SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
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Securities Exchange Act of 1934
(Amendment No. 2)
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240.14a-12
SBI COMMUNICATIONS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person Filing Proxy Statement if other than the Registrant)
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INFORMATION STATEMENT
OF
SBI COMMUNICATIONS, INC.
1239 South Glendale Avenue
Glendale, CA 91205
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
===============================================================================
This Information Statement is first being furnished on or about
November 21, 2000, to the stockholders of record as of the close of business
on August 31, 2000 (the "Record Date") of the common stock ("Common
Stock") of SBI Communications, Inc. ("SBI" or the "Company").
The Company's Board of Directors has approved of, and a total of
4 stockholders (the "Consenting Stockholders") owning 6,954,178 shares of
the 12,324,878 shares of Common Stock outstanding as of August 31, 2000
have consented in writing to, the actions described below (collectively, the
"Actions"). Such approval and consent constitute the approval and consent
of a majority of the total number of shares of outstanding of Common Stock
and are sufficient under the Delaware General Corporation Law and SBI's
By-Laws to approve the Actions. Accordingly, the Actions will not be
submitted to the other stockholders of SBI for a vote and this Information
Statement is being furnished to stockholders to provide them with certain
information concerning the Actions in accordance with the requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the regulations promulgated thereunder, including Regulation 14C.
ACTIONS BY BOARD OF DIRECTORS
AND
CONSENTING STOCKHOLDERS
The Company's Board of Directors and the Consenting Stockholders
have approved the acquisition of Valencia Entertainment International, LLC
("VEI"), a California limited liability company, and the collateral actions that
must be taken in order to consummate the acquisition (collectively, the
"Reorganization"). The Reorganization is described below, and the full text
of the Agreement and Plan of Merger setting forth the terms and conditions
of the Reorganization is attached hereto as Exhibit A.
Summary Term Sheet
------------------
VEI will merge with and into the Company's wholly owned
subsidiary, Valencia Entertainment Acquisition Corporation, a
Delaware corporation ("VAC'), with VEI being the surviving
limited liability company and becoming a wholly owned subsidiary
of SBI (the "Merger").
Pursuant to the Merger, (i) the Company will issue 75,709,965
shares of Common Stock to the principals of VEI, (the "VEI
Shares"), (ii) 100% of the outstanding membership interests in VEI
will be issued to VAC, and (iii) all of the outstanding shares of
capital stock of VAC will be cancelled. The Company shares issued
to the VEI principals will represent approximately 86% of the issued
and outstanding shares of capital stock of the Company. Current
stockholders of SBI including the Company's insiders will own
collectively 14% of the outstanding shares of Common Stock after
the Merger. As a result of the Reorganization, current SBI
stockholders will incur substantial dilution with respect to their
voting interests.
The Company will amend its Certificate of Incorporation to increase
the number of its authorized shares of Common Stock from
40,000,000 to 100,000,000. The Company will not be able to issue
the VEI Shares until the number of authorized shares of Common
Stock is increased and an amendment to the Certificate of
Incorporation is properly filed with the Secretary of State of
Delaware.
The Company will amend its Certificate of Incorporation to change
its name to ValCom, Inc., and the Company will primarily focus on
operating the business of VEI.
Following the Reorganization, the Board of Directors will have 4
members consisting of 1 current director of the Company and 3
members of VEI management. In addition, the executive officers of
the Company will consist entirely of individuals who are current
members of VEI management, with the exception of Ronald Foster,
who has resigned as the Company's President and CEO and will
assume the title and duties of Vice President of Business
Development after the Reorganization.
The Company will also amend its Certificate of Incorporation to
reflect a change in the par value of its Preferred Stock from $5.00 to
$.001 per share. The purpose of the amendment is to reduce the
annual franchise tax liability of the Company. Ronald Foster, the
sole preferred stockholder, has consented to this action.
GENERAL
-------
This Information Statement contains forward-looking statements
which involve risks and uncertainties. SBI's actual results may differ
significantly from the results discussed in the forward-looking statements.
VEI will pay all costs associated with the distribution of the
Information Statement, including the costs of printing and mailing. VEI will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending this Information Statement
to the beneficial owners of SBI's Common Stock.
INTEREST OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE ACTED UPON.
-------------------------------------------------------------------------
In October, 2000 Vince Vellardita, Managing Member of VEI, was
appointed interim President and CEO of the Company. Upon the closing of
the Reorganization, Mr. Vellardita will receive approximately 18,927,491
shares of Common Stock and will retain the permanent position of President
and CEO. In addition, Mr. Vellardita is currently the beneficial owner of
300,000 shares of Common Stock.
Ronald Foster, who is currently the Company's Chairman and
previously the President and CEO, will receive a 5 year employment
agreement commencing at the closing of the Reorganization to serve as the
Company's Vice President of Business Development. In addition, concurrent
with the Reorganization, the principals of VEI and Ronald Foster will enter
into a stockholders' agreement, pursuant to which the VEI shares must be
voted to elect Ronald Foster as a director for the ensuing 5 years.
There is no director who has informed the Company that he opposes
or intends to oppose any of the above -described actions to be taken by the
Company.
INFORMATION ON CONSENTING STOCKHOLDERS
--------------------------------------
Pursuant to the Company's Bylaws and the General Corporation
Law of the State of Delaware, a vote by the holders of at least a majority of
the Company's outstanding capital stock is required to effect the Actions
described herein. The Company's Certificate of Incorporation does not
authorize cumulative voting. As of the record date, the Company had
12,324,878 voting shares of Common Stock issued and outstanding of which
6,162,440 shares are required to pass any stockholder resolutions. The
Consenting Stockholders, who consist of 4 current stockholders of the
Company, are collectively the record and beneficial owners of 6,954,178
shares which represents 56.4% of the issued and outstanding shares of
Common Stock. Pursuant to Section 228(a) of the General Corporation Law
of the State of Delaware, the Consenting Stockholders voted in favor of the
Actions described herein in a Written Consent, dated October 16, 2000,
attached here to as Exhibit B. The Consenting Stockholders' names,
affiliations with the Company and their beneficial holdings are as follows:
Name Affiliation Shares Beneficially Held Percentage
Ronald Foster Chairman, Past President and CEO,
Significant Shareholder* 4,154,178 33.7%
Larry CahillSignificant Shareholder* 1,000,000 8.11%
Michael GrahamSignificant Shareholder* 1,000,000 8.11%
Peter Papas TrustSignificant Shareholder 800,000 6.49%
----------- ------
Total 6,954,178 56.4%
_______________________
* Significant Shareholder represents more than 5% voting equity interest
The Consenting Stockholders' consent was obtained from direct solicitation
by the Company's Board of Directors. No consideration was paid for their
consent.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------
The following table sets forth information, as of October 31, 2000,
as to each person who is known to SBI to be the beneficial owner of more
than 5% of SBI's outstanding Common Stock and as to the security and
percentage ownership of each executive officer Director of SBI and all
officers and Directors of SBI as a group. Except where specifically noted,
each person listed in the table has sole voting and investment power with
respect to the shares listed.
Pre-Reorganization
Title of
Class Name and Address Of
Beneficial Owners Security Ownership
Amount and Nature
Of Beneficial
Ownership Percentage Of
Class
Common
Ronald Foster Chairman of the Board
1239 South Glendale Avenue Glendale,
CA 91205 4,154,178 33.7%
Common
Vince Vellardita Interim
President, CEO 26030 Avenue Hall
Studio 5 Valencia, CA 91355 300,000 2.43%
Common
Karien Anderson Director,
Secretary/Treasurer
1239 South Glendale Avenue Glendale,
CA 91205 0 -
Common
William Beggs Director
1239 South Glendale Avenue
Glendale, CA 91205 0 -
Common
Claude Pichard Director
1239 South Glendale Avenue
Glendale, CA 91205 10,000 .08%
Common
Larry Cahill
330 South Gate Court
Cedar Rapids, IA 52406 1,000,000 8.11%
Common
Peter Papus Trust
432 NW 111 Avenue Coral
Springs, FA 33071 800,000 6.49%
Common
Michael Graham
1804 Cherrywood Lane
Bluefield, WV 24701 1,000,000 8.11%
Common
----------- -------
Officers and Directors as a
group ( 5 persons) 4,464,178 36.22%
No other stockholder owns more than 5%of SBI's voting securities. After the
Reorganization referenced herein is effected, the following will represent the
security ownership of certain beneficial owners and management:
Post-Reorganization
Title of Name and Address Of Beneficial Owners
Class Security Ownership Amount and Nature
Of Beneficil Ownership Percentage Of Class
Common
Ronald Foster Chairman of the
Board Vice President
Business Development 4,154,178 4.72%
Common
Vince Vellardita Director,
President, CEO 19,227,491 21.8%
Common
Steven A. Webber
Director, CFO 0
--
Common
David Weiner Director 0
--
Common
MMSV Partners, Inc. 39,747,732 45.15%
Common
FECL California, Inc. 17,034,742 19.35%
Officers and Directors as a group ------------- --------
( 5 persons) 23,381,669 26.22%
SECTION 16(a) REPORTS
-----------------------
The requirements imposed by Section 16(a) of the Securities
Exchange Act of 1934, as amended, provide that SBI's Officers and
Directors, and persons who own more than 10% of SBI's Common Stock, file
initial statements of beneficial ownership (Form 3), and statements of changes
in beneficial ownership (Forms 4 or 5) with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% stockholders
are required by SEC regulations to furnish SBI with copies of all such forms
they file. Based solely on its review of the copies of such forms received,
SBI believes that during its fiscal year ended December 31, 1999, the above
referenced forms were filed on a timely basis.
ATTENDANCE OF SEATED DIRECTORS AT 1999 DIRECTOR MEETINGS
---------------------------------------------------------
During SBI's fiscal year ended December 31, 1999, the Board held
41 meetings. Of the current directors, all attended at least 75% of those
meetings. The Board held no separate committee meetings during that year.
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 directors of the Company. No officer of the Company receives any
additional compensation for his services as a director, and the Company does
not contribute to any retirement, pension, or profit sharing plan covering its
directors.
RENUMERATION OF DIRECTORS AND OFFICERS
---------------------------------------
For the fiscal year ended December 31, 1999, Ronald Foster, past
President and CEO of SBI, received no compensation. No other officer of
SBI received any cash or other compensation. The directors of SBI received
no compensation for services rendered to SBI during the fiscal year ended
December 31, 1999.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
---------------------------------------------------------
Except with respect to the matters referenced above under "Interest
of Certain Persons in or Opposition to Matters to be Acted Upon", there has
been no transaction or series of transactions, or proposed transaction during
the last fiscal year to which SBI is a party in which any director, nominee for
election as a director, executive officer, beneficial owner of 5% or more of
SBI's Common Stock or any member of the immediate family of any of the
foregoing had or is to have a direct or indirect material interest
exceeding $60,000.
NOTICE TO STOCKHOLDERS OF ACTIONS APPROVED BY CONSENTING STOCKHOLDERS
----------------------------------------------------------------------
The following Actions were taken based upon the unanimous
recommendation by the Company's Board of Directors and the Written
Consent of the Consenting Stockholders:
ACTION 1
ELECTION OF DIRECTORS
The Board of Directors unanimously nominated and the
Consenting Stockholders have approved and elected 4 individuals as directors
to hold office until the next Annual Meeting of Stockholders or until their
successors are duly elected and qualified. Each of the following individuals
has consented to serve as a Director of the Company and there is no familial
relationship between any nominated director and any current director or
between any of the nominated directors.
Name and Position in the Company Age Since
Ronald Foster 59 1986
Chairman of the Board
Vince Vellardita 42 2000
Interim President / CEO
David Weiner 41 --
Nominee
Stephen A. Webber 52 --
Nominee
Ronald Foster.
----------------
Mr. Foster, age 59, served as the Company's Chief
Executive Officer, President and Chairman of the Board from 1986 to
October 2000. Mr. Foster is presently Chairman of the Board of SBI. He has
been working with the Company since its inception in 1984. His primary
responsibilities include finance, marketing and technical review. In addition
to his responsibilities with the Company, 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, Inc. a Georgia corporation,
where he was responsible for coordinating television entertainers, sports
figures and other celebrities for department store promotions. Previously, Mr.
Foster 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 was the president and chief executive officer of ROPA
Communications, Inc., a Georgia corporation, 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 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.
Other than the Company, Mr. Foster does not currently serve as a director of
any reporting company.
Vince Vellardita
----------------
Mr. Vellardita is currently the interim President
and CEO of SBI and is the CEO of VEI. Mr. Vellardita was instrumental in
having VEI acquire a 170,000 square foot production facility in Valencia,
California that houses 8 sound stages that have been occupied for the past 4
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
tours on the continent. He also produced a benefit tour for the 1980
Presidential campaign of John Anderson. Mr. Vellardita does not currently
serve as a director of any other reporting company.
David Weiner
-------------
Mr. 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.
Mr. Weiner does not currently serve as a director of any other reporting
company.
Stephen A Webber
----------------
Mr. Webber is the President and Chief
Financial Officer of VEI. Mr Weber has over 20 years of experience in
Finance and Management and is a certified public accountant. Prior to
joining VEI, Mr. Webber was the managing partner of the regional audit firm,
located in Los Angeles, California. Currently, in addition to his duties at
VEI, Mr. Webber consults for a publicly traded Internet company, Genesis
Entermedia.com, Inc., where he sits on the Board of Directors and is
Chairman of the Audit Committee.
ACTION 2
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
The Board of Directors and the Consenting Stockholders
unanimously adopted and approved an amendment to the Company's
Certificate of Incorporation to change the Company's name to ValCom, Inc.
(the "Name Amendment"). The Name Amendment will be implemented by
filing a Certificate of Amendment to the Certificate of Incorporation (the
"Certificate of Amendment) with the Delaware Secretary of State. The text
of the Name Amendment is attached as Exhibit C and is incorporated herein
by reference. In the judgment of the Board of Directors, the change of the
Company's corporate name is desirable in view of the significant change in
the Company's character and strategic focus.
The Name Amendment will become effective upon the filing of
the Certificate of Amendment with the Secretary of State of Delaware. Under
federal securities laws, the Company cannot file the Certificate of
Amendment until at least 20 days after the mailing of this Information
Statement.
ACTION 3
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO CHANGE THE PAR VALUE OF PREFERRED STOCK
The Board of Directors and the Consenting Stockholders
unanimously adopted and approved an amendment to the Company's
Certificate of Incorporation to change the par value of its preferred stock (the
"Par Value Amendment"). The Company's current capital structure
authorizes 10,000,000 million shares of Preferred Stock at a par value of
$5.00 per share. Delaware law computes the annual franchise tax based
either on the authorized share method or the assumed par value capital
method, but in no event is the annual franchise tax greater than $150,000. In
order to reduce and minimize the annual franchise tax, the Board of Directors
and the Consenting Stockholders unanimously adopted and approved an
amendment to the Company's Certificate of Incorporation to change the
Preferred Stock par value from $5.00 to $.001 per share. The text of the Par
Value Amendment is attached hereto as Exhibit D and is incorporated herein
by reference.
The Par Value Amendment will become effective upon the filing
of the Certificate of Amendment with the Secretary of State of Delaware.
Under federal securities laws, the Company cannot file the Certificate of
Amendment until at least 20 days after the mailing of this Information
Statement.
ACTION 4
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED COMMON STOCK
The Board and the Consenting Stockholders unanimously adopted
and approved an amendment to the Company's Certificate of Incorporation
to increase the Company's authorized Common Stock from 40,000,000 to
100,000,000 shares (the "Authorized Shares Amendment"). The terms of the
Reorganization will make VEI a wholly owned subsidiary of the Company
and the principals of VEI will receive shares of the Company's Common
Stock based upon an agreed upon fair market valuation of the net assets of
VEI. According to the audited financial statements of VEI for the year ended
December 31, 1999, VEI recorded $8,749,487 in net assets, which represents
approximately 83% of the total net assets of VEI and SBI combined. A copy
of VEI's audited financial statement is included in this Information
Statement. In order to consummate the Merger, the Company will be required
to issue 75,709,965 shares of Common Stock to the principals of VEI. The
shares of Common Stock do not have any preemption rights. The text of the
Authorized Share's Amendment is attached hereto as Exhibit D.
Currently, the Company has 40,000,000 shares of Common Stock
authorized of which 12,324,878 shares are issued and outstanding. As a
result, the Company will not be able to consummate the Merger without first
implementing the Authorized Shares Amendment.
The Authorized Shares Amendment will be implemented by filing
the Certificate of Amendment with the Secretary of State of Delaware. Once
the Company files the Certificate of Amendment, the Company will have
87,1675,122 shares of unissued shares of Common Stock available for
issuance. The Company will immediately issue 75,709,965 shares to the
principals of VEI and will cause the Merger to be consummated. The VEI
shares will not be registered under the Securities Act of 1933, as amended
(the "Act"), and may not be resold unless the shares are registered under the
Act or an exemption from such registration is available.
The remaining unissued shares of Common Stock will be available
for issuance from time to time as may be deemed advisable or required for
various purposes, including the issuance of shares in connection with
financing or acquisition transactions and the issuance or reservation of
Common Stock for employee stock options. The Board would be able to
authorize the issuance of shares for these transactions without the necessity,
and related costs and delays, of either calling a special stockholders' meeting
or of waiting for the regularly scheduled annual meeting of stockholders in
order to increase the authorized capital. If in a particular transaction
shareholder approval were required by law or any stock exchanges or markets
or were otherwise deemed advisable by the Board, then the matter would be
referred to the stockholders for their approval notwithstanding that the
Company may have the requisite number of voting shares to consummate the
transaction.
The issuance of the VEI Shares will cause a dilution to the
existing SBI Stockholders. The 12,324,878 shares of Common Stock
currently issued and outstanding will represent approximately 14% of the
outstanding shares after the Reorganization. The Authorized Share
Amendment is not intended to have any anti-takeover effect and is not part of
any series of anti-takeover measures contained in any debt instruments or the
Certificate of Incorporation or the Bylaws of the Company in effect on the
date of this Information Statement. However, SBI stockholders should note
that the availability of additional authorized and unissued shares of Common
Stock could make any attempt to gain control of the Company or the Board
more difficult or time consuming and that the availability of additional
authorized and unissued shares might make it more difficult to remove
management. Although the Board currently has no intention of doing so,
shares of Common Stock could be issued by the Board to dilute the
percentage of Common Stock owned by a significant shareholder and
increase the cost of, or the number of, voting shares necessary to acquire
control of the Board or to meet the voting requirements imposed by Delaware
law with respect to a merger or other business combination involving the
Company. The Company is not aware of any proposed attempt to take over
the Company or of any attempt to acquire a large block of the Company's
Common Stock. The Company has no present intention to use the increased
authorized Common Stock for anti-takeover purposes.
The Authorized Shares Amendment will become effective upon
the filing of the Certificate of Amendment. Under federal securities laws, the
Company cannot file the Certificate of Amendment until at least 20 days after
the mailing of this Information Statement
BACKGROUND OF TRANSACTION
-------------------------
For the past several years, SBI sought unsuccessfully to raise capital
or enter into a joint venture arrangement to fund its current operations. To
fund the administrative costs of operating a public corporation, SBI privately
sold its Common Stock at a price of $.01 per share. The Board concluded
that the dilution caused by these private offerings coupled with SBI's lack of
success in obtaining funding for its former business warranted exploring
other strategic alternatives. Because of its public, but relatively dormant
status, SBI had received numerous inquiries regarding whether it would be
interested in effecting a reverse merger with a private operating company. The
Board decided to explore this possibility.
Vince Vellardita, who is a current stockholder of the Company and
a close acquaintance of a member of the Company's Board of Directors, was
aware of SBI's situation. Mr. Vellardita contacted SBI to determine whether
the Company was interested in pursuing a strategic relationship with VEI.
Numerous meetings were held between Mr. Vellardita and with members of
the Board to determine if, in fact, there were synergies between the two
companies. The Board concluded that VEI's business of providing
entertainment content and distribution provided a valuable opportunity for
enhancing and commercializing the Company's current business of
telecommunication and interactive entertainment content. In addition, the
assets held by VEI would enhance shareholder value and provide greater
opportunity for growth for the combined companies. The Board and the
principals of VEI concluded that a merger between the two companies would
provide the most value and opportunity for growth for the two companies
going forward.
A Letter of Intent was executed between the principals of VEI and
the Company on August 21, 2000. The SBI Board was satisfied with the
exchange ratio proposed by VEI and was impressed by VEI's proposed post
Reorganization management team. The Board concluded that a merger with
VEI was in the best interest of the Company's existing stockholders. On
October 16, 2000 the parties executed a definitive Agreement and Plan of
Merger ("the Agreement"). The text of the Agreement, excluding the
corresponding schedules and exhibits, is being furnished with this
Information Statement.
ABOUT SBI COMMUNICATIONS, INC.
------------------------------
Information about SBI is provided in Form 10-KSB for the Fiscal
Year Ended December 31, 1999, filed with the Securities and Exchange
Commission on April 5, 2000, and appearing in its entirety at page 32 of this
Information Statement.
ABOUT VALENCIA ENTERTAINMENT INTERNATIONAL, LLC
-----------------------------------------------
VEI is a limited liability company organized in November 1996
under the laws of the State of California for the purpose of operating a studio
facility in Valencia, California and the development, financing and
production of entertainment content. The members of VEI consist of Vince
Vellardita, MMSV Partners, Inc., a California corporation, and FECL
California, Inc., a California corporation. Mr. Vellardita, is the CEO and
COO of VEI and currently is the interim President and CEO of SBI.
VEI is a entertainment conglomerate that includes television
production, for both network and syndicate, motion pictures, sports, internet
and real estate holdings. VEI, which owns 12 acres of real property and a
120,000 square feet production facility in Valencia, California, has been the
studio set for such series as JAG produced by Paramount Pictures and Power
Rangers produced by Saban Productions. In addition, VEI's facilities include
six sound stages that have been operating at full capacity since 1995. VEI
recently leased an additional 52,000 square feet production facility which
includes two full service sound stages, for a total of eight sound stages.
VEI's clients include Warner Bothers, Universal Studios, MGM, HBO, NBC,
20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network.
VEI is a diversified company engaged in the development, financing
and production of entertainment content for the worldwide audience. Using
its 8-stage studio facility in Valencia, California as its base, VEI intends to
focus its activities primarily on the creation of feature-length films and
television programs for global theatrical and television distribution, with a
secondary focus on the burgeoning field of entertainment-oriented interactive
media. VEI's objective is to build asset value by creating a library of wholly
owned productions whose distribution rights will be exploited in all markets
and all media. In addition, when the timing is appropriate VEI will establish
divisions to exploit ancillary revenue opportunities generated by its
productions in the merchandising, book and record publishing, new media,
and merchandising industries.
Business Description
--------------------
Recent consolidation in the entertainment industry has resulted in the
consolidation of once independent production companies like Miramax, New
Line Cinema, Castle Rock, and Spelling Entertainment. Now owned by
major studios like Disney, AOL-Time-Warner and Viacom, these companies
have become constrained by large studio structures and increased
performance pressures, and are rarely able to exercise the type of creative
freedom, artistic risk and market responsiveness that enabled their rapid
growth when they were independent.
There is presently a dearth of nimble and aggressive independent
companies capable of exploiting those entertainment opportunities that are
either too small or too specialized to be of interest to the large studios.
Consequently, the timing is excellent for establishing a new independent
production company to fill the void that has been left by the recent wave of
industry consolidation.
VEI will capitalize on these opportunities by providing mainstream
motion pictures and television entertainment with worldwide commercial
appeal in a low-risk, cost-efficient manner. VEI will be differentiated from
the large studios by its ability to maintain a low overhead and cost structure,
its ability to be attentive and responsive to talent, and by its commitment to
undertake only those projects that have sound business prospects and
attractive profit potential.
Business Objectives and Philosophy
----------------------------------
VEI's primary business objective is to build a premier quality
independent company focused on the creation and worldwide exploitation of
entertainment product. VEI's intended tactics for achieving this objective are
twofold:
1.Develop and produce feature-length motion pictures and network
and syndicated television programs for worldwide distribution in
theaters and on television, and to the home video market. The
copyrights and distribution rights for these programs will be owned
and controlled by VEI to enable VEI to build long-term value by
amassing a library of entertainment content. Any ancillary revenues
the programs generate-through, for instance, licensing,
merchandising, music and book publishing, or other means-will
accrue directly to VEI.
2.VEI will also provide the facilities and management expertise to
support, on a "work-for-hire basis," the production of television
series, films, specials, commercials, and music videos for third
parties. This work-for-hire activity will be conducted in order to
generate immediate positive cash flow for the Company, subsidize
the Company's own development and content production and
provide a level of financial stability through the normal cyclical ups
and downs inherent in the entertainment industry.
VEI'S Business Approach
-----------------------
VEI's business approach is driven by a shared desire among its
principals to create a viable alternative to the cumbersome and often
inefficient business practices of Hollywood's major studios. In contrast to
the studio process, VEI will be:
Project-driven. VEI'S investment and growth will occur on a
strict "as-needed" basis, with projects initiated only when their
commercial prospects are reasonably assured and the
investment risk is minimized.
Economical. Management will exercise rigorous control over
the costs, both at the top overhead level and the individual
project level. Necessary expenditures will be made only where
the expected financial returns on investment are attractive. VEI
will refrain from engaging in costly bidding wars for talent or
material.
Talent-friendly. VEI recognizes that success in the filmed
entertainment business is driven largely by the ability to attract
top quality creative talent. Management will draw upon its
extensive relationships with talent and strive to create a culture
that is attractive to and supportive of writers, directors and
actors.
