UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL QUARTER ENDED JUNE 30, 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
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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 June 30, 2004 the issuer had 25,042,048 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 June 30, 2004 and the results of their operations and their
cash flows for the three months ended June 30, 2004. These consolidated
financial statements include the accounts of ValCom, Inc. and its subsidiary
companies (together "the Company"). Results for the three and nine months
ended June 30, 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
June 30, 2004 (unaudited)
4
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2004
and 2003 (unaudited)
6
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 2004 and
2003 (unaudited) 8
Notes to Condensed Consolidated Financial State-
ments (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Disclosure Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
SIGNATURES 23
Item 6. Exhibits and Reports on Form 8-K 24
Part III. EXHIBITS
-3-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30,
2004
------
ASSETS (Unaudited)
------
Current Assets:
Cash & Cash equivalents $ 73,794
Accounts receivable, net 11,512
-----------
Total Current Assets 85,306
Property and equipment - net 3,446,394
Prepaid development costs 66,625
Deposits and other assets 46,807
------------
Total Assets $ 3,645,132
============
See accompanying notes to the condensed consolidated financial statements
-4-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities Not Subject To Compromise
Current liabilities:
Accounts payable $ 355,602
Accrued interest 324,753
Accrued expenses 169,955
Advanced Rent 30,600
Due to related parties 455,771
Notes payable 14,043
-----------
Total Current Liabilities 1,350,724
Mortgage payable-Nevada 2,593,661
Liabilities Subject To Compromise
Prepetition trade accounts payable 206,249
Prepetition Payables due to related parties 95,000
Prepetition accrued expenses 126,173
-------
Total Liabilities 4,371,807
Commitments and contingencies
Stockholders' equity:
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
Common stock, par value $.001; 100,000,000 shares
authorized; 25,042,048
shares issued and outstanding 25,527
Additional Paid-in capital 15,423,767
Accumulated deficit (16,177,487)
Total Stockholders' Equity (726,675)
-----------
Total Liabilities and Stockholders' Equity $3,645,132
===========
See accompanying notes to the condensed consolidated financial statements
-5-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three For the three
months ended months ended
June 30, 2004 June 30, 2003
Revenue:
Rental . . . . . . . . . . . . .$ 540,204 $536,978
Production . . . . . . . . . . . . 28,427 182,453
Other. . . . . . . . . . . . . . . 1,596 (76,573
-----------------------------------------
. . . . . . . . . 570,227 642,858
-----------------------------------------
Cost and Expenses:
Production . . . . . . . . . . 122,509 17,354
Loss on impairment of Property
Litigation Settlement
Selling and promotion 75,858 4,074
Depreciation and amortization. . 20,020 85,545
General and administrative . . . 571,826 408,847
Consulting and professional services 452,705
Total Cost and Expenses. . . . 1,242,918 515,820
-----------------------------------------
Operating loss . . . . . . . (672,691) 127,038
Other Income (Expense):
Interest Expense (122,247). (203,095)
Gain on sale of assets - 34,000
Loss on equity investment (49,713)
-----------------------------------------
Total Other Income (Expense) . . (122,247) (218,808)
-----------------------------------------------
Loss from continuing operations (91,770)
Discontinued operations:
Operating loss from discontinued operations. 0 (109,167)
--------------- ------------------------
Net gain on disposal of discontinued operations.0 80,388
--------------- ------------------------
Net loss . . . . . . . . . . .$ (794,938) $ (120,549)
===============================================
Basic and diluted loss per share from continuing
operations . . . . . . . . . $(0.04) $ 0.01
===============================================
Weighted average shares outstanding:
Basic and diluted. 21,366,619 12,600,064
===============================================
See accompanying notes to the condensed consolidated financial statements
-6-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine For the nine
months ended months ended
June 30, 2004 June 30, 2003
Revenue:
Rental . . . . . . . . . . . . . . . . . . . . . . $ 1,633,979 $ 1,560,005
Production . . . . . . . . . . . . . . . . . . . . . 87,612 385,422
Other. . . . . . . . . . . . . . . . . . . . . . . . . 7,433 0
-------------- ------------------------
1,729,024 1,945,427
Cost and Expenses:
