PRER14C 1 0001.txt PROXY STATEMENT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14C INFORMATION Proxy Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934 (Amendment No. 2) Filed by the Registrant [ X ] Filed by a Party other than the Registrant [ ] Check the appropriate box: [x]Preliminary Proxy Statement [ ]Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ]Definitive Proxy Statement [ ]Definitive Additional Materials [ ]Soliciting Material Pursuant to Section 240.14a-11(c) or Section 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) Payment of Filing Fee (Check the appropriate box) [X]No fee required. [ ]Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: [ ]Fee Paid previously with preliminary materials. [ ]Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: 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 January __, 2001, to the stockholders of record as of the close of business on August 31, 2000 of the common stock of SBI Communications, Inc. SBI's Board of Directors has approved of, and a total of 4 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 . 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 and the regulations promulgated thereunder, including Regulation 14C. ACTIONS BY BOARD OF DIRECTORS AND CONSENTING STOCKHOLDERS SBI's Board of Directors and the consenting stockholders have approved the acquisition of Valencia Entertainment International, LLC, a California limited liability company, who we refer hereinafter as "VEI", and the collateral actions that must be taken in order to consummate the acquisition. The merger is described below, and the full text of the Agreement and Plan of Merger setting forth the terms and conditions is attached hereto as Exhibit A. Summary Term Sheet * VEI will merge with and into SBI's wholly owned subsidiary, Valencia Entertainment Acquisition Corporation, with VEI being the surviving limited liability company and becoming a wholly owned subsidiary of SBI. * The following steps will occur pursuant to the merger: 1. SBI will issue 75,709,965 shares of Common Stock to the principals of VEI; 2. All of the outstanding membership interests in VEI will be issued to Valencia Entertainment Acquisition; and 3. All of the outstanding shares of capital stock of VAC will be cancelled. * SBI's shares issued to the VEI principals will represent approximately 86% of the issued and outstanding shares of capital stock of SBI. Existing stockholders of SBI 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. * SBI 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. SBI will not be able to issue the 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. * SBI will amend its certificate of incorporation to change its name to ValCom, Inc., and SBI will primarily focus on operating the business of VEI. * Following the merger the Board of Directors of SBI will have 4 members consisting of 1 current director of the SBI and 3 members of VEI management. In addition, the executive officers of SBI will consist entirely of individuals who are current members of VEI management, with the exception of Ronald Foster, who has resigned as President and CEO and will assume the title and duties of Vice President of Business Development after the merger. * SBI 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 SBI. 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, the managing member of VEI, was appointed interim President and CEO of SBI. Upon the closing of the merger, 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 (after a 2 for 1 stock split). Ronald Foster, who was previously the President and CEO, will receive a 5 year employment agreement commencing at the closing of the merger to serve as SBI's Vice President of Business Development. In addition, at the closing of the merger, the principals of VEI and Ronald Foster will enter into a stockholders' agreement, pursuant to which the VEI shares to be issued must be voted to elect Ronald Foster as a director for the ensuing 5 years. INFORMATION ON CONSENTING STOCKHOLDERS Pursuant to SBI's Bylaws and the General Corporation Law of the State of Delaware, a vote by the holders of at least a majority of SBI's outstanding capital stock is required to effect the actions described in the summary term sheet. SBI's certificate of incorporation does not authorize cumulative voting. As of the record date, SBI 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 SBI, 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 SBI 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 Cahill Significant Shareholder* 1,000,000 8.11% Michael Graham Significant Shareholder* 1,000,000 8.11% Peter Papas Trust Significant Shareholder* 800,000 6.49% ---------- ------- Total 6,954,178 56.4% _______________________ * Significant Shareholder represents more than 5% voting equity interest The consenting stockholders are acquaintances of Ronald Foster, a Director of SBI, and were instrumental in advising the board of directors on potential merger acquisition candidates. 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 and 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-Merger Title of Class Name and Address Security Ownership Pecentage of Class Of Beneficial Owners Amount and Nature Of Beneficial Ownership Common Ronald Foster Chairman of the Board 4,154,178 33.7% 1239 South Glendale Avenue Glendale, CA 91205 Common Vince Vellardita Interim President, CEO 300,000 2.43% 26030 Avenue Hall Studio 5 Valencia, CA 91355 Common Karien Anderson -0- .00 Director, Secretary/Treasurer 1239 South Glendale Avenue Glendale, CA 91205 Common William Beggs Director -0- .00 1239 South Glendale Avenue Glendale, CA 91205 Common Claude Pichard 10,000 .08% Director 1239 South Glendale Avenue Glendale, CA 91205 Common Larry Cahill 1,000,000 8.11% 330 South Gate Court Cedar Rapids, IA 52406 Common Peter Papus Trust 800,000 6.49% 432 NW 111 Avenue Coral Springs, FA 33071 Common Michael Graham 1,000,000 8.11% 1804 Cherrywood Lane Bluefield, WV 24701 ---------- ---------- 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 merger referenced herein is effected, the following will represent the security ownership of certain beneficial owners and management: Post-Merger Title of Name and Address Security Ownership Percentage Class Or Beneficial Amount and Nature Of Of Owners Of Beneficial Ownership Class Common Ronald Foster Chairman of the Board 4,154,178 4.72% Vice President Business Development Common Vince Vellardita 19,227,491 21.8% Director, President, CEO Common Steven A. Weber -0- -0- Director, CFO Common David Weiner -0- -0- Director 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 SBI. 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 SBI'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 SBI 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. Weber 52 -- Nominee Ronald Foster. Mr. Foster, age 59, served as SBI's Chief Executive Officer, President and Chairman of the Board from 1986 to October 2000. Mr. Foster has been working with SBI since its inception in 1984. His primary responsibilities include finance, marketing and technical review. In addition to his responsibilities with SBI, 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 SBI, Mr. Foster does not currently serve as a director of any reporting company. Vincent 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 150,000 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 Weber. Mr. Weber is the 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. Weber was the managing partner of the regional audit firm, located in Los Angeles, California. Currently, in addition to his duties at VEI, Mr. Weber consults for a publicly traded Internet company, Genesis Intermedia.