UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL QUARTER ENDED March 31, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file Number 0-28416
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VALCOM, INC.
(Name of small business issuer specified in its charter)
======================================================================
Delaware 58-1700840
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
920 S. Commerce Street, Las Vegas, NV 89106
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(Address of Principal executive offices) (Zip code)
(702) 385-9000
-----------------------
Issuer's telephone number
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 18, 2006 the issuer had 68,107,506 shares of its $0.001 par value
common stock outstanding.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying financial statements are unaudited and are prepared
in accordance with rules and regulations of the Securities and Exchange
Commission for interim quarterly reporting. Accordingly, these financial
statements do not include all disclosures required under generally accepted
accounting principles.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of
ValCom, Inc. and subsidiaries as of March 31, 2006 and the results of
their operations and their cash flows for the three months ended
March 31, 2006. These consolidated financial statements include the
accounts of ValCom, Inc. and its subsidiary companies (together "the
Company"). Results for the three months ended March 31, 2006, are
not necessarily indicative of the operations, which may occur during the
year ending December 31, 2006. Refer to the Company's Annual Report on Form
10-KSB for the year ended September 30, 2005 for further information.
VALCOM, INC.
FORM 10-QSB
INDEX Page
- ----- ----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of
March 31, 2006 (unaudited) 4-5
Condensed Consolidated Statements of Operations
for the three month period ended March 31,
2006 and 2005 (unaudited) 6-7
Condensed Consolidated Statements of Cash Flows
for the three month period ended March 31,2006
and 2005 (unaudited) 8
Notes to Condensed Consolidated Financial State-
ments (unaudited) 9-12
Item 2. Management's Discussion and Analysis
and Plan of Operation 13
Item 3. Controls and Procedures 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits
SIGNATURES
VALCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
AS OF
MARCH 31,
2006
(unaudited)
------------
CURRENT ASSETS
Cash $ 83,536
Accounts receivable, net 131,339
Prepaid expenses 25,000
Notes receivable 474,000
------------
TOTAL CURRENT ASSETS 713,876
NET PROPERTY & EQUIPMENT 122,520
OTHER ASSETS
Deposits 8,350
Other assets 1,150,000
------------
TOTAL OTHER ASSETS 1,158,350
------------
TOTAL ASSETS $ 1,994,745
============
VALCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
AS OF
MARCH 31,
2006
(unaudited)
------------
CURRENT LIABILITIES
Accounts payable $ 878,827
Accrued interest 28,111
Accrued expenses 20,000
Deferred income
Due to related parties 621,106
Notes payable 847,147
------------
TOTAL CURRENT LIABILITIES 2,395,192
LIABILITIES SUBJECT TO COMPROMISE
Mortgage payable -
Long term loans -
------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE -
------------
TOTAL LIABILITIES 2,395,192
STOCKHOLDERS' EQUITY
Convertible preferred stock: all with par
value of $0.001; shares authorized and
outstanding as of September 30,2005 and
2004 are as follow:
Series B, 1,000,000 shares authorized;
38,000 shares issued and outstanding. 38
Series C, 15,000,000 shares authorized;
10,517,000 shares issued and outstanding
as of December 31, 2005 10,517
Common stock ($0.001 par value, 100,000,000
shares authorized;44,963,986 shares issued
and outstanding as of December 30, 2005 60,614
Treasury stock (35)
Additional paid-in capital 12,431,212
Retained (deficit) (12,902,793)
------------
TOTAL STOCKHOLDERS' EQUITY (400,447)
------------
TOTAL LIABILITIEs
& STOCKHOLDERS' EQUITY $ 1,994,745
============
See accompanying notes to the condensed consolidated financial statements
VALCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
3 MONTH PERIOD ENDED
-------------------------------
MARCH 31, MARCH 31,
2006 2005
(unaudited) (unaudited)
------------- --------------
REVENUES
Rental income $ 131,930 $ 436,711
Production income 1,974,883 126,031
Other income 350 5,000
------------- --------------
TOTAL REVENUES 2,107,163 567,742
COSTS AND EXPENSES
Production 2,597,382 88,314
Selling and promotion 72,066 29,608
Depreciation and amortization 17,300 30,583
General and administrative 709,049 992,050
Consulting and professional fees 979,672 517,312
Bad debts - (321,395)
------------- --------------
TOTAL COSTS AND EXPENSES 4,395,226 1,336,472
------------- --------------
OPERATING LOSS (2,288,063) 1,336,472
OTHER INCOME & (EXPENSES)
Interest expense (31,388) (7,038)
Other expense (275,311) -
Interest Income - -
Other income 37,319 28,971
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TOTAL OTHER INCOME & (EXPENSES) (269,380) 21,933
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NET LOSS $ (2,557,443) $ (746,797)
============= ==============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.06) $ (0.02)
============= ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 42,454,473 $ 33,564,277
============= ==============
See accompanying notes to the condensed consolidated financial statements
VALCOM, INC. AND SUBSIDIARIE
CONSOLIDATED STATEMENTS OF CASH FLOWS
3 MONTH PERIOD ENDED
-------------------------------
MARCH 31, MARCH 31,
2006 2005
(unaudited) (unaudited)
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (2,557,443) $ (746,797)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Accrued interest expense 17,345 -
Depreciation expense 17,300 30,583
Bad Debt Expense 19,757 5,697
Stock issued for settlements 275,311 -
Stock issued for services & compensation 540,708 550,866
Preferred stock issued for services &
compensation 200,000 -
Changes in operating assets and liabilities:
Receivables (63,477) 2,759
Note receivables (474,000) -
Production in Progress - (3,397)
Prepaid Expenses (25,000) -
Accounts payable and accrued expenses 358,608 174,896
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,690,890) 14,607
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property plant and
equipment (44,442) -
Disposition of property and equipment - (347,093)
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (44,442) (347,093)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayment of notes payable - -
Preferred stock issued for cash - -
Cash proceeds from sale of stock - 93,673
Common stock issued for cash 198,000 -
Principal borrowings on notes 913,922 249,813
Net borrowings from related parties 430,667 16,550
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,542,589 360,036
------------ ------------
NET INCREASE (DECREASE) IN CASH (192,744) 27,550
------------ ------------
CASH AT BEGINNING OF YEAR 276,280 49,018
CASH AT END OF YEAR $ 83,536 $ 27,540
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during period for interest $ - $ 7,038
============ ============
Cash paid during period for taxes $ - $ -
============ ============
Stock issued for services $ 540,708 $ -
============ ============
Stock issued for note conversions &
settlements $ 275,311 $ -
============ ============
See accompanying notes to the condensed consolidated financial statements
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BANKRUPTCY PROCEEDINGS, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
On April 7, 2003, the Company filed on an emergency basis a voluntary Chapter
11 bankruptcy petition.
