SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal quarter ended June 30, 2002
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)
26030 Avenue Hall - Studio #5, 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 June 30, 2002 the issuer had 9,757,649 shares of its $0.001 par value
common stock outstanding.
Table Of Contents
ValCom, Inc.
FORM 10-QSB
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of 3
June 30, 2002 (unaudited) and
September 30, 2001
Condensed Consolidated Statements of Operations 5
for the three and nine months ended June 30,
2002 and 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
for the nine months ended June 30,
2002 and 2001 (unaudited)
Condensed Consolidated Statement of Changes in 7
Shareholders' Equity for the nine months ended
June 30, 2002 (unaudited)
Notes to Condensed Consolidated Financial State- 9
ments (unaudited)
Item 2. Management's Discussion and Analysis 16
of Financial Condition and Results
of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of matters to a vote of 21
Security Holders
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Part III EXHIBITS
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2002 2001
------------ ------------
(Unaudited)
Current Assets:
Cash $ 1,000,888 $ 420,857
Accounts receivable, net 283,359 156,179
Other receivables 74,000 74,000
Prepaid development costs 624,891 190,699
Notes receivable, related parties 1,300,000 1,415,000
------------ ------------
Total Current Assets 3,283,138 2,256,735
Fixed Assets - net 11,864,837 11,959,941
Deferred financing costs 305,760 232,171
Deposits 34,419 31,750
Note receivable, long term 100,000 100,000
------------ ------------
Total Assets $15,588,154 $14,580,597
============ ============
See accompanying notes and accountants' report to condensed consolidated
financial statements
-3-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 201,488 $ 540,983
Accrued interest 22,027 20,384
Accrued other 421,723 107,824
Credit line payable -0- 150,837
Notes payable - current portion 93,173 133,405
Production advances, net -0- 765,656
------------- -------------
Total Current Liabilities 738,411 1,719,089
Notes payable, net 7,956,012 6,636,734
------------- -------------
Total Liabilities $ 8,694,423 $ 8,355,823
------------- -------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock: all with par value
$0.001;
Series B, 1,000,000 shares authorized; 38,000
shares issued and outstanding, respectively 38 38
Series C, 5,000,000 shares authorized; 1,500,000
shares issued and outstanding, respectively 1,500 1,500
Series D, 1,250,000 shares authorized; 1,250,000
and 0 shares issued and outstanding, respectively 1,250 0
Common stock, par value $.001; 100,000,000 shares
authorized; 9,757,649 and 8,909,401
shares issued and outstanding, respectively 9,758 8,909
Additional Paid-in capital 10,749,030 9,512,699
Accumulated deficit (3,867,845) (3,298,372)
------------- -------------
Total Stockholders' Equity 6,893,731 6,224,774
------------- -------------
Total Liabilities and Stockholders' Equity $ 15,588,154 $ 14,580,597
============= =============
See accompanying notes and accountants' report to condensed consolidated
financial statements
-4-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue
Rental $ 787,952 $ 542,461 $ 2,743,572 $ 1,066,331
Production 2,838,936 279,426 6,195,214 576,926
Other 0 102,410 0 131,201
------------ ------------ ------------ ------------
Total 3,626,888 924,297 8,938,786 1,774,458
Cost and Expenses:
Production 2,760,600 179,895 5,683,232 451,666
Selling and promotion 37,006 86,801 79,119 217,873
Depreciation and
amortization 180,570 35,040 315,410 250,397
General
and administrative 771,881 1,146,093 2,295,988 2,774,261
------------ ------------ ------------ ------------
Total 3,750,057 1,447,829 8,373,749 3,694,197
------------ ------------ ------------ ------------
Operating Income (loss) (123,169) (523,532) 565,037 (1,919,739)
Interest expense (715,195) (160,418) (1,134,510) (680,377)
------------ ------------ ------------ ------------
Net loss $ (838,364) $ (683,950) $ (569,473) $(2,600,116)
============ ============ ============ ============
Net loss
per common share
Basic $ (0.09) $ (0.07) $ (0.06) $ (0.28)
============ ============ ============ ============
