10KSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2002 Securities and Exchange Commission File Number O-28416 VALCOM, INC. (Name of small business issuer specified in its charter) Delaware 58-1700840 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 26030 Avenue Hall - Studio #5, Valencia, California 91355 --------------------------------------------------------- (Address of Principal executive offices) (Zip Code) (661) 257-8000 -------------- (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $0.001 - Preferred Stock, Par Value $0.001 ------------------------------------------------------------------ (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of the issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most current fiscal year: $12,211,329.00 Aggregate market value of the voting stock held by non-affiliates as of December 15, 2002: $3,563,760.00 Number of common shares outstanding as of 9/30/02 at $.001 par value: 11,011,933 Documents Incorporated By Reference: None Transitional Small Business Disclosure Format: Yes ____ No _X_ DATED FEBRUARY 13, 2003 Table of Contents Item Page Number Number Item Caption ------ ------ ------------- Part I ------- Item 1. 3 Description of Business Item 2. 7 Description of Properties Item 3. 8 Legal Proceedings Item 4. 9 Submission of Matters to a Vote of Security Holders Part II -------- Item 5. 10 Market for Common Equity and Related Stockholder Matters Item 6. 13 Management's Discussion and Analysis or Plan of Operation Item 7. 19/F1 Financial Statements and Summary Financial Data Item 8. 45 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III --------- Item 9. 45 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10. 49 Executive Compensation Item 11. 50 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. 52 Certain Relationships and Related Transactions Item 13. 52 Exhibits, Financial Statement Schedules, and Reports on Form 8-K Item 14. 52 Disclosure Controls and Procedures Signatures 55 Ex. 99.1 55 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Ex. 99.2 56 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 2 PART I ------ Statements contained in this Annual Report on Form 10-KSB that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risk and uncertainties, which could cause actual results to differ materially from estimated results. Certain of such risks and uncertainties are described in the Company's filings with the Securities and Exchange Commission and in Item 1 ("DESCRIPTION OF BUSINESS") and Item 6 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION") below. ITEM I. DESCRIPTION OF BUSINESS ----------------------------------- GENERAL ------- ValCom, Inc., a publicly held Delaware corporation (the "Company"), was originally organized in the State of Utah on September 23, 1983, under the corporate name Alpine Survival Products, Inc. Its name was changed to Justin Land and Development, Inc. during October of 1984, and to Supermin, Inc. on November 20, 1985. The Company was originally formed to engage in the acquisition of any speculative investment or business opportunity without restriction as to type or classification. On September 29, 1986, Supermin, Inc. concluded a reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1954, as amended, pursuant to which it exchanged 200,000 shares of its common stock, $.001 par value (all share numbers, unless otherwise stated, have been adjusted to reflect a one-for-20 reverse stock split) for all of the capital stock of Satellite Bingo, Inc., a Georgia corporation organized on January 10, 1986, and the originator of the Company's current business (the "SBI Subsidiary"). In conjunction with such reorganization, the former stockholders of the SBI Subsidiary acquired control of the Company and the Company changed its name to Satellite Bingo, Inc. On March 10, 1988, the Company changed its name to SBI Communications, Inc., and on January 28, 1993, the Company reincorporated in Delaware through a statutory merger with a wholly-owned Delaware subsidiary in reliance on the exemption from registration requirements of Section 5 of the Securities Act of 1933, as amended, provided by Rule 145(a)(2) promulgated thereunder. On July 20, 2000, the Board of Directors approved a "2-1 forward stock split" with a distribution date of August 14, 2001 and a stockholder record date of August 10, 2000. The purpose of the forward split was to strengthen the Company's flexibility and address the liquidity issue in increasing the available float in the market. On August 21, 2000, the principals of Valencia Entertainment International, LLC ("VEI") and SBI Communications, Inc. ("SBI") executed a letter of intent to consummate a merger. On October 16, 2000, the majority stockholders approved the Agreement and Plan of Merger. Pursuant to the Merger Agreement, the Company appointed new Board members, changed the par value of the Preferred Stock, increased the authorized Common Stock and changed its name to ValCom, Inc. ("ValCom"). A Schedule 14C Information Statement was filed with the Securities and Exchange Commission. The Securities and Exchange Commission approved the definitive Schedule 14C Information Statement on February 13, 2001. The Merger was finalized on March 6, 2001. APPOINTMENT OF NEW DIRECTORS ------------------------------- Effective February 13, 2001, the Board of Directors unanimously nominated and the consenting stockholders elected the following four 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 ValCom and there is no familial relationship between any nominated director and any current director or between any of the nominated directors. The following table sets forth information regarding the directors as of February 13, 2001. 3
Name Position Since ---- -------- ----- Vince Vellardita Interim CEO and President October 2000 Ronald Foster Chairman of the Board September 1986 David Weiner Nominee -- Stephen A. Weber Nominee --
For the most current information on the Company's directors and executive officers, refer to Part III, Item 9 (Directors, Executive Officers, Promoters and Control Persons). CHANGE IN PAR VALUE OF PREFERRED STOCK -------------------------------------------- The Board of Directors and the consenting stockholders unanimously adopted an amendment to SBI's (now Valcom's) Certificate of Incorporation to change the par value of its preferred stock from $5.00 to $.001 per share to minimize annual franchise taxes payable to the State of Delaware (the "Par Value Amendment"). INCREASE IN AUTHORIZED COMMON STOCK --------------------------------------- The Board and the consenting stockholders unanimously adopted an amendment to SBI's (now ValCom's) Certificate of Incorporation to increase the authorized common stock from 40,000,000 to 100,000,000 shares (the "Authorized Share Amendment"). The terms of the merger made VEI a wholly-owned subsidiary of ValCom and the principals of VEI received shares of ValCom's common stock based upon an agreed upon fair market valuation of the net assets of VEI. In order to consummate the merger, SBI (now ValCom) was required to issue 75,709,965 shares of common stock to the principals of VEI. The shares of common stock do not have any pre-emptive rights. NAME AMENDMENT --------------- The Board of Directors and the consenting stockholders unanimously adopted an amendment to SBI's Certificate of Incorporation to change the corporation's name to ValCom, Inc. (the "Name Amendment"). In the judgment of the SBI Board of Directors, the change of the corporate name was desirable in view of the significant change in SBI's character and strategic focus as a result of the merger with VEI. VALCOM'S CORPORATE STRUCTURE ------------------------------ As of September 30, 2002, ValCom, Inc. had three subsidiaries: Valencia Entertainment International, LLC, a California limited liability company; Half Day Video, Inc., a California corporation; and PTL Productions, Inc. dba Brentwood Magazine, a California corporation. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization, dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. dba Brentwood Magazine and sell PTL Productions, Inc. back to the seller. See Note 16 (Subsequent Events) to the Consolidated Financial Statements. Unless the context requires otherwise, the term "Company" includes ValCom, Inc., a publicly held Delaware corporation and, its subsidiaries, predecessors and affiliates whose operations or assets have been taken over by ValCom, Inc. BUSINESS OVERVIEW ------------------ ValCom's business includes television production for network and syndication programming, motion pictures,and real estate holdings, however, revenue is primarily generated through the lease of the sound stages. ValCom, which owns six acres of real property and a 120,000 square foot production facility in Valencia, California, is currently the studio set for JAG, produced by Paramount Pictures and Power Rangers produced by Saban productions. The Company's sound stages have been operating at full capacity since 1996. ValCom also leases an additional three acres and a 52,000 square foot production facility that includes two full-service sound stages, for a total of eight sound stages. ValCom's past and present clients include Warner Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network. In addition to leasing its sound stages, ValCom also owns a small library of television content, which is ready for worldwide distribution, and several major television series in advanced stages of development. 4 EXPANSION PLANS ---------------- The Company continuously reviews industry developments and regulations for potential expansion opportunities. As a public company, the Company benefits from operating in highly regulated markets, which levels the competitive playing field. It is imperative that the Company continues to grow its operational revenues. The Company has made a significant investment in assembling its management team and operational infrastructure. This investment cost is now relatively fixed, however, and the Company has the potential to significantly leverage its profitability through incremental revenue increases. The Company will therefore continue to employ an aggressive yet methodical growth strategy. It intends to make strategic expansions in markets with: (i) accommodating regulations; (ii) favorable demographics; (iii) successful operations management; and (iv) customer acceptance and patronization. The Company intends to grow through both acquisitions and developments. It uses extensive review procedures to evaluate expansion opportunities, including market studies, legal evaluations, financial analyses and operational reviews. The Company determines development budgets and acquisition prices based on the proposed investment's expected financial performance, competitive market position, risk profile and overall strategic fit within the Company's operational plans. Acquisition terms typically include cash payments, issuance of Company securities and seller-financed notes. Consulting and non-competition agreements with the target companies' principals may also be included. The development of telecommunications, the emergence of new technology and the international nature of the Internet has created opportunities to develop new, efficient and secure ways to deliver entertainment to customers. As one of the companies that plans to employ these new technologies on the Internet, ValCom intends to capitalize on its expertise in the analysis of consumer data and information to become a world leader in online entertainment. JOINT VENTURE AGREEMENT WITH WOODY FRASER PRODUCTIONS, INC. ------------------------------------------------------------------ In January 2001, ValCom executed a joint venture agreement with Woody Fraser Productions, Inc., a California corporation, in which the parties agreed that Woody Fraser and his production company, Woody Fraser Productions, Inc., would serve exclusively as a television production company for ValCom. The primary purpose of the joint venture is the development and production of various television projects. However, the Company has a dispute with Woody Fraser and Woody Fraser Productions, Inc., which is currently arbitrated. Thus, it is not clear how much ValCom will recover from the joint venture agreement. See Part I, Item 3 ("Legal Proceedings"). ACQUISITION OF HALF DAY VIDEO, INC. ---------------------------------------- On March 8, 2001, the Company executed a definitive agreement for the purchase of 100% of the stock of Half Day Video, Inc. ("Half Day"). Half Day specializes in supporting the entertainment industry with television and film equipment rentals. Half Day's client list includes The Academy Awards, Emmy Awards, NBC, Entertainment Tonight, MTV, Oscar Awards, General Hospital and other major entertainment and production companies. Half Day has approximately $786,000 in assets, not including depreciation, with current revenues of $1,300,000. Half Day leases its offices and warehouse facility in Valencia, California and will continue to operate and service its clients using its current employees. Effective November 8, 2002, the Company terminated Clay Harrison, the former President of Half Day Video, Inc. Mr. Harrison has filed a lawsuit against the Company alleging breach of his employment contract. See Part I, Item 3 (Legal Proceedings). JOINT VENTURE AGREEMENT WITH NEW GLOBAL COMMUNICATIONS, INC. - VALCOM -------------------------------------------------------------------------------- BROADCASTING, LLC ------------------ In May 2002, the Company entered into a joint venture agreement with New Global Communications, Inc. ("Global") whereby Global agreed to contribute $500,000 to the joint venture in exchange for a 55% equity interest in a new entity known as Valcom Broadcasting, LLC, a New York limited liability company, and the Company would contribute certain fixed assets and manage the operations of the joint venture for a 45% equity interest in Valcom Broadcasting, LLC. The joint venture operates a newly developed low power television broadcast station K08MX-LP in Indio-Palm Springs, California operating on Channel 8. The Company believes that the investment in the joint venture adds to the Company's infrastructure of becoming a full-service television and motion picture company. The amount contributed to the joint venture by Global will be used to purchase the license for the television station from the licensee. The effectiveness of 5 the joint venture agreement was dependent on approval by the Federal Communications Commission (the "FCC"). On September 20, 2002, the FCC approved the transaction. As of September 30, 2002, Global had contributed $400,000 to the joint venture. Since Global has not contributed the entire amount of $500,000 to the joint venture as of September 30, 2002, and, as such the transfer of the license has not been finalized, the Company has not recognized any investment in the joint venture at September 30, 2002. Subsequent to September 30, 2002, Global has not contributed any additional funds to the joint venture. ACQUISITION OF PTL PRODUCTIONS, INC. DBA BRENTWOOD MAGAZINE ------------------------------------------------------------------ On August 2, 2002, the Company executed an Agreement and Plan of Reorganization, pursuant to which the Company acquired 100% of the stock of PTL Productions, Inc. dba Brentwood Magazine. Brentwood Magazine, a Southern California entertainment publication, has been setting trends in Southern California from Santa Barbara to San Diego for over seven years, covering entertainment, business, luxurious lifestyles, travel and fashion. The Company anticipated that its acquisition of Brentwood Magazine would help promote and establish the Company as a total entertainment company with several promotional avenues. In connection with the acquisition of Brentwood Magazine, the Company formed a new division, Valcom Publishing. Effective December 27, 2002, the Company terminated Phillip Troy Linger, the President of PTL Productions, Inc. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization and sell PTL Productions, Inc. back to Mr. Linger. COMPETITION ----------- FILM ENTERTAINMENT OVERVIEW ----------------------------- Competition in the film entertainment business is diverse and fragmented, with scores of companies operating at various levels of product budget and scope. The market is overwhelmingly dominated by the major Hollywood studios, with the top-ranked company, Disney in 1999, usually commanding 15 to 20 percent of the domestic market share in any given year. ValCom plans to succeed by choosing its projects and markets carefully, and selecting segments and geographic areas where it can build proprietary competitive advantages. With the proper positioning and segment focus, the Company believes it can insulate itself from the brunt of competition in the entertainment content business. Since the sector's revenues from foreign markets are growing rapidly, a sound niche strategy should ensure superior profitability. INDEPENDENT PRODUCTION COMPANIES ---------------------------------- Consolidation through acquisition has recently reduced the number of independent production companies in operation. However, barriers to entry remain relatively low, and management anticipates that the market segments in which it intends to compete will remain highly competitive. THE COMPANY'S COMPETITIVE POSITION ------------------------------------- The Company's operations are in competition with all aspects of the entertainment industry, both locally, nationally and worldwide. ValCom experiences competition from three market segments: 1) Traditional television, game shows and reality television drama 2) Movies for television and theatrical releases 3) Other entertainment/media companies OTHER ACTIVITIES ----------------- INTERACTIVE TECHNOLOGY ----------------------- The Company has experience in the interactive communications and entertainment fields which brings together elements of the "Information Superhighway." It has created and broadcast interactive national and international television programs using state-of-the-art computer technology, proprietary software programs, satellite communications, and advanced telecommunications systems. 