AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 2002
REGISTRATION NO. 333-97797
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
VALCOM, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 7819 58-1700840
(STATE OR OTHER JURISDICTION OF PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE IDENTIFICATION NO.)
NUMBER)
-------------------------------------------
26030 AVENUE HALL, STUDIO 5
VALENCIA, CALIFORNIA 91355
(661) 257-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------------------------
VINCE VELLARDITA
CHAIRMAN, PRESIDENT & CEO
26030 AVENUE HALL, STUDIO 5
VALENCIA, CALIFORNIA 91355
(661) 257-8000
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------------------------
COPIES TO:
GREGORY SICHENZIA, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
------------------------------------------
APPROXIMATE DATE OF PROPOSED
SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------------
CALCULATION OF REGISTRATION FEE
===================================== ================ ======================= ======================= =================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION FEE
TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1)
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 5,052,632 (2) $0.55 $ 2,778,947.60 $ 255.66
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 300,000 (3) $0.55 $ 165,000 $ 15.18
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 50,000 (4) $0.55 $ 27,500 $ 2.53
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 1,250,000 (5) $0.55 $ 687,500 $ 63.25
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 1,300,000 (6) $0.55 $ 715,000 $ 65.78
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 125,000 (7) $0.55 $ 68,750 $ 6.33
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock, $.001 par value 125,000 (8) $0.55 $ 68,750 $ 6.33
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Series D preferred stock, $.001 par 1,250,000 (9) $ .80 $ 1,000,000 $ 92.00
value
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Common stock purchase warrants 1,300,000 (10) $ .01 $ 13,000 $ 1.20
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
Unit Warrants 125,000 (11) $ .01 $ 1,250 $ .12
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
TOTAL $5,525,697.37 $508.36*
- ------------------------------------- ---------------- ----------------------- ----------------------- -----------------
*$416 has been previously paid.
===================================== ================ ======================= ======================= =================
(1) Estimated solely for the purpose of determining the
registration fee.
(2) Represents 200% of the shares of common stock underlying
convertible debentures in the aggregate of $2,000,000 issued
to Laurus Master Fund, Ltd.
(3) Represents shares of common stock issuable upon exercise of
warrants issued to Laurus Master Fund, Ltd. at an exercise
price of $1.20 per share.
(4) Represents shares of common stock issued in connection with a
settlement.
(5) Represents shares of common stock underlying series D
convertible preferred stock issued to High Capital Funding,
LLC.
(6) Represents shares of common stock issuable upon exercise of
warrants issued to High Capital Funding, LLC at an exercise
price of $.80 per share.
(7) Represents shares of common stock issuable upon exercise of
warrants issued to Bathgate Capital Partners, LLC and its
affiliates as a placement agent fee for the High Capital
Funding, LLC financing at an exercise price of $.80 per share.
(8) Represents shares of common stock issuable upon exercise of
warrants issued to Bathgate Capital Partners, LLC and its
affiliates as a placement agent fee for the High Capital
Funding, LLC financing at an exercise price of $.80 per share.
(9) Represents series D convertible preferred stock issued to High
Capital Funding, LLC.
(10) Represents warrants issued to High Capital Funding, LLC.
(11) Represents unit warrants issued to Bathgate Capital Partners,
LLC and its affiliates as a placement agent fee for the High
Capital Funding, LLC financing. Each unit warrant has an
exercise price of $.80 per share.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
AUGUST 27, 2002
VALCOM, INC.
8,202,632 SHARES OF COMMON STOCK
1,250,000 SHARES OF SERIES D PREFERRED STOCK
1,300,000 COMMON STOCK PURCHASE WARRANTS
125,000 UNIT WARRANTS
- --------------------------------------------------------------------------------
This prospectus relates to the resale by the selling stockholders of
our securities. The selling stockholders may sell the securities from time to
time in the principal market on which the securities are traded at the
prevailing market price or in negotiated transactions. Please see the "Selling
Stockholders" section in this prospectus for a complete description of the
selling stockholders.
We will not receive any proceeds from the sale of shares by the
selling stockholders. However, we will receive proceeds upon the exercise of any
warrants that may be exercised by the selling stockholders, if any.
Our common stock is quoted on the Over-the-Counter Bulletin board
under the symbol "VACM." On August 6, 2002, the closing price of our common
stock was $0.55 per share.
- --------------------------------------------------------------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE THE
"RISK FACTORS" BEGINNING ON PAGE 7.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
3
TABLE OF CONTENTS
SECTION PAGE NUMBER
- ------- -----------
Prospectus Summary...........................................................
Risk Factors.................................................................
Price Range of Common Stock..................................................
Dividend Policy..............................................................
Selected Financial Data......................................................
Management's Discussion and
Analysis of Financial Condition and Results of Operation...........
Business.....................................................................
Management...................................................................
Summary Compensation Table...................................................
Security Ownership of Management and Certain Beneficial Owners...............
Description of Capital Stock.................................................
Selling stockholders.........................................................
Plan of Distribution.........................................................
Experts......................................................................
Legal Matters................................................................
Index to Financial Statements................................................
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the SEC in accordance with registration rights granted to investors. Under this
process, the stockholders named in the "Selling Stockholders" section of this
prospectus, or in any supplement to this prospectus, may sell the securities
described in this prospectus from time to time. This prospectus provides you
with a general description of the securities. You should read this and with any
additional information described under the heading "How to Obtain More
Information about ValCom, Inc."
4
PROSPECTUS SUMMARY
VALCOM, INC.
Our business...................... We primarily lease sound stages. Our
business includes television production for
network and syndication programming, motion
pictures, rental of producion equipment and
personnel, broadcast television station,
post production facility and real estate
holdings. In addition to leasing our sound
stages, we also have a small library of
wholly-owned television content ready for
distribution.
Our properties.................... We own six acres of real property and a
120,000 square feet production facility in
Valencia, California, which is currently the
studio set for "JAG" produced by Paramount
Pictures and "Power Rangers" produced by
Saban Productions. Our sound stages have
been operating at full capacity since 1995.
We also lease an additional three acres and
52,000 square feet production facility that
includes two+ full service sound stages, for
a total of eight sound stages.
Our clients....................... Our past and present clients include Warner
Brothers, Universal Studios, MGM, HBO, NBC,
20th Century Fox, Disney, CBS, Sony,
Showtime, and the USA Network.
Our principal offices............. We maintain executive offices at 26030
Avenue Hall, Studio 5, Valencia California
91355 and our telephone number is (661)
257-8000.
5
THE OFFERING
Registration rights............... This prospectus is part of a registration
statement filed pursuant to registration
rights granted to Laurus Master Fund, Ltd.
and High Capital Funding, LLC
Securities offered by the selling
stockholders................... 8,202,632 shares of common stock 1,250,000
shares of series D preferred stock 1,300,000
common stock purchase warrants 125,000 unit
warrants
Common stock outstanding before
this offering.................. We have 10,284,649 shares of common stock
outstanding prior to this offering.
Common stock offered by the
selling stockholders........... 8,202,632 shares of common stock.
Common stock outstanding after
this offering.................. 18,487,281.
Use of proceeds................... We will not receive any proceeds from the
sale of common stock by the selling
stockholders. We will realize a reduction in
debt as our note holders convert our debt to
equity. In addition, we may realize up to
$1,240,000 if all of the warrants we are
registering are not exercised on a cashless
basis.
Risk factors...................... Investing in these securities involves a
high degree of risk and immediate. As an
investor, you should be able to bear a
complete loss of your investment. See "Risk
Factors" for a more detailed discussion.
Trading Symbols................... Our common stock trades on the Over-The
Counter Bulletin Board under the symbol
"VACM" and on the Frankfurt XETRA under the
symbol "VAM." Our series D preferred stock,
common stock purchase warrants, and unit
warrants are not traded securities.
6
RISK FACTORS
INVESTING IN OUR SECURITIES WILL PROVIDE YOU WITH AN EQUITY OWNERSHIP
INTEREST IN VALCOM, INC. AS ONE OF OUR SHAREHOLDERS, YOUR INVESTMENT WILL BE
SUBJECT TO RISKS INHERENT IN OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED. IN THAT EVENT, THE TRADING PRICE
OF OUR SHARES MIGHT DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR
SECURITIES. ADDITIONAL RISKS THAT ARE NOT CURRENTLY KNOWN TO US OR THAT WE DEEM
IMMATERIAL MAY ALSO HARM US AND THE VALUE OF YOUR INVESTMENT. AN INVESTMENT IN
OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK.
WE HAVE A HISTORY OF NET LOSSES AND NEGATIVE CASH FLOW AND MAY NOT BE ABLE TO
SATISFY OUR CASH NEEDS FROM OPERATIONS.
We have experienced negative cash flow. We cannot project with
certainty that losses will not continue in the short term as we grow and
integrate our businesses, and that losses will not continue in the long term
should we be unsuccessful in our business and integration efforts. We cannot
know when, if ever, net cash generated by our internal business operations will
support our growth and continued operations.
WE WILL NEED SUBSTANTIAL AMOUNTS OF ADDITIONAL FINANCING.
We anticipate that we will need substantial amounts of cash for:
o capital expenditures to build and enhance our business;
o operating expenses relating to our business, expansion and
integration efforts;
o potential acquisitions;
o debt service requirements; and
o other general corporate expenditures.
There is a probability that our cash needs will exceed our cash flows
from operating activities through 2002, which means we will have to seek out
additional financing. In addition, we may need to revise our business plan to
respond to competitive and other factors, so our need for cash may increase.
A REDUCTION IN DEMAND FOR STUDIO FACILITIES COULD LEAD TO A DECREASE IN
REVENUES.
Content production in foreign countries such as Canada, as a result of
lower production costs and more lenient labor laws in such countries, may reduce
the demand for studio facilities in Los Angeles and the United States generally.
Such decreased demand could diminish our revenues, threaten our sustained
profitability in the future and have a material adverse effect on our business
and results of operations.
7
OUR REVENUES DEPEND ON A LIMITED NUMBER OF FILM PRODUCERS.
Our results of operations in any given period depend to a significant
degree upon revenues from a small number of film producers who rent our studios.
In addition, only two film producers, Paramount Productions and Saban
Productions, are contractually obligated to lease any of our studios. Our
failure to rent to a sufficient number of film producers or to increase the
number of film producers during a particular period could adversely affect our
results of operations.
ADVANCES IN TECHNOLOGY MAY CREATE ALTERNATE FORMS OF ENTERTAINMENT, WHICH MAY
NEGATIVELY AFFECT OUR BUSINESS.
The entertainment industry in general, and the motion picture industry
in particular, continue to undergo significant changes, primarily due to
technological developments. Due to this rapid growth of technology and shifting
consumer tastes, we cannot accurately predict the overall effect that such
changes may have on the potential revenue from and profitability of
feature-length motion pictures and television programming.
FUNDING FOR OUR CAPITAL NEEDS IS NOT ASSURED, AND WE MAY HAVE TO CURTAIL OUR
BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING.