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 SBI's certificate of incorporation to change the corporation's name to ValCom, Inc., which is referred to as the "Name Amendment". The Name Amendment will be implemented by filing a certificate of amendment to the certificate of incorporation 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 SBI Board of Directors, the change of the corporate name is desirable in view of the significant change in the SBI's character and strategic focus as a result of the merger with VEI. 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, SBI 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 SBI's certificate of incorporation to change the par value of its preferred stock which is referred to as the "Par Value Amendment". SBI'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 SBI'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, SBI 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 SBI's certificate of incorporation to increase the authorized common stock from 40,000,000 to 100,000,000 shares, which is referred to as the "Authorized Shares Amendment.". The terms of the merger will make VEI a wholly owned subsidiary of SBI and the principals of VEI will receive shares of SBI'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 $8,424,047 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, SBI 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, SBI has 40,000,000 shares of common stock authorized of which 12,324,878 shares are issued and outstanding. As a result, SBI 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 SBI files the certificate of amendment, SBI will have 87,1675,122 shares of unissued shares of common stock available for issuance. SBI will immediately issue 75,709,965 shares to the principals of VEI and will cause the merger to be consummated. The shares will not be registered under the Securities Act of 1933, and may not be resold unless the shares are registered under the Securities 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. SBI's 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 SBI may have the requisite number of voting shares to consummate the transaction. The issuance of the 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 merger. 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 SBI 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 SBI 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 SBI. SBI is not aware of any proposed attempt to take over the company or of any attempt to acquire a large block of SBI's common stock. SBI 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, SBI cannot file the certificate of amendment until at least 20 days after the mailing of this Information Statement BACKGROUND OF TRANSACTION SBI's reason for the merger --------------------------- For the past several years, SBI sought unsuccessfully to raise capital or enter into a joint venture arrangement to fund its 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 SBI 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. VEI's reason for the merger --------------------------- VEI has been a private operating company since its inception in 1996. During its years of operations, VEI grew in size at a nominal pace. VEI was able to finance its expansion plans based upon current operations and through various credit facilities from financial institutions, however VEI was limited to the scale of its acquisitions and expansion plan. Over the past year, new opportunities were presented to VEI including acquisition of production content, acquisition of companies in similar industry, and expansion of its existing facilities. However, due to its private status and limited financing, VEI was not in the position to further explore these opportunities. The management decided that it was in VEI's best interest to become a publicly traded company and to leverage the advantages that comes with such as status. In addition, management believed that for VEI to effectively compete in the rapidly changing entertainment industry, it must have the tools and resources that would allow it to have ready access to affordable capital. Although the traditional initial public offering was appealing, the cost, time, and existing market conditions outweighed the benefits. Management of VEI explored the possibility of acquiring a public shell for purposes of a reverse merger. VEI management believed that a reverse merger into a public shell that is trading on a bulletin board and reporting with the SEC will allow VEI the ability to acquire other companies through the issuance of its trading stock and able VEI to readily attract private and public financing in the future. Contacts between VEI and SBI ----------------------------- Vince Vellardita, is a current stockholder of SBI and a close business acquaintance of Ronald Foster since 1988. During 1988 to 1990, Mr. Vellardita performed advertising and promotional consulting services for SBI's products. In June 2000, Mr. Vellardita purchased 150,000 restricted shares of SBI's at a purchase price of $37,500 under a private placement exempt from registration, the proceeds were used to pay existing liabilities of SBI. During the second quarter of 2000, Mr. Vellardita and Mr. Foster began to have informal discussions regarding the possibility of merging SBI and VEI. In May 2000, numerous meetings were held between Mr. Vellardita and with members of the SBI Board to determine if, in fact, there were synergies between the two companies. Mr. Vellardita also had extensive discussions with the other members of VEI to consider the terms and conditions of a possible merger. VEI considered the price, the financial condition and compatibility of the businesses that VEI anticipates will result from the merger. The companies consulted with their financial and tax advisors, as well as their in-house and outside counsel regarding the financial terms and structure of a proposed merger. In August 2000, a meeting was held at the law firm of Pollet & Richardson who serves as outside counsel to SBI. Present at the meeting and representing VEI was Ms. Linda Layton, in-house counsel and Mr. Vellardita. Representing the interest of SBI was Mr. Ron Foster and Nimish Patel of Pollet & Richardson. The parties discussed the proposed merger including issues related to a tax-free reorganization, issuance of shares based upon formula of net assets, appointment of a new board, and the confirmatory of legal and accounting due diligence. On August 21, 2000, a letter of intent was executed between the principals of VEI and SBI. Through the month of September, both parties conducted due diligence and began the formal process of drafting the merger agreement. The SBI Board was satisfied with the exchange ratio based upon the net assets contributed by VEI and was satisfied by VEI's current audited financial statements and the management team. The SBI Board concluded that a merger with VEI was in the best interest of SBI's existing stockholders and submitted the information to the consenting stockholders for their input and recommendation. On October 16, 2000, the consenting stockholders executed a written shareholder resolution approving the action described in this Information Statement. On the same day, the parties to the merger executed a definitive Agreement and Plan of Merger . The text of the Agreement, excluding the corresponding schedules and exhibits, is being furnished with this Information Statement. ABOUT SBI Description of Business ----------------------- 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. during 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 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, SBI executed a plan of merger that effectively changed the company's state of domicile from Utah to Delaware. For the past two years, SBI did not have significant operations and remained in dormant