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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 DECEMBER 31, 2004
Commission file Number 0-28416
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
VALCOM, INC.
(Name of small business issuer specified in its charter)
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Delaware 58-1700840
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
41 North Mojave Road, Las Vegas, Nevada 89101
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(Address of Principal executive offices) (Zip code)
(702) 385-9000
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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
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(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 December 31, 2004 the issuer had 33,537,926 shares of its $0.001 par value
common stock outstanding.
MARCH 15, 2005
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 December 31, 2004 and the results of their operations and
their cash flows for the three months ended December 31, 2004. These
consolidated financial statements include the accounts of ValCom, Inc. and its
subsidiary companies (together "the Company"). Results for the three months
ended December 31, 2004, are not necessarily indicative of the operations, which
may occur during the year ending September 30, 2005. Refer to the Company's
Annual Report on Form 10-KSB for the year ended September 30, 2004 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
December 31, 2004 (unaudited) . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for
the three and three month periods ended December 31,
2004 and 2003 (unaudited) . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows
for the three-month periods ended December 31,
2004 and 2003 (unaudited) . . . . . . . . . . . . . . 7
Notes to Condensed Consolidated Financial
Statements (unaudited). . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 16
Item 3. Disclosure Controls and Procedures. . . . . . . . . . 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 22
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. . . . . . . . . . . . 22
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Part III. EXHIBITS
-3-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
(UNAUDITED)
-----------
ASSETS
------
Current Assets:
Cash & Cash equivalents $22,142
Accounts receivable, net 40,132
Note receivable - current 94,598
-----------
Total Current Assets
Property and equipment - net 3,538,959
Deposits and other assets 40,631
------------
Total Assets $3,736,462
============
See accompanying notes to the condensed consolidated financial statements
-4-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 2004
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Liabilities Not Subject To Compromise
Current liabilities:
Accounts payable $536,588
Accrued interest 100,797
Accrued expenses 30,956
Due to related parties 91,000
Notes payable 528,452
-----------
Total Current Liabilities not subject to
compromise 1,287,793
Mortgage payable-Nevada. . . . . . . . . . . . . 2,400,000
Long term loans . . . . . . . . . . . . . . . . . . . 46,004
----------
Total Current Liabilities 2,446,004
Commitments and contingencies
TOTAL LIABILITIES . . . . . . . . . . . . . . . . .3,733,797
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;
4,859,083 shares issued and outstanding,. . . . . . . 4,859
Common stock, par value $.001;
100,000,000 shares authorized;
33,572,926 shares issued and outstanding 33,574
Treasury Stock 35,000 (35)
Additional Paid-in capital 9,582,344
Minority Interest . . . . . . . . . . . . . . . . .(158,595)
Accumulated deficit (9,459,520)
Total Stockholders' equity 2,665
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Total Liabilities and Stockholders' equity $3,736,462
=========
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
December 31, December 31,
2004 2003
---- ----
Revenue:
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 173,372 $ 531,571
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,039 30,237
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 2,340
------------ ------------
Total Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 240,411 564,148
------------ ------------
Cost and Expenses:
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,786 10,942
Selling and promotion. . . . . . . . . . . . . . . . . . . . . 12,062 13,972
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 26,253 210,360
General and administrative . . . . . . . . . . . . . . . . . . . . 617,634 612,717
Consulting and professional expenses . . . . . . . . . . . . . . . 517,312 142,569
Total Cost and Expenses. . . . . . . . . . . . . . . . . . . . . . 1,221,048 990,560
------------ ------------
Operating Profit (loss). . . . . . . . . . . . . . . . . . . . . . (980,636) (426,412)
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (4,494) (267,592)
Gain on sale of assets. . . . . . . . . . . . . . . . . . . - 53,950
Loss on equity investment . . . . . . . . . . . . . . . . . - -
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 25,688
------------
Other income
Total Other Income (Expense) . . . . . . . . . . . . . . . . . . . 21,193 (220,321)
Loss from continuing operations. . . . . . . . . . . . . . (959,444) (646,733)
Discontinued Operations:
Operation loss from discontinued operations. . . . . - -
============ ============
Net gain on disposal of discontinued operation.. . . - -
============ ============
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (959,444) $ (646,733)
============ ============
Basic and diluted loss per share from continuing operations. (0.03) (0.06)
------------ ------------
Basic and diluted loss per share from discontinued operations . (0.00) (0.00)
Basic and diluted loss per share. . . . . . . . . . . . . . . . (0.03) (0.06)
Weighted average shares outstanding: Basic. . . . . . . . . . 31,501,469 15,213,818
Weighted average shares outstanding: Diluted . . . . . . . . . . 36,360,552 17,943,818
===========- ============
See accompanying notes to the condensed consolidated financial statements
-6-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three For the three
months ended months ended