We currently have no legally binding commitments with any third parties
to obtain any material amount of additional equity or debt financing. We cannot
assure you that we will be able to obtain any additional financing in the
amounts or at the times that we may require the financing or, if we do obtain
any financing, that it would be on acceptable terms. As a result, we cannot
assure you that we will have adequate capital to implement future expansions and
enhancements of our wireless technology, to maintain our current levels of
operation or to pursue strategic acquisitions. Our failure to obtain sufficient
additional financing could result in the delay or abandonment of some or all of
our development, expansion and expenditures, which could have an adverse effect
on us and on the value of our common stock.
WE HAVE A LIMITED HISTORY OF OWNING AND OPERATING OUR ACQUIRED BUSINESSES ON A
CONSOLIDATED BASIS, WHICH COULD RESULT IN INEFFECTIVE MANAGEMENT OF THESE
BUSINESSES.
There can be no assurance that we will be able to meet performance
expectations or successfully integrate our acquired business on a timely basis
without disrupting the quality and reliability of service to our customers or
diverting management resources. Our rapid growth has placed and will continue to
place a significant strain on management, our financial resources, and on our
information, operating and financial systems. If we are unable to manage this
growth effectively, it may have an adverse effect on our business, financial
condition and results of operations.
THE LOSS OF ANY OF OUR KEY EXECUTIVES MAY HAVE A MATERIAL ADVERSE EFFECT UPON
OUR OPERATIONS.
Our success is dependent upon the expertise of the key members of our
management team, particularly our President, CEO and Chairman, Vince Vellardita,
and Vice President, Ronald Foster. The loss of services from any of these
individuals would have a material adverse effect upon our operations. Our future
8
success also depends on our continuing ability to attract, train and retain
highly qualified technical, sales, marketing, development and managerial
personnel. If we are unable to hire such personnel on a timely basis, our
business, operating results and financial condition could be adversely affected.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
OUR COMMITMENTS TO ISSUE ADDITIONAL COMMON STOCK MAY ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK AND MAY IMPAIR OUR ABILITY TO RAISE CAPITAL.
We currently have outstanding commitments in various forms such as
warrants, and convertible securities to issue a substantial number of new shares
of our common stock. The shares subject to these issuance commitments, to some
degree, will be issued in transactions registered with the Securities and
Exchange Commission and thus will be freely tradable. In many other instances,
these shares are subject to grants of registration rights that, if and when
exercised, would result in those shares becoming freely tradable. An increase in
the number of shares of our common stock that will become available for sale in
the public market may adversely affect the market price of our common stock and,
as a result, could impair our ability to raise additional capital through the
sale of our equity securities or convertible securities.
THE ISSUANCE OF SHARES UPON CONVERSION OF OUR SERIES D PREFERRED STOCK AND
CONVERTIBLE NOTES, AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND
SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the series D preferred stock
and convertible notes, and exercise of warrants may result in substantial
dilution to the interests of other stockholders since the selling stockholder
may ultimately convert and sell the full amount. Although the preferred
stockholders and note holders may not convert their securities and/or exercise
their warrants into more than 4.99% of our outstanding common stock, this
restriction does not prevent the investors from converting and/or exercising
some of their holdings and then converting the rest of their holdings. In this
way, the investor could sell more than this limit while never holding more than
this limit.
THE INTEREST PAYABLE ON OUR CONVERTIBLE NOTES IS ALSO CONVERTIBLE INTO SHARES OF
OUR COMMON STOCK.
To date, we have outstanding an aggregate of $2,000,000 principal
amount 12% convertible notes. The convertible notes are due and payable, with
12% interest, over 21 months unless sooner converted into shares of our common
stock. In addition, any event of default as described in the convertible notes
could require the early repayment of the convertible notes, including a premium
of 30% of the outstanding principal balance of the note at the time of the
default. We anticipate that the full amount of the convertible notes, together
with accrued interest, will be converted into shares of our common stock, in
accordance with the terms of the convertible notes. If we are required to repay
the convertible notes, we would be required to use our limited working capital
and raise additional funds. If we were unable to repay the notes when required,
the note holders could foreclose on the collateral and commence legal action
against us to recover the amounts due which ultimately could require the
disposition of some or all of our assets. Any such action could require us to
curtail or cease operations.
9
WE MAY NEED ADDITIONAL CAPITAL THAT COULD DILUTE THE OWNERSHIP INTEREST OF
INVESTORS.
We require substantial working capital to fund our business. If we
raise additional funds through the issuance of equity, equity-related or
convertible debt securities, these securities may have rights, preferences or
privileges senior to those of the rights of holders of our common stock may
experience additional dilution. We cannot predict whether additional financing
will be available to us on favorable terms when required, or at all. We have
experienced negative cash flow from operations, and expect to experience
significant negative cash flow from operations in the immediate future as we
grow, expand and integrate our businesses. The issuance of additional common
stock by our management, may have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
OUR SERIES D PREFERRED STOCK, COMMON STOCK PURCHASE WARRANTS AND UNIT WARRANTS
DO NOT TRADE PUBLICLY.
There is no public market for our series D preferred stock, common
stock purchase warrants and unit warrants. We do not expect that any market will
develop for these securities subsequent to this offering.
10
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will realize
a reduction in debt as our note holders convert our debt to equity. In addition,
we may realize up to $1,240,000 if all of the warrants we are registering are
not exercised on a cashless basis. There will be no proceeds to our company from
the sale of shares of common stock in this offering.
11
MARKET FOR COMMON EQUITY AND RELATED STOCK MATTERS
Our common stock trades on the Over-The-Counter Bulletin Board under
the symbol "VACM." Trading of our common stock began in 1983. The following
table sets forth the range of high and low bid quotations for our common stock
for each quarter of the last two fiscal years, as reported by the OTC BB. The
quotations represent inter-dealer prices without retail markup, markdown or
commission, and may not necessarily represent actual transactions.
PERIOD HIGH LOW
------ ---- ---
YEAR ENDED DECEMBER 31, 2000:
First Quarter................. $17.00 $0.55
Second Quarter................ $1.72 $0.47
Third Quarter................. $5.80 $0.21
Fourth Quarter................ $21.56 $2.19
YEAR ENDED SEPTEMBER 30, 2001:
First Quarter................. $15.94 $4.06
Second Quarter............... $7.30 $2.50
Third Quarter................. $3.30 $0.70
Fourth Quarter................ $0.92 $0.20
YEAR ENDED SEPTEMBER 30, 2002:
First Quarter................. $1.99 $0.24
Second Quarter................ $1.45 $0.32
Third Quarter................. $1.20 $0.70
In September 2001, we effectuated a 1 for 10 reverse stock split.
The approximate number of holders of record of our common stock, $.001
par value, as of June 30, 2002, was 3,540.
12
DIVIDEND POLICY
Holders of our common stock are entitled to receive such dividends as
may be declared by our board of directors. Except for August 14, 2000, no
dividends have been paid on our common stock.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DOCUMENT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS INCLUDING, AMONG OTHERS, ANTICIPATED TRENDS IN OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OUR BUSINESS STRATEGY. THESE
FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON OUR CURRENT EXPECTATIONS AND ARE
SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS TO CONSIDER
IN EVALUATING SUCH FORWARD-LOOKING STATEMENTS INCLUDE (I) CHANGES IN EXTERNAL
COMPETITIVE MARKET FACTORS OR IN OUR INTERNAL BUDGETING PROCESS WHICH MIGHT
IMPACT TRENDS IN THE OUR RESULTS OF OPERATIONS; (II) UNANTICIPATED WORKING
CAPITAL OR OTHER CASH REQUIREMENTS; (III) CHANGES IN THE OUR BUSINESS STRATEGY
OR AN INABILITY TO EXECUTE ITS STRATEGY DUE TO UNANTICIPATED CHANGES IN THE
INDUSTRIES IN WHICH WE OPERATES; AND (IV) VARIOUS COMPETITIVE FACTORS THAT MAY
PREVENT THE US FROM COMPETING SUCCESSFULLY IN THE MARKETPLACE.
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
14
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.
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.
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.
15
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, our 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.
16
Due to the factors described above, our 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.
Trends events of uncertainties:
- -------------------------------
The studios rented by the us 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 our ability to rent the properties at profitable
amounts.
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 COMPARISON
As of September 30, 2001, we had working capital of $537,646. As of the
prior year working capital was $1,074,031. The change was due primarily to the
increase in accounts payable and accrued liabilities.
Total assets were $14,580,597 at September 30, 2001 versus $16,008,529
at December 31, 2000 and additionally total liabilities were $8,355,823 and
$8,987,769 respectively. The changes in total assets and liabilities are
substantially accounted for by above described changes in current assets and
liabilities.
For the nine months ended September 30, 2001, we had revenue of
$2,413,260, operating expenses of $3,988,588 and net losses of $(2,126,291).
Loss before depreciation and interest was $(1,327,951) for the nine-month
period.
Rental revenue increased $93,251 for the nine months compared with the
corresponding prior year. This increase was the result of the revenue earned
from two additional stages and contractual rate increases. Production revenue
increased $914,734 for the nine months versus the prior year.
Production costs increased $708,450 for the nine months compared with
the prior year. This increase relates to the increase in production activity and
expensed development costs.
Selling and promotion costs increased $126,307 for the nine months due
to the effort to promote our services and productions.
Depreciation expense decrease of $79,789 was due to the fully
depreciated status of certain assets as of September 30, 2001.
For the nine months ended September 30, 2001, administrative and
general costs increased by $797,903. This increase was the result of significant
increases in Legal and Accounting, Management Consulting, Salaries and Fringes,
Taxes and Licenses, Development Costs and Rent Expense categories for the
following reasons:
A $34,059 increases in Legal and Accounting was due to the performance
of audits and the preparation of agreements and other legal matters related to
the merger.
17
A $207,250 increases in Management Consulting was due to costs incurred
in the planning and reorganization of the newly merged companies.
A $53,172 increase in Taxes and Licenses was due to adjustments made
for the under adjacent to the Valencia studio property.
A $368,194 increase in Salaries and Fringes was primarily due to
management staffing increases.
SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
September 30, 2000 was prior to the October 17, 2000 merger with
Valencia Entertainment International and prior to the March 2001 joint venture
with Woody Fraser Productions.
For the nine months ended September 30, 2000, we had no revenue and had
not completed the merger with Valencia Entertainment or Half Day Video.
For the nine months ended September 30, 2001, we incurred
administrative and general costs of $289,335, web site development costs of
$102,491 and Interest expense of $100,000. The web site development was
completed, however all other costs increased substantially due to the
acquisitions and formations of new business entities.
We did not record any income tax expense for any periods due to its tax
loss and tax loss carry forwards. At the end of fiscal 2001, we had a tax loss
carry forwards in excess of $12 million.
Effective September 28, 2001, we sold 100% of the outstanding equity of
SBI Communications, Inc. of Alabama, a Alabama corporation to Ronald C. Foster,
an officer, director and shareholder of ValCom, Inc. We received a promissory
note for $1,200,000 secured by a second position on the property.