Production . . . . . . . . . . . . . . . . . . . . . . 139,212 273,070
Loss on Impairment of Property. . . . . . . . . . . 1,438,250
Litigation costs . . . . . . . . . . . . . . . 1,405,656
Selling and promotion. . . . . . . . . . . . . . . . . 105,423 18,542
Depreciation and amortization. . . . . . . . . . . . . . 490,87 261,820
General and administrative . . . . . . . . . . . . . . .2,273,975 2,474,591
Consulting and professional services . . . . . . . . . . .967,224
Total Cost and Expenses. . . . . . . . . . . . . 6,819,927 3,028,023
--------------- -------------------------------
Operating loss . . . . . . . . . . . . . . . . . . . (5,090,903) (1,082,596)
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . (803,624) (774,508)
Gain on sale of assets. . . . . . . . . . . . . . . 60,230 61,642
Impairment of property
Loss on Equity Investment . . . . . . . . . . . . . (6,679) (49,713)
Other income. . . . . . . . . . . . . . . . . . . . 0 50,000
--------------- ------------------------------
Total Other Income (Expense) . . . . . . . . . . (750,073) (712,579)
Total Other Expenses
Net Loss . . . . . . . . . . . . . . . . . . . . . . (5,840,976) (1,795,175)
=============== =============================
Discontinued operations:
Operating loss from discontinued operations. . . 0 (109,167)
--------------- ------------------------------
Net gain on disposal of discontinued operations. . . . . . 0 80,388
--------------- ------------------------------
Net Loss .. . . . . . . . . . . . . . . . . . . . (5,840,976) (1,823,954)
--------------- ------------------------------
Basic and diluted loss per share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . (0.29) $ (0.15)
--------------- ------------------------------
Weighted average shares outstanding:
Basic and diluted. 20,372,661 11,858,208
See accompanying notes to the condensed consolidated financial statements
-7-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine For the nine
months ended months ended
June 30, 2004 June 30, 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) income $(5,840,976) $(1,823,955)
Adjustments to reconcile net loss to net cash used
in operating activities:
Impairment of property and equipment 1,438,250
Litigation costs 1,405,656
Depreciation and amortization 490,187 261,820
Bad debt expense - 56,606
Gain on sale of fixed assets (60,230) (61,642)
Stock issued for debt retirement. . . . . . . . . . . . . . . 401,800 3,870
Stock issued for services 594,000 140,376
Stock issued for compensation. . . . . . . . . . . . . . . . 256,125 54,475
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,080 (18,973)
Prepaid development costs (287,679) (31,952)
Other assets 241,897
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . 33,022 129,357
Deposits (185,146) (63,979)
Accounts payable and accrued expenses . . . . . . . . . . . . . (18,387) 710,951
---------------- --------------
Net Cash Used by Operating Activities . . . . . . . . . . . . . (1,574,879) (405,019)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Fixed Assets . . . . . . . . . . . . . . . . . . (46,566) -
Notes receivable payments . . . . . . . . . . . . . . . . . . . . . 35,178 66,101
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 57,200 84,159
---------------- ----------------
Net Cash Provided by Investing Activities. . . . . . . . . . . . . 45,812 150,260
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from sale of stock 1,147,000
Principal repayment of notes. . . . . . . . . . . . . . . . . . . . (174,807)
Principal borrowings on notes and mortgages . . . . . . . . . . . . 153,102 234,463
Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . 397,281 (91,635)
Net Cash Provided By Financing Activities . . . . . . . . 1,391,179 (31,979)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . (137,888) (286,738)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . 211,682 343,374
---------------- ----------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . $ 73,794 $ 56,636
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------
Interest paid . . . . . . . . . . . . . . . . .. . . . . . . . $ 347,824 $ 284,402
---------------- ----------------
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . $ $ 0
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY:
26,400 Shares of common stock issued for retirement debt 3,870
See accompanying notes to the condensed consolidated financial statements
-8-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The Company is required to have its consolidated financial statements reviewed
by its independent accountants prior to filing. As of the date of this report,
our independent accountants were unable to complete their review of these
financial statements. We will file an amendment to form 10-QSB when our
independent accountants complete their review of these financial statements.
