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 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
- -----------------------
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 August 26, 2004 the issuer had 26,611,928 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 nine 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 nine month periods ended June 30,
2004 and 2003 (unaudited)
6
Condensed Consolidated Statements of Cash Flows
for the nine month periods 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 11
Item 3. Disclosure Controls and Procedures 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 23
Part III. EXHIBITS
-3-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
-----------
ASSETS
------
Current Assets:
Cash & Cash equivalents $ 73,794
Accounts receivable, net 10,722
-----------
Total Current Assets 84,516
Property and equipment - net 3,442,254
Deferred Compensation 209,147
Prepaid development costs 148,959
Deposits and other assets 228,154
------------
Total Assets $ 4,113,030
============
See accompanying notes to the condensed consolidated financial statements
-4-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------
Liabilities Not Subject To Compromise
Current liabilities:
Accounts payable $ 350,602
Accrued interest 324,753
Accrued expenses 243,418
Advanced Rent 30,600
Due to related parties 274,246
Notes payable 14,043
-----------
Total Current Liabilities not subject to compromise 1,237,662
Mortgage payable-Nevada 2,584,199
Liabilities Subject To Compromise
Prepetition trade accounts payable 206,249
Prepetition Payables due to related parties 95,000
Prepetition accrued expenses 131,902
-------
Total Current Liabilities 4,255,012
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; 2,879,999
shares issued and outstanding 2,880
Common stock, par value $.001; 100,000,000 shares
authorized; 25,042,048
shares issued and outstanding 25,042
Additional Paid-in capital 15,999,034
Shares to be issued 350,000
Accumulated deficit (16,518,976)
Total Stockholders' deficit (141,982)
-----------
Total Liabilities and Stockholders' deficit $4,113,030
===========
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
month period month period
ended ended
June 30, 2004 June 30, 2003
Revenue:
Rental . . . . . . . . . . . . . . . . . $ 525,212 536,978
Production . . . . . . . . . . . . . . . .. 28,427 182,453
Other. . . . . . . . . . . . . . . . . . . . 1,596 (76,573)
------------------------------------------------
555,235 642,858
------------------------------------------------
Cost and Expenses:
Production . . . . . . . . . . . . . . . . 30,311 17,354
Selling and promotion. . . . . . . . . . . 75,858 4,074
Depreciation and amortization. . . . . . . 231,955 85,545
General and administrative . . . . . . . . 385,591 408,847
Consulting and professional expenses . . . 635,183
Total Cost and Expenses. . . . . . . . . .1,358,898 515,820
Operating Profit (Loss). . . . . . . . . .(803,663) 127,038
Other income (expense):
Interest expense . . . . . . . . . . .(112,784) (203,095)
Gain on sale of assets . . . . . . . . .- 34,000
Loss on equity investment. . . . . . . . - (49,713)
------------------------------------------------
Total Other Income (Expense) . . . .. . . (112,784) (218,808)
------------------------------------------------
Loss from continuing operations. . . . . (916,447) (91,770)
Discontinued Operations:
Operation loss from
discontinued operations . . - (109,167)
Net gain on disposal of
discontinued operation. - 80,388
------------------------------------------------
Total discontinued operations. . . - (28,779)
------------------------------------------------
Net loss . . . . . . . . . . . . . . .. $(916,447) (120,549)
================================================
Basic and diluted loss per share from
continuing operations . . . . . . . $ (0.04) (0.01)
------------------------------------------------
Basic and diluted loss per share from discontinued
operations . . . . . . . . . . . . . . . . $(0.00) (0.00)
Basic and diluted loss per share . . . $(0.04) (0.01)
Weighted average shares outstanding:
Basic and diluted. 22,799,352 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 month For the nine month
period ended period ended
June 30, 2004 June 30, 2003
Revenue:
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,618,987 $ 1,560,005
Production . . . . . . . . . . . . . . . . . . . . . . . . . 87,612 385,422
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,433 -
--------------- -----------------------------------------------
Total Revenue. . . . . . . . . . . . . . . . . . . 1,714,032 1,945,427
--------------- -----------------------------------------------
Cost and Expenses:
Production . . . . . . . . . . . . . . . . . . . . . . . . . 47,014 273,070
Loss on impairment of property and equipment. . . . . . . 1,438,250 -
Litigation. . . . . . . . . . . . . . . . . . . . . . . . 1,405,656 -
Selling and promotion. . . . . . . . . . . . . . . . . . . . 105,422 18,542
Depreciation and amortization. . . . . . . . . . . . . . . . 702,122 261,820
General and administrative . . . . . . . . . . . . . . . . . 2,087,741 2,474,591
Consulting and professional services . . . . . . . . . . . . 1,149,843 -
