405,656 as the litigation settlement expense and reflected
it on the income statement for the period ending March 31, 2004.
NOTE 6 IMPAIRMENT OF PROPERTY AND EQUIPMENT
The property and equipment was recorded in the books at net value of
$11,251,216 (net of depreciation of $ 1,324,266). On June 10, 2004, the
property was foreclosed for $ 9,812,966 and the proceeds were used to pay off
the notes from Laurus. The Company has adjusted the value of the property to
its subsequent disposal value. The Company recorded difference between the
liabilities settled from foreclosure of the property and the net book value,
as an impairment of the property and equipment and recorded imapirement costs
of $ 1,438,250 during the period ending March 31, 2004.
The impaired property and equipment comprised of the following:
Land $ 7,392,292
Building 5,183,190
Accumulated depreciation (1,324,266)
11,251,216
Exchange for payment of liability (9,812,966)
Impairment loss $ (1,438,250)
NOTE 7 RELATED PARTY TRANSACTIONS
On February 16, 2004, the Company sold its 45% interest in ValCom Broadcasting
consisting of a joint venture agreement with New Global Communications, Inc.
The joint venture operates a newly developed low power television broadcast
station, K08MX-LP, in Palm Springs, California. The February 16, 2004 Asset
Purchase Agreement with Eye Span Entertainment Network, Inc. also included the
sale by the Company of 143 titles from the ValCom, Inc. film library, along
with the copyrights, trademarks, equipment, legal options, supplies, spare
parts, inventory, and all other tangible personal property related to bingo
owned and used or useful in the operation of Latino Bingo, Satellite Bingo and
all other related items. It also included the sale of 10% ownership interest
in Las Vegas Studios located at 41 North Mojave Road, Las Vegas, Nevada 89101.
The shareholders of interest of Valcom Inc. as of December 15, 2003 received
750,000 shares of common stock of Eye Span Entertainment Network, Inc,value at
$14,519,000 for the sale of 45% interest in ValCom Broadcasting, LLC, 143 film
and television titles, all of the rights, title and interest in Latino Bingo
and Satellite Bingo, as well as the 10% interest in Las Vegas Studios. . .
The Company distributed shares of ES to its shareholders as dividend in their
ratio of ownership as of December 15, 2003. The Company is in the process of
revising this transaction.
NOTE 8 STOCKHOLDERS' EQUITY
- ------------------------------
(A) CONVERTIBLE PREFERRED STOCK
- ----------------------------------
On September 30, 2002, the Company had three series of convertible Preferred
Stock: B, C, and D. Series B Preferred Stock has no voting rights, is entitled
to receive cumulative dividends in preference to any dividend on the common
stock at a rate of 8% per share, per year. Series B Preferred Stock is to be
issued if and when declared by the Board of Directors, and can be converted at
any time into common stock on a 1 for 5 basis. In the event of any liquidation,
the holders of shares of Series B Preferred Stock then outstanding, shall be
entitled to receive an amount equal to the purchase price per share, plus an
amount equal to declared but unpaid dividends thereon, if any, to the date of
payment. Series C Preferred Stock has no voting rights, is entitled to receive
cumulative dividends in preference to any dividend on the common stock at a rate
of 8% per share, per year, to be issued if and when declared by the Board of
Directors and can be converted at any time into common stock on a 1 for 1 basis.
In the event of any liquidation, the holders of shares of Series C Preferred
Stock then outstanding, shall be entitled to receive an amount equal to the
purchase price per share, plus an amount equal to declared but unpaid dividends
thereon, if any, to the date of payment. Series D Preferred Stock has no voting
rights, no dividends and can be converted at any time to common stock on a 1 for
1 basis. In the event of any liquidation, the holders of shares of Series D
Preferred Stock then outstanding, shall be entitled to receive an amount equal
to the purchase price per share.
With respect to rights on liquidation, Series B, C, and D Preferred Stock shall
rank senior to the common stock, but Series C Preferred Stock shall be senior to
both Series B and D Preferred Stock. Series D Preferred Stock shall be junior
to both Series B and C Preferred Stock. No dividends have been declared by the
Board of Directors for any of the Series of convertible Preferred Stock for the
fiscal year ended September 30, 2003.