December 31, December 31,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(959,444) $(646,733)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of property and equipment
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 26,253 210,360
Bad debt expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Gain on sale of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . (53,950)
Stock issued for services and compensation. . . . . . . . . . . . . . . . . 547,781 465,959
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,135 30,776
Production in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . (3,397) (125,767)
Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,220)
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,511
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,864)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 172,290 35,886
----------
Net Cash Used In Operating Activities . . . . . . . . . . . . . . . . . . . (214,382) (106,042)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . (25,698) (46,556)
Notes receivable payments . . . . . . . . . . . . . . . . . . . . . . . . . 17,589
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . 57,200
----------
Net Cash Provided(used) Investing Activities. . . . . . . . . . . . . . . . (25,698) 28,233
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from sale of stock. . . . . . . . . . . . . . . . . . . . . . 48,090
Joint venture contribution. . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Long term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,664 100,000
Cash received for shares to be issued
Principal borrowings on notes and mortgages . . . . . . . . . . . . . . . . (48,883)
Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Net Cash Provided By (Used In) Financing Activities . . . . . . . . . . . . 240,754 101,117
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NET DECREASE IN CASH & CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . 674 23,308
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . 21,468 211,682
---------- ----------
CASH & CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . . . . . . . $ 22,142 $ 234,990
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,494 $ 191,116
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Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0
---------- ----------
See accompanying notes to the condensed consolidated financial statements
-7-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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DESCRIPTION OF BUSINESS
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ValCom, Inc. and subsidiaries (the "Company"), formerly SBI Communications,
Inc., was originally organized in the State of Utah on September 23, 1983, under
the corporate name of Alpine Survival Products, Inc. Its name was subsequently
changed to Supermin, Inc. on November 20, 1985. On September 29, 1986, Satellite
Bingo, Inc. became the surviving corporate entity in a statutory merger with
Supermin, Inc. In connection with the above merger, the former shareholders of
Satellite Bingo, Inc. acquired control of the merged entity and changed the
corporate name to Satellite Bingo, Inc. On January 1, 1993, the Company executed
a plan of merger that effectively changed the Company's state of domicile from
Utah to Delaware. Through shareholder approval dated March 10, 1998, the name
was changed to SBI Communications, Inc.
In October 2000, the Company was issued 7,570,997 shares by SBI for 100% of the
shares outstanding in Valencia Entertainment International, LLC ("VEI"), a
California limited liability company. This acquisition has been accounted for as
a reverse acquisition merger with VEI as the surviving entity. The corporate
name was changed to ValCom, Inc. effective March 21, 2001.
The Company is a diversified entertainment company with the following operating
activities:
a) Studio rental - The Company and its subsidiary, Valencia Entertainment
International, LLC, operated eight sound stages in Valencia, California until
June 10,2004 when six of the sound stages were sold off to pay the debts of
Laurus and Finance Unlimited. The Company leases the other two sound stages.
Beginning June 2003, the Company and its subsidiary signed one-year lease with
five one-year options for its sound stages. The Company has acquired seven and
one half acres of property in Nevada with 162,000 square feet of buildings,
which are being renovated into seven sound stages for rental. The Company's
subsidiary, Half Day Video, Inc., supplies personnel, cameras, and other
production equipment to various production companies on a short-term basis.
b) Film, TV, & Animation Production -The Company, in addition to producing
its own television and motion picture programming, has an exclusive facilities
agreement in place for productions in Los Angeles County for a three-year term
with Woody Fraser/Woody Fraser Productions
-8-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
BASIS OF PRESENTATION
- -----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and related
notes included in the Company's Form 10-KSB.
The audited consolidated financial statements of the Company for the year ended
September 30, 2004 were filed on March 14, 2005 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 months
ended December 31, 2004 are not necessarily indicative of the results to be
expected for the entire year.
Following is a summary of the significant accounting policies followed in the
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, New Zoo Revenue was acquire during 2004.
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.
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:
-9-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
CONCENTRATIONS AND CREDIT RISK
- ---------------------------------
The Company had one production customer and one major rental income customer who
accounted for total rental revenues for the three months ended December 31,
2004.
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.
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.
-10-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 working
capital deficiency of $1,130,921 and an accumulated deficit of $9,459,520 at
December 31, 2004. The Company had a net loss of $959,444 for the three months
ended December 31, 2004.