Responsive. The major studios' size and numerous layers of
management can often make the project decision-making
process slow and cumbersome. VEI will differentiate itself and
keep costs down by streamlining this process. Management
will take hands-on responsibility for personally reading scripts
and evaluating projects quickly and minimizing the bureaucracy
and "turnaround" time for making decisions. VEI's close
collaboration with filmmakers will enable it to prevent
catastrophic cost overruns such as those that occur with larger
studio films.
The Management Team
-------------------
VEI's management team is comprised of several highly experienced
film and television production professionals, some of who have been involved
with the production of numerous motion pictures, television programs,
commercials and music videos. Their productions have ranged from low
budget independent projects to major studio blockbusters with top-caliber
acting and directing talent. They have managed or participated in sales and
marketing, distribution, and all phases of the film and video production
process, from development, pre-production, principal photography, post-
production and directing and producing.
The Company will initially consist of approximately four executive
and managerial employees. These include a Chief Executive Officer, a Chief
Operating Officer/Chief Financial Officer, a Head of Production/New Media
Division, and a Head of Distribution.
VEI has experienced management and advisors in place with critical
specialized knowledge and expertise in the filmed entertainment industry. The
Valencia Entertainment team is a combination of seasoned operations
veterans and young, aggressive producers, with substantial backgrounds in
the facilities, motion picture, television, distribution and new media
industries.
Vince Vellardita
----------------
CEO/COO and President, is a Production Executive with a
successful track record that extends throughout many areas of the
Entertainment Industry. Currently focusing his efforts on his film and
television career, Mr. Vellardita began his work in music. Beyond this,
however, he is also known for--and frequently cited as an expert in--the
development and management of independent studios. As the CEO of VEI,
Mr. Vellardita is responsible for the successful turnaround of his 120,000 sq.
ft. property, which houses 8 sound stages. His tenure began in 1996 and his
efforts have caused the VEI studios to be fully booked for the foreseeable
future.
Mr. Vellardita began his career in Nashville, Tennessee. Mr. Vellardita
started as a music producer of live music shows, including U2's
and Duran Duran's first North American tours. Next, turning his attention to
the television industry, Mr. Vellardita turned a small relatively unknown
production house into a television satellite network housing multiple sound-
stages and edit bays, quadrupling the number of employees under his
supervision.
Following his efforts in Nashville, Mr. Vellardita developed and
established such independent production houses as Empire Studios, one of the
largest independent studios in Los Angeles, with a 60,000 sq. ft capacity,
Santa Monica Studio West, Studio West Productions, and other facilities
throughout Los Angeles and the United States. Mr. Vellardita's involvement
not only included supervising the construction of these full-service video
studios, but also the handling of sales and contract negotiations and the
launching of marketing strategies to attract eminent players in the television
industry such as Paramount, Warner Brothers and Disney.
Stephen A. Weber
----------------
President and Chief Financial Officer, Stephen Weber has over 20
years of experience in Finance and Management. A graduate of the
University of Southern California, Steve was a practicing certified public
accountant for 13 years. He was the managing partner of the regional CPA
firm located in Los Angeles, California. In 1989, Mr. Weber co-founded
Positive Response Television Inc. (PRTV). At PRTV home of the series
"Amazing Discoveries," which purchased a small media company with sales
of $2 million and grew that company to over $30 million in annual sales and
earnings of over $3 million. During his tenure as President and later
Chairman of the Board, PRTV bought half-hour and short form time from
over 800 broadcast stations in all domestic markets and over 40 cable
networks. Mr. Weber also created a telemarketing company form inception
to sell back-end products to PRTV customers.
Mr. Weber was one of the pioneers of the infomercial business. He
was the executive producer of over 40 infomercials for which the sales from
those infomercials were over $500 million. He was also in charge of
worldwide distribution of the company's products.
In 1996, Mr. Weber negotiated the sale of PRTV to a marketing
company, which is listed on the New York exchange. Currently, in addition
to his duties at VEI, Mr. Weber consults for a publicly traded Internet
company where he sits on the Board of Directors and is Chairman of its Audit
Committee.
Forrest L. "Woody" Fraser
-------------------------
Phase I Consultant - Phase II Business partner Television
Division: Woody Fraser has created developed, produced, and packaged
many of television's most successful talk / variety / magazine programs.
Beginning his career in 1960 as a director for NBC, Mr. Fraser became
responsible for the creation of 32 one-half hour television shows between
1966 and 1973. With Mr. Fraser's implementation of the concept of the "Co-
Host", the Mike Douglas Show became one of television's first and most
successful syndicated talk shows, receiving 5 Emmy Awards.
From 1975 to 1998, Mr. Fraser helped developed such shows as
Good Morning America, America Alive, That's Incredible, Those Amazing
Animals, The Richard Simmons Show, Life's Most Embarrassing Moments,
Incredible Sunday, The Home Show, Wild and Crazy Kids and Home and
family.
In addition, Mr. Fraser produced over 12 television specials, which
appeared on broadcast Networks. Mr. Fraser (via the Home Show) produced an
ensemble of public health and education series on topics such as breast Cancer,
bone marrow transplants/leukemia, women and alcohol, arthritis, animal
adoption and farm sanctuaries, all of which received service awards of
excellence in their respective genres. In total, Mr. Fraser has received 8 Emmy
Awards and 1 Peabody Award.
Marty Hornstein
Phase I: Consultant: Phase II President Motion Picture
Division. Mr. Hornstein has over 37 years of experience as a motion picture
producer, executive producer and line producer. His credits include a broad
range of films, ranging from numerous major studio to low-budget
independent projects, and television pilots, movies of the week ("MOWs"),
miniseries and commercials.
His first feature film credit was for Arthur Penn's The Miracle
Worker. His other feature credits include The Heart is a Lonely Hunter, Ode
to Billy Joe, Bad Boys, Futureworld, Beverly Hills Cop III, and Star Trek-
First Contact, in capacities ranging from Unit Production Manager to
Executive Producer. One of his greatest box office successes is a feature
called One On One, produced for Warner Brothers, which cost $1.8 million
to produce and has generated over $20 million in revenues. Hornstein's pilots,
movies-of-the-week and mini-series include The Bold Ones, The Other Man,
Love Boat- The Egypt Cruise, Sybil and others. He has worked with directors
such as Leo Penn, Boris Sagal and Steven Spielberg.
The Marketing Plan
------------------
VEI's management has reliable contacts with film and television
buyers throughout Europe, Asia, Latin America and North America.
Established consultants are also available to assist VEI's early marketing and
distribution efforts. Since the sale and distribution of moderate budget film
and television programs is largely relationship-based, these contacts will
provide an essential competitive advantage with regard to the VEI's
worldwide sales efforts.
Strategy For Creating Value
----------------------------
VEI will create value in three principal ways:
1.Optimization of the Valencia Studios facilities operations.
Management has overseen the turnaround of the facility's
profitability, reversing operating losses and restoring a sustained
level of profitability. Management believes that the general business
environment and the specific opportunities for an improved business
mix will lead to a substantially higher level of profitability for the
facility over the next 2-3 years. Additional growth will come
through expansion of operations and asset acquisitions.
2. Creation and exploitation of library assets. An essential
source of value and profitability for entertainment companies is the
library value of their films and television programs. The economic
value of an individual program extends well beyond its initial
exhibition period. Many programs continue to earn revenues through
repeated showing on television and other electronic media for many
decades after their initial release. Since the key to earning
significant profits from library programming is having a continual
supply of new programs to license concurrently with library product,
VEI will aggressively build a library of its own programs, both
through internal content production/co-production, and when
appropriate through acquisition.
3. Create and Develop a Syndicated Media Division, The
decade-long trend on television (and more recently on the Internet)
toward lower-cost, "non-scripted" programming favors production
companies with low overhead and strong production capabilities.
VEI is well-positioned to capitalize on this trend by producing low-
cost programs like the Truster game show, currently in development,
and Internet programming such as the live auto auctions and sports
memorabilia sales programs that it has in development. These types
of programs can be mounted quickly, generate relatively quick returns,
and be exploited across multiple media platforms.
Management envisions a phased implementation of the business plan
over a five-year period to ensure a conservative, risk-tempered approach to
the Company's growth.
Phase I
--------
During Phase I VEI will:
Establish its core management team.
Secure agreements for the acquisition of additional production facilities
Launch a new Media Division
Establish a strong presence in the foreign marketplace
Begin development of MOWs, TV series and specials
Begin development of 2-3 feature film projects
Produce VEI's first feature
Phase II
--------
Once VEI has established a stable base of operations and delivered one
quality commercial feature, it will be poised for more rapid growth. In this
phase the company will:
Add to its management team
Continue to drive production to completion
Put at least 3-5 viable new feature or MOW projects into development
Commence production on 2-4 new feature films and television series
Establish merchandising and publishing divisions
Phase III
---------
By Phase III, management anticipates that it will have sufficient cash flow,
asset base and operating history to raise substantial debt or equity capital to
expand its operations. At the beginning of this phase management will re-
evaluate its goals and operating procedures, and develop a long-term plan for
the VEI's future growth. As needs arise and if the opportunities are judged
to be attractive, the VEI will extend its activities into new media
diversification and other ancillary businesses opportunities.
Industry and Market Analysis Domestic Film Entertainment
--------------------------------------------------------
Motion picture and television production is a moderate growth
business, with generally low margins. But within the industry there are a few
areas of rapid growth and attractive profitability, most notably the studio
facilities business and the foreign television and theatrical film markets. VEI
will concentrate its business focus on these more attractive niches of the
industry.
The domestic U.S. motion picture and television market remains a
slow-growth, competitive, and risky arena in which to compete. The major
Hollywood studios combined domestic market share typically exceeds 90%.
Because of the studios' rigid control over domestic distribution and their
financial ability to spend heavily on talent, marketing and advertising, it has
recently become extremely risky-even prohibitive-for independent producers
to produce films or television programs targeted primarily at U.S. consumers.
The strategic implications for VEI of these domestic conditions and
trends are twofold: First, with the major studios exerting such powerful
dominance over the domestic marketplace, VEI must avoid competing head-to-
head with these giants, and choose niches where competition is less restric-
tive. Serving the foreign marketplace with products that have global appeal
will be an essential element of a winning long-term strategy. Also, since
competition places heavy downward pressure on profit margins, strict cost
controls are critical to sustained profitability. Second, in order to build an
entrenched, defensible position against new and existing competitors, VEI
must differentiate itself in order to gain a competitive edge. VEI's ability
to attract talent byoffering an attractive alternative to the studio
environment, and to move quicklyand selectively in choosing partners and
projects, should help VEI build aunique, positive image.
The Worldwide Market
---------------------
An important trend in the filmed entertainment industry over the past
decade has been the increasing size and influence of the foreign marketplace.
Whereas foreign revenues accounted for only about a third of American
distributors' total revenues ten years ago, they now make up almost two-thirds
of the total. Management believes that the international market will grow at
a much more rapid pace than the domestic market, particularly as the
emerging economies in Asia and South America create higher levels of
demand for U.S. entertainment content.
Several key trends have caused the value of foreign rights to
American motion picture product to increase dramatically. These trends
include the growing worldwide popularity of home video, the rapid
proliferation of pay television channels, and the increase in competition
among free television stations caused by privatization.
Competition
-----------
Competition in the filmed entertainment business is diverse and
fragmented, with many companies operating at different budgetary levels and
with different content focus. The market is dominated by the large
Hollywood studios, with the top-ranked company-Disney in 1999-usually
commanding 15 to 20 percent of the domestic market share in any given year.
With the proper positioning and content focus, VEI believes it can
insulate itself from the brunt of competition in the filmed entertainment
business. Since the industry's revenues from foreign markets are growing
rapidly, a sound strategy to exploit foreign markets should keep VEI
profitable for the foreseeable future.
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.
Rather than attempt a comprehensive overview of all the
independent companies that currently compete with VEI, this section provides
brief overviews of two companies-Morgan Creek Productions and New
Regency Productions-which represent the class of company that VEI
considers its primary competition.
Morgan Creek Productions
-------------------------
Morgan Creek Productions was founded in 1987 by James G.
Robinson, a businessman who created a successful chain of Subaru auto
dealerships. The company's first production was "Young Guns," which
starred Emilio Estevez and Lou Diamond Phillips, cost $10 million to
produce and grossed over $40 million in domestic box office receipts. Other
successful films for the company include "Major League," "Robin Hood:
Prince of Thieves," and "Ace Ventura: Pet Detective," and its sequel "Ace
Ventura: When Nature Calls."
Morgan Creek's financial strategy is to produce the majority of its
films at relatively low budgets (usually under $25 million) and to retain and
control a basket of foreign rights for each film, which it pre-sells to cover
the majority of its production costs. Morgan Creek has guaranteed theatrical
distribution through a major studio partner, Warner Brothers. Morgan
Creek's deal with Warner Brothers is as follows:
Warner Brothers distributes Morgan Creek's films in the United
States and several foreign territories on a "rent-a-system" basis.
The rent-a-system deal means that Warner Brothers acts solely
as a distributor and is not at risk for any of the production or
marketing costs of Morgan Creek's films. However, Warner
Brothers does cash-flow the marketing costs with Morgan
Creek guaranteeing to make up any short-fall should Warner
Brothers not recoup these costs. This arrangement helps
Morgan Creek to manage its cash flow exposure.
Because Warner Brothers has no financial exposure under the
terms of the rent-a-system deal, it charges Morgan Creek
significantly reduced distribution fees (15% versus the normal
30-35%). Furthermore, 100% of video revenues are accounted
for in producer's gross proceeds.
Morgan Creek withholds a number of foreign territories from
its deal with Warner Brothers, and pre-sells those territories to
cover a portion of its production risk. Currently those
territories include Australia, Japan, and several other countries
where it has made output arrangements with foreign
distributors. As the company's successful films have improved
its cash flow and equity position, it has gradually assumed more
foreign risk-and improved its potential upside-by negotiating
lower up-front advances on pre-sales in exchange for a greater
share of the foreign profits.
New Regency Enterprises
-----------------------
New Regency was founded by European pharmaceutical heir Arnon
Milchan in the late 1980's. Starting in the late 1970's Milchan began
financing the development and production of several major motion pictures
including "Once Upon A Time in America" starring Robert DeNiro and
"Pretty Woman" starring Julia Roberts and Richard Gere.
New Regency's financial structure is similar to that of Morgan Creek
in that it revolves around the company retaining rights to numerous foreign
territories. With these retained rights New Regency has formed lucrative
foreign partnerships to co-finance its films and offset a substantial portion of
its production risk. The company is one of the most prolific of today's
independent production companies, producing 6-8 "A" title movies a year,
including such hits as "J.F.K.," "Under Siege" and "Under Siege 2," and John
Grisham's "The Client." The company has managed to build a substantial
and valuable library in less than a decade.
New Regency's structure is as follows:
Twentieth Century Fox handles both theatrical and home video
distribution for New Regency's films on a worldwide basis
excluding France and Germany. Fox distributes in these media
on a "rent-a-system basis similar to Morgan Creek's
arrangement with Warner Brothers.
New Regency retains worldwide television rights to its movies
in addition to all rights in France and Germany. It pre-licenses
the television rights around the world to foreign distributors via
output arrangements in order to cover part of their production
budgets.
In France and Germany, New Regency has co-production
partnerships with Canal Plus and Boda Scriba. These
partnerships differ from traditional pre-sale arrangements, in
that they provide Canal Plus and Boda Scriba with equity
positions in New Regency's films in addition to the underlying
distribution rights. This arrangement provides New Regency
with a greater proportion of its financing from France and
Germany than it might otherwise receive.
Between its co-production partnerships in France and Germany,
and pre-selling the worldwide television rights to its films, New
Regency is able to offset the lion's share of its production
risk. The majority of the company's exposure is for the marketing
costs of its movies.
Common Competitor Strategies
----------------------------
Maintaining ownership of negatives and building film libraries: The
companies discussed above have deal structures which allow them to use their
own equity capital in conjunction with strategic distribution alliances and pre-
sales to retain ownership of the movies which they produce and thus create
a library of films as an asset base for the company. Portfolios of films have
proven to hold their value over time, above and beyond their discounted cash
flow.
Domestic Distribution: Although their arrangements differ, these
companies have generally facilitated domestic theatrical distribution through
a major distributor. New Regency and Morgan Creek have rent-a-system
deals in which they are responsible for all costs and Fox and Warner Brothers
provide distribution. They are charged a significantly reduced distribution fee
by the studio, and all video revenues are accounted for on a straight
distribution basis. In other words, video revenues are not subject to a royalty
basis as is the case under traditional financing and distribution deals where
the studio is funding all production and releasing costs.
Bifurcation of rights: The companies retain and control a "basket"
of foreign rights with which they are able to cover a substantial portion of
their production risk.
Production of A-title films: Morgan Creek and New Regency make
movies which are intended to appeal to a broad audience, and therefore have
widely recognized stars.
Cost-effective film production: Rapidly increasing production costs
have caused both the studios and a number of independent production
companies to experience a significant deterioration in their internal rates of
return. Morgan Creek and New Regency have flourished largely because of
their ability to maintain cost-effective film production. This means making
films at a cost that is below the industry average for its type or genre, while
maintaining high standards for the quality of story, cast, and production
values.
Revolving credit facility: The elite independent production
companies have revolving lines of credit secured by the assets of the
companies. Each of these companies initially assumed varying degrees of
financial risk in financing the production of its films. As the companies
evolved to the point where they were able to fund their productions from
internally-generated cash flow, they graduated from single-project loans to
revolving credit facilities secured by the assets of the company.
Facilities Division
-------------------
With its experience in building and managing studio facilities, VEI
plans to maintain a major presence in the film stage business. Under the
direction of the Chief Executive Officer, the facilities division oversees the
management of the Company's currently owned and operated Valencia
Studios, the newly acquired Piedmont, Alabama property, and also the future
expansion of these facilities and the acquisition of additional facilities in
the future. Management believes that the continued growth of the production
business in and around the Los Angeles area, and the recent revival of
production in the New York area, reflect a strong trend of increased demand
for facility space in the coming years.
The core of VEI's business is its 8-stage, 170,000 square foot studio
facility situated on 9 acres in Valencia, California. Since it acquired the
property in 1996, management has overseen a successful turnaround in the
facility's profitability, reversing operating losses and restoring a sustained
level of profitability. The company owned property was recently appraised
at a value of approximately $11 million. Management believes that the
general business environment and the specific opportunities for an improved
business mix will lead to a substantially higher level of profitability for the
facility over the next 2-3 years. Specific areas of focus include:
Replacement of "grand-fathered" deals with new clients operating under
more economically beneficial packages.
Expansion into new profit sources including equipment rentals and
exterior filming locations.
Continued growth of the facility with costs borne through incoming
tenant improvements.
During the third quarter of 2000 VEI expanded its Valencia
operations by leasing a 52,000 square foot building directly adjacent to the
existing facilities. This building is situated on 3 acres and houses 2
additional sound stages.
In addition to the expansion in Los Angeles, SBI plans to develop
an 80,000 square foot building located on 17 acres in Birmingham, Alabama.
The property is strategically located in the center of the Southeast between
Birmingham, Alabama and Atlanta, Georgia, with 12 million people living
within 100 miles of the property. A former amusement center, the facility will
be renovated into a sound stage to be used for Internet related programming
and eventually television and movie production. The facility now is being
remodeled for use for auto auctions and an antique appraisal show, both to be
broadcast via the Web. In the near future the Company will make it possible
for its webcast audiences to bid on an array of products in addition to the
autos and antiques. A restaurant and lounge facility will also be included in
the new operation. The Company has hired an experienced team to manage
this operation. This new entity is expected to produce gross revenue of
approximately $2 million in the first year.
Motion Picture Division
-----------------------
VEI's motion picture division is focused on creating mainstream
motion pictures and made-for-television movies with worldwide commercial
appeal in a low-risk, cost-efficient manner. The Company's long-term
objective is to build asset value by creating a library of wholly owned films
whose distribution rights will be exploited in all markets and all media.
The Company's production activity will concentrate primarily on
theatrical films in the under $5 million budget range. Foreign pre-sales and
distribution-driven "negative pick-up" deals often allow films in this budget
range to be wholly or largely recouped prior to the start of principal
photography. The motion picture division will also focus on acquiring
finished film properties in an ongoing effort to build a library of content
assets.
Television and Distribution Division
-------------------------------------
The rise of co-productions and specialty programming for many
foreign and cable markets continues to drive significant growth in television
content production. The Television & Distribution division, like the Motion
Picture Division, will endeavor to retain ownership of its developed products
in order to build the asset library of its content based divisions:
VEI has a small library of wholly owned television content that is
ready for worldwide distribution, and several major series in advanced
stages of development. These include:
PCH - Combining the sex appeal and glamour of Bay Watch with the
intrigue and drama of Melrose Place, PCH is a completed two-hour pilot
which is ready to go into production as a prime time television series. The
pilot stars Jack Scalia, Sally Kellerman, Denise Richards, Elliot Gould and
Casper VanDien, and revolves around the wealthy denizens of a Southern
California beachfront restaurant/cabaret. PCH will appeal to viewers
worldwide with its character-based drama dressed in hip fashion and
cinematic style. Current developments for PCH include:
12 overseas distributors have expressed interest in
committing a total of approximately $400,000 per episode
in co-production funding in exchange for the rights to
distribute the series in their respective territories. These
pre-sale commitments will cover 70% of the series' total
production cost, while leaving 65% of the world revenue
pie still available to VEI.
Foreign distribution of the television series has been
secured with Daro Film Distribution.
The two-hour television pilot has been licensed for
broadcast and U.S. home video distribution by Spartan Home
Entertainment, LLC.
Frankie Avalon's Let's Do It Again- This television special/series
will feature Frankie Avalon and appearances by many guest stars. This show
is a retrospective of the music, fashion and entertainment of the latter half of
this century. The show will feature live guests, from movie stars to
musicians, performing their top hits and talking about milestones in their
careers. CBS and Paramount have expressed interest in doing a show with
this format.
Fuhgedabowdit - This situation comedy is set around a New York
crime family boss who is stepping down to pursue his lifelong dream, which
is to sing. He has to choose between his three children as to who will take
over the "family business". The eldest boy is a cross dresser who owns a
flower shop and has no interest in the "business". The youngest boy is a
Harvard MBA graduate and wants to pursue a career as a CEO and CFO of
an Internet company. The only child willing and able to take over is the
beautiful daughter. Fugedabowdit was launched in France at MIPCOM in
October 2000, the international television buyers' convention. Following
MIPCOM, the series will be presented at NAPTE in January 2001, the U.S.
television buyers' convention. Initial interest from buyers has been positive.
New Media Division
-------------------
Truster - In 1998 VEI licensed the exclusive rights to distribute a
breakthrough software product that has the potential to fundamentally change
the way people interact and do business. Truster is an inexpensive, easy to use
new Windows-based software program that was designed to catch liars in the
act. Using an ordinary PC hooked up to a microphone or a telephone line,
Truster's sophisticated algorithms process live or recorded voice signals to
detect subtle clues that reveal when a person may be lying.
Originally developed by the Israeli military to interrogate suspected
terrorists at border check points, the product is now being made commercially
available by VEI's New Media Division, a licensee with exclusive rights to
sell the Truster software throughout North America. The program is
distributed on CD-ROM and retails for $179. Through its ambitious efforts
in recent months, VEI has set the stage for a major launch of the Truster
program in 2000. In addition to establishing a substantial retail, Internet and
direct marketing presence for the software, the Company has also prepared
an unprecedented level of media support for the launch; all of which will
make Truster not only a universally recognized product but also a bona fide
cultural phenomenon. Accomplishments to date include:
Secured agreements with Ingram Micro, one of the largest
packaged software distributors in the world, to place
Truster on the shelves of more than 5,000 retail outlets.
Retailers interested in carrying the program include
CompUSA, Staples, Office Max, Circuit City, Best Buy,
Future Shops and Fry's Electronics.
In association with Twentieth Century Fox Television, VEI
produced two pilots at a cost of over $1 million for a daily
television entertainment series called Truster, which
prominently features the Truster software. The show,
which is hosted by veteran broadcaster Nancy Glass, is a
"Jerry Springer/Judge Judy" style talk show which uses
Truster's lie-detection technology to settle disputes
between on-air guests. Fox is evaluating plans to roll-out
the show nationally in 2001.
VEI has produced 2-3 hour radio specials that have been broadcast
in over 150 of the largest markets across America, that
utilize and promote the Truster program.
The Truster program won the "Invention of the Year" award at the
prestigious 1998 Invention Convention.
VEI established a World Wide Web site with links to Web software
retailers in order to drive on-line sales and e-commerce
opportunities.
VEI arranged for 18 major software "e-tailing" web sites-
including Egghead.com, Buy Software, Value America and
Compsource-to promote and sell the Truster software
program, with Ingram Micro handling fulfillment.
Home Shopping Network has aired the Truster and the product was
well received. HSN is looking to reschedule more Truster
segments in 2000.
Sports Fan Clubs - Moving forward with VEI's plans to exploit the
opportunities on the Internet, the Company has launched its Sports Fan Club
web sites. Beginning with the signing of NBA stars such as Nick Van Exel,
Antonio McDyess, Derek Fisher, Sam Cassell and many other top stars, VEI
has created the opportunity to profit from these sites through fan club
memberships and authentic merchandise sales. VEI is hosting an NBA Allstar
Bash after the 2000 NBA All-star game. This event will kick off the VEI
Sport Division. Many athletes from all major sporting venues are scheduled
to attend this event which will facilitate the expansion of this division.