Following is a summary of the significant accounting policies followed in the
preparation of these consolidated financial statements, which policies are in
accordance with accounting principles generally accepted in the United States of
America.
On April 7, 2003, one of the Company's subsidiaries filed on an emergency basis
a voluntary Chapter 11 bankruptcy petition.
The Subsidiary 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 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.
On April 28th 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 discharge from bankruptcy.
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.
See accompanying notes to the condensed consolidated financial statements
-9-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 three
and nine months ended June 30, 2004 are not necessarily indicative of the
results to be expected for the entire year.
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 form those estimates.
CONCENTRATIONS AND CREDIT RISK
- ---------------------------------
The Company has two customers who accounted for approximately 99% of total
rental revenues for the nine months ended June 30, 2004 and 2003, respectively.
As of June 30, 2004, all 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.
See accompanying notes to the condensed consolidated financial statements
-10-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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. Based on its
review, the Company believes that, as of September 30, 2003, there were no
significant impairments of its long-lived assets.
However, as per Court order dated June 3, 2004 and based on the deed of trust
bearing instrument nos. 99-2400871, 02-1209820 and 02-1209821, the property
belonging to VEI, as defined in the instruments was auctioned for sale. The
properties which were valued at Land $7,392,292 Building $4,028,785 and Building
improvements $1,154,406 and Accumulated Depreciation of $1,294,088 at March
31,2004 were sold to repay the obligations to Laurus (Laurus having paid the
obligations owed to Finance Unlimited) under Trust Sale Nos: 8413-40 and
8414-30.Consequently the loss incurred due to this sale is recorded as
$1,405,656 under the heading "Impairment of Property and Equipment" in the
Profit and loss account of VEI for the nine months ending June 30, 2004.
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. The Company's 45% investment in a recently
acquired television station has been accounted for as an investment under the
equity method (See Note 3)
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
The condensed consolidated financials statements as of June 30, 2004 and for the
three and nine months ended June 30, 2004 and 2003 are unaudited. In the
opinion of management, such condensed consolidated financial statements include
all adjustments (consisting only of normal recurring accruals) necessary for the
fair presentation of the consolidated financial position and the consolidated
results of operations. The consolidated results of operations for the three and
nine months ended June 30, 2004 and 2003 are not necessarily indicative of the
results to be expected for the full year.
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 $5,840,976 and a working capital deficiency of $1,265,419 and an
accumulated deficit of $16,177,487 at June 30, 2004. The Company had a net loss
of $794,938 for the three months ended June 30, 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.
See accompanying notes to the condensed consolidated financial statements
-11-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
-----------
LOSS PER COMMON SHARE
- ------------------------
Basic loss per common share is based on net loss divided by the weighted average
number of common shares outstanding. Common stock equivalents were not included
in the calculation of diluted loss per share, as their effect would be
anti-dilutive.
DEPRECIATION AND AMORTIZATION
- -------------------------------
For financial and reporting purposes, the Company follows the policy of
providing depreciation and amortization on the straight-line method over the
estimated useful lives of the assets, which are as follows:
Building 39 years
Building Improvements 39 years
Production Equipment 5 years
Office Furniture and Equipment 5 to 7 years
Leasehold Improvements 5 years
Autos and Trucks 5 years
NEW ACCOUNTING PRONOUNCEMENTS
- -------------------------------
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards ("SFAS"). Statement No. 141,
"Business Combinations" supersedes Accounting Principles Board ("APB") Opinion
No. 16 and various related pronouncements. Pursuant to the new guidance in
Statement No. 141, all business combinations must be accounted for under the
purchase method of accounting; the pooling-of-interests method is no longer
permitted. SFAS 141 also establishes new rules concerning the recognition of
goodwill and other intangible assets arising in a purchase business combination
and requires disclosure of more information concerning a business combination in
the period in which it is completed.