6 The Company's management believes that its experience in developing and delivering interactive television programs, as well as its ownership of proprietary systems and software, enhance its ability to launch new entertainment and information programs based on comparable resources. 1. Sources and Availability of Raw Materials and the Namesof Principal Suppliers -------------------------------------------------------------------------------- None of the Company's proposed activities rely on raw materials. Rather, they depend on the ability to exploit emerging technologies that are expected to be readily available. 2. Dependence on One or a Few Major Customers ----------------------------------------------------- The Company has three customers who accounted for approximately 99% of total real estate rental revenues for the year and nine months ended September 30, 2002 and 2001, respectively. As of September 30, 2002, all eight sound and production stages were under non-cancelable operating leases for one year from two major production companies. The Company's subsidiary, Half Day Video, Inc., does not rely on a small group of customers. It may rent production equipment and personnel to any motion picture studio or production company. The Company's television broadcast operations do not rely on a small group of customers; rather, any advertiser who wishes to advertise on Channel 8 in Indio-Palm Springs, California may generate revenues. The Company's former publishing operations did not rely on a small group of customers; rather, any advertiser who wished to advertise in Brentwood Magazine could generate revenues. See Part I, Item 1 ("Acquisition of PTL Productions, Inc."). EMPLOYEES --------- As of September 30, 2002, the Company had 25 full-time employees, including two officers and five professional staff. No employee of the Company is represented by a labor union or is subject to a collective bargaining agreement. ITEM 2. DESCRIPTION OF PROPERTY ----------------------------------- PREMISES The Company's corporate offices are located at 26030 Avenue Hall, Studio #5, Valencia, California. The Company owns six acres and leases three acres of land in Valencia, California. The Company operates eight production sound stages consisting of approximately 425,000 square feet, 270,000 square feet of which are owned and the balance of which are leased. Offices occupy 60,000 square feet. Patents, Trademarks, Copyrights, Licenses, Franchises, Concessions, ------------------------------------------------------------------------ ROYALTY AGREEMENTS OR LABOR CONTRACTS, INCLUDING DURATION --------------------------------------------------------------- The Company has no patent rights. It has the following service marks: SATELLITE BINGO: ----------------- International Class 41 (production and distribution of television game shows) granted Registration Number 1,473,709 on January 19, 1988 to Satellite Bingo, Inc. 20 years. "HANGIN WITH THE BOYZ": -------------------------- International Class 25 (Clothing) and 41 (Production and distribution of television game shows) application filed on March 1,2000, Serial NO. 75/932,583, "WHO CAN YOU TRUST?" ----------------------- Mark granted March 9,1999 for 20 years International Class 41(production and distribution of television game shows) serial NO.75/485225, 7 "FUHGETABOWTIT": ---------------- International Class 41 (production and distribution of television game shows) Serial NO. 75/784,763 application filed on August 26, 1999. GLOBALOT BINGO: ---------------- International Class 41 (production and distribution of television game shows) applied for on September 24, 1993, by SBI Communications, Inc. RICO BINGO: ------------ International Class 41 (production and distribution of television game shows) applied for on September 24, 1993, by SBI Communications, Inc. C-NOTE: ------- International Class 41 (production and distribution of television game shows) applied for on September 24, 1993, by SBI Communications, Inc. The Company obtained an assignment to a copyright for "The Works," copyright registrations for Globalot Bingo and derivatives: Number PAU 855-931 (June 10, 1986); Number Pau 847-876 (March 11, 1986); Number PAU 788-031 (September 19, 1985); Number PAU 927-410 (November 4, 1986); Number PA 370-721 (February 9, 1988); Number PA 516-494 (January 17, 1991); Number PA 533-697 (January 17,1991); from Satellite Bingo, Inc. to SBI Communications, Inc., dated September 14, 1993. The Company applied for registration of copyright of "The Final Round-The Gabriel Ruelas Story" on December 2, 2000. The Company obtained an assignment of copyright of "The Life",Txu 744-678 June 12, 1996. The Company obtained a copyright by assignment of "PCH" Pau 2-040-426 September 12, 1995. ITEM 3 - LEGAL PROCEEDINGS ------------------------------ Diane Russomanno and Knowledge Booster, Inc. v. Valencia Entertainment International, ValCom, Inc., Vince Vellardita, Tom Grimmett, Nalin Rathod, Aburizal Bakrie, Nirwan Bakrie, Linda Layton, Barak Isaacs, and Does 1 through ------- 20 (Los Angeles Superior Court Case No. BC257989) ------------------------------------------------------- On September 14, 2001, plaintiffs Diane Russomanno and Knowledge Booster, Inc. commenced an action in the Superior Court of the State of California, County of Los Angeles against the foregoing defendants. The complaint arises from an underlying action in which the plaintiffs alleged, among other things, that the show "A.J.'s Time Travelers" violated plaintiffs' rights in a children's television show called "Rickey Rocket". That case went to trial, and plaintiffs obtained judgments against several defendants, including a judgment for $3,000,000 against Rickey Rocket Enterprises ("RREI") and a judgment for $1,200,000 against Time Travelers, Inc. ("TTI"). The complaint asserted two causes of action against the Company, Valencia Entertainment International, LLC and other defendants. The first cause of action alleges that the Company was the "alter ego" of RREI and/or TTI and is therefore liable for the judgments against those entities. Plaintiffs seek payment of the judgments in the amount of $4,200,000 plus interest under this cause of action. Depositions are currently being taken. A motion for summary judgment may be heard in June 2003. Valencia Entertainment International, LLC became a distributor for A.J. Time Travelers, Inc., but not until four years after the alleged wrongdoing occurred. Therefore, the Company believes that the allegations are without merit and intends to vigorously defend itself. In addition, a related party will indemnify the Company if the Company sustains any loss in this case. Further, Plaintiffs' second cause of action concerning malicious prosecution alleged alter ego liability. Plaintiffs alleged that Ricky Rocket Enterprises, Inc. and AJ Time Travelers, Inc. filed a cross-complaint in the underlying litigation without any probable cause and for an improper motive or purpose. Plaintiffs similarly alleged that we, and other defendants, are alter egos of Ricky Rocket Enterprises, Inc. and AJ Time Travelers, Inc. and are, therefore, liable for such malicious prosecution. Plaintiffs sought unspecified compensatory and punitive damages under this cause of action. The parties have executed a settlement agreement resolving this second cause of action at no cost to the Company. The court has dismissed the second cause of action with prejudice. 8 Valcom, Inc. v. Woody Fraser Productions, Inc. and Woody Fraser ------------------------------------------------------------------------ On January 1, 2001, the Company entered into a joint venture agreement with Woody Fraser Productions, Inc. in which, among other things, the Company agreed to pay Woody Fraser Productions, Inc. a production fee in exchange for Woody Fraser Productions, Inc.'s agreement to act as the exclusive television production company for the Company. The Company alleged breach of the exclusive nature of the joint venture agreement, and Woody Fraser Productions, Inc. alleges non-payment under the joint venture agreement. The Company is vigorously defending the claims, and aggressively seeking recovery for its damages. Binding arbitration is scheduled to occur in February, 2003. No discovery has been undertaken in this matter. Clay Harrison v. SBI Communications, Inc. and Valcom, Inc. (Los Angeles Superior ---------------------------------------------------------- Court Case No. BC 035014) On December 19, 2002, Clay Harrison filed a complaint, seeking an unspecified amount of damages, for breach of his alleged employment contract. The dispute involves Mr. Harrison's termination of employment as President of Half Day Video, Inc., a wholly-owned subsidiary of Valcom. The Company disputes liability and is vigorously defending the claims. The matter is not yet at issue and no discovery has yet taken place. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------------------- The Company did not hold an annual meeting of stockholders during 2002. 9 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS; PREFERRED -------------------------------------------------------------------------------- STOCK ----- At September 30, 2002, the Company had three series of convertible preferred stock: B, C and D. Series B Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a one for five basis. In the event of any liquidation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series C Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a one for one basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series D Preferred Stock has no voting rights, no dividends and can be converted at any time to common stock on a one for one basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share. With respect to rights on liquidation, Series B, C and D Preferred Stock shall rank senior to the common stock but Series C Preferred Stock shall be senior to both Series B and D Preferred Stock while Series D Preferred Stock shall be junior to both Series B and C Preferred Stock. The Board of Directors has not declared any dividends for any of the series of convertible preferred stock. MARKET FOR COMMON EQUITY --------------------------- The Company's common stock is traded on the NASDAQ Over-the-Counter Electronic Bulletin Board under the symbol of VACM. As of September 30, 2002, the Company had 11,011,933 shares of common stock outstanding, with approximately 2,000,000 in the public float and approximately 3,200 shareholders of record. For the fiscal year ended September 30, 2002, the Company reported revenues of $12,211,329 and a net loss of $4,827,818. The Company's trading symbol on the Frankurt XETRA is "VAM" and its security code is #940589. No common equity is subject to options or warrants to purchase or securities convertible into common stock, except for the currently issued 2,688,000 shares of preferred stock which are convertible into common stock and 72,737 warrants to purchase common stock. The Company has not agreed to register securities for resale under the Securities Act of 1933, as amended, for anyone. The following table sets forth in United States dollars the high and low bid and ask quotations for the Company's common stock for each quarter within the last two fiscal years. Such bid and ask quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and do not necessarily represent actual transactions. The source of the following information is the National Association of Securities Dealers, Inc.'s NASDAQ Over-the-Counter Electronic Bulletin Board. Date Bid Ask ---- ----- ----- Low High Low High --- ---- --- ---- 2000 ---- First Quarter $1.1000 $3.8000 $1.6000 $ 5.000 Second Quarter $0.9380 $3.1250 $1.6500 $3.4380 Third Quarter $1.2550 $35.300 $19.000 $35.313 Fourth Quarter $2.3000 $21.400 $21.563 $25.000 10 2001 ---- First Quarter $ .6875 $1.5600 $ .7500 $1.6250 Second Quarter $2.1000 $6.4200 $3.1000 $7.3000 Third Quarter $ .5100 $ .7000 $1.1000 $3.0000 2002 ---- First Quarter $0.24 $1.35 $0.25 $1.99 Second Quarter $0.31 $1.35 $0.33 $1.45 Third Quarter $0.69 $1.26 $0.72 $1.35 Fourth Quarter $0.31 $0.69 $0.39 $0.75 As of September 30, 2002, there were approximately 3,200 stockholders of record of the common stock. Prices quoted reflect a one share-for-twenty reverse split effective on February 1, 1993, a two share-for-one forward split effective on August 14, 2000 and a one share-for-ten reverse split effective on September 27, 2001. DIVIDEND POLICY ---------------- The Company has never paid any dividends. However, the policy is to declare dividends as and when the Company is in a position to do so subject to availability of cash. There can, however, be no assurance that funds for payment of dividends will ever be available, or that even if available, the Company's Board of Directors then serving will resolve to declare them. MARKET ------ The Company's securities are currently quoted on the Nation Association of Securities Dealers, Inc.'s NASDAQ Over-the-Counter Bulletin Board: VACM and on the Frankfurt XETRA: "VAM". SECURITY HOLDERS ----------------- As of September 30, 2002, the Company had approximately 3,200 common stock holders. DIVIDENDS --------- There have been no cash dividends declared or paid since the inception of the Company and no dividends are contemplated to be paid in the foreseeable future. DESCRIPTION OF SECURITIES --------------------------- GENERAL ------- The Company is authorized to issue 110,000,000 shares of capital stock, 100,000,000 shares of which are designated as common stock, $0.001 par value per share, and the balance of which are designated as preferred stock, $0.001 par value per share. As of September 30, 2002, 11,011,933 shares of Common Stock were outstanding and held of record by approximately 3,200 persons. In addition, 2,688,000 shares of preferred stock were outstanding, and held by approximately five persons. Continental Stock Transfer & Trust Company, 17 Battery Place; New York, New York 10004, acts as transfer agent and registrar for the Company's common and preferred stock. 11 EQUITY COMPENSATION PLAN -------------------------- The Company has a 2001 Employee Stock Compensation Plan (the "ESCP") to enhance its ability to attract, retain and compensate experienced employees, officers, directors and consultants. The effective date of the ESCP is January 15, 2001. A total of 2,600,000 shares of common stock were registered for issuance under the ESCP on three Form S-8 registration statements filed January 16, 2001, March 26, 2001 and October 19, 2001. Pursuant to the ESCP, the Compensation Committee or the Board of Directors may award registered shares of the Company's common stock to employees, officers, directors or consultants for cash, property, services rendered or other form of payment constituting lawful consideration. Plan shares awarded for other than services rendered shall be sold at not less than fair market value on the date of grant. During the fiscal year ended September 30, 2002, the Company issued an aggregate of 585,000 shares of registered common stock to employees, officers, directors and consultants pursuant to the ESCP for services rendered. RECENT SALES OF UNREGISTERED SECURITIES ------------------------------------------- On May 20, 2002, pursuant to the Employment Agreement between the Company and Donald P. Magier, the Company granted Mr. Magier, its Controller who subsequently was appointed as the Treasurer, Secretary and a director, an option to purchase up to 25,000 shares of the Company's common stock at an exercise price of $0.01 per share. The Employment Agreement provides that the Company will grant Mr. Magier an option to purchase an additional 25,000 shares at an exercise price of $0.01 per share on the first and second anniversaries of the Employment Agreement. He must exercise the options within 60 days after each anniversary date. Twenty-five percent of the common stock issuable upon exercise of the options will be freely trading and the remaining 75% of the shares issuable will be restricted pursuant to Rule 144 of the Securities Act of 1933, as amended. This issuance of securities was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On May 24, 2002, the Company issued to Laurus Master Fund, Ltd. 12% convertible notes in the aggregate principal amount of $2,000,000. The notes are convertible into the Company's common stock at a fixed conversion price of $.95 per share. This issuance of securities was exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended. On May 29, 2002, the Company issued 250,000 shares of its common stock to the Laurus Master Fund, Ltd. pursuant to that certain Settlement Agreement between the parties, dated on or about May 24, 2002. This issuance of shares was exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended. In June 2002, the Company issued to High Capital Funding, LLC 1,250,000 shares of Series D Preferred Stock and a warrant to purchase 1,250,000 shares of its common stock at an exercise price of $.80 per share for an aggregate purchase price of $1,000,000. This issuance of securities was exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended. In June 2002, the Company issued to High Capital Funding, LLC an additional warrant to purchase 50,000 shares of its common stock at an exercise price of $.80 per share for an aggregate purchase price of $40,000. This issuance of securities was exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended. In June 2002, in connection with the financing by High Capital Funding, LLC, the Company collectively issued to Bathgate Capital Partners, LLC and its principals a placement agent fee including an aggregate of 125,000 "VACM Units", each unit comprised of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.80 per share, for an aggregate purchase price of $100,000. This issuance of securities was exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended. In June 2002, in connection with the financing by High Capital Funding, LLC, the Company desposited into escrow an aggregate of 2,800,000 shares of its common stock as a deposit in anticipation of (1) the preferred stockholder's conversion of 1,250,000 shares of Series D Preferred Stock, (2) the preferred stockholder's 12 exercise of warrants to purchase 1,300,000 shares of common stock, and (3) the placement agent's exercise of its VACM Units. None of the 2,800,000 shares of common stock will be released from escrow until the preferred stockholder converts its Series D Preferred Stock and/or exercises its warrants and/or the placement agent exercises its VACM Units. On July 24, 2002, the Company issued 1,000 shares of its common stock to each of two employees at a price of $.63 per share as a bonus for services rendered. These issuances of shares were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On July 31, 2002, the Company issued 100,000 shares of its common stock to the Laurus Master Fund, Ltd. at a price of $.56 per share as part of a settlement. This issuance of shares was exempt from registration pursuant to under the Securities Act of 1933, as amended. On August 7, 2002, the Company issued 5,000 shares of its common stock to an individual at a price of $.58 per share for consulting services. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company has disclosed additional sales of unregistered securities in Item 2 ("Changes in Securities") in its Form 10-KSB for the fiscal quarter ended June 30, 2002, which it filed with the Securities and Exchange Commission on August 20, 2002. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of September 30, 2002, ValCom, Inc. operations were comprised of five divisions: (1) Studio Rental, (2) Studio Equipment and Personnel Rental, (3) Broadcast Television, (4) Film and Television Production and (5) Publishing. In January 2003, the Company divested itself of its publishing division. See Part I, Item 1 ("Acquisition of PTL Productions, Inc. dba Brentwood Magazine"). STUDIO RENTAL -------------- The Company's subsidiary, Valencia Entertainment International, LLC, operates eight sound stages in Valencia, California. Valencia Entertainment International, LLC owns six improved acres on which six of the sound stages are located. Valencia Entertainment International, LLC leases the other two sound stages. Valencia Entertainment International, LLC has one-year, written leases with two major production companies, which lease six of the sound stages and sublease two of the sound stages. Rental income from the eight sound stages should remain constant at approximately $2,000,000 annually including cost-of-living increases. STUDIO EQUIPMENT RENTAL ------------------------- The Company's subsidiary, Half Day Video, Inc., supplies personnel, cameras and other production equipment to various production companies on a short-term basis. As a result of additional equipment purchases and increased activity, from both internal and external sources, we anticipate that Half Day Video, Inc.'s revenues should increase significantly. 13 TELEVISION AND FILM PRODUCTION ------------------------------- In January 2001, the Company entered into a joint venture agreement with Woody Fraser Productions, Inc. to produce various television productions on its behalf. Under the terms of the agreement, we will fund up to $500,000 of annual production development costs. In return, we will retain after costs of production, 75% of the net savings derived from all production, 75% of ownership of foreign and syndication plus executive producer fees. In January 2002, Woody Fraser Productions, Inc., as part of its Joint Venture agreement with the Company, signed contracts with a cable television network to produce the second season of a television series consisting of 13 episodes. Revenue under this contract during 2002 was approximately $2,500,000. The Company was to retain 75% of any possible net savings from the productions and a percentage of foreign sales and merchandising. Half Day Video, Inc. handled a majority of the production rental needs. However, the Company has a dispute with Woody Fraser and Woody Fraser Productions, Inc., which is currently being arbitrated. Thus, it is not clear how much ValCom will recover from the joint venture agreement. See Part I, Item 3 ("Legal Proceedings"). Additionally, the Company signed a contract with a different Cable Television Network to produce six (6) episodes of a television series at a contracted amount of approximately $500,000. After costs of production, we will retain 100% of any savings plus a portion of the executive producer fees. Additional productions are in the development process. Revenues will be recognized when all individual programs are available. CHANNEL 8 IN PALM SPRINGS, CALIFORNIA ------------------------------------------ In connection with its joint venture with Global Communications, Inc., the Company owns a 45% equity interest in ValCom Broadcasting, LLC, a New York limited liability company, which operates KVPS (Channel 8), an independent television broadcaster in the Palm Springs, California market, which is strategically located in the middle of four major markets including Los Angeles, Phoenix, Las Vegas and San Diego. See Part I, Item 1 ("Joint Venture Agreement with New Global Communications, Inc. - Valcom Broadcasting, LLC"). We plan to acquire additional television stations and utilize the infrastructure of full-service television and motion picture studios. This would enable Channel 8 to operate at a fraction of the cost compared to other broadcasters in the market. PUBLISHING ---------- In August, 2002, the Company acquired PTL Productions, Inc. dba Brentwood Magazine, which publishes a Southern California entertainment magazine which has been setting trends in Southern California from Santa Barbara to San Diego for over seven years covering entertainment, business, luxurious lifestyles, travel and fashion. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization, dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. dba Brentwood Magazine and sell PTL Productions, Inc. back to the seller. See Note 16 (Subsequent Events) to the Consolidated Financial Statements. RESULTS OF OPERATIONS In December 2001, he Company changed its fiscal year end from December 31 to September 30. The year end of September 30 will more closely match the Company's natural business cycle. FISCAL YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- 2001 ---- Revenues for the year ended September 30, 2002 increased by $9,798,069 or 406.0% from $2,413,260 for the nine months ended September 30, 2001 to $12,211,329 for the year ended September 30, 2002. The increase in revenues was principally due to revenues associated with the Company's acquisition of Half Day Video, Inc. and its joint venture with Woody Fraser Productions, Inc., both of which occurred in the first fiscal quarter of 2001. 14 Production costs for the year ended September 30, 2002 increased by $6,783,693 or 691.0% from $981,667 for the nine months ended September 30, 2001 to $7,765,360 for the year ended September 30, 2002. The increase in production costs was principally due to the acquisition of Half Day Video, Inc. and production and development costs incurred by Woody Fraser Productions, Inc., which the Company paid for pursuant to the joint venture agreement. General and administrative expenses for the year ended September 30, 2002 increased by $2,116,440 or 99.9% from $2,119,348 for the nine months ended September 30, 2001 to $4,235,788 for the year ended September 30, 2002. The increase was due principally to increases in settlement charges in connection with issuances of common stock, insurance expense, personnel costs and rent. Consulting and professional fees for the year ended September 30, 2002 increased by $379,163 or 97.3% from $389,713 for the nine months ended September 30, 2001 to $768,876 for the year ended September 30, 2002. The increase was due principally to increases in consulting fees and outside services in connection with issuances of common stock. Reserve for doubtful accounts and other receivables for the year ended September 30, 2002 increased by $1,869,302 or 9,346.5% from $20,000 for the nine months ended September 30, 2001 to $1,889,302 for the year ended September 30, 2002. The increase is due principally to the write-off of an uncollectible note receivable from a former officer and director of the Company and write-offs associated with the production agreement between the Company and Woody Fraser Productions, Inc. See Note 5 (Production Agreement) to the Financial Statements. Depreciation and amortization expense for the year ended September 30, 2002 increased by $209,587 or 109.2% from $191,925 for the nine months ended September 30, 2001 to $401,512 for the year ended September 30, 2002. The increase in depreciation and amortization expense is a result of additional assets being depreciated. Goodwill impairment for the year ended September 30, 2002 increased by $424,634 from $0 for the nine months ended September 30, 2001 to $424,634 for the year ended September 30, 2002. The increase in goodwill impairment was due to the goodwill associated with the Brentwood Magazine acquisition being fully impaired. Selling and promotion costs for the year ended September 30, 2002 decreased by $66,207 or 28.7% from $230,483 for the nine months ended September 30, 2001 to $164,276 for the year ended September 30, 2002. The decrease was due principally to a decrease in travel expenses. Interest expense for the year ended September 30, 2002 increased by $791,421 or 130.5% from $606,415 for the nine months ended September 30, 2001 to $1,397,836 for the year ended September 30, 2002. The increase was due principally to interest associated with the pay off of the Laurus Master Fund, Ltd. loan. Due to the factors described above, the Company's net loss increased by $2,701,527 from a loss of $2,126,291 for the nine months ended September 30, 2001 to $4,827,818 for the year ended September 30, 2002. FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- In December 2001, he Company changed its fiscal year end from December 31 to September 30. The year end of September 30 will more closely match the Company's natural business cycle. As of September 30, 2001, the Company had working capital of $537,646. As of the prior year, working capital was $1,074,031. The change was due primarily to the increase in accounts payable and accrued liabilities. Total assets were $14,580,597 at September 30, 2001 versus $16,008,529 at December 31, 2000 and additionally total liabilities were $8,355,823 and $8,987,769, respectively. The changes in total assets and liabilities are substantially accounted for by the above-described changes in current assets and liabilities. For the nine months ended September 30, 2001, the Company had revenues of $2,413,260, operating expenses of $3,933,136 and net losses of $(2,126,291). Loss before depreciation and interest was $(1,327,951) for the nine-month period. 15 Rental revenues increased $93,251 for the nine months compared with the corresponding prior year. This increase was the result of the revenues earned from two additional sound stages and contractual rate increases. Production revenues increased $914,734 for the nine months versus the prior year. Production costs increased $708,450 for the nine months compared with the prior year. This increase relates to the increase in production activity and expensed development costs. Selling and promotion costs increased $126,307 for the nine months due to increased efforts to promote the Company and its services/productions. Depreciation expense decrease of $79,789 was due to the fully depreciated status of certain assets as of September 30, 2001. For the nine months ended September 30, 2001, administrative and general costs increased by $797,903. This increase was the result of significant increases in Legal and Accounting, Management Consulting, Salaries and Fringes, Taxes and Licenses, Development Costs and Rent Expense categories for the following reasons: A $34,059 increase in Legal and Accounting was due to the performance of audits and the preparation of agreements and other legal matters related to the merger. A $207,250 increases in Management Consulting was due to costs incurred in the planning and reorganization of the newly merged companies. A $53,172 increase in Taxes and Licenses was due to adjustments made for the under adjacent to the Valencia studio property. A $368,194 increase in Salaries and Fringes was primarily due to management staffing increases. FUTURE OUTLOOK --------------- The sale of PTL Productions, Inc. dba Brentwood Magazine back to the seller is not expected to have a significant impact on the Company's revenues but is expected to reduce overall losses. Through September 30, 2002, PTL Productions, Inc. generated only $59,590 or 0.5% of the Company's total sales, while contributing $589,403 or 12.2% to the Company's net loss. STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE ----------------------------------------------------------- See Notes To Consolidated Financial Statements in Part F/S for a description of the Company's calculation of earnings per share. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has a net loss of $4,827,818 and a negative cash flow from operations of $2,005,392 for the year ended September 30, 2002, and a working capital deficiency of $594,990 and an accumulated defici of $8,126,190 at September 30, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $343,400 on September 30, 2002, compared to $420,900 at September 30, 2001. During the fiscal year 2002, net cash used by operating activities totaled $2,005,400 compared to cash provided by operating activities of $1,494,400 for the nine months ended September 30, 2001. A significant portion of operating activities included payments for accounting and legal fees, consulting fees, salaries, and rent. Net cash provided by financing activities for fiscal year 2002 totaled $1,917,900 compared to cash used of $625,100 for the nine months ended September 30, 2001. Net cash provided by investing activities during fiscal year 2002 totaled $10,000 compared to cash used of $501,200 during the nine months ended September 30, 2001, for proceeds of notes receivable and decreased expenditures for the purchase of equipment. The above cash flow activities yielded a net cash decrease of $77,500 during fiscal year 2002 compared to a net cash increase of $368,100 during the nine months ended September 30, 2001. 16 Net working capital (current assets less current liabilities) was a negative $595,000 as of September 30, 2002 and a positive $484,300 as of September 30, 2001. During the twelve months ended September 30, 2002, the Company raised $2,930,000, net of placement fees of approximately $70,000 from private placements of common stock and Series D Preferred Stock. The Company will need to continue to raise funds through various financings to maintain its operations until such time as cash generated by operations is sufficient to meet its operating and capital requirements. There can be no assurance that the Company will be able to raise such capital on terms acceptable to the Company, if at all. Long-term debt as of September 30, 2002 and 2001 was $6,702,600 and $6,636,700 and related primarily to the Company's owned real estate. Total shareholders' equity decreased to $4,891,000 in fiscal year 2002 from $6,224,800 for the nine months ended September 30, 2001. Stock options and warrants increased to $253,100 in fiscal year 2002 from $10,400 for the nine months ended September 30, 2001. Additional paid in capital increased to $12,787,600 in fiscal year 2002 from $9,512,700 for the nine months ended September 30, 2001. INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY During the last fiscal year, the Company financed its operations with cash from its operating activities and through private offerings of its securities to the Laurus Master Fund, Ltd. and High Capital Funding, LLC. These transactions are described below. On May 24, 2002, the Company repaid the remaining $1,089,616 convertible note due to the Laurus Master Fund, Ltd. In connection with the payoff of the note, the Company expensed $109,000 in unamortized prepaid loan fees, $245,000 of unamortized discounts and $295,000 of interest expense. In May and June 2002, the Company issued to Laurus Master Fund, Ltd. 12% convertible notes in the aggregate principal amount of $2,000,000. The notes mature on May 24, 2004 and are convertible into the Company's common stock at a fixed conversion price of $.95 per share and are payable monthly over 22 months. The convertible notes are secured by a second deed of trust on our real property. In addition, in connection with the issuance of the convertible notes, the Company issued warrants to purchase 300,000 shares of its common stock at an exercise price of $1.20 per share exercisable until May 24, 2007. In June 2002, the Company issued to High Capital Funding, LLC 1,250,000 shares of its Series D Preferred Stock and a warrant to purchase 1,250,000 shares of its common stock at an exercise price of $.80 per share in exchange for $1,000,000. The Series D Preferred Stock is convertible into common stock at a ratio of one for one. The Company paid Bathgate Capital Partners, LLC a 7% placement agent fee in cash. In addition, the Company collectively issued to Bathgate Capital Partners, LLC and its principals an aggregate of 125,000 "VACM Units", each Unit consisting of one share of the Company's common