On June 6, 2002, the Company received $930,000, net for the issuance of
1,250,000 shares of Series D Convertible Preferred Stock to an accredited
investor. In connection with the transaction, the Company also issued warrants
to the preferred stockholder to purchase an aggregate of 1,300,000 shares of the
Company's common stock at an exercise price of $.80 per share, expiring on June
18, 2007.
The Company allocated the net proceeds received from the sale of the preferred
stock to the warrants using the Black-Scholes pricing model. The allocation of
the net proceeds to the warrants amounted to $466,908 and is included in
additional paid-in capital in the accompanying condensed consolidated balance
sheet at September 30, 2002. Also, in connection with the sale of the Series D
Convertible Preferred Stock, the Company incurred a 7% placement agent fee and
issued the placement agent's 125,000 "VACM Units". Each unit is comprised of one
share of common stock and a warrant to purchase one share of common stock at an
exercise price of $0.80 per share. The Company recorded the $70,000 placement
agent fee as a reduction of the proceeds received, thereby reducing additional
paid-in capital by $70,000 at September 30, 2002. Each VACM Unit is exercisable
at $0.80 per unit and the unit and the underlying warrant expire June 18, 2007.
The Company valued the VACM Unit by apportioning value to the underlying warrant
and common stock using the Black-Scholes pricing model, and by measuring the
intrinsic value of the common stock. The value of the 125,000 VACM Units
amounted to $60,745 and was recorded as an increase in additional paid-in
capital at September 30, 2002.
-15-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(B) COMMON STOCK
- ------------------
During the six months dnded March 31, 2004, the Company converted the Series
D Preferred Stock to common stock by issance of 2,800,000 shares of common
stock.
During the six months ended March 31, 2004, the Company issued 208,333 shares of
common stock in lieu of debt retirement. The value of the debt retired totaled
$25,000.
During the six months ended March 31, 2004, the Company issued 500,000 shares of
common stock in lieu of prepaid development costs. The value of the development
costs totaled $215,000. The Company amortized $107,500 of the expenses during
the six months period ending March 31, 2004.
During the six months ended March 31, 2004, the Company issued 650,000 shares of
common stock in lieu of prepaid acquisition and development costs of the Las
Vegas Studios. The value of the development costs totaled approximately
$266,510. The Company amortized $66,625 of expenses for the period ending March
31, 2004.
During the six months ended March 31, 2004, the Company issued 1,200,000 shares
of common stock in lieu of compensation for consultant services performed and
compensation. The value of the services performed totaled $594,000.
During the six months ended March 31, 2004, the Company issued 30,000 shares of
common stock to a director in lieu of an interest payment of $3000.
During the six months ended March 31, 2004, the Company issued 600,000 shares
of common stock in exchange for 600,000 shares of series C preferred convertible
on a one on one basis and retired 110,000 to treasury as part of settlement
agreement.
During the six months ended March 31, 2004, the Company issued 300,000 shares of
common stock to a director in lieu of retirement of a loan.
During the six months ended March 31, 2004, the Company issued 928,000 shares of
common stock for options exercised amounting to $ 232,000
During the six months ended March 31, 2004, the Company issued an aggregate of
315,750 shares of common stock in lieu of compensation, salaries and bonuses to
employees. Total value of the compensation, salaries and bonuses was
$121,458.
During the six months ended March 31, 2004, the Company issued 752,000 shares
of common stock for cash amounting to $ 467,500.
-16-
During the fiscal year ended September 30, 2003, the Company issued warrants to
purchase 2,083,334 shares of the Company's common stock to a director in
connection with services provided and to be provided to the company. The
weighted average exercise price for the warrants issued was $0.12 and all of the
warrants begin to expire in September 2005. The director has exercised 791,666
warrants up to March 31, 2004. This issuance of shares was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
During the fiscal year ended September 30, 2002, the Company issued warrants to
purchase 2,075,000 shares of the Company's common stock to certain individuals
and companies in connection with the issuance of Series D Preferred Stock (see
Note 13(A)) and consulting agreements. The weighted average exercise price for
the warrants issued was $0.75, and all of the warrants begin to expire in fiscal
year 2007. There were no warrants outstanding prior to fiscal year 2002.