status. Prior to 1998, SBI was engaged in leasing its 80,000 square foot facility in Piedmont, Alabama to a charity organization for purposes of conducting bingo operations. During the fourth quarter of 1997, the charity defaulted on the lease agreement and was unable to make its monthly payments. SBI ceased its operations of leasing the facility in January 1998. SBI new focus is to provide interactive satellite delivered bingo games, game shows and other similar telecommunication gaming products or services to television viewers throughout the United States. SBI 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. In addition, SBI converted the 80,000 square foot facility located in Piedmont Alabama as a venue for car auctions. SBI has spent approximately $75,000 to make the conversion. Description of Property ----------------------- SBI is the owner of 80,000 square foot facility located in Piedmont, Alabama. SBI acquired the facility with the furniture and fixtures in December 1994 by issuing 1,500,000 shares of preferred stock at $5.00 per share to the owner. After a warranty was delivered to SBI free and clear of all encumbrances, it was discovered that the State of Alabama had placed a tax lien in the amount of $750,000. As consideration for the payment of the tax lien, SBI cancelled all of the preferred stock issued to the prior owner. SBI's corporate offices are located at 1239 South Glendale Avenue, Glendale, California. The premises are comprised of approximately 3,000 square feet for which SBI pays $1,000 per month. Legal Proceedings ------------------ There are no legal proceedings instituted against SBI. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- SBI's common stock is traded over-the-counter and quoted on the OTC Electronic Bulletin Board on a limited and sporadic basis under the symbol "SBID." The reported high and low bid and asked prices for the common stock are shown below for the period through December 31, 2000. The source for the data was obtained from the NASDAQ Trading & Market Services Department. The prices presented are bid and ask prices, which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commission to the broker-dealer. The prices do not necessarily reflect actual transactions. Bid Ask Low High Low High 1998 First Quarter $.15625 $.25000 $.28125 $.50000 Second Quarter $.15625 $.31250 $.21875 $.43750 Third Quarter $.12500 $.31250 $.28125 $.43750 Fourth Quarter $.12500 $.13000 $.25000 $.31250 1999 First Quarter $.13000 $.18750 $.18750 $.31250 Second Quarter $.12500 $.15625 $.21875 $.21875 Third Quarter $.01000 $.12500 $.06000 $.21875 Fourth Quarter $.02000 $.24000 $.04000 $.30000 2000 First Quarter $.11000 $.38000 $.16000 $.50000 Second Quarter $.09380 $.31250 $.16500 $.34380 Third Quarter $.12550 $3.5300 $.19000 $3.5313 Fourth Quarter $.23000 $2.1400 $.25000 $2.1563 As of December 31, 2000 there were approximately 3,500 stockholders of record of the common stock. Dividends --------- SBI has not paid any cash dividends on the common stock and does not expect to do so in the foreseeable future. SBI anticipates that any earnings generated from future operations will be used to finance its operations. No restrictions exist upon our ability to pay dividends. Changes in and disagreement with accountants on accounting and -------------------------------------------------------------- financial disclosure -------------------- There were no disagreements with the accountant on accounting and financial disclosure matters ABOUT VEI Description of Business ----------------------- 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. Mr. Vellardita, is the CEO and COO of VEI and currently is the interim President and CEO of SBI. VEI's business includes television production for both network and syndicate, motion pictures, sports, internet and real estate holdings, however, revenue is primarily generated through the lease of the sound stages. VEI, which owns 6 acres of real property and a 120,000 square feet production facility in Valencia, California, is currently the studio set for 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 3 acres and 52,000 square feet production facility which includes two full service sound stages, for a total of eight sound stages. VEI's past and present clients include Warner Bothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network. In addition to leasing its sound stages, VEI also has a small library of wholly owned television content that are ready for worldwide distribution, and several major series in advanced stages of development. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- VEI's membership interests does not have a public trading market and none is expected in the near future. The members of VEI consist of Vincent Vellardita, MMSV Partners, Inc., a California corporation, and FECL California, Inc., a California corporation. Dividends --------- VEI has not paid any cash dividends on its membership interest and does not expect to do so in the foreseeable future. VEI anticipates that any earnings generated from current and future operations will be used to finance its operations. No restrictions exist upon our ability to pay dividends. Changes in and disagreement with accountants on 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. 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, SBI's pro forma consolidated net assets would have been $10,221,168 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. In the opinion of SBI's management, 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 SELECTED FINANCIAL DATA --------------------------------- PRO FORMA BALANCE SHEET December 31, 1999 Valencia SBI Entertainment Communications, Adustments International, LLC Inc. Dr. (Cr.) Combined Current Assets $ 2,713,406 $ $ 2,713,406 Property and Equipment 11,760,154 3,940,000 15,700,154 Other Assets 139,668 (20,000)(1) 119,668 ----------------- ---------- ------------ ---------- $ 14,613,228 $ 3,940,000 $ (20,000) $ 18,533,228 ------------------- ----------- ------------ ----------- Current Liabilities $ 272,717 $ 2,233,317 $ 20,000 (1) $ 2,395,596 Long-Term Liabilities 5,916,464 -0- -0- 5,916,464 Preferred stock 765,000 765,000 Common stock 4,846 (32,331)(2) 37,177 Paid in capital 3,477,604 (5,131,308)(2-3) 8,698,551 Ret. earnings (deficit) 719,641 (2,540,767) (2,540,767)(3) 719,641 Partners equity 7,704,406 7,704,406(3) - ------------ ------------ ------------ --------- $ 14,613,228 $ 3,940,000 $ 20,000 $ 18,533,228 ------------- ------------ ------------ --------- PRO FORMA INCOME STATEMENT Year Ended December 31, 1999 Valencia SBI Entertainment Communications, International, LLC Inc. Adjustments Combined ------------------ --------------- ----------- ------------ Revenue $ 1,474,171 $ 0 $ 1,474,171 Operating Expenses 780,717 130,000 910,717 Income from Operations 693,454 (130,000) 563,454 Interest Expense (292,588) (159,000) (451,588) ----------- ---------- ------------ ----------- Net Income (Loss)$ 400,866 $ (289,000) $ 111,866 Net Income Per Share$ (0.00) $ (0.00) $ (0.00) --------- ----------- ------------ ------------ (1) Non-interest bearing note due on demand (2) Issuance of 75,709,965 shares of common stock to VEI. The book value of VEI as of 9/30/00 has been determined to be the fair market value of the stock issued. (3) Re-capitalization adjustment to reflect reverse merger acquisition. PRO FORMA BALANCE SHEET September 30, 2000 Valencia SBI Entertainment Communications, Adjustments International, LLC Inc. Dr. (Cr.) Combined Current Assets $ 168,881 $ 44,541 $ 213,422 Property and Equipment 11,747,867 4,015,000 15,762,867 Other Assets 327,729 20,500 (20,000) (1) 328,229 ----------- ---------- ------------ ------------ $ 12,244,477 $ 4,080,041 $ (20,000) $ 16,304,518 ------------ ----------- ------------- ------------ Current