stock and a warrant to purchase one share of common stock at an exercise price of $.80 per share, for an aggregate purchase price of $100,000. On July 1, 2002, the Company acquired all of the outstanding shares of common stock of Digital Cut Post, Inc. Digital Cut Post, Inc. is a computer-based, non-linear, post-production editorial facility specializing in independent feature film and broadcast television. This acquisition provides for the sole shareholder of Digital Cut Post, Inc. to receive $1,100,000 and 1,400,000 shares of Series C Preferred Stock over a four-year period. On November 20, 2002, the Company and Digital Cut Post, Inc. mutually agreed upon a rescission of their Agreement and Plan of Reorganization. Pursuant to the rescission agreement, Digital Cut Post, Inc. agreed to repay the Company approximately $281,000 in cash. As of the date of this filing, Digital Cut Post, Inc. owes the Company approximately $95,000 and has agreed to pay this amount by June 26, 2003. In December 2002, an unaffiliated company offered to purchase up to an 85% equity interest in the Company in exchange for contributing equity financing. The Company and the unaffiliated company signed a non-binding letter of intent. The closing of the transaction is subject to various conditions. There is no assurance that the transaction will ever be consummated, or if it is 17 consummated, that it will be consummated on the terms set forth in the letter of intent. On January 14, 2003, the Company's subsidiary, Valencia Entertainment International, LLC, entered into an Exclusive Sales Listing Agreement with a commercial real estate broker to sell the real property serving as the Company's headquarters located at 26030 Avenue Hall in Valencia, California. The Exclusive Sales Listing Agreement lists the property at $11,850,000. The Exclusive Sales Listing Agreement requires Valencia Entertainment International, LLC to pay a commission to the broker of four percent of the gross sales price if the broker sells the real property. The Company intends to engage in a sale-leaseback transaction with respect to its real property to generate funds for working capital and payment of debts. However, there is no assurance that the Company's property will be sold for $11,850,000 or on terms otherwise favorable to the Company. The Company's subsidiary, Valencia Entertainment International, LLC, is actively negotiating to lease several of the Company's vacant production stages to production companies that produce television series and motion pictures. If the production companies sign leases for production stages, the Company will recommend that the production companies rent production equipment and personnel from Half Day Video, Inc., another Company subsidiary. Thus, the Company's synergistic relationship with Half Day Video, Inc. may enable it to possibly enhance its revenue-generation. The Company anticipates that its proposed sale-leaseback of its studio real estate, stock issuances and projected positive cash flow from operations collectively will generate sufficient funds for the Company's operations for the next 12 months. If the Company's existing cash combined with cash from operating activities is not adequate to finance the Company's operations during the next 12 months, the Company will consider one or more of the following options: (1) issuing equity securities in exchange for services, (2) selling additional equity or debt securities or (3) reducing the number of its employees. FUTURE FUNDING REQUIREMENTS The Company's capital requirements have been and will continue to be significant. The Company's adequacy of available funds during the next fiscal year and thereafter will depend on many factors, including whether the Company will be able to: (1) lease its vacant production stages, (2) rent its production equipment and personnel profitably, (3) develop additional distribution channels for its programming, and (4) generate sufficient advertising revenues to support its television station operations. Assuming funds are available, during the next fiscal year, the Company expects to spend approximately $500,000 for plant and equipment. There can be no assurance that additional private or public financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to the Company. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of the Company's existing common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on the operating flexibility of the Company. The Company's failure to successfully obtain additional future funding may jeopardize its ability to continue its business and operations. 18 ITEM 7. FINANCIAL STATEMENTS AND SUMMARY FINANCIAL DATA -------------------------------------------------------------- FINANCIAL STATEMENTS -------------------- The audited consolidated balance sheets of the Company as of September 30, 2002 and 2001 and the related consolidated statements of operations, stockholder's equity and cash flows for the years then ended are submitted herewith. CONTENTS OF REPORT CONTENTS OF REPORT Independent Auditors' Reports F-2/F-3 Consolidated Balance Sheets F-4/F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Stockholders Equity F-7/F-8 Consolidated Statements of Cash Flow F-9/F-10 Notes to Consolidated Financial Statements F-11/F-26 19/F-1 INDEPENDENT AUDITORS' REPORTS ----------------------------- To the Board of Directors: Valcom, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Valcom, Inc. and subsidiaries (the "Company") as of September 30, 2002 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Valcom, Inc. and subsidiaries as of September 30, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has a net loss of $4,827,818 and a negative cash flow from operations of $2,005,392 for the year ended September 30, 2002, and a working capital deficiency of $594,990 and an accumulated deficit of $8,126,190 at September 30, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regards to these matters is also described in Note 17. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, WEINBERG & COMPANY, P.A. Los Angeles, California January 8, 2003 F2 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors ValCom, Inc.: We have audited the accompanying consolidated balance sheet of ValCom, Inc. and subsidiaries (the "Company") as of September 30, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for the nine-month period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2001, and the consolidated results of its operations and its cash flows for the nine months ended September 30, 2001 in conformity with generally accepted accounting principles. /s/JAY J. SHAPIRO, C.P.A. a professional corporation Encino, California December 27, 2001 F3 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, September 30, 2002 2001 ------ ----- ASSETS ------ Current Assets: Cash $ 343,374 $ 420,857 Accounts receivable, net 99,864 156,179 Other receivables 281,471 - Receivable from Woody Fraser Productions - 150,000 Prepaid development costs 80,932 40,699 Related party receivables, net 29,000 1,274,000 Note receivable, current 71,566 161,667 Deferred compensation 404,548 - ----------- ----------- Total Current Assets 1,310,755 2,203,402 Property and equipment - net 11,849,037 11,959,941 Deferred financing costs 275,220 232,171 Deposits and other assets 39,413 31,750 Note receivable, long-term 64,892 153,333 ------------ ----------- Total Assets $ 13,539,317 $ 14,580,597 ============ ============ See accompanying notes to the consolidated financial statements F4 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 263,539 $ 540,983 Accrued interest 38,764 20,384 Accrued expenses 300,850 107,824 Due to related parties, current portion 51,635 - Notes payable, current portion 1,238,357 284,242 Preferred stock payable 12,600 - Production advances, net - 765,656 ----------- --------- Total Current Liabilities 1,905,745 1,719,089 Due to related parties, net of current portion 40,000 - Notes payable, net of current portion 6,702,593 6,636,734 ----------- ---------- Total Liabilities $ 8,648,338 $8,355,823 ----------- ---------- Commitments and contingencies Stockholders' equity: Convertible preferred stock: all with par value $0.001; Series B, 1,000,000 shares authorized; 38,000 shares issued and outstanding, respectively 38 38 Series C, 5,000,000 shares authorized; 1,400,000 and 1,500,000 shares issued and outstanding, respectively 1,400 1,500 Series D, 1,250,000 shares authorized;1,250,000 and 0 shares issued and outstanding, respectively 1,250 - Common stock, par value $.001; 100,000,000 shares authorized; 11,011,933 and 8,909,401 shares issued and outstanding, respectively 11,012 8,909 Series C preferred stock to be issued 239,400 - Additional Paid-in capital 12,787,591 9,512,699 Accumulated deficit (8,126,190) (3,298,372) Treasury stock, at cost (35,000 shares) (23,522) - ----------- ----------- Total Stockholders' Equity 4,890,979 6,224,774 ----------- ----------- Total Liabilities and Stockholders' Equity $13,539,317 $14,580,597 =========== =========== See accompanying notes to the consolidated financial statements F5
VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended For the Nine September 30, 2002 Months Ended ------------------ ------------ September 30, 2001 -------------------- Revenue: Rental $ 3,426,405 $ 1,422,033 Production 8,733,278 952,234 Other 51,646 38,993 ------ ------ Total Revenue 12,211,329 2,413,260 ---------- --------- Cost and Expenses: Production 7,765,360 981,667 General and administrative 4,235,788 2,119,348 Consulting and professional fees 768,876 389,713 Bad debts 1,889,302 20,000 Depreciation and amortization 401,512 191,925 Goodwill impairment 424,634 - Selling and promotion 164,276 230,483 ------- ------- Total Cost and Expenses 15,649,748 3,933,136 -------------------- -------------------- Operating loss (3,438,419) (1,519,876) Other Income (Expense): Interest expense (1,397,836) (606,415) Other income 8,437 - --------- --------- Total Other Income (Expense) (1,389,399) (606,415) -------------------- -------------------- Net loss $ (4,827,818) $ (2,126,291) ==================== ==================== Net loss per common share: Basic and diluted $ (0.48) $ (0.23) ==================== ==================== Weighted average shares outstanding: Basic and diluted 10,152,597 9,135,419 ==================== ====================
See accompanying notes to the consolidated financial statements F-6
VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Common Preferred Series B Preferred Series Shares Amount Shares Amount Shares Amount ---------- --------- ---------------------- ----------- ---------- Balance, December 31, 2000 90,139,843 $ 90,140 43,000 $ 43 1,500,000 $ 1,500 Acquisition of Half Day 950,000 950 - - - - Discount on convertible debt - - - - - - Shares issued for services 1,600,000 1,600 - - - Shares issued for debt retirement 869,162 869 - - - - Shares issued for cash 410,000 410 - - - - Conversion of preferred shares 25,000 25 (5,000) (5) - - Correction of shares issued upon merger 100,000 100 - - - - Canceled (5,000,000) (5,000) - - - - Reverse split 1:10 (80,184,604) (80,185) - - - - Net loss - - - - - - ------------ --------- ------- -------- ---------- --------- Balance September 30, 2001 8,909,401 8,909 38,000 38 1,500,000 1,500 Shares issued for services 440,284 440 - - - - Shares issued for debt retirement 552,748 553 - - - - Shares issued to employees as compensation 759,500 760 - - - - Shares issued for payment of penalties and fees - Laurus Master Fund, Ltd. loan 350,000 350 - - - - Preferred stock issued for cash, net - - - - - - Warrants issued with preferred stock payable - - - - - - Issuance of warrants with convertible notes - - - - - - VACM Units issued to placement agents - - - - - - Issuance of common stock warrants and options - - - - - - Cancellation of Series C Preferred Stock at par - - - - (100,000) (100) Less treasury stock, at cost - - - - - - Preferred stock to be issued - - - - - - Net loss - - - - - - ------------- --------- -------- -------- ----------- --------- Balance September 30, 2002 11,011,933 $ 11,012 38,000 $ 38 1,400,000 $ 1,400 ============= ========= ======== ======== =========== =========
See accompanying notes to the consolidated financial statements F-7
VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED) Series C Preferred Stock Additional Preferred Series D To be issued Paid-In Treasury Accumulated Shares Amount Shares Amount Capital Stock Deficit ------------------ ------------------- ------------- --------- ----------- Balance, December 31, 2000 - $ - - $ - $ 8,101,157 $ - $(1,172,081) Acquisition of Half Day - - - - 140,792 - - Discount on convertible debt - - - - 375,000 - - Shares issued for services - - - - 378,400 - - Shares issued for debt retirement - - - - 227,695 - - Shares issued for cash - - - - 204,590 - - Conversion of preferred shares - - - - (20) - - Correction of shares issued - - - - (100) - - upon merger Canceled - - - - 5,000 - - Reverse split 1:10 - - - - 80,185 - - Net loss - - - - - - (2,126,291) Balance September 30, 2001 - - - - 9,512,699 - (3,298,372) Shares issued for services - - - - 430,843 - - Shares issued for debt retirement - - - - 144,959 - - Shares issued to employees for compensation - - - - 718,846 - - Shares issued for payment of - - - - 255,650 - - penalties and fees- Laurus Master Fund, Ltd. loan Preferred stock issued for 1,250,000 1,250 - - 468,797 - - cash, net Warrants issued with preferred - - - - 441,203 - - stock Issuance of warrants with - - - - 77,300 - - convertible notes VACM Units issued to - - - - 60,995 - - placement agents Issuance of common stock - - - - 676,199 - - warrants and options Cancellation of Series C - - - - 100 - - Preferred Stock at par Less treasury stock, at cost - - - - - (23,522) - Preferred stock to be issued in - - 380,000 239,400 - - - acquisition Net loss - - - - - - (4,827,818) ------------ ------- ------- -------- ----------- -------- ------------ Balance September 30, 2002 1,250,000 $ 1,250 380,000 $239,400 $12,787,591 $(23,522) $(8,126,190) ============ ======= ======= ======== =========== ========= ============ Total Balance, December 31, 2000 $ 7,020,759 Acquisition of Half Day 141,742 Discount on convertible debt 375,000 Shares issued for services 380,000 Shares issued for debt retirement 228,564 Shares issued for cash 205,000 Conversion of preferred shares - Correction of shares issued - upon merger Canceled - Reverse split 1:10 - Net loss (2,126,291) Balance September 30, 2001 6,224,774 Shares issued for services 431,283 Shares issued for debt retirement 145,512 Shares issued to employees for compensation 719,606 Shares issued for payment of 256,000 penalties and fees- Laurus Master Fund, Ltd. loan Preferred stock issued for 470,047 cash, net Warrants issued with preferred 441,203 stock Issuance of warrants with 77,300 convertible notes VACM Units issued to 60,995 placement agents Issuance of common stock 676,199 warrants and options Cancellation of Series C - Preferred Stock at par Less treasury stock, at cost (23,522) Preferred stock to be issued in 239,400 acquisition Net loss (4,827,818) Balance September 30, 2002 $ 4,890,979
See accompanying notes to the consolidated financial statements F-8 ------
VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year For the Nine Ended Months Ended September 30, September 30, 2002 2001 =============== =============== CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (4,827,818) $ (2,126,291) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 401,512 191,925 Bad debt expense 1,889,302 - Goodwill impairment 424,634 - Discount on note receivable 16,875 - Warrants and options issued for compensation 271,651 280,000 Warrants issued to placement agent 42,245 - Stock issued for payment of fees and penalties 256,000 - Stock issued for compensation 719,606 - Stock issued for services 431,283 - Changes in operating assets and liabilities: Increase in receivables (295,878) (61,223) Increase in other receivables (281,471) - Increase in prepaid development costs (40,233) (80,498) Increase in related party receivables (65,000) - (Increase) decrease in deposits and other assets (7,063) 9,819 (Decrease) increase in accounts payable and accrued expenses (175,381) 2,515,014 (Decrease) increase in production advances (765,656) 765,656 --------------- --------------- Net Cash (Used In) Provided By Operating Activities (2,005,392) 1,494,402 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (111,658) (401,179) Proceeds from (payment for) note receivable 121,667 (100,000) -------------- --------------- Net Cash Provided By (Used In) Investing Activities 10,009 (501,179) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible debt 2,000,000 131,198 Payment of loan costs on new debt (221,999) (131,670) Repayment of notes payable (757,214) (381,529) Repayment of amounts due to related parties (9,365) (448,142) Purchase of treasury stock (23,522) - Proceeds from issuance of preferred stock and warrants 930,000 205,000 -------------- --------------- Net Cash Provided By (Used In) Financing Activities 1,917,900 (625,143) --------------- --------------- NET (DECREASE) INCREASE IN CASH (77,483) 368,080 CASH AT BEGINNING OF YEAR 420,857 52,777 ------------- -------------- CASH AT END OF YEAR $ 343,374 $ 420,857 ============= ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ------------------------------------------------- Cash paid for interest $ 1,371,810 $ 299,000 ------------- -------------- Cash paid for income taxes $ 800 $ - --------------- ---------------