The net assets of SBI Communications, Inc. of Alabama included the
Piedmont property with a carrying value of $3,940,000 previously classified as
"Property held for sale" and related liabilities including a Mortgage, Accrued
interest and amounts due Ronald C. Foster for salaries and advances made to us.
18
The following table sets forth the relative relationship to total
revenue of the revenue categories in our statement of income and percentage
changes (rounded to the nearest whole dollar).
Amount of Total Revenue
Fiscal Year Ended: September 30, December 31,
------------- ------------
2001 2000 2000
---- ---- ----
Revenues:
Rental $ 1,422,033 -0- $ 1,328,782
Production 952,234 -0- 37,500
Other Income 38,993 -0- 28,791
------------ ----------- ------------
Total Revenue $ 2,413,260 $ -0- $ 1,395,073
============ =========== ============
Should we successfully acquire additional production facilities and
broadcast companies under consideration, or expand operations in areas
previously discussed as currently under consideration, revenues and expenses of
ValCom would change significantly. Management is not able to predict the impact
of such changes on revenues or expenses at this time.
LIQUIDITY AND CAPITAL RESOURCES
INTERNAL AND EXTERNAL SOURCE OF FUNDING
We project positive cash flow from our studio division. ValCom may
issue stock for services as a means of maintaining working capital.
Additionally, we are seeking refinancing of our 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, we repaid the remaining $1,089,616 convertible note
due to The Laurus Master Fund, LTD. In connection with the payoff of the note,
we 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 sold 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, 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
19
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.
STATEMENT REGARDING COMPUTATION OF EARNINGS (LOSS) PER SHARE
See Notes To Condensed Consolidated Financial Statements included
elsewhere in this filing for a description of our earnings per share.
SUBSEQUENT EVENTS
Effective July 1, 2002, we 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, we 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, we acquired for $31,000, a film library from "The
Shapiro Group", consisting of 143 TV movies and featured films for worldwide
syndication.
20
BUSINESS
OVERVIEW
ValCom, Inc. operations at present are comprised of five divisions
o Studio Rental
o Studio Equipment & Personnel Rental
o Television Productions
o Film Production
o Broadcast Television Station
We maintain corporate offices at 26030 Avenue Hall, Studio 5, and
Valencia, California 91355.
Our common shares currently are traded on the Over-The-Counter Bulletin
Board under the trading symbol "VACM" and on the Frankfurt Exchange under the
symbol "VAM."
In this prospectus, unless otherwise specified or the context otherwise
requires, references to "we", "our" and "ValCom" includes a reference to our
subsidiaries which we beneficially own a majority of the outstanding voting
shares. Our subsidiaries and the percentage of voting shares that we
beneficially own are as follows:
NAME OF SUBSIDIARY (JURISDICTION) OWNERSHIP
- --------------------------------- ---------
Valencia Entertainment International, LLC a limited
liability corporation 100%
Half Day Video, Inc., a California corporation 100%
Digital Cut Post 100%
ValCom Broadcasting, LLC, a Delaware corporation 45%
HISTORY
ValCom, Inc., formerly SBI Communication, Inc. was originally organized
in the State of Utah on September 23, 1983, under the corporate name of Alpine
Survival Products, Inc. Our 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 Superman, 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, 1988, the
name was changed to SBI Communications, Inc. On January 1, 1993, we executed a
plan of merger that effectively changed our state of domicile from Utah to
Delaware.
In October 2000, we were issued 7,570,997 shares by SBI for 100% of the
shares outstanding in Valencia Entertainment International LLC, a California
limited liability corporation. This acquisition has been accounted for as a
reverse acquisition merger with Valencia Entertainment becoming the surviving
entity. The corporate name was changed to ValCom, Inc.
21
BUSINESS
We primarily lease sound stages. Our business includes television
production for network and syndication programming, motion pictures, rental of
producion equipment and personnel, broadcast television station, post production
facility and real estate holdings. In addition to leasing our sound stages, we
also have a small library of wholly-owned television content ready for
distribution.
We own six acres of real property and a 120,000 square feet production
facility in Valencia, California, which is currently the studio set for "JAG"
produced by Paramount Pictures and "Power Rangers" produced by Saban
Productions. Our sound stages have been operating at full capacity since 1995.
We also lease an additional three acres and 52,000 square feet production
facility that includes two+ full service sound stages, for a total of eight
sound stages.
Our past and present clients include Warner Brothers, Universal
Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the
USA Network. In addition to leasing our sound stages, we also have a small
library of wholly owned television content that are ready for distribution.
JOINT VENTURE AGREEMENT WITH WOODY FRASER PRODUCTIONS
On March 30, 2001, we executed a joint venture agreement with Woody
Fraser Productions, in which Woody Fraser Productions would serve exclusively as
a television production company for us. The primary purpose of the joint venture
is to develop and produce various television projects.
Woody Fraser has 25 years of experience as an executive producer in
Hollywood. He operates his own production company, Woody Fraser Productions,
which has created and produced many television shows including the "Dick Cavitt
Show", "Steve Allen Show", "That's Incredible", "Mike Douglas Show", "Good
Morning America", "Richard Simmons", and "The Home Show." Mr. Fraser holds a
Bachelors Degree from Dartmouth College and is a member of the Director's &
Writer's Guilds.
ACQUISITION OF HALF DAY VIDEO
On March 8, 2001, we completed the acquisition of Half Day Video, Inc.
Half Day is located in Burbank, California and specializes in supporting the
entertainment industry with television and film equipment rentals. Half Day's
client list includes The Academy Awards, Emmy Awards, NBC, Entertainment
Tonight, MTV, General Hospital and other major entertainment and production
companies. Half Day has approximately $847,000 in assets with current revenues
of $609,000. Half Day leases its offices and warehouse facility in Burbank and
will continue to operate and service its clients using its current employees.
22
ACQUISITION OF CHANNEL 8 IN PALM SPRINGS, CALIFORNIA
Through our partially-owned subsidiary, ValCom Broadcasting, LLC, we
own KO8MX (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.
ValCom Broadcasting, LLC, our subsidiary, acquired the assets of KO8MX
(Channel 8), an independent broadcaster in the Palm Springs, CA market.
ACQUISITION OF DIGITAL CUT POST
In June 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 wholley owned sudsidiary.
COMPETITION
FILM ENTERTAINMENT OVERVIEW
Competition in the film entertainment business is diverse and
fragmented, with scores of companies operating at various levels of product
budget and scope. The market is dominated by large Hollywood studios usually
commanding 15 to 20 percent of the domestic market share in any given year.
Valencia Entertainment will succeed by choosing its projects and
markets carefully, and by selecting segments and geographic areas in where it
can build proprietary competitive advantages.
INDEPENDENT PRODUCTION COMPANIES
Consolidation through acquisition has recently reduced the number of
independent production companies in operation. However, barriers to entry remain
relatively low, and management anticipates that the segments in which it intends
to compete will remain highly competitive.
OUR COMPETITIVE POSITION
Our operations are in competition with all aspects of the entertainment
industry, locally, nationally and worldwide.
We experience competition from three market segments:
23
1) Traditional television, game shows, Reality Television Drama
2) Movies for television and Theatrical Release
3) Other entertainment/media companies
SERVICE MARKS
We have the following service marks:
SATELLITE BINGO
International Class 41, production and distribution of television game
Shows, granted Registration Number 1,473,709 on January 19, 1988 to Satellite
Bingo, Inc. for 20 years.
"HANGIN WITH THE BOYZ"
International Class 25, Clothing, and 41, production and distribution
of television game shows, application filed on March 1, 2000, Serial NO.
75/932,583.
"WHO CAN YOU TRUST?"
International Class 41, production and distribution of television game
shows, Serial NO. 75/485225, granted on March 9, 1999 for 20 years.
"FUHGETABOWTIT"
International Class 41, production and distribution of television game
shows, Serial NO. 75/784,763, application filed on August 26, 1999.
GLOBALOT BINGO
International Class 41, production and distribution of television game
shows, applied for on September 24, 1993, by SBI Communications, Inc.
RICO BINGO
International Class 41, production and distribution of television game
shows, applied for on September 24, 1993, by SBI Communications, Inc.
C-NOTE
International Class 41, production and distribution of television game
shows, applied for on September 24, 1993, by SBI Communications, Inc.
24
"THE WORKS"
We obtained an assignment to copyrights for "the Works," copyright
registrations for Globalot Bingo and derivatives: Number PAU 855-931 (June 10,
1986); Number Pau 847-876 (March 11, 1986); Number PAU 788-031 (September 19,
1985); Number PAU 927-410 (November 4, 1986); Number PA 370-721 (February 9,
1988); Number PA 516-494 (January 17, 1991); Number PA 533-697 (January
17,1991); from Satellite Bingo, Inc., to SBI Communications, Inc., dated
September 14, 1993.
"THE FINAL ROUND-THE GABRIEL RUELAS STORY"
We applied for registration of copyright of "The Final Round-The
Gabriel Ruelas Story" on December 2, 2000.
"THE LIFE"
We obtained an assignment of copyright of "The Life", Txu 744-678, June
12, 1996.
"PCH"
We obtained a copyright by assignment of "PCH" Pau 2-040-426, September
12, 1995.
EMPLOYEES
As of June 1, 2002, we had 21 permanent employees, including two
officers. None of our employees are represented by a labor union or are subject
to a collective bargaining agreement.
25
LEGAL PROCEEDINGS
LITIGATION
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 us regarding this second cause of
action.
We believe the allegations are without merit and intend to vigorously
defend ourselves. In addition, we are indemnified by a third party if any loss
relating to this matter is sustained by us.
DESCRIPTION OF PROPERTY
Our corporate offices are located at 26030 Avenue Hall Studio #5,
Valencia, California. We control nine acres of land in Valencia, California. The
premises are comprised of eight production sound stages and consist of
approximately 180,000 square feet for which 120,000 are owned and the balance
are leased. Offices occupy 60,000 square feet. The balance of the property
consists of loading docks, New York back lot set, outdoor sets and 450 parking
spaces.
26
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
The executive officers, directors and key employees of our company and
their ages and positions with us as of June 1, 2002 are as follows:
NAME AGE POSITION/TERM
- ---- --- -------------
Vince Vellardita 44 Chief Executive Officer, President and Chairman,
since 2000
Stephen A. Weber 54 Director, since 2001
Ronald Foster 60 Secretary, Vice President and Director, since 1986
David Weiner 43 Director, since 2001
All directors will serve on the board until our next annual meeting of
the shareholders, or until their successors have been duly elected and qualified
BACKGROUND OF DIRECTORS & OFFICERS
VINCE VELLARDITA is currently President, Chief Executive Officer and
Chairman of the Board of ValCom, Inc. Mr. Vellardita was instrumental in having
Valencia Entertainment acquire a 180,000 square feet production facility in
Valencia, California that houses eight film and production sound stages that
have been occupied for the past four years by the hit CBS series "JAG" and Fox's
"Power Rangers." Mr. Vellardita began his career in 1977 as a music producer and
promoter of live shows and is credited with bringing Duran/Duran and U2 to North
America for their first US tours. He also produced a benefit tour for the 1980
Presidential campaign of John Anderson. Mr. Vellardita is a 25-year veteran
production executive with a successful track record that extends throughout many
arms of the Entertainment Industry. While in Nashville, Mr. Vellardita was
responsible for the turn around of a small production house for music into a
television satellite network, housing multiple sound-stages and edit bays. Mr.