Satellite Bingo - In an effort to expand the Company's Internet
presence, VEI plans to take advantage of the growing bingo market. Statistics
estimate the U.S. charitable bingo market currently totals approximately $7
billion in annual receipts. It is estimated that over 60 million people
participate in the game of bingo and there are over 65,000 bingo operations
(primarily by charitable organizations). The Company will secure a small
portion of this market which is being estimated at $20 million gross annually.
The bingo games will be broadcast over the Internet at the web address
"Frontier Palace.com" and on television and cable. They will be broadcast on
a barter basis via satellite to participating cable and television stations
under the banner "Satellite Bingo". This sponsor supported bingo program will
have 12, 30-second spots.
Future Divisions
-----------------
In addition to the above-mentioned operating divisions, management
also contemplates the possibility of diversifying and launching new functional
divisions in the future if the opportunity and need arise. These divisions
would include:
Record and Publishing Division - In developments similar to those
in the theatrical film business, recent consolidation of the record
industry has diminished the opportunities for artists seeking
independent recording contracts. Industry growth trends are
normally cyclical in nature, and management believes that increased
global distribution opportunities and Internet-driven marketing of
music will accelerate in the coming years. While the major record
companies continue to focus on North American and major market
hit-driven properties, the opportunity to develop more niche-oriented
record production and distribution will continue to develop.
New Media Division Diversification - The exponential growth of the
Internet has been well documented in recent years. Internet
advertising alone has grown from its 1997 level of $500 million to
over $5 billion in 2000. Many financial analysts view this medium
as the most important information and entertainment delivery
platform for the next century. VEI will leverage the experience of
several members of its management team to help the studio combine
reputable talent in the entertainment industry with the technological
and content opportunities this new arena can offer.
Merchandising Division - Attractive opportunities exist for the
cross-promotion, product placement and merchandising of product
and clothing lines in filmed entertainment content. Management
will leverage all properties with independent vendor based
companies to create a synergistic approach to cross promoting all
aspects of VEI's business. It has become common ground for
studios today to create off-shoot retail merchandising profit centers
geared directly around library content.
Risk Factors
-------------
Competition - Ease of Entry
Competition in the entertainment industry is extremely fragmented and
diverse, with low barriers to entry. The industry is intensely competitive with
respect to product quality, access to key talent and material, and access to
channels of distribution. In addition, there are many well-established
entertainment competitors with substantially greater financial and other
resources than VEI and with substantially longer operating histories than VEI.
Risks Associated with the Motion Picture Projects
Film entertainment businesses are often affected by changes in consumer
tastes, national, regional and local economic conditions, demographic trends,
the cost and availability of labor, purchasing power, and cyclical changes in
the relative bargaining power of creative talent. Individual projects are
subject to risks in their development, production, completion, and commercial
viability. As a result of such fluctuations, there can be no assurance that VEI
will be profitable in the future, or that, if profitability is achieved, it
will be sustained.
A reduction in demand for the studio facilities caused by a recent trend to
produce films outside the US may adversely affect VEI results of operations.
A recent trend towards 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 VEI's
revenues, threaten VEI's sustained profitability in the future and have a
material adverse effect on VEI's business and results of operations.
The revenues depend on a limited number of film producers.
VEI results of operations in any given period depend to a significant degree
upon revenues from a small number of film producers who rent the studios.
In addition, few film producers are contractually obligated to lease the 8
existing studios. VEI's failure to rent a sufficient number of film producers
or to increase the number of film producers during a particular period could
adversely affect its results of operations.
VEI's success depends on its ability to retain Vince Vellardita and other
key personnel.
The entertainment industry background of Vince Vellardita, president and
chief executive officer of VEI, is critical to VEI's success. Mr. Vellardita's
experience and his industry connections are key factors in forming the
cooperative ventures and strategic alliances that insure the availability of
variety and high quality content. The loss of his services would have a
detrimental impact on VEI's business. VEI's success also depends on its
ability to hire and retain other qualified employees. VEI may not be able to
locate and hire those employees because of intense competition in the
entertainment industry for personnel with the requisite skills.
VEI's ability to meet its working capital needs will be significantly limited
if it cannot obtain additional financing.
To meet VEI's anticipated working capital and capital expenditure
requirements for the foreseeable future, VEI will need substantial capital,
which it may not be able to obtain. The amount of the current cash
reserves, and proceeds from current operations should be sufficient to meet
VEI's requirements for the foreseeable future. If, however, VEI's capital
requirements or cash flow vary materially from its current projections, or if
unforeseen circumstances occur, VEI may require additional financing
sooner than it anticipates. Additional financing may not be available on
terms favorable to VEI, or at all. If adequate funds are not available, or are
not available on acceptable terms, VEI's ability to meet its working capital
needs will be significantly limited, which would adversely affect its
business.
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTSON
ACCOUNTING AND FINANCIAL DISCLOSURE
VEI has had only one independent auditing firm, which is the
certified public accounting firm of Jay J. Shapiro, C.P.A., a professional
corporation, in Encino, California. There were no disagreements with the
accountant on accounting and financial disclosure matters.
The audited balance sheet of VEI as of December 31, 1999, and
December 31, 1998, and the related statements of operations and cash flows
for each of the years then ended are included in this Information Statement.
PRO FORMA SELECTED FINANCIAL DATA (UNAUDITED)
--------------------------------------------
In October 2000, SBI entered into an agreement to issue 75,709,965 shares
of Common Stock to acquire 100% ownership VEI. This transaction will be
treated as a reverse acquisition merger for accounting purposes. If the
transaction had taken place as of January 1, 2000, the Company's pro forma
consolidated net assets would have been $10,000,000 and the shares
outstanding 88,034,843.
The September 30, 2000 pro forma selected financial data was derived from
the unaudited consolidated financial statements of SBI and VEI. This interim
period data does not included all disclosures provided in the annual audited
financial statements or all disclosures required by generally accepted
accounting principles. This unaudited financial data should be read in
conjunction with the audited financial statements and the footnotes thereto
contained in the Form 10-KSB for the year ended December 31, 1999 of SBI
as filed with the Securities and Exchange Commission and attached hereto,
as well as the audited financial statement for the year ended December 31,
1999 of VEI, also included herein.
In the opinion of the Company, the accompanying pro forma selected
financial data contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reporting amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could materially differ from those estimates.
In August 2000 SBI effected a 2 for 1 split of its Common Stock. The
financial data in these statements reflects the post-split basis.
PRO FORMA BALANCE SHEET
(UNAUDITED)
September 30, 2000
SBI VEI, LLC Eliminations Combined
Current Assets $ 44,541 $343,317 $387,858
Property & Equipment 4,0150,000 11,747,867 15,762,867
Other Assets 20,500 153,293 153,793
Current Liabilities 2,551,181 311,355 (20,000)* 2,842,536
Long-Term Liabilitie s - 5,878,744 (20,000)* 5,878,744
Stockholders/Partners ------------ ---------- --------- ----------
Equity 1,528,860 6,054,378 7,583,238
* Non-interest bearing advance due on demand
PRO FORMA INCOME STATEMENT
(UNAUDITED)
Nine Months Ended September 30, 2000
SBI Communications,
Inc. Valencia Entertainment
International,
LLC Eliminations Combined
Revenue $0 $1,194,282 1,194,282
Operating Expenses 391,826 1,151,455 1,543,281
Income (Loss) from
Operations (391,826) 42,827 (348,999)
Interest Expense (100,000) (412,496) (512,496)
Net Loss (491,826) (369,669) (861,495)
Number of Shares
Outstanding 12,324,878 75,709,965 88,034,843
Net Loss Per Share ($.04) ($.00) (.01)
Management's Discussion and Analysis of Financial Condition and
Results of Operations:
SBI
----
SBI 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 Justin Land and Development, Inc. in October,
1984, and then to Supermin, Inc. on November 20, 1985. On September 29,
1986, Satellite Bingo, Inc. was the surviving corporate entity in a statutory
merger with Supermin, Inc., a Utah corporation. In connection with the above
merger, the former stockholders 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 its current name of SBI Communications, Inc. On January 1, 1993, SBI
effected a re-incorporation merger to change its state of domicile from Utah
to Delaware.
The Company plans to provide interactive satellite delivered bingo
games, game shows and other similar telecommunication gaming products or
services to television viewers throughout the United States. The Company
has also developed a system that can be integrated into all standard
communications channels including the World Wide Web for interactive play
throughout the World. The Company is currently developing its web site.
The sale of the property in Piedmont, Alabama for net proceeds of
$3,940,000, pending as of June 30, 2000 has been cancelled. SBI decided to
develop the property as an Auto Auction. The Company spent $75,000 for
renovation of this property for the Auto Auction in September 2000.
SBI generated no revenues during its third fiscal quarter ended
September 30, 1999 and 2000. The Company expects to generate revenue
upon the successful operation of the Company's Web site and the
broadcasting of its interactive programming.
SBI's general and administrative costs totaled $150,000 during the
third quarter of 2000 versus $33,000 in the third quarter of 1999, which
represents a 433% increase. Most of the current period's costs were
attributable to the development of the Company's web site, which are not
fixed expenses. The balance is primarily comprised of professional costs. The
end of the first Quarter of 1999 was the last bingo operation of the Piedmont
facility for the Company and the Company was inactive after that date. The
nine months ended September 30,2000 reflects a $294,000 increase over the
1999 period due to website development cost and professional fees.
Interest and financing costs totaled $35,000 during the third
quarter of 2000 as compared to $40,000 in the comparable 1999 period, and
for the nine months ended September 30, 2000, such costs were $100,000
versus $120,000 for 1999.
SBI did not record any tax expense during the current quarter or
comparable 1999 period due to tax loss carry forwards. SBI's tax loss carry-
forward balance at the end of fiscal 1999 was in excess of $9 million and, as
a result, SBI does not expect to incur any federal income tax liability until
this carryforward is depleted by operational profits.
Net loss for the nine months ended September 30, 2000 was
$492,826. Virtually all losses in 2000 are attributable to the development
of SBI's web site, the renovation of the Auction Plaza in Piedmont and
professional fees.
VEI
----
VEI is a limited liability company organized in November 1996
under the laws of the State of California for the purpose of operating a studio
facility in Valencia, California and the development, financing and
production of entertainment content.
As of September 30, 2000 VEI had current assets of $343,317 and
current liabilities of $311,355 for a positive working capital of $31,962.
Total assets were $12,244,477 and total liabilities were $6,190,099. For the
nine months ended September 30, 2000 VEI had revenue of $1,194,282. All
revenue earned during the period was from studio rental. Operating expenses
for the period were $1,151,455 with the major components being salaries and
related payroll taxes of $302,059, overhead expenses billed back to tenants
of $192,809, production costs of $199,618, and depreciation of $102,936.
Income before depreciation and interest for the period was $145,763.
No production revenue was earned for the period. Production
revenue was $260,000 and $105,135 for the years ended December 31, 1999
and 1998 respectively. In accordance with generally accepted accounting
principles revenue has not been recognized until or unless a distribution
contract is entered into. Several contracts are in the final stages of
negotiation.
Interest expense was $412,496 for the nine month period ended
September 30, 2000 compared with $292,588 and $298,292 for the years
ended December 31, 1999 and 1998 respectively. The mortgage on the
facility was refinanced in December 1999 with additional borrowing of
approximately $2,700,000. The refinancing and borrowing resulted in a
mortgage interest rate increase from 8.6% to 10.0%.
In July 2000 VEI leased an additional building adjacent to its current
facility for $29,000 per month. The building, which was leased as a studio
rental property, had not been fully rented as of September 30, 2000. The
planned use of the building was two sound stages and office space. One of
the two stages was leased out commencing in July 2000 for $13,000 per
month. The second sound stage has not been totally built out and is still not
rented or leased. The office space was not rented until October 2000.
Management's plan is to rent/lease the combined facility for approximately
$50,000 per month.
ADDITIONAL INFORMATION REGARDING THE TRANSACTION
Contact Information:
The principal executive offices of SBI are:
1239 South Glendale Avenue
Glendale, CA 91205
Telephone: (818) 550-6181
Contact Person: Ronald Foster,
Chairman of the Board
The principal executive offices of VEI are:
26030 Avenue Hall, Studio 5
Valencia, CA 91355
Telephone: (661) 257-8000
Contact Person: Vince Vellardita, CEO
Business Conducted:
--------------------
SBI is in the business of providing telecommunications and
interactive entertainment to the consumer by broadcasting interactive game
shows and creation of internet related entertainment services. The intent of
the Company is to identify and commercialize leading edge internet
entertainment technologies.
VEI is a entertainment conglomerate that includes television
production, for both network and syndicate, motion pictures, sports, internet
and real estate holdings. VEI, which has 12 acres and a 120,000 square feet
production facility in Valencia California, has been the studio set for such
series as JAG produced by Paramount Pictures and Power Rangers produced
by Saban Productions. In addition, VEI's facilities include six sound stages
that have been operating at full capacity since 1995. Recently, Valencia
leased an additional 52,000 square feet of production facility which includes
two full service sound stages, for a total of eight sound stages. Valencia's
clients include, Warner Bothers, Universal Studios, MGM, HBO, NBC, 20th
Century Fox, Disney, CBS, Sony, Showtime, and the USA Network.
Terms of the Transaction:
-----------------------------
Pursuant to the terms of the Agreement, (i) VEI will merge with and
into SBI's wholly owned subsidiary, VAC, with VEI being the surviving
limited liability company and becoming wholly owned subsidiary of SBI, (ii)
all of the outstanding shares of capital stock of VAC will be exchanged for
all of the outstanding membership interests of VEI, with all of the outstanding
VAC shares being cancelled concurrent with the Merger, and (iii) SBI will
issue 75,709,965 shares of its authorized but unissued Common Stock to the
principals of VEI. After the Merger, the principals of VEI will collectively
own a controlling interest in SBI (approximately 86% of the outstanding
shares of Common Stock).
The reason for engaging in the transaction is that the Board of
Directors of SBI believes that the business engaged in by VEI has substantial
growth potential, will compliment its existing business, and will enhance
shareholder value in the future. A majority vote of the outstanding shares is
required under the Company's Bylaws and under Delaware law. The
Consenting Stockholders who represent 56.4% of the issued and outstanding
shares have approved the transaction and the Actions to be undertaken. There
are no other changes in the rights of security holders as a result of this
Transaction.
As a result of the Reorganization, the stockholders of SBI will suffer
substantial dilution in their interests in SBI. Following the transaction, the
current SBI stockholders will own approximately 14% of the outstanding
Common Stock. Consequently, not only will the SBI stockholders' capital
interest in SBI be reduced from 100% to 14%, but their voting power will be
similarly reduced. Following the Merger, the current members of VEI will
own 86% of the outstanding Common Stock of SBI and will be able to
control the Company's affairs, including the election of all members of the
Board of Directors.
The Agreement contains standard representations and warranties and
provides for the mutual indemnification of the parties for breaches of such
representations and warranties. The accounting treatment of this transaction
will be under the requirements of a reverse merger which results in the
legal acquirer, SBI, being the accounting acquiree under purchase accounting.
Regulatory Approvals
-----------------------
There are no federal or state regulatory requirements that must be
complied with in regard to this transaction.
Reports, Opinions, Appraisals:
No reports, opinions or appraisals were obtained in connection with
this transaction.
VALENCIA ENTERTAINMENT INTERNATIONAL, LLC
FINANCIAL STATEMENTS
December 31, 1999 and 1998
CONTENTS OF REPORT
Independent Auditors' Report
Balance sheet
Statements of operations
Statements of cash flows
Notes to financial statements
INDEPENDENT AUDITORS REPORT INDEPENDENT AUDITORS REPORT
-------------------------------------------------------
To the Board of Directors
Valencia Entertainment International, LLC:
We have audited the accompanying balance sheet of Valencia
Entertainment International, LLC as of December 31, 1999, and
December 31, 1998, and the related statements of operations and cash
flows for each of the years then ended. 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 financial position of the Company as of
December 31, 1999 and December 31, 1998, and the results of its
operations and its cash flows for each of the years then ended, in
conformity with generally accepted accounting principles.
Jay J. Shapiro, C.P.A.
A professional corporation
Encino, California
October 17, 2000
<PAGE>
VALENCIA ENTERTAINMENT INTERNATIONAL, LLC
BALANCE SHEET
December 31
1999 1998
ASSETS ---- ----
------
Cash (Note 6) $3,104,134 $8,835
Accounts receivable 106,812 48,144
Mortgage escrow holdback 327,900 0
Total Current Assets 3,538,846 56,979
Fixed assets - net (Notes 2 and 3) 11,260,154 11,355,999
Production costs 28,000 6,170
Prepaid loan fees 111,668 0
----------- -------------
Total Assets $14,938,668 $11,419,148
LIABILITIES AND EQUITY
----------------------
Accounts payable $114,181 $51,929
Loans payable 75,000 55,000
Mortgage payable - current portion (Note 3) 83,536 126,928
----------- ------------
Total Current Liabilities 272,717 233,857
Mortgage payable (Note 3) 5,916,464 2,786,670
----------- ------------
Total Liabilities 6,189,181 3,020,527
Commitments (Note 5)
Equity:
Capital (Note 2, 4 and 6) 8,029,846 8,079,846
Accumulated income 719,641 318,775
----------- -----------
Total Equity 8,749,487 8,398,621
============ ============
Total Liabilities and Equity $14,938,668 $11,419,148
-----------------------------
See accompanying notes to financial statements
VALENCIA ENTERTAINMENT INTERNATIONAL, LLC
STATEMENTS OF OPERATIONS
Year ended December 31
1999 1998
Revenue:
Rental $1,214,171 $1,166,983
Production 260,000 105,135
----------- -----------
Total Revenue 1,474,171 1,272,118
-------------
Costs and Expenses:
Production 83,049 63,195
Selling and promotion 89,017 74,562
Depreciation 135,376 133,620
Administrative and general 473,275 490,363
----------- ---------
Total Operating Expenses 780,717 761,740
Operating income 693,454 510,378
Interest expense (292,588) (298,292)
---------- ----------
Net income $400,866 $212,086
========== ==========
See accompanying Notes to financial statements
<PAGE>
VALENCIA ENTERTAINMENT INTERNATIONAL, LLC
STATEMENT OF CASH FLOWS
Year ended December 31
1999 1998
Operating Activities:
Net income $400,866 $212,086
Items Not Requiring Cash Outlays:
Depreciation and amortization 135,376 133,620
--------- ---------
536,242 345,706
Changes in:
Receivables (58,686) 6,259
Other assets (21,830) (6,170)
Accounts payable and other accrued expenses 62,272 14,000
Loans payable 20,000 (55,000)
------- --------
1,756 (40,911)
Cash Provided by Operations 537,998 304,795
========= =========
Investing Activities:
Acquisition of fixed assets (39,534) (265,051)
-------- ---------
Cash Used by Investing Activities (39,534) (265,051)
======== ==========
Financing Activities:
Principal payments on former mortgage (52,000) (49,786)
Repayment of former mortgage (2,911,165) 0
Proceeds from mortgage refinancing 5,560,000 0
Withdrawal of capital contribution (50,000) (55,000)
Cash Provided (Used) by ----------- ----------
Financing Activities 2,546,835 (104,786)
Increase (Decrease) in Cash and =========== ==========
Cash Equivalents 3,045,299 (65,042)
cash and cash equivalents,
beginning of year 8,835 18,877
----------- -----------
Cash and cash equivalents, end of year $3,054,134 $(46,165)
-========== ===========
Supplemental disclosure of cash flow information:
Interest paid $299,000 $291,000
Income taxes $0 $0
Capital contribution -
land and buildings $0 $8,114,000
See accompanying notes to financial statements
<PAGE>
VALENCIA ENTERTAINMENT INTERNATIONAL, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
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:
Nature of Business
Valencia Entertainment International, LLC (the "Company")
is a limited liability corporation organized in November 1996 under
the laws of the State of California for the purpose of
operating a studio facility in Valencia, California and the
development, financing and production for entertainment content.
The Company is managed pursuant to the Amended Operating Agreement
dated January 1, 1998 (the "Agreement").
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted; 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.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentrations of risk consist of trade receivables principally
arising from monthly leases. 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.
Depreciation
--------------
For financial and tax 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
Amortization of Prepaid Loan Costs
-----------------------------------
For financial reporting purposes, costs are amortized on the
straight line method over 10 years, the life of the related loan.
Income Taxes
--------------
The Company files it's taxes as a Partnership under the laws of
the United States As a Limited Liability Company under the laws of
the State of California. In both cases the
Partners/Owners of the company report as individuals their
share of the income of the Company and individually pay all related
income taxes.
Note 2:Property and Equipment
-------------------------------
Property and equipment at December 31, consists of the
following:
1999 1998
---- ----
Land $6,892,292 $6,892,292
Building 4,028,785 4,028,785
Building Improvements 1,062,473 1,025,648
Office furniture and
equipment 24,156 21,450
---------- ---------
Total 12,007,706 11,968,175
Less: Accumulated
Depreciation (747,552) (612,176)
------------ -----------
Net book value $11,260,154 $11,355,999
============ ===========
Note 3 Notes Payable
Following is a summary of the Company's Notes Payable at
year end. December 31,
1999 1998
Promissory note payable to Great-West Life
Insurance Company due in monthly installments of
principal and interest of $33,944 at 8.625% per annum.
The note is secured by a Deed of Trust on the Valencia
Studio property. The note was refinanced in
December 1999. $2,913,598
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 2000
$6,000,000
Various other loans, short-term, 8.00%-9.00%
interest 55,000 75,000
---------- --------
Total 6,055,000 2,988,598
Less: Current maturities 138,536 201,928
Notes Payable $5,916,464 $2,786,670
=========== ===========
Maturities on the notes are as follows:
2000 $138,536 $201,928
2001 92,283 2,786,670
2002 101,946
2003 112,622
2004 124,415
And thereafter 5,485,198
--------- ----------
$6,055,000 $2,988,598
========== ==========
The Company's average short-term weighted interest rate is
9% and 8.5% respectively, for 1999 and 1998.
Note 4 Partners' Capital
-----------------
In January 1997 Magic Movie Studios of Valencia, LLC, a
California partnership, contributed property including land and
buildings with a net book value of $11,370,412 to the Company. The
land and buildings contributed were subject to a Deed of Trust with an
unpaid balance of $3,256,566. The capital accounts of the individual
partners were credited for $8,114,000 and the Agreement recognizes their
50% ownership of the Company.
Note 5: Commitments
-----------
In May 2000 the Company leased additional facilities adjacent
to it's current location. 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.
Note 6: Subsequent Events
-----------------
a.The Company distributed $2,000,000 cash to an affiliate,
Magic Movie Studios of Valencia, LLC, on January 11, 2000. Such
distribution reduces the respective ownership interest in the Company.
b.A lease was executed on May 11, 2000 for approximately
52,000 square feet of additional facility space.
c.In August 2000, the Company entered into a letter of
intent with SBI Communications, Inc. a publicly-traded Delaware
corporation (SBI), to be acquired for 86% of all the outstanding stock
of SBI. This transaction will be treated for accounting purposes as
a reverse acquisition merger. If this transaction took place on
January 1, 1999 and a corporate tax provision were appropriately
recognized,the 1999 pro-forma net income would be $261,000 and the
pro-forma net income per share would be $.02 per share.
<PAGE>
Securities and Exchange Commission
Washington, D.C., 20549
FORM 10-KSB
Annual Report Pursuant To Sections 13 Or 15 (D) Of The Securities
Exchange Act Of 1934
For the Fiscal Year Ended December 31, 1999
Filed Pursuant To Sections 13 Or 15(D) Of The Securities Exchange Act
of 1934
Securities and Exchange Commission File Number O-28416
==============================================================================
SBI Communications, Inc.
(Name of small business issuer specified in its charter)
===============================================================================
Delaware 58-1700840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1239 South Glendale Avenue [818] 550-6181
Glendale, California 91205 ISSUER'S telephone number
(Address of Principal
Executive Offices) (Zip Code)
=============================================================================
Securities registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par value $0.001 - Preferred Stock, Par Value $5.00
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definite proxy or information
statements incorporation by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. YES X NO __
Registrant's revenues for its most current fiscal year: $ 0.00
Aggregate market value of the voting stock held by
non-affiliates as of March 30, 2000: $1,893,949.20
Number of common shares outstanding as of latest
practical date at $.001 par value: 5,570,439
Documents Incorporated By Reference: None
Location of Exhibit Index: The index of exhibits is contained in part IV
herein on page number 49.
Transitional Small Business Disclosure Format: Yes ____ No _X_
=============================================================================
Dated March 30, 2000
______________________________________________________________________________
<PAGE>
Table of Contents
Item Page
Number Number Item Caption
------ ------ ------------
Part I
------
Item 1. 3 Description of Business
Item 2. 15 Description of Properties
Item 3. 16 Legal Proceedings.
Item 4. 16 Submission of Matters to a Vote of Security Holders
Part II
-------
Item 5. 16 Market Price of and Dividends on the Registrant's Common
Equity and other Shareholder Matters
Item 6. 22 Management's Discussion and Analysis or Plan of
Operation
Item 7. 25 Financial Statements and Summary Financial Data
Item 8 33 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Part III
--------
Item 9 34 Directors, Executive Officers, Promoters and Control
Persons
Item 10. 42 Executive Compensation
Item 11. 44 Security Ownership of Certain Beneficial Owners and
Management
Item 12. 45 Certain Relationships and Related Transactions
Part IV
-------
Item 13. 45 Exhibits, Financial Statement Schedules, and Reports on
Form
8-K
Signatures 49
----------
<PAGE>
Part I
------
Statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements as that term is defined
in the Private Securities Litigation Reform Act Of 1995. Such forward-
looking statements are subject to risk and uncertainties, which could
cause actual results to differ materially from estimated results. Certain
of such risks and uncertainties are detailed in filings with the Securities
and Exchange Commission and the Company's in Item 1 "BUSINESS" and Item 6
MANAGEMENT'S DISCUSSION AND DESCRIPTION OR PLAN OF OPERATION" below.