Diluted $ (0.09) $ (0.07) $ (0.06) $ (0.28)
============ ============ ============ ============
See accompanying notes and accountants' report to condensed consolidated
financial statements
-5-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30,
(UNAUDITED)
2002 2001
------------ ------------
Operating Activities:
Net loss $ (569,473) $ (2,600,116)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 315,410 255,977
Stock and warrants issued for services 98,333 558,000
Changes in assets and liabilities:
Receivables (127,180) (368,950)
Prepaid expenses 0 11,569
Other assets 0 (130,710)
Prepaid development costs (434,192) (421,358)
Accounts payable and accrued expenses (23,953) 542,062
Production deposits (765,656) 0
Deposits (2,669) 40,500
------------ ------------
Net Cash used by Operating Activities (1,509,380) (2,113,026)
------------ ------------
Investing Activities:
Acquisition of fixed assets (71,896) ( 523,518)
Acquisition of VEI 0 80,738
Investment in Partnership 0 0
Notes receivable payments 115,000 0
------------ ------------
Net Cash Provided (Used) by Investing Activities 43,104 (442,780)
------------ ------------
Financing Activities:
Principal borrowings on notes 1,489,143 1,196,612
Issuance of preferred stock and warrants 930,000 330,000
Loans payable 0 1,202,767
Credit line payable (150,837) 110,000
Due to stockholder 0 114,860
Deferred financing costs (221,999) 0
------------ ------------
Net Cash Provided by Financing Activities 2,046,307 2,954,239
------------ ------------
Increase in Cash and Cash Equivalents 580,031 398,433
Cash and cash equivalents, beginning of period 420,857 22,541
------------ ------------
Cash and cash equivalents, end of period $ 1,000,888 $ 420,974
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,129,646 $ 666,796
============ ============
Income taxes paid $ 0 $ 800
============ ============
Supplemental disclosure of non cash investing
and financing activity:
Shares issued for retirement of debt $ 132,797 $ 0
============ ============
See accompanying notes and accountants' report to condensed consolidated
financial statements
-6-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Preferred Series B Preferred Series C
---------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Balance
Sep.30, 2001 8,909,401 $ 8,909 38,000 $ 38 1,500,000 $ 1,500
Shares issued
for services 320,500 321
Shares issued
for debt
retirement 527,748 528
Preferred stock
issed for cash, net
Warrants issued
with preferred stock
Issuance of warrants
with convertible notes
Warrants issued
to placement agent
Net loss
for the Period
---------- ---------- ---------- ---------- ---------- ----------
Balance
June 30, 2002 9,757,649 $ 9,758 38,000 $ 38 1,500,000 $ 1,500
========== ========== ========== ========== =========== ==========
See accompanying notes and accountants' report to condensed consolidated financial statements
-7-
VALCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)
Preferred Series D Additional
-------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
Balance
Sep.30, 2001 $ 9,512,699 $(3,298,372) $ 6,224,774
Shares issued
for services 55,767 56,088
Shares issued
for debt
retirement 132,269 132,797
Preferred stock
issued for cash, net 1,250,000 1,250 506,297 507,547
Warrants issued
with preferred stock 422,453 422,453
Issuance of warrants
with convertible notes 77,300 77,300
Warrants issued
to placement agent 42,245 42,245
Net loss
for the Period (569,473) (569,473)
------------ ------------ ------------ ------------ ------------
Balance
June 30, 2002 1,250,000 $ 1,250 $10,749,030 $(3,867,845) $ 6,893,731
============ ============ ============ ============ ============
See accompanying notes and accountants' report to condensed consolidated financial statements
-8-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
Following is a summary of the significant accounting policies followed in the
preparation of these condensed consolidated financial statements, which policies
are in accordance with accounting principles generally accepted in the United
States of America.
ORGANIZATION
- ------------
ValCom, Inc. (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. Through shareholder approval dated March 10, 1998, the
name was changed to SBI Communications, 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.