Vellardita also increased revenues by bring national accounts to this network.
Mr. Vellardita has been involved in over 10,000 episodes of television and 100
films. After Mr. Vellardita's success in Nashville, he moved to Los Angeles
focusing on film and television where he developed independent production
studios. Mr. Vellardita handled everything from the coordination of sales and
contracts negotiations, to the launching of marketing strategies to lure some of
the biggest names in the television community. These include Paramount, Warner
Brothers, and Disney. Mr. Vellardita does not currently serve as a director of
any other reporting company.
STEPHEN A WEBER has over 20 years of background in Finance and
Management and is a certified public accountant. Since 1996, Mr. Weber has been
an active consultant in a number of companies. From June 9, 2000 to April 30,
2002, Mr. Weber served as a Director of GensisIntermedia, Inc., a publicly
traded company, and from October 8, 2001 to April 30, 2002, Mr. Weber served as
interim Chief Executive Officer, at which time her resigned. From 1989 to 1996,
he was the President of Positive Response Television, Inc., a direct marketing
and media company that he co-founded in 1989, built and eventually took public.
Under Mr. Weber's direction, within six years, Positive Response had 80
employees and had achieved annual sales of over $30 million. Prior to the
founding of Positive Response, Mr. Weber was a practicing Certified Public
Accountant, with over 13 years of experience in public accounting. From 1981 to
27
1989, Mr. Weber was a senior partner in a regional accounting firm. He
supervised certified audits of many companies in diversified fields. Prior to
1981, Mr. Weber worked for local and national accounting firms, performing and
supervising audit and client engagements. Mr. Weber graduated from the
University of Southern California in 1970.
RON FOSTER has served as our Chief Executive Officer, President and
Chairman of the Board from 1986 to October 2000. Mr. Foster is presently Vice
President and a Director of ValCom. Mr. Foster has been working with us since
our inception in 1984. Mr. Foster's primary responsibilities include finance,
marketing and technical review. In addition to his responsibilities with ValCom,
Mr. Foster has held a number of other management positions over the years. From
1984 to 1986, he was executive vice president and producer of Pioneer Games of
American Satellite Bingo, in Albany, Georgia. Mr. Foster was also the owner and
operator of Artist Management & Promotions where he was responsible for
coordinating television entertainers, sports figures and other celebrities for
department store promotions. Previously, Mr. Foster has served as president and
director of Ed-Phills, Inc., a Nevada corporation, and executive vice president
and member of the Board of Directors of Golden American Network, a California
corporation. From 1984 to 1994, he has also been the president and chief
executive officer of ROPA Communications, Inc., which owned and operated
WTAU-TV-19 in Albany, Georgia. He created and produced "Stock Outlook 87, 88,
and 89," a video presentation of public companies through Financial News Network
(FNN), a national cable network. Mr. Foster also has experience as a technical
director and associate producer for numerous national live sports broadcasts
produced by ABC, CBS and WTBS. Mr. Foster is Director/Producer/Writer of the
Company Interactive Broadcast Programs.
DAVID WEINER received his MBA degree from U.C.L.A. and gained a wide
variety of business experiences early in his career working in the investment
banking and pension fund management arena. He joined the consulting group of
Deloitte and Touche in 1988, where he provided general and corporate finance
consulting services to a wide variety of entertainment, telecommunications, and
direct response clients including K-tel, International, Inc. Mr. Weiner joined
K-tel in 1993, as Vice President of Corporate Development and was appointed
President in September of 1996. His responsibilities included directing all
United States operations of the company as well as its wholly owned subsidiaries
in the Untied Kingdom, Germany and Finland. Mr. Weiner resigned as President of
K-tel in 1998 to form W-Net, Inc., an Internet and software development and
consulting firm.
MEETINGS OF THE BOARD OF DIRECTORS
Each director is elected to serve for a term of one year until the next
annual meeting of shareholders or until a successor is duly elected and
qualified. There are no family relationships among directors or persons
nominated or chosen by us to become a director. The present term of office of
each director will expire at the next annual meeting of shareholders.
During the fiscal year ended September 30, 2001, the Board of Directors
held 62 meetings of which no director attended fewer than 75% of the total
number of meetings. Outside directors received no cash compensation for their
services, however they were reimbursed for their expenses associated with
attendance at meetings or otherwise incurred in connection with the discharge of
their duties as our directors. None of our officers receives any additional
compensation for his services as a director, and we do not contribute to any
retirement, pension, or profit sharing plans covering our directors.
28
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation we paid to our Chief Executive Officer and our other executive
officers whose income exceeded $100,000 for our last three fiscal years (the
"Named Officers").
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding
compensation we paid to our Chief Executive Officer and our other executive
officers whose income exceeded $100,000 for our last three fiscal years (the
"Named Officers").
SUMMARY COMPENSATION TABLE
========================== ======= ====================================== ============================================ =============
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
-------------------------------------- --------------------------------------------
AWARDS PAYOUTS
--------------------------------- ----------
RESTRICTED
SECURITIES SHARES OR
OTHER ANNUAL UNDER OPTIONS RESTRICTED SHARE LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION GRANTED UNITS PAYOUTS COMPENSATION
POSITION YEAR* ($) ($) ($) # ($) ($) ($)
- -------------------------- ------- ---------- ---------- ---------------- ---------------- ---------------- ---------- -------------
Vince Vellardita, 2001 130,000 Nil Nil Nil Nil Nil Nil
CEO 2000 120,000
- -------------------------- ------- ---------- ---------- ---------------- ---------------- ---------------- ---------- -------------
Ronald Foster, 2001 130,000 Nil Nil Nil Nil Nil Nil
Vice President 2000 120,000 Nil Nil
- -------------------------- ------- ---------- ---------- ---------------- ---------------- ---------------- ---------- -------------
Ronald Foster, 1999 120,000 Nil Nil Nil Nil Nil Nil
CEO
- -------------------------- ------- ---------- ---------- ---------------- ---------------- ---------------- ---------- -------------
========================== ======= ========== ========== ================ ================ ================ ========== =============
* Please note that we changed our fiscal year from December 31 to September 30.
OPTIONS
No options were issued to or exercised by any officer or director
during the last fiscal year.
COMPENSATION OF DIRECTORS
Outside directors received no cash compensation for their services,
however they were reimbursed for their expenses associated with attendance at
meetings or otherwise incurred in connection with the discharge of their duties
as our directors. None of our officers receives any additional compensation for
his services as a director, and we do not contribute to any retirement, pension,
or profit sharing plans covering our directors.
29
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of our
voting securities as of May 31, 2002, by: o each person known by us to
beneficially own 5% or more of the outstanding shares of our voting securities o
each of our directors o our named executive officers o all directors and
executive officers as a group.
As of May 31, 2002, there were 10,284,649 shares of common stock issued and
outstanding. The information set forth in the table and accompanying footnotes
has been furnished by the named beneficial owners.
NUMBER OF SHARES
TITLE OF CLASS IDENTITY OF PERSON OR GROUP BENEFICIALLY OWNED(1) PERCENT OF CLASS
-------------- --------------------------- --------------------- ----------------
E-Blaster International 3,000,000 29.17%
Common Shares JL H,R, Rasuna Said Kav.
B-1 6th Flr.
Jakarta, 12920
Indonesia
Great Asian Holdings Limit 2,110,423 20.52%
Common Shares Jakarta, 12920
Indonesia
Vince Vellardita 1,377,491 13.39%
Common Shares 26030 Avenue Hall
Valencia, California 91355
Radorm Technology Limited 567,825 5.52%
Common Shares Jakarta, 12920
Indonesia
Ronald Foster 246,500 2.00%
Common Shares 103 Firetower Road
Leesburg, Georgia 31763
Common Shares All Officers and Directors as a 1,731,638 16.84%
Group (2 persons)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unissued common shares
subject to options, warrants or other convertible securities currently
exercisable or convertible, or exercisable or convertible within 60
days, are deemed outstanding for the purpose of computing the
beneficial ownership of common shares of the person holding such
convertible security but are not deemed outstanding for computing the
beneficial ownership of common shares of any other person.
We do not know of any arrangements, the operation of which may, at a
subsequent date, result in a change in control of ValCom.
30
DESCRIPTION OF SECURITIES
This prospectus covers for resale by the selling stockholders the
following securities:
o 8,202,632 shares of common stock
o 1,250,000 shares of series D preferred stock
o 1,300,000 common stock purchase warrants
o 125,000 unit warrants
AUTHORIZED CAPITAL
Our authorized capital stock consists of (i) 100,000,000 shares of
common stock, par value $.001 per share, of which 10,284,649 shares were issued
and outstanding as of the date hereof, and 10,000,000 shares of "blank check"
preferred stock, of which 6,000,000 shares were designated and 2,788,000 shares
were issued and outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by the shareholders. The holders of
common stock are entitled to receive dividends ratably, when, as and if declared
by the Board of Directors, out of funds legally available therefor. In the event
of a liquidation, dissolution or winding-up of ValCom, the holders of common
stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion,
preemptive, or other subscription rights and there are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are, and the shares of common stock offered by the selling stockholders hereby,
when issued against the consideration set forth in this prospectus, will be,
validly issued, fully-paid and non-assessable.
PREFERRED STOCK
GENERAL. Under our articles of incorporation, our board of directors
is authorized, subject to any limitations prescribed by the laws of the
Delaware, but without further action by our shareholders, to provide for the
issuance of up to 10,000,000 shares of preferred stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the designations, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any further
vote or action by the stockholders. Our board of directors may authorize and
issue preferred stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of common stock. The
issuance of preferred stock, for example in connection with a shareholder
right's plan, could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, a majority of
our outstanding stock.
31
SERIES D CONVERTIBLE PREFERRED STOCK
The series D convertible preferred stock has priority over the common
stock and is junior to all other classes of preferred stock of our company in
the event of a liquidation. Holders of shares of our series D convertible
preferred stock are not entitled to dividends. The series D convertible
preferred shares are entitled to a liquidation preference amount of $.80 per
share and is convertible into our common stock on a one for one basis.
COMMON STOCK PURCHASE WARRANTS
The common stock purchase warrants have an exercise price of $.80
per share and is exercisable until June 18, 2007. In addition to customary
anti-dilution provisions, the warrant holders are subject to a 5% ownership
limitation of our common stock.
UNIT WARRANTS
The unit warrants have an exercise price of $.80 per unit. Each unit
warrant is exercisable into one common stock purchase warrant and shares of
common stock until June 18, 2007. In addition to customary anti-dilution
provisions, the unit warrant holders are subject to a 5% ownership limitation of
our common stock.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer, 17 Battery Place 8th Floor, New York, NY
10004, acts as transfer agent and registrar for our common and preferred stock.