Item I. Description of Business
------ -----------------------
General
------
SBI Communications, Inc., a publicly held Delaware corporation (the
"Company"), was originally organized in the State of Utah on September
23, 1983, under the corporate name Alpine Survival Products, Inc. Its name was
changed to Justin Land and Development, Inc., during October of 1984, and to
Supermin, Inc., on November 20, 1985.
The Company was originally formed to engage in the acquisition of any
speculative investment or business opportunity without restriction as to
type or classification. On September 29, 1986, Supermin, Inc., concluded
a reorganization under Section 368(a)(1)(B) of the Internal Revenue Code
of 1954, as amended, pursuant to which it exchanged 200,000 shares of its
common stock, $.001 par value (all shares numbers, unless otherwise
stated, adjusted to reflect a one for 20 reverse stock split) for all of the
capital stock of Satellite Bingo, Inc., a Georgia corporation organized on
January 10, 1986, and the originator of the Company's current business (the
"SBI Subsidiary").
In conjunction with such reorganization, the former stockholders of the
SBI Subsidiary, acquired control of the Company and the Company changed
its name to Satellite Bingo, Inc. On March 10, 1988, the Company changed
its name to SBI Communications, Inc., its current name, and on January
28, 1993, the Company reincorporated into Delaware through a statutory
merger with a wholly owned Delaware subsidiary in exemption from registration
requirements of Section 5 of the Securities Act of 1933, as amended,
provided by Rule 145(a)(2) promulgated thereunder.
The Company has four subsidiaries, Frontier Palace.Com, SBI
Communications, Inc., an Nevada corporation; Satellite Bingo, Inc.,
a Georgia corporation and SBI Communications, Inc., a Alabama
corporation. Unless the context requires otherwise, the term "Company" includes
SBI Communications, Inc., a publicly held Delaware corporation, and,
its subsidiaries, predecessors and affiliates whose operations or assets
have been taken over by SBI Communications, Inc., a publicly held
Delaware corporation.
Business Overview
-------------------
SBI Communications, Inc. (The "Company" or SBI), owned a bingo
facility and leased this facility and equipment to charities, for fund
<PAGE>
raising projects, under a licences to operate and conduct bingo.
Due to the fact that the charity was not able to pay the agreed rental
payment. This operation ceased in January of 1998 and the company did
not renew the charity lease. The Company has since place the facility for
sale and has a purchase agreement in place to close on April 30, 2000.
The Company moved its corporate offices to Glendale, California and
change its direction and focus to the broadcasting of interactive game
shows and creationof Internet entertainment and related services. The intent
of the company is to identify and commercialize leading edge Internet
entertainment technologies and make available to it's Frontier Palace.Com
membership base throughout the world.
The Company?s wholly owned subsidiary Frontier Palace.Com, is a high
tech Internet website that will provide an interactive communicative
infrastructure of international chat, e-commerce, entertainment, 24/7
Satellite Bingo with cash prizes for your chance to win up to
$1,000,000.00 with guarantee prizewinners, trade & barter, shopping cart,
web-casting of special events, classified ads, newsletters, players club
and other service available for its members.
Current Operations
------------------
Alabama Facility
----------------
The Company owns a facility in Piedmont, Alabama which is leased to
businesses for their operations in Piedmont, Alabama. The company has in
place a purchase agreement for this facility from The Brindlee Mountain Castle
Corporation for $6,000,000.
The company had considered renovation to turn the Piedmont facility
into a E-Mall for store front, hosting of web sites and fulfillment for home
base Internet business that have need for this service and facility as their
business grows. Also, considering a retail or entertainment facility. This is
needed in Piedmont and would be well received by the City and local
community.
California
----------
The Company web site is located in Glendale, California at the
company's production facility. The company has moved it's offices to
Glendale, California October of 1999.
Expansion Plans
---------------
The Company continuously reviews industry developments and
regulations for potential expansion opportunities. As a public company, the
Company benefits from operating in highly regulated markets which levels
the competitive playing field.
<PAGE>
It is imperative that the Company continue to grow its operational
revenues. The Company has made a significant investment in assembling
its management team and operational infrastructure. This investment cost is
now relatively fixed, however, and the Company has the potential to
significantly leverage its profitability through incremental revenue increases.
The Company will therefore continue to employ an aggressive yet methodical
growth strategy. It intends to make strategic expansions in markets with: i)
accommodating regulations; ii) favorable demographics; iii) successful
operations management; and iv) customer acceptance and patronization.
The Company intends to grow through both acquisitions and
developments. it uses extensive review procedures to evaluate expansion
opportunities, including market studies, legal evaluations, financial analyzes
and operational reviews. The Company determines development budgets and
acquisition prices based on the proposed investment's expected financial
performance, competitive market position, risk profile and overall strategic
fit within the Company's operational plans. Acquisition terms typically include
cash payments, issuance of Company securities and seller-financed notes.
Consulting and non-competition agreements may also be included.
The development of telecommunications, the emergence of new
technology and the international nature of the Internet has created
opportunities to develop new, efficient and secure ways to deliver entertainment
to customers. As one of the companies that plans to employ these new
technologies on the Internet, SBI intends to capitalize on its expertise in the
analyzing of consumer data and information to become a world leader of online
entertainment.
Products or Services and Their Markets
--------------------------------------
1. Broadcast And Internet
-------------------------
The Company has experience in the interactive communications and
entertainment fields which brings together elements of the "information
superhighway." It has created and broadcast interactive national television
programs using state-of-the-art computer technology, proprietary software
programs, satellite communications, and advanced telecommunications
systems.
The Company's management believes that its experience in developing
and delivering interactive television programs, as well as its ownership of
proprietary systems and software, provide an advantage in its ability to
launch new entertainment and information programs based on comparable
resources.
A.Globalot Bingo & Satellite Bingo
----------------------------------
Introduction
------------
Globalot Bingo and Satellite Bingo are proprietary interactive Bingo
games which were broadcast by the Company in the past via satellite to
participating cable and television stations. The Company plans to resume
expanded broadcasts in the near future/
<PAGE>
The use of telephones for game card distribution makes it possible for
home viewers to also participate in the Company's broadcast programs.
The Globalot Bingo program was designed to provide larger jackpots than
participating operations could individually pay, permitting participating
cable and broadcast stations to attract larger viewing audiences, increase
profits and attract commercial sponsors. The company's plans to enter into a
license agreement with a major Spanish Network to broadcast its interactive
programming.
Operation
---------
In order to play the game each player must be playing a different card or
cards. Globalot Bingo has developed a "Super Jackpot Bingo" computer
program that can generate a series of one billion individual cards without
duplication. Each card is unique and all cards are serially numbered to
preclude anyone from submitting a fraudulent cards and/or
counterfeiting.
Globalot Bingo cards may be obtained by telephone until a specified
time. At that point the Company provides the serial number of cards
obtained for that night's game to its central processing office.
In order to encourage participation and to develop a broad playing
audience, Globalot Bingo developed a special Million Dollar Globalot
game, designed to air each Saturday evening at 11:00 p.m. (eastern time). When
broadcasts resume, the game will pay the first person who attains Bingo
each broadcast night an advertised cash prize. The prizes will involve a
chance to win $1,000,000 by being the first participant to cover the correct 8
numbers in 16 calls (the term call referring to the first 16 numbers selected
in the game) or less (the "Quick Pick 8" game) or, guaranteed second prizes
of $25,000. If there is no winner in the $1,000,000 game, the Company
will pay the first person to cover the shaded area or complete the Quick Pick 8
game $5,000. In the event of a Quick Pick 8 winner, each winner will be
transported to the studios where a monthly web cast of a wheel game
which will provide each winner the opportunity to spin for a cash prize up to
one million dollars. All prizes over $100,000. will be paid by a twenty
year annuity. In addition to the Quick Pick 8 game, the Company will award a
$20,000.00 dollar grand prize to the first person covering an entire card.
Cards obtained to play the Company's 24 hour
program will be good for the entire week, including the Saturday Million
Dollar Globalot Bingo game. As additional players participate, the
Company plans to increase the grand prize to $50,000.
When the televised game begins, each number being called on the
televised show is also recorded by the master computer. The computer
system, by monitoring all of the cards in play, is able to determine when
a Bingo has occurred and provide the location of the winning card holder. The
viewing audience is immediately shown the image of the winning card.
All games are called at the rate of approximately one Bingo number
every 12-15 seconds in order to allow players to play multiple cards. If it
is determined that, based on the cards in play, the call is too fast or
too slow, an adjustment is made.
<PAGE>
The national winner will be called during the broadcast by the program's
host, or, may call the Globalot Bingo 800 number shown on the program.
Upon contact, the winner will provide the Company's staff with his or her
serial number and other necessary identification, including name and
address.The winner is then instructed on how to claim the prize.
If for reasons beyond the control of Globalot Bingo the regular telecast
and game cannot be broadcast, all prize moneys announced for that week
will be added to the jackpot for the next succeeding game. All elements of the
broadcast game are being conducted on the Company web site at
frontierpalace.com/Satellite Bingo..
Technology
----------
The Company will use proprietary technologies that enable viewers at
home to participate in Bingo games televised live in specific English
speaking and Hispanic markets in the US and Worldwide (local laws permitting).
Globalot Bingo has a special telephone number, 800-729-BINGO
(2464), which is an access code to gain entry into long distance network.
Upon dialing the number a caller hears a 45 second message disclosing who the
caller has reached,providing information about Globalot Bingo, the caller's
options and how to receive Globalot Bingo playing cards by telephone (including
the cost and method of billing). A caller must have a prepaid calling card in
order to obtain free Satellite Bingo playing cards via the phone, which must be
purchased from the Company. The prepaid calling card also permits the purchaser
to make long distance telephone calls at savings of up to 70% from regular long
distance rates and will provide access to other services which the Company
plans to make available in the future.
In the event the caller, (who must be 18 or over), wishes to proceed after
the 45 second announcement he or she must activate the system. Upon
activation by the caller, the call is automatically switched to the Globalot
Bingo card distribution center, and charges for the call begin. The time
necessary toreceive three Globalot Bingo playing cards by telephone is
eight minutes and the caller is charged $8.00 or $1.00 per minute. The charge
for the call is deducted from the caller's prepaid calling card. The prepaid
calling card may be obtained from the Tele-communications switch via
credit cards or by sending in payment to the Company.
Interactive players will also be able to obtain a strip of three cards free of
any charge by sending a stamped, self addressed envelope to the
Company.
The Company has established a winners hot-line that will allow card
holders to obtain information concerning winning cards. This will allow
players to play and win even if they didn't have an opportunity to see the
show.
The Company also has the ability to receive long distance calls from 65
countries for Globalot Bingo playing cards, provided in the same manner
as domestic callers except that service is provided in the predominant
language used in the originating country. The cost for such calls will
differ depending on the country of origin. The Company receives a portion of
each call paid,
<PAGE>
payment being different in each originating country. International callers
can obtain play information over the Internet.
The Company's software and communications technology eliminates the
need and minimizes the expense related to the printing and distribution of
Bingo cards by permitting viewers to receive up to four "cards" (numbers) by
phone; and, allows its telephone switching network to handle thousands of calls
simultaneously, permitting optimum viewer participation in each game.
The use of these technologies also eliminates the need for live operators.
The Company's production offices and computer center are located at
1239 South Glendale Avenue, Glendale, California 91205. Its phone
number is 1-818-550-6181.
Company's Income
----------------
The Company's income will be based on the difference between the
telephone charges paid by players and the negotiated cost charged to by the
participating long distance company. The long distance charges will
appear on each caller's prepaid calling card, eliminating collection
functions. Since no live operators are employed in recording and processing
the calls and awards, the only expensesare related to the prizes offered,
production and telecast of the Bingo game and administrative costs. Additional
revenues are from a advertising, marketing for third parties, Internet and
memberships. We intend to seek to generate revenues by selling advertising on
our web site and entering into arrangements with sponsor to post links to
their web sites. In order to accomplish this goal our games must attract a
sufficient number of visitors and participants to our web site.
Internet
-------
The Company URL?s are located at http://www.sbicommunications.com,
http://www.globalot.com, http://www.sbid.net,http://www.bingonut.com,
http://www.wnet1.com, http://www.sbicom.com, http://www.bingo2k.com,
and the company web site is at http://www.frontierpalace.com. Shopping,
travel, bingo games and other items will be available for the consumer
second quarter-2000. A club membership will be required, and membership fee
will be $19.95 per month. To gain access to the site and take advantage of
services and games available you must be a member. All bingo games are
free with no purchase necessary and anyone may acquire free game cards by
sending the Company a request and a self addressed, stamped, envelope
(SASE). Satellite Bingo games will be played 24 hours 7 days a week. Members
may play all games available. Upon winning, the player will be sent an
e-mail disclosing the game number, amount of winnings and be featured in the
winners circle.
IMPACT OF THE YEAR 2000
The year 2000 risk is the result of computers being written using two
digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. As a result, computer systems and/or
software used by many companies and government agencies may need to be upgraded
to comply
<PAGE>
with year 2000 requirements or risk systems or miscalculations causing
disruptions of normal business activities.
STATE OF READINESS
Based on as internal assessment, SBI believes that its software programs,
both those development internally and purchased from material outside
vendors, are year 2000 compliant or will be by December 31st 1999.
SBI began assessing its state of year 2000 readiness during September
1998. This included reviewing the year 2000 compliance of the following:
SBI internally developed proprietary software incorporated in the
SBI broadcast bingo and Internet programs;
Third-party software vendors; SBI will continue to require its
vendors of material hardware and softwareto provide assurances of their
year 2000 compliance.
COSTS
To date, SBI has incurred approximately $30,000.00 of costs in
identifying andevaluating year 2000 compliance issues. Most of SBI
expenses have related to. And expected to continue ro relate to the operating
costs associated with timespent by employees in the evaluation year 2000
compliance matters. At this time, SBI does not possess the information
necessary to estimate the potential costs of future revision to software
relating to the SBI programs should revision by required of the replacement
of third-party software, hardware of services, if any, that are determined to
not be year 2000 compliant.
Although SBI believes that its software programs, both development
internally and purchased from outside vendors are either already year 2000
compliant or will be by December 31st, 1999,. Failure to identify non year 2000
compliant software could have amaterial and adverse effect on SBI's business,
results of operations and financial condition.
RISKS
SBI is not currently aware of any significant year 2000 compliance
problems relating to the broadcast or Internet or other software systems
that would material and adverse effect on business, results of operations and
financial condition.
Competition
1. Broadcast
-------------
Interactive Technology
----------------------
A number of important trends support management's belief that the
Company is re-entering the interactive television programming market at
the right time with the right products. As the phenomenon known as the
"Information Superhighway" continues to shape the way people communicate with
one another,
<PAGE>
receive information and facilitate transactions, a number of events are
beginning to occur. Numerous books and recent articles indicate that
people are becoming more comfortable with services and entertainment offered
in the privacy of their ownhome through their telephones or personal
computers.The data highway also known as the National Information
Infrastructure (NII), is helping facilitate this trend by linking homes,
offices and entertainment sources into one big network.
The data highway and its ability to reach millions of consumers is
providing unprecedented opportunities for manufacturers and marketers of
products and services. These companies are being challenged to find ways
to use advancedtechnology, like interactive technology, to make it easy for
consumers to find out about and purchase their products and services.
Popular examples of interactive technology in the consumer market
include on-line computer services (like AOL, AT&T, Prodigy and
CompuServe), voice automated telephone services (like consumer banking and
financial services), and at-home television shopping services (like the Home
Shopping Network). The success of these have convinced management that
interactive television programming like that being offered will be well
received by a public that continues to accept more and more interactive
technology into their daily lives.
The Bingo Industry
-----------------------------
The interjection is so familiar one would think it originated with the
eponymous game of chance. Yet bingo is derived from an Italian lottery
game, Lo Giuoco del Lotto d'Italia, one initiated in 1530 and still held
every Saturday in Italy. "Le Lotto" migrated to France in the late 1700s in
a form similar to the bingo we know today, with a playing card, tokens and
numbers read aloud.
Lotto became educational in the 1800s - in Germany, lottery games were
designed to teach children multiplication tables. It grew throughout Europe
over the next two centuries. In 1929, a game called "Beano" was played at
a carnival near Atlanta, Georgia. The primitive bingo game's tools consisted
of dried beans, a rubber number stamp and some cardboard. Edwin Lowe, a
New York toysalesman, observed the game where players exclaimed "beano" if
they filled a line of numbers on their card. Lowe introduced the game to his
friends in New York, where one of his players mistakenly yelled "Bingo!"
in her excitement "Lowe's Bingo" began as a game and Lowe asked
competitors to pay him $1 per year to allow them to call their games bingo
as well. He later sought the services of an elderly math professor at Columbia
University, Carl Leffler, to expand the amount of number combinations.
In 1930 , Professor Leffler devised 6,000 bingo cards with
non-repeating number groups. He completed the task successfully, and
then went insane. The game of "Bingo" moved to New York, and quickly
spread up and down the East Coast. By 1934, an estimated 10,000 bingo games
were played every week. In 1998, approximately $7 Billion was spent on active
bingo in North America alone.
There are 64,000 charitable bingo centers in North America with over
70,000 organizations licensed to operate bingo. Bingo is the most accepted
form of gaming by the public. Approximately 45 states and the District of
Columbia have legalized charitable bingo. There are approximately 65
millions people who visit a bingo facility each month and spend an average
of $22.00 per visit. Bingo is expected to maintain or possibly increase its
market share of total gamingindustry receipts consistent with an aging U.S.
population, which has more disposable income and time and enjoys
playing bingo more than other age groups.
Management believes that the past success of the Company's interactive
bingo programs are evidence that the game is as popular as ever among
people around the world. Recent statistics generated by the United States
government seem to strongly support this belief. According to a recent
survey of American Gambling Attitudes and Behavior conducted by the United
States Commission on the Review of a National Policy Toward Gambling, bingo
is the fourth leading "entertainment sport" in the United States, generating
some 60,000,000 spectators and/or participants each month. This figure
represents 7,300,000 more participants/spectators than Major League Baseball
attracts and almost 40,000,000 more participants/spectators than NFL Football
and NBA Basketball attracts.
The survey also shows that the game has equal appeal among genders.
Approximately 30% of bingo players have an income of $25,000 and over,
and bingo players are more likely to use their leisure time by doing indoor
activities such as reading books, newspapers and magazines.
As Americans become older as a population and choose to spend more
time at home, management believes that interactive television programs
like those it plans to offer will increase in popularity. Current statistics
indicate that persons 65 and older that play Bingo play the game at least
once a week.
These research findings and past experience support management's belief
that bingo is as popular as ever and that there is a viable market
opportunity for the Company's nationally and internationally interactive
broadcast programs
The Company's Competitive Position
----------------------------------
The Company operations are in competition with all aspects of the
entertainment industry, both locally, nationally and worldwide.
SBI experiences competition from five market segments:
1) Traditional game shows;
2) Internet bingo companies;
3) Electronic bingo companies;
4) Web services providers; and
5) Other entertainment/media companies
Broadcast Bingo
---------------
The Company competes with all broadcast game shows and, more
generally, all types of broadcast promotions designed to increase audience
share and advertising revenues. Management is not aware of any
nationally broadcasted bingo shows. Some locally-originated shows exist in
various locations.
Management
<PAGE>
believes, without assurance, that it has a competitive edge over other
broadcastbingo promotions since Ron Foster originated the concept and
has been promoting it since 1984. Management believes that the Company has
established a reputation of equitable and complete service to the broadcast and
gaming industry.With respect to game shows and other types of broadcast
promotion, management believes that the simplicity of the bingo game and its
mass audience appeal enables the Company to successfully compete with other game
shows.
Other Activities
----------------
The Company is not an established participant in the other areas in which
it expects to operate; however, management believes that the fields
involve rapidly developing markets which no single entity currently
dominates, with great opportunities for entry level participants possessing an
understanding of developing technologies. Consequently, although the
interactive television fields are highly competitive and include major cable
television and telephone companies, management is confident that its endeavors
constitute a niche inwhich it can successfully compete.
2. Sources and Availability of Raw Materials and the Names of Principal
-----------------------------------------------------------------------
Suppliers
---------
None of the Company's proposed activities are reliant on raw materials.
Rather, they depend on the ability to exploit emerging technologies that are
expected to be readily available.
3. Dependence on One or a Few Major Customers
---------------------------------------------
The Company's previous operations were highly reliant on local
charities. Its former broadcast operations and contemplated future
Internet Web Site operations are not expected to be reliant on any single or
small group of customers.
Employees
---------
As of December 31, 1999, the Company had 6 permanent employees,
including two officers, four professional staff. The Company also retains
the services of property managers who oversee the facility maintenance &
grounds in Alabama. No employee of the Company is represented by a labor union
or is subject to a collective bargaining agreement.
Premises
Frontier Palace
376 Highway 278 Bypass - Piedmont, Alabama 36272
Company-owned
<PAGE>
Government Regulation
Due to the game show broadcast and Internet bingo games are free.
These game do not have the elements that comprise a lottery. This being
prize, chance and consideration. The consideration is remove by offering the
games free. However, the games are considered a sweepstakes and do fall under
the government and state regulation for sweepstakes.
Item 2 - Properties
-------------------
The Company owns a facility in Piedmont, Alabama and was purchased
by the Company on December 16, 1994, for $6,500,000 and $1,000,000.00
for equipment (paid in 1,500,000 shares of the Company's preferred stock,
valued at $5.00 per share) for a total of $7,500,00.00.
The facility is comprised of 80,000 square feet of usable space under
roof, and includes a Bingo hall. The Bingo hall, including the personal
property owned by the Company and maintained properties therein, has
been leased on a month to month basis by the Company to Piedmont Jaycees,
Inc. since August 10, 1995 until terminated January 1, 1998. The rental for
the building and equipment located therein is $75,000 per month or $7,000 per
day, whichever is greater, plus all other defined expenses, excluding
insurance, ad valorem taxes, assessments, repairs, upkeep, maintenance and
similar expenses. However, the Piedmont Jaycees were not able to pay $75,000.00
per month and the rent was reduce to a minium payment of $25,000.00
through the startup period. However the company was never able to collect the
total amount of agreed rent. This lease was cancel and was not renewed in
January of 1998.
Furthermore, on April the 28th 1995, before the deed was recorded, the
State of Alabama placed a $550,000.00 tax lien on Cranberry-Magnetite
for admission taxes, thereby placing a lien on the property. The Company
received a warranty deed which reflected no liens. After a legal action by
Cranberry-Magentite with the State of Alabama failed in 1998 the Company was
force to pay these taxes which total $750,000.00 on behalf of Cranberry-
Magnetite. In order to pay this liability the Company borrowed $1,050,000.00
from Haulmark, Inc. Haulmark, Inc. also wanted to have a first mortgage and by
paying the first mortgage holder, which was a $250,000.00 loan from National
Mortgage Company of Fort Lauderdale, Florida, Haulmark received a first mortgage
on the Piedmont property. This pay-off to National Mortgage cost the company
an additional $25,000.00 for early payoff of this loan.
Haulmark, Inc. is owned by the principals that previously owned the
Frontier Palace facility. In order to recover this payment to the
State of Alabama, on behalf of Cranberry-Magnetite, The Company has
received payment by Canceling the 1,500,000 shares of preferred stock
previously issued for the payment of the facility.
The Company had several Companies that had interest in purchasing the
facility but was not able to complete the process for what ever reason. The
facility has remained closed until January of 2000. The First Call System
has leased part of the facility and will remain when new owner take over the
facility in May. The property is being sold to the Brindlee Mountain Castle
<PAGE>
Corporation for $6,000,000.00.
The Company's corporate offices are located at 1239 South Glendale
Avenue, Glendale, California, and Production Studio and transmission
facilities are obtained from third parties at competitive rates. The premises
are comprised of approximately 3,000 square feet for which the Company
pays $1,000 per month. The lease is scheduled to expire on December 31,
2000; however the Company is confidant that the lease would be renewed
on favorable terms.
Patents, Trademarks, Copyrights, Licenses, Franchises, Concessions,
-----------------------------------------------------------------------------
Royalty Agreements or Labor Contracts, Including Duration
-----------------------------------------------------------------------------
The Company has no patent rights. It has 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. 20
years.
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.
The Company obtained an assignment to a 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.
Item 3 - Legal Proceedings
--------------------------
Involvement in Certain Legal Proceedings
----------------------------------------
On April the 28th 1995 the State of Alabama place a tax lien on the
previous owner, Cranberry-Magnetite for admission taxes, in the amount
of $750,000.00 plus 12% interest. The company received a warranty deed
from Cranberry Magnetite. After a legal action by Cranberry Magnetite with the
State of Alabama
<PAGE>
failed in 1998 the company paid this tax liability on behalf of Cranberry
Magnetite/Broadway Bottle Gas Corporation. The company has
recovered these funds by canceling the previously issued preferred stock.
In April of 1995 two of the employees of the company's subsidiaries
(SBI Communications, Inc. of Alabama) was named as defendants in a
legal action in Alabama. This action alleges that the defendant's bingo game
which was operate by the charity; 1) comprise a illegal lottery, which violates
the state constitution; 2) further comprise that the equipment (a computer)
was an illegal gaming device. After appeals to Circuit and State Supreme
court failed, the defendants was incarcerated and later place on 24 months
probation which ended November 14th 1999. This was a misdemeanor and a first
offence for both defendants.