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 becoming the surviving entity. The
corporate name was changed to ValCom, Inc.
PRINCIPLES OF CONSOLIDATION/PRESENTATION
- ----------------------------------------
The condensed consolidated financial statements include the accounts of the
Company and three wholly owned subsidiaries, Valencia Entertainment, LLC which
was acquired effective February 2001, Half Day Video, Inc. which was acquired
effective March 2001 and ValCom Broadcasting, LLC which was formed in April
2002.
-9-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- ----------------------------------------------------------
The Company changed its fiscal year to September 30 from December 31 to better
reflect its operating cycle.
USE OF ESTIMATES
- ----------------
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could materially differ form those estimates.
COMMITMENTS, RISK AND CONTINGENCIES
- -----------------------------------
Financial instruments that potentially subject the Company to concentrations of
risk consist of trade receivables principally arising from monthly leases from
television producers. Management believes all receivables to be fully
collectible.
CASH EQUIVALENTS
- ----------------
The Company maintains cash and cash equivalents (short-term highly liquid
investments with original maturity less than three months) with various
financial institutions. From time to time, cash balances may exceed Federal
Deposit Insurance Corporation insurance limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying value of cash, receivables and accounts payable approximates fair
value due to the short maturity of these instruments. The carrying value of
short and long-term debt approximates fair value based on discounting the
projected cash flows using market rates available for similar instruments. None
of the financial instruments are held for trading purposes. As of June 30, 2002
accounts receivable has been reported net of a $10,000 allowance for bad debts.
-10-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- ----------------------------------------------------------
INTERIM FINANCIAL STATEMENTS
- ----------------------------
The condensed consolidated financial statements as of June 30, 2002 and for the
three and nine months ended June 30, 2002 and 2001 are unaudited. In the opinion
of management, such condensed consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) necessary for the
fair presentation of the consolidated financial position and the consolidated
results of operations. The consolidated results of operations for the three and
nine months ended June 30, 2002 and 2001 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated balance
sheet information as of September 30, 2001 was derived from the audited
consolidated financial statements included in the Company's annual report on
Form 10-KSB. The interim condensed consolidated financial statements should be
read in conjunction with that report.
RECLASSIFICATIONS
- -----------------
Certain amounts from prior years have been reclassified to conform to the
current year presentation.
NOTE 2 NET LOSS PER SHARE
- --------------------------
The Company's net loss per share was calculated using weighted average shares
outstanding of 9,757,649 and 9,577,079 for the three and nine months ended June
30, 2002 and 9,345,651 and 9,184,447 for the three and nine months ended June
30, 2001, 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.
-11-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 NOTE RECEIVABLE - RELATED PARTY
- ---------------------------------------
Included in notes receivable, related parties in the accompanying condensed
consolidated balance sheet at June 30, 2002 is a note receivable from an officer
of the Company in the amount of $1,200,000. This is a non-recourse note secured
by a second mortgage on a building and land located in Alabama.
NOTE 4 SEGMENT INFORMATION
- ---------------------------
Studio Studio Equip Film & TV
Rental Rental Production Total
------------- ------------- ------------- -------------
For the nine months ended June 30,
2002
- ----
Revenues $ 3,297,914 $ 1,041,356 $ 4,599,516 $ 8,938,786
Operating Income 418,584 40,394 106,059 565,037
Total Assets 15,064,066 416,964 107,124 15,588,154
Depreciation and Amortization 278,410 37,000 0 315,410
2001
- ----
Revenues $ 1,066,331 $ 131,201 $ 576,926 $ 1,774,458
Operating (Loss) Income (2,044,999) 23,799 101,461 (1,919,739)
Total Assets 17,039,840 422,493 338,577 17,800,910
Depreciation and Amortization 238,858 11,539 0 250,397
NOTE 5 LITIGATION
- ------------------
On September 14, 2001, an action was filed against Valencia Entertainment
International, Inc. and ValCom, Inc. This matter arises from an underlying
action wherein plaintiffs obtained judgments against Ricky Rocket Enterprises,
Inc. and AJ Time Travelers, Inc. in the amounts of $3,000,000 and $1,200,000,
respectively. In this matter, Plaintiffs' first of two causes of action alleges
that the Company, and other defendants, are alter-egos of Ricky Rocket
Enterprises, Inc. and Time Travelers, Inc. and, therefore, plaintiffs are
entitled to enforce the aforementioned judgments against the Company.