32
SELLING STOCKHOLDERS
This prospectus covers for resale by the selling stockholders the
following securities:
o 8,202,632 shares of common stock
o 1,250,000 shares of series D preferred stock
o 1,300,000 common stock purchase warrants
o 125,000 unit warrants
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will realize a reduction in debt as our note holders convert our debt to equity.
In addition, we may realize up to $1,240,000 if all of the warrants we are
registering are not exercised on a cashless basis. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
Total
Percentage
Total Shares of Common
of Common Stock Stock, Shares of Beneficial Percentage of Beneficial Percentage
Issuable Upon Assuming Common Stock Ownership Common Stock Ownership of Common
Name Conversion/Exercise Full Included in Before the Owned Before After the Stock Owned
of Securities Conversion Prospectus Offering Offering Offering After Offering
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
Laurus Master Fund, 2,876,316 (2) 22.0% 5,402,632 (1) 540,158 4.99% 0 0
Ltd.
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
High Capital 2,550,000 (3) 19.55% 2,550,000 540,158 4.99% 0 0
Funding, LLC
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
James E. Hosch 190,000 (4) 1.8% 190,000 190,000 1.8% 0 0
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
Vicki D.E. Barone 8,324 (5) * 8,324 8,324 * 0 0
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
Stephen Bathgate 16,676 (6) * 16,676 16,676 * 0 0
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
Bathgate Capital 25,000 (7) * 25,000 25,000 * 0 0
Partners LLC
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
Janet L. Hayes 10,000 (8) * 10,000 10,000 * 0 0
- --------------------- ----------------- -------------- -------------- ------------ --------------- ----------- ---------------
* Less than one percent.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares, which the selling stockholder has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible preferred stock is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
33
(1) Includes 200% of the shares issuable upon conversion of the
convertible notes, based on current market prices. Because the
number of shares of common stock issuable upon conversion of
the convertible note is dependent in part upon the market
price of the common stock prior to a conversion, the actual
number of shares of common stock that will be issued upon
conversion will fluctuate daily and cannot be determined at
this time. However the selling stockholder has contractually
agreed to restrict its ability to convert or exercise its
warrants and receive shares of our common stock such that the
number of shares of common stock held by it and its affiliates
after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of common stock.
(2) Includes (i) 300,000 shares underlying warrants that are
currently exercisable at an exercise price of $1.20 per share;
and (ii) 2,576,316 shares underlying convertible debentures.
In accordance with rule 13d-3 under the securities exchange
act of 1934, Laurus Capital Management, L.L.C. may be deemed a
control person of the shares owned by such entity. David Grin
and Eugene Grin are the principals of Laurus Capital
Management, L.L.C.
(3) Includes (i) 1,300,000 shares underlying warrants that are
currently exercisable at an exercise price of $.80 per share;
and (ii) 1,250,000 shares underlying series D preferred stock.
In addition we are registering (i) 1,300,000 common stock
purchase warrants; and (ii) 1,250,000 shares of series D
preferred stock. High Capital Funding, LLC is a Delaware LLC,
which is beneficially owned by approximately 95 persons. Sole
voting and dispositive powers for all securities owned by it
is vested in its manager, Profit Concepts, Ltd., a NY
corporation controlled by Frank E. Hart, as sole director and
president.
(4) Represents 190,000 shares of common stock underlying 95,000
unit warrants exercisable at $.80 per unit warrant. Each
warrant is exercisable into (i) one share of our common stock
and (ii) one warrant that is exercisable into one share of our
common stock at an exercise price of $.80 per share. Does not
include the 95,000 unit warrants that are being registered in
this prospectus.
(5) Represents 8,324 shares of common stock underlying 4,162 unit
warrants exercisable at $.80 per unit warrant. Each warrant is
exercisable into (i) one share of our common stock and (ii)
one warrant that is exercisable into one share of our common
stock at an exercise price of $.80 per share. Does not include
the 4,162 unit warrants that are being registered in this
prospectus.
(6) Represents 16,676 shares of common stock underlying 8,338 unit
warrants exercisable at $.80 per unit warrant. Each warrant is
exercisable into (i) one share of our common stock and (ii)
one warrant that is exercisable into one share of our common
stock at an exercise price of $.80 per share.
34
(7) Represents 25,000 shares of common stock underlying 12,500
unit warrants exercisable at $.80 per unit warrant. Each
warrant is exercisable into (i) one share of our common stock
and (ii) one warrant that is exercisable into one share of our
common stock at an exercise price of $.80 per share. In
addition we are registering 12,500 unit warrants that are
being registered in this prospectus. In accordance with rule
13d-3 under the securities exchange act of 1934, Bathgate
Capital Partners, LLC is controlled by Stephen Bathgate.
(8) Represents 10,000 shares of common stock underlying 5,000 unit
warrants exercisable at $.80 per unit warrant. Each warrant is
exercisable into (i) one share of our common stock and (ii)
one warrant that is exercisable into one share of our common
stock at an exercise price of $.80 per share. Does not include
the 5,000 unit warrants that are being registered in this
prospectus.
FINANCING TERMS OF THE LAURUS MASTER FUND, LTD. CONVERTIBLE NOTE
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with Laurus Master Fund Ltd. on May 24, 2002 and
June 7, 2002 for the sale of (i) an aggregate of $2,000,000 convertible notes
and (ii) a warrants to buy 300,000 shares of our common stock.
The note bear interest at 12%, mature on May 24, 2004, and is
convertible into our common stock, at a fixed conversion price of $.95 per
share. The notes are repayable over an twenty-two month period. Monthly payments
may be made in either common stock or in cash at the option of ValCom. If paid
in common stock, we must have an effective registration statement relating to
the shares of common stock. In addition, if the closing price of our common
stock is lower than 125% of the fixed conversion price then our monthly payment
must be made in either cash or common stock at a conversion price of 80% of the
three (3) lowest closing prices during the thirty (30) trading days immediately
preceding the conversion date. The full principal amount of the convertible
notes are due upon default under the terms of convertible notes. The warrants
are exercisable until May 24, 2007 at a purchase price of $1.20.
The conversion price of the notes and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholder's position.
The selling stockholder has contractually agreed to restrict its
ability to convert or exercise its warrants and receive shares of our common
stock such that the number of shares of common stock held by it and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock.
The convertible notes are secured by a second mortgage on certain real
property of the company.
35
A complete copy of the Securities Purchase Agreement and related
documents was filed with the SEC as exhibits to our Form SB-2 relating to this
prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of a note
is determined by dividing that portion of the principal of the note to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $2,000,000 of notes on June 16, 2002, a conversion price of $.95
per share, and the payment of accrued interest in the approximate amount of
$12,500 in additional shares rather than in cash, the number of shares issuable
upon conversion would be:
$2,000,000 + $12,500 = 2,118,421 shares
--------------------
$.95
FINANCING TERMS OF THE HIGH CAPITAL FUNDING LLC SERIES D PREFERRED STOCK
TRANSACTION
In June 2002, we sold to High Capital Funding, LLC 1,250,000 shares of
our Series D convertible preferred stock for $1,000,000. In addition we issued
1,300,000 common stock purchase warrants that are exercisable at $.80 per share.
We issued a 7% placement agent fee and 125,000 unit warrants to both Gate
Capital Partners, LLC and its affiliates. See "Description of Securities" for a
complete description of our common stock Series D convertible preferred, common
stock purchase warrants and unit warrants.
36
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market, or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. There is no assurance that the selling stockholders
will sell any or all of the common stock in this offering. The selling
stockholders may use any one or more of the following methods when selling
shares:
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
o Block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction.
o An exchange distribution following the rules of the applicable
exchange
o Privately negotiated transactions
o Short sales or sales of shares not previously owned by the
seller
The selling stockholders may also engage in:
o Short selling against the box, which is making a short sale
when the seller already owns the shares.
o Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by
the stockholder.
o Pledging shares to their brokers under the margin provisions
of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer to
sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from selling stockholders in amounts to be negotiated.
If any broker-dealer acts as agent for the purchaser of shares, the
broker-dealer may receive commission from the purchaser in amounts to be
negotiated. The selling stockholders does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be considered to be "underwriters" within the
meaning of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities Act.
37
We are required to pay all fees and expenses incident to the
registration of the shares in this offering. However, we will not pay any
commissions or any other fees in connection with the resale of the common stock
in this offering. We have agreed to indemnify the selling shareholders and their
officers, directors, employees and agents, and each person who controls any
selling shareholder, in certain circumstances against certain liabilities,
including liabilities arising under the Securities Act. Each selling shareholder
has agreed to indemnify us and our directors and officers in certain
circumstances against certain liabilities, including liabilities arising under
the Securities Act.
If the selling stockholders notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
38
HOW TO OBTAIN MORE INFORMATION ABOUT VALCOM, INC.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith file reports, proxy or
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.20549, at
prescribed rates. In addition, the Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's web site is http://www.sec.gov.
We have filed with the Commission, a registration statement on Form
SB-2 under the Securities Act of 1933 with respect to the shares of common stock
being offered by its selling shareholders. As permitted by the rules and
regulations of the Commission, this prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to our common stock
offered by the selling shareholders, reference is made to the registration
statement, and such exhibits and schedules. A copy of the registration
statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at the
addresses set forth above, and copies of all or any part of the registration
statement may be obtained from such offices upon payment of the fees prescribed
by the Commission. In addition, the registration statement may be accessed at
the Commission's web site. Statements contained in this prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference.
39
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
ValCom by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Our financial statements as at March 31, 2002 and for the years ended,
September 30, 2001 and December 31, 2000 have been included in this prospectus
in reliance on the report of Jay J. Shapiro, Certified Public Accountant, as
given upon the authority of said firm as experts in accounting and auditing.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
In March 20, 2000, Daniel Ratliff and Company, independent certified
public accountants, engaged as the principal accountant to audit the prior
financial statements of ValCom, Inc., resigned. The resignation resulted from us
moving our corporate offices to the west coast in Glendale, California and the
conclusion that we would be better served through the engagement of a local
Certified Public Accounting firm. We elected to utilize the services of Jay J.
Shapiro, CPA of Encino, California.
The decision to change accountants was approved by the board of
directors of the company. There have been no disagreements with the former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of the former accountant, would have cause it
to make reference to the subject matter of the disagreements in connection with
its report for 1998 and 1999. We have filed with the Securities and Exchange
Commission an 8-K dated March 29, 2000 disclosing this action. We have requested
that the former accountants furnish them with letter stating whether they agree
with the statements made by the registrant, and, if not, stating the respects in
which they do not agree as indicated in Item 4. A copy of this letter was filed
by Exhibit with an 8-K.
On April 23, 2002, CPA Jay J. Shapiro resigned as our auditor.
Effective as of that date, we engaged Weinberg & Company, CPA as our new
independent auditor.