The Company believes that this action was completely without merit and
did defend vigorously.
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999. The Company's annual shareholder meeting
with voting on proxy issues is on May 30, 2000.
PART II
Item 5. Market Price of and Dividends on the Company's Common
Equity and
------- ----------------------------------------------------------------
Related Stockholder Matters
---------------------------
Preferred Stock
---------------
All attributes of the currently unissued preferred stock will be determined
by the Company's board of directors prior to issuance, as permitted by and
subject to the requirements of applicable Delaware law. The currently
outstanding preferred stock has a $5.00 per share par value and a $5.00 per
share liquidation preference; paying no dividend but convertible into
common stock upon demand at a conversion rate equal to $5.00 per share
divided by the market value of the common stock at the date of conversion.
The preferred stock has no voting rights except as to matters specifically
dealing with changes in the attributes of the preferred stock.
Market for Common Equity
------------------------
The Company's stock is traded on the NASDAQ OTC Electronic
Bulletin Board under the symbol of SBID. The Company currently has
5,570,439 shares of stock outstanding, with 1,500,000 in the public float.
There are approximately 3,240 shareholders of record. For the fiscal year ended
December 31st, 1999 the Company reported revenues of $0.00 and a net
loss of $**********280,209.00.
---------------------
<PAGE>
The Common Stock of Company has been traded over-the-counter since
1983. Its trading symbol is "SBID." No established public trading
market exists for the Common Stock of Company at this time.
No common equity is subject to options or warrants to purchase or
securities convertible into common stock, except for the currently
issued 153,000 shares of preferred stock which are convertible into
common stock. The Company has re-purchasing 1,500,000 of its preferred shares
from the previous owner after paying the State of Alabama $750,000.00 in tax
liens that were in place against the previous owner pertaining to the
property in Piedmont, Al. These shares were canceled March 31, 2000
No common stock is currently being offered or proposed to be offered
which offering could be reasonably expected to have a materially adverse
effect on the market price of the Company's common equity; and There are
approximately 5,570,439 shares of common stock which will become
eligible for sale by December 31, 1999, pursuant to the provisions of
Securities and Exchange Commission Rule 144.
The Company has not agreed to register securities for resale under the
Securities Act of 1934, as amended, for anyone.
The following table sets forth in United States dollars the high and low
bid quotations for such shares. Such bid quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and do not
necessarily re-present actual transactions. The source of the following
information is the National Daily Quotation System, Inc.'s "Pink Sheets"
and the National Ass-ociation of Securities Dealers, Inc.'s NASDAQ
Electronic Bulletin Board.
Common Stock
Date Low High
---- --- ----
Fiscal 1998 $ 0.1875 $0.375
-----------
Fiscal 1999
-----------
First Quarter $0.25 $0.50
Second Quarter $0.1875 $0.375
Third Quarter $0.02 $0.04
Fourth Quarter $0.02 $0.50
______
<PAGE>
Prices quoted reflect a one share for twenty reverse split effective on
February
1, 1993.
Dividend Policy
---------------
The Company has never paid any dividends. it is the present intention of
the Company to pay dividends as soon as possible. There can, however, be
no assurance that funds for payment of dividends will ever be available, or
that even if available, the Company's board of directors then serving will
resolve to declare them.
Market
------
The Company's securities are currently quoted on the Nation Association
of Securities Dealers, Inc.'s NASDAQ Bulletin Board and on the National
Daily Quotation System, Inc.'s "Pink Sheets." The Company expects that
its securities will be listed on the National Association of Securities
Dealers, Inc.'s automated quotation system ("NASDAQ") within the next 12
months and that they will be traded under its current symbol "SBID".
Section 15(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires brokers and dealers to make risk disclosures to
customers before effecting any transactions in "penny stocks". It also
directs the Securities and Exchange Commission to adopt rules setting
forth additional standards for disclosure of information concerning
transactions in penny stocks.
Penny stocks are low-priced, over-the-counter securities that are prone to
manipulation because of their price and a lack of reliable market
information regarding them. Under Section 3(a)(51)(A) of the Exchange
Act, any equity security is considered to be a "penny stock," unless that
security is: i)registered and traded on a national securities exchange meeting
specified Securities and Exchange Commission criteria; ii) authorized for
quotation on the National Association of Securities Dealers, Inc.'s
(NASD") automated inter-dealer quotation system ("NASDAQ"); iii) issued by a
registered investment company; iv) excluded, on the basis of price or the
issuer's net tangible assets, from the definition of the term by Securities and
exchange Commission rule; or v) excluded from the definition by the
Securities and Exchange Commission.
Pursuant to Section 3(a)(51)(B), securities that normally would be
considered penny stocks because they are registered on an exchange or
authorized for quotation on NASDAQ may be designated as penny stocks by the
Securities and Exchange Commission if the securities are traded off the
exchange or if transactions in the securities are effected by market makers
that are not entering quotations in NASDAQ.
Rule 3a51-1 was adopted by the Securities and Exchange Commission
for the purpose of implementing the provisions of Section 3(a)(51). Like
Section 3(a)(51), it defines penny stocks by what they are not. Thus, the
rule excludes from the definition of penny stock any equity security that is:
<PAGE>
(1) a "reported" security; (2) issued by an investment company registered
under the 1940 Act; (3) a put or call option issued by the Options
Clearing Corporation; (4) priced at five dollars or more; (5) subject to last
sale reporting; or (6) whose issuer has assets above a specified amount.
(Release No. 30608, Part III.A).
Rule 3a51-1(a) excludes from the definition of penny stock any equity
security that is a "reported security" as defined in Rule 11Aa3-1(a).
A reported security is any exchange-listed or NASDAQ security for which
transaction reports are required to be made on a real-time basis pursuant to
an effective transaction reporting plan. Securities listed on the New York
Stock Exchange (the "NYSE"), certain regional exchange-listed securities that
meet NYSE or Amex criteria, and NASDAQ National Market System ("NMS")
securities are not considered penny stocks. (Release No. 30608, Part
III.A.1). Generally, securities listed on the American Stock Exchange
(the "Amex") pursuant to the Amex's original and junior tier or its "Emerging
Company Marketplace" listing criteria, are not considered penny stocks.
Securities listed on the Amex pursuant to its Emerging Companies Market ("ECM")
criteria, however, are considered to be "penny stock" solely for purposes of
Exchange Act 15(b)(6). (Release No. 30608, Part III.A.1).
Rule 3a51-1(d) excludes securities that are priced at five dollars or more.
Price, in most cases, will be the price at which a security is purchased or
sold in a particular transaction, excluding any broker commission,
commission equivalent, mark-up, or mark-down. In the absence of a
particular transaction, the five dollar price may be based on the inside bid
quotation for the security as displayed on a Qualifying Electronic Quotation
System (i.e., an automated inter-dealer quotation system as set forth in
Exchange Act Section 17B(b)(2)).
"Inside bid quotation" is the highest bid quotation for the security
displayed by a market maker in the security on such a system. If there
is no inside bid quotation, the average of at least three inter-dealer bid
quotations displayed by three or more market makers in the security must
meet the five dollar requirement. Broker-dealers may not rely on quotations if
they know that the quotations have been entered for the purpose of
circumventingthe rule. (Release No. 30608, Part III.A.3.b). An inter-dealer
quotation system is defined in Rule 15c2-7(c)(1) as any system of general
circulation to brokers and dealers that regularly disseminates quotations of
identified brokers or dealers. In the case of a unit composed of one or more
securities, the price divided by the number of shares of the unit that are not
warrants, options, or rights must be five dollars or more. Furthermore, the
exercise price of any warrant, option, or right, or of the conversion price
of any convertible security, included in the unit must meet the five dollar
requirement. For example: a unit composed of five shares of common
stock and five warrants would satisfy the requirements of the rule only if
the unit price was twenty-five dollars or more, and the warrant exercise price
was five dollars or more. Once the components of the unit begin trading
separately on the secondary market, they must each be separately priced at
five dollars or more. (Release No. 30608, footnote 66).
Securities that are registered, or approved for registration upon notice of
issuance, on a national securities exchange are also excluded from the
definition of penny stock (Rule 3a51-1(e)). The exchange must make
transaction reports available pursuant to Rule 11Aa3-1 for the exclusion
to work.
<PAGE>
The exclusion is further conditioned on the current price and
volume information with respect to transactions in that security being
reported on a current and continuing basis and made available to vendors of
market information. In addition, the exclusion is limited to exchange-listed
securities that actually are purchased or sold through the facilities of the
exchange, or as part of a distribution. Exchange-listed securities
satisfying Rule 3a51-1(e), but which are not otherwise excluded under
Rule 3a51-1(a)-(d), continue to be deemed penny stocks for purposes of
Exchange Action Section 15(b)(6).
Exchanges that qualified for this exclusion as of April, 1992 were the
NYSE, Amex, Boston Stock Exchange, Cincinnati Stock Exchange,
Midwest Stock Exchange, Pacific Stock exchange, Philadelphia Stock Exchange,
and the Chicago Board of Options. (Release No. 30608, footnote 37).
Securities that are registered, or approved for registration upon notice of
issuance, on NASDAQ are excluded from the definition of penny stock
(Rule 3a51-1(f)). Similar to the exchange-registered exclusion of Rule
3a51-1(e), the NASDAQ exclusion is conditioned on the current price
and volume information with respect to transactions in that security being
reported on a current and continuing basis and made available to vendors
of market information pursuant to the rules of NASD. NASDAQ
securities satisfying Rule 3a51-1(e), but which are not otherwise excluded under
Rule 3a51-1(a)-(d), continue to be deemed penny stocks for purposes of
Exchange Act Section 15(b)(6).
An exclusion is available for the securities of issuers that meet certain
financial standards. This exclusion pertains to: (1) issuers that have been
in continuous operation for at least three years having net tangible assets
in excess of $2 million (Rule 3a51-1(g)(1); ii) issuers that have been in
continuous operation for less than three years having net tangible assets
in excess of $5 million (Rule3a51-1(g)(1); iii) issuers that have an average
revenue of at least $6 million for the last three years (Rule 3a51-1(g)(2)).
To satisfy this requirement, an issuer must have had total revenues of
$18 million by the end of a three-year period. (Release No. 30608, Part
III.A.4). The Company believes that its securities qualify under this
exemption.
For domestic issuers, net tangible assets or revenues must be
demonstrated by financial statements that are dated no less than fifteen
months prior to the date of the related transaction. The statements must
have been audited and reported on by an independent accountant in accordance
with Regulation S-X.
For foreign private issuers, net tangible assets or revenues must be
demonstrated by financial statements that are dated no less than fifteen
months prior to the date of the related transaction. The statements must
be filed with the Securities and Exchange Commission pursuant to Rule
12g3-2(b). If the issuer has not been required to furnish financial
statements during the previous fifteen months, the statements may be
prepared and audited in compliance with generally accepted accounting
principles of the country of incorporation.
Whether the issuer is domestic or foreign, in all cases a broker or dealer
must review the financial statements and have a reasonable basis for
believing that they were accurate as of the date they were made (Rule 3a51-1
(g)(3). In most
<PAGE>
cases a broker-dealer need not inquire about or independently verify
information contained in the statements. (Release No. 30608, Part
III.A.4). Brokers and dealers must keep copies of the domestic or foreign
issuer's financial statements for at least three years following the date of
the related transaction (Rule 3a51-1(g)(4).
Security Holders
----------------
As of December 31, 1999, the latest practicable date for which
information is available, the Company's management was of the opinion
that the Company had approximately 3,240 common stock holders.
Dividends
---------
There have been no cash dividends declared or paid since the inception
of the Company and no dividends are contemplated to be paid in the
foreseeable future.
Description of Securities
-------------------------
General
-------
The Company is authorized to issue 50,000,000 shares of capital stock,
40,000,000 shares of which are designated as common stock, $.001 par
value per share, and the balance as preferred stock, $5.00 par value per
share. As of December 31, 1999, 5,570,439 shares of Common Stock were
outstanding (excluding the 2,500,000 shares held but not yet allocated by
the Company's Employees' Trust) and held of record by approximately 3,240
persons. In addition, 153,000 shares of preferred stock were outstanding,
and held by approximately five persons. The Company has canceled 1,500,000
preferred shares as of March 31st, 2000.
Corporate Stock Transfer, 3200 Cherry Creek Drive, South; Suite 430,
Denver Colorado 80209, acts as transfer agent and registrar for the
Company's common and preferred stock.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Plan of Operation.
--------------------------------------------
Introduction
------------
The Company is currently in the development stage of its business cycle.
Since its inception, the Company has actively pursued licensing
agreements designed to generate royalty income in exchange for providing
software and methods involving bingo game production. In the past, the
Company has entered into various agreements covering territories in Brazil,
Greece, Hong King, and Indian reservations, military bases, and charity bingo
parlors in the United States. Prior emphasis on these type of licensing
agreements has proven to be ineffective.
<PAGE>
No licensee currently has bingo operations generating
significant fees or royalties for the Company. The majority of its current
operating income is provided by rental income generated from the lease
of its facility to retail businesses in a facility owned by the Company.
The majority of future revenues, however, are not anticipated to occur in
either of these areas. The Company hopes to generate significant future
revenues from telecommunications services involved in interactive game
shows with a bingo format and television buying shows by purchasing
large blocks of long distance telephone time and reselling such time to
television audience users at a profit. Also, It?s Internet business.
Management of the Company has made this area of business their first
priority, and most of the other plans for the future are based on the success
of the telecommunications area. Management would like to broadcast the
bingo show to as many viewers as possible, and although there are no
current foreign agreements, management's plans are not limited to the U.S.
Management intends to pursue contracts with foreign countries and begin its
bingo programs on the Internet. Overall, management hopes to be able to
generate net revenues of $25 million annually from this area of business.
The Company also has plans to expand operations through the acquisition of
television production facilities and rights to a television buying show.
This would allow the Company to produce their bingo show in their own studio
and broadcast it over their own network. It will also give management freedom
to use their experience in programming and production to produce other forms of
interactive entertainment, such as the ideas of Public Domain
Broadcasting and The Life and Leisure Network mentioned elsewhere in
this offering document. Diligently being examined are the legal opinions
submitted for imminent contractual arrangements between two companies with the
Company, a major international shop at home entity and a telecommunications
company.
FrontierPalace.Com, Inc. a wholly owned subsidiary of the Company
was formed in June 1999 in order to become a dedicated Internet
Entertainment website. That is, it will provide communication equipment for
consumers to connect the company website via the Internet 24 hours a day
seven days a week.
It will also provide design and programming services to build Internet
Web Sites and the personnel and equipment to maintain these sites.
The company will also provide a television network with programs
design to promote, tour, advertised and provide Information for each
website desiring its services. Simulcasting of live or tape programs via the
Internet and satellite broadcast. The company will have its own website
featuring a 24 hour bingo program, classified ad, trade and barter,
auctions, special events and other service available for its members.
Overall, the company can be characterized as a Broadcast Internet
Service company.
Frontier Palace.Com, Inc. is a newly formed Nevada Corporation and a
Wholly Owned Subsidiary of SBI Communications, Inc. We chose this
form of organization because we anticipate aggressive growth and will
require additional capital in the future to support this growth, probably in
the form of a secondary public offering. FrontierPalace.Com, Inc. is currently
in its start up phase. The management team has been formed, new space has
been leased,equipment and telecommunications have been ordered for delivery
within 30 days and certain business alliances have been formed.
<PAGE>
The Company expects to turn a profit within one year of going on line
and expect to offer shares of the parent Company to raise additional
capitol by the end of the first year operation.
To accomplish this goal we have developed a comprehensive plan to
intensify our marketing and sales activities, product development,
services expansion and customer support.
Internet
The Internet is one of the fastest growing phenomenons. The current
facts are; More than 50 million American households are connected to the
Internet with Southeast Florida as one of the fasted growing regions.
Currently there are 150 million users worldwide. Every two seconds, a new user
signs up for Internet access. It is estimated that by the year 2002, 550
million people will be on-line. The Internet has gained the support of
everyone from the White House to the Department of Revenue to United Parcel
Service. Companies are scampering to become a part of the madness and make a
fortune. While making a fortune is possible, it requires the help of an expert
in the field with specific working knowledge and training in the necessary
technologies.
Management feels confident that all will be consummated by year end
2000 allowing the Company to commence operations on a full scale in the
Internet and telecommunications business segment.
The Company is continuing to search for avenues to develop future
revenue. In light of the preliminary and conditional nature of negotiations,
no assurance can be provided as to the likelihood that such proposed projects
will come to fruition. A summary of projects currently being pursued is as
follows:
Frontier Palace
---------------
Management of it's wholly owned subsidiary (SBI Communications,
Inc. of Alabama) has a signed purchase agreement with The Brindlee
Mountain Castle Corporation, Inc. of Arab, Alabama to purchase the Piedmont
property for $6,000,000.00. The sale of this property should be closed by April
30, 2000. Brindlee plans are to have an entertainment center with motel,
bowling lanes, food court, daycare center, laser tag, arcade and small car
racing tract.Brindlee plans to contract with SBI to set all phases of operation
in place.
Internet Web Site
----------------
The company has established a secure web site allowing individuals to
join "A Shopping Club for a fee of $19.95 per month which is a shopping
club for a variety of products, services, Bingo game related events and items,
travel and consumer goods; the opportunity is primarily a shopping club. No
charge is made for Bingo cards, and for allowing members to play an
on-going Satellite Bingo game, with winnings credited to the member's account or
delivered to the member at their option. Payment for membership will be
made by credit card, bank check, and debit cards. The company will host
the Internet Web Site and provide fulfillment. The company will at
<PAGE>
some point be a major entertainment Internet web site with server and
tee access to the Internet. The website will be on line by the end of May.
The company will generate additional revenues by offering advertising
and its web services to others.
Bingo Broadcast.
----------------
The company has developed a pay-per-view television game show to be
operate by SBI, at a production studio in Glendale, California. The
company is in negotiations with the Dish Network to provide an interactive
programming for a weekly two hour broadcast at $9.95 per subscriber per
broadcast; SBI receives a license fee equal to approximately $5.00 with the
broadcaster/network company paid the balance.
Liquidity
---------
The following table summarizes working capital and total assets:
Fiscal Year Ended December 31,
1999 1998
---- ----
Working Capital $ -0- $ 118,160
Total Assets $7,610,010 $ 6,984,557
December 31, 1995, the Company's current assets exceeded its current
liabilities, creating a working capital surplus. The surplus is primarily
the result of the issuance of preferred convertible stock to liquidate
liabilities owed to shareholders, and in income provided by the
Company's operating activities relating to approximately $100,000 in rental
fees collected from charities that sponsor bingo games at the Company's
bingo hall. At December 31, 1994, the Company had current liabilities in
excess of current assets, principally due to administrative expenses incurred
during the development stage that have been funded by the majority stockholder
in the form of advances due on demand. The Company has had some success
in issuing stock for services, and accordingly has kept the working capital
deficit to a minimum during these years.
The changes in total assets are attributable to the Company's purchase of
a building (bingo hall) in 1994 through the issuance of preferred stock. As
a result, income from bingo hall operations has boosted working capital in
the calendar year ended December 31, 1997. In the years prior to 1996,
the Company was primarily involved in securing licensing agreements for
rights to software and methods of operating bingo games it had developed.
As the Company continues to operate in the development stage, no
significant cash flow is being generated from operating activities. 1998
and 1999 was a dormant year. The Company was not able to generate any
revenues from operations.
<PAGE>
Capital Resources
-----------------
Since its inception, the Company's only significant sources of capital
have been from the sale of common stock and loans from shareholders.
See a discussion of these transactions under Item 7 - Certain Relationships and
Related Party Transactions, and in the Consolidated Financial Statements
of the Company. The Company has also acquired significant assets through the
sale of convertible preferred stock. The Company anticipates continued
expansion of its business through acquisitions using Company stock.
Furthermore, with the bingo hall acquired in 1994 now in operation, the Company
anticipates generation of revenues from the lease of this facility sufficient
to cover administrative costs still being incurred as the Company moves
forward in its development stage.
Results of Operations
---------------------
The following table sets forth the relative relationship to total revenue of
the revenue categories in the Company's statement of income and
percentage changes (rounded to the nearest whole dollar).
Amount of Total Revenue
Fiscal Year Ended December 31, 1999 1998
---- ----
Revenues:
Licenses & Royalties -0- -0-
Bingo Hall Operations -0- -0-
Kitchen and gift shop revenues -0- -0-
Other Income -0- -0-
--------- --------
Total Revenue -0- $ -0-
========= ========
In general, the Company experienced insignificant revenues in 1999 as it
attempted to expand and develop its operations. Total revenues were
$0.00 for 1999. The Company owns a facility , during 1997 was leases to
charities who sponsor bingo games. Net revenues related to the facility
operations were only $0.00 in 1998, and had no revenues for the calendar
year ended December 31, 1999. Total revenues for calendar year ended
December 31,1997 were $544,662. Accordingly, except for the operation of the
bingo hall, there are no other significant revenue sources of the Company at
this time. For 1996, 1997 and 1998, the Company did not generated revenue from
the sale of copyrighted bingo cards, foreign licensing agreements, sale of
computer hardware or security systems, or other various areas of business
opportunity discussed in this offering document.
<PAGE>
The Company's expenses can be summarized as follows:
Amount of Total Expenses
Fiscal Year Ended December 31, 1999 1998
---- ----
Salaries and related expenses ****** $157,649
Other general and administrative expenses $358,670
Depreciation and amortization $346,742
Interest expenses and finance charges $ 82,637
The most significant expense relates to the amortization of trademark,
game show and computer program assets the Company has developed.
The expense is running $265,960 per year. Such assets will be fully amortized
at the end of 1997. For 1997, the Company also had depreciation on the bingo
hall and related equipment, which will approximate $367,202 per year. These
expenses do not require the use of cash. The low level of other expenses in
1994 is due to a slow down in the general activity of the Company as it explored
alternative revenue generating ideas. With the addition of the bingo hall in
late 1994, as well as the pursuit of television production and broadcast
possibilities in 1996, such expenses have decreased in 1997. As the Company
continues to pursue television production and broadcast possibilities, these
expenses will continue to rise as a result of expanded facility space and
travel costs. Interest and finance charge expenses increased in 1996 due to
$200,000 in finance charges incurred to obtain short-term financing. These
finance charges were paid for through the issuance of preferred stock.
Should the Company successfully acquire production facilities and
broadcast companies under consideration, or expand operations in areas
previously discussed as currently under consideration, revenues and
expenses ofthe Company would change significantly. Management is not able to
predict the impact of such changes on revenues or expenses at this time.
Statement Re Computation of Earnings Per Share
----------------------------------------------
See Notes To Consolidated Financial Statements included elsewhere in
this filing for a description of the Company's calculation of earnings per
share.
Item 7. Financial Statement and Summary Financial Data
------ -----------------------------------------------
Financial Statements
--------------------
The audited consolidated balance sheet of the Company for its years
ended December 31, 1999 and audited 1998 and the related consolidated
statements of operations, stockholder's equity and cash flows. Information
with respect to this item is contained in the financial statements appearing at
Item 13 of this report.
<PAGE>
Item 8. Charges in and Disagreements with Accountants on Accounting
and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
In March 20, 2000 Daniel, Ratliff, and Company, independent certified
public accountants, previously engaged as the principal accountant to audit
the prior financial statements of the company, resigned. The resignation
resulted from the Company moving its corporate offices to the west coast
(Glendale, California) and the conclusion that the Company would be
better served through the engagement of a local Certified Public Accounting
firm. The Company 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. The
Company has filed with the Securities and Exchange Commission an 8-K dated
March 29, 2000 disclosing this action. The Company has 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 indicating in Item 4. A copy of this letter, when
received, will be filed by Exhibit with an 8-K.
Item 9. Directors, Executive Officers, Promoters and Control Persons
--------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the members of the
Company's board of directors and its executive officers, the positions
with the Company held by each, and the period during which each such
person has held such position.
Name Age Position Since
---- --- -------- ----
Ronald Foster 58 President/Chairman of the Board 1986
William Beggs 56 Director 1998
Karien Anderson 49 Secretary/Treasurer/Director 1997
Claude Pichard 45 Director 1986
______
Messrs. Fosters, Mr. Pichard and Ms. Anderson are all engaged with
the Company's business on a full time basis.
All directors hold office until the next annual meeting of stockholders of
the Company (currently expected to be held during May 2000) and until
their successors are elected and qualified. Officers hold office until the
first meeting of directors following the annual meeting of stockholders and
until
<PAGE>
their successors are elected and qualified, subject to earlier removal by
the board of directors. There are currently no committees of the board of
directors.
Biographies of the Company's Executive Officers and Directors
-------------------------------------------------------------
Ronald Foster
-------------
Mr. Foster, 58, is presently Chairman, President, Chief Executive
Officer, and Executive Producer for SBI Communications, Inc. He has
been working with the Company since its inception in 1984. His primary
responsibilities include finance, marketing and technical review. In
addition to his responsibilities with the Company, Mr. Foster has held a
number of other management positionsover 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 owner and operator of Artist
Management & Promotions wherehe was responsible for coordinating
television entertainers, sports figures and other celebrities for department
store promotions. Since 1987, Mr.Foster has served as president and director
of Ed-Phills, Inc., a Nevada corporation and is now an executive vice president
and member ofthe board of directors of Golden American Network, a California
corporation. Since 1984, he has also been the president and chief executive
officer of ROPA Communications, Inc., which owns and operates 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 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.