Further, a second cause of action concerning malicious prosecution also alleges
alter-ego liability. Unspecified compensatory and punitive damages are sought
under this cause of action. However, both parties have reached a settlement
agreement at no cost to the Company regarding this second cause of action.
Valencia Entertainment was a distributor for AJ Time Travelers, Inc. and
management believes it should not be a party to this action and did not become
the distributor for Time Travelers, Inc. until four years after the alleged
wrongdoing occurred. The Company believes the allegations are without merit and
intends to vigorously defend itself. In addition the Company is indemnified by a
related party if any loss relative to this matter is sustained.
-12-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 BASIC AND DILUTED LOSS PER SHARE
- ---------------------------------------
Basic and diluted earnings per share for the three and nine months ended June
30, 2002 and 2001 are computed as follows:
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic:
Net loss $ (838,364) $ (683,950) $ (569,473) $(2,600,116)
Weighted average shares outstanding 9,757,649 9,345,651 9,577,079 9,184,447
------------ ------------ ------------ ------------
Basic loss per share $ (0.09) $ (0.07) $ (0.06) $ (0.28)
============ ============ ============ ============
Diluted:
Net loss $ (838,364) $ (683,950) $ (569,473) $(2,600,116)
Interest expense add back 0 0 0 0
------------ ------------ ------------ ------------
Adjusted Net Loss (838,364) (683,950) (569,473) (2,600,116)
Weighted average shares outstanding 9,757,649 9,345,651 9,577,079 9,184,447
Conversion of deferred stock to common stock 0 0 0 0
Conversion of debt to common stock 0 0 0 0
------------ ------------ ------------ ------------
Diluted weighted average common share 9,757,649 9,345,651 9,577,079 9,184,447
------------ ------------ ------------ ------------
Diluted earnings per share $ (0.09) $ (0.07) $ (0.06) $ (0.28)
============ ============ ============ ============
-13-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company had a 10 for 1 reverse split of its common shares of stock in
September 2001. The weighted average shares outstanding and loss per share in
2001 have been restated to reflect this change.
NOTE 7 CONVERTIBLE PREFERRED STOCK
- ----------------------------------
At June 30, 2002 the Company had three series of convertible preferred stock: B,
C and D. Series B preferred stock has no voting rights, is entitled to receive
cumulative dividends in preference to any dividend on the common stock at a rate
of 10% 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 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 10% 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 C 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 while 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.
In connection with the issuance of the Series D convertible preferred stock, the
Company also granted warrants to the preferred stockholder to purchase 1,250,000
shares of the Company's common stock for $.80 per share, expiring in five years.
The Company allocated the net proceeds received from the sale of the preferred
stock to the warrants using the Black-Scholes pricing model. The allocation of
the net proceeds to the warrants amounted to $422,453 and is included in
additional paid-in capital in the accompanying condensed consolidated balance
sheet at June 30, 2002.
Also in connection with the sale of the Series D convertible preferred stock,
the Company incurred a 7% placement agent fee and also issued the placement
agent warrants to purchase 125,000 shares of the Company's common stock at $.80
per share, expiring in five years. The Company recorded the $70,000 placement
agent fee as a reduction of the proceeds received, thereby also reducing
additional paid-in capital by $70,000 at June 30, 2002. The Company valued the
125,000 warrants issued to the placement agent using the Black-Scholes pricing
model resulting in an increase to additional paid-in capital of $42,245 for the
period ended June 30, 2002.