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 December 31, 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.
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.
-11-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
NOTE 2 NET INCOME (LOSS) PER SHARE
- ----------------------------------------
The Company's net loss per share was calculated using weighted average shares
outstanding of 31,501,469 for the three months ended December 31, 2004 and
15,213,818 for the three months ended December 31, 2003. Convertible preferred
stock, convertible debt, and warrants are common stock equivalents, they are
included in the calculation of diluted earnings per share.
NOTE 3 EQUITY INVESTMENT
- ---------------------------
None
NOTE 4 SEGMENT INFORMATION
- -----------------------------
Studio Film & TV
Rental Production Total
------ ---------- -----
For the three months ended December 31, 2004
- ---------------------------------------------
Revenues. . . . . . . . . . . . . . . . . . . $ 173,372 $62,039 $235,411
Operating Income (Loss) . . . . . . . . . . . (980,636) (980,636)
Total Assets. . . . . . . . . . . . . . . . . 3,736,462 3,736,462
Depreciation and Amortization . . . . . . . . 26,253 26,253
Capital Expenditure . . . . . . . . . . . . . 25,698 - 25,698
-12-
VALCOM, INC. AND SUBSIDIARIES
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
NOTE 5 LITIGATION
- -------------------
On October 5, 2004, ValCom, Inc. and Valencia Entertainment International, LLC,
commenced a lawsuit in the Los Angeles Superior Court, State of California,
against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an
accounting of the amount due in connection with a non-judicial foreclosure of a
deed of trust securing a promissory note executed by ValCom and Valencia. It
also alleges that Chicago Title breached its trustee's duties and Laurus
breached the terms of the promissory note and deed of trust securing it.
ValCom's attorney has expressed his belief that the lawsuit it meritorious but
at this stage in the proceeding, he is unable to state how much, if any, will be
recovered in the lawsuit.
Lloyd Kurtz
Pending or Threatened Litigation, Claims and Assessments by the prior contractor
for the renovations, at ValCom Studios in Nevada has been replaced. Mr. Lloyd
Kurtz filed suit on October 25, 2004 against ValCom, Inc., A private Nevada
Corporation which is 80% owned by ValCom, Inc. a Delaware Corporation, ValCom,
Inc. a Delaware Corporation and Vincent Vellardita. The suit alleges a violation
of Securities Act of 1933 and states that Mr. Kurtz purchased 600,000 shares of
ValCom - Delaware at $0.25 per share and that the shares were not registered. He
claims he is owed an additional $303,000. Mr. Kurtz has filed a Mechanic's Lien
for $303,000. A motion to dismiss the claim of Mr. Kurtz has been filed. If the
corporation does not prevail on its Motions to Dismiss the corporation will file
its full defense and counterclaims which exceed the amount claimed by Mr. Kurtz.
Farkhanda Rana
On October 20, 2004 a shareholder of ValCom initiated suit against the Company
and its President alleging violations of State and Federal Securities Law along
with Fraud and Breach of Contract. The lawsuit captioned Farkhanda Rana vs.
ValCom, Inc., Valencia Entertainment and Vince Vellardita et al. were filed in
Los Angeles Superior Court as Case Number PC035673. On November 23, 2004 after
a hearing the Plaintiff in this matter obtained a pre-judgment writ of
attachment against the Company for $325,000.00.
NOTE 6 IMPAIRMENT OF PROPERTY AND EQUIPMENT
None during this quarter
-13-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 RELATED PARTY TRANSACTIONS
- -------------------------------------
THE COMPANY BORROWED $54,000 FROM MR. VINCE VELLARDITA, PRESIDENT AND CEO AND
- --------------------------------------------------------------------------------
$30,000 FROM RICHARD SHINTAKU.
- ---------------------------------
NOTE 8 STOCKHOLDERS' EQUITY
- ------------------------------
(A) CONVERTIBLE PREFERRED STOCK
- ----------------------------------
On December 31, 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
three months ended December 31, 2004.
During the quarter ending December 31, 2004, the Company issued 379,084 Series C
Preferred Stock in lieu of cash payment. The Company granted no warrants
associated with the issuance of the preferred stock.
-14-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(B) COMMON STOCK
- ------------------
During the three months ended December 31, 2004, the Company issued an aggregate
of 2,500,000 shares of common stock under the Company stock option plan to
employee. Total value of the compensation was approximately $25,000, 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 three months ended December 31, 2004, the Company issued 2,000,000
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 $480,000, which was computed based upon the market prices of the
common stock on the applicable payment dates.