The Company requires the use of its secured creditor's cash collateral
to operate. Throughout the pendency of this case, the Company has worked with
its two real estate secured lenders, Finance Unlimited, LLC and Laurus Master
Fund, Limited on the details of cash collateral stipulation. An order
approving a global interim cash collateral stipulation with Finance Unlimited
and Laurus was entered on August 26, 2003. This stipulation permitted the
Company's use of the lenders' cash collateral through March 31, 2004.
On January 15, 2004, the Court approved two additional cash
collateral stipulations, one each with Finance Unlimited and Laurus,
authorizing the Company's continued use of cash collateral through March
31, 2004 (Second Interim Stipulation). The Second Interim Stipulation
generally grants Finance Unlimited and Laurus relief from the automatic
bankruptcy stay effective March 31, 2004, and the right to hold foreclosures
sales on their real and personal property collateral as early as April 1,
2004.
In May 2004, Laurus paid off Finance Unlimited and was subrogated to
Finance's $6,565,998 claim, which became included in the senior of Laurus'
two claims. Laurus then sought to conduct a non-judicial foreclosure sale of
the Property, and VEI objected. The Bankruptcy Court issued an order on
June 3, 2004, that while Laurus could conduct a non-judicial foreclosure
sale of the Property, Laurus would not be entitled to any deficiency
claim against either VEI or Valcom, or any other assets other than the
Property itself (and the rents and leases appurtenant thereto).
On June 10, 2004, Laurus had the Property sold. At this sale, Laurus
claimed that its senior note had a balance of $7,407,873 and its junior note
a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the
$6,565,998 million subrogated from the Finance claim. The sale was
conducted through the junior note, and the Property was sold for $2.9 million
to a third party. An affiliate of this third party then purchased the senior
note directly from Laurus, without a second sale.
As a result of the Bankruptcy Court's order and the subsequent trustee's sale
of the Property, neither VEI nor Valcom are subject to any further
liabilities on account of the notes and deeds of trust previously held by
Finance and Laurus. Even though the senior note still technically exists,
it has been rendered non-recourse by the Bankruptcy Court's order, and could
only be enforced against the Property itself (which no longer belongs to VEI).
Any liability owed to the third party, which purchased the Property with regard
to the rents collected for June 2004, has been resolved by settlement
with that party.
On August 3, 2004, the Bankruptcy Court granted the motion for dismissal
of Chapter 11 bankruptcy case against the Company.
DESCRIPTION OF BUSINESS
- -------------------------
ValCom, Inc. and subsidiaries (the "Company"), formerly SBI
Communications, Inc., was originally organized in the State of Utah on
September 23, 1983, under the corporate name of Alpine Survival Products, Inc.
Its name was subsequently changed to Supermin, Inc. on November 20,
1985. On September 29, 1986, Satellite Bingo, Inc. became the surviving
corporate entity in a statutory merger with Supermin, Inc. In connection
with the above merger, the former shareholders of Satellite Bingo, Inc.
acquired control of the merged entity and changed the corporate name to
Satellite Bingo, Inc. On January 1, 1993, the Company executed a plan of
merger that effectively changed the Company's state of domicile from Utah to
Delaware. Through shareholder approval dated March 10, 1998, the name was
changed to SBI Communications, Inc.
In October 2000, the Company was issued 7,570,997 shares by SBI for 100% of
the shares outstanding in Valencia Entertainment International, LLC
("VEI"), a California limited liability company. This acquisition has been
accounted for as a reverse acquisition merger with VEI as the surviving
entity. The corporate name was changed to ValCom, Inc. effective March
21, 2001.
The Company is a diversified entertainment company with the following
operating activities:
1. STUDIO RENTAL.
ValCom's business includes television production for network and
syndication programming, motion pictures, and real estate holdings,
however, revenue is primarily generated through the lease of the sound
stages and production. ValCom's past and present clients in addition to
Paramount Pictures and Don Belisarious Productions, include Warner
Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney,
CBS, Sony, Showtime, and the USA Network. In addition to leasing its
sound stages, ValCom also owns a small library of television content, which
is ready for worldwide distribution and several major television series in
advanced stages of development. ValCom's Studio Division is composed of two
properties: 920 South Commerce which is leased and 41 North Mojave which
ValCom has 1/3 equity in the real estate of 7.5 acres, 160,000 square feet of
commercial space, giving ValCom a total of 9 sound stages and a recording
studio. Corporate offices are located at the Commerce Studios which houses a
state-of-the art production studio, broadcast facilities, recording studios,
production design construction, animation and post-production.
2. FILM, PRODUCTION DIVISION.
ValCom, Inc. entered a joint venture with entertainment giant, Stan Lee's POW!
Entertainment. POW! (Purveyors of Wonder) Entertainment, Inc. is founded by
Stan Lee, together with Gill Champion and Arthur Lieberman. POW's principals
combined have over a hundred years experience creating, producing, and
licensing original intellectual properties. POW! specializes in franchises for
the entertainment industry, including animation and live-action feature films,
plus television, DVDs, video games, merchandising, and related ancillary
markets. POW! partners with studios and networks in creating new and exciting
characters. In some cases, POW! creates `custom-tailored' properties for a
specific star or director.
Stan Lee, chairman and chief creative officer of POW!, is the creator and
inventor of the modern superhero. A prolific author, Lee revolutionized the
comic book industry by creating compelling characters who, despite
extraordinary powers and talents, are nonetheless plagued by the same doubts
and difficulties experienced by ordinary people. Some of his most enduring
characters, like Spider-Man{reg-trade-mark} (a), The Hulk{reg-trade-mark} (a),
and the X-Men{reg-trade-mark} (a), have spun off into television programs and
feature films that have grossed hundreds of millions of dollars at the box
office.
3. LIVE THEATRE.
February 9, 2006, ValCom Inc. named Jeff Kutash as President of their Live
Theatre Division. The first venture, a theatre production called "Headlights
and Tailpipes" opened at the Las Vegas Stardust Casino and Hotel on April 3,
2006.
Kutash's experience in the field of theatre, television and film create a vast
knowledge of the entertainment field.