F-9 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: ------------------------------------------------------------------------------ During the year ended September 30, 2002, the Company issued 552,748 shares of common stock to convert $145,512 of principal and interest on convertible debentures (See Note 7). During the year ended September 30, 2002, the Company acquired all of the outstanding shares of common stock of PTL Productions, Inc. (dba Brentwood Magazine) for the assumption of approximately $109,343 of debt and accounts payable, recorded due to related parties of $101,000 and 400,000 shares of Series C Preferred Stock (See Note 4). In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. (dba Brentwood Magazine) and sell PTL Productions, Inc. back to the seller (See Note 16). During the year ended September 30, 2002, the Company issued 2,075,000 warrants and 425,000 options to consultants having a fair value of $676,170 of which $404,548 has been classified as deferred compensation and $271,651 has been expensed (See Notes 13 and 14). During the year ended September 30, 2002, the Company cancelled 100,000 shares of Series C Preferred Stock for no consideration. F-10 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- Following is a summary of the significant accounting policies followed in the preparation of these consolidated financial statements, which policies are in accordance with accounting principles generally accepted in the United States of America. DESCRIPTION OF BUSINESS ----------------------- ValCom, Inc. and subsidiaries (the "Company"), formerly SBI Communications, Inc., was originally organized in the State of Utah on September 23, 1983, under the corporate name of Alpine Survival Products, Inc. Its name was subsequently changed to Supermin, Inc. on November 20, 1985. On September 29, 1986, Satellite Bingo, Inc. became the surviving corporate entity in a statutory merger with Supermin, Inc. In connection with the above merger, the former shareholders of Satellite Bingo, Inc. acquired control of the merged entity and changed the corporate name to Satellite Bingo, Inc. On January 1, 1993, the Company executed a plan of merger that effectively changed the Company's state of domicile from Utah to Delaware. Through shareholder approval dated March 10, 1998, the name was changed to SBI Communications, Inc. In October 2000, the Company was issued 7,570,997 shares by SBI for 100% of the shares outstanding in Valencia Entertainment International, LLC ("VEI"), a California limited liability company. This acquisition has been accounted for as a reverse acquisition merger with VEI as the surviving entity. The corporate name was changed to ValCom, Inc. effective March 21, 2001. The Company is a diversified entertainment company with the following operating activities: a) Studio rental - the Company leases eight sound and production stages to production companies. Six of the eight sound and production stages are owned by the Company while the remaining two stages are leased from a third party under an operating lease agreement. b) Studio equipment and rental - operating under the name Half Day Video, Inc., the Company supplies and rents personnel, cameras and other production equipment to various production companies on a short-term or long-term basis. c) Film and TV production - the Company has a joint-venture agreement with Woody Fraser Productions, Inc. ("Woody Fraser") pursuant to which the Company and Woody Fraser produce various television productions for the broadcast networks, cable networks or first-run television syndication and may be subsequently licensed to foreign or domestic cable and syndicated television markets. However, the Company is currently in a dispute with Woody Fraser (See Note 5). d) Magazine publication - Operating under the name Brentwood Magazine, the Company derives advertising revenues from the publishing of a southern California magazine covering entertainment, business, luxurious lifestyles, travel and fashions. The Company also uses the magazine as a source for additional promotion of the Company. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions (dba Brentwood Magazine) and sell PTL Productions, Inc. (dba Brentwood Magazine) back to the seller (See Note 16). BASIS OF PRESENTATION ----------------------- This summary of significant accounting policies of the Company is presented to assist in understanding the consolidated financial statements. The consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. During the fiscal year 2001, the Company changed its year-end to September 30 from December 31 to better reflect its operating cycle. F-11 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 PRINCIPLES OF CONSOLIDATION ---------------------------- The consolidated financial statements include the accounts of ValCom, Inc. and three wholly-owned subsidiaries, VEI, which was acquired effective February 2001, Half Day Video, Inc., which was acquired effective March 2001 and PTL Productions, Inc., (dba Brentwood Magazine) which was acquired in August 2002 (See Note 4). In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions (dba Brentwood Magazine) and sell PTL Productions, Inc. (dba Brentwood Magazine) back to the seller (See Note 16). Investments in affiliated companies over which the Company has a significant influence or ownership of more than 20% but less than or equal to 50% are accounted for under the equity method. USE OF ESTIMATES ------------------ The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ form those estimates. CONCENTRATIONS AND CREDIT RISK --------------------------------- The Company has three customers who accounted for approximately 99% of total rental revenues for the year and nine months ended September 30, 2002 and 2001, respectively. As of September 30, 2002, all eight sound and production stages were under non-cancelable operating leases for one year from two major production companies. Woody Fraser accounted for approximately 91% and 22% of total production revenues for the year and nine months ended September 30, 2002 and 2001, respectively. During fiscal year 2002, the Company, in association with Woody Fraser, produced three television pilots or series, two of which have been "picked up" by network companies for the next season. Financial instruments that potentially subject the Company to concentrations of risk consist of trade receivables principally arising from monthly leases from television producers. The Company continuously monitors the credit-worthiness of its customers to minimize its credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying value of cash, receivables and accounts payable approximates fair value due to the short maturity of these instruments. The carrying value of short and long-term debt approximates fair value based on discounting the projected cash flows using market rates available for similar instruments. None of the financial instruments are held for trading purposes. As of September 30, 2002, accounts receivable is reported net of a $496,190 allowance for bad debts. DEPRECIATION AND AMORTIZATION ------------------------------- For financial and reporting purposes, the Company follows the policy of providing depreciation and amortization on the straight-line method over the estimated useful lives of the assets, which are as follows:
Building 39 years Building Improvements 39 years Production Equipment 5 years Office Furniture and Equipment 5 to 7 years Leasehold Improvements 5 years Autos and Trucks 5 years
DEFERRED LOAN COSTS ------------------- Deferred loan costs are amortized on the straight-line method over the term of the related loan. F-12 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 INCOME TAXES ------------- Deferred income tax assets or liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. STOCK-BASED COMPENSATION ------------------------- The Company accounts for its stock-based employee compensation plans using the intrinsic value based method, under which compensation cost is measured as the excess of the stock's market price at the grant date over the amount an employee must pay to acquire the stock. Expenses related to stock options and warrants issued to non-employees are accounted for using the fair value based method, under which the fair value of the security is measured at the date of grant based on the Black-Scholes pricing model. PREPAID DEVELOPMENT COSTS --------------------------- Prepaid development costs consist principally of direct production costs and production overhead and are expensed when the Company records the applicable revenues and the films or series are available for telecast or all contractual obligations have been met by the Company. The Company has recorded prepaid development as a current asset due to the short-term nature of the films or series being produced. Production costs incurred on films or series that are not expected to be telecast within one year are classified as long-term prepaid development costs. At September 30, 2002 and 2001, prepaid production costs totaled $80,932 and $40,699, respectively. None of the prepaid production costs have been classified as long-term. 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 undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. During the fourth quarter of fiscal year ended September 30, 2002, the Company recorded an impairment charge amounting to $424,634 relating to the goodwill recorded for the acquisition of PTL Productions, Inc. (See Note 4). REVENUE RECOGNITION -------------------- Revenues from studio and equipment rentals are recognized ratably over the contract terms. Revenues from the production and licensing of television programming are recognized when the films or series are available for telecast and certain contractual terms of the related production and licensing agreements have been met. Advertising revenues are recognized in the period during which the advertising is published in the Company's magazine, Brentwood Magazine. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions (dba Brentwood Magazine) and sell PTL Productions, Inc. (dba Brentwood Magazine) back to the seller (See Note 16). EQUITY INVESTMENT ------------------ The Company accounts for its investments in companies over which the Company has significant influence or ownership of more than 20% but less than or equal to 50% under the equity method. The Company's 45% investment in a recently acquired television station has been accounted for as an investment under the equity method (See Note 15) F-13 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 TREASURY -------- Treasury stock is accounted for by the cost method. Issuance of treasury shares is accounted for on a first-in, first-out basis. Differences between the cost of treasury shares and the re-issuance proceeds are charged to additional paid-in capital, if reissued. During July 2002, the Company purchased 35,000 shares of its common stock at a total cost of $23,522. No shares have been reissued as of September 30, 2002. LOSS PER COMMON SHARE ------------------------ Basic loss per common share is based on net loss divided by the weighted average number of common shares outstanding. Common stock equivalents were not included in the calculation of diluted loss per share as their effect would be anti-dilutive. The Company had a 1 for 10 reverse stock split of its shares of common stock in September 2001. The weighted average shares outstanding and loss per share in 2001 have been restated to reflect this change. RECLASSIFICATIONS ----------------- Certain amounts from prior periods have been reclassified to conform to the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS ------------------------------- The Financial Accounting Standards Board has recently issued several new Statements of Financial Accounting Standards ("SFAS"). Statement No. 141, "Business Combinations" supersedes Accounting Principles Board ("APB") Opinion No. 16 and various related pronouncements. Pursuant to the new guidance in Statement No. 141, all business combinations must be accounted for under the purchase method of accounting; the pooling-of-interests method is no longer permitted. SFAS 141 also establishes new rules concerning the recognition of goodwill and other intangible assets arising in a purchase business combination and requires disclosure of more information concerning a business combination in the period in which it is completed. This statement is generally effective for business combinations initiated on or after July 1, 2001. Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion 17 and related interpretations. Statement No. 142 establishes new rules on accounting for the acquisition of intangible assets acquired in a business combination and the manner in which goodwill and all other intangibles should be accounted for subsequent to their initial recognition in a business combination accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should be recorded at fair value. Intangible assets with finite useful lives should be amortized over such period and those with indefinite lives should not be amortized. All intangible assets being amortized as well as those that are not, are both subject to review for potential impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that goodwill arising in a business combination should not be amortized but is subject to impairment testing at the reporting unit level to which the goodwill was assigned at the date of the business combination. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and must be applied as of the beginning of such year to all goodwill and other intangible assets that have already been recorded in the balance sheet as of the first day in which SFAS No. 142 is initially applied, regardless of when such assets were acquired. Goodwill acquired in a business combination whose acquisition date is on or after July 1, 2001, should not be amortized, but should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No. 142 has not yet been adopted. However, previously acquired goodwill should continue to be amortized until SFAS No. 142 is first adopted. Statement No. 143, "Accounting for Asset Retirement Obligations" establishes standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets arising from the acquisition, construction, or development and/or normal operation of such assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. F-14 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company will apply the provisions of SFAS 144 for the listing of its property (See Note 17). In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS 145 rescinds the provisions of SFAS No. 4, which requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS 145 related to classification of debt extinguishments are effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged. In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring Costs." SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, the Company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require the Company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS 147 addresses financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. SFAS 147 also provides guidance on the accounting for the impairment or disposal of acquired long-term customer relationship intangible assets of financial institutions, including those acquired in transactions between two or more mutual enterprises. These provisions of the statement will be effective for acquisitions on or after October 1, 2002. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS 148 amends FASB Statement No. 123, "Accounting for Stock Based Compensation" and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock based-compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002. With the exception of SFAS 144, the adoption of these pronouncements is not expected to have a material effect on the Company's consolidated financial statements. F-15 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 NOTE 2 PROPERTY AND EQUIPMENT --------------------------------- Property and equipment consists of the following at:
September 30, 2002 2001 Land $ 7,392,292 $ 7,392,292 Building 4,028,785 4,028.785 Building Improvements 1,161,256 1,154,406 Production Equipment 757,207 699,286 Leasehold Improvements 62,677 50,164 Autos and Trucks 96,787 89,087 Office Furniture and Equipment 99,917 73,243 ------ ------ 13,598,921 13,487,263 Less: accumulated depreciation (1,749,884) (1,527,322) ----------- ---------- Net book value $11,849,037 $11,959,941 ----------- -----------