Karien Anderson
---------------
Ms. Anderson is 49 years old and resides in Piedmont, Alabama. Ms.
Anderson has extensive experience in executive secretarial business,
including government and private sectors. She has extensive background in the
field of advertising, marketing, special event promotions, contract
management, personnel management and real estate. Ms. Anderson
currently holds a real estate licence. Ms. Anderson has been involve as
coordinator for non-profit association for the last eighteen years. She is
currently employed as secretary and property manager for SBI Communications,
Inc.
Claude Pichard
--------------
Mr. Pichard, 45, has been a Vice President and a director for the
Company since 1986. His primary responsibilities include directing and
developing the interactive Bingo and auction programs. Mr. Pichard has
over twenty years of television experience as a producer, director and
scriptwriter. He served as creative services director at WCTV in Tallahassee,
Florida, where heheaded an award-winning team of directors, writers and artists
for the
<PAGE>
number one station in its market. He has also worked with numerous
Hollywood-based game shows and was the director for the Bolivian National
Lottery game. In addition to his responsibilities with the Company,
Mr. Pichard also serves as a research and training specialist with the
Florida Department of Law Enforce ment where he supervises the production of
training tapes, public serviceannouncements and media related courses.
Mr. Pichard holds a bachelor of science degree in mass communications from
Florida State University.
William Beggs
-------------
Mr. Beggs is 56 years old and resides in Fort Lauderdale, Florida. Mr.
Beggs has been a member, in good standing, of The Florida Bar since
1973. Mr. Beggs practices real estate and corporate law in the Fort Lauderdale
area.
Item 10 Executive Compensation
----------------------------------
The Summary Compensation Table below sets forth all compensation
paid to the Officers and Directors of the Company during the Company's
year ended December 31, 1998 and 1999.Prior to June of 1992, the date on
which a change in control of the Company was effected and current management
took over their respective positions, previous management conducted no business,
the Company's was inactive and no compensation was paid or deferred to and
of the Company's officers or directors.
1998 Summary Compensation Table
-------------------------------
Name Annual Compensation Long Term Compensation
and Awards Awards LTIP All
Principal Restricted Restricted Pay- Other
Position Salary Bonus Other Stock Options outs
Compensation
-------- ------------ ------------ ------- ---- ------------
Ronald Foster ** (5) * * * * * * *
Claude Pichard + * * * * * * *
Karien Anderson (1)(6) * * * * * * *
______________________________________________________________________________
1999 Summary Compensation Table
-------------------------------
Name Annual Compensation Long Term Compensation
and Awards Awards LTIP All
Principal Restricted Restricted Pay- Other
Position Salary Bonus Other Stock Options outs
Compensation
Ronald Foster ** 5 Y * Y * * *
Claude Pichard +(2) * * * * * * *
Karien Anderson(1)(2)6 * * * * * *
______________________________________________________________________________
<PAGE>
* None.
** President, Chairman and Chief Executive Officer.
*** Former Secretary, Treasurer and Chief Financial Officer.
+ Vice President.
(1) Secretary and Treasurer.
(2) Director.
(3) Director.
(4) Vice President.
(5) $130,000.
(6) $ 30,000.
(7) $ 35,500.
(8) $ 30,000.
(9) No person listed has any options to acquire securities of the kind
required to be disclosed pursuant to instruction 1 of Item 403 of
Regulation SB.
(Y) Yes
Employment Agreements
The Company is a party to an employment agreement with Ronald
Foster, a copy of which is filed as an exhibit to this registration statement.
The following summary thereof is qualified in its entirety by reference to
such exhibit.
On January 1, 1992, Mr. Foster entered into a ten year employment
agreement with the Company, renewable thereafter for continuing one year
terms unless one of the parties provides the other with written intention
not to renew, on or before the 180th day prior to expiration of the then current
term. Although the agreement can be terminated by the Company for cause, or
the Company's stockholders can refuse to comply with its terms by not re-
electing Mr. Foster as a director, such events accelerate Mr. Foster's rights
to compensation under the Agreement.
The Agreement provides the Company with an obligation to defend and
indemnify Mr. Foster to the fullest extent legally permitted, and calls for
the following compensation:
(a) Mr. Foster is entitled to an annual bonus payable in shares of the
Company's common stock, determined by dividing 10% of the
Company's pre-tax profits (excluding depreciation) for the subject
calendar
year by the average bid price for the Company's common stock during the
last five trading days prior to the end of the last day of each year and
the first five days of the new year, provided, however, that the agreement
shall have been in effect for at least one business day during the subject
year.
(b) Mr. Foster is entitled to an annual cash bonus in a sum equal to 5%
of the Company's gross annual income or 10% of the Company's net pre-
tax profit (excluding depreciation), whichever is less.
(c) Mr. Foster is entitled to a salary starting at $2,500.00 per Week, but
subject to review on a quarterly basis, with the expectation that it will
be substantially increased as increased profits and cash flow from
operations permit.
<PAGE>
(d) In addition to the foregoing, Mr. Foster is entitled to a benefit
package equal to the most favorable benefit package provided by the
Company or its subsidiaries to any of their employees, officers, directors,
consultants or agents.
All required payments are accruing until such time as the Company has
adequate funds to meet its operating expenses and commitments.
Item 11. Security Ownership of Certain Beneficial Owners &
Management
----------------------------------------------------------------------
The following table sets forth, as of the date of this Registration
Statement, the number and percentage of shares of common stock owned
of record and beneficially by any group (as that term is defined for purposes of
Section 13(d)(3) of the Exchange Act), person or firm that owns more than five
percent (5%) of the Company's outstanding common stock (the Company's
only
class of voting securities).
Name and Address of Amount of Nature of Percent of
Beneficial Owner *Shares Ownership Class
Ronald Foster 1,632,089 Record & 32% Common
103 Firetower Road Beneficial
Leesburg, Georgia, 31763
Larry Cahill 1,000,000 Record & 19% Common
3330 Southgate Court Beneficial
Cedar Rapids, Iowa 52404
Michael Graham 500,000 Record & 10% Common
1804 Cherry Lane Beneficial
Bluefield, West Virginia 24701
_____
* Includes all stock held either personally or by affiliates.
(b) Security Ownership of Management
----------------------------------------
The following table sets forth, as of the date of this Registration
Statement, the number and percentage of the equity securities of the
Company, its parent or subsidiaries, ,owned of record or beneficially by
each officer, director and person nominated to hold such office and by all
officers and directors as a group.
<PAGE>
Title of Name of Amount Nature of Percent of
Class Beneficial Owner Shares Ownership Class
----- --------------- ------ ---------------
Common Ronald Foster 1,632,089 ** 32.00%
Common Karien Anderson 0 *** 00.00%
Common Claude Pichard 10,000 ** 00.07%
Common Betty Rodgers 5,000 *** 00.035%
Common Williams Beggs 0 *** 00.00%
Common All officers and directors
as a group (5 people) 1,647,089 ** 33.05%
___
* Includes all stock held either personally or by affiliates.
** Record & Beneficial.
*** Not Applicable.
To the best knowledge and belief of the Company, there are no
arrange- ments, understandings, or agreements relative to the disposition
of the Company's securities, the operation of which would at a
subsequent
date result in a change in control of the Company.
Changes In Control
------------------
SBI is unaware of any contract or other arrangement, the operation of
which may at a subsequent date result in a change in control of SBI.
Item 12. Certain Relationships and Related Transactions
---------------------------------------------------------
There are no family relationships among directors, executive officers or
persons chosen by the Company to be nominated as a director or
appointed as an executive officer of the Company of any of its affiliated
subsidiaries.
PART IV
-------
Item 13. Index to Exhibits
------- -----------------
Description of Exhibits
-----------------------
Page or
Exhibit Source of
Number Incorporation Description
------ ----------------- ---------------
FS The audited consolidated balance sheet of the Company
for its years ended December 31, 1999 and audited 1998
and the related consolidated statements of Operations,
Stockholders equity and cash flows.
27 Summary Financial Information
<PAGE>
Additional Information
----------------------
Headquarters
------------
SBI Communications, Inc.
1239 South Glendale Avenue - Glendale, California 91205.
Subsidiaries
------------
SBI Communications, Inc., a Alabama Corporation
-------------------------
376 Hwy 278 Bypass - Piedmont, Alabama 36272
FrontierPalace.Com, a Nevada Corporation
1239 South Glendale Avenue, Glendale, California 91205
SBI Communications, Inc., a Nevada Corporation
1063 Centerville Lane, Gardnerville, Nevada 89410
Satellite Bingo, Inc., a Georgia Corporation
103 Firetower Road - P. O. Box 729, Leesburg, Georgia 31763
Officers & Directors
--------------------
Ronald Foster: President, Chairman of the Board, Chief Executive Officer
Karien Anderson: Secretary/Treasurer/Director
Claude Pichard: Vice President/Director
Al Makhanian: Vice President/Director
Williams Beggs : Director
Auditors
--------
Mr. Jay J. Shapiro
Jay J. Shapiro, CPA. A Professional Corporation
16501 Ventura Boulevard, Suite 650, Encino, California 91436
Transfer Agent
--------------
Corporate Stock Transfer
3200 Cherry Creek Drive South; Suite 430; Denver, Colorado 80209
Exhibits to this Form 10-KSB will be provided, subject to payment of
actual copy costs, to shareholders of the Company upon written request
addressed to Lisa Evans acting, Secretary, SBI Communications, Inc., at
the Company's headquarters listed above.
<PAGE>
Signatures
----------
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the Company has duly caused this First
Amended Registration Statement to be signed on its behalf by the
undersigned,
hereunto duly authorized.
SBI Communications, Inc.
Dated: April 4, 2000
/s/Ronald Foster/s/
Ronald Foster
Chairman, President & Chief Executive
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
or
the Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald Foster Chairman, President & May 30, 2000
-----------------
Ronald Foster
/s/ Karien Anderson Director, Secretary, Treasurer May 30, 2000
-------------------
Karien Anderson
/s/ Claude Pichard Director, Vice President May 30, 2000
------------------
Claude Pichard
/s/William Beggs Director May 30, 2000
----------------
William Beggs
To the Board of Directors
SBI Communications. Inc.:
We have audited the accompanying consolidated balance sheets of SBI
Communications, Inc. and subsidiaries (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1999. 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 December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended January 31, 1999 in conformity with generally accepted accounting
principles. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
accompanying financial statements, the Company has a $3.6 million
provision for net realizable value regarding the cost basis of building and
equipment as of January 1, 1998.
As more specifically indicated in Note 1 to the financial statements, the
Company's existence is dependent on the successful closing of this
property held for sale and has no established commercial product or marketing
channels at this time to generate future revenues. These factors raise a
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regards to those matters are also described in
Notes 1 and 8. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/JAY J. SHAPIRO, C.P.A.
a professional corporation
Encino, California
March 27 2000
SBI COMMUNICATIONS. INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
1999 1998
Cash $0 $0
Property - held for sale(Notes 2,7 and 8) $ 3,940,000 3,940,000
------------ ----------
$ 3,940,000 $3,940,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Mortgage note payable to trust managed by a
shareholder (Notes 5 and 8) $ 150,000 150,000
Mortgage note payable (Notes 5 and 8) $ 1,050,000 $1,050,000
Equipment notes payable (Note 8) $ 131,181 131,181
Accrued wages due to principal shareholder $ 550,000 420,000
Advances due to principal shareholder $ 12,698 12,698
Accrued interest payable (Note 8) $ 199,000 40,000
Accounts payable (Note 8 ) $ 50,000 50,000
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, par value $5.00; 10,000,000 shares
authorized: 153,000 and 153,000 shares issued and
outstanding at December 31, 1999 and December 31,
1998, respectively (Notes 3 and 8) 765,000 765,000
Common stock, par value $.001; 40,000,000 shares
authorized; 5,570,439 shares issued and outstanding
at December 31, 1999 and 1998(Note 8) 5,570 5,570
Paid in capital 3,567,318 3,567,318
Accumulated deficit (2,540,767) (2,251,767)
$ 1,032,121 1,321,121
3,940,000 $3,940,000
See accompanying notes to consolidated financial statements
<PAGE>
SBI COMMUNICATIONS. INC. AND SUBSIDIARIES
STATEMENTS OF LOSS
December 31
1999 1998
Revenue 0.00 0.00
Provision - net realizable value(Note 8 ) ($3,578,279)
Expenses:
Compensation 130,000 130,000
Other general and administrative 0 88,069
Interest 159,000 40,000
(259,000) (258,069)
Net loss ($289,000) ($3,836,348)
Basic net( loss)per share(Note 4) ( $.05 ) ($.69)
See accompanying notes to consolidated financial statements
<PAGE>
SBI COMMUNICATIONS. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31
1999 1998
Cash flows from operating activities:
Net (loss) income ($289,000) ($3,836,348)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Provision - net realizable value $3,578,279
Change in accounts payable and accrued expenses 289,000 170,000
Cash (used) by operating activities 0 (88,069)
Cash flows from investing activities:
Affiliate receivables (7,570)
Purchase of real estate (748,622)
Cash (used) by investing activities (756,192)
Cash flows from financing activities:
Loans from shareholders/affiliates 12,698
Proceeds from new first mortgage $1,050,000
Mortgage loan repayment (239,701)
Equipment note repayments (964)
Cash flows provided by financing activities $ 822,033
Net increase (decrease) in cash 0 (22,228)
Cash at beginning of period 0 22,228
Cash at end of period _0 $ 0
Supplemental information:
Income taxes paid $ - $
Interest paid $ - $24,311
Items not requiring use of cash:
Preferred stock converted $ 0 ($200,000)
Issuance of common stock $ 0 202,500
Preferred stock canceled $ 0 $7,500,000
See accompanying notes to consolidated financial statements
<PAGE>
SBI COMMUNICATIONS. INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Organization and Signification Accounting Policies
SBI Communications, Inc. (the "Company"), 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 its current name of SBI
Communications, Inc. On January 1, 1993, the Company executed aplan of merger
that effectively changed the Company's state of domicile from Utah to
Delaware. Although the Company is currently a Delaware corporation, on
January 31, 1998 the stockholders and Board of Directors approved a plan to
change the Company's corporate domicile to the State of Nevada. The Company
owns approximately $25,000 for Delaware franchise taxes as of
December 31, 1997 and such amount is included in Accounts Payable.
The Company has developed a system that can be integrated into all
standard communications channels including the World Wide Web for
interactive bingo play. Currently, the Company is developing its
website.
The Alabama bingo hall lease was allowed to not be renewed in early
1998. The Company is establishing a website allowing individuals to
become members in a shopping club with membership fees of $19.95 per month.
The shopping club will provide a variety of products, services, bingo
game sweepstakes related events and items, travel and consumer goods;
No charge is made to participate in the bingo games. The website will be
hosted by the Company's subsidiary, FrontierPalace.Com. and fulfillment
will be provided by unrelated company. The Company will generate
additional revenues by offering web page/site design/development,
advertising, fulfillment and its web services to others.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and four wholly-owned subsidiaries of which only SBI
Communications, Inc. - Alabama has activity during the two-year
period ended 12/31/99.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reporting amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
1998 financial statements reflect $3.6 million change in the reporting
amount of building and equipment.
<PAGE>
SBI COMMUNICATIONS. INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 (Cont'd)
Property and Equipment
Property and equipment were stated at cost. In March 2000, the
Company sold all its property and equipment for net cash sales price of
$3,940,000 due at closing. The gross sales price of $6,000,000 was
reduced by $860,000 in closing costs, $635,000 in fix-up expenses, and the
assignment of no value to $565,000 in downpayment received in Buyer's
non-trading common stock. The Company also cancelled the 1,500,000
shares of preferred stock(valued at $7.5 million) issued to former owner of this
property due to non-performance relative to reimbursement of Company
for payment of $750,000 in delinquent Alabama property taxes.
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 rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
Statements of Cash Flows
For the purposes of the statements of cash flows, the Company considers
cash and highly liquid investments purchased with a remaining maturity
of three months or less at the date of purchase to be cash equivalents.
Related Party Transactions
From time to time, the Company's principal shareholder advances money
to the Company for operations. All amounts owed to the shareholder~ll
2,968) are non-interest bearing advances. In addition to advances, the
Company accrued salaries payable to the Company's principal shareholder totaling
$130,000 for the years ended December 1999 and 1998, respectively. All
amounts owed to the shareholder are payable on demand.
In October, 1995, the Company borrowed $250,000 from a trust managed
by a shareholder, in the form of a mortgage note. The note was payable
in full on October 15, 1996, with interest payable quarterly at prime plus
3%, secured by a second mortgage on The Piedmont Property. Fifty
thousand dollars of this note was repaid in 1996 when due, and an additional
$50,000 was repaid during 1997. The note has been extended on a quarter
to quarter basis, with $150,000 remaining outstanding at December 31, 1998
and 1999.
<PAGE>-
SBI COMMUNICATIONS. INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2
Piedmont Property Taxes
On April 28, 1995 the State of Alabama placed a tax lien on the previous
owner of the Piedmont Property, Cranberry-Magnetite/Broadway Gas
Corporation(the "Seller") for admission taxes, in the amount of $750,000
plus 12% interest. The Company received a warranty deed from
Cranberry Magnetite. After a legal action by Cranberry Magnetite with the
State of Alabama failed in 1998 the Company paid this tax liability on
behalf of Cranberry Magnetite/Broadway Gas Corporation. The Company
attempted to recover these funds.
NOTE 3
Stockholders' Equity
In January 1998 the Company issued 25,000 shares of its common stock
to cover the cost of PandaAmerica software programming. Such cost was
recognized at $.10 per share nominal value and expensed in 1998. The
Company also converted 40,000 shares of preferred shares to 200,000
shares of the Company common stock. Such preferred stock pays no
dividends, has a liquidation value of $5.00 per share, and is convertible
at 5 shares common stock for 1 share of preferred. The company also
cancelled 1,500,000 shares of preferred stock due to failure of Seller to
meet its obligation owed to the Company.
NOTE 4
Net Loss Per Share
The Company's net loss per share was calculated using 5,570,439 and
6,182,000 weighted average shares outstanding for 1999 and 1998,
respectively. Although convertible preferred stock is a common stock
equivalent, with a conversion rate of approximately 10 shares of
common stock (based upon an approximate market price for common stock
of $0.50) for each share of preferred stock, preferred stock conversion has
not been included in the calculation of earnings per share in that to do so
would be antidilutive.
NOTE 5
Mortgage Note Payable
The Company agreed to issue 5,000 shares of preferred stock to the
lender to cover $20,000 in loan closing costs for a $250,000 mortgage loan
due October 1, 1998.
<PAGE>
SBI COMMUNICATIONS. INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 (Cont'd)
Mortgage Note Payable Icont'd)
The Company borrowed $1,050,000 to pay the State of Alabama, on
behalf of Cranberry-Magnetite, the previous owner tax liability of
$748,422 and to pay old mortgage loan with a balance of $239,701 plus
accruedinterest.
NOTE 6
Income Taxes
Deferred income tax assets and liabilities are summarized as follows at
December 31,1999:
Deferred tax assets attributable to operating
loss carry forwards $3,500,000
Valuation allowance due to uncertainty
surrounding realization of operating
loss carry forwards ($3,500,000)
Total deferred taxes $ 0
The Company has available at December 31, 1999, unused operating loss
carry forwards, which may be applied against future taxable income, that
expire as follows:
Amount of Unused Expiration During
Operating Loss Year Ended
Carry Forwards December 31
$ 200,000 2001
$ 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
-------------
$9,925,000
=============
<PAGE>
SBI COMMUNICATIONS. INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
Commitments. Risks and Contingencies
The Company has developed bingo productions to be broadcast via
satellite in English and Spanish to the television market and the Internet,
into homes of viewers throughout the World. Should local, state, or federal
laws change regarding bingo sweepstakes, such changes could have a
material impact on the ability of the Company to generate future revenues.
The Company is the owner of record on the Piedmont Property and is
therefore, responsible for all amounts attributable or assessed by state tax
authorities. Management believes that $100,000 paid at closing will
satisfy all obligations.
The Company has a history or issuing common stock tor services
difficult to value or yet to be provided. Approximately 3,000,000 (or 57%)
of the common stock outstanding at December 31, 1998, is restricted in
some fashion as a result of the above transactions. Furthermore, the Company
has in prior years canceled common stock certificates due to non-
performance of the third parties involved in certain of the above
transactions.
Although no party to such transactions has yet instigated litigation
involving the Company for cancellation or restriction of related shares,
due to the volume of such transactions, litigation relating to such activity
remains a possibility. Management believes all actions it has taken to cancel
or restrict common stock are with merit, and does not anticipate any material
loss being incurred by the Company relating to future resolution of these
matters.
The Company has an employment agreement with Mr. Ron Foster,
shareholder and president, which expires on December 31, 2001. Under
the agreement, Mr. Foster is entitled to $130,000 in minimum annual
salary, cash bonuses of the lesser of 10% of revenues or 5% of pre-tax
profits, and stock bonuses equivalent to 10% of pre-tax profits before
depreciation.
NOTE 8
Subsequent Events
a) The Company sold its building in Alabama in March 2000. The net
sales price is $6,000,000 with a 20% cash down payment and real
estate contract for $4.8 million at 9.00% interest payable monthly with
balloon payment of $4,695,000 in five years. The note will be
acquired at closing for $4.1 million in cash. The financial statements
reflect at $3.6 million provision for net realizable value of the Piedmont
Property as of 12/31/99 and 12/31/98 and no depreciation has been
recognized.
<PAGE>
SBI COMMUNICATIONS. INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 (Cont'd)
Subsequent Events (cont'd)
b) The Company intends on using the proceeds of Piedmont property
sales to settle the two outstanding mortgage obligations and the
equipment notes payable.
c) The Company cancelled 1,500,000 shares of preferred stock issued
to the former owner of the Piedmont property in March 2000 and
released such party from its obligation to repay the Company
$750,000 paid for past property taxes (See Note 2). Accordingly,
the basis of the property sold in March 2000 was $750,000 and
related closing costs at acquisition and the Company will recognize a
gain at closing in April 2000 of approximately $3.2 million.
d) In January 2000, the Company received all 2,500 shares issued by a
new company, FrontierPlace.Com, a Nevada corporation. This
wholly-owned subsidiary will operate proprietary software and
copyrighted bingo programs over the Internet. This company will also
provide a television network with programs promoting the Internet
bingo and shopping website and will be characterized as a broadcast
Internet service company.
e) In February 2000, they issued 200,000 shares of restricted stock
(estimated value $40,000) for the origination of a $150,000 loan from
two parties (the "Holder") which will bear interest at 10.00% per
annum. Principal and interest payable on 2/7/01 or demand of the
Holder and loan is secured by all Company assets. Note is
repayable at the option of the Holder in cash or upon exercise of stock
options granted in February 2000 for 300,000 shares at $.50 per
share.
f) On January 12, 2000, the Company issued 100,000 shares
of restricted common stock to an individual in consideration of a $5,000
cash payment and financial marketing services valued at $7,500 ($.12
per share).
g) On March 30, 2000, the Company canceled 723,500 shares of
common stock held by various individuals for non-performance of
services.
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 calendar years, 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.
December 31, 1999 December 31, 1998
----------------- -----------------
Statement of Operations Data
----------------------------
Gross Revenues $ -0- 544,662
Income from Operations(Loss) ($ 280,209) (693,879)
Net Income(Loss) per share * ( .05) ( .13)
Balance Sheet Data
------------------
Assets
------
Current Assets $ 485 118,160
Property & equipment, less
accumulated depreciation $7,458,345 6,782,223
Other Assets $ 151,180 84,174
------------ -----------
Total Assets $7,610,010 6,984,557
----------- -----------
Liabilities
-----------
Current Liabilities $ 817,350 847,634
Long Term Liabilities $1,050,000 Nil
Total Liabilities $1,867,950 962,288
Total Stockholders' Equity $5,742,060 6,022,269
----------- ------------
Total Liabilities and Equity $7,610,010 $ 6,984,557
=========== =============
______
* See above. Per share data is computed based on the weighted average
of common stock outstanding as of the report date.