Several large-scale productions put Kutash on the map for live entertainment
including the first rock n' roll revue "Gold Ol' Rock n' Roll," "Dancin'
Machine" and most notably "Splash," which recently celebrated its 20 year
anniversary. Kutash received accolades for the choreography he staged for John
Travolta's appearance in the film "Saturday Night Fever." Kutash continued
staging and began co-producing television for ABC, NBC, CBS, Viacom and
Filmways. His television work garnered an Emmy{reg-trade-mark} and Golden
Globe{reg-trade-mark} for his participation on "Taxi", and was responsible for
staging the 20th Anniversary Grammy{reg-trade-mark} Awards. He has spent the
last several years commuting to and from Europe on a regular basis,
coordinating international talent, music, theatrical, and television
productions.
4. ANIMATION DIVISION.
October 1, 2003, we formed New Zoo Revue LLC pursuant to a
joint venture agreement with O Atlas Enterprises Inc., a California
corporation. New Zoo Revue LLC was formed for the development and production
of "New Zoo Revue" a feature film and television series and marketing of
existing episodes. ValCom shall contribute all funding required for the
development of the above to a maximum of $1,000,000 and O Atlas shall
contribute an exclusive ten (10) year worldwide license in and to all
rights, music and characters as its equal contribution towards Capital. The
net profit after all expenses will be shared equally by ValCom Inc. and O
Atlas. New Zoo Review LLC is expected to generate revenue by 2005 and
expected to grow based on our ability to sell the TV Series of New Zoo
Revue. The Company has secured a seven year marketing contract with BCI
Navarre, a video marketing company.
On September 27, 2005,ValCom, Inc. signed a letter of intent to acquire Digital
Animation Media, Ltd., a privately held Irish corporation headquartered in
Dublin, Ireland. Digital Animation Media, Ltd., one of the premier independent
animation companies in Europe and a leading provider of animation software to
other production companies worldwide. With its production capability and
proprietary technology, the company is well positioned to take advantage of the
growth in existing animation markets as well as a burgeoning market for
wireless animation tools and content with clients such as Disney, Warner and
The New Zoo Revue.
5. BROADCAST TELEVISION.
The Company owns a 45% equity interest in ValCom Broadcasting, LLC, a New
York limited liability company, which operates KVPS (Channel 8), an
independent television broadcaster in the Palm Springs, California
market, which is strategically located in the middle of four major markets
including Los Angeles, Phoenix, Las Vegas and San Diego.
ValCom's business includes television production for network and
syndication programming, motion pictures, and real estate holdings,
however, revenue is primarily generated through the lease of the sound
stages and production. ValCom's past and present clients in addition to
Paramount Pictures and Don Belisarious Productions, include Warner
Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney,
CBS, Sony, Showtime, and the USA Network. In addition to leasing its
sound stages, ValCom also owns a small library of television content, which
is ready for worldwide distribution and several major television series in
advanced stages of development. ValCom's Studio Division is composed of two
properties: 920 South Commerce which is leased and 41 North Mojave which
ValCom has 1/3 equity in the real estate of 7.5 acres, 160,000 square feet of
commercial space, giving ValCom a total of 9 sound stages and a recording
studio. Corporate offices are located at the Commerce Studios which houses a
state-of-the art production studio, broadcast facilities, recording studios,
production design construction, animation and post-production.
BASIS OF PRESENTATION
- -----------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and related notes included in the Company's Form 10-KSB.
The audited consolidated financial statements of the Company for the year
ended September 30, 2005 were filed on February 22, 2006, with the
Securities and Exchange Commission and are hereby referenced. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) considered necessary for fair presentation has been included. The
results of operations for the three and six months ended March 31, 2006
are not necessarily indicative of the results to be expected for the
entire year.
Following is a summary of the significant accounting policies followed in
the preparation of these consolidated financial statements, which policies
are in accordance with accounting principles generally accepted in the United
States of America.
PRINCIPLES OF CONSOLIDATION
- -----------------------------
The consolidated financial statements include the accounts of ValCom, Inc.
and two wholly-owned subsidiaries, Valencia Entertainment International, LLC,
which was acquired effective February 2001 and Half Day Video, Inc.,
which was acquired effective March 2001.
Investments in affiliated companies over which the Company has a
significant influence or ownership of more than 20% but less than or
equal to 50% are accounted for under the equity method.
USE OF ESTIMATES
- ------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America. Management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could materially differ form those
estimates.
DEPRECIATION AND AMORTIZATION
- -------------------------------
For financial and reporting purposes, the Company follows the policy
of providing depreciation and amortization on the straight-line method over
the estimated useful lives of the assets, which are as follows:
Building 39 years
Building Improvements 39 years
Production Equipment 5 years
Office Furniture and Equipment 5 to 7 years
Leasehold Improvements 5 years
Autos and Trucks 5 years
CONCENTRATIONS AND CREDIT RISK
- ---------------------------------
The Company has two customers who accounted for approximately 99% of
total rental revenues for the nine months ended June 30, 2005 and 2004,
respectively. As of June 30, 2005, all sound and production stages were under
non-cancelable operating leases for one year from two major production
companies.
Financial instruments that potentially subject the Company to concentrations
of risk consist of trade receivables principally arising from monthly leases
from television producers. The Company continuously monitors the credit-
worthiness of its customers to minimize its credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
Statement of financial accounting standard No. 107, Disclosures about fair
value of financial instruments requires that the Company disclose
estimated fair values of financial instruments. The carrying amounts
reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
- ----------------------------------
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations
for a Disposal of a Segment of a Business." The Company periodically
evaluates the carrying value of long-lived assets to be held and used in
accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. In that
event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss
on long-lived assets to be disposed of is determined in a similar manner,
except that fair market values are reduced for the cost of disposal
As per Court order dated June 3, 2004 and based on the deed of trust
bearing instrument nos. 99-2400871, 02-1209820 and 02-1209821, the property
belonging to VEI, as defined in the instruments was auctioned for sale. The
properties which were valued at Land $7,392,292 Building $4,028,785 and
Building improvements $1,154,406 and Accumulated Depreciation of $1,294,088
were sold to repay the obligations to Laurus (Laurus having paid the
obligations owed to Finance Unlimited) under Trust Sale Nos: 8413-40 and
8414-30.Consequently the loss incurred due to this sale was recorded as
$1,405,656 under the heading "Impairment of Property and Equipment" in the
Profit and loss account of VEI ending June 30, 2004.
REVENUE RECOGNITION
- --------------------
Revenues from studio and equipment rentals are recognized ratably over
the contract terms. Revenues from the production and licensing of
television programming are recognized when the films or series are available
for telecast and certain contractual terms of the related production and
licensing agreements have been met.
EQUITY INVESTMENT
- ------------------
The Company accounts for its investments in companies over which the Company
has significant influence or ownership of more than 20% but less than or
equal to 50% under the equity method.