-14-
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 DEBT
- -----------
On May 24, 2002, the Company repaid the remaining $1,089,616 convertible note
due to The Laurus Master Fund, LTD (LMF). In connection with the payoff of the
note, the Company expensed $109,000 in unamortized prepaid loan fees, $245,000
of unamortized discounts and $295,000 of interest expense.
In May and June 2002, we issued to Laurus Master Fund, Ltd. 12 % convertible
notes in the aggregate principal amount of $2,000,000. The notes are convertible
into our common stock at a fixed conversion price of $.95 and are payable on a
monthly basis over 22 months. In addition, in connection with the issuance of
the convertible notes, we issued warrants to purchase 300,000 shares of our
common stock at an exercise price of $1.20. The convertible notes are secured by
a second mortgage on our properties. The fair value assigned to the warrants
amounted to $77,300 and was determined using the Black-Scholes pricing model.
Such amount is included in additional paid-in-capital at June 30, 2002. The
convertible notes are presented in the accompanying condensed balance sheet at
June 30, 2002 net of a discount of $74,079.
NOTE 9 SUBSEQUENT EVENTS
- ------------------------
Effective July 1, 2002, the Company acquired all of the outstanding shares of
common stock of Digital Cut Post, Inc for 1,400,000 shares of series "C"
convertible preferred stock and $1,100,000 in cash. Digital Cut Post, Inc is a
computer based non-linear, post production editorial facility specializing in
independent feature film and broadcast television. Total consideration for this
acquisition was approximately $1,600,000 to be paid over four years.
Effective August 2, 2002, the Company acquired all of the outstanding shares of
common stock of PTL Productions, Inc. (Brentwood Magazine) for the assumption of
approximately $90,000 of debt. Brentwood Magazine, a Southern California
entertainment publication, has been setting the trends in Southern California
from Santa Barbara to San Diego for over 7 years, covering entertainment,
business, luxurious lifestyles, travel and fashion.
On August 5, 2002, the Company acquired for $31,000, a film library from "The
Shapiro Group", consisting of 143 TV movies and featured films for worldwide
syndication.
-15-
VALCOM, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
PLAN OF OPERATION
ValCom, Inc. operations at present are comprised of five divisions: 1)
Studio Rental, 2) Studio Equipment and Personnel Rental, 3) Post Production, 4)
Broadcast Television, and 5) Film and Television Production.
STUDIO RENTAL
- -------------
We own six improved acres with six sound stages and two additional
leased stages in Valencia California doing business as Valencia Entertainment
International. Eight of the eight stages are leased under annual contracts to
two major production companies. Rental income for the seven stages should remain
constant at approximately $2,000,000 annually with cost of living increases.
Rental income for the eighth stage increased in August 2001 to $95,000 per
month.
STUDIO EQUIPMENT RENTAL
- -----------------------
In March 2001, we acquired with stock, Half Day Video, Inc. a company
which supplies personnel, cameras and other production equipment to various
production companies on a short-term basis. As a result of additional equipment
purchases and increased activity, from both internal and external sources, it is
anticipated that Half Day Video revenue should increase significantly from the
prior year.
FILM PRODUCTION
- ---------------
In March 2001, we entered into an agreement with Woody Fraser
Productions to produce various television productions on its behalf. Under the
terms of the agreement, we will fund up to $500,000 of annual production
development costs. In return, we will retain after costs of production, 75% of
the net savings derived from all production, 75% of ownership of foreign and
syndication plus Executive Producer fees. In January 2002, we signed contracts
with a Cable Television Network to produce the second season of a television
series consisting of 13 episodes. Revenue under this contract during 2002 will
be approximately $2,500,000. In addition to retaining 75% of any possible net
savings from the productions, Half Day Video will handle a majority of the
production rental needs. Additionally, we signed a contract with a different
Cable Television Network to produce six (6) episodes of a television series at a
contracted amount of approximately $500,000. After costs of production, we will
retain 100% of any savings plus a portion of the executive producer fees.
Additional productions are in the development process. Revenues will be
recognized when all individual programs are available.