<PAGE>
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
by and between
SBI Communications, Inc., a Delaware corporation
and
Valencia Entertainment Acquisition Corporation, a Delaware corporation
on the one hand
and
Valencia Entertainment International, LLC,
a California limited liability company
and
Valencia Members
on the other hand
Dated as of October 16, 2000
<PAGE>
TABLE OF CONTENTS
PAGE
AGREEMENT AND PLAN OF MERGER
RECITALS
AGREEMENT
1. THE MERGER
1.1 Surviving Corporation; Effective Time
1.2 Articles of Incorporation and Bylaws
1.3 Directors
1.4 Conversion of Shares
1.5 Fractional Shares
1.6 Stock Certificates
1.7 Closing
2. REPRESENTATIONS AND WARRANTIES OF VALENCIA AND
THE VALENCIA MEMBERS
2.1 Organization
2.2 Capitalization of Valencia
2.3 Subsidiaries and Investments
2.4 Financial Statements
2.5 Liabilities
2.6 Absence of Material Changes
2.7 Litigation
2.8 Title to Assets
2.9 Contracts and Undertakings
2.10 Transactions with Affiliates, Managers and Members
2.11 No Conflict
2.12 Authority
2.13 Compliance with Law
2.14 Securities Laws
2.15 Tax Matters
2.16 Salaries
2.17 Accrued Compensation
2.18 Employee Benefit Plans
2.19 Insurance
2.20 No Broker
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND SUB
3.1 Organization
3.2 Capitalization of the Company
3.3 Subsidiaries and Investments
3.4 Liabilities
3.5 Litigation
3.6 Title to Assets
3.7 Contracts and Undertakings
3.8 Transactions with Affiliates, Directors and Shareholders
3.9 No Conflict
3.10 Authority
3.11 Compliance with Law
3.12 Tax Matters
3.13 Salaries
3.14 Accrued Compensation
3.15 Employee Benefit Plans
3.16 No Broker
4. COVENANTS AND AGREEMENTS OF THE PARTIES
EFFECTIVE PRIOR TO CLOSING
4.1 Corporate Examinations and Investigations
4.2 Cooperation; Consents
4.3 Conduct of Business
4.4 Litigation
4.5 Notice of Default
5. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS
6. CONDITIONS TO CLOSING
6.1 Conditions to Obligation of Valencia and Valencia Members
(a) Representations and Warranties of Company to be True
(b) No Legal Proceedings
(c) Statutory Requirements
(d) Stockholders Agreement
(e) Officer's Certificate
(f)Legal Fees
(g)Certificate of Amendment Filed
6.2 Conditions to Obligations of Company.
(a) Representations and Warranties of Valencia and the
Valencia Members to be True
(b) No Legal Proceedings
(c) Statutory Requirements
(d) Employment Agreement
(e) Certain Releases
(f) Stockholders Agreement
(g) Certain Other Conditions
(h) Members' Certificate
(i) Manager's Certificate
(j) Accounting and Auditing Fees
(k) Certificate of Amendment Filed
7. INDEMNIFICATION
7.1 Indemnification by the Valencia Members
7.2 Indemnification by the Company
7.3 Computation of Losses
7.4 Notice to Indemnifying Party
7.5 Defense by Indemnifying Party
8. MISCELLANEOUS
8.1 Further Assurances
8.2 Expenses of Sale
8.3 Use and Confidentiality
8.4 Notices
8.5 Parties in Interest
8.6 Entire Agreement, Amendments
8.7 Headings, Etc.
8.8 Pronouns
8.9 Counterparts
8.10 Governing Law
8.11 Attorneys' Fees
SCHEDULES
Schedule 1.5 Conversion of Shares
Schedule 2.5 Liabilities
Schedule 2.7 Litigation
Schedule 2.8 Title to Assets
Schedule 2.9 Contracts and Undertakings
Schedule 2.10 Transactions with Affiliates, Managers and
Members
Schedule 2.11 No Conflict
Schedule 2.13 Compliance with Law
Schedule 2.14 Legend
Schedule 2.16 Salaries
Schedule 2.17 Accrued Compensation
Schedule 2.18 Employee Benefit Plans
Schedule 3.3 Subsidiaries and Investments
Schedule 3.4 Liabilities
Schedule 3.6 Litigation
Schedule 3.7 Title to Assets
Schedule 3.8 Contracts and Undertakings
Schedule 3.9 Transactions with Affiliates, Directors and
Shareholders
Schedule 3.14 Salaries
Schedule 3.15 Accrued Compensation
Schedule 3.16 Employee Benefit Plans
EXHIBITS
Exhibit A California Certificate of Merger
Exhibit B Certificate of Amendment
Exhibit CDelaware Certificate of Merger
Exhibit DArticles of Organization
Exhibit E Operating Agreement
Exhibit F Shareholders Agreement
Exhibit G Employment Agreement
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is
dated as of
October 16 2000, by and between SBICommunications, Inc., a Delaware
corporation
(the "Company"), and Valencia Entertainment Acquisition Corporation,
a Delaware corporationand a wholly owned subsidiary of the Company
("Sub"),
on the one hand; and Valencia Entertainment International, LLC, a
California
limited liability company ("Valencia"), and each of the members of
Valencia
set forth on the signature page hereto (collectively, the "Valencia
Members"),
on the other hand.
RECITALS
--------
A.The Company, Sub and Valencia have each determined
to engage in the transactions contemplated hereby (collectively, the
"Transaction") pursuant to which Sub will merge with and into Valencia,
with Valencia being the surviving limited liability company (the
"Merger"),
and the outstanding membership interests of Valencia shall be converted
into shares of the Company's common stock in the manner herein
described;
B.The respective Boards of Directors or members, as the
case may be, of the Company, Sub and Valencia have each approved the
Merger, the Transaction, this Agreement, and the California Certificate of
Merger and the Delaware Certificate of Merger, both referred to in Section
1.1(b) hereof, and the Valencia Members and the Company, as the sole
stockholder of Sub, have each approved the Merger, the Transaction, this
Agreement, and the California Certificate of Merger and the Delaware
Certificate of Merger, both referred to in Section 1.1(b) hereof, and the
parties intend that this Agreement constitutes a plan of reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of
1986,
as amended (the "Code"), and the regulations promulgated thereunder; and
AGREEMENT
----------
NOW, THEREFORE, in consideration of the mutual covenants
and agreements contained herein and in reliance upon the representations
and warranties hereinafter set forth, the parties hereto hereby agree as
follows:
1.THE MERGER
-----------
1.1SURVIVING ENTITY; EFFECTIVE TIME.
------------------------------------
(a)At the Closing (as hereinafter defined), subject to
the terms and conditions of this Agreement, Sub shall be merged with and
into Valencia in accordance with Sections 1113 and 17551 of the California
Corporations Code (the "CCC"), whereupon the separate existence of Sub
shall cease, and Valencia shall be the surviving limited liability company.
It is intended by the parties hereto that the Transaction shall constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code and the parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a)
of the United States Treasury Regulations.
(b)Simultaneously with the Closing, Valencia and
Sub shall file a Limited Liability Company Certificate of Merger (the
"California Certificate of Merger"), in the form attached hereto as Exhibit
A, in the office of the Secretary of State of the State of California in
accordance with the CCC. The Merger shall become effective at such time
as the California Certificate of Merger is duly filed in California (the date
of such filing being hereinafter referred to as the "Effective Date" and the
time of such filing being hereinafter referred to as the "Effective Time");
provided, however, that the California Certificate of Merger shall not be
filed until the Company has filed a Certificate of Amendment to the
Certificate of Incorporation of the Company (the "Certificate of
Amendment"), substantially in the form of Exhibit __ hereto, with the
Delaware Secretary of State. On the Effective Date a certificate of merger
(the "Delaware Certificate of Merger"), in the form attached hereto as
Exhibit B, shall be filed with the Secretary of State of the State of
Delaware in accordance with the Delaware General Corporation Law. From and
after the Effective Time, Valencia shall possess all the rights, privileges,
powersand franchises and be subject to all of the restrictions, disabilities
and duties of both Valencia and Sub, as provided under the CCC.
1.2ARTICLES OF ORGANIZATION AND OPERATING
AGREEMENT. The Articles of Organization and Operating Agreement
of Valencia shall be amended and restated effective as of the Effective Time
in the forms attached hereto as Exhibits ___ and ___, respectively.
1.3DIRECTORS. From and after the Effective Time, until
successors are duly elected and qualified in accordance with applicable
law, the directors of the Company shall be the same directors of the Company
who are in office immediately preceding the Effective Time.
1.4 OFFICERS. From and after the Effective Time, until
successors are duly appointed and qualified in accordance with applicable
law, the officers of the Company immediately after the Effective Time
shall be the officers of Valencia.
1.5 CONVERSION OF SHARES. As of the Effective Time,
by virtue of the Merger, automatically and without any action on the part
of any holder thereof:
(a)Each share of common stock, par value $0.01 per share, of
Sub issued and outstanding immediately prior to the Effective Time shall
be converted into a 0.1% fully paid and nonassessable membership interest of
Valencia ("Valencia Membership Interest") and the Company shall be
admitted as the sole member of Valencia.
(b)Each Class A Valencia Membership Interest outstanding
immediately prior to the Effective Time shall be converted into shares of
the Company's common stock, par value $0.001 per share ("Company
Shares"),
at the rate of 1378,549.82 Company Shares for each one percent (1%)
Class A Valencia Membership Interest. Each Class B Valencia Membership
Interest outstanding immediately prior to the Effective Time shall be converted
into Company Shares, at the rate of 378,549.82 Company Shares for each one
percent (1%) Class B Valencia Membership Interest. Each Valencia
Member shall be entitled to receive the number of Company Shares set forth on
Schedule 1.5 attached hereto, and, collectively, the Valencia Members
shall be entitled to receive an aggregate of 75,709,965 Company Shares.
1.6FRACTIONAL SHARES. Fractional shares of the
Company shall not be issued in connection with the Company Shares, but
any fractional shares shall be rounded to the nearest whole share. No cash
shall be issued in lieu of any fractional shares.
1.7STOCK CERTIFICATES.
(a)At the Effective Time, the Valencia Members
shall each be entitled to receive one or more certificates representing the
number of shares of Company Shares to which each such Valencia
Member is entitled pursuant to the provisions of Section 1.5(b) hereof.
(b)Each Valencia Membership Interest converted into
Company Shares shall, by virtue of the Merger and without any action on
the part of the holder thereof, cease to be outstanding, be cancelled and
retired and cease to exist. As of the Effective Time, by virtue of the
Transaction, each Valencia Member shall thereafter cease to possess any rights
with respect to each such Valencia Membership Interest, except the right to
receive the number of Company Shares as provided by Section 1.5(b) hereof.
(c)All Company Shares delivered to the Valencia
Members in respect of the Valencia Membership Interests in accordance
with the terms of this Agreement shall be deemed to have been delivered in full
satisfaction of all rights pertaining to such Valencia Membership Interests.
1.8CLOSING. Subject to the satisfaction of the conditions
precedent specified in Section 6 hereof, the closing of the Transaction
shall take place at 11:00 a.m. (Los Angeles time) at the offices of Pollet &
Richardson, a Law corporation, 10900 Wilshire Blvd., Los Angeles, CA
90024, on or before ________, 2000 or on such other date as may be
mutually agreed upon by the parties (the "Closing").
2.REPRESENTATIONS AND WARRANTIES OF
VALENCIA AND THE VALENCIA MEMBERS
Valencia and the Valencia Members hereby represent and warrant
to the Company as follows:
2.1ORGANIZATION.
(a)Valencia is a limited liability company, duly organized,
validly existing, and in good standing under the laws of the State of
California. Valencia has the power and authority to carry on its business
as presently conducted; and Valencia is qualified to do business in all
jurisdictions where the failure to be so qualified would have a material
adverse effect on its business.
(b)The copies of the charter documents of Valencia, including
but not limited to the Articles of Organization and the Amended and
Restated Operating Agreement of Valencia, heretofore furnished to the Company,
are complete and correct copies thereof as amended and in effect immediately
prior to the Effective Time.
2.2CAPITALIZATION OF VALENCIA.
(a)The capital structure of Valencia consists of Class
A and Class B Membership Interests, and one hundred percent (100%) of
such Class A and B Membership Interests are presently, and will be
immediately prior to the Closing, issued and outstanding. All of the issued and
outstanding Valencia Membership Interests are duly authorized, validly issued,
fully paid and nonassessable and are free from any liens, claims, charges,
security interests or other encumbrances. The Valencia Members are the sole
beneficial and record owners of the Valencia Membership Interests, and
such Valencia Members have as of the date hereof, and will have as of the
Effective Time, the unqualified right to transfer and dispose of such Valencia
Membership Interests.
(b)There are no outstanding options, warrants or
rights of any kind to acquire any membership interests, economic interests
or other securities of Valencia, whether direct or indirect, derivative or
otherwise.
2.3SUBSIDIARIES AND INVESTMENTS. Except as set
forth in Schedule 2.3 attached hereto, Valencia does not own any capital
stock or have any interest of any kind whatsoever in any corporation,
partnership, or other form of business organization.
2.4FINANCIAL STATEMENTS. The reviewed balance
sheets of Valencia as of September 30, 2000 and reviewed statements of
operations and cash flows for the 9 months ended September30, 2000, the
audited balance sheets of Valencia as of December 31, 1999 and audited
statements of operations and cash flows for the 12 months ended
December 31, 1999, and the audited balance sheets as of December 31, 1998 and
audited statements of operations and cash flows for the 12 months ended
December 31, 1998 (collectively, the "Valencia Financial Statements") (a)
are complete and correct in all material respects, (b) were prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods indicated, and (c) fairly and accurately
present the financial condition and results of operations of Valencia as of
the relevant dates thereof and for the periods covered thereby.
2.5LIABILITIES. All of the liabilities of any nature
whatsoever, contingent or otherwise, of Valencia as of the date hereof are
accurately described in detail and quantified (both individually and in the
aggregate) in Schedule 2.5 attached hereto.
2.6ABSENCE OF MATERIAL CHANGES. Since
December 31, 1999, there has not been:
(a)any material adverse change in the condition
(financial or otherwise) of the properties, assets, liabilities or business of
Valencia, except changes in the ordinary course of business which,
individually and in the aggregate, have not had a material adverse effect on
the business, operations, affairs or financial condition of Valencia or its
properties or assets.
(b)any redemption, purchase or other acquisition of
any membership or economic interest of Valencia or the granting, issuance
or execution of any rights, warrants, options or commitments by Valencia
relating to any membership or economic interest of Valencia.
2.7LITIGATION. Except as set forth on Schedule 2.7
attached hereto, there is no claim, proceeding, litigation or investigation,
whether civil or criminal in nature, pending or threatened against Valencia
or any of its affiliates in any court or by or before any governmental body
or agency, including without limitation any claim, proceeding or litigation
for the purpose of challenging, enjoining or preventing the execution,
delivery or consummation of the Transaction and this Agreement.
Valencia is not subject to any order, judgment, decree, stipulation or consent
or any agreement with any governmental body or agency that affects its business
or operations.
2.8TITLE TO ASSETS. Except as set forth on Schedule 2.8
attached hereto, Valencia has good and marketable title to all of the assets
and properties now carried on its books including those reflected in the
most recent balance sheet contained in the Valencia Financial Statements,
free and clear of all liens, claims, charges, security interests or other
encumbrances, except as described in the Valencia Financial Statements or
arising thereafter in the ordinary course of business (none of which will be
material).
2.9CONTRACTS AND UNDERTAKINGS. Except as set
forth on Schedule 2.9 attached hereto, Valencia has no contracts,
agreements, leases, licenses, arrangements, commitments or other
undertakings (collectively the "Valencia Contracts") to which it is a party
or to which it or its property is subject. Except as set forth on such
Schedule 2.9 attached hereto, Valencia is not in material default under any
of the Valencia Contracts and no other party to any Valencia Contract is in
default thereunder nor does there exist any condition or event which, after
notice or lapse of time or both, would constitute a default by any party to
any such Valencia Contract.
2.10TRANSACTIONS WITH AFFILIATES, MANGAGERS
AND MEMBERS. Except as set forth on Schedule 2.10 attached hereto,
there are no contracts, agreements, arrangements or other transactions
between Valencia and any officer, manager or member of Valencia, or any
corporation or other entity owned or controlled, directly or indirectly, by
any such officer, manager or member, a member of any such officer,
manager or member's family, or any affiliate of any such officer, manager
or member.
2.11NO CONFLICT. Except as set forth on Schedule 2.11
attached hereto, the execution and delivery of this Agreement and the
consummation of the Transaction will not conflict with or result in a
breach of any term or provision of, or constitute a default under, the charter
documents of Valencia or any agreement, contract or instrument to which
Valencia or any of the Valencia Members is a party or by which any of
them or any of their respective assets are bound.
2.12AUTHORITY. Valencia and each of the Valencia
Members has full power and authority to enter into this Agreement and to
carry out the Transaction. The execution and delivery of this Agreement
and the consummation of the Transaction have been duly authorized and
approved by all of the Members and the Manager(s) of Valencia and no
other corporate or other proceedings on the part of Valencia or the
Valencia Members are necessary to authorize this Agreement and the Transaction.
2.13COMPLIANCE WITH LAW. Except as set forth on
Schedule 2.13 attached hereto, Valencia has in all material respects
complied with and it is now in all material respects in compliance with, all
federal, state and local laws applicable to it. The Valencia Membership
Interests were issued in compliance with all state and federal securities
laws.
2.14SECURITIES LAWS. The Valencia Members
acknowledge that the Company Shares are not being registered under the
Securities Act of 1933, as amended (the "Securities Act"), on the ground
that the offer and sale of the Company Shares are exempt from the
registration provisions of Section 5 of the Securities Act pursuant to
Section4(2) thereof, as transactions by an issuer not involving any public
offering, and/or may be deemed not to involve an offer or sale within the
meaning of Section 5 of the Securities Act pursuant to
Regulation D promulgated thereunder, and that the Company Shares
may not be resold in any transaction subject to Section 5 of
the Securities Act unless registered or an
exemption from registration is available for such sale, and that the
certificates representing the Company Shares will bear a legend to that
effect, substantially in the form set forth on Schedule 2.14 attached hereto.
Each of the Valencia Members is acquiring the Company Shares for
investment purposes only and not with a view to distribution or resale
thereof.
2.15TAX MATTERS.
(i) Each of Valencia and the Valencia Members has filed
or caused to be filed with the appropriate Federal, state, county, local and
foreign governmental agencies or instrumentalities all tax returns and tax
reports required to be filed, and all taxes, assessments, fees and other
governmental charges in respect of Valencia have been fully paid when
due (subject to any extensions filed).
(ii) There is not pending nor, to the best knowledge of each
of Valencia and the Valencia Members, is there any threatened Federal,
state or local tax audit of the Valencia or any Valencia Member in respect of
Valencia. There is no agreement with any Federal, state or local taxing
authority by the Valencia or any Valencia Member that may affect the
subsequent tax liabilities of Valencia.
(iii) Without limiting the foregoing: (a) the Valencia
Financial Statements include adequate provisions for all taxes,
assessments, fees, penalties and governmental charges which have been or in the
future may be assessed against Valencia or any Valencia Member in respect of
Valencia with respect to the period ended September 30, 2000 and all
periods prior thereto; and (b) neither Valencia nor any Valencia Member is,
on the date hereof, liable for taxes, assessments, fees or governmental charges
in respect of Valencia.
2.16SALARIES. Schedule 2.16 attached hereto sets forth a
true and complete list, as of the date of this Agreement, of all of the
persons who are employed by Valencia, together with their compensation
(including bonuses) for the calendar year ended December 31, 1999, and the rate
of compensation (including bonus arrangements) currently being paid to each
such employee.
2.17ACCRUED COMPENSATION. Valencia does not have
any outstanding liability for payment of wages, vacation pay (whether
accrued or otherwise), salaries, bonuses, pensions or contributions under
any labor or employment contract, whether oral or written, or by reason of
any past practices with respect to such employees based upon or accruing
with respect to services of present or former employees of the Company or
Sub, except as disclosed in Schedule 2.17 attached hereto.
2.18EMPLOYEE BENEFIT PLANS. Valencia does not have
any pension plan, profit sharing plan or employee's savings plan, and is not
otherwise subject to any applicable provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA") except as set forth on Schedule
2.18 attached hereto.
2.19INSURANCE. Schedule 2.19 contains a description of
each insurance policy maintained by Valencia (or which names Valencia as
an additional insured) with respect to its properties, assets and business, or
with respect to the life of the Manager or any officer of Valencia, and each
such policy is presently in full force and effect. The Company is not in
default with respect to any insurance policy maintained by it, and, to the
Company's Knowledge, there is no default with respect to any insurance
policy that names the Company as an additional insured.
2.20NO BROKER. All negotiations relative to this
Agreement and the Transaction have been carried on directly by Valencia
and the Valencia Members with the Company without the intervention of
any person on behalf of Valencia or any Valencia Member in such manner
as to give rise to any valid claim against any of the parties hereto for a
brokerage commission, finder's fee or other like payment.
3.REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND SUB
Each of the Company and Sub hereby represents and warrants,
individually as to itself, to the Valencia Members as follows:
3.1ORGANIZATION
(a)Except as set forth on Schedule 3.1 attached
hereto, each of the Company and Sub is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware,
has the corporate power and authority to carry on its business as presently
conducted, and is qualified to do business in all jurisdictions where the
failure to be so qualified would have a material adverse effect on the business
of the Company or Sub, as the case may be.
(b)The copies of the Certificate of Incorporation of
the Company and Sub, and the Bylaws of the Company and Sub heretofore
furnished to Valencia are complete and correct copies of the Certificate of
Incorporation and the Bylaws, as amended, of the Company and Sub as in
effect on the date hereof.
3.2CAPITALIZATION OF THE COMPANY. Upon filing
the Certificate of Amendment, the authorized capital stock of the Company
will consist of One Hundred Million (100,000,000) shares of common
stock, par value $0.001 per share, of which Twelve Million Three Hundred
Twenty-Four Thousand Eight Hundred Seventy-Eight (12,324,878) shares
are issued and outstanding as of the date of the date hereof; and Ten
Million (10,000,000) shares of Preferred Stock, par value, upon filing the
Certificate of Amendment, $.001 per share, of which Sixty-Three Thousand
(63,000) shares are issued and outstanding as of the date hereof. All of
the issued and outstanding shares are duly authorized, validly issued, fully
paid and non-assessable, and, at the Closing, the Company Shares will be duly
authorized, validly issued, fully paid and non-assessable. Except for such
outstanding shares, there are no outstanding shares of capital stock or other
securities or other equity interests of the Company or options, warrants or
rights of any kind to acquire such stock or other securities of the Company.
3.3SUBSIDIARIES AND INVESTMENTS. Except as set
forth on Schedule 3.3 attached hereto, the Company does not own directly
or indirectly, any capital stock or have any interest in any corporation,
partnership or other form of business organization.
3.4LIABILITIES. Except as set forth on Schedule 3.4
attached hereto or otherwise contemplated in this Agreement, the liabilities
of the Company will not exceed __ as of the Closing. As used herein,
liabilities shall mean liabilities of any nature whatsoever, contingent or
otherwise.
3.5LITIGATION. Except as set forth on Schedule 3.5
attached hereto, there is no litigation, proceeding or investigation pending
or, to the knowledge of the Company or Sub, as the case may be,
threatened against the Company or Sub, as the case may be, affecting any of its
properties or assets that might result, either in any case or in the aggregate,
in any material adverse change in the business, operations, affairs or
financial condition of the Company or Sub, as the case may be, or their
respective properties or assets, or that might call into question the validity
of this Agreement, or any action taken or to be taken pursuant hereto.
3.6TITLE TO ASSETS. Except as set forth on Schedule 3.6
attached hereto, each of the Company and Sub has good and marketable
title to all of its assets and properties now carried on its books including
those reflected in the balance sheet contained in the Company Financial
Statements, free and clear of all liens, claims, charges, security interests or
other encumbrances, except as described in the Company Financial
Statements or arising thereafter in the ordinary course of business (none of
which will be material).
3.7CONTRACTS AND UNDERTAKINGS. Except as set
forth on Schedule 3.7 attached hereto, the Company or Sub, as the case
may be, has no contracts, agreements, leases, licenses, arrangements,
commitments or other undertakings (collectively, the "Company
Contracts") to which the Company or Sub, as the case may be, is a party or to
which it or its property is subject. Except as set forth on Schedule 3.7
attached hereto, the Company or Sub, as the case may be, is not in material
default, or alleged to be in material default, under any Company Contract and,
to the knowledge of the Company or Sub, as the case may be, no other party to
any Company Contract to which the Company or Sub, as the case may be,
is a party is in default thereunder nor, to the knowledge of the Company or
Sub, as the case may be, does there exist any condition or event which,
after notice or lapse of time or both, would constitute a default by any party
to any such Company Contracts.
3.8TRANSACTIONS WITH AFFILIATES, DIRECTORS
AND SHAREHOLDERS. Except as set forth on Schedule 3.8 attached
hereto, there are no contracts, agreements, arrangements or other
transactions between the Company or Sub, as the case may be, and any
officer, director, or 5% stockholder, a member of any such officer, director
or 5% stockholder's family, or any affiliate of any such officer, director or
5% stockholder.
3.9NO CONFLICT. The execution and delivery of this
Agreement and the consummation of the Transaction will not conflict with
or result in a breach of any term or provision of, or constitute a default
under, the Certificate of Incorporation or Bylaws of the Company or Sub,
as the case may be, or any agreement, contract or instrument to which the
Company or Sub, as the case may be, is a party or by which it or any of
their respective assets are bound.
3.10AUTHORITY. Each of the Company and Sub has full
power and authority to enter into this Agreement and to carry out the
Transaction. The execution and delivery of this Agreement, the
consummation of the Transactions and the issuance of the Company
Shares in accordance with the terms hereof, have been duly authorized and
approved by the Board of Directors of the Company and Sub and no other
corporate proceedings on the part of the Company or Sub are necessary to
authorize this Agreement, the Transaction and the issuance of the
Company Shares in accordance with the terms hereof.
3.11COMPLIANCE WITH LAW. To the knowledge of
Company or Sub, as the case may be, each of the Company and Sub has in
all material respects complied with and it is now in all material respects in
compliance with, all Federal, State and local laws applicable to the
Company or Sub, as the case may be. Except for the issuance of the
Company Shares to the Valencia Members hereunder, all outstanding
securities have been issued in full compliance in all material respects with
all state and federal securities laws. The securities filings of the Company
contain no material misstatement or fail to state a material fact necessary to
make the statements made, in light of the circumstances under which they
were made, not misleading.
3.12TAX MATTERS.
(i) Except as to taxes contested in good faith, each of the
Company and Sub has filed or caused to be filed with the appropriate
Federal, state, county, local and foreign governmental agencies or
instrumentalities all tax returns and tax reports required to be filed, and all
taxes, assessments, fees and other governmental charges have been fully
paid when due (subject to any extensions filed).