GOING CONCERN
- --------------
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a net
loss to date of $2,557,443 and a working capital deficiency of $1,681,316
and an accumulated deficit of $12,902,793 at March 31, 2006.
Valencia Entertainment International, LLC, a California limited
liability company and the Registrant's subsidiary filed on April 7, 2003,
a voluntary petition in bankruptcy for reorganization under Chapter 11
of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of California (note 8). The main income of the
Registrant is from the operations of Valencia Entertainment International. As
of May 30th, 2005, we have closed the operation at Valencia Entertainment
International, California.
Management has taken various steps to revise its operating and
financial requirements, which it believes are sufficient to provide the
Company with the ability to continue on in next twelve months. Management
devoted considerable effort during the period ended March 31, 2006, towards
management of liabilities and improving the operations. The management
believes that the above actions will allow the Company to continue its
operations through the next twelve months.
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
-----------
NEW ACCOUNTING PRONOUNCEMENTS
- -------------------------------
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that "{ellipsis} under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and re-handling costs may
be so abnormal as to require treatment as current period charges{ellipsis}"
This Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal." In
addition, this Statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Shared-Based Payment ("SFAS 123R). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the
third quarter of fiscal year 2005. Currently, the Company accounts for its
share-based payment transactions under the provisions of APB 25, which does not
necessarily require the recognition of compensation cost in the financial
statements. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,
Accounting for Non-monetary transactions ("SFAS 153"). This statement amends
APB Opinion 29 to eliminate the exception for no monetary exchanges of similar
productive assets and replaces it with a general exception of exchanges of no
monetary assets that do not have commercial substance. Under SFAS 153, if a no
monetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for non-monetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
RECLASSIFICATION
- ----------------
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
NOTE 2 NET INCOME (LOSS) PER SHARE
- ----------------------------------------
The Company's net loss per share was calculated using weighted average
shares outstanding of 42,454,473 for the six months ended March 31,
2006 and 33,564,277 for the six months ended March 31, 2005, 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. PROPERTY AND EQUIPMENT
==================================
Property and equipment consists of the following at:
December September
31, 2005 30, 2005
---------- ------------
Building Improvements 4,500 4,500
Production Equipment 68,708 68,708
Leasehold Improvements 62,677 62,677
Autos and Trucks 33,971 33,971
Office Furniture and Equipment 44,814 47,814
Video Equipment 181,877 279,021
Recording Studio 17,068 -
---------- -----------
416,615 396,547
Less: accumulated depreciation (309,775) (301,125)
---------- -----------
Net book value . . . . . . . $106,840 $3,539,513
========== ===========
Depreciation expense for the periods ended December 31, 2005 and September 30,
2005 was $8,650 and $92,001, respectively.
NOTE 4. CONVERTIBLE NOTES PAYABLE
=================================
The following are notes issued as of March 31, 2006. All of these notes
incur interest at 10% per annum with different due dates. All related
interest has been accrued and reflected in the financial statements.
1. Vince Vellardita $360,000
2. ICAG, Inc. $125,000
3. Condor Financial $ 40,000
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LITIGATION
- -------------------
On April 7, 2003, the Company filed on an emergency basis, a voluntary
Chapter 11 bankruptcy petition. The case is pending in the United States
Bankruptcy Court, Central District of California, San Fernando Valley Division,
as Case No. SV 03-12998-GM. As of June 30, 2004, the Company was in
compliance of all of its duties under the Bankruptcy Code and all applicable
guidelines of the Office of the United States Trustee.
The Company requires the use of its secured creditor's cash collateral
to operate. Throughout the pendency of this case, the Company has worked with
its two real estate secured lenders, Finance Unlimited, LLC and Laurus Master
Fund, Limited on the details of cash collateral stipulation. An order
approving a global interim cash collateral stipulation with Finance Unlimited
and Laurus was entered on August 26, 2003. This stipulation permitted the
Company's use of the lenders' cash collateral through March 31, 2004.
On April 28, 2004 the court approved two additional cash collateral
stipulations, one each with Finance Unlimited and Laurus, authorizing
the Company's continued use of cash collateral through May 31, 2004. The
court approved an extension and granted the restructuring of notes/debt with
Finance Unlimited and Laurus for settlement and to be discharged from
bankruptcy.
In May 2004, Laurus paid off Finance and was subrogated to Finance's
$6,565,998 claim, which became included in the senior of Laurus' two claims.
Laurus then sought to conduct a non-judicial foreclosure sale of the
Property, and VEI objected. The Bankruptcy Court issued an order on June
3, 2004, that while Laurus could conduct a non-judicial foreclosure sale of
the Property, Laurus would not be entitled to any deficiency claim against
either VEI or ValCom, or any other assets other than the Property itself
(and the rents and leases appurtenant thereto).
On June 10, 2004, Laurus had the Property sold. At this sale, Laurus
claimed that its senior note had a balance of $7,407,873 and its junior note
a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the
$6,565,998 million subrogated from the Finance claim. The sale was
conducted through the junior note, and the Property was sold for $2.9 million
to a third party. An affiliate of this third party then purchased the senior
note directly from Laurus, without a second sale.
As a result of the Bankruptcy Court's order and the subsequent trustee's sale
of the Property, neither VEI nor ValCom are subject to any further
liabilities on account of the notes and deeds of trust previously held by
Finance and Laurus. Even though the senior note still technically exists,
it has been rendered non-recourse by the Bankruptcy Court's order, and could
only be enforced against the Property itself (which no longer belongs to VEI).
Any liability owed to the third party, which purchased the Property with regard
to the rents collected for June 2004, has been resolved by settlement
with that party.
On October 5, 2004, Valcom, Inc. and Valencia Entertainment International, LLC,
commenced a lawsuit in the Los Angeles Superior Court, State of California,
against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an
accounting of the amount due in connection with a non-judicial foreclosure of
a deed of trust securing a promissory note executed by Valcom and Valencia. It
also alleges that Chicago Title breached its trustee's duties and Laurus
breached the terms of the promissory note and deed of trust securing it.
Valcom's attorney has expressed his belief that the lawsuit it meritorious but
at this stage in the proceeding, he is unable to state how much, if any, will
be recovered in the lawsuit. The trial date has been set for July 17, 2006.
Lloyd Kurtz
Pending or Threatened Litigation, Claims and Assessments by the prior
contractor for the renovations, at ValCom Studios in Nevada has been replaced.