--------------- -----------------------------------------------
Total Cost and Expenses. . . . . . . . . . . . . . . . . . . 6,936,048 3,028,023
--------------- -----------------------------------------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . (5,222,016) (1,082,596)
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . (794,161) (774,508)
Gain on sale of assets. . . . . . . . . . . . . . . . 60,230 61,642
Impairment of property. . . . . . . . . . . . . . . . - -
Loss on Equity Investment . . . . . . . . . . . . . . (6,679) (49,713)
Other income. . . . . . . . . . . . . . . . . . . . . . . - 50,000
--------------- -----------------------------------------------
Total Other Income (Expense) . . . . . . . . . . . . . . . . (740,610) (712,579)
--------------- -----------------------------------------------
Loss from continuing operations. . . . . . . . . . . . . . . (5,962,626) (1,795,175)
Discontinued operations:
Operating loss from discontinued operations. . . . . - (109,167)
Net gain on disposal of discontinued operations. . . - 80,388
--------------- -----------------------------------------------
Total discontinued operations. . . . . . . . . - (28,779)
--------------- -----------------------------------------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . (5,962,626) (1,823,954)
=============== ===============================================
Basic and diluted loss per share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . $ (0.29) $ (0.15)
Basic and diluted loss per share from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.00) $ (0.00)
--------------- -----------------------------------------------
Basic and diluted loss per share . . . . . . . . . . . . $ (0.29) $ (0.15)
=============== ===============================================
Weighted average shares outstanding: Basic and diluted. 20,161,930 11,858,208
=============== ===============================================
See accompanying notes to the condensed consolidated financial statements
-7-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine For the nine
month period month period
ended ended
June 30, 2004 June 30, 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,962,626) $(1,823,955)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of property and equipment 1,438,250
Depreciation and amortization 702,122 261,820
Bad debt expense 56,606
Gain on sale of fixed assets (60,230) (61,642)
Stock issued for services and compensation 1,049,058 194,851
Changes in operating assets and liabilities:
Receivables 61,185 (18,973)
Prepaid expenses (148,959) (31,952)
Other assets 153,060 241,897
Deferred Compensation 49,533 129,357
Deposits (112,616) (63,979)
Accounts payable and accrued expenses 980,185 710,951
---------------
Net cash used by operating activities (1,851,038) (405,019)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property & equipment . . . . . . . . . . . . . . . . . . . . (464,293) -
Notes receivable payments . . . . . . . . . . . . . . . . . . . . . . . . . 35,178 66,101
Proceeds from sale of property & equipment . . . . . . . . . . . . . . . . 57,200 84,159
--------------- ---------------
Net Cash Provided by (Used In) Investing Activities . . . . . . . . . . . (371,915) 150,260
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from sale of stock. . . . . . . . . . . . . . . . . . . . . 1,024,000
Principal repayment of notes. . . . . . . . . . . . . . . . . . . . . . . . (10,924) (174,807)
Cash received for options exercised. . . . . . . . . . . . . . . . . . . . 282,000
Cash received for shares to be issued. . . . . . . . . . . . . . . . . . . 350,000
Principal borrowings on notes and mortgages . . . . . . . . . . . . . . . . 200,000 234,463
Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . 239,989 (91,635)
---------------
Net Cash Provided By (Used In) Financing Activities . . . . . . . . . . . . 2,085,065 (31,979)
------------------------------
NET DECREASE IN CASH & CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (137,888) (286,738)
CASH & CASH EQUIVALENTS - BEGINNING . . . . . . . . . . . . . . . . . . . . 211,682 343,374
--------------- ---------------
CASH & CASH EQUIVALENTS - ENDING. . . . . . . . . . . . . . . . . . . . . . $ 73,794 $ 56,636
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 470,070 $ 284,402
Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
=============== ===============
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 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.
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 June10, 2004, Laurus had the Property 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.
On August 3, 2004, the Bankruptcy Court granted the motion for dismissal of
Chapter 11 bankruptcy case against the Company.
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.
-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 owned 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. This interest
was sold to Eye Span Entertainment Network, Inc. on February 16, 2004.
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.
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.
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.