Liabilities $ 311,355 $ 2,716,434 $ 20,000 (1) $ 3,007,789 Long-Term Liabilities 5,878,744 5,878,744 Preferred stock 215,000 215,000 Common stock 6,181 (32,331)(2) 38,512 Paid in capital 4,175,039 (2,639,462)(2-3) 6,814,501 Ret. earnings (deficit) 349,972 (3,032,593) (3,032,593)(3) 349,972 Partners equity 5,704,406 5,704,406 (2) - ----------- ------------ ---------------- ------------ $ 12,244,477 $ 4,080,041 $ 20,00 $16,304,518 ------------- -------------- ---------------- ------------- PRO FORMA INCOME STATEMENT Nine Months Ended September 30, 2000 Valencia SBI Entertainment Communications, International, LLC Inc. Adjustments Combined Revenue $ 1,194,282 $ 0 $ 1,194,282 Operating Expenses 1,151,45 391,826 1,543,281 Income from Operations 42,827 (391,826) 348,999 Interest Expens (412,496) (100,000) (512,496) ----------- ------------ --------- ------------- Net Income (Loss) $ (369,669) $ (491,896) 0 $ (861,495) Net Income Per Share $ (0.00) $ (0.00) $ (0.00) -------------- ------------- ---------- -------------- (1) Non-interest bearing note due on demand (2) Issuance of 75,709,965 shares of common stock to VEI. The book value of VEI as of 9/30/00 has been determined to be the fair market value of the stock issued. (3) Re-capitalization adjustment to reflect reverse merger acquisition. NOTE: The reverse merger method of accounting is being applied whereby the financial statements of SBI and VEI are combined and recapitalization takes place. Management's Discussion and Analysis of Financial Condition and Results of Operations: SBI September 30, 2000 and 1999 --------------------------- SBI generated revenues of $-0- during its third fiscal quarter ended September 30, 2000, as compared to $-0- in the comparable period of the prior fiscal year. SBI expects to generate revenue upon the successful operation of the SBI's web site and the broadcasting of its interactive programming and the Auto Auction. General and administrative costs of SBI totaled $150,000 during the third quarter of 2000 versus $33,000 in the comparable 1999 quarter, which represents a 433% increase. Most of the current period's costs were comprised of the development of the SBI's web site, which are not fixed expenses. The balance is primarily comprised of professional cost. The nine months ended September 30, 2000 reflects $294,000 increase over the 1999 period due to website development cost and professional fees. Interest and financing cost 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 year-ago period due to tax loss carry forwards. SBI's tax loss carryforward balance at the end of fiscal 1999 was in excess of $9 million. Net loss for the nine months of 2000 was $492,826. The loss was primarily due to the development of SBI's web site and the renovation of the Auction Plaza in Piedmont and professional fees. The sale of the property located in Piedmont, Alabama for net proceeds of $3,940,000, pending as of June 30, 2000 was subsequently cancelled. SBI has decided to develop the property as a venue for auto auction. SBI spent $75,000 for renovation of this property for the auto auction in September 2000. December 31, 1999 and 1998 Total assets as of December 31, 1999 and 1998 were $3,940,000. SBI had a working capital deficit of ($2,143,000) and ($1,854,000) as of December 31, 1999 and 1998 respectively. SBI's excess of current liabilities over current assets was 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. SBI continues to operate in the development stage with no significant cash flow being generated from operating activities in 1998 or 1999. SBI was not able to generate any revenues from operations in 1999 or 1998. Total revenues for calendar year ended December 31, 1997 were $544,662 earned primarily from rental fees collected from charities that sponsor bingo games. Rental fees collected from those entities ended in 1997. Since its inception, SBI'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 Related Party Transactions, and in the Consolidated Financial Statements of the Company. SBI has also acquired significant assets through the sale of convertible preferred stock. SBI anticipates continued expansion of its business through acquisitions using company stock. Other operations are anticipated for the facility acquired in 1994 and SBI anticipates generation of revenues from this facility sufficient to cover administrative costs still being incurred as the SBI moves forward in its development stage. SBI's expenses can be summarized as follows: Fiscal Year Ended December 31, 1999 1998 Salaries and related expenses $130,000 130,000 Other general and administrative expenses 0 $ 88,069 Interest expenses and finance charges $159,000 $ 40,000 Should SBI successfully acquire production facilities and broadcast companies under consideration, or expand operations in other areas currently under consideration, revenues and expenses of SBI would change significantly. VEI --- September 30, 2000 and 1999 As of September 30, 2000 VEI had negative working capital of $142,000. 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 were from studio rental. Rental revenue increased from $910,628 to $1,194,282 for the nine months ended September 30, 2000 versus the nine months ended September 30, 1999, an increase of $283,654 or 31%. The increase is due to increases in monthly rents per contract and increases in overhead costs charged to tenants. There was no production revenue earned for the nine month period. Production revenue was $195,000 for the same period last year. Subsequent to September 2000 $36,000 in production revenue has been earned. 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. Production costs for the comparable nine month periods have increased from $72,287 to $199,618 or $127,331 representing a 176% increase. Marketing and development costs accounted for most of the production costs. Management reviews production costs on a quarterly basis and records write-offs as needed. Production costs have decreased subsequent to September. Interest expense was $412,496 for the nine month period compared with $219,441 for the comparable period. The 88% increase was due to increased mortgage interest. The mortgage on the facility was refinanced in December 1999 with an additional borrowing of approximately $2,700,000. The effective interest rate on the refinanced mortgage also increased from 8.6% to 10.3%. The $365,639 or 79% increase in administrative and general expense is due primarily to increases in four categories; (1) increase facility costs, largely offset by increases in costs billed to tenants discussed in relation to rental revenue above, (2) increase in rent expense discussed below, (3) increases in legal and accounting fees incurred in anticipation of the merger, and (4) compensation paid to company employees. 