This statement is generally effective for business combinations initiated on or
after July 1, 2001. Statement No. 142, "Goodwill and Other Intangible Assets"
supersedes APB Opinion 17 and related interpretations. Statement No. 142
establishes new rules on accounting for the acquisition of intangible assets
acquired in a business combination and the manner in which goodwill and all
other intangibles should be accounted for subsequent to their initial
recognition in a business combination accounted for under SFAS No. 141. Under
SFAS No. 142, intangible assets should be recorded at fair value. Intangible
assets with finite useful lives should be amortized over such period and those
with indefinite lives should not be amortized. All intangible assets being
amortized, as well as those that are not, are both subject to review for
potential impairment under SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142
also requires that goodwill arising in a business combination should not be
amortized, but is subject to impairment testing at the reporting unit level to
which the goodwill was assigned at the date of the business combination.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, and addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement 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 - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
The adoption of above pronouncements, did not materially impact the Company's
financial position or results of operations.
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"). SFAS 145 rescinds the automatic treatment of gains or losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in APB Opinion No. 30, Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
145 also requires sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions and makes
various technical corrections to existing pronouncements.
-12-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The provisions of SFAS 145, related to the rescission of FASB Statement 4 are
effective for fiscal years beginning after May 15, 2002, with early adoption
encouraged. All other provisions of SFAS 145 are effective for transactions
occurring after May 15, 2002, with early adoption encouraged. The adoption of
SFAS 145 does not have a material effect on the earnings or financial position
of the Company.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
exit or Disposal Activities." This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3 a liability for an
exit cost as defined, was recognized at the date of an entity's commitment to an
exit plan. The adoption of SFAS 146 does not have a material effect on the
earnings or financial position of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this pronouncement does not have a material effect on the
earnings or financial position of the Company.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003. The Company does not expect the adoption of SFAS No.
148 would have a material impact on its financial position or results of
operations or cash flows.
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 Company does not expect the adoption of SFAS No. 150 to
have a material impact on its 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 21,366,619 and 20,372,661 for the three and nine months ended
June 30, 2004 and 12,600,064 and 11,858,208 for the three and nine months ended
June 30, 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 June 30, 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 Studio & Film & TV
Rental Equip. Rental Production Total
------- ------------ ---------- -----
As of and for the nine months
ended June 30,
2004
- ----
Revenues 1,343,258 43,766 42,000 1,729,024
Operating (Loss) Income (5,015,878) (20,637) (54,388) (5,090,903)
Total Assets 3,264,198 220,412 160,522 3,645,132
Depreciation and Amortization 451,687 36,400 2,100 490,187
2003
- ----
Revenues $ 1,602,313 $ 343,114 $ 0 $ 1,945,427
Operating loss (929,978) (7,692) (144,926) (1,082,596)
Total Assets 12,141,320 172,674 0 12,313,994
Depreciation and Amortization 224,620 37,200 0 261,820
-14-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LITIGATION
- -------------------
On April 7, 2003, the Company 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, 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.
The Company 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 the Company'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.
NOTE 6 STOCKHOLDERS' EQUITY
- ------------------------------
(A) CONVERTIBLE PREFERRED STOCK
- ----------------------------------
On June 30, 2004, 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
nine months ended June 30, 2004.
-15-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(B) COMMON STOCK
- ------------------
During the nine months ended June 30, 2004, the Company issued 208,333 shares of
common stock in lieu of debt retirement. The value of the debt retired totaled
approximately $25,000.
During the nine months ended June 30, 2004, the Company issued 500,000 shares of
common stock in lieu of prepaid development costs. The value of the development
costs totaled approximately $215,000, which was computed based upon the market
prices of the common stock on the applicable payment dates.
During the nine months ended June, 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
$266,500, which was computed based upon the market prices of the common stock on
the applicable payment dates. This issuance of shares was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
During the nine months ended June 30, 2004, the Company issued 1,290,000 shares
of common stock in lieu of compensation consultancy services performed and
compensation. The value of the services performed totaled approximately
$620,400, which was computed based upon the market prices of the common stock on
the applicable payment dates.