-16-
VALCOM, INC. AND SUBSIDIARIES
CHANNEL 8 IN PALM SPRINGS, CALIFORNIA
- -------------------------------------
Through our partially-owned subsidiary, ValCom Broadcasting, LLC, we
own KVPS (Channel 8), an independent broadcaster in the Palm Springs, CA market.
We plan to acquire additional television stations and utilize its
infrastructure of its full-service television and motion picture studios. This
would enable Channel 8 to operate at a fraction of the cost compared to other
broadcasters in the market
Palm Springs is located in the middle of four major markets that
include: Los Angeles, Phoenix, Las Vegas, and San Diego.
DIGITAL CUT POST
- ----------------
In July 2002, we acquired with cash and stock, Digital Cut Post, Inc. a
company providing a full service Avid rental company specializing in the
independent feature film and television community. With over ten years of proven
industry experience with AVID non-linear editing systems, we understand not only
the systems, but what it takes to complete a project. Ed Santiago, president and
founder of Digital Cut Post, Inc. heads this wholly owned subsidiary.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001
- --------------------------------------------------
Revenues for the three months ended June 30, 2002 increased by $2,702,591 or
292.4% from $924,297 for the three months ended June 30, 2001 to $3,626,888 for
the same period in 2002. The increase in revenue was principally due to revenues
associated with the acquisition of Half Day Video and the joint venture with
Woody Fraser, both of which occurred in March 2001.
Production and development costs for the three months ended June 30, 2002
increased by $2,580,705 or 143.5% from $179,895 for the three months ended June
30, 2001 to $2,760,600 for the same period in 2002. The increase in production
costs was principally due to the acquisition of Half Day Video and production
and development costs incurred with Woody Fraser Productions.
Selling and promotion costs for the three months ended June 30, 2002 decreased
by $49,795 or 57.4% from $86,801 for the three months ended June 30, 2001 to
$37,006 for the same period in 2002. The decrease was due principally to a
decrease in travel expenses.
-17-
VALCOM, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Depreciation and amortization expense for the three months ended June 30, 2002
increased by $145,530 or 415.3% from $35,040 for the three months ended June 30,
2001 to $180,570 for the same period in 2002. The increase in depreciation and
amortization expense is a result of additional assets being depreciated.
General and administrative expenses for the three months ended June 30, 2002
decreased by $374,212 or 32.7% from $1,146,093 for the three months ended June
30, 2001 to $771,881 for the same period in 2002. The decrease was due
principally to decreases in personnel costs, taxes and licenses, equipment rent
and telephone and utility costs.
Interest expense for the three months ended June 30, 2002 increased by $554,777
or 345.8% from $160,418 for the three months ended June 30, 2001 to $715,195 for
the same period in 2002. The increase was due principally to interest associated
with the payoff of the Laurus Fund loan.
Due to the factors described above, the Company's net loss increased by $154,414
from a loss of $683,950 for the three months ended June 30, 2001 to $838,364 for
the same period in 2002.
NINE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001
- -------------------------------------------------
Revenues for the nine months ended June 30, 2002 increased by $7,164,328 or
407.8% from $1,774,458 for the nine months ended June 30, 2001 to $8,938,786 for
the same period in 2002. The increase in revenue was principally due to revenues
associated with the acquisition of Half Day Video and the joint venture with
Woody Fraser, both of which occurred in March 2001.
Production and development costs for the nine months ended June 30, 2002
increased by $5,231,566 or 1,158.3% from $451,666 for the nine months ended June
30, 2001 to $5,683,232 for the same period in 2002. The increase in production
costs was principally due to the acquisition of Half Day Video and production
and development costs incurred with Woody Fraser Productions.
Selling and promotion costs for the nine months ended June 30, 2002 decreased by
$138,754 or 63.7% from $217,873 for the nine months ended June 30, 2001 to
$79,119 for the same period in 2002. The decrease was due principally to
decreases in travel and public relation expenses.