Additionally, the Company recorded consulting expense of $271,651 in connection
with warrants issued to consultants. These warrants were valued using the Black
Scholes pricing model. The Company also recorded $324,724 of deferred
compensation in connection with the consulting agreements in the accompanying
consolidated balance sheet at September 30, 2002.
In connection with the acquisition of PTL Productions, Inc. (dba Brentwood
Magazine), the Company was to issue 400,000 shares of Series C preferred stock,
convertible 1 for 1 into common shares. The Value of the preferred stock was
$252,000 or $.63 per share based on the value of the Company's common stock on
the date of acquisition. On December 6, 2002 the Company issued 380,000 shares
of Series C Preferred Stock valued at $239,400. The par value of the 380,000
shares of Series C Preferred Stock ($380) is included in preferred stock while
the remaining value ($239,020) is included in additional paid-in-capital. The
value of the remaining 20,000 shares of $12,600 still to be issued is included
in preferred stock payable in the accompanying balance sheet. In January 2003,
the Company entered into a Memorandum of Understanding to cancel the Agreement
and Plan of Reorganization dated August 2, 2002, pursuant to which the Company
acquired PTL Productions, Inc. (dba Brentwood Magazine) and sell PTL
Productions, Inc. back to the seller. In connection with the sale, the Company
will receive back 200,000 shares of its Series C Preferred Stock and $300,000 of
trade credit (See Note 8).
NOTE 9 SUBSEQUENT EVENTS
- ---------------------------
Sale of Building
The Company filed a voluntary chapter 11-bankruptcy petition on April 7, 2003.
By May 2004, the Property was subject to three (3) secured claims. These
were a note and first-priority deed of trust held by Finance Unlimited, LLC
("Finance") in the amount of $6,565,998 and two notes, secured by
second-priority and third-priority deeds of trust, both held by Laurus Master
Fund, Ltd. ("Laurus"). Laurus claimed that it was owed a total of $2,978,876
plus additional penalties and additional legal fees on the two notes
but the Company disputed many of the penalties claims by Laurus. The Finance
note was solely the obligation of the Company.
In May 2004, Laurus paid off Finance and was subrogated to Finance's $6,565,998
claim, which became included in the senior of Laurus' two claims. Laurus then
sought to conduct a non-judicial foreclosure sale of the Property, and VEI
objected. The Bankruptcy Court issued an order on June 3, 2004, that while
Laurus could conduct a non-judicial foreclosure sale of the Property, Laurus
would not be entitled to any deficiency claim against either VEI or ValCom, or
any other assets other than the Property itself (and the rents and leases
appurtenant thereto).
On June 10, 2004, the court ordered the Property to be sold. At this sale,
Laurus claimed that its senior note had a balance of $7,407,873 and its junior
note a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the $6,565,998
million subrogated from the Finance claim. The sale was conducted through the
junior note, and the Property was sold for $2.9 million to a third party. An
affiliate of this third party then purchased the senior note directly from
Laurus, without a second sale.
As a result of the Bankruptcy Court's order and the subsequent trustee's sale of
the Property, neither VEI nor ValCom are subject to any further liabilities on
account of the notes and deeds of trust previously held by Finance and Laurus.
Even though the senior note still technically exists, it has been rendered
non-recourse by the Bankruptcy Court's order, and could only be enforced against
the Property itself (which no longer belongs to VEI). Any liability owed to the
third party, which purchased the Property with regard to the rents, collected
for June 2004 has been resolved by settlement with that party.
Based upon court order, the Company has adjusted the value of its property at
March 31, 2004 and recorded an impairement of its value (note 6).
BANKRUPTCY DISMISSAL
VEI filed a voluntary chapter 11 bankruptcy petition on April 7, 2003 and
obtained the status of Debtor in Possession. After successfully settling the
debts owed to secured creditors through sale of property as per court order
dated June 3,2004 VEI applied to the United States Bankruptcy Court, Central
District of California, San Fernando Valley Division for a Motion to dismiss
Chapter 11 Bankruptcy case ("the Motion").The Court on August 3, 2004, having
considered the Motion and pleadings filed in support thereof, having heard
argument of counsel, finding that notice was proper, and for good cause
appearing therefore, ordered (1) The Motion granted (2) Debtor's Chapter 11
bankruptcy case dismissed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PLAN OF OPERATION
As of March 31, 2004, ValCom, Inc. operations were comprised of three divisions:
(1) Studio and Equipment Rental, and Personnel Rental, (2) Broadcast Television
and (3) Film and Television Production.