During the nine months ended June, 2004, the Company issued 30,000 shares of
common stock to a director in lieu of an interest payment of $3,000, which was
computed based upon the market price of common stock at the applicable payment
date.
During the nine months ended June 30, 2004, the Company issued 300,000 shares of
common stock to a director in lieu of retirement of a loan which was computed
based upon the market prices of common stock on the applicable payment dates.
During the nine months ended June 30, 2004, the Company issued an aggregate of
1,315,750 shares of common stock in lieu of compensation, salaries and bonuses
to employees. Total value of the compensation, salaries and bonuses was
approximately $436,458, which was computed based upon the market prices of the
common stock on the applicable payment dates. This issuance of shares was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
During the nine months ended June 30, 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 nine months ended June 30, 2004, the Company issued 4,454,999 shares
of common stock to individuals through a Private Placement Memorandum for
$1,015,000. This issuance of shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
NOTE 7 SUBSEQUENT EVENTS
- ---------------------------
Sale of Building
VEI 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 VEI disputed many of the penalty
claims by Laurus. The Finance note was solely the obligation of VEI, but
ValCom, Inc. was also an obligor on the two Laurus notes.
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 valium, 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.
-16-
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.
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.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
As per Courts order dated June 3, 2004, based on the deed of trust bearing
instrument nos. 99-2400871, 02-1209820, and 02-1209821 the property belonging to
VEI, as defined in the instruments was auctioned for sale. The properties which
were valued at Land $7,392,292 Building $4,028,785 and Building improvements
$1,154,406 and Accumulated Depreciation of $1,294,088 at March 31, 2004 were
sold to repay the obligations to Laurus (Laurus having paid the obligations owed
to Finance Unlimited) under Trust Sale Nos: 8413-40 and 8414-30.Consequently the
loss incurred due to this sale is recorded as $1,438,250 in the Profit and loss
account of VEI for the period six months ending March 31, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PLAN OF OPERATION
As of June 30, 2004, ValCom, Inc. operations were comprised of four divisions:
(1) Studio (2) Equipment and Personnel Rental, (3) Broadcast Television and (4)
Film and Television Production.
RENTAL
- ------
The Company and its subsidiary, Valencia Entertainment International, LLC,
operates two sound stages in Valencia, California, which the Company leases.
Beginning June 2003, the Company and its subsidiary have a newly signed one-year
lease with five one-year options for two sound stages, which will generate
$700,000 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).
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 JUNE 30, 2004 VS. JUNE 30, 2003
- -----------------------------------------------------------
-17-
VALCOM, INC. AND SUBSIDIARIES
Revenues for the three months June 30, 2004 decreased by $72,631 or 11.30% from
$642,858 for the three months ended June 30, 2003 to $570,226 for the same
period in 2004. The decrease in revenue was principally due to increased studio
revenues offset by decreased production revenues associated with the joint
venture with Woody Fraser Productions.
Production costs for the three months ended June 30, 2004 decreased by $105,155
or 605.94% from $17,354 for the three months ended June 30, 2003 to $122,509 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 June
30,2004 principally due to the property being sold to pay off Finance Unlimited
and Laurus Notes.
The litigation costs increased by $1,405,656 for the three months ended June 30,
2004 compared to $0 for the three months ended June 30, 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 June 30, 2004
decreased by $65,525 or 76.60% from $85,545 for the three months ended June 30,
2003 to $20,020 for the same period in 2004. General and administrative
expenses for the three months ended June 30, 2004 increased by $162,978 or
39.86% from $408,847 for the three months ended June 30, 2003 to $571,825 for
the same period in 2004. The increase was due principally to increased
personnel costs for the new projects.
Interest expense for the three months ended June 30, 2004 decreased by $80,848
or 39.81% from $203,095 for the three months ended June 30, 2003 to $122,246 for
the same period in 2004. The decrease was due principally to the decrease in
interest rates associated with the company's mortgage loans.
Due to the factors described above, the Company's net loss increased by $674,389
from $120,549 for the three months ended June 30, 2003 to $794,938 for the same
period in 2004.