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 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. Trends events of uncertainties : The Screen Actors Guild and the Screen Writers Guild may go on strike starting May 2001. While not materially affecting the studio operation of Valencia because of long-term contracts, the strike may affect Valencia's plans for its own productions which could have a material affect on Valencia's projected income for 2001 and 2002. VEI's internal and external source of funding: --------------------------------------------- VEI has obtained lines of credit from City National Bank for $400,000 and projects positive cash flow from VEI's studio division. VEI sufficient funds to operate: -------------------------------- VEI projects to have positive cash flow, in addition as mentioned above VEI has recently obtained sufficient line of credit to have funds to operate. December 31, 1999 and 1998 Working capital was $2,441,000 and ($177,000) as of December 31, 1999 and 1998 respectively. Total assets were $14,613,000 as of December 31, 1999 an increase of $2,694,000 from December 31, 1998 total assets of $11,919,000. As of year end 1999 total liabilities increased to $6,191,000. from 1998 year end of 3,415,000 The significant increase in total assets, total liabilities and working capital from 1998 to 1999 is a result of the refinancing of the Studio Facility in December 1999. This refinancing increased the mortgage payable by $3,087,000 and correspondingly increased Cash, Mortgage Escrow Holdback and Prepaid Loan Fees in total by $2,710,000. Subsequent to December 31, 1999 VEI distributed $2,000,000 to an affiliate. Such distribution reduced the respective ownership interest. For year ended December 31, 1999 VEI had revenue of $1,474,000, operating expenses of $780,717 and net income of $400,866. Income before depreciation and interest for the year was $828,830. Production revenue increased from $105,000 in 1998 to $260,000 for the year ended December 31, an increase of $155,000 or 148%. In accordance with generally accepted accounting principles production revenue has not been recognized until or unless a distribution contract is entered into. Rental revenue for the year ended December 31, 1999 was $1,214,171 an increase of only $47,000 from the prior year due to minor rate changes. .In general, other income and expense accounts have not fluctuated significantly from the year ended December 31, 1998 to 1999. 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 intends to focus on 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 SBI is to identify and commercialize leading edge internet entertainment technologies. Over the last several years, SBI did not have any material operations and remained dormant. 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 6 acres and a 120,000 square feet production facility in Valencia California, is the studio set for 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 3 acres and 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: (1) VEI will merge with and into SBI's wholly owned subsidiary, Valencia Acquisition, with VEI being the surviving limited liability company and becoming wholly owned subsidiary of SBI; (2) all of the outstanding shares of capital stock of Valencia Acquisition will be exchanged for all of the outstanding membership interests of VEI, with all of the outstanding Valencia Acquisition shares being cancelled concurrent with the Merger; and (3) SBI will issue 75,709,965 shares of its authorized but unissued common stock to the principals of VEI. 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 SBI'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. As a result of the merger, 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 SBI's affairs, including the election of all members of the Board of Directors. The definitive merger 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 ------------------------------------------------------------------------------- Page 1 Accountants' report Page 2 Balance sheet Page 3 Statements of operations Page 4 Statements of cash flows Page 5-9 Notes to financial statements 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, partners' capital 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 VALENCIA ENTERTAINMENT INTERNATIONAL, LLC BALANCE SHEET December 31 1999 1998 ---- ---- ASSETS ------ Cash (Note 6) 2,278,694 8,835 Accounts receivable 106,812 48,144 Mortgage escrow holdback 327,900 0 ----------- ----------- Total Current Assets 2,713,406 56,979 Fixed assets - net (Notes 2 and 3) 11,760,154 11,855,999 Production costs 28,000 6,170 Prepaid loan fees 111,668 0 ----------- --------------- Total Assets $ 14,613,228 $ 11,919,148 ============= ================ 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 3,181,670 ------------ ----------- Total Liabilities 6,189,181 3,415,527 Commitments (Note 5) Equity: Capital (Note 2, 4 and 6) 7,704,406 8,184,843 Accumulated income 719,641 318,775 ----------- ------------ 8,424,047 8,503,621 ----------- ------------- Total Liabilities and Equity $14,613,228 $11,919,148 ============ =============== 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 ------------ ------------ 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 780,717 761,740 ---------- ------------ Operating income 693,454 510,378 Interest expense (292,588) (298,292) ----------- ------------ Net income $ 400,866 212,086 Proforma provision for income $ 160,346 85,000 taxes (Note 6c) Proforma net income per share $ 0.00 0.00 (Note 6c) 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) ------------- ------------- Cash Provided by Operations 537,998 304,795 Investing Activities: Acquisition of fixed assets (39,534) (110,051) ------------ ------------- Cash Used by Investing Activities (39,534) (110,051) Financing Activities: Principal payments on former mortgage (152,000) (149,786) Repayment of former mortgage (3,261,165) 0 Proceeds from mortgage refinancing 5,664,997 0 Withdrawal of capital contribution (480,440) (55,000) ------------- ------------- Cash Provided (Used) by Financing Activities 1,771,392 (204,786) Increase (Decrease) in Cash and Cash Equivalents 2,269,859 (10,042) Cash and cash equivalents, beginning of year 8,835 18,877 ------------ -------------- Cash and cash equivalents, end of year $ 2,278,694 $ 8,835 ---------------- --------------- Supplemental disclosure of cash flow information: Interest paid $ 299,000 $ 291,000 Income taxes $ 0 $ 0 Capital contribution - land and buildings $ 0 $8,114,000 VALENCIA ENTERTAINMENT INTERNATIONAL, LLC STATEMENT OF PARTNERS' CAPITAL Year ended December 31, 1999 and 1998 Partners' Accumulated Capital Income Total ------------------------------------------------------- Balance January 1, 1998 8,576,658 106,689$ 8,683,347 Net income for the year 212,086 212,086 Distributions (391,812) (391,812) ------------------------------------------------------- Balance December 31, 1998 8,184,846 318,775 8,503,621 Net income for the year 400,866 Distributions (480,440) (480,440) ------------------------------------------------------- Balance December 31, 1999 $7,704,406 $719,641 $8,424,047 ======================================================= See accompanying notes to financial statements 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. VALENCIA ENTERTAINMENT INTERNATIONAL. LLC NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 Note 1: Summary of Significant Accounting Policies (Continued ----------------------------------------------------- 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 and 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. Impairment of Long-Lived Assets ------------------------------- Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on and estimate of undisclosed future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets are based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Revenue Recognition ------------------- Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are exhibited. Revenues from video sales are recognized on the date that video units are made widely available for sale by retailers. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecasting by the license and when certain other conditions are met. Rental revenue is recognized monthly pursuant to written contracts. VALENCIA ENTERTAINMENT INTERNATIONAL. LLC NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 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 12,507,706 12,468,175 Less: Accumulated Depreciation (747,552) (612,176) ----------- ------------- Net book value $ 11,760,154 $ 11,855,999 =============== ================ 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 2009 $ 6,000,000 Various other loans, short-term, 8.00%-9.00% interest 75,000 55,000 -------------- ------------ Total 6,075,000 3,363,598 Less: Current maturities 158,536 181,928 ------------- ----------- Notes Payable $ 5,916,464 $ 3,181,670 ============== ============== VALENCIA ENTERTAINMENT INTERNATIONAL LLC NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 Note 3 Notes Payable (Continued) ------------------------- Maturities on the notes are as follows: 2000 $ 158,536 2001 92,283 2002 101,946 2003 112,622 2004 124,415 And thereafter 5,485,198 ---------- $6,075,000 ============ 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. VALENCIA ENTERTAINMENT INTERNATIONAL, LLC NOTES TO FINANCIAL STATEMENTS December 31, 1999 and 1998 Note 6: Subsequent Events (Continued) 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 accountingpurposes as a reverse acquisition merger. Such transaction will provide the company with 75,709,965 million shares of SBI common stock. Pro forma computations are based on these shares and at a 40% income tax rate. VALENCIA ENTERTAINMENT INTERNATIONAL, LLC UNAUDITED FINANCIAL STATEMENTS September 30, 2000 CONTENTS OF REPORT Page 1 Balance sheet Page 2 Statements of operations Page 3 Statements of cash flows Page 4-8Notes to financial statements VALENCIA ENTERTAINMENT INTERNATIONAL, LLC BALANCE SHEET (UNAUDITED) September 30, 2000 ASSETS Cash $ 80,738 Accounts receivable 88,143 --------- Total Current Assets 168,881 ---------- Fixed assets - net (Notes 2 and 3) 11,747,867 ------------ Deposits 50,000 Production costs 174,436 Prepaid loan fees 103,293 ----------- 327,729 Total Assets $12,244,477 ------------- LIABILITIES AND EQUITY Accounts payable $ 178,063 Loans payable 30,000 Due to affiliates 16,175 Mortgage payable - current portion (Note 3) 87,117 ------------- Total Current Liabilities 311,355 Mortgage payable (Note 3) 5,878,744 -------------- Total Liabilities 6,190,099 Commitments (Note 5) Equity: Capital (Note 2 and 4) 6,054,378 --------------- Total Liabilities and Equity $ 12,244,477 =============== VALENCIA ENTERTAINMENT INTERNATIONAL, LLC STATEMENTS OF OPERATIONS (UNAUDITED) Nine months ended September 30, 2000 1999 ----------------------------- Revenue: Rental $ 1,194,282 $ 910,628 Production 0 195,000 ------------ ------------ 1,194,282 1,105,628 Costs and Expenses: Production 199,618 72,287 Selling and promotion 18,306 46,763 Depreciation 102,936 101,532 Administrative and general 830,595 464,956 ------------ ----------- Total 1,151,455 685,538 ------------ ------------- Operating income 42,827 420,090 Interest expense (412,496) (219,441) ------------ -------------- Net income (loss) $ (369,669) $ 200,649 ------------ -------------- Proforma provision for income taxes $ 0 $ 80,300 ------------ -------------- Net income per share $ 0 $ 0 ------------ -------------- See accompanying Notes to financial statements VALENCIA ENTERTAINMENT INTERNATIONAL, LLC STATEMENT OF CASH FLOWS (UNAUDITED) Nine months ended September 30, 2000 1999 --------------------------------- Operating Activities: Net income (loss) $ (369,669) $ 200,649 Items Not Requiring Cash Outlays: Depreciation and amortization 111,311 101,532 --------------- ---------- (258,358 ) 302,181 --------------- ----------- Changes in: Receivables 18,669 (44,050) Mortgage escrow holdback 327,900 0 Production costs (146,436) 0 Deposits (50,000) 0 Accounts payable and other accrued expenses 63,882 61,970 Due to affiliates 16,175 0 Loans payable (45,000) 15,000 ------------- ----------- 185,190 32,920 ------------ ----------- Cash Provided (Used) by Operations (73,168) 335,101 ------------ ----------- Investing Activities: Acquisition of fixed assets (90,649) (29,651) ------------ ----------- Cash Used by Investing Activities (90,649) (29,651) ------------ ----------- Financing Activities: Principal payments on mortgage (34,139) (152,000) Withdrawal of capital contribution (2,000,000) (140,000) ------------ ------------ Cash Used by Financing Activities (2,034,139) (292,000) ------------ ------------- Increase (Decrease) in Cash and Cash Equivalents (2,197,956) 13,450 Cash and Cash Equivalents, beginning 2,278,694 (8,835) ----------- ---------- Cash and Cash Equivalents, ending $ 80,738 $ 4,615 ----------- - ---------- Supplemental disclosure of cash flow information: Interest paid $ 412,496 $ 224,000 ----------- ----------- Income taxes $ 0 $ 0 See accompanying notes to financial statements STATEMENT OF PARTNERS' CAPITAL (UNAUDITED) Nine months ended September 30, 2000 Partners' Accumulated Capital Income Total ------------ ------------- ------------- Balance January 1, 2000 $ 7,704,406 $ 719,641 $ 8,424,047 Net loss for the period (369,669) (369,669) Distributions (2,000,000) (2,000,000) ------------- ------------- ------------- Balance September 30, 2000 $ 5,704,406 $ 349,972 $ 6,054,378 ============= ============= ============= See accompanying notes to financial statements VALENCIA ENTERTAINMENT INTERNATIONAL, LLC NOTES TO FINANCIAL STATEMENTS September 30, 2000 Note 1:Summary of Significant Accounting Policies Following is a summary of the significant accounting policies followed in the preparation of these financial statements, which policies are in accordance with generally accepted accounting principles: 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 of 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 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 form 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. VALENCIA ENTERTAINMENT INTERNATIONAL, LLC NOTES TO FINANCIAL STATEMENTS September 30, 2000 Note 1:Summary of Significant Accounting Policies (Continued 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 Leasehold improvements 10 Years Office Furniture and Equipment 5 to 7 Years Amortization of Prepaid Loan Costs ---------------------------------- For financing reporting purposes, costs are amortized on the straight-line method over 10 years, the life of the related loan. Income Taxes ------------ The Company files its' taxes as a Partnership under the laws of the United States and 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. Impairment of Long-Lived Assets ------------------------------- Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on and estimate of undisclosed future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets are based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Revenue Recognition ------------------- Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are exhibited. Revenues from video sales are recognized on the date that video units are made widely available for sale by retailers. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecasting by the license and when certain other conditions are met. Revenues from studio space rentals are recognized monthly by contract. Note 2:Property and Equipment ----------------------------- Property and equipment at September 30, 2000, consists of the following: Land $ 7,392,292 Building 4,028,785 Building Improvements 1,139,381 Office furniture and equipment 37,897 ------------ Total 12,598,355 Less: Accumulated Depreciation (850,488) ------------ Net book value $ 11,747,867 Note 3: Notes Payable Following is a summary of the Company's Notes Payable at September 30, 2000. Promissory note payable to First Fidelity Investment and Loan due in monthly installments of principal and interest of $54,648 at 10.03% per annum. The rate is variable dependent on the 6 month US T-Bill rate. The note is secured by a Deed of Trust on the Valencia Studio property. The Note matures December 2009 $5,965,861 Various other loans, short-term, 8.00%-9.00% interest 30,000 ---------- Total $5,995,861 Less: Current maturities 117,117 ---------- Notes Payable $5,878,744 Maturities on the notes are as follows: 2001 $ 117,117 2002 101,946 2003 112,622 2004 124,415 2005 136,800 And thereafter 5,402,961 --------- $5,995,861 ---------- The Company's average short-term weighted interest rate is 9% for the period. Note 4 Partners' Capital The Company distributed $2,000,000 cash to an affiliate, Magic Movie Studios of Valencia, LLC, on January 11, 2000. Such distribution reduces their respective ownership interest in the Company. Note 5:Commitments In May 2000 the Company leased additional facilities adjacent to its 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 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. The consummation of the merger is pending SEC approval. If this transaction took place on January 1, 2000 no corporate tax provision would be recognized since the Company sustained a loss. Pro-forma net income per share would be $.00 per share. 