Mr. Lloyd Kurtz filed suit on October 25, 2004 against ValCom, Inc., A private
Nevada Corporation which is 80% owned by ValCom, Inc. a Delaware Corporation,
ValCom, Inc. a Delaware Corporation and Vincent Vellardita. The suit alleges a
violation of Securities Act of 1933 and states that Mr. Kurtz purchased 600,000
shares of ValCom - Delaware at $0.25 per share and that the shares were not
registered. He claims he is owed an additional $303,000. Mr. Kurtz has filed a
Mechanic's Lien for $303,000. A motion to dismiss the claim of Mr. Kurtz has
been filed. If the corporation does not prevail on its Motions to Dismiss the
corporation will file its full defense and counterclaims which exceed the
amount claimed by Mr. Kurtz.
Farkhanda Rana
On October 20, 2004 a shareholder of ValCom initiated suit against the Company
and its President alleging violations of State and Federal Securities Law along
with Fraud and Breach of Contract. The lawsuit captioned Farkhanda Rana vs.
ValCom, Inc., Valencia Entertainment and Vince Vellardita et al. were filed in
Los Angeles Superior Court as Case Number PC035673. On November 23, 2004 after
a hearing the Plaintiff in this matter obtained a pre-judgment writ of
attachment against the Company for $325,000.00. The case has been settled as
of November 2005.
NOTE 6 RELATED PARTY TRANSACTIONS
- -------------------------------------
Mr. Vince Vellardita, CEO is owed 281,445 from advances, cash and accrued wages
from the Company as of December 31, 2005.
NOTE 7 STOCKHOLDERS' EQUITY
- ------------------------------
(A) CONVERTIBLE PREFERRED STOCK
- ----------------------------------
On December 31, 2005, the Company had three series of convertible Preferred
Stock: B, C, and D.
Series B Preferred Stock has no voting rights, is entitled to receive
cumulative dividends in preference to any dividend on the common stock at a
rate of 8% per share, per year. Series B Preferred Stock is to be issued if and
when declared by the Board of Directors, and can be converted at any time
into common stock on a 1 for 5 basis. In the event of any liquidation,
the holders of shares of Series B Preferred Stock then outstanding,
shall be entitled to receive an amount equal to the purchase price per
share, plus an amount equal to declared but unpaid dividends thereon, if
any, to the date of payment.
Series C Preferred Stock has no voting rights, is entitled to receive
cumulative dividends in preference to any dividend on the common stock at a
rate of 8% per share, per year, to be issued if and when declared by the
Board of Directors and can be converted at any time into common stock on a 1
for 1 basis. In the event of any liquidation, the holders of shares of
Series C Preferred Stock then outstanding, shall be entitled to receive an
amount equal to the purchase price per share, plus an amount equal to declared
but unpaid dividends thereon, if any, to the date of payment.
Series D Preferred Stock has no voting rights, no dividends and can be
converted at any time to common stock on a 1 for 1 basis. In the event of
any liquidation, the holders of shares of Series D Preferred Stock then
outstanding, shall be entitled to receive an amount equal to the purchase
price per share.
With respect to rights on liquidation, Series B, C, and D Preferred Stock
shall rank senior to the common stock, but Series C Preferred Stock shall be
senior to both Series B and D Preferred Stock. Series D Preferred Stock
shall be junior to both Series B and C Preferred Stock. No dividends have
been declared by the Board of Directors for any of the Series of convertible
Preferred Stock for the three months ended December 31, 2005.
Assumption used (for Black Scholes calculations):
======================================================
Exercise Price $ .25
Life 12 months
Volatility 125%
Interest Rate 8%
The following is the summary of
warrants as of June 30, 2005:
Warrants as of September 30, 2003 0
Warrants issued during the period 300,000
Warrants exercised during the period 0
Warrants expired during the period 0
Warrants outstanding as of June 30, 2004 300,000
VALCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(B) COMMON STOCK
- -----------------
COMMON STOCK ISSUED
During the three months ended December 31, 2005, the Company issued
750,000 shares of common stock in lieu of compensation for legal and
consulting services performed. The value of the legal and consulting
services performed totaled approximately $42,500, which was computed based
upon the market prices of the common stock on the applicable payment dates.
During the three months ended December 31, 2004, the Company issued 25,000
shares of common stock in lieu of compensation, salaries and bonuses to
employees. Total value of the compensation, salaries and bonuses was
approximately $1,250, which was computed based upon the market prices of the
common stock on the applicable payment dates.
During the three months ended December 31, 2004, the Company issued 810,000
shares of common stock pursuant to its private placement memorandum in
exchange for $198,000 in cash.
During the three months ended December 31, 2004, the Company issued
1,495,269 shares of common stock to convert $89,669 in liabilities.
NOTE 9 DISPOSAL OF BUILDING (UNDER THE ORDER OF BANKRUPTCY COURT)
VEI filed a voluntary chapter 11 bankruptcy petition on April 7, 2003. By
May 2004, the Property was subject to three (3) secured claims. These were a
note and first-priority deed of trust held by Finance Unlimited, LLC
("Finance") in the amount of $6,565,998 and two notes, secured by
second-priority and third-priority deeds of trust, both held by Laurus Master
Fund, Ltd. ("Laurus"). Laurus claimed that it was owed a total of $2,978,876
plus additional penalties and additional legal fees on the two notes but VEI
disputed many of the penalty claims by Laurus. The Finance note was
solely the obligation of VEI, but ValCom, Inc. was also an obligor on
the two Laurus notes. In May 2004, Laurus paid off Finance and was
subrogated to Finance's $6,565,998 claim, which became included in the senior
of Laurus' two claims. Laurus then sought to conduct a non-judicial
foreclosure sale of the Property, and VEI objected. The Bankruptcy Court
issued an order on June 3, 2004, that while Laurus could conduct a non-
judicial foreclosure sale of the Property, Laurus would not be entitled to
any deficiency claim against either VEI or valium, or any other assets other
than the Property itself (and the rents and leases appurtenant thereto).
On June 10,2004, Laurus had the Property sold. At this sale, Laurus
claimed that its senior note had a balance of $7,407,873 and its junior note
a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the
$6,565,998 million subrogated from the Finance claim. The sale was
conducted through the junior note, and the Property was sold for $2.9 million
to a third party. An affiliate of this third party then purchased the senior
note directly from Laurus, without a second sale. As a result of the
Bankruptcy Court's order and the subsequent trustee's sale of the Property,
neither VEI nor ValCom are subject to any further liabilities on account of
the notes and deeds of trust previously held by Finance and Laurus. Even
though the senior note still technically exists, it has been rendered non-
recourse by the Bankruptcy Court's order, and could only be enforced against
the Property itself (which no longer belongs to VEI). Any liability owed to
the third party, which purchased the Property with regard to the rents
collected for June 2004, has been resolved by settlement with that
party.