RENTAL
- -------
The Company and its subsidiary, Valencia Entertainment International, LLC,
operates eight sound stages in Valencia, California. Valencia Entertainment
International, LLC owns six improved acres on which six of the sound stages are
located. The Company leases the other two sound stages. Beginning June 2003,
the Company and its subsidiary has a newly signed one-year lease with five
one-year options for all eight sound stages, which will generate $2,100,000
annually with cost-of-living increases. The Company has acquired seven and one
half acres of property in Nevada with 162,000 square feet of buildings, which
are being renovated into seven sound stages for rental. The Company's
subsidiary, Half Day Video, Inc., supplies personnel, cameras, and other
production equipment to various production companies on a short-term basis.
TELEVISION, FILM, & ANIMATION PRODUCTION
- --------------------------------------------
The Company, in addition to producing its own television and motion picture
programming, has an exclusive facilities agreement in place for productions in
Los Angeles County for a three-year term with Woody Fraser/Woody Fraser
Productions (See Note 5).
-17-
VALCOM, INC. AND SUBSIDIARIES
CHANNEL 8 IN PALM SPRINGS, CALIFORNIA
- ------------------------------------------
In connection with its joint venture with New Global Communications, Inc., the
Company owns a 45% equity interest in ValCom Broadcasting, LLC, a New York
limited liability company, which operates KVPS (Channel 8), an independent
television broadcaster in the Palm Springs, California market
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 VS. MARCH 31, 2003
- -------------------------------------------------------------
Revenues for the three months March 31, 2004 decreased by $11,058 or 2.09% from
$537,640 for the three months ended March 31, 2003 to $526,582 for the same
period in 2004. The decrease in revenue was principally due to increased studio
revenues and decreased production revenues associated with the joint venture
with Woody Fraser Productions.
Production costs for the three months ended March 31, 2004 decreased by $58,932
or 91.09% from $64,693 for the three months ended March 31, 2003 to $5,761 for
the same period in 2004. The decrease in production costs was principally due
to decreased production associated with Woody Fraser Productions as described
above.
Impairment of property increased by $1,438,250 for the three months ended March
31,2004 principally due to the property being sold subsequently to pay off
Finance Unlimited and Laurus Notes.
The Litigation costs increased by $1,405,656 for the three months ended
March 31, 2004 compared to $0 for the three months ended March 31, 2003
primarily due to additional interest, penalties, acceleration payment and lawyer
fees paid for the settlement of Laurus Notes.
Depreciation and amortization expense for the three months ended March 31, 2004
increased by $293,792 or 432% from $88,535 for the three months ended March 31,
2003 to $382,327 for the same period in 2004. General and administrative
expenses for the three months ended March 31, 2004 increased by $39,259 or
3.8% from $982,107 for the three months ended March 31, 2003 to $1,021,366 for
the same period in 2004. The increase was due principally to decreased
personnel costs, insurance, printing, and bad debt expenses.
Interest expense for the three months ended March 31, 2004 increased by $17,210
or 4.16% from $396,575 for the three months ended March 31, 2003 to $413,785 for
the same period in 2004. The increase was due principally to the increase in
interest rates associated with the company's mortgage loans.
Due to the factors described above, the Company's net loss increased
by$3,595,146 from $926,679 for the three months ended March 31, 2003 to
$4,521,825 for the same period in 2004.
SIX MONTHS ENDED MARCH 31, 2004 VS. MARCH 31, 2003
- -----------------------------------------------------------
Revenues for the six months ended March 31, 2004 decreased by $143,772 or 12.41%
from $1,352,569 for the six months ended March 31, 2003 to $1,158,797 for the
same period in 2004. The decrease in revenue was principally due to increased
rental income from sound stages leased to Paramount and decreased production
revenues associated with the joint venture with Woody Fraser Productions and
decreased rental revenues from other income.
Production costs for the six months ended March 31, 2004 decreased by $239,013
or 93.5%from $255,716 for the six months ended March 31, 2003 to $16,703 for the
same period in 2004. The decrease in production costs was principally due to
decreased production associated with Woody Fraser Productions as described
above.