For the years ended December 31, 1999 and 2000 and the transition
period for the nine months ended September 30, 2001, none of the reports on the
financial statements of the Company issued by Shapiro contained an adverse
opinion, disclaimer of opinion, or was qualified or modified as to uncertainty,
audit scope or accounting principles.
For the years ended December 31, 1999 and 2000 and the transition
period for the nine months ended September 30, 2001, and the subsequent interim
period up until April 23, 2002, the Company and Shapiro had no disagreement on
any matter of accounting principles or practices, financial statement
disclosure, auditing scope or procedure, which disagreement, if not resolved to
the satisfaction of Shapiro, would have caused it to make reference to the
subject matter of the disagreement in connection with any report of opinion it
might have issued.
40
INDEX TO FINANCIAL STATEMENTS
-----------------------------
For the Period Ended June 30, 2002
- ----------------------------------
Consolidated Balance Sheet F-1
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flow F-4
Consolidated statements of Stockholders Equity F-5
Notes to Consolidated Financial Statements F-7/F-10
For the Years Ended September 30, 2001 and December 31, 2000
- ------------------------------------------------------------
Consolidated Independent Auditors' Report F-11
Consolidated Balance Sheet F-12
Consolidated Statements of Operations F-14
Consolidated Statements of Cash Flow F-15
Consolidated statements of Stockholders Equity F-16
Notes to Consolidated Financial Statements F-17/F-27
41
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
F-1
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
F-2
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
F-3
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
F-4
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
F-5
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
F-6
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.
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.
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.
F-7
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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.
F-8
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)
============ ============ ============ ============
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
F-9
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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.
F-10
To the Board of Directors
ValCom, Inc.:
We have audited the accompanying consolidated balance sheets of ValCom, Inc. and
subsidiaries (the "Company") as of September 30, 2001, and December 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 2000 and the nine month period ended
September 30, 2001.These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 2001 and December 31, 2000, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2000 and the nine
months ended September 30, 2001 in conformity with generally accepted accounting
principles.
/S/JAY J. SHAPIRO, C.P.A.
A PROFESSIONAL CORPORATION
ENCINO, CALIFORNIA
DECEMBER 27, 2001
F-11
VALCOM, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, December 31,
------------- ------------
2001 2000 2000
---- ---- ----
(Unaudited)
Cash $ 420,857 $ 22,541 $ 7,787
Accounts receivable, net 156,179 -0- 74,455
Other receivables 74,000 -0- 52,634
Prepaid expenses -0- -0- 11,569
Inventory -0- 22,000 -0-
Prepaid development costs 190,699 -0- -0-
Property held for sale -0- 3,940,000 3,940,000
Note receivable, related party 1,415,000 -0- -0-
------------ ------------ ------------
Total Current Assets 2,256,735 3,984,541 4,086,445
------------ ------------ ------------
Fixed Assets - net $11,959,941 $ 75,000 $11,681,381
Production costs -0- -0- 110,201
Prepaid loan fees 232,171 -0- 100,501
Deposits 31,750 20,500 30,000
Notes receivable, long-term 100,000 -0- -0-
------------ ------------ ------------
Total Assets $14,580,597 $ 4,080,041 $16,008,528
============ ============ ============
See accompanying notes to consolidated financial statements
F-12
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accrued interest $ 20,384 $ 299,000 $ 325,010
Accrued wages due stockholder -0- 550,000 670,000
Advances due stockholder -0- 295,000 200,508
Loan payable affiliate -0- 150,000 150,000
Other current liabilities -0- -0- 42,461
Accrued other 107,824 -0- -0-
Credit line payable 150,837 -0- 110,000
Notes payable -- current portion 133,405 1,181,181 1,289,586
Accounts payable 540,983 76,000 297,285
Production advances, net 765,656 -0- -0-
------------ ------------ ------------
Total Current Liabilities 1,719,089 2,551,181 3,084,850
Notes Payable 6,636,734 -0- 5,902,919
------------ ------------ ------------
Total Liabilities $ 8,355,823 $ 2,551,181 $ 8,987,769
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, par value
$0.001; 10,000,000 shares
authorized: 1,538,000 and 1,543,000
1,543,000 shares issued and
outstanding at September 30, 2001
and 2001 and December 31,
2000, respectively: 1,538 1,543 1,543
Common stock, par value $.001;
100,000,000 shares
authorized; 8,909,401 and 13,770,878
and 90,139,843 shares issued and
outstanding at September 30, 2001
and 2000 and December 31, 2000
respectively: 8,909 6,885 90,140
Additional Paid in capital 9,512,699 4,508,025 8,101,157
Accumulated deficit (3,298,372) (2,987,593) (1,172,081)
------------ ------------ ------------
6,224,774 1,528,860 7,020,759
------------ ------------ ------------
$ 14,580,597 $ 4,080,041 $ 16,008,528
============ ============ ============
See accompanying notes to consolidated financial statements
F-13
VALCOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
September 30, December 31,
------------- ------------
2001 2000 2000
---- ---- ----
(unaudited)
Revenue
Rental $ 1,422,033 $ -0- $ 1,328,782
Production 952,234 -0- 37,500
Other 38,993 -0- 28,791
-------------- ------------- --------------
2,413,260 -0- 1,395,073
-------------- ------------- --------------
Cost and Expenses:
Production and development 981,667 -0- 273,217
Selling and promotion 230,483 -0- 104,176
Depreciation 191,925 -0- 271,714
Web site development -0- 102,491 -0-
Administrative and
general 2,529,061 289,335 1,786,610
-------------- ------------- --------------
Total 3,933,136 391,826 2,435,717
-------------- ------------- --------------
Operating (loss) (1,519,876) (391,826) (1,040,644)
Interest Expense (606,415) (100,000) (851,078)
-------------- ------------- --------------
Net Loss $ (2,126,291) $ (491,826) $ (1,891,722)
============== ============= ==============
Basic net
(loss) per share $ (0.23) $ (0.04) $ (.06)
============== ============= ==============
Weighted number of shares 9,135,419 13,770,878 29,805,000
============== ============= ==============
See accompanying notes to consolidated financial statements
F-14
VALCOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
September 30 December 31
------------ -----------
2001 2000 2000
---- ---- ----
Unaudited
Operating Activities:
Net (Loss) ($2,126,291) (491,826) ($1,891,722)
Not Requiring Cash:
Depreciation and amortization 191,925 -- 271,714
Stock issued for services 280,000 141,565 617,084
Other -- -- 2,167
------------ ------------ ------------
(1,654,366) (350,261) (1,000,757)
------------ ------------ ------------
Changes in:
Receivables (61,223) -- 307,623
Inventory -- 22,000 --
Mortgage escrow hold back -- -- --
Prepaid expenses 11,569 (11,569)
Liabilities assumed by buyer or
property held for sale (2,525,000) -- --
Development costs (80,498) -- --
Other assets -- -- (101,034)
Accounts payable and other
accrued expenses (9,986) 120,000 293,575
Production deposits 765,656 -- --
Credit line payable 40,837 -- 110,000
Loans payable -- 150,000
Due to stockholder (870,508) 280,802 225,372
------------ ------------ ------------
2,320,847 422,802 973,967
------------ ------------ ------------
Cash Provided (used) by Operations 666,481 72,541 (26,790)
------------ ------------ ------------
Investing Activities:
Acquisition of fixed assets (401,179) (20,000) (180,441)
Acquisition of Half Day, Video 141,742 -- --
Renovation costs (75,000) --
Deposits (1,750) -- --
Notes receivable (100,000) -- --
Prepaid loan fees (131,670) -- --
------------ ------------ ------------
Cash Used by Financing
Activities (634,599) (95,000) (180,441)
------------ ------------ ------------
Financing Activities:
Principal payments
on notes payable 131,198 -- (213,676)
Withdrawl of capital contribution -- (2,000,000)
Issuance of stock 205,000 45,000 150,000
------------ ------------ ------------
Cash Provided (Used) by
Financial Activities 336,198 45,000 (2,063,676)
------------ ------------ ------------
Increase (Decrease) in Cash and
Cash Equivalents 368,080 (22,541) (2,270,907)
Cash and cash equivalents,
beginning of year 52,777 -- 2,278,694
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 420,857 $ 22,541 7,787
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 299,000 $ -- $ 291,000
============ ============ ============
Income taxes paid $ 0 $ 0 $ 0
============ ============ ============
Notes receivable accepted
for property held for sale $ 1,415,000 -- --
============ ============ ============
See accompanying notes to consolidated financial statements
F-15
VALCOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
-----------------------------------------------
YEAR ENDED SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
Common Preferred Additional
--------------------------- --------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance
Jan 1, 2000 9,693,878 9,694 1,653,000 1,653 9,399,742 719,641
Shares issued
for services 2,736,000 2,736 -- -- 616,515 (458,250)
Shares issued
for assets 100,000 100 -- -- 12,400 --
Shares issued
for cash 900,000 900 -- -- 169,100 --
Conversion
of preferred 1,100,000 1,100 (110,000) (110) (990) --
Withdrawal of
capital contribution
December 2000 -- -- -- -- (2,000,000) --
Retirement upon
merger (100,000) (100) -- -- (19,900) --
Acquisition of
VEI-Oct 2000 75,709,965 75,710 -- -- (75,710) --
Net loss
for 2000 -- -- -- -- -- (1,433,472)
------------ ------------ ------------ ------------ ------------ ------------
Balance
December
31, 2000 90,139,843 $ 90,140 1,543,000 $ 1,543 $ 8,101,157 ($1,172,081)
Acquisition
of Half Day 950,000 950 -- -- 140,792 --
Discount on
convertible debt -- -- -- -- 375,000 --
Shares issued
for services 1,600,000 1,600 -- -- 378,400 (380,000)
Shares issued
for debt
retirement 869,162 869 -- -- 227,695 --
Shares issued
for cash 410,000 410 -- -- 204,590 --
Conversion of
preferred shares 25,000 25 (5,000) (5) (20) --
Correction of
shares issued
upon merger 100,000 100 -- -- (100) --
Canceled (5,000,000) (5,000) -- -- 5,000 --
Reverse
split 1:10 (80,184,604) (80,185) -- -- 80,185 --
Net loss
for the
period -- -- -- -- -- (1,746,291)
------------ ------------ ------------ ------------ ------------ ------------
Balance
September
30,2001 8,909,401 $ 8,909 1,538,000 $ 1,538 $ 9,512,699 (3,298,372)
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-16
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000, AND DECEMBER 31, 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
Following is a summary of the significant accounting policies followed in the
preparation of these financial statements, which policies are in accordance with
generally accepted accounting principles:
ORGANIZATION
- ------------
ValCom, Inc. (the "Company"), formerly SBI Communication, 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, 1988, 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 75,709,965 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 consolidated financial statements include the accounts of the Company and
one wholly-owned subsidiary Half Day Video, Inc. These financial statements
include all activities as if the acquisition occurred on January 1, 2000.
F-17
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31,2000
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. Accordingly the audited financial statements for
the nine months ended 9/30/01 are presented with the unaudited statements as of
9/30/00 for comparison purposes.