During the three months ended December 31, 2004, the Company issued 193,500
shares of common stock in lieu of compensation, salaries and bonuses to
employees. Total value of the compensation, salaries and bonuses was
approximately $30,471, which was computed based upon the market prices of the
common stock on the applicable payment dates.
During the three months ended December 31, 2004, the Company issued 760,000
shares of common stock to convert $95,000 in liabilities from Great Asian
Holding.
NOTE 9 SUBSEQUENT EVENTS
- ---------------------------
Appointment of David Dadon as direct and chairman of Board of Directors and was
awarded 2,000,000 shares of common stock for his acceptance.
Lost of property in Las Vegas, Nevada to Studios Properties, LLC
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PLAN OF OPERATION
As of December 31, 2004, ValCom, Inc. operations were comprised of four
divisions:
(1) Studio (2) Equipment and Personnel Rental, and (3) 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. The Company's subsidiary,
Half Day Video, Inc., supplies personnel, cameras, and other production
equipment to various production companies on a short-term basis.
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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).
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 VS. DECEMBER 31, 2003
- -------------------------------------------------------------------
Revenues for the three months December 31, 2004 decreased by $323,737 or 57%
from $564,148 for the three months ended December 31, 2003 to $240,411 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 December 31, 2004 increased by $
36,844 or 336% from $10,942 for the three months ended December 31, 2003 to
$47,786 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 December 31,
2004 decreased by $184,107 or 88% from $210,360 for the three months ended
December 31, 2003 to $26,253 for the same period in 2004.
General and administrative expenses for the three months ended December 31, 2004
increased by $4,917 or .01% from $612,717 for the three months ended December
31, 2003 to $617,634 for the same period in 2004. The increase was due
principally to decreased personnel costs for the new projects.
Interest expense for the three months ended December 31, 2004 decreased by
$263,098 or 98% from $267,592 for the three months ended December 31, 2003 to
$4,494 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 $312,711
from $646,733 for the three months ended December 31, 2003 to $959,444 for the
same period in 2004.
THREE MONTHS ENDED DECEMBER 31, 2003 VS. THREE MONTHS ENDED DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Revenues for the three months December 31, 2003 decreased by $200,781 or 26%
from $764,929 for the three months ended December 31, 2002 to $564,148 for the
same period in 2003. The decrease in revenue was principally due to decreased
production revenues associated with the joint venture with Woody Fraser
Productions.
-17-
VALCOM, INC. AND SUBSIDIARIES
Production costs for the three months ended December 31, 2003 decreased by
$180,081 or 94.3% from $191,023 for the three months ended December 31, 2002 to
$10,942 for the same period in 2003. The decrease in production costs was
principally due to decreased production associated with Woody Fraser Productions
as described above.
Selling and promotion costs for the three months ended December 31, increased by
$1,555 or 12.5% from $12,417 for the three months ended December 31, 2002 to
$13,972 for the same period in 2003. The increase was due principally to an
increase in travel and public relations expenses.
Depreciation and amortization expense for the three months ended December 31,
2003 increased by $122,620 or 140% from $210,360 for the three months ended
December 31, 2002 to $87,840 for the same period in 2003.
General and administrative expenses for the three months ended December 31, 2003
decreased by $235,426 or 28% form $848,143 for the three months ended December
31, 2002 to $612,717 for the same period in 2003. the decrease was due
principally to decreased personnel costs, insurance, printing, and bad debt
expense.
Consulting and professional fees for the three months ended December 31, 2003
decreased by $92,925 or by 39.5% from $235,494 for the three months ended
December 31, 2002 to $142,569 for the same period in 2003. the decrease in
consulting and professional fees was principally due to decreased legal and
accounting costs.
Interest expense for the three months ended December 31, 2003 increased by
$92,754 or 53.1% from $174,838 for the three months ended December 31, 2002 to
$267,592 for the same period in 2003. The increase was due principally to the
increase in interest rates associated with the company's mortgage loans.
Other income for the three months ended December 31, 2003 increased by $45,950
from $8,000 for the three months ended December 31, 2002 to $53,950 for the same
period in 2003. The increase was due to a gain recognized from the sale of
fixed assets offset by the loss recorded on equity investment of ValCom
Broadcasting, LLC.
Due to the factors described above, the Company's net loss decreased by $129,993
from $776,726 for the three months ended December 31, 2002 to $646,733 for the
same period in 2003.
-18-
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 three months ended December 31, 2004.