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, except for Note 9 as to which the date is December 21, 2000 SBI COMMUNICATIONS. INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31 ----------- 1999 1998 ---- ---- Cash $ 0 $ 0 Property 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 $ 150,000 $ 150,000 Mortgage note payable 1050,000 1,050,000 Equipment notes payable 131,181 131,181 Accrued wages due to principal shareholder 550,000 420,000 Advances due to principal shareholder 95,136 12,698 Accrued interest payable 199,000 40,000 Accounts payable 50,000 50,000 ---------- ----------- Total liabilities 2,233 ,317 1,853,879 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 765,000 765,000 Common stock, par value $.001; 40,000,000 shares authorized; 4,846,939 and 5,570,439 shares issued and outstanding at December 31, 1999 and 1998 4,846 5,570 Paid in capital 3,477,604 3,567,318 Accumulated deficit (2,540,767) (2,251,767) ----------- ----------- Total Stockholders equity 1,706,683 1,321,121 ----------- ----------- $ 3,940,000 3,940,000 =========== =========== See accompanying notes to consolidated financial statements SBI COMMUNICATIONS. INC. AND SUBSIDIARIES STATEMENTS OF LOSS December 31 1999 1998 ---- ---- Revenue 0 0 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 -------- ---------- (289,000) (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 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 $ 0 $ 0 Interest paid $ 0 $ 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 SBI COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Additional Common Preferred Paid-in Accumulated Capital Deficit ------------ ------------- ----------- ----------- Shares Amount Shares Amount Balance January 1 1998 5,345,439 $5,345 1,963,000 $8,465,000 $3,567,343 ($5,915,419) Conversion 200,000 $ 200 (40,000) (200,000) Acquisition of Software 25,000 $ 25 (25) Cancellation of Stock issued (Note 3 (1,500,000) (7,500,000) 7,500,000 Net loss for 1998 (3,836,348) ------------------------------------------------------------- Balance December 31, 1998 5,570,439 5,570 153,000 765,000 3,567,318 (2,251,767) Cancellation Common Stock (Note 9) (723,500) (724) (89,714) Net loss For 1999 (289,000) ----------------------------------------------------------------------------- Balance December 31, 1999 4,846,939 $4,846 153,000 $765,00 $3,477,604($2,540,767) ============================================================================= See accompanying notes to consolidated financial statements 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 a plan 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. 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 ($12,968) 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. Impairment of Long-Lived Assets ------------------------------- Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undisclosed future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets are based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount of fair value less costs to sell. The December 31, 1999 and 1998 basis of the Property reflects this accounting policy. 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, its fair market value ($2,500) 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 4,970,439 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. SBI COMMUNICATIONS. INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 Mortgage Note Payable --------------------- 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 accrued interest. 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 ------------- 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 Property and equipment ---------------------- Property and equipment consisted of the following at December 31, 1999 1998 Land $4,500,000 $4,500,000 Building 2,500,000 2,500,000 Reserve for impairment (3,060,000) (3,060,000) ------------- ------------ $3,940,000 $3,940,000 NOTE 9 Subsequent Events ----------------- a)The Company intended to sell its building in Alabama before March 2000. The net sales price was $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. Negotiations continued and the closing never took place. Upon merger discussions with Valencia Entertainment International, LLC in September 2000, the building was planned to be used for new purposes. A 1997 appraisal indicates a $7.1 million valuation for the Alabama building. SBI COMMUNICATIONS. INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 (Cont'd) Subsequent Events (cont'd) -------------------------- b)The Company intended on using the proceeds of Piedmont property sales to settle the two outstanding mortgage obligations and the equipment notes payable. However, since the sale did not close, the Company anticipates to refinance the property. 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). d)In January 2000, the Company intends to receive 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 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)Before March 30, 2000, the Company canceled 723,500 shares of common stock held by various individuals for non-performance of services. This cancellation has been retroactively reflected as of December 31, 1999. h)On October 2000 the Company split its common stock on a 2 for 1 basis. i)In November 2000 the Company agreed to merge with Valencia Entertainment International, LLC (VEI) in a reverse acquisition transaction whereby 75,709,965 million new shares will be issued to VEI for its net assets which approximate $6 million. INDEPENDENT ACCOUNTANTS' REPORT ------------------------------- We have reviewed the accompanying consolidated balance sheet, statement of operations, stockholders' equity, and cash flows of SBI Communications, Inc., and subsidiaries as of September 30, 2000, and for the three-months and nine-months period then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such as opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be conformity with generally accepted accounting principles. /s/ Jay J. Shapiro, CPA P.C. JAY J. SHAPIRO, C.P.A. A professional corporation December 21, 2000 Encino, California SBI COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (Unaudited) (Audited) Sept. 30, Dec. 31, 2000 1999 ---- ---- ASSETS Current assets: Cash $ 22,541 $ -0- Inventory 20,500 -------- -------- 44,541 -0- Property and equipment, at real sale value: $4,015,000 $ 3,940,000 Other assets: Fixed Assets: 20,500 -0- ------------ ------------ $4,080,041 $ 3,940,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to trust managed by a shareholder $ 150,000 $ 150,000 Mortgage note payable 1,050,000 1,050,000 Equipment note payable current portion 131,181 131,181 Accrued salaries due to principal shareholder (Note 2) 550,000 550,000 Advances due to principal shareholder 460,253 95,136 Accrued interest payable 299,000 199,000 Accounts Payable 76,000 58,000 ---------- ---------- Total liabilities 2,716,434 2,233,317 Stockholders' equity: Preferred stock, par value $5.00; 10,000,000 shares authorized; 43,000 and 153,000 shares issued and outstanding at September 30, 2000 215,000 765,000 Common stock, par