Impairment of property and equipment increased by $1,438,250 for the six months
ended March 31, 2004 compared to $0 for the three months ended March 31, 2003
primarily due to subsequent sale of property of VEI to pay off Finance
Unlimited and Laurus Notes.
-18-
VALCOM, INC. AND SUBSIDIARIES
The Litigation costs increased by $1,405,656 for the six months
ended March 31, 2004 compared to $0 for the six months ended March 31, 2003
primarily due to additional interest, penalties, and acceleration payment and
lawyer's fee paid for the settlement of Laurus Notes.
Depreciation and amortization expense for the six months ended March 31, 2004
increased by $293,892 or 159% from $176,275 or for the six months ended March
31,2003 to $470,396 for the same period in 2004, mainly due to write off of
certain balance sheet items.
General and administrative expenses for the six months ended March 31, 2004
decreased by $363,093 or 21% from $2,065,744 for the six months ended March 31,
2003 to $1,702,150 for the same period in 2004. The decrease was due to
decreased personnel costs, legal and accounting fees, outside services and
consulting fees and bad debt expense.
Interest expense for the six months ended March 31, 2004 increased by $109,964
or 19% from $571,413 for the six months ended March 31, 2003 to $681,377 for the
same period ended March 31, 2004.
Other income for the six months ended March 31, 2004 decreased by $24,091 or
45% from $77,642 for the six months ended March 31, 2003 to $53,551 primarily
due to less equipment rental activity. Due to the factors described above, the
Company incurred a net loss of $5,046,038 for the six months ended March 31,
2004 compared to net loss of $1,703,405 for the same period in 2003.
FUTURE OUTLOOK
The Company has entered into a joint venture agreement with O. Atlas Enterprises
to produce an animation movie and an animation TV series called "New Zoo Revue"
based on an American Classic of the same name, which was highly successful.
BCI/Navarre has purchased an exclusive agreement to distribute 195 existing
shows of New Zoo Revue for the retail market. We anticipate the New Zoo Revue
to be available to consumers through 4,000 Wal-Mart retail outlets by August 10,
2004. The Company has already incurred start-up costs, which have been
reflected in the financial statements for the six months ended March 31, 2004.
The Company has purchased additional studio facilities comprising 7.5 acres of
land and 162,000 sq. ft. of buildings in Las Vegas as part of its expansion
plans. The Company is undergoing a three-phase renovation, which will ensure
additional rental revenues to the Company with revenue opportunities for the
Company's other related businesses to begin almost immediately.
LIQUIDITY AND CAPITAL RESOURCES
The Company's condensed consolidated financial statements have been prepared,
assuming that the Company will continue as a going concern. The Company has a
net loss of $5,046,038 and a negative cash flow from operations of $876,688 for
the six months ended March 31, 2004, a working capital deficiency of $11,638,059
and an accumulated deficit of $15,602,388 at March 31, 2004. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
Cash totaled $229,723 on March 31, 2004 compared to $39,670 as at March 31,2003.
During the six months ended March 31, 2004, net cash used by operating
activities totaled $876,688 compared to net cash used by operating activities
totaled $503,240 for the comparable six-month period in 2003. A significant
portion of operating activities included payments for interest and production
development costs. Net cash provided by financing activities for the six months
ended March 31, 2004 totaled $1,127,898 compared to $98,097 for the comparable
six-month period in 2003. Net cash used in investing activities during the
six months ended March 31, 2004 totaled $8,247,380 compared to net cash provided
$233,169 during the comparable prior year period due to proceeds from sale of
fixed assets.
The above cash flow activities yielded a net cash increase of $18,041 during the
six months ended March 31, 2004 compared to a decrease of $343,374 during the
comparable prior year period.
Net working capital (current assets less current liabilities) was a negative
$11,538 as of March 31, 2004. The Company will need to raise funds through
various financing to maintain its operations until such time as cash generated
by operations is sufficient to meet its operating and capital requirements.
There can be no assurance that the Company will be able to raise such capital on
terms acceptable to the Company, if at all.