USE OF ESTIMATES
- ----------------
The preparation of 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 from 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. In addition, the Company has a standby letter of credit for $30,000
related to a lease of the facility.
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 September 30,
2001 accounts receivable has been reported net of a $20,000 allowance for bad
debts.
F-18
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- ----------------------------------------------------------
DEPRECIATION
- ------------
For financial and reporting purposes, the Company follows the policy of
providing depreciation and amortization on the straight-line and accelerated
declining balance methods over the estimated useful lives of the assets, which
are as follows:
Building 39 years
Building Improvements 39 years
Office Furniture and Equipment 5 to 7 years
Production Equipment 5 years
AMORTIZATION OF PREPAID LOAN COSTS
- ----------------------------------
For financial reporting purposes, costs are amortized on the straight line
method over the term of the related loan.
INCOME TAXES
- ------------
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which requires the use of the asset and liability
method and recognizes deferred income taxes for the consequences of "temporary
differences" by applying enacted statutory tax rate applicable to future years
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities.
RELATED PARTY TRANSACTIONS
- --------------------------
From time to time, a shareholder of the Company advances money to the Company
for operations. All amounts owed to the shareholder are non-interest bearing. In
addition to advances, the Company accrued salaries payable to the shareholder.
All amounts owed to the shareholder are payable on demand upon disposition of
property held for sale to related party. The Company's financial statements
reflect 1.2 million secured note receivable with interest due at 5%.
F-19
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONT'D)
- -------------------------------------------------------
STOCK-BASED COMPENSATION
- ------------------------
As provided for in SFAS #123, the Company elected to apply APBO #25 and related
interpretations whereby the fair value of stock given is determined at the grant
date and additional disclosures are provided in Note 7.
IMPAIRMENT OF LONG-LIVED ASSETS
- -------------------------------
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recover ability is based on an estimate of
undisclosed future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for long-lived assets is
based on the fair value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell.
REVENUE RECOGNITION
- -------------------
Revenues from licensing of television programming is recorded when the material
is available for telecasting by the licensee and when certain other conditions
are met. Rental revenue is recognized monthly pursuant to written contracts.
NOTE 2 PROPERTY AND EQUIPMENT
- -----------------------------
Property and equipment consists of the following at:
September 30, December 31,
- ---------------------------
2001 2000 2000
Land $ 7,392,292 -0- $7,392,292
Building 4,028,785 -0- 4,028,785
Building Improvements 1,154,406 -0- 1,240,070
Production Equipment 699,286 -0- -0-
Leasehold Improvements 50,164 -0- -0-
Autos and Trucks 89,087 -0- -0-
Office Furniture and 73,243 75,000 39,500
equipment ------------- ------------ -----------
13,487,263 75,000 12,700,647
Less: Accumulated
depreciation (1,527,322) -0- (1,019,266)
------------- ------------ ------------
Net Book Value $ 11,959,941 75,000 $11,681,381
============= ============ ============
NOTE 3 BUSINESS ACQUISITION
- ---------------------------
In March 2001, the company acquired 100% ownership of Half Day Video, Inc. a
California corporation, for 950,000 shares of ValCom, Inc. common stock. The net
book value of Half Day Video, Inc. has been determined to be the fair market
value of the common stock issued.
NOTE 4 PRODUCTION AGREEMENT
- ---------------------------
In March 2001, the Company entered into an agreement with Woody Fraser
Productions, (WFP) to produce various television productions. Under the terms of
the agreement the Company will advance WFP $500,000 per year to be used for
various development costs. Additionally 25% of the net profits from any
productions will be paid to WFP. In March 2001 the venture signed contracts to
produce a television series of 13 episodes and a pilot for a cable TV Network.
F-20
VALCOM, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
NOTE 5 NOTES PAYABLE
- --------------------
The following is a summary of the Company's Notes Payable at year end.
September 30 December 31
------------ -----------
2001 2000 2000
----------- ----------- -----------
Promissory note payable to First
Fidelity Investment and Loan due
in monthly installments of principal
and interest of $54,648 at 10.03% per
annum. The rate is variable dependent
on the 6 month US T-Bill rate. The note
is secured by a Deed of Trust on the
Valencia Studio property. The note
matures December 2009 5,927,508 -0- $5,961,324
Convertible promissary note net of
discount of $336,000 See note 6
for further description 586,388 -0- -0-
Promissory note payable to private lender
due with interest at 12% per annum and
was due July, 1999. The note is secured
by a Deed of Trust on the Piedmont
property -0- 1,050,000 $1,050,000
Various other loans, 8.00%
- -11.00% Interest 256,243 131,181 181,181
----------- ----------- -----------
Total 6,770,139 1,181,181 7,192,505
Less Current Maturities 133,405 1,181,181 1,289,586
----------- ----------- -----------
Notes Payable $6,636,734 $ -0- $5,902,919
=========== =========== ===========
Maturities on the notes are as follows:
2001 $ 133,405
2002 650,909
2003 71,277
2004 78,740
2005 86,986
2006 87,027
Thereafter $5,661,795
-----------
$6,770,139
===========
The Company's average short-term weighted interest rate is 10% and 9%
respectively for the periods presented.
F-21
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
NOTE 6 CONVERTIBLE NOTE PAYABLE
- -------------------------------
On June 6, 2001 and September 7, 2001 the Company borrowed $750,000 and $250,000
from the Laurus Master Fund, LTD (LMF). The borrowing are evidenced by
convertible promissory notes due June 7, 2003 and September 7, 2003. Interest at
8% per annum is payable quarterly. Any or all principal or interest is
convertible into common stock of the Company at 80% of the average of the lowest
closing prices during the preceding 60 days. Subsequent to September 30, 2001
$77,612 of the principal and interest was converted to 537,490 shares of common
stock. The detachable warrant entitles LMF to purchase up to 72,737 shares of
common stock of the company at the lesser $.548 per share or 120% of the average
three lowest closing prices during the immediately preceding 10 trading days. A
discount of $375,000 was recognized on the convertible features of this debt and
the detachable warrants.
NOTE 7 INCOME TAXES
- -------------------
Deferred income tax assets and liabilities are summarized as follows at
September 30, 2001:
Deferred tax assets attributable to
operating loss carry forwards $4,800,000
Valuation allowance due to uncertainty
surrounding realization of operating
loss carry forwards ($ 4,800,000)
-------------
Total deferred taxes $ 0
=============
The Company has available at September 30, 2001, unused operating loss carry
forwards, which may be applied against future taxable income, that expire as
follows:
F-22
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
Amount of Unused Expiration During
Operating Loss Year Ended
Carry Forwards December 31
- --------------- ----------------
$ 550,000 2002
$ 1,200,000 2003
$ 300,000 2004
$ 490,000 2007
$ 340,000 2008
$ 320,000 2009
$ 650,000 2010
$ 1,050,000 2011
$ 700,000 2012
$ 3,836,000 2013
$ 289,000 2014
$ 1,892,000 2015
$ 2,126,000 2016
- -------------
$13,743,000
- -------------
NOTE 8 COMMITMENTS
- ------------------
In May 2000 the Company leased additional facilities adjacent to its location in
Valencia. The lease has a term of five years. Initial monthly base rent is
$29,000 with annual increases until 2004 when base rent will be $34,585. During
fiscal 2001, the Company recognized $173,650 rent expense.
The Company has various employment agreements with certain officers,
shareholders and key employees which expire beginning in 2002. These agreements
provide for compensation aggregating $300,000 per annum.
NOTE 9 NET LOSS PER SHARE
- -------------------------
The Company's net loss per share was calculated using weighted average shares
outstanding of 9,135,419, 13,770,878, 29,805,000 for the nine month periods
ended September 2001 and 2000, and the year ended December 31, 2000
respectively. Although convertible preferred stock and convertible debt are a
common stock equivalent, with a conversion rate of 5 shares of common stock for
each share of preferred stock conversion has not been included in the
calculation of earnings per share as it would be antidilutive.
NOTE 10 STOCKHOLDERS' EQUITY
- ----------------------------
In January 2000, the Company issued 200,000 shares of its common stock for cash
of $5,000 and financial marketing services with a fair value of $7,500.
In January 2000, Valencia Entertainment International, LLC distributed
$2,000,000 to its partners. This amount was accounted for as a reduction of
partners' capital.
F-23
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
NOTE 10 STOCKHOLDERS' EQUITY (CONT'D)
- -------------------------------------
In February 2000, the Company issued 400,000 shares of restricted stock for the
origination of $25,000 on a $150,000 loan from two parties.
In June 2000, the Company issued 100,000 shares for $25,000 cash.
In June 2000, the Company issued 100,000 shares for $20,000 cash. These shares
were sold to VEI and were therefore retired upon merger in October 2000.
In June 2000 the Company issued 400,000 shares of restricted stock for web site
development fees valued at $50,000.
In July 2000 the Company issued 100,000 shares for purchase of an auto with fair
value of $12,500.
In August 2000, the Company issued 30,000 shares of restricted stock as a loan
origination fee valued at $3,350.
In August 2000, 110,000 shares of preferred stock were converted to 1,100,000
shares of common stock.
In October 2000, the Company split its common stock on a 2-for-1 basis changed
par value of its preferred stock from $5.00 to $.001 per share and issued
75,709,965 post-split shares of common stock to the partners of Valencia
Entertainment International, LLC. The consolidated financial statements have
been retroactively restated for the split.
In November 2000, the Company issued 200,000 shares of restricted stock for
legal services at fair value. A price guarantee of $0.50 accompanied the
issuance.
In December 2000, the Company issued 6,000 shares of restricted stock to
employees of the Company. These shares were valued at $0.50 per share.
In December 2000, the Company issued 500,000 shares of restricted stock as
satisfaction of a debt of $250,000.
In December 2000, the Company issued 500,000 shares of restricted common stock
for cash of $125,000.
In December 2000, the Company issued 1,000,000 shares of restricted common stock
for management consulting and legal services with a fair value of $175,000.
In January 2001, the Company issued 500,000 shares of restricted common stock
for management consulting services with a fair value of $87,500.
F-24
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
In February 2001, the Company issued 250,000 shares of restricted common stock
for management consulting services with a fair value of $26,250.
In February 2001, the Company issued 950,000 shares of restricted common stock
for the acquisition of 100% of the common stock of Half Day Video, Inc. with a
net book value of $141,742.
In March 2001, the Company issued 400,000 shares of restricted stock for cash of
$205,000.
In March 2001, the Company issued 331,664 shares of restricted stock as
satisfaction of a debt of $150,000.
In March 2001, the Company issued 500,000 shares of restricted common stock for
management consulting services with a fair value of $87,500.
In March 2001, the company issued 250,000 shares of restricted stock for prepaid
development costs with a fair value of $43,500.
In April 2001, the Company issued 100,000 shares of restricted common stock for
management consulting services with a fair value of $17,500.
In April 2001 5,000 shares of preferred stock were converted to 25,000 shares of
common stock.