value $.001; 40,000,000 shares authorized; 12,323,878 and 9,693,878 shares issued and outstanding September 30, and December 31, 1999 6,181 4,846 Paid in capital 4,175,039 3,477,604 Accumulated deficit (3,032,593) (2,540,767) ------------ ------------- 1,363,607 1,706,683 $ 4,080,041 $ 3,940,000 ============= ============== See accompanying notes to consolidated financial statements. SBI COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) Nine Months Ended Sept. 30, Three Months Ended Sept. 30, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Revenues $ -0- $ -0- $ -0- -0- Expenses: General and administrative 289,335 98,000 112,188 33,500 Website Development 102,491 -0- 38,000 -0- Interest and finance expenses 100,000 120,000 35,000 40,000 ---------- -------- --------- -------- 491,826 218,000 185,188 73,000 ============ ======== ========= ======== Net loss ($ 491,826) ($ 218,000) ($185,188) ($73,000) =========== ========= ========= ======== Net loss per share $ (0.04) $ (0.02) $ (0.01) $ (0.00) =========== ======== ========= ========= SBI COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Additional Common Preferred Paid-in Accumulated Shares Amount Shares Amount Capital Deficit ------ ------ ------ ------ ------- ------- Balance December 31, 1999 9,693,878 $4,846 153,000 $765,000 $3,477,604 ($2,540,767) Net loss for 9 months ended Sept. 30, 2000: (405,576) Shares Issued for services: 950,000 475 85,775 (86,250) shares Issued for asset: 180,000 90 17,410 Shares Issued for cash: 400,000 200 44,800 45,000 --------- -------- -------- --------- ----------- ------------ conversion of prefered stock 1,100,000 550 (110,000)(550,000) 549,450 --------- -------- -------- --------- ---------- --------- 12,323,878 $ 6,181 43,000 $215,000 $4,175,039 ($3,032,593) See accompanying notes to consolidated financial statements SBI COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) 2000 1999 ----- ------ Cash flows from operating activities: Net (loss) ($ 491,826) ($218,000) Adjustments to reconcile net loss to cash provided (used) by operating activities: Stock issued for services: 141,565 -0- Increase in accounts payable: 120,000 218,000 Inventory 20,500 --------- ----------- Cash (used) by operating activities: (201,761) -0- Cash flows from investing activities: Renovation Costs (75,000) -0- Purchase of fixed assets: (20,000) -0- --------- --------- Cash flow (used) by finanicing activities (95,000) -0- Loans from shareholders/affiliates: 282,302 -0- Sale of common stock 45,000 -0- ---------- --------- Cash flows provided by financing activities: 327,302 -0- Net increase in cash 22,541 -0- Cash at beginning of period: -0- -0- --------- --------- Cash at end of period: $ 22,541 $ -0- ============= ========== Supplemental information: Income taxes paid: $ -0- $ - Interest paid $ -0- $ 24,311 ============= ========== Items not requiring use of cash: Conversion of preferred stock $ 550,000 -0- ============ ========== See accompanying notes to consolidated financial statements. SBI COMMUNICATIONS, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 Note 1 - Selected disclosures ------------------------------ The accompanying unaudited consolidated financial statements, which are for interim periods, do not included all disclosures provided in the annual consolidated audited financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated audited financial statements and the footnotes thereto contained in the Form 10-KSB for the year ended December 31, 1999 of SBI Communications, Inc. (the "Company"), as filed with the Securities and Exchange Commission. The September 30, 2000 financial statement was derived from the unaudited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial statements. The results of operations and cash flow for the three and nine months ended September 30, 2000 and 1999 are not necessarily indicative of the results to be expected for the full year. 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. In August 2000 the Company split its common stock 2 for 1. All financial data in these statements reflects the post-split basis. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on and estimate of undisclosed future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets are based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Such policy has been applied to property prior to September 30, 2000. Note 2 - Related party transactions ----------------------------------- The Company accrued salaries payable to the Company's principal shareholder totaling $97,500 for the nine months ended September 30, 1999 and no accrued salaries for 2000, respectively. All amounts owed to the shareholder are payable on demand. Note 3 - Net loss per share --------------------------- The Company's net loss per share was calculated using 13,770,878 weighted average shares outstanding for ended September 30, 2000 and 11,140,878 for September 30, 1999 on a post split basis. Although convertible preferred stock is a common stock equivalent, with a conversion rate of each specific series of preferred share to common, preferred stock conversion has not been included in the calculation of earnings per share in that to do so would be antidilutive. Note 4 - Mortgage ------------------ The company borrowed $1,050,000 to pay State of Alabama, on behalf of Cranberry-Magnetite/Broadway Gas Company, the previous owner tax liability. The Company is delinquent on the repayment of this obligation. Note 5 - Property and equipment -------------------------------- Property and equipment consists of the following at September 30, 2000 Land $ 4,500,000 Building 2,575,000 Reserve for impairment (3,060,000) ------------ $ 4,015,000 NOTE 6 - Subsequent Events -------------------------- In October 2000, the Company entered into an agreement to issue 75,710,000 shares of common stock to acquire 100% ownership Valencia Entertainment International LLC ("Valencia"). This transaction will be treated as a reverse acquisition merger for accounting purposes. If the transaction would have taken place as of January 1, 2000, the Company's proforma consolidated net assets would be $10,221,168 the shares outstanding 88,034,843 net loss for nine months ended September 30, 2000 of $861,495, and net loss per share of $0.00. 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 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 Stockholders 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 Stockholders 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 C Delaware Certificate of Merger Exhibit D Articles of Organization Exhibit E Operating Agreement Exhibit F Stockholders Agreement Exhibit G Employment Agreement AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is dated as of October 16 2000, by and between SBI Communications, Inc., a Delaware corporation (the "Company"), and Valencia Entertainment Acquisition Corporation, a Delaware corporation and 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, powers and 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. 1.4OFFICERS. 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. 1.5CONVERSION 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 378,549.82 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 Section 4(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 STOCKHOLDERS. 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) shall have the right to engage separate counsel, the reasonable costs and expenses of which shall be paid by the Indemnifying Party, but in no event shall 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 stockholders, 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 it incurred 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 Pappas 800,000 as trustee for the Peter Pappas Trust 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").