Depreciation and amortization expense for the nine months ended June 30, 2002
decreased by $65,013 or 26.0% from $250,397 for the nine months ended June 30,
2001 to $315,410 for the same period in 2002. The decrease in depreciation and
amortization expense is a result of certain assets becoming fully depreciated.
General and administrative expenses for the nine months ended June 30, 2002
decreased by $478,273 or 17.2% from $2,774,261 for the nine months ended June
30, 2001 to $2,295,988 for the same period in 2002. The decrease was due
principally to decreases in professional fees and taxes and licenses.
Interest expense for the nine months ended June 30, 2002 increased by $454,133
or 66.7% from $680,377 for the nine months ended June 30, 2001 to $1,134,510 for
the same period in 2002. The increase was due principally to the payoff of the
Laurus Fund loan partially offset by interest rate reductions.
Due to the factors described above, the Company's net loss decreased by
$2,030,643 from a loss of $2,600,116 for the nine months ended June 30, 2001 to
$569,473 for the same period in 2002.
-18-
VALCOM, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Trends events of uncertainties:
- -------------------------------
The studios rented by the Company are on one-year extensions of previous
long-term leases. The options expire at various dates during 2002. If these
productions are cancelled, it is unlikely lease options would be extended.
However, the current lessees have first right of refusal on new leases. An
uncertainty may exist regarding the Company's ability to rent the properties at
profitable amounts.
LIQUITY AND CAPITAL RESOURCES
Internal and external source of funding:
- ----------------------------------------
The Company projects positive cash flow from its studio division. ValCom may
issue stock for services as a means of maintaining working capital.
Additionally, the Company is currently seeking refinancing of its Studio real
estate sufficient to provide approximately $1,500,000 in working capital.
ValCom has sufficient funds to operate for the next 12 months through its
refinancing, common stock issues and projected positive cash flow from its
operation of business.
On May 24, 2002, the Company repaid the remaining $1,089,616 convertible note
due to The Laurus Master Fund, LTD (LMF). In connection with the payoff of the
note, the Company expensed $109,000 in unamortized prepaid loan fees, $245,000
of unamortized discounts and $295,000 of interest expense.
In May and June 2002, we issued to Laurus Master Fund, Ltd. 12 % convertible
notes in the aggregate principal amount of $2,000,000. The notes are convertible
into our common stock at a fixed conversion price of $.95 and is payable on a
monthly basis over 22 months. In addition, we issued warrants to purchase
300,000 shares of our common stock at an exercise price of $1.20. The
convertible notes are secured by a second mortgage on our properties.
In June 2002, we issued to High Capital Funding, LLC 1,250,000 shares of our
Series D convertible preferred stock and 1,250,000 warrants to purchase shares
of our common stock at an exercise price of $.80 in exchange for $1,000,000. The
Series D preferred stock is convertible into our common stock at a ratio of one
for one. We issued a 7% placement agent fee to Bathgate Capital Partners, LLC
and 125,000 warrants exercisable at $.80 per unit. Each warrant entitles the
holder to one share of common stock exercisable at $.80 per share for a total of
$1,100,000.
On July 1, 2002, we acquired all of the outstanding shares of Digital Cut Post,
Inc. Digital Cut Post is a computer based non-linear, post-production editorial
facility specializing in independent feature film and broadcast television. This
acquisition provides for the sole shareholder of Digital Cut Post to receive
$1,100,000 and 1,400,000 of series C preferred stock over a four (4) year
period.
Statement Regarding Computation of Earnings (Loss) Per Share
- ------------------------------------------------------------
See Notes To Condensed Consolidated Financial Statements included elsewhere in
this filing for a description of the Company's calculation of earnings per
share.