NOTE 3 NOTE RECEIVABLE ------------------------- In September 2001, the Company sold production equipment to an unrelated third party under an asset purchase agreement for $350,000. Under the terms of the agreement, $150,000 was to be paid at signing and the remaining $200,000 was to be paid in 24 monthly installments of $8,333. The $150,000 was paid to the Company, however, none of the $8,333 monthly payments were made. In July 2002, the Company restructured the note to forgive $40,000 of the note and extend the maturity date one year, thereby reducing the monthly payments to $6,667. In connection with the sale, the Company recorded a loss of $25,312, which is included in general and administrative expenses for the fiscal year ended September 30, 2002. Additionally, the Company recorded a $40,000 loss on the restructuring of the note which is also included in general and administrative expenses. The note is non-interest bearing. The Company recorded a discount on the note amounting to $25,312 and the discount is accreted to interest income over the term of the note. In connection with the discount, the Company recorded interest income of $8,437 for the fiscal year ended September 30, 2002. As of September 30, 2002, the balance due on the note is $136,458, of which $71,566 is due within one year. The third party is current with the $6,667 monthly payments on the note. The note is secured by the equipment sold. In January 2003, the Company also entered into an agreement to receive $40,000 of the equipment back from the seller. NOTE 4 BUSINESS ACQUISITIONS ------------------------------- In March 2001, the Company acquired 100% of the common stock of Half Day Video, Inc., a California corporation, for 950,000 shares of ValCom, Inc. common stock. The net book value of Half Day Video, Inc. has been determined to be the fair market value of the common stock issued and therefore no goodwill was recorded. Effective July 1, 2002, the Company acquired all of the outstanding shares of common stock of Digital Cut Post, Inc. in exchange for the issuance of 1,400,000 shares of Series C Convertible Preferred Stock and $1,100,000 in cash. Digital Cut Post, Inc is a computer based, non-linear, post production editorial facility specializing in independent feature film and broadcast television. Total consideration for this acquisition was approximately $1,600,000 to be paid over four years. However, on November 20, 2002, the Company and Digital Cut Post, Inc. mutually agreed to rescind the stock purchase agreement and therefore the accounts of Digital Cut Post, Inc. are not included in the Company's consolidated financial statements at September 30, 2002. Any agreements that the Company had entered into on behalf of Digital Cut Post, Inc. were cancelled without prejudice. Also, the preferred shares issued to the owners of Digital Cut Post, Inc. by the Company in connection with the acquisition were returned and subsequently cancelled. Cash paid by the Company in the amount of $225,000 to the owners of Digital Cut Post, Inc. will be returned subject to certain adjustments. As of September 30, 2002, Digital Cut Post, Inc. owes the Company approximately $281,000 representing the cash consideration given for the acquisition of Digital Cut Post, Inc., and operating expenses and payroll paid on behalf of Digital Cut Post, Inc. by the Company. The total amount due from Digital Cut Post, Inc. has been included in other receivables in the accompanying Consolidated Balance Sheet as of September 30, 2002. F-16 Effective August 2, 2002, the Company acquired all of the outstanding shares of common stock of PTL Productions, Inc. (dba Brentwood Magazine) in exchange for the assumption of approximately $109,343 of debt and accounts payable, the payment of $101,000 in cash and an agreement to issue 400,000 shares of Series C Convertible Preferred Stock, convertible 1 for 1 into common shares. The Company also acquired approximately $38,000 of accounts receivable and other assets. The value of the preferred stock to be issued was $252,000 or $.63 per share based on the value of the Company's common stock on the date of the acquisition. As of September 30, 2002, the preferred stock had not been issued, however on December 6, 2002 the Company issued 380,000 shares of Series C Preferred Stock. As such at September 30, 2002, the value of 380,000 shares of Series C Preferred Stock ($239,400) is presented as preferred stock to be issued and the value of the 20,000 shares ($12,600) still to be issued is included in preferred stock payable in the accompanying balance sheet. The cash is to be paid over a period of one year subject to the collections of certain accounts receivable amounts and the accuracy of the accounts payable assumed. As of September 30, 2002, the balance owed to the former owners was $91,635. Brentwood Magazine, a Southern California entertainment publication, has been setting the trends in Southern California from Santa Barbara to San Diego for over seven years, covering entertainment, business, luxurious lifestyles, travel and fashion. The Company anticipated that its acquisition of Brentwood Magazine would help promote and establish the Company as a total entertainment company with several promotional avenues. In connection with the acquisition of Brentwood Magazine, the Company formed a new division, Valcom Publishing. This acquisition has been accounted for by the purchase method of accounting and, accordingly, the operating results have been included in the Company's consolidated results of operations from the date of the acquisition. As a result of the Brentwood Magazine acquisition, the Company recorded goodwill in the amount of approximately $424,634. During the fourth quarter of the fiscal year ended September 30, 2002, management has determined that the goodwill associated with this acquisition was fully impaired and has written-off the total goodwill recorded. In connection with the acquisition of PTL Productions, Inc. (dba Brentwood Magazine), the Company entered into an employment agreement with the former owner of the magazine for a period of three years. Pursuant to the employment agreement, the Company agreed, subject to certain terms and conditions, to pay the former owner a salary of $100,000 per year and a $20,000 bonus in the first year and a $40,000 bonus payment in the following year. At September 30, 2002, the Company accrued approximately $57,700 for the former owner's bonus. The Company has accounted for the amounts paid to the former owner as compensation expense ratably over the term of the employment agreement. Effective December 27, 2002, the Company terminated the former owner and stopped paying his salary and bonuses. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. (dba Brentwood Magazine) and sell PTL Productions, Inc. back to the seller (See Note 16). NOTE 5 PRODUCTION AGREEMENT ------------------------------ In January 2001, the Company entered into an agreement with Woody Fraser to produce various television productions on its behalf. Under the terms of the agreement, the Company was to fund $500,000 of annual production development costs in the form of a recoverable draw. The amount was to be paid in 10 equal installments of $50,000 throughout the year. In return, the Company retains, after costs of production, 75% of the net savings derived from all production, 75% of ownership of foreign and syndication plus executive producer fees. The remaining 25% of the net profits from any productions are paid to Woody Fraser. The Company was to retain 75% of any possible net savings from the productions. Half Day Video, Inc., a subsidiary of the Company, provided most of Woody Fraser's production rental needs. After costs of production, the Company was to retain 100% of any savings plus a portion of the executive producer fees. The agreement expires December 31, 2003. F-17 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 In November 2001, due to disputes among the parties and the failure of Woody Fraser Productions, Inc. to perform its respective duties under the production agreement, the Company stopped paying Woody Fraser Productions, Inc. monthly payments of $50,000 for production costs. Both parties claimed an unspecified amount of damages are owed to them and have not distributed any of the profits or allocated any of the production costs in accordance with the production agreement. The production agreement provides that disputes must be resolved by binding arbitration rather than litigation. The dispute is currently being arbitrated. The Company believes that Woody Fraser's claims are without merit and will vigorously defend itself. As of September 30, 2002, no accrual has been recorded with respect to the arbitration. Through September 30, 2002, Woody Fraser Productions, Inc. owed the Company approximately $400,000 pertaining to amounts advanced to Woody Fraser for production costs and $371,910 for accounts receivable. Woody Fraser Productions, Inc. also owes the Company 75% of the net profits generated from certain television shows it produced as well as executive producer fees of $115,000 for which the Company has not recorded a receivable due to the uncertainty of collection. The Company has reserved $150,000 for production costs during the fourth quarter of fiscal year 2002 and the Company reserved the remaining $250,000 in the prior fiscal year. The Company also reserved $371,910 for accounts receivable associated with Woody Fraser Productions, Inc. in the fourth quarter of fiscal year ended September 30, 2002. NOTE 6 NOTES PAYABLE ----------------------- Notes payable consist of the following at:
September 30, 2002 2001 ========= ===== Promissory note payable to Hawthorne Savings, formerly known as First $ 5,869,212 $5,927,508 Fidelity, monthly installments of principal and interest of $54,648. Interest is variable based on a 6-month US T-Bill rate. The note is secured by a Deed of Trust on the Valencia Studio property and matures January 2010. Convertible promissory note, net of discount of $336,000 at September - 586,388 30, 2001. On May 24, 2002, the Company repaid the note. See Note 7 for further description. Convertible promissory note, net of discount of $64,416 at September 30, 1,845,346 - 2002. See Note 7 for further description. Promissory note payable to City National Bank, interest at 11.25%, 113,516 150,837 maturing February 28, 2006. The note is collateralized by production equipment Other, 8.00% - 11.00% interest, maturing from 2003 to 2006 112,876 256,243 ------------ ----------- Total 7,940,950 6,920,976 Less current maturities (1,238,357) (284,242) ------------ ----------- Long-term notes payable $ 6,702,593 $6,636,734 ============ ===========
F-18 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Future maturities on the notes are as follows:
2003 $1,238,357 2004 925,035 2005 119,877 2006 129,487 2007 132,635 Thereafter $5,395,559 ---------- $7,940,950 ==========
NOTE 7 CONVERTIBLE NOTES PAYABLE ------------------------------------ On June 6, 2001 and September 7, 2001, the Company borrowed $750,000 and $250,000, respectively, from the Laurus Master Fund, Ltd The borrowings were evidenced by convertible promissory notes due June 7, 2003 and September 7, 2003, respectively. Interest at 8% per annum was payable quarterly. Any or all principal or interest was convertible into common stock of the Company at 80% of the average of the lowest closing stock prices during the preceding 60 trading days. The convertible notes were also issued with detachable warrants to purchase up to 72,737 shares of common stock of the Company at the lesser of $.548 per share or 120% of the average three lowest closing stock prices during the immediately preceding 10 trading days prior to exercise of the warrants. A discount of $375,000 was recognized on the convertible features of this debt and the detachable warrants. On May 24, 2002, the Company repaid the remaining $1,089,616 convertible note due to the Laurus Master Fund, Ltd. In connection with the payoff of the note, the Company expensed $109,000 in unamortized prepaid loan fees, $245,000 of unamortized discounts and $295,000 of interest expense. In May and June 2002, the Company issued to the Laurus Master Fund, Ltd. 12 % convertible notes in the aggregate principal amount of $2,000,000. The notes mature on May 24, 2004, are convertible into the Company's common stock at a fixed conversion price of $.95 per share and are payable monthly over 22 months. In addition, in connection with the issuance of the convertible notes, the Company issued warrants to purchase 300,000 shares of common stock at an exercise price of $1.20 exercisable until May 24, 2007. The convertible notes are secured by a second mortgage on the Company's properties. The fair value assigned to the warrants amounted to $77,300 and was determined using the Black-Scholes pricing model. Such amount is included in additional paid-in-capital at September 30, 2002. The convertible note is presented in the accompanying consolidated balance sheet at September 30, 2002 net of a discount of $64,416. During the year ended September 30, 2002, the Company issued 552,748 shares of common stock to the holders of its convertible notes payable for payment of principal and accrued interest. Principal and accrued interest converted during the year ended September 30, 2002 totaled approximately $145,512, which was computed based upon terms stipulated in the applicable convertible notes. In connection with the repayment of the June 6, 2001 and September 7, 2001 convertible notes and the issuance of the May and June 2002 convertible notes, the Company issued 350,000 restricted shares of its common stock to Laurus Master Fund, Ltd. for payment of late fees and penalties. The total amount of the late fees and penalties paid with common stock amounted to approximately $256,000, which was computed based upon the market prices of the common stock on the applicable conversion dates and is included in general and administrative expenses in the accompanying consolidated statement of operations for the year ended September 30, 2002. During the nine months ended September 30, 2001, the Company issued 537,498 shares of common stock to the holders of its convertible notes payable for payment of principal and accrued interest. Principal and accrued interest converted during the nine months ended September 30, 2001 totaled $78,564, which was computed F-19 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 based upon terms stipulated in the applicable convertible notes. The Company also issued 331,664 shares of common stock during the nine months ended September 30, 2001 for satisfaction of debt. The value of debt totaled $150,000, which was computed based on the market price of the common stock on the applicable payment date. NOTE 8 INCOME TAXES ---------------------- No provision for Federal and state income taxes has been recorded as the Company has incurred net operating losses through September 30, 2002. At September 30, 2002, the Company had approximately $7,770,896 of net operating loss carryforwards for Federal income tax reporting purposes available to offset future taxable income. Such carryforwards expire beginning in 2003. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses and capital losses carried forward may be impaired or limited in certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Deferred tax assets at September 30, 2002 and 2001 consist primarily of the tax effect of net operating loss carryforwards, which amounted to approximately $1,844,079 and $800,412, respectively. Other deferred tax assets and liabilities are not significant. The Company has provided a full valuation allowance on the deferred tax assets at September 30, 2002 and 2001 to reduce such deferred income tax assets to zero, as it is management's belief that realization of such amounts is not considered more likely than not. NOTE 9 RELATED PARTY TRANSACTIONS ------------------------------------- At September 30, 2002, related party receivables, net represents $24,000 due from the President and $5,000 due from a former officer of the Company, and $1,260,000 of principal and accrued interest due from a former officer of the Company that is discussed in the following paragraph and is fully reserved. The amounts due from the President and the former officer are due on demand. In connection with the reverse merger with SBI (See Note 1), the Company acquired property in Piedmont, Alabama. During fiscal year 2001, the Company sold the property to a then officer of the Company who was also the majority stockholder of SBI prior to the reverse merger. The Company sold the property to the then officer for $1,200,000, net of the mortgage and accrued expenses on the property of $2,700,000. The bank mortgage was also transferred to the then officer. The then officer ceased being an officer of the Company during fiscal year 2002. In connection with the sale, the Company received a promissory note, subordinated to the bank mortgage on the property. The note is due on demand with interest at 5% per annum. The former officer defaulted on the bank mortgage and has been unsuccessful at selling the property. Additionally, there are unpaid taxes and insurance on the property. Since the former officer is in default of the bank mortgage and has been unable to sell the property, the Company believes that the collection of the promissory note is doubtful and has therefore reserved the entire note and accrued interest. Additionally, the Company ceased accruing interest on the note. At September 30, 2001, related party receivables represented $1,200,000 due from a former officer for the sale of the Alabama property, $24,000 due from the Company's President and $50,000 due from a former stockholder and President of Half Day Video, Inc. During fiscal year 2002, the Company demanded repayment of the $50,000 loan and has reserved this amount. In connection with the acquisition of PTL Productions, Inc. (dba Brentwood Magazine), as of September 30, 2002, the Company owed approximately $91,635 to its former owners, representing their buyout interests in Brentwood Magazine. Of the $91,635 amount due, $51,635 was to be due August 2, 2003 and the remaining $40,000 was to be due August 2, 2004. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. (dba Brentwood Magazine) and sell PTL Productions, Inc. (dba Brentwood Magazine) back to the seller (See Note 16). F-20 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 NOTE 10 COMMITMENTS --------------------- In May 2000, the Company leased additional facilities adjacent to its location in Valencia. The lease has a term of five years. Initial monthly base rent is $29,000 with annual increases until 2004 when base rent will be $34,585. Rent expense for the year and nine months ended September 30, 2002 and 2001 were $470,354 and $173,650, respectively. The Company has employment agreements with certain officers and other key employees, most of which expire in 2005. These agreements provide for compensation aggregating $300,000 per annum. NOTE 11 SEGMENT INFORMATION ------------------------------ The Company classifies its business interests into three fundamental areas: Studio Rental, consisting principally of sound and production stage rentals to production companies, Studio Equipment Rental, consisting principally of personnel, camera and other production equipment rentals to various production companies on a short-term or long-term basis, and Film and TV Productions, consisting principally of television productions for the broadcast networks, cable networks or first-run television syndication.