VEI filed a voluntary chapter 11-bankruptcy petition on April 7, 2003
and obtained the status of Debtor in Possession. After successfully
settling the debts owed to secured creditors through sale of property as
per court order dated June 3, 2004 VEI applied to the United States
Bankruptcy Court, Central District of California, San Fernando Valley
Division for a Motion to dismiss Chapter 11 Bankruptcy case ("the Motion").
The Court on August 3, 2004, having considered the Motion and pleadings
filed in support thereof, having heard argument of counsel, finding that
notice was proper, and for good cause appearing therefore, ordered (1)
The Motion granted (2) Debtor's Chapter 11 bankruptcy case dismissed.
On October 5, 2004, Valcom, Inc. and Valencia Entertainment International, LLC,
commenced a lawsuit in the Los Angeles Superior Court, State of California,
against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an
accounting of the amount due in connection with a non-judicial foreclosure of
a deed of trust securing a promissory note executed by Valcom and Valencia. It
also alleges that Chicago Title breached its trustee's duties and Laurus
breached the terms of the promissory note and deed of trust securing it.
Valcom's attorney has expressed his belief that the lawsuit it meritorious but
at this stage in the proceeding, he is unable to state how much, if any, will
be recovered in the lawsuit. The trial date has been set for July 17, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
PLAN OF OPERATION
As of March 31, 2006, ValCom, Inc. operations were comprised of five
divisions:
STUDIO RENTAL
ValCom's business includes television production for network and
syndication programming, motion pictures, and real estate holdings,
however, revenue is primarily generated through the lease of the sound
stages and production. ValCom's past and present clients in addition to
Paramount Pictures and Don Belisarious Productions, include Warner
Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney,
CBS, Sony, Showtime, and the USA Network. In addition to leasing its
sound stages, ValCom also owns a small library of television content, which
is ready for worldwide distribution and several major television series in
advanced stages of development. ValCom's Studio Division is composed of two
properties: 920 South Commerce which is leased and 41 North Mojave which
ValCom has 1/3 equity in the real estate of 7.5 acres, 160,000 square feet of
commercial space, giving ValCom a total of 9 sound stages and a recording
studio. Corporate offices are located at the Commerce Studios which houses a
state-of-the art production studio, broadcast facilities, recording studios,
production design construction, animation and post-production.
FILM PRODUCTION DIVISION
ValCom, Inc. entered a joint venture with entertainment giant, Stan Lee's POW!
Entertainment. POW! (Purveyors of Wonder) Entertainment, Inc. is founded by
Stan Lee, together with Gill Champion and Arthur Lieberman. POW's principals
combined have over a hundred years experience creating, producing, and
licensing original intellectual properties. POW! specializes in franchises for
the entertainment industry, including animation and live-action feature films,
plus television, DVDs, video games, merchandising, and related ancillary
markets. POW! partners with studios and networks in creating new and exciting
characters. In some cases, POW! creates `custom-tailored' properties for a
specific star or director.
Stan Lee, chairman and chief creative officer of POW!, is the creator and
inventor of the modern superhero. A prolific author, Lee revolutionized the
comic book industry by creating compelling characters who, despite
extraordinary powers and talents, are nonetheless plagued by the same doubts
and difficulties experienced by ordinary people. Some of his most enduring
characters, like Spider-Man{reg-trade-mark} (a), The Hulk{reg-trade-mark} (a),
and the X-Men{reg-trade-mark} (a), have spun off into television programs and
feature films that have grossed hundreds of millions of dollars at the box
office.
LIVE THEATRE DIVISION
February 9, 2006, ValCom Inc. named Jeff Kutash as President of their Live
Theatre Division. The first venture, a theatre production called "Headlights
and Tailpipes" opened at the Las Vegas Stardust Casino and Hotel on April 3,
2006.
Kutash's experience in the field of theatre, television and film create a vast
knowledge of the entertainment field.
Several large-scale productions put Kutash on the map for live entertainment
including the first rock n' roll revue "Gold Ol' Rock n' Roll," "Dancin'
Machine" and most notably "Splash," which recently celebrated its 20 year
anniversary. Kutash received accolades for the choreography he staged for John
Travolta's appearance in the film "Saturday Night Fever." Kutash continued
staging and began co-producing television for ABC, NBC, CBS, Viacom and
Filmways. His television work garnered an Emmy{reg-trade-mark} and Golden
Globe{reg-trade-mark} for his participation on "Taxi", and was responsible for
staging the 20th Anniversary Grammy{reg-trade-mark} Awards. He has spent the
last several years commuting to and from Europe on a regular basis,
coordinating international talent, music, theatrical, and television
productions.
ANIMATION DIVISION
October 1, 2003, we formed New Zoo Revue LLC pursuant to a joint venture
agreement with O Atlas Enterprises Inc., a California corporation. New
Zoo Revue LLC was formed for the development and production of "New Zoo Revue"
a feature film and television series and marketing of existing episodes.
ValCom shall contribute all funding required for the development of the above
to a maximum of $1,000,000 and O Atlas shall contribute an exclusive ten
(10) year worldwide license in and to all rights, music and characters as
its equal contribution towards Capital. The net profit after all expenses will
be shared equally by ValCom Inc. and O Atlas. New Zoo Review LLC is expected to
generate revenue by 2005 and expected to grow based on our ability to sell the
TV Series of New Zoo Revue.
On September 27, 2005,ValCom, Inc. signed a letter of intent to acquire Digital
Animation Media, Ltd., a privately held Irish corporation headquartered in
Dublin, Ireland. Digital Animation Media, Ltd., one of the premier independent
animation companies in Europe and a leading provider of animation software to
other production companies worldwide. With its production capability and
proprietary technology, the company is well positioned to take advantage of the
growth in existing animation markets as well as a burgeoning market for
wireless animation tools and content with clients such as Disney, Warner and
The New Zoo Revue.
CHANNEL 8 IN PALM SPRINGS, CALIFORNIA
In connection with our joint venture with New Global Communications, Inc.,
we own a 45% equity interest in ValCom Broadcasting, LLC, a New York
limited liability company, which operates KVPS (Channel 8), an independent
television broadcaster in the Palm Springs, California market.
SIX MONTHS ENDED MARCH 31, 2006 VS. MARCH 31, 2005
- -----------------------------------------------------------
Revenues for the six months March 31, 2006 increased by $1,539,421 or 271%
from $567,742 for the six months ended March 31, 2005 to $2,107,163
for the same period in 2006. The increase in revenue was principally
due to increased production revenues associated with the Valcom's activities.