-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
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 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.
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 $5,962,626 and a working capital deficiency of $1,153,146 and an
accumulated deficit of $16,518,976 at June 30, 2004. The Company had a net loss
of $5,962,626 for the nine 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.
Management has taken various steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue on in next twelve months. Management devoted considerable
effort during the period ended June 30, 2004, towards management of liabilities
and improving the operations. The management believes that the above actions
will allow the Company to continue its operations through the next twelve
months.
-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.
RECLASSIFICATION
- ----------------
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
-12-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 NET INCOME (LOSS) PER SHARE
- ----------------------------------------
The Company's net loss per share was calculated using weighted average shares
outstanding of 22,799,352 and 20,161,930 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.
NOTE 3 EQUITY INVESTMENT
- ---------------------------
As of December 31, 2003, ValCom had a 45% interest in a broadcasting company in
Palm Springs, California. This interest was sold to Eye Span Entertainment
Network, Inc. (ES), a related party, in exchange for 750,000 shares of common
stock of ES on February 16, 2004. valued at $14,519. The Company distributed
shares of ES to its shareholders as dividend in their ratio of ownership as of
December 15, 2003.
NOTE 4 SEGMENT INFORMATION
- -----------------------------
As of and for the nine months
ended June 30,
Studio Rental Studio & Equip. Rental Film & TV Production Total
--------------- ------------------------ ---------------------- ------------
2004
====
Revenues $1,582,654 43,766 87,612 1,714,032
--------------- ------------------------ ---------------------- ------------
Operating (Loss) Income (5,996,377 (20,637) 54,388 (5,962,626)
--------------- ------------------------ ----------------------
Total Assets 4,019,349 93,681 4,113,030
--------------- ------------------------
Depreciation and Amortization 667,422 34,700 702,122
--------------- ------------------------
Capital Expenditure 464,293 - - 464,293
--------------- ------------------------ ---------------------- ------------
2003
====
Revenues. . . . . . . . . . $ 1,602,313 $ 343,114 $ - $ 1,945,427
--------------- ------------------------ ---------------------- ------------
Operating loss. . . . . . . (929,978) (7,692) ( 144,926) (1,082,596)
--------------- ------------------------ ---------------------- ------------
Total Assets. . . . . . . . . 12,141,320 172,674 - 12,313,994
--------------- ------------------------ ---------------------- ------------
Depreciation and Amortization 224,620 37,200 - 261,820
---------------- --------------- ------------------------ ------------
-13-
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 June10, 2004, Laurus had the Property 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 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 impairment costs of $ 1,438,250 during the
period ending June 30, 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)
-14-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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,
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 StudiosThe Company
distributed shares of ES to its shareholders as dividend in their ratio of
ownership as of December 15, 2003.
NOTE 8 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.
During the period ending June 30, 2004, the Company issued 1,599,999 Series C
================================================================================
Preferred Stock in lieu of services and cash . The Company granted 300,000
================================================================================
warrants associated with the issuance of the preferred stock. The Company
================================================================================
recorded $ 51,568 in expenses for the warrants granted based on Black Scholes
================================================================================
calculation.
============
Assumption used (for Black Scholes calculations):
======================================================
Exercise Price $ .25
===================================================================
Life 12 months
===========================================================================
Volatility 125%
======================================================================
Interest Rate 8%
====================================================================
The following is the summary of warrants as of June 30, 2004:
========================================================================
Warrants as of September 30, 2003 0
================================================================================
Warrants issued during the period 300,000
================================================================================
Warrants exercised during the period 0
================================================================================
Warrants expired during the period 0
======================================--------
Warrants outstanding as of June 30, 2004 300,000
================================================================================
During the period ending June 30, 2004, the Company received $ 350,000 for
================================================================================
1,400,000 Series C Preferred Stock to be issued .
=========================================================
-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 converted the Series D
Preferred Stock to common stock by issuance of 2,800,000 shares of 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.
During the nine months ended June 30, 2004, the Company issued 1,900,000 shares
of common stock in lieu of compensation consultancy services performed and
compensation. The value of the services performed totaled approximately
$797,600, 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, 2004, the Company issued 500,000 shares of
common stock to a director in lieu for compensation valued at $ 95,000 and
principal loan repayment for $ 50,000, which was computed based upon the market
price of common stock at the applicable payment date.