Studio Studio Equip Film & TV Rental Rental Production Total ============ ------------ ---------- ----- For the year ended September 30, 2002 --------------------------------------------- Revenues $ 3,426,405 $ 1,314,797 $ 7,470,127 $12,211,329 Operating Income (Loss) (3,511,871) (54,776) 128,228 (3,438,419) Total Assets 13,197,107 212,918 129,292 13,539,317 Depreciation and Amortization 352,805 48,707 - 401,512 For the nine months ended September 30, 2001 --------------------------------------------- Revenues $ 1,422,033 $ 38,993 $ 952,234 $ 2,413,260 Operating (Loss) Income (1,090,443) (39,658) (389,775) (1,519,876) Total Assets 13,819,527 422,493 338,577 14,580,597 Depreciation and Amortization 180,386 11,539 - 191,925
The Studio Rental segment above includes the operating activities of the corporate division. NOTE 12 LITIGATION -------------------- In September 2001, a complaint was filed in the Los Angeles County Superior Court, Russomano et al. v. VEI et al., BC 257989. The plaintiffs are Diane Russomano and Knowledge Booster, Inc. and the defendants include Valcom, Inc. and Valencia Entertainment International ("Valencia"), the Company's president and others. The complaint revolves around prior litigation in which the plaintiffs alleged, among other things, that the show "A.J.'s Time Travelers" violated plaintiffs' rights in a children's television show called "Rickey Rocket". That case went to trial, and plaintiffs obtained judgments against a number of defendants, including a judgment in the amount of $3 million against Rickey Rocket Enterprises ("RREI") and a judgment in the amount of $1.2 million against Time Travelers, Inc. ("TTI"). The complaint asserted two causes of action against the Company, Valencia and other defendants. The first cause of action alleges the Company was the "alter ego" of RREI and/or TTI and is therefore liable for the judgments against those entities. The second cause of action was for malicious prosecution and that cause has been dismissed with prejudice. Valencia became a distributor for A.J. Time Travelers, Inc. but not until four years after the alleged wrongdoing occurred. Therefore management believes it should not be a party to this action. Depositions are currently being taken. A motion for summary judgment may be heard in June 2003. There are no accruals in the accompanying consolidated financial statements for this matter. The Company believes the allegations are without merit and intends to vigorously defend itself. In addition, a related party will indemnify the Company if the Company sustains any loss in this case. F-21 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Further, Plaintiffs' second cause of action concerning malicious prosecution alleged alter-ego liability. Plaintiffs alleged that Ricky Rocket Enterprises, Inc. and AJ Time Travelers, Inc. filed a cross complaint in the underlying litigation without any probable cause and for an improper motive or purpose. Plaintiffs similarly alleged that the Company and other defendants are alter egos of that Ricky Rocket Enterprises, Inc. and AJ Time Travelers, Inc. and are, therefore, liable for such malicious prosecution. Plaintiffs sought unspecified compensatory and punitive damages under this cause of action. The parties have executed a settlement agreement resolving the second cause of action at no cost to the Company. The court has dismissed the second cause of action with prejudice. On November 26, 2001, Valencia Entertainment International, LLC filed a complaint alleging a breach of contract, conversion, intentional misrepresentation and negligent misrepresentation. On March 28, 2002, Tri-Crown Productions, Inc. filed a Cross-Complaint against Valencia Entertainment International, LLC, Valcom, Inc., Valencia Entertainment International, LTD. and Vince Vellardita, seeking $50,000 in specified damages, for breach of written contract, breach of oral contract, quantum meruit, unjust enrichment, conversion and replevin. The dispute involves the ownership of certain equipment and claims of non-payment for services rendered. Each side seeks return of certain equipment and damages for non-payment of the services rendered. The parties executed a settlement agreement on January 15, 2003 resolving this dispute in full, and are now in the process of performing the terms of the settlement agreement. On March 7, 2002, Quebecor World USA filed a complaint against PTL Productions, Inc. dba Brentwood Magazine, a subsidiary of ValCom, and against Phillip Troy Linger, the former President of PTL Productions, Inc., for open book account, account stated, goods sold and delivered and breach of personal guaranty. The dispute involves alleged non-payment for printing services. The complaint seeks approximately $65,000 in damages. The Company has accrued $14,700, representing the amount owed to Quebecor World USA for printing services. This amount is included in accounts payable on the accompanying consolidated balance sheet as of September 30, 2002. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. and sell PTL Productions, Inc. back to Mr. Linger. Also see Note 16. Since the Company has divested itself of PTL Productions, Inc., the Company does not believe it has any exposure to loss regarding the outcome of this litigation. On October 30, 2002, Coffin Communications Group, Inc. filed a lawsuit against the Company for breach of a public relations consulting contract. Coffin Communications Group, Inc. seeks monetary damages in the amount of $197,000, plus punitive damages. The Company estimates the potential loss from the lawsuit to be between $5,000 and $70,000 and has accrued $40,000 for the potential loss at September 30, 2002. The Company will vigorously defend itself against these claims. On December 9, 2002, a complaint was filed by Clay Harrison against the Company and SBI Communications, Inc. seeking damages for breach of his alleged employment contract. The dispute involves Mr. Harrison's termination as the President of Half Day Video, Inc., a wholly-owned subsidiary of the Company. The Company disputes liability and is vigorously defending the claims. The matter is not yet at issue and no discovery has yet taken place. There is no accrual relating to this matter in the accompanying consolidated balance sheet at September 30, 2002. The Company is involved from time to time in legal proceedings incident to the normal course of business. Management believes that the ultimate outcome, except the cases mentioned above, of any pending or threatened litigation would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. F-22 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 NOTE 13 STOCKHOLDERS' EQUITY ------------------------------- (A) CONVERTIBLE PREFERRED STOCK ---------------------------------- At September 30, 2002, the Company had three series of convertible Preferred Stock: B, C and D. Series B Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a 1 for 5 basis. In the event of any liquidation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series C Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a 1 for 1 basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series D Preferred Stock has no voting rights, no dividends and can be converted at any time to common stock on a 1 for 1 basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share. With respect to rights on liquidation, Series B, C and D Preferred Stock shall rank senior to the common stock but Series C Preferred Stock shall be senior to both Series B and D Preferred Stock while Series D Preferred Stock shall be junior to both Series B and C Preferred Stock. No dividends have been declared by the Board of Directors for any of the Series of convertible Preferred Stock for the fiscal year ended September 30, 2002. On June 6, 2002, the Company received $930,000, net for the issuance of 1,250,000 shares of Series D Convertible Preferred Stock to an accredited investor. In connection with the transaction, the Company also issued warrants to the preferred stockholder to purchase an aggregate of 1,300,000 shares of the Company's common stock at an exercise price of $.80 per share, expiring on June 18, 2007. The Company allocated the net proceeds received from the sale of the preferred stock to the warrants using the Black-Scholes pricing model. The allocation of the net proceeds to the warrants amounted to $466,908 and is included in additional paid-in capital in the accompanying condensed consolidated balance sheet at September 30, 2002. Also in connection with the sale of the Series D Convertible Preferred Stock, the Company incurred a 7% placement agent fee and also issued the placement agents 125,000 "VACM Units", each unit comprised of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.80 per share. The Company recorded the $70,000 placement agent fee as a reduction of the proceeds received, thereby reducing additional paid-in capital by $70,000 at September 30, 2002. Each VACM Unit is exercisable at $.80 per unit and the unit and the underlying warrant expire June 18, 2007. The Company valued the VACM Unit by apportioning value to the underlying warrant and common stock using the Black-Scholes pricing model, and by measuring the intrinsic value of the common stock. The value of the 125,000 VACM Units amounted to $60,745 and was recorded as an increase in additional paid-in capital at September 30, 2002. In connection with the Series D Preferred Stock financing, the Company has also issued 2,800,000 shares of its common stock to be held in escrow based upon the terms of the financing agreement. The financing agreement requires the Company to hold in escrow 1,250,000 shares of common stock as a deposit in anticipation of the preferred stockholder's conversion of 1,250,000 shares of Series D Preferred Stock, an additional 1,300,000 shares of common stock as a deposit in anticipation of the preferred stockholder's exercise of warrants to purchase 1,300,000 shares of common stock, and an additional 250,000 shares of common stock as a deposit in anticipation of the placement agents' exercise of its VACM Units. As discussed above, the Series D Preferred Stock can be converted at any time to common stock on a 1 for 1 basis. At September 30, 2002, none of the 2,800,000 common shares have been released from escrow and are not considered outstanding for purposes of computing weighted average shares outstanding. F-23 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 (B) COMMON STOCK ------------------ During the fiscal year ended September 30, 2002, the Company issued 440,284 shares of common stock in lieu of compensation for consulting and professional services performed. The value of the consulting and professional services performed totaled approximately $431,283, which was computed based upon the market prices of the common stock on the applicable payment dates. During the fiscal year ended September 30, 2002, the Company issued 759,500 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $719,606, which was computed based upon the market prices of the common stock on the applicable payment dates. During the nine months ended September 30, 2001, the Company issued 1,600,000 shares of common stock for the payment of consulting and professional services performed. The value of the consulting and professional services performed totaled $380,000, which was computed based on the market prices of the common stock on the applicable payment dates. See Note 7 for common stock issued for debt repayment. (C) WARRANTS ------------- During the fiscal year ended September 30, 2002, the Company issued warrants to purchase 2,075,000 shares of the Company's common stock to certain individuals and companies in connection with the issuance of Series D Preferred Stock (see Note 13(A)) and consulting agreements. The weighted average exercise price for the warrants issued was $0.75, and all of the warrants begin to expire in fiscal year 2007. There were no warrants outstanding prior to fiscal year 2002. Additionally, the Company recorded consulting expense of $271,651 in connection with warrants issued to consultants. These warrants were valued using the Black Scholes pricing model. The Company also recorded $324,724 of deferred compensation in connection with the consulting agreements in the accompanying consolidated balance sheet at September 30, 2002. NOTE 14 EMPLOYEE STOCK COMPENSATION PLAN AND NON-QUALIFIED STOCK OPTIONS ------------------------------------------------------------------------------- The Company has a 2001 Employee Stock Compensation Plan (the "ESCP") to enhance its ability to attract, retain and compensate experienced employees, officers, directors and consultants. The effective date of the ESCP is January 2001. A total of 2,600,000 shares of common stock were registered for issuance under the ESCP on three Form S-8 registration statements filed January 16, 2001, March 26, 2001 and October 19, 2001. Pursuant to the ESCP, the Compensation Committee or Board of Directors may award registered shares of the Company's common stock to employees, officers, directors or consultants for cash, property, services rendered or other form of payment constituting lawful consideration. Plan shares awarded for other than services rendered shall be sold at not less than the fair market value on the date of grant. During the fiscal year ended September 30, 2002, the Company issued an aggregate of 585,000 shares of registered common stock to employees, officers, directors and consultants pursuant to the ESCP. The expense recorded during fiscal year 2002 under the ESCP amounted to $532,960, and was based on the closing trading price of the Company's common stock on the date granted. During the fiscal year ended September 30, 2002, the Company issued options to consultants to purchase 425,000 shares of the Company's common stock. The options were valued using the Black-Scholes pricing model and resulted in $221,692 of consulting expense and $79,824 of deferred compensation expense. The options expire from December 5, 2002 through February 1, 2003. The weighted average exercise price and fair value of the options are $.64 and $.71 per share, respectively. F-24 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 NOTE 15 JOINT VENTURE ------------------------ In May 2002, the Company entered into a joint venture agreement with New Global Communications, Inc. ("Global") whereby Global would contribute $500,000 to the joint venture in exchange for a 55% interest and the Company would contribute certain fixed assets and manage the operations of the joint venture for a 45% interest. The newly formed joint venture is Valcom Broadcasting, LLC. The net book value of the fixed assets contributed are insignificant and are maintained on the Company's premises. The joint venture operated a newly developed low power television broadcast station K08MX-LP in Indio-Palm Springs, California operating on Channel 8. The Company believes that the investment in the joint venture adds to the Company's infrastructure of becoming a full service television and motion picture company. The amount contributed to the joint venture by Global will be used to purchase the license for the television station from the licensee. The effectiveness of the joint venture agreement was dependent on the approval by the Federal Communications Commission ("FCC"). On September 20, 2002, the FCC approved the transaction. As of September 30, 2002, Global contributed $400,000 to the joint venture. Since the entire amount of $500,000 was not contributed to the joint venture as of September 30, 2002, and, as such the transfer of the license has not been finalized, the Company has not recognized any investment in the joint venture at September 30, 2002. Subsequent to September 30, 2002, Global has not contributed any additional funds to the joint venture. NOTE 16 SUBSEQUENT EVENTS ---------------------------- On January 18, 2003, the Company entered into a Memorandum of Understanding with PTL Productions, Inc. (dba Brentwood Magazine) to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. (dba Brentwood Magazine) and sell PTL Productions, Inc. (dba Brentwood Magazine) back to the seller. The unaudited, pro forma information and results, as if the PTL Productions, Inc. (dba Brentwood Magazine) had not occurred as of and for the fiscal year ended September 30, 2002, are:
Total assets $13,456,314 Total liabilities $ 8,450,200 Net sales $12,151,739 Net loss $(4,238,415) Net loss per common share $ (0.42)
Also see Note 17 for additional subsequent events. NOTE 17 GOING CONCERN --------------------- The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a net loss of $4,827,818 and a negative cash flow from operations of $2,005392 for the year ended September 30, 2002, and a working capital deficiency of $594,990 and an accumulated deficit of $8,126,190 at September 30, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. In December 2002, an unaffiliated company offered to purchase up to an 85% equity interest in the Company in exchange for contributing equity financing. The Company and the unaffiliated company signed a non-binding letter of intent. The closing of the transaction is subject to various conditions. There is no assurance that the transaction will ever be consummated, or if it is consummated, that it will be consummated on the terms set forth in the letter of intent. F-25 ValCom, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 On January 14, 2003, the Company's subsidiary, Valencia Entertainment International, LLC, entered into an Exclusive Sales Listing Agreement with a commercial real estate broker to sell the real property serving as the Company's headquarters located at 26030 Avenue Hall in Valencia, California. The Exclusive Sales Listing Agreement lists the property at $11,850,000. The Exclusive Sales Listing Agreement requires Valencia Entertainment International, LLC to pay a commission to the broker of four percent of the gross sales price if the broker sells the real property. The Company intends to engage in a sale- leaseback transaction with respect to its real property to generate funds for working capital and payment of debts. However, there is no assurance that the Company's property will be sold for $11,850,000 or on terms otherwise favorable to the Company. The Company's subsidiary, Valencia Entertainment International, LLC, is actively negotiating to lease several of the Company's vacant production stages to production companies that produce television series and motion pictures. If the production companies sign leases for production stages, the Company will recommend that the production companies rent production equipment and personnel from Half Day Video, Inc., another Company subsidiary. Thus, the Company's synergistic relationship with Half Day Video, Inc. may enable it to possibly enhance its revenue-generation. If the Company's existing cash combined with cash from operating activities is not adequate to finance the Company's operations during the next 12 months, the Company will consider one or more of the following options: (1) issuing equity securities in exchange for services, (2) selling equity or debt securities or (3) reducing the number of its employees. The Company's capital requirements have been and will continue to be significant. There can be no assurance that additional private or public financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to the Company. F-26 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Jay J. Shapiro, C.P.A., P.C., the Company's former auditor, resigned effective April 23, 2002. Mr. Shapiro's reports on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were his reports modified as to uncertainty, audit scope or accounting principles. The Company had no disagreements with Mr. Shapiro. The Board of Directors authorized the engagement of Weinberg & Company, P.A., located at 6100 Glades Road, Suite 314, Boca Raton, Florida 33434, as the new principal auditors for the Company and all its subsidiaries effective as of April 23, 2002. Weinberg & Company, P.A. expects to rely on the Company's management in issuing its reports on the Company's consolidated financial statements. This Company previously disclosed this information in its Form 8-K filed with the Securities and Exchange Commission on April 24, 2002, its Amendment to Form 8-K filed on May 6, 2002 and its Amendment to Form 8-K filed on May 10, 2002. PART III -------- ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ---------------------------------------------------------------------------- DIRECTORS AND EXECUTIVE OFFICERS ----------------------------------- The following table sets forth the names and ages of the Company's directors and executive officers, the positions with the Company held by each, and the period during which each such person has held such position.
Name Age Position Since ----------------- --- ------------------------------------------- ----- Vince Vellardita 45 CEO/President/Chairman of the Board 2000 Stephen A. Weber 54 Director 2001 Ronald Foster (1) 61 Treasurer/Secretary/Vice President/Director 1986 David Weiner 43 Director 2001 (1) Effective September 30, 2002, Ronald Foster resigned as Treasurer, Secretary, Vice President and Director. Effective November 1, 2002, the Board of Directors appointed Donald P. Magier, the Company's Controller, as Treasurer, Secretary and Director to replace Mr. Foster.