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
- -----------------------------------------------
Evaluation of Disclosure Controls and Procedures
- -----------------------------------------------------
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the Company's periodic reports filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in the periodic
reports filed under the Securities Exchange Act of 1934 is accumulated and
communicated to management, including the Chief Executive Officer and Principal
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to the filing date of this Report, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-14. This evaluation was conducted under the supervision and with the
participation of the Company's Chief Executive Officer and Principal Financial
Officer.
Effective Disclosure Controls
-------------------------------
Based upon that evaluation, the Company's officers concluded that many of the
Company's disclosure controls and procedures are
-19-
VALCOM, INC. AND SUBSIDIARIES
effective in gathering, analyzing and disclosing information needed to satisfy
the Company's disclosure obligations under the Securities Exchange Act of 1934.
For example, the Company's internal controls, particularly the areas of payroll,
control of cash and accounts payable, are effective. In addition, the Audit
Committee meets with the principal accounting officer on a regular basis to
review and evaluate the Company's financial position. The Audit Committee also
reports to the Board of Directors on the accounting and finance functions on a
regular basis.
Weaknesses in Disclosure Controls
------------------------------------
The Company's officers also identified several weaknesses in the Company's
disclosure controls. Such weaknesses, and the steps the Company plans to take
to remedy the weaknesses, are discussed below.
1. The Company's records of stock and equity related transactions were not
updated on a timely basis and do not reflect the current ownership of the
Company as accurately as they might. Remedy: The Company intends to engage a
stock transfer agent to handle issuances and conversions of all series of its
preferred stock. In addition, the Company will maintain more accurate records of
all equity transactions during the year.
The Board of Directors will ensure that it authorizes all stock, warrants and
options granted in accordance with applicable agreements and/or compensation
plans to avoid the possibility of unauthorized issuances of stock, warrants and
options.
2. The Company recorded a significant number of audit adjustments during the
fourth quarter, which were required to properly state the account balances at
September 30, 2002. Remedy: The Company will implement comprehensive closing
procedures, including an analysis of all balance sheet accounts and significant
income statement accounts.
3. The minutes of the Board of Directors' and stockholders' meetings were not
always complete. Remedy: The Company will implement procedures to be more
comprehensive in the preparation of its minutes to include all important matters
that affect the Company's operations. The Company will take appropriate steps to
ensure that all minutes are properly approved and signed by the applicable
parties.
4. The Company drafted several agreements without consulting its legal counsel.
Therefore, some of the agreements had terms and provisions that either changed
the purpose of the agreement or undermined the purpose or intent of management.
Remedy: The Company will consult its legal counsel as to the legality of future
agreements and consult its auditors regarding the proper accounting treatment of
such agreements in order to preserve the purpose of the agreements and the
intent of management.
Changes in Internal Controls
-------------------------------
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls. The Company intends to make extensive
improvements, as outlined above, to its disclosure controls.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
The Company is involved from time to time in legal proceedings incident to the
normal course of business. Management believes that the ultimate outcome of any
pending or threatened litigation would not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
- ---------------------------------
(B) COMMON STOCK
- ------------------
During the six months ended March 31, 2004, the Company convertd the Series D
Preferred Stock to common staock by issuance of 2,800,000 shares of
common stock.
During the six months ended March 31, 2004, ths Company issued 208,333 shares
of common stock in lieu of debt retirement. The value of the debt retired total
$25,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
- ----------------------------
1. Donald Magier resigned as secretary, controller and director.
2. Tracey Eland has been appointed to service as Secretary of the
Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(A) EXHIBITS:
Exhibit Number Description
- --------------- -----------
99.1 Certification of the Chief Executive Officer of ValCom, Inc. Pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer of ValCom, Inc. Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
VALCOM, INC. AND SUBSIDIARIES
99.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
March 29, 2004 Edgar: Resignation of Donald Magier as officer and
director.
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VALCOM, INC.