During the nine months ended June, 2004, the Company issued 250,000 shares of
common stock to a director in lieu of services valued at $ 35,000, 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
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 $121,458, 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 1,344,667 shares
of common stock for options exercised amounting to $ 282,000.
During the nine months ended June 30, 2004, the Company issued 2,792,468 shares
of common stock to individuals through a Private Placement Memorandum for
$1,024,000.
During the nine months ended June 30, 2003, the Company issued 975,000 shares of
common stock in lieu of compensation for legal and consulting services
performed. The value of the legal and consulting services performed totaled
approximately $140,376, which was computed based upon the market prices of the
common stock on the applicable payment dates.
During the nine months ended June 30, 2003, the Company issued 597,500 shares of
common stock in lieu of compensation, salaries and bonuses to employees. Total
value of the compensation, salaries and bonuses was approximately $54,475, which
was computed based upon the market prices of the common stock on the applicable
payment dates.
During the nine months ended June 30, 2003, the Company issued 26,400 shares of
common stock in lieu of debt retirement. Total value of the debt retired was
approximately $3,870, which was computed based upon the market prices of the
common stock issued on the applicable payment dates.
-16-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9 DISPOSAL OF BUILDING (UNDER THE ORDER OF BANKRUPTCY COURT)
- ---------------------------------------------------------------------------
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 June10, 2004, Laurus had the Property 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 10 SUBSEQUENT EVENTS
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 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
$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.
-17-
VALCOM, INC. AND SUBSIDIARIES
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
- -----------------------------------------------------------
Revenues for the three months June 30, 2004 decreased by $87,623 or 14% from
$642,858 for the three months ended June 30, 2003 to $555,235 for the same
period in 2004. The decrease in revenue was principally due to decreased
production revenues associated with the joint venture with Woody Fraser
Productions.
Production costs for the three months ended June 30, 2004 increased by $12,957
or 75% from $17,354 for the three months ended June 30, 2003 to $30,311 for the
same period in 2004. The increase in production costs was principally due to
increased production associated with Woody Fraser Productions as described
above.
Depreciation and amortization expense for the three months ended June 30, 2004
increased by $146,410 or 171% from $85,545 for the three months ended June 30,
2003 to $231,955 for the same period in 2004.
General and administrative expenses for the three months ended June 30, 2004
decreased by $23,256 or 6% from $408,847 for the three months ended June 30,
2003 to $385,591 for the same period in 2004. The decrease was due principally
to decreased personnel costs for the new projects.
Interest expense for the three months ended June 30, 2004 decreased by $90,311
or 44% from $203,095 for the three months ended June 30, 2003 to $112,784 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 $795,898
from $120,549 for the three months ended June 30, 2003 to $916,447 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 $231,395 or 12%
from $1,945,427 for the nine months ended June 30, 2003 to $1,714,032 for the
same period in 2004. The decrease in revenue was principally due to decreased
production revenues associated with the joint venture with Woody Fraser
Productions.
Production costs for the nine months ended June 30, 2004 decreased by $226,056
or 83% from $273,070 for the nine months ended June 30, 2003 to $47,014 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 nine 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 $440,302 or 168% from 261,820 for the nine months ended June 30,
2003 to $702,122 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 $386,850 or 16% from $2,474,591 for the nine months ended June 30,
2003 to $2,087,741 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 $19,653
or 3% from $774,508 for the nine months ended June 30, 2003 to $794,161 for the
same period ended June 30, 2004.
Other income for the nine months ended June 30, 2004 decreased by $50,000 from
$50,000 for the nine months ended June 30, 2003 to $0 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 totalled $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: September 10, 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 September 10, 2004
------------------ Chairman of the Board --------------
Vince Vellardita
BY: /s/ Tracey Eland Secretary September 10, 2004
------------- (Principal Accounting Officer)-------------
Tracey Eland
-23-
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 June 30, 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: September 10, 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 June 30, 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: September 10, 2004
--------------
/s/Tracey Eland
----------------
Name: Tracey Eland
Title: Controller (Principal Accounting Officer)
-24-
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 June 30,
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: September 10, 2004
----------------
By: /s/ Vince Vellardita
----------------------
Vince Vellardita
Chief Executive Officer
-25-
In connection with of the Quarterly Report of ValCom, Inc., a Delaware
corporation (the "Company"), on Form 10-QSB for the period ending June 30,
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: September 10, 2004
-----------------
By: /s/ Tracey Eland
------------------
Tracey Eland
Secretary and
Principal Accounting Officer
-26-