Production costs for the six months ended March 31, 2006
increased by $2,509,068 from $30,583 for the six months ended March 31, 2005
to $2,597,382 for the same period in 2006. The increase in
production costs was principally due to increased production associated
with Valcom Productions.
Depreciation and amortization expense for the six months ended March 31,
2006 decreased by $13,283 or 43.4% from $30,583 for the six months ended
March 31, 2005 to $17,300 for the same period in 2006.
General and administrative expenses for the six months ended March 31,
2006 decreased by $283,001 or 28.5% from $992,050 for the six months
ended March 31, 2005 to $709,049 for the same period in 2006. The decrease
was due principally to decreased personnel costs for the new projects.
Consulting and professional fees for the six months ended March 31, 2006
increased by $462,360 or 89.4% from $517,312 for the six months ended
March 31, 2005 to $979,672 for the same period in 2006. The increase was due
principally to increases in use of professionals.
Interest expense for the six months ended March 31, 2006 increased by
$24,350 or 345.98% from $7,038 for the six months ended March 31, 2005 to
$31,388 for the same period in 2006. The increase was due principally to
the increase in notes payables.
Due to the factors described above, the Company's net loss increased by
$1,810,646 from $746,797 for the six months ended March 31, 2005 to
$2,557,443 for the same period in 2006.
FUTURE OUTLOOK
The Company has entered into a joint venture agreement with O. Atlas
Enterprises to produce an animation movie and an animation TV series called
"New Zoo Revue" based on an American Classic of the same name, which was
highly successful. BCI/Navarre has purchased an exclusive agreement to
distribute 195 existing shows of New Zoo Revue for the retail market. We
anticipate the New Zoo Revue to be available to consumers through 4,000 Wal-
Mart retail outlets by August 31, 2004. The Company has already incurred
start-up costs, which have been reflected in the financial statements for
the six months ended March 31, 2004.
The Company has entered into agreement with Q Television Network, Palm Springs,
CA on April 1, 2005. The Company has granted Q Television Network a License to
use 142 films and television shows for a period of seven years. Q Television
Network issued 50,000,000 shares of the Company valued at $150,000 as advance.
September 22, 2005, ValCom Inc. entered into a production agreement with
entertainment industry billion dollar producer Jeff Franklin who also joins
ValCom's Strategic Advisory Board. Franklin has brought in more than $2
billion in domestic box office sales and with the addition of the film
division. Mr. Franklin is one of producers of the theatrical feature, "Casper"
and is executive producer on "Kull, The Conqueror," "Cold Around The Heart,"
"Stuart Little," and "Stuart Little 2."
On September 27, 2005, ValCom, Inc. signed a letter of intent to acquireDigital
Animation Media, Ltd., a privately held Irish corporation headquartered in
Dublin, Ireland. Digital Animation Media, Ltd., one of the premier independent
animation companies in Europe and a provider of animation software to
other production companies worldwide. With its production capability and
proprietary technology, the company is well positioned to take advantage of the
growth in existing animation markets as well as a burgeoning market for
wireless animation tools and content with clients such as Disney, Warner and
The New Zoo Revue.
ValCom, Inc. entered a joint venture in February, 2006 with entertainment
giant, Stan Lee's POW! Entertainment. POW! (Purveyors of Wonder)
Entertainment, Inc. is founded by Stan Lee, together with Gill Champion and
Arthur Lieberman. POW's principals combined have over a hundred years
experience creating, producing, and licensing original intellectual properties.
POW! specializes in franchises for the entertainment industry, including
animation and live-action feature films, plus television, DVDs, video games,
merchandising, and related ancillary markets. POW! partners with studios and
networks in creating new and exciting characters. In some cases, POW! creates
'custom-tailored' properties for a specific star or director.
Stan Lee, chairman and chief creative officer of POW!, is the creator and
inventor of the modern superhero. A prolific author, Lee revolutionized the
comic book industry by creating compelling characters who, despite
extraordinary powers and talents, are nonetheless plagued by the same doubts
and difficulties experienced by ordinary people. Some of his most enduring
characters, like Spider-Man(R)(a), The Hulk(R)(a), and the X-Men(R)(a), have
spun off into television programs and feature films that have grossed hundreds
of millions of dollars at the box office.
On February 9, 2006 ValCom, Inc. named Jeff Kutash as President of their Live
Theatre Division. The first venture Kutash will undertake is a theater
production called 'Headlights and Tailpipes' that will be unveiled at a Las
Vegas hotel and casino. In heading up this division, Kutash will be responsible
for developing and directing new productions and live theatrical events
throughout the world. Kutash's experience in the field of theatre, television
and film create a vast knowledge of the entertainment field.
Several large-scale productions put Kutash on the map for live entertainment
including the first rock n' roll revue 'Good Ol' Rock n' Roll,' 'Dancin'
Machine' and most notably 'Splash,' which recently celebrated its 20 year
anniversary. Kutash received accolades for the choreography he staged for John
Travolta's appearance in the film 'Saturday Night Fever.' Kutash continued
staging and began co-producing television for ABC, NBC, CBS, Viacom and
Filmways. His television work garnered an Emmy(R) and Golden Globe(R) for his
participation on 'Taxi,' and was responsible for staging the 20th Anniversary
Grammy(R) Awards. He has spent the last several years commuting to and from
Europe on a regular basis, coordinating international talent, music,
theatrical, and television productions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's condensed consolidated financial statements have been
prepared, assuming that the Company will continue as a going concern. The
Company has a net loss of $2,557,443 and a negative cash flow from
operations of $1,690,890 for the six months ended March 31, 2006, a working
capital deficiency of $1,681,316 and an accumulated deficit of $12,902,793 at
March 31, 2006. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Cash totaled $83,536 on March 31, 2006 compared to $49,018 as at March 31,
2005. During the six months ended March 31, 2006, net cash used by
operating activities totaled $1,690,890 compared to net cash
provided by operating activities of $14,607 for the comparable six-month
period in 2005. A significant portion of operating activities included
payments for interest and production development costs. Net cash used
by financing activities for the six months ended March 31 ,2006 totaled
$1,542,589 compared to $1,360,036 for the comparable six-month period in 2005.
The above cash flow activities yielded a net cash decrease of $192,744 during
the six months ended March 31, 2006 compared to a increase of $27,550 during
the comparable prior year period.
Net working capital (current assets less current liabilities) was a negative
$1,681,316 as of March 31, 2006. The Company will need to raise funds through
various financings to maintain its operations until such time as cash
generated by operations is sufficient to meet its operating and capital
requirements. There can be no assurance that the Company will be able to raise
such capital on terms acceptable to the Company, if at all.