In July 2001, the Company's CEO surrendered 5,000,000 shares of restricted
common stock in an effort to improve the share market value.
In August 2001, the Company issued 200,000 shares of restricted stock as a
correction of shares issued upon merger.
On various dates from June through September 2001, 537,498 shares of common
stock registered under an SB-2 were issued as satisfaction of convertible debt
valued at $78,027.
In September 2001, the Company reverse split its common stock on a 10-for-1
basis.
F-25
VALCOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000
NOTE 11 SEGMENT INFORMATION
- ---------------------------
The Company has two segments - studio operations and production/distribution of
television programming.
September 30, 2001 September 30, 2000 December 31, 2000
---------------------- -------------------- -------------------
Studio Programming Studio Programming Studio Programming
------- ----------- ------ ------------ ------ -----------
Identifiable
assets $11,959,941 $1,625,578 -0- -0- 9,399,742 110,201
============ =========== ======== ======= =========== =========
Revenues 1,422,033 952,234 -0- -0- 1,357,573 37,500
============ =========== ======== ======= =========== =========
Operating
(Losses) ($1,090,443) ($429,433) -0- -0- (804,927) (235,717)
============ =========== ======== ======= =========== =========
NOTE 12 LEGAL 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 judgements against Ricky Rocket Enterprises,
Inc. and 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.
Valencia Entertainment was a distributor for 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 wrong
doing 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.
F-26
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 - SEPTEMBER 30, 2000 AND DECEMBER 31, 2000
SUMMARY FINANCIAL DATA
- ----------------------
Set forth below is selected financial information of the Company and its
consolidated subsidiaries as derived from the audited statements of income
(loss) for the last two fiscal periods ( September 30, 2001 and December 2000),
from the balance sheets for the periods then ended. The selected financial
information should be read in conjunction with the financial statements
(including the notes thereto) filed with this Registration Statement and are
qualified by reference to such financial statements.
September 30, December 31,
---------------------- ------------
2001 2000 2000
----- ----- ------
Unaudited
Statement of Operations Data
- ----------------------------
Gross Revenues $ 2,413,260 -0- $ 1,395,073
Income from Operations(Loss) (1,575,328) (391,826) ($1,891,722)
Net Income(Loss) per share* (.18) (.04) (.06)
Balance Sheet Data
- ------------------
Assets
------
Current Assets $ 2,256,735 $ 3,984,541 $ 4,086,445
------------ ------------ -------------
Fixed assets-net 11,959,941 75,000 $ 11,681,381
Production costs -0- -0- 110,201
Note receivable 100,000 -0- -0-
Prepaid loan fees 232,171 -0- 100,501
Deposits 31,750 20,500 30,000
------------ ------------ -------------
Total Assets $14,580,597 $ 4,080,041 $ 16,008,528
============= ============= =============
Liabilities
- -----------
Current Liabilities 1,719,089 2,551,181 3,084,850
Notes payable 6,636,734 -0- 5,902,919
------------ ------------ -------------
Total Liabilities 8,355,823 2,551,181 8,987,769
Total Stockholders' Equity 6,224,774 1,528,860 7,020,759
------------ ------------ -------------
Total Liabilities and Equity $14,580,597 $ 4,080,041 $ 16,008,528
============ ============ =============
* See above. Per share data is computed based on the weighted average of common
stock outstanding as of the report date.
F-27
================================================================================
8,202,632 SHARES OF COMMON STOCK
1,250,000 SHARES OF SERIES D PREFERRED STOCK
1,300,000 COMMON STOCK PURCHASE WARRANTS
125,000 UNIT WARRANTS
VALCOM, INC.
-----------------
PROSPECTUS
-----------------
THE DATE OF THIS PROSPECTUS IS
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION OF DIRECTORS AND OFFICER
- ----------------------------------------
The corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the state of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have the
power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of the stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, Officer, Employee or Agent and shall inure to
the benefit of the heirs, executors and administrators of such person.
The Board of Directors of the Company may also authorize the Company to
indemnify employees or agents of the Company, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to directors and officers of the Company. As of the date
of this Registration Statement, the Board of Directors has not extended
indemnification rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended (the "Securities Act") and
is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities offered hereby.
SEC registration fee.................................. $ 500
Accountants' fees and expenses ....................... 25,000
Legal fees ........................................... 25,000
Transfer agent's and warrant agent's fees and expenses 500
--------
Total ..................................................... $51,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Description Date Shares
- ----------- ---- ------
Stock issued for cash and services Richard Abbenante 1/12/00 200,000
Stock issued for services Douglas Scott 2/7/00 266,666
Stock issued for services Douglas Scott 2/10/00 133,334
Stock issued for services Lisa Williams 6/7/00 30,000
Stock issued for fixed asset Vince Vellardita 6/7/00 100,000
II-1
Stock issued for services 6/15/00 400,000
Stock issued for cash Papes Capital Services 6/15/00 200,000
Preferred shares converted Martin Nickelsen 7/15/00 100,000
Preferred shares converted Ron Foster 7/15/00 900,000
Preferred shares converted The Peter Pappas Trust 7/21/00 100,000
Stock issued for services 11/30/00 200,000
Stock issued for cash Jeff Gleckman 12/15/00 500,000
Stock issued for services Beth Grover 12/18/00 250
Stock issued for services Melissa Wohl 12/18/00 250
Stock issued for services Jesus Martinez 12/18/00 500
Stock issued for services Rigoberto Bahena 12/18/00 500
Stock issued for services Lal Rati 12/18/00 500
Stock issued for services Charlotte Larsen 12/18/00 500
Stock issued for services Tracy Sciarrino 12/18/00 500
Stock issued for services Earl Kuester 12/18/00 500
Stock issued for services Linda Layton 12/18/00 500
Stock issued for services Adam Kliarsky 12/18/00 500
Stock issued for services Jeff Huntley 12/18/00 500
Stock issued for services Steve Weber 12/18/00 500
Stock issued for services James Warnock 12/18/00 500
Stock issued for debt cancellation The Peter Pappas Trust 12/19/00 500,000
Stock issued for services Todd Moore 1/26/01 100,000
Shares issued for Half Day purchase Clay Harrison 2/27/01 950,000
Shares issued to VEI upon merger Vince Vellardita 3/16/01 18,077,491
Shares issued to VEI upon merger Kristen Gleckman 3/16/01 50,000
Shares issued to VEI upon merger Steve Weber 3/16/01 500,000
Shares issued to VEI upon merger Jo-Ann Srebnik 3/16/01 100,000
Shares issued to VEI upon merger E-Blaster International Ltd. 3/16/01 30,000,000
Shares issued to VEI upon merger Random Technology Ltd. 3/16/01 5,678,247
Shares issued to VEI upon merger Great Asian Holdings Pte. Ltd. 3/16/01 21,104,227
Stock issued for debt cancellation The Scott Family Trust 3/27/01 110,548
Stock issued for debt cancellation Douglas Scott 3/27/01 221,116
Stock issued for cash Raj Mitta 3/29/01 100,000
Stock issued for cash Samin Tan 3/29/01 90,000
Stock issued for cash Manoj Kumar Samtani 3/29/01 50,000
Stock issued for cash Nalin Rathod 3/29/01 50,000
Stock issued for cash Bismarka Kurniawan 3/29/01 10,000
Stock issued for cash Arie K. Kresnadi 3/29/01 28,000
Stock issued for cash T. R. Seetharaman 3/29/01 10,000
Stock issued for cash Sanjeev Gupta 3/29/01 30,000
Stock issued for cash Vino Nasution 3/29/01 10,000
Stock issued for cash Juliandus Tobing 3/29/01 10,000
Stock issued for cash Harlin Rahardjo 3/29/01 22,000
Stock issued for services Shirley C. Nathan 3/30/01 100,000
Stock issued for investment Woody Fraser 3/30/01 250,000
II-2
Stock issued for services Tood Moore 3/30/01 100,000
Stock issued for services Barry Ross 3/30/01 50,000
Stock issued for services Mikalla Lida 4/27/01 100,000
Cancel stock exchange for preferred Vince Vellardita 8/11/01 (5,000,000)
Stock issued to correct error Vince Vellardita 8/20/01 200,000
Stock issued for employee bonus Employee 12/10/01 87,500
Stock issued for Laurus Settlement Laurus Master Fund, Ltd. 5/24/02 250,000
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 1,300,000 warrants to purchase
shares of our common stock at an exercise price of $.80. The series D preferred
stock is convertible into our common stock at a ratio of one for one.
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.
Except as otherwise disclosed, each of the foregoing issuances of
securities was made in reliance on Section 4(2) of the Securities Act of 1933,
as amended. Securities issued prior to September 2001 do not reflect our reverse
10-1 stock split.
II-3
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Acquisition of Digital Cut Post (1)
3.1 Articles of Incorporation of the Company(2)
3.2 Bylaws of the Company(3)
3.3 Certificate of Designation*
3.4 Common Stock Purchase Warrants
3.5 Unit Warrants
5.1 Opinion of Sichenzia Ross Friedman Ference LLP
10.1 Joint Venture Agreement with Woody Fraser (2)
10.2 Laurus Note*
10.3 Security Agreement for Laurus Note*
10.4 Laurus Security Purchase Agreement*
10.5 High Capital Funds, LLC Financing Agreement*
16.1 Letter on Change in Certifying Accountant(4)
16.2 Letter on Change in Certifying Accountant (5)
21.1 List of Subsidiaries
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included in Exhibit 5.1)
23.2 Consent of accountants
* Previously filed
(1) Incorporated by referenced to the Form 8-K/A filed by ValCom on July 18,
2002
(2) Incorporated by referenced to the Form 10SB File # 000-28416
(3) Incorporated by referenced to the Form 10KSB File # 000-28416
(4) Incorporated by referenced to the Form 8-K filed by ValCom on March 29,
2000
(5) Incorporated by referenced to the Form 8-K filed by ValCom on May 10,
2002
II-4
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during any
period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post- effective amendment thereof) which, individually,
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
((S)230.424(b) of this Chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement of any material change to such information in the
Registration Statement.
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of this
offering.
(3) To provide to the Underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the Underwriter to permit prompt delivery to each purchaser.
(4) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and this offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That, insofar as indemnification for liabilities arising from the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
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SIGNATURES
In accordance the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirement for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Valencia, California on August 27, 2002.
VALCOM, INC.
By: /s/ Vince Vellardita
--------------------------------------------------------
Vince Vellardita, President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following persons on
behalf of the Company in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- --------- ----
/s/ Vince Vellardita President, Chief Executive Officer August 27, 2002
- ------------------------------------ and Chairman
Vince Vellardita
/s/ Steve Weber Director August 27, 2002
- ------------------------------------
Steve Weber
/s/ Ronald Foster Vice President, Secretary & Director August 27, 2002
------------------------------------
Ronald Foster
/s/ David Weiner Director August 27, 2002
------------------------------------
David Weiner
/s/ Don Magier Principal Financial Officer and August 27, 2002
------------------------------------ Controller
Don Magier
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