NINE MONTHS ENDED JUNE 30, 2004 VS. NINE MONTHS ENDED JUNE 30, 2003
- ----------------------------------------------------------------------
Revenues for the nine months ended June 30, 2004 decreased by $216,403 or 11.12%
from $1,945,427 for the nine months ended June 30, 2003 to $1,729,024 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 nine months ended June 30, 2004 decreased by $133,858
or 49.02 from $273,070 for the nine months ended June 30, 2003 to $139,212 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 nine months
ended June 30, 2004 compared to $0 for the three months ended June 30, 2003
primarily due to sale of property of VEI to pay off Finance Unlimited and Laurus
Notes.
The Litigation costs increased by $1,405,656 for the nine months ended June 30,
2004 compared to $0 for the nine months ended June 30, 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 nine months ended June 30, 2004
increased by $228,367 or 87.22% from $2,474,591or for the nine months ended June
30, 2003 to $490,187 for the same period in 2004, mainly due to write off of
certain balance sheet items.
General and administrative expenses for the nine months ended June 30, 2004
decreased by $200,615 or 8.11% from $2,474,591 for the six months ended June 30,
2003 to $2,273,975 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 nine months ended June 30, 2004 increased by $109,964
or 19% from $571,413 for the nine months ended June 30, 2003 to $681,377 for the
same period ended June 30, 2004.
Other income for the nine months ended June 30, 2004 increased by $29,115 or
3.76% from $774,508 for the nine months ended June 30, 2003 to $803,624 for the
same period in 2004.
-18-
VALCOM, INC. AND SUBSIDIARIES
Due to the factors described above, the Company incurred a net loss of
$5,840,976 for the nine months ended June 30, 2004 compared to net loss of
$1,823,954 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 31,
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 $5,840,976 and a negative cash flow from operations of $1,574,879
for the nine months ended June 30, 2004, a working capital deficiency of
$1,265,419, and an accumulated deficit of $16,177,487 at June 30, 2004. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
Cash totaled $73,794 on June 30, 2004 compared to $39,670 as at June 30, 2003.
During the nine months ended June 30, 2004, net cash used by operating
activities totaled $1,574,879 compared to net cash used by operating activities
of $405,019 for the comparable nine-month period in 2003. A significant portion
of operating activities included payments for interest and production
development costs. Net cash used by financing activities for the nine months
ended June 30, 2004 totaled $1,391,179 compared to $31,979 for the comparable
nine-month period in 2003. Net cash provided by investing activities during the
nine months ended June 30, 2004 totaled $45,812 compared to net cash provided of
$150,260 during the comparable prior year period due to proceeds from sale of
fixed assets.
The above cash flow activities yielded a net cash decrease of $137,888 during
the nine months ended June 30, 2004 compared to a decrease of $286,738 during
the comparable prior year period.
Net working capital (current assets less current liabilities) was a negative
$1,265,415as of June 30, 2004. The Company will need to raise funds through
various financings 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.
-19-
VALCOM, INC. AND SUBSIDIARIES
Effective Disclosure Controls
-------------------------------
Based upon that evaluation, the Company's officers concluded that many of the
Company's disclosure controls and procedures are
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 nine months ended June 30, 2004, the Company issued 208,333 shares of
common stock in lieu of debt retirement. The value of the debt retired totaled
approximately $25,000.
During the nine months ended June 30, 2004, the Company issued 500,000 shares of
common stock in lieu of prepaid development costs. The value of the development
costs totaled approximately $215,000, which was computed based upon the market
prices of the common stock on the applicable payment dates.
-20-
VALCOM, INC. AND SUBSIDIARIES
During the nine months ended June, 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
$266,500, which was computed based upon the market prices of the common stock on
the applicable payment dates. This issuance of shares was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
During the nine months ended June 30, 2004, the Company issued 1,290,000 shares
of common stock in lieu of compensation consultancy services performed and
compensation. The value of the services performed totaled approximately
$620,400, which was computed based upon the market prices of the common stock on
the applicable payment dates.
During the nine months ended June, 2004, the Company issued 30,000 shares of
common stock to a director in lieu of an interest payment of $3,000, which was
computed based upon the market price of common stock at the applicable payment
date.