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 $959,444 and a negative cash flow from operations of $214,382 for
the three months ended December 31, 2004, a working capital deficiency of
$1,130,921, and an accumulated deficit of $9,459,519 at December 31, 2004. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
Cash totaled $22,142 on December 31, 2004 compared to $234,990 as at December
31, 2003. During the three months ended December 31, 2004, net cash used by
operating activities totaled $214,382 compared to net cash used by operating
activities of ($106,042) for the comparable three-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
three months ended December 31, 2004 totaled $240,754 compared to $101,117 for
the comparable three-month period in 2003. Net cash provided by investing
activities during the three months ended December 31, 2004 totaled $(25,698)
compared to net cash provided of $28,233 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 $676 during the
three months ended December 31, 2004 compared to a decrease of $23,308 during
the comparable prior year period.
Net working capital (current assets less current liabilities) was a negative
$1,130,921 as of December 31, 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
-19-
Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Within the 90 days prior to the filing date of this Report,
the Company conducted an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-14. This evaluation was conducted under the supervision
and with the participation of the Company's Chief Executive Officer and
Principal Financial Officer.
EFFECTIVE DISCLOSURE CONTROLS
-----------------------------
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.
2. 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.
-20-
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On October 5, 2004, ValCom, Inc. and Valencia Entertainment International, LLC,
commenced a lawsuit in the Los Angeles Superior Court, State of California,
against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an
accounting of the amount due in connection with a non-judicial foreclosure of a
deed of trust securing a promissory note executed by ValCom and Valencia. It
also alleges that Chicago Title breached its trustee's duties and Laurus
breached the terms of the promissory note and deed of trust securing it.
ValCom's attorney has expressed his belief that the lawsuit it meritorious but
at this stage in the proceeding, he is unable to state how much, if any, will be
recovered in the lawsuit.
Lloyd Kurtz
Pending or Threatened Litigation, Claims and Assessments by the prior contractor
for the renovations, at ValCom Studios in Nevada has been replaced. Mr. Lloyd
Kurtz filed suit on October 25, 2004 against ValCom, Inc., A private Nevada
Corporation which is 80% owned by ValCom, Inc. a Delaware Corporation, ValCom,
Inc. a Delaware Corporation and Vincent Vellardita. The suit alleges a violation
of Securities Act of 1933 and states that Mr. Kurtz purchased 600,000 shares of
ValCom - Delaware at $0.25 per share and that the shares were not registered. He
claims he is owed an additional $303,000. Mr. Kurtz has filed a Mechanic's Lien
for $303,000. A motion to dismiss the claim of Mr. Kurtz has been filed. If the
corporation does not prevail on its Motions to Dismiss the corporation will file
its full defense and counterclaims which exceed the amount claimed by Mr. Kurtz.
Farkhanda Rana
On October 20, 2004 a shareholder of ValCom initiated suit against the Company
and its President alleging violations of State and Federal Securities Law along
with Fraud and Breach of Contract. The lawsuit captioned Farkhanda Rana vs.
ValCom, Inc., Valencia Entertainment and Vince Vellardita et al. were filed in
Los Angeles Superior Court as Case Number PC035673. On November 23, 2004 after
a hearing the Plaintiff in this matter obtained a pre-judgment writ of
attachment against the Company for $325,000.00.
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.
-21-
ITEM 2. CHANGES IN SECURITIES
- ---------------------------------
(B) COMMON STOCK
- ------------------
During the three months ended December 31, 2004, the Company issued an aggregate
of 2,500,000 shares of common stock under the Company stock option plan to
employee. Total value of the compensation was approximately $25,000, 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 three months ended December 31, 2004, the Company issued 2,000,000
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 $480,000, which was computed based upon the market prices of the
common stock on the applicable payment dates.
During the three months ended December 31, 2004, the Company issued 193,500
shares of common stock in lieu of compensation, salaries and bonuses to
employees. Total value of the compensation, salaries and bonuses was
approximately $30,471, which was computed based upon the market prices of the
common stock on the applicable payment dates.
During the three months ended December 31, 2004, the Company issued 760,000
shares of common stock to convert $95,000 in liabilities from Great Asian
Holding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- ----------------------------
None
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
- --------------------------------
1. Resignation of Krishnaswamy Alladi from the Board of Director (filed with
Edgar on December 13, 2004,).
2. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT filed with Edgar on
February 1, 2005.
-22-
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: March 15, 2005 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 March 15, 2005
---------------------- Chairman of the Board ----------------
Vince Vellardita
BY: /s/ Tracey Eland Secretary March 15, 2005
------------- (Principal Accounting Officer)----------------
Tracey Eland
-23-