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
The Company is involved from time to time in legal proceedings incident to
the normal course of business. Management believes that the ultimate outcome
of any pending or threatened litigation would not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
On April 7, 2003, the Company filed on an emergency basis, a voluntary
Chapter 11 bankruptcy petition. The case is pending in the United States
Bankruptcy Court, Central District of California, San Fernando Valley Division,
as Case No. SV 03-12998-GM. As of June 30, 2004, the Company was in
compliance of all of its duties under the Bankruptcy Code and all applicable
guidelines of the Office of the United States Trustee.
The Company requires the use of its secured creditor's cash collateral
to operate. Throughout the pendency of this case, the Company has worked with
its two real estate secured lenders, Finance Unlimited, LLC and Laurus Master
Fund, Limited on the details of cash collateral stipulation. An order
approving a global interim cash collateral stipulation with Finance Unlimited
and Laurus was entered on August 26, 2003. This stipulation permitted the
Company's use of the lenders' cash collateral through March 31, 2004.
On April 28, 2004 the court approved two additional cash collateral
stipulations, one each with Finance Unlimited and Laurus, authorizing
the Company's continued use of cash collateral through May 31, 2004. The
court approved an extension and granted the restructuring of notes/debt with
Finance Unlimited and Laurus for settlement and to be discharged from
bankruptcy.
In May 2004, Laurus paid off Finance and was subrogated to Finance's
$6,565,998 claim, which became included in the senior of Laurus' two claims.
Laurus then sought to conduct a non-judicial foreclosure sale of the
Property, and VEI objected. The Bankruptcy Court issued an order on June
3, 2004, that while Laurus could conduct a non-judicial foreclosure sale of
the Property, Laurus would not be entitled to any deficiency claim against
either VEI or ValCom, or any other assets other than the Property itself
(and the rents and leases appurtenant thereto).
On June 10, 2004, Laurus had the Property sold. At this sale, Laurus
claimed that its senior note had a balance of $7,407,873 and its junior note
a balance of $2,405,093. Virtually all of the disputed penalties, along
with a disproportionate share of disputed legal fees and expenses, were
incorporated into the junior balance, while the senior included the
$6,565,998 million subrogated from the Finance claim. The sale was
conducted through the junior note, and the Property was sold for $2.9 million
to a third party. An affiliate of this third party then purchased the senior
note directly from Laurus, without a second sale.
As a result of the Bankruptcy Court's order and the subsequent trustee's sale
of the Property, neither VEI nor ValCom are subject to any further
liabilities on account of the notes and deeds of trust previously held by
Finance and Laurus. Even though the senior note still technically exists,
it has been rendered non-recourse by the Bankruptcy Court's order, and could
only be enforced against the Property itself (which no longer belongs to VEI).
Any liability owed to the third party, which purchased the Property with regard
to the rents collected for June 2004, has been resolved by settlement
with that party.
On October 5, 2004, Valcom, Inc. and Valencia Entertainment International, LLC,
commenced a lawsuit in the Los Angeles Superior Court, State of California,
against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an
accounting of the amount due in connection with a non-judicial foreclosure of
a deed of trust securing a promissory note executed by Valcom and Valencia. It
also alleges that Chicago Title breached its trustee's duties and Laurus
breached the terms of the promissory note and deed of trust securing it.
Valcom's attorney has expressed his belief that the lawsuit it meritorious but
at this stage in the proceeding, he is unable to state how much, if any, will
be recovered in the lawsuit.
Lloyd Kurtz
Pending or Threatened Litigation, Claims and Assessments by the prior
contractor for the renovations, at ValCom Studios in Nevada has been replaced.
Mr. Lloyd Kurtz filed suit on October 25, 2004 against ValCom, Inc., A private
Nevada Corporation which is 80% owned by ValCom, Inc. a Delaware Corporation,
ValCom, Inc. a Delaware Corporation and Vincent Vellardita. The suit alleges a
violation of Securities Act of 1933 and states that Mr. Kurtz purchased 600,000
shares of ValCom - Delaware at $0.25 per share and that the shares were not
registered. He claims he is owed an additional $303,000. Mr. Kurtz has filed a
Mechanic's Lien for $303,000. A motion to dismiss the claim of Mr. Kurtz has
been filed. If the corporation does not prevail on its Motions to Dismiss the
corporation will file its full defense and counterclaims which exceed the
amount claimed by Mr. Kurtz.
Farkhanda Rana
On October 20, 2004 a shareholder of ValCom initiated suit against the Company
and its President alleging violations of State and Federal Securities Law along
with Fraud and Breach of Contract. The lawsuit captioned Farkhanda Rana vs.
ValCom, Inc., Valencia Entertainment and Vince Vellardita et al. were filed in
Los Angeles Superior Court as Case Number PC035673. On November 23, 2004 after
a hearing the Plaintiff in this matter obtained a pre-judgment writ of
attachment against the Company for $325,000.00. The case has been settled as
of November 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
- ---------------------------------
(A) PREFERRED STOCK:
On January 24 Company issued 4,000,000 shares of C preferred Stock in lieu
of cash payment.
COMMON STOCK
- ------------------
During the three months ended December 31, 2005, the Company issued
750,000 shares of common stock in lieu of compensation for legal and
consulting services performed. The value of the legal and consulting
services performed totaled approximately $42,500, which was computed based
upon the market prices of the common stock on the applicable payment dates.
-15-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
- ----------------------------
Not applicable
ITEM 6. EXHIBITS
- -------------------------------------------
(A) Exhibits
31.1 Certification by CEO pursuant to Section 302 of
Sarbanes Oxley Act of 2002.
31.2 Certification by CFO pursuant to Section 302 of
Sarbanes Oxley Act of 2002.
32.1 Certification of Chief Executive Office Pursuant
to 18 U.S.C. Section 1350.
32.2 Certification of Chief Executive Office Pursuant
to 18 U.S.C. Section 1350.
The Company incorporates by reference all exhibits to its Form 10-KSB for the
year ending September 30, 2005.
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALCOM, INC.
Date: May 22, 2006
By: /s/Vince Vellardita
-------------------------------------
Vince Vellardita Chairman of the
Board and Chief Executive Officer
(Principal executive officer)
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
BY: /s/ Vince Vellardita CEO/President May 22, 2006
- --------------------------- Chairman of the Board
Vince Vellardita
BY: /s/ Raymond Campbell CFO May 22, 2006
- ----------------------- (Principal Accounting Officer)
Raymond Campbell