During the nine months ended June 30, 2004, the Company issued 300,000 shares of
common stock to a director in lieu of retirement of a loan which was computed
based upon the market prices of common stock on the applicable payment dates.
During the nine months ended June 30, 2004, the Company issued an aggregate of
1,315,750 shares of common stock in lieu of compensation, salaries and bonuses
to employees. Total value of the compensation, salaries and bonuses was
approximately $436,458, which was computed based upon the market prices of the
common stock on the applicable payment dates. This issuance of shares was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
During the nine months ended June 30, 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 nine months ended June 30, 2004, the Company issued 4,454,999 shares
of common stock to individuals through a Private Placement Memorandum for
$1,015,000. This issuance of shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
-21-
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
- ----------------------------
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.
IMPAIRMENT OF PROPERTY AND EQUIPMENT
As per Courts order dated June 3, 2004, based on the deed of trust bearing
instrument nos. 99-2400871, 02-1209820, and 02-1209821 the property belonging to
VEI, as defined in the instruments was auctioned for sale. The properties which
were valued at Land $7,392,292 Building $4,028,785 and Building improvements
$1,154,406 and Accumulated Depreciation of $1,294,088 at March 31, 2004 were
sold to repay the obligations to Laurus (Laurus having paid the obligations owed
to Finance Unlimited) under Trust Sale Nos: 8413-40 and 8414-30.Consequently the
loss incurred due to this sale is recorded as $1,438,250 in the Profit and loss
account of VEI for the period six months ending March 31, 2004.
-22-
VALCOM, INC. AND SUBSIDIARIES
99.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
1. F.D. Disclosures pertaining to Option of Shares (filed with Edgar on May 25,
2004).
2. Foreclosure on six of the eight Valencia Sound Stages(filed with Edgar
on June 30, 2004).
3. Dismissal of Chapter 11-Bankruptcy for Valencia Entertainment International
(filed with Edgar on June 30, 2004).
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 19, 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 August 19, 2004
------------------ Chairman of the Board --------------
Vince Vellardita
BY: /s/ Tracey Eland Secretary August 19, 2004
------------- (Principal Accounting Officer) -------------
Tracey Eland
-23-
EXHIBIT 99.1
(a) Exhibits.
Exhibit Number Description
- -------------- -----------
31.1 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.
31.2 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.
32.1 Certification Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) A Form 8-K was filed on ____________
Exhibit 31.1
CERTIFICATION
I, Vince Vellardita, certify that:
1. I have reviewed this Form 10-QSB of ValCom, Inc.;
2. Based on my knowledge, this 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 this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
isclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: August 23, 2004
/s/ Vince Vellardita
Vince Vellardita
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Tracey Eland, certify that:
1. I have reviewed this Form 10-QSB of ValCom, Inc.;
2. Based on my knowledge, this 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 this report;
3. Based on my knowledge, the financial statements, and other financial
nformation included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business issuers
most recent fiscal quarter (the small business issuer's fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the a
udit committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: August 23, 2004
/s/ Tracey Eland
- ---------------------------
Tracey Eland
Principal Accounting Officer and Secretary
EXHIBIT 32.1
ValCom, Inc.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ValCom, Inc. (the Company) on
Form 10-QSB for the period ended June 30, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Vince
Vellardita, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
A signed original of this written statement required by Section 906
has been provided to ValCom, Inc. and will be retained by ValCom, Inc.
and furnished to the Securities and Exchange Commission or its staff
upon request.
Dated: August 23, 2004
/s/ Vince Vellardita
- ----------------------------------
Name: Vince Vellardita
Title: Chief Executive Officer
EXHIBIT 32.2
ValCom, Inc.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ValCom, Inc. (the Company) on Form
10-QSB for the period ended June 30, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, Tracey Eland,
Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to ValCom, Inc. and will be retained by ValCom, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
Dated: August 23, 2004
/s/ Tracey Eland
- -------------------------------------
Name: Tracey Eland
Title: Principal Accounting Officer and Secretary