-19-
VALCOM, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
On September 14, 2001, plaintiffs Diane Russomanno and Knowledge Booster, Inc.
commenced an action in the Superior Court of the State of California, County of
Los Angeles Diane Russomanno and Knowledge Booster, Inc. v. Valencia
Entertainment International, ValCom, Inc., Vince Vellardita, Tom Grimmett, Nalin
Rathod, Aburizal Bakrie, Nirwan Bakrie, Linda Layton, Barak Isaacs, and Does 1
through 20, Case No. BC257989 (Sup. Ct., L.A. Co., C.A.). This matter arises
from an underlying action wherein plaintiffs obtained judgments against Ricky
Rocket Enterprises, Inc. and AJ Time Travelers, Inc. in the amounts of
$3,000,000 and $1,200,000, respectively. In this matter, Plaintiffs' first of
two causes of action alleges that we, and other defendants, are alter-egos of
Ricky Rocket Enterprises, Inc. and AJ Time Travelers, Inc. and, therefore,
plaintiffs are entitled to enforce the aforementioned judgments against us.
Plaintiffs seek payment of the judgments in the amount of $4,200,000 plus
interest under this cause of action.
Further, Plaintiffs second cause of action concerning malicious prosecution also
alleges alter-ego liability. Plaintiffs allege that Ricky Rocket Enterprises,
Inc. and AJ Time Travelers, Inc. filed a cross-complaint in the underlying
litigation without any probable cause and for an improper motive or purpose.
Plaintiffs similarly allege that we, and other defendants, are alter egos of
Ricky Rocket Enterprises, Inc. and AJ Time Travelers, Inc. are, therefore,
liable for such malicious prosecution. Plaintiffs seek unspecified compensatory
and punitive damages under this cause of action. Both parties have reached a
settlement agreement at no cost to the Company regarding this second cause of
action.
We believe the allegations are without merit and intend to vigorously defend
ourselves. In addition, the Company is indemnified by a related party if any
loss relative to this matter is sustained.
ITEM 2. CHANGES IN SECURITIES
- -----------------------------
In May and June 2002, we issued to Laurus Master Fund, Ltd. 12 % convertible
notes in the aggregate principal amount of $2,000,000. The notes are convertible
into our common stock at a fixed conversion price of $.95 and is payable on a
monthly basis over 22 months. In addition, we issued warrants to purchase
300,000 shares of our common stock at an exercise price of $1.20. The
convertible notes are secured by a second mortgage on our properties.
In June 2002, we issued to High Capital Funding, LLC 1,250,000 shares of our
Series D convertible preferred stock and 1,250,000 warrants to purchase shares
of our common stock at an exercise price of $.80 in exchange for $1,000,000. The
Series D preferred stock is convertible into our common stock at a ratio of one
for one. We issued a 7% placement agent fee to Bathgate Capital Partners, LLC
and 125,000 warrants exercisable at $.80 per unit. Each warrant entitles the
holder to one share of common stock exercisable at $.80 per share for a total of
$1,100,000.
On July 1, 2002, we acquired all of the outstanding shares of Digital Cut Post,
Inc. Digital Cut Post is a computer based non-linear, post-production editorial
facility specializing in independent feature film and broadcast television. This
acquisition provides for the sole shareholder of Digital Cut Post to receive
$1,100,000 and 1,400,000 of series C preferred stock over a four (4) year
period.
-20-
VALCOM, INC. AND SUBSIDIARIES
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
- -------------------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(A) EXHIBITS:
Exhibit Number Description
- -------------- -----------
99.1 Certification of the Chief Executive Officer of ValCom, Inc. Pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of ValCom, Inc. Pursuant
to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
Change in registrant's certifying accountant filed on April 24, 2002
and amendment to this report filed on May 6 and 10
2002.
-21-
VALCOM, INC. AND SUBSIDIARIES
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VALCOM, INC.
DATE: AUGUST 19, 2002 BY: /s/ VINCE VELLARDITA
-------------------------------------
VINCE VELLARDITA CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
Signature Title Date
--------- ----- ----
BY: /s/Vince Vellardita CEO/President August 19, 2002
------------------- ---------------
Vince Vellardita Chairman of the Board
BY: /s/ Don Magier Controller (principal accounting August 19, 2002
------------------- officer) ---------------
Don Magier
-22-