(ii) There is not pending nor, to the best knowledge of each
of the Company and Sub, is there any threatened Federal, state or local tax
audit of the Company or Sub. There is no agreement with any Federal,
state or local taxing authority by the Company or Sub that may affect the
subsequent tax liabilities of Valencia.
(iii) Without limiting the foregoing: (a) the Company
Financial Statements include adequate provisions for all taxes,
assessments, fees, penalties and governmental charges which have been or in the
future may be assessed against the Company or Sub with respect to the period
then ended and all periods prior thereto; and (b) neither the Company nor Sub
is, on the date hereof, liable for taxes, assessments, fees or governmental
charges.
3.13SALARIES. Schedule 3.13 attached hereto sets forth a
true and complete list, as of the date of this Agreement, of all of the
persons
who are employed by the Company and Sub, together with their
compensation (including bonuses) for the calendar year ended December
31, 1999, and the rate of compensation (including bonus arrangements)
currently being paid to each such employee.
3.14ACCRUED COMPENSATION. The Company and Sub
do not have any outstanding liability for payment of wages, vacation pay
(whether accrued or otherwise), salaries, bonuses, pensions or
contributions under any labor or employment contract, whether oral or
written, or by reason of any past practices with respect to such employees
based upon or accruing with respect to services of present or former
employees of the Company or Sub, except as disclosed in Schedule 3.14
attached hereto.
3.15EMPLOYEE BENEFIT PLANS. The Company and Sub
do not have any pension plan, profit sharing plan or employee's savings
plan, and neither is otherwise subject to any applicable provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA") except as
set forth on Schedule 3.15 attached hereto.
3.16NO BROKER. All negotiations relative to this
Agreement and the Transaction have been carried on directly by the
Company and Sub with Valencia and the Valencia Members without the
intervention of any person on behalf of the Company or Sub in such
manner as to give rise to any valid claim against any of the parties hereto
for a brokerage commission, finder's fee or other like payment.
4.COVENANTS AND AGREEMENTS OF THE PARTIES
EFFECTIVE PRIOR TO CLOSING
4.1CORPORATE EXAMINATIONS AND
INVESTIGATIONS. Prior to the Closing, each party shall be entitled,
through its employees and representatives, to make such investigations and
examinations of the books, records and financial condition of the
Company, Sub and Valencia as each party may request. In order that each party
may have the full opportunity to do so, the Company, Sub, each of the Valencia
Members and Valencia shall furnish each party and its representatives
during such period with all such information concerning the affairs of the
Company, Sub or Valencia as each party or its representatives may
reasonably request and cause the Company, Sub or Valencia and their
respective officers, managers, employees, consultants, agents, accountants
and attorneys to cooperate fully with each party's representatives in
connection with such review and examination and to make full disclosure
of all information and documents requested by each party and/or its
representatives. Any such investigations and examinations shall be
conducted at reasonable times and under reasonable circumstances, it
being agreed that any examination of original documents will be at each party's
premises, with copies thereof to be provided to each party and/or its
representatives upon request.
4.2COOPERATION; CONSENTS. Prior to the Closing,
each party shall cooperate with the other parties to the end that the parties
shall (i) in a timely manner make all necessary filings with, and conduct
negotiations with, all authorities and other persons the consent or approval
of which, or the license or permit from which is required for the
consummation of the Transaction and (ii) provide to each other party such
information as the other party may reasonably request in order to enable it
to prepare such filings and to conduct such negotiations.
4.3CONDUCT OF BUSINESS. Subject to the provisions
hereof, from the date hereof through the Closing, each party hereto shall
(i)
conduct its business in the ordinary course and in such a manner so that the
representations and warranties contained herein shall continue to be true
and correct in all material respects as of the Closing as if made at and as of
the Closing and (ii) not enter into any material transactions or incur any
material liability not required or specifically contemplated hereby, without
first obtaining the written consent of the Company and Sub on the one
hand and Valencia on the other hand. Without the prior written consent of the
Company, Sub and Valencia, except as required or specifically
contemplated hereby, each party shall not undertake or fail to undertake
any action if such action or failure would render any of said warranties and
representations untrue in any material respect as of the Closing.
4.4LITIGATION. From the date hereof through the Closing,
each party hereto shall promptly notify the representative of the other
parties (Valencia shall represent itself and the Valencia Members and the
Company shall represent itself and Sub) of any lawsuits, claims,
proceedings or investigations which after the date hereof are threatened or
commenced against such party or any of its affiliates or any officer,
director, employee, consultant, agent or shareholder thereof, in their
capacities as such, which, if decided adversely, could reasonably be
expected to have a material adverse effect upon the condition (financial or
otherwise), assets, liabilities, business, operations or prospects of such
party or any of its subsidiaries.
4.5NOTICE OF DEFAULT. From the date hereof through
the Closing, each party hereto shall give to the representative of the other
parties (Valencia shall represent itself and the Valencia Members and the
Company shall represent itself and Sub) prompt written notice of the
occurrence or existence of any event, condition or circumstance occurring
which would constitute a violation or breach of this Agreement by such
party or which would render inaccurate in any material respect any of such
party's representations or warranties herein.
5.SURVIVAL OF REPRESENTATIONS, WARRANTIES
AND COVENANTS.
All representations, warranties and covenants of the parties hereto
contained herein shall survive the consummation of the Transaction and
remain in full force and effect until the expiration of the applicable statute
of limitations except (a) Sections 2.4 and 3.4 hereof which shall not
survive the Closing and (b) Section 2.5 hereof which shall remain in full
force and effect for a period of one year from the Closing.
6.CONDITIONS TO CLOSING
6.1CONDITIONS TO OBLIGATION OF VALENCIA AND
VALENCIA MEMBERS. The obligations of Valencia and the Valencia
Members under this Agreement shall be subject to each of the following
conditions:
(a)REPRESENTATIONS AND WARRANTIES OF
COMPANY TO BE TRUE. The representations and warranties of the
Company and Sub, as the case may be, herein contained shall be true in all
material respects at the Closing with the same effect as though made at
such time, except to the extent they expressly relate to an earlier date. The
Company and Sub, as the case may be, shall have performed in all material
respects all obligations and complied in all material respects, to their
respective actual knowledge, with all covenants and conditions required by
this Agreement to be performed or complied with by it at or prior to the
Closing.
(b)NO LEGAL PROCEEDINGS. No injunction or
restraining order shall be in effect prohibiting this Agreement, and no
action or proceeding shall have been instituted and, at what would otherwise
have been the Closing, remain pending before the court to restrain or prohibit
the Transaction.
(c)STATUTORY REQUIREMENTS. All statutory
requirements for the valid consummation by the Company or Sub, as the
case may be, of the Transaction shall have been fulfilled. All authorizations,
consents and approvals of all governments and other persons required to
be obtained by Company and Sub in order to permit consummation by the
Company or Sub, as the case may be, of the Transaction shall have been
obtained except as to any authorization, consents and approvals that may
be required for the issuance of the Company Shares to the Valencia Members
hereunder.
(d)STOCKHOLDERS AGREEMENT. The
Company and the Valencia Members shall have entered into a stockholders
agreement substantially in form of Exhibit F attached hereto (the
"Stockholders Agreement").
(e)OFFICER'S CERTIFICATE. The Company
shall have delivered to Valencia and the Valencia Members, an officer's
certificate to Valencia and the Valencia Members, in form and substance
reasonably satisfactory to Valencia and the Valencia Members, as to the
satisfaction of the foregoing conditions.
(f)CERTIFICATE OF AMENDMENT FILED.
The Company shall have filed the Certificate of Amendment with the
Delaware Secretary of State.
6.2CONDITIONS TO OBLIGATIONS OF COMPANY.
The obligation of the Company and Sub under this Agreement shall be
subject to the following conditions:
(a)REPRESENTATIONS AND WARRANTIES OF
VALENCIA AND THE VALENCIA MEMBERS TO BE TRUE. The
representations and warranties of Valencia and the Valencia Members
herein contained shall be true in all material respects as of the Closing and
shall have the same effect as though made at such time, except to the extent
they expressly relate to an earlier date. Valencia and the Valencia Members
shall have performed in all material respects all obligations and complied in
all material respects, with all covenants and conditions required by this
Agreement to be performed or complied with by them prior to the Closing.
(b)NO LEGAL PROCEEDINGS. No injunction or
restraining order shall be in effect, and no action or proceeding shall have
been instituted and, at what would otherwise have been the Closing,
remain
pending before the court to restrain or prohibit the Transaction.
(c)STATUTORY REQUIREMENTS. All statutory
requirements for the valid consummation by Valencia and the Valencia
Members of the Transaction shall have been fulfilled. All authorizations,
consents and approvals of all governments and other persons required to
be obtained by Valencia and the Valencia Members in order to permit
consummation by Valencia and the Valencia Members of the Transaction
shall have been obtained.
(d)EMPLOYMENT AGREEMENT. The Company
shall have entered into an employment agreement with Ronald Foster
substantially in the form of Exhibit G attached hereto.
(e)CERTAIN RELEASES. Each Valencia Member
shall have delivered to the Company and Valencia, an acknowledgment
and release, in form and substance reasonably satisfactory to the Company,
acknowledging that Valencia has no liabilities, debts or obligations of any
nature whatsoever to such Valencia Member, and fully and forever
releasing the Company and Valencia in respect thereof.
(f)STOCKHOLDERS AGREEMENT. The
Company and the Valencia Members shall have entered into a stockholders
agreement substantially in form of Exhibit F attached hereto.
(g)CERTAIN OTHER CONDITIONS. The
conditions contemplated by Sections 6.1(c), 6.1(d) and 6.1(f) hereof shall
have been satisfied.
(h)MEMBERS' CERTIFICATE. The Valencia
Members shall have delivered to the Company a certificate as to good title
to the Valencia Membership Interests owned by them and as to their
waiver of appraisal rights available under the CCC in respect of the Merger.
(i)MANAGER'S CERTIFICATE. Valencia shall
have delivered to the Company a manager's certificate in form and
substance reasonably satisfactory to the Company, as to the satisfaction of
the foregoing conditions.
(j)ACCOUNTING AND AUDITING FEES.
Subject to the billing statements having been submitted to Valencia for
advance review, Jay J. Shapiro, APC, shall have confirmed in writing that
all sums payable for services rendered through the Closing Date, to the extent
billed, have been paid in full.
(k)CERTIFICATE OF AMENDMENT FILED.
The Company shall have filed the Certificate of Amendment with the
Delaware Secretary of State.
7.INDEMNIFICATION.
7.1INDEMNIFICATION BY THE VALENCIA
MEMBERS. Provided the Company's claim therefor is instituted by
written notice within the time period specified in Section 5 hereof, except that
notice shall be deemed to have been given for the disputes referred to in
Schedule 2.5 attached hereto, the Valencia Members shall, jointly and
severally, indemnify, defend and hold harmless and in all respects make
whole the Company, its officers, directors, employees and agents and each
person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, from and against
any and all claims, demands, liabilities, damages, judgments and payments,
including reasonable attorneys' fees ("Losses"), which may be incurred or
suffered by the Company or to which it may be subject, which may arise
out of or result from (i) any breach of or exist in violation of any
representation, warranty, covenant or agreement of Valencia and the Valencia
Members contained in this Agreement, or (ii) the disputes referred to in
Schedule 2.5 attached hereto.
7.2INDEMNIFICATION BY THE COMPANY. Provided
the claim therefor is instituted by written notice within the time period
specified in Section 5 hereof, the Company shall indemnify, defend and
hold harmless and in all respect make whole the Valencia Members from
and against any Losses which may be incurred or suffered by any such
party or to which any such party may be subject, which may arise out of or
result from any breach of or exist in violation of any representation,
warranty, covenant or agreement of the Company or Sub, as the case may
be, contained in this Agreement.
7.3COMPUTATION OF LOSSES. For purposes of
calculating any Losses suffered by an indemnified party pursuant to
Sections 7.1 or 7.2 hereof, the amount of the Losses suffered by the
indemnified party shall be the net amount of damage so suffered after
giving effect to any insurance proceeds recovered with respect to such
matter.
7.4NOTICE TO INDEMNIFYING PARTY. If any party
(the "Indemnified Party") receives notice of any claim or other
commencement of any action or proceeding with respect to which any
other party (or parties) (the "Indemnifying Party") is obligated to provide
indemnification pursuant to Sections 7.1 or 7.2 hereof, the Indemnified
Party shall promptly give the Indemnifying Party written notice thereof
which notice shall specify, if known, the amount or an estimate of the
amount of the Losses arising therefrom. Such notice shall be a condition
precedent to any liability of the Indemnifying Party for indemnification
hereunder. The Indemnified Party shall not settle or compromise any
claim by a third party for which it is entitled to indemnification hereunder,
without the prior written consent of the Indemnifying Party (which shall
not be unreasonably withheld or delayed) unless suit shall have been instituted
against it and the Indemnifying Party shall not have taken control of such
suit after notification thereof as provided in Section 7.5 hereof.
7.5DEFENSE BY INDEMNIFYING PARTY. In connection
with any claim giving rise to indemnity hereunder resulting from or arising
out of any claim or legal proceeding by a person who is not a party to this
Agreement, the Indemnifying Party at its sole cost and expense shall
assume the defense of any such claim or legal proceeding using counsel of its
choice (subject to the approval of the Indemnified Party, which approval
may not be unreasonably withheld or delayed). The Indemnified Party
shall be entitled to participate in the defense of any such action, with its
counsel and at its own expense; provided, however, that if the Indemnified
Party, in its sole reasonable discretion, determines that there exists a
conflict of interest between the Indemnifying Party (or any constituent
party thereof) and the Indemnified Party or that the Indemnifying Party
does not have sufficient financial resources to fully defend the proceeding
or to pay the claim or judgment, the Indemnified Party (or any constituent
party thereof) hall have the right to engage separate counsel, the reasonable
costs and expenses of which shall be paid by the Indemnifying Party, but in
no eventshall the Indemnifying Party be liable for the costs and expenses of
more than one such separate counsel. If the Indemnifying Party does not assume
the defense of any such claim or litigation resulting therefrom, the
Indemnified Party may defend against such claim or litigation, after giving
notice of the same to the Indemnifying Party, on such terms as the
Indemnified Party may deem appropriate, and the Indemnifying Party shall
be entitled to participate in (but not control) the defense of such action,
with its counsel and at its own expense.
8.MISCELLANEOUS
8.1FURTHER ASSURANCES. From time to time, at
another party's request and without further consideration, each of the
parties will execute and deliver to the requesting party such documents and take
such action as such other party may reasonably request in order to
consummate more effectively the Transaction.
8.2EXPENSES OF SALE. Except as otherwise provided
herein, whether or not the Transaction is consummated, each party shall
bear its direct and indirect expenses incurred in connection with the
negotiation and preparation of this Agreement and the consummation and
performance of the Transaction. Without limitation, such expenses shall
include the fees and expenses of all attorneys, brokers, investment bankers,
accountants, agents and finders and other professionals incurred in
connection herewith, acting on behalf of such party. The parties shall
indemnify each other against any claims, costs, losses, expenses or
liabilities arising from any claim of commissions, broker's fees, finder's
fees or other compensation in connection with the Transaction which may be
asserted by any person based on any agreement or arrangement for
payment by the other party.
8.3USE AND CONFIDENTIALITY. All of the information,
records, books, and data to which the parties are given access as set forth
herein shall be used by the parties solely for the purpose of confirming the
representations and warranties set forth herein. Subject to any obligation
to comply with (i) any law (ii) any rule or regulation of any authority or
securities exchange or (iii) any subpoena or other legal process to make
information available to the persons entitled thereto, whether or not the
Transaction shall be concluded, all information obtained by any party
about the other, and all of the terms and conditions of this Agreement, shall be
kept in confidence by each party, and each party shall cause its
shareholders, directors, trustees, officers, employees, agents and attorneys
to hold such information confidential. Such confidentiality shall be
maintained to the same degree as such party maintains its own confidential
information and shall be maintained until such time, if any, as any such
data or information either is, or becomes, published or a matter of public
knowledge; provided, however, that the foregoing shall not apply to any
information obtained by either party through its own independent
investigations of the other party or received by such party from a third
party not under any obligation to keep such information confidential nor to any
information obtained by such party which is generally known to others
engaged in the trade or business; and provided, further, that, from and after
the Closing, such party shall be under no obligation to maintain
confidential any such information concerning the other party. If this
Agreement shall be terminated for any reason, each party shall return or
cause to be returned to the other all written data, information, files, records
and copies of documents, worksheets and other materials obtained by such
party in connection with the Transaction.
8.4NOTICES. All notices, requests and other
communications hereunder shall be in writing and shall be delivered by
courier or other means of personal service (including by means of a
nationally recognized courier service or professional messenger service),
or sent by telex or telecopy or mailed first class, postage prepaid, by
certified mail, return receipt requested, or by Federal Express or other
reputable overnight delivery service, in all cases, addressed:
TO VALENCIA OR VALENCIA MEMBERS:
26030 Avenue Hall
Studio 5
Valencia CA 91355
Tel: 661-257-8000
Fax: 661-257-1780
Attention: Vince Vellardita
TO THE COMPANY:
SBI Communications, Inc.
1239 South Glendale Avenue
Glendale, CA 91205
Tel: 818-550-6181
Fax: 818-550-6111
Attention: Ronald Foster
WITH A COPY TO:
Pollet & Richardson
10900 Wilshire Boulevard
Los Angeles, California 90024
Tel: 310-208-1182
Fax: 310-208-1154
Attention: Nimish Patel, Esq.
All notices, requests and other communications shall be deemed
given on the date of actual receipt or delivery as evidenced by written
receipt, acknowledgment or other evidence of actual receipt or delivery to
the address. In case of service by telecopy, a copy of such notice shall be
personally delivered or sent by registered or certified mail, in the manner
set forth above, within three (3) business days thereafter. Either party
hereto may from time to time by notice in writing served as set forth above
designate a different address or a different or additional person to which
all such notices or communications thereafter are to be given.
8.5PARTIES IN INTEREST. Except as otherwise expressly
provided herein, all the terms and provisions of this Agreement shall be
binding upon, shall inure to the benefit of and shall be enforceable by the
respective heirs, beneficiaries, personal and legal representatives,
successors and assigns of the parties hereto; provided, however, that no
assignment or transfer by any party of this Agreement or its rights or
obligations hereunder shall occur without the prior written consent of the
other parties hereto.
8.6ENTIRE AGREEMENT, AMENDMENTS. This
Agreement, including the Schedules, Exhibits and other documents and
writings referred to herein or delivered pursuant hereto, which form a part
hereof, contains the entire understanding of the parties with respect to this
subject matter. There are no restrictions, agreements, promises,
warranties, covenants or undertakings other than those expressly set forth
herein or therein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter. This
Agreement may be amended only by a written instrument duly executed by
the parties or their respective permitted successors or assigns.
8.7HEADINGS, ETC. The section and paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretations of this Agreement.
8.8PRONOUNS. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine or neuter, singular or
plural, as the identity of the person, persons, entity or entities may require.
8.9COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
8.10GOVERNING LAW. This Agreement shall be governed
by the laws of the State of California.
8.11ATTORNEYS' FEES. If any legal action or other
proceeding is brought for the enforcement of this Agreement or because of
any dispute, breach, default or claim hereunder, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs ncurred in that action or proceeding, in addition to any other
relief to which it may be entitled.
EXHIBIT B
WRITTEN CONSENT OF
THE MAJORITY STOCKHOLDERS OF
SBI COMMUNICATIONS, INC.
IN LIEU OF MEETING
The undersigned, being the holders of at least a majority of the
outstanding capital stock of SBI Communications, Inc., a Delaware
corporation (the "Corporation"), acting pursuant to authority granted by the
Bylaws of the Corporation and Section 228(a) of the General Corporation
Law of the State of Delaware, do hereby adopt the following resolutions
by written consent as of October 16, 2000:
AMENDMENTS TO CERTIFICATE OF INCORPORATION
WHEREAS, it is proposed by the
Corporation's Board of Directors that
the Corporation enter into an
Agreement and Plan of Merger (the
"Merger Agreement"), by and between
the Corporation and Valencia
Entertainment Acquisition
Corporation, a Delaware corporation
and a wholly owned subsidiary of the
Corporation ("VAC"), on the one
hand, and Valencia Entertainment
International, LLC, a California
limited liability company
("Valencia"), and its members, on the
other hand, whereby VAC would be
merged with and into Valencia, with
Valencia being the surviving limited
liability company (the "Merger");
WHEREAS, it is deemed to be in the
best interests of the Corporation and
its stockholders that VAC be merged
with and into Valencia, with Valencia
as the surviving limited liability
company;
WHEREAS, pursuant to the Merger, it
is proposed that the name of the
Corporation be changed to ValCom,
Inc;
WHEREAS, in order effectuate the
terms of the Merger, it is deemed to be
in the best interests of the Corporation
and its stockholders to amend the
Corporation's Certificate of
Incorporation to increase the
Corporation's aggregate number of
authorized shares of common stock;
WHEREAS, it is deemed to be in the
best interests of the Corporation and
its stockholders to decrease the par
value of the Corporation's Preferred
Stock, from $5.00 to $0.001 per share;
NOW, THEREFORE, BE IT
RESOLVED, that, effective upon the
filing with the Delaware Secretary of
State of a Certificate of Amendment to
the Certificate of Incorporation of the
Corporation (the "Certificate of
Amendment"), the article numbered
FIRST of the Corporation's Certificate
of Incorporation be, and hereby is,
amended in its entirety to read as
follows:
"The name of the Corporation
(hereinafter called the "Corporation")
is
ValCom, Inc."
RESOLVED FURTHER, that,
effective upon the filing of the
Certificate of Amendment with the
Delaware Secretary of State, the article
numbered FOURTH of the
Corporation's Certificate of
Incorporation be, and hereby is,
amended in its entirety to read as
follows:
"The total number of shares of stock
which the Corporation shall have
authority to issue is 110,000,000
shares, of which 10,000,000 shares
shall be Preferred Stock of the par
value of $0.001 each (hereinafter
called "Preferred Stock") and
100,000,000 shares shall be Common
Stock of the par value of $0.001 each
(hereinafter called "Common
Stock")."
RESOLVED FURTHER, that any
officer of the Corporation, acting
alone, be and hereby is authorized,
empowered and directed, for and on
behalf of the Corporation, to file the
Certificate of Amendment with the
Delaware Secretary of State in order to
effectuate the foregoing resolutions;
RESOLVED FURTHER, that any
officer of the Corporation, acting
alone, be and hereby is authorized,
empowered and directed, for and on
behalf of the Corporation, to execute
and deliver any and all certificates,
instruments and other documents, and
to take such further actions as any
such officer deems necessary or
appropriate to effectuate the purposes
of the foregoing resolutions.
ELECTION OF DIRECTORS
WHEREAS, it is deemed to be in the
best interests of the Corporation and
its stockholders that, effective upon
the consummation of the Merger, the
Corporation elect four (4) directors to
serve as the Corporation's Board of
Directors for the ensuing year until
their successors are duly elected or
qualified;
NOW, THEREFORE, BE IT
RESOLVED, that, effective upon the
consummation of the Merger, the
following individuals be, and hereby
are, duly appointed and qualified to
serve as the members of the
Corporation's Board of Directors until
their successors are duly elected or
qualified:
Ronald Foster
Vincent Vellardita
David Weiner
Stephen A. Webber
RESOLVED FURTHER, that any
officer of the Corporation, acting
alone, be and hereby is authorized,
empowered and directed, for and on
behalf of the Corporation, to execute
and deliver any and all certificates,
instruments and other documents, and
to take such further actions as any
such officer deems necessary or
appropriate to effectuate the purposes
of the foregoing resolutions.
REVIEW OF BUSINESS
WHEREAS, the undersigned
stockholders have reviewed all actions
taken by the officers and directors of
the Corporation since the last annual
meeting of the stockholders of the
Corporation;
NOW, THEREFORE, BE IT
RESOLVED, that any action or
actions heretofore taken by any officer
or director of the Corporation for and
on behalf of the Corporation since the
last annual meeting of stockholders be,
and hereby are, ratified and approved
as the actions of the Corporation.
This Written Consent shall be added to the records of the
Corporation and made a part thereof, and the resolutions set forth above
shall have the same force and effect as if adopted at a meeting duly
noticed and held.
This Written Consent may be executed in counterparts with the
effect as if all parties hereto had executed the same document. All
counterparts shall be construed together and shall constitute a single
Written
Consent.
Shareholder SignatureShares Beneficially Owned
/s/ Ronald Foster 4,154,178
/s/ Larry Cahill 1,000,000
/s/ Michael Graham 1,000,000
/s/ Peter Papas 800,000
as trustee for the Peter Papas Trust
<PAGE>
EXHIBIT C
THE NAMED AMENDMENT
RESOLVED, that the First Article of the Certificate of
Incorporation of the Corporation be amended to read in its entirety as
follows:
FIRST:The name of the Corporation (hereinafter called the
"Corporation") is:
ValCom, Inc.
* * * *
EXHIBIT D
THE PAR VALUE AND AUTHORIZED SHARE AMENDMENT
RESOLVED FURTHER, that the fourth Article of the Certificate
of Incorporation of the Corporation be amended to read in its entirety as
follows:
FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue is 110,000,000 shares, of which
10,000,000 shares shall be Preferred Stock of the par value of $.001 each
(hereinafter called "Preferred Stock") and 100,000,000 shares shall be
Common stock of the par value of $.001 each (hereinafter called the
"Common Stock").