Date: August 20, 2004 By: /s/Vince Vellardita
-------------------------------------
Vince Vellardita Chairman of the
Board and Chief Executive Officer
(Principal executive officer)
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
Signature Title Date
--------- ----- ----
BY: /s/ Vince Vellardita CEO/President May 19, 2004
------------------ Chairman of the Board --------------
Vince Vellardita
BY: /s/ Tracey Eland Secretary May 19, 2004
------------- (Principal Accounting Officer) -------------
Tracey Eland
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
------------------------------------------------------------
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Vince Vellardita, the Chief Executive Officer of ValCom, Inc. (the
"Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, that to the best of my knowledge:
(1) the Quarterly Report on Form 10-QSB of the Company for the fiscal
quarter ended March 31, 2004 (the "Report") fully complies with the
requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: August 13, 2004
--------------
/s/ Vince Vellardita
----------------------
Name: Vince Vellardita
Title: Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
------------------------------------------------------------
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Tracey Eland, the Secretary (principal accounting officer) of ValCom, Inc.
(the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that to the best of my knowledge:
(1) the Quarterly Report on Form 10-QSB of the Company for the fiscal
quarter ended March 31, 2004 (the "Report") fully complies with the
requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: August 13, 2004
--------------
/s/Tracey Eland
----------------
Name: Tracey Eland
Title: Controller (Principal Accounting Officer)
EXHIBIT 99.2
CERTIFICATIONS PURSUANT TO
RULES 13A-14 AND 15D-14 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ValCom, Inc., a Delaware
corporation (the "Company"), on Form 10-QSB for the period ending March 31,
2004, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Vince Vellardita, the Company's Chief Executive Officer (the
"Officer"), certify, pursuant to Rule 13a-14 or 15d-14 of the Securities
Exchange Act of 1934, as amended, that:
(1) The Officer has reviewed the Report.
(2) Based on the Officer's knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report.
(3) Based on the Officer's knowledge, the financial statements and other
financial information included in the Report fairly present in all material
respects the Company's financial condition and results of operations as of, and
for, the periods presented in the Report.
(4) The Officer and the other certifying officer:
(a) Are responsible for establishing and maintaining "disclosure controls and
procedures," as that term is defined by the Securities and Exchange
Commission, for the Company.
(b) Have designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to them,
particularly during the period in which the periodic Report is being
prepared.
(c) Have evaluated the effectiveness of the Company's disclosure controls and
procedures within 90 days prior to the filing date of the Report.
(d) Have presented in the Report their conclusions about the effectiveness of
the disclosure controls and procedures based on the required evaluation as
of that date.
(5) The Officer and the other certifying officer have disclosed to the Company's
auditors and audit committee of the board of directors (or persons fulfilling
the equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls, as that term is defined by the Securities and Exchange
Commission, which could adversely affect the Company's ability to record,
process, and summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls.
(6) The Officer and the other certifying officer have indicated in the Report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: August 13, 2004
--------------
By: /s/ Vince Vellardita
----------------------
Vince Vellardita
Chief Executive Officer
In connection with of the Quarterly Report of ValCom, Inc., a Delaware
corporation (the "Company"), on Form 10-QSB for the period ending March 31,
2004, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Tracey Eland , the Company's Secretary and principal
accounting officer (the "Officer"), certify, pursuant to Rule 13a-14 or 15d-14
of the Securities Exchange Act of 1934, as amended, that:
(1) The Officer has reviewed the Report.
(2) Based on the Officer's knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report.
(3) Based on the Officer's knowledge, the financial statements and other
financial information included in the Report fairly present in all material
respects the Company's financial condition and results of operations as of, and
for, the periods presented in the Report.
(4) The Officer and the other certifying officer:
(a) Are responsible for establishing and maintaining "disclosure controls and
procedures," as that term is defined by the Securities and Exchange
Commission, for the Company.
(b) Have designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to them,
particularly during the period in which the periodic Report is being
prepared.
(c) Have evaluated the effectiveness of the Company's disclosure controls and
procedures within 90 days prior to the filing date of the Report.
(d) Have presented in the Report their conclusions about the effectiveness of
the disclosure controls and procedures based on the required evaluation as
of that date.
(5) The Officer and the other certifying officer have disclosed to the Company's
auditors and audit committee of the board of directors (or persons fulfilling
the equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls, as that term is defined by the Securities and Exchange
Commission, which could adversely affect the Company's ability to record,
process, and summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls.
(6) The Officer and the other certifying officer have indicated in the Report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: August 13, 2004
---------------
By: /s/ Tracey Eland
------------------
Tracey Eland
Secretary and
Principal Accounting Officer
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