All directors hold office until the next annual meeting of stockholders of the Company and until their successors are elected and qualified. Officers hold office until the first meeting of directors following the annual meeting of stockholders and until their successors are elected and qualified, subject to earlier removal by the Board of Directors. BIOGRAPHIES OF THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS -------------------------------------------------------------------- Vince Vellardita - 45 Chairman of the Board, Chief Executive Officer and President Vince Vellardita has served as the Company's President, Chief Executive Officer and Chairman of the Board since October 2000. Mr. Vellardita was instrumental in having Valencia Entertainment International, LLC acquire a 180,000 square foot production facility in Valencia, California that houses eight film and production 45 sound stages that have been occupied for the past four years by the hit CBS series JAG and Fox's Power Rangers. Mr. Vellardita began his career in 1977 as a music producer and promoter of live shows and is credited with bringing Duran/Duran and U2 to North America for their first US tours. He also produced a benefit tour for the 1980 Presidential campaign of John Anderson. Mr. Vellardita is a 25-year veteran production executive with a successful track record. While in Nashville, Mr. Vellardita was responsible for the turnaround for a production house for music into a television satellite network, housing multiple sound-stages and edit bays. Mr. Vellardita also increased revenues by bringing national accounts to this network. Mr. Vellardita has been involved in over 10,000 episodes of television and 100 films. After Mr. Vellardita's success in Nashville, he moved to Los Angeles, focusing on film and television, where he developed independent production studios. Mr. Vellardita handled everything from the coordination of sales and contracts negotiations, to the launching of marketing strategies to lure some of the biggest names in the television community. These include Paramount, Warner Brothers, and Disney. Mr. Vellardita does not currently serve as a director of any other reporting company. Ronald Foster - 61 Treasurer, Secretary, Vice President and Director Ronald Foster, during the fiscal year ended September 30, 2002, served as the Company's Treasurer, Secretary, Vice President and director. He resigned as an officer and director effective September 30, 2002. Mr. Foster has been working with the Company since its inception in 1984. He served as the Company's Chief Executive Officer, President and Chairman of the Board from September 1986 to October 2000. He became a Vice President and remained as a member of the Board of Directors after resigning as Chairman in October 2000. In April 2001, he was appointed Treasurer and Secretary. His primary responsibilities included finance, marketing and technical review. In addition to his responsibilities with the Company, Mr. Foster has held a number of other management positions over the years. From 1984 to 1986, he was executive vice president and producer of Pioneer Games of American Satellite Bingo, in Albany, Georgia. Mr. Foster was also the owner and operator of Artist Management & Promotions 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., 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. Mr. Foster does not currently serve as a director of any other reporting company. David Weiner - 43 Director David Weiner has served as a director of ValCom, Inc. since February 2001. 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. 46 Stephen A. Weber - 54 Director Stephen A. Weber has served as a director of ValCom, Inc. since February 2001. Mr. Weber served as the Company's Chief Financial Officer from March 2001 until March 2002. Mr. Weber has over 20 years of background in Finance and Management and is a certified public accountant. Prior to joining ValCom, Mr. Weber was the Co-founder and President of a publicly traded marketing company that had annual revenues of $60 million. Mr. Weber was instrumental in negotiating the sale of the company to a NYSE corporation. Prior to joining ValCom, Mr. Weber, was a practicing CPA for 13 years, where he was the managing partner for a regional audit firm. Currently, in addition to his duties at ValCom, Mr. Weber also consults for a publicly traded Internet company, GenesisIntermedia, Inc., formerly known as GenesisIntermedia.com, Inc., where he sits on the Board of Directors and is Chairman of the Audit Committee. Donald P. Magier - 36 Treasurer, Secretary, Controller and Director Donald P. Magier has served as the Company's Secretary, Treasurer, Controller and Director since November 2002. Mr. Magier commenced working for the Company in April 2002 as its Controller and was subsequently promoted. He received his accounting degree from California Sate University, Northridge and began his accounting career in 1989 as an auditor with Weber Lipshie and Co., CPAs, a small national accounting firm specializing in the garment industry. In 1992, Mr. Magier joined Falcon Cable TV, the fifth largest cable company in the country, as a Regional Controller until he left in 2000. He then joined a publicly traded internet company, GenesisIntermedia, Inc., a Delaware corporation formerly known as GenesisIntermedia.com, Inc., as Controller of both the company and two of its subsidiaries until he joined Valcom, Inc. in 2002. Mr. Magier does not hold a directorship in any other reporting company. Section 16(a) Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires officers, directors and beneficial owners of more than 10% of any class of equity securities of a public company to file with the Securities and Exchange Commission certain individual periodic reports -- (Form 3) (Initial Statement of Beneficial Ownership of Securities), Form 4 (Statement of Changes of Beneficial Ownership of Securities) and Form 5 (Annual Statement of Beneficial Ownership of Securities) -- which disclose their beneficial ownership of the company's securities. Securities and Exchange Commission regulations require officers, directors and greater than 10% stockholders to furnish the Company with copies of all such forms they file. David Weiner, a Director of the Company, failed to file a Form 3 within 10 calendar days after he was elected to the Board of Directors effective February 13, 2001. Mr. Weiner does not own any of the Company's common stock. The Company's other directors and executive officers and more than 10% stockholders filed their Section 16(a) reports as required. 47 MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS ------------------------------------------------- Each director is elected to serve for a term of one (1) year until the next annual meeting of stockholders or until a successor is duly elected and qualified. There are no family relationships among directors or persons nominated or chosen by the Company to become a director. The present term of office of each director will expire at the next annual meeting of stockholders. During the fiscal year ended September 30, 2002, the Board of Directors held 20 meetings. No director attended fewer than 75% of the total number of meetings. Outside directors received no cash compensation for their services, however they were reimbursed for their expenses associated with attendance at meetings or otherwise incurred in connection with the discharge of their duties as directors of the Company. No officer of the Company receives any additional compensation for his services as a director, and the Company does not contribute to any retirement, pension, or profit sharing plans covering its directors. The Board of Directors has two committees, the Audit Committee and the Compensation Committee. The sole member of the Audit Committee is Stephen A. Weber. As of September 30, 2002, the members of the Compensation Committee were Vince Vellardita and Ronald Foster. Effective November 1, 2002, Donald P. Magier replaced Ronald Foster on the Compensation Committee. 48 ITEM 10 EXECUTIVE COMPENSATION --------------------------------- The Summary Compensation Table below sets forth all compensation paid to the Company's officers and directors during the fiscal years ended September 30, 2002, 2001 and 2000.
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Name & Principle Position Year Salary Bonus Other Restricted Securities LTIP All ($) ($) Annual Stock Underlying Payouts Other Compen- Award(s) Options/ ($) Comp- sation ($) SARs ensa- ($) (#) tion ($) Vince 2000 120,000 * * * * * * Vellardita, Chairman, CEO & President 2001 130,000 * * * * * * 2002 140,000 * * * * * * Ronald Foster, 2000 120,000 * * * * * * Treasurer, Secretary, Vice President, Director (1) 2001 130,000 2002 130,000 * * * * * * Wayne 2000 * * * * * * * Lepoff, COO (2) 2001 120,000 * * * * * * 2002 * * * * * * * *None (1) Mr. Foster served as the Company's Treasurer, Secretary, Vice President and Director during the fiscal year ended September 30, 2002. Effective September 30, 2002, he resigned as an officer and director. Effective November 1, 2002, the Board of Directors appointed Donald Magier as Treasurer, Secretary and Director to replace Mr. Foster. Mr. Magier has also served as the Company's Controller since April 15, 2002. (2) Mr. Lepoff served as the Company's Chief Operating Officer from June 2001 until November 2001.
EMPLOYMENT AGREEMENTS ---------------------- The Company is a party to employment agreements with Vince Vellardita, Ronald Foster and Donald P. Magier. Vince Vellardita The Company entered into an Employment Agreement with Vince Vellardita, the Company's Chairman of the Board, Chief Executive Officer and President, effective October 1, 2000. The term of the Agreement is for five years. The Board of Directors may terminate Mr. Vellardita's employment at any time. The Agreement shall be automatically renewed for successive one-year terms, unless either party gives written notice of termination three months prior to the end of the term. The Agreement provides for an annual salary of $120,000 for the first year, $150,000 for the second year and $200,000 for the third year, plus a bonus if authorized by the Board of Directors. If the Company is involved in a merger or consolidation in which it does not survive, or if the 49 Company transfers substantially all of its assets, the surviving entity in the merger or consolidation or the transferee of the Company's assets shall be bound by the Agreement. With the exception of ownership of up to five percent of the equity securities of another publicly traded corporation, the Agreement prohibits Mr. Vellardita from engaging in any activity competitive with or adverse to the Company's business or welfare without the Company's prior written consent. Ronald Foster The Company entered into an Employment Agreement with Ronald Foster, the Company's Treasurer, Secretary, Vice President and Director, effective October 19, 2000. The term of the Agreement is for five years. The Board of Directors may terminate Mr. Foster's employment at any time. The Agreement shall be automatically renewed for successive one-year terms, unless either party gives written notice of termination three months prior to the end of the term. The Agreement provides for an annual salary of $100,000 for the first year, $120,000 for the second year and $140,000 for the third through fifth years, plus a bonus if authorized by the Board of Directors. If the Company is involved in a merger or consolidation in which it does not survive, or if the Company transfers substantially all of its assets, the surviving entity in the merger or consolidation or the transferee of the Company's assets shall be bound by the Agreement. With the exception of ownership of up to five percent of the equity securities of another publicly traded corporation, the Agreement prohibits Mr. Foster from engaging in any activity competitive with or adverse to the Company's business or welfare without the Company's prior written consent. Donald P. Magier The Company entered into an Employment Agreement with Mr. Magier, the Company's Controller, effective May 20, 2002. The term of the Agreement is for three years. The Board of Directors may terminate Mr. Magier's employment at any time. The Agreement shall be automatically renewed for successive one-year terms, unless either party gives written notice of termination three months prior to the end of the term. The Company pays Mr. Magier an annual salary of $80,000, with a $5,000 increase on each anniversary date if approved by the Board of Directors. The Agreement requires the Company to grant Mr. Magier an annual option to purchase up to 25,000 shares of the Company's common stock at an exercise price of $0.01 per share for each year of the Agreement. He must exercise the option within 60 days after each anniversary date. Twenty-five percent of the common stock issuable upon exercise of the options will be freely trading and the remaining 75% of the shares issuable will be restricted pursuant to Rule 144 of the Securities Act of 1933, as amended. If the Company is involved in a merger or consolidation in which it does not survive, or if the Company transfers substantially all of its assets, the surviving entity in the merger or consolidation or the transferee of the Company's assets shall be bound by the Agreement. With the exception of ownership of up to five percent of the equity securities of another publicly traded corporation, the Agreement prohibits Mr. Magier from engaging in any activity competitive with or adverse to the Company's business or welfare without the Company's prior written consent. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT ------------------------------------------------------------------------------ The following table sets forth, as of September 30, 2002, the number and percentage of shares of common stock owned of record and beneficially by any "group" (as that term is defined in Item 403 of Regulation S-B), person or firm that owns more than five percent (5%) of the Company's outstanding common stock (the Company's only class of voting securities). 50 (a) Security Ownership of Certain Beneficial Owners Name and Address of Amount of Nature of Percent of Beneficial Owner Shares (1) Ownership Class ----------------- ----------- --------- ----- Vince Vellardita 1,308,249 Record & 11.9% Common 26030 Avenue Hall Beneficial Valencia, California 91355 E-Blaster International 3,000,000 Record & 27.2% Common JL. H.R. Rasuna Said Kav. Beneficial B-1 6th Floor, Jakarta, 12920 Indonesia (2) Radorm Technology Limited 567,824 Record & 5.2% Common Jakarta, 12920 Beneficial Indonesia (2) Great Asian Holdings Ltd. 2,110,422 Record & 19.2% Common Jakarta, 12920 Beneficial Indonesia (2) (1) Includes all stock held either personally or by affiliates. (2) These three entities together comprise a "group" as defined in Item 403 of Regulation S-B. (b) Security Ownership of Management ---------------------------------------- The following table sets forth, as of September 30, 2002, the number and percentage of the equity securities of the Company, its parent or subsidiaries, owned of record or beneficially by each officer, director and person nominated to hold such office and by all officers and directors as a group.
Title of Name of Amount of Shares (1) Nature of Percent of -------- --------- -------------------- Class Beneficial Owner Ownership Class -------- ---------------- --------------- Common Ronald Foster 0 (2) 00.00% Common Vince Vellardita 1,308,249 11.90% Common Stephen A. Weber 40,050 (2) 00.004% Common David Weiner 0 00.00% Common All officers and directors 1,348,299 12.24% as a group (4 people) (1) Includes all stock held either personally or by affiliates. (2) Includes ownership of record and beneficial ownership.
51 CHANGES IN CONTROL -------------------- To the best knowledge and belief of the Company, there are no arrangements, understandings, or agreements relative to the disposition of the Company's securities, the operation of which would, at a subsequent date, result in a change in control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------------------------------------------- There are no family relationships among directors, executive officers or persons chosen by the Company to be nominated as a director or appointed as an executive officer of the Company of any of its affiliated subsidiaries. In connection with the Company's reverse merger with SBI Communications, Inc. in or around February 2001, the Company acquired real property in Piedmont, Alabama (the "Piedmont Property"). In September 2001, the Company sold this property to Ronald Foster, its Treasurer, Secretary, Vice President and Director, who was also the majority stockholder of SBI Communications, Inc. prior to the reverse merger. The Company sold the Piedmont Property to Mr. Foster for $1,200,000, net of the mortgage and accrued expenses of $2,700,000 on the Piedmont Property. The bank mortage on the Piedmont Property was transferred to Mr. Foster. Mr. Foster executed a Promissory Note, dated September 30, 2001, in favor of the Company in the principal amount of $1,200,000 with interest at five percent per year and all principal and accrued interest due by September 30, 2002. The Promissory Note was subordinated to the bank mortgage. Mr. Foster defaulted on the bank mortgage and the Promissory Note and has been unsuccessful at selling the Piedmont Property. In addition, there are unpaid taxes and insurance on the Piedmont Property. Because Mr. Foster is in default on the bank mortgage and has been unable to sell the Piedmont Property, the Company believes that the collection of the Promissory Note is doubtful and has therefore reserved the entire $1,260,000 in principal and accrued interest owing on the Promissory Note as of September 30, 2002. In addition, the Company has stopped accruing interest on the Promissory Note. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------------------ (a) EXHIBITS The Company will file an amendment to this Report attaching as exhibits or incorporating by reference into this Report the exhibits required by Item 601 of Regulation S-B. (b) REPORTS ON FORM 8-K FILED DURING THE FISCAL QUARTER ENDED SEPTEMBER 30, 2002: 1. The Company filed a Current Report on Form 8-K, dated June 27, 2002, with the Securities and Exchange Commission on July 17, 2002 to report the Company's execution of an Agreement and Plan of Reorganization between ValCom, Inc. and Digital Cut Post, Inc. on June 26, 2002. No financial statements were filed with this Form 8-K. 2. The Company filed an Amendment to its Current Report on Form 8-K/A, dated July 18, 2002, with the Securities and Exchange Commission on July 18, 2002, to report additional information regarding the Company's acquisition of Digital Cut Post, Inc. No financial statements were filed with this Form 8-K. ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company's periodic reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the periodic 52 reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the filing date of this Report, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. This evaluation was conducted under the supervision and with the participation of the Company's Chief Executive Officer and Principal Financial Officer. Effective Disclosure Controls ------------------------------- Based upon that evaluation, the Company's officers concluded that many of the Company's disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company's disclosure obligations under the Securities Exchange Act of 1934. For example, the Company's internal controls, particularly the areas of payroll, control of cash and accounts payable, are effective. In addition, the Audit Committee meets with the principal accounting officer on a regular basis to review and evaluate the Company's financial position. The Audit Committee also reports to the Board of Directors on the accounting and finance functions on a regular basis. Weaknesses in Disclosure Controls ------------------------------------ The Company's officers also identified several weaknesses in the Company's disclosure controls. Such weaknesses, and the steps the Company plans to take to remedy the weaknesses, are discussed below. 1. The Company's records of stock and equity related transactions were not updated on a timely basis and do not reflect the current ownership of the Company as accurately as they might. Remedy: The Company intends to engage a stock transfer agent to handle issuances and conversions of all series of its preferred stock. In addition, the Company will maintain more accurate records of all equity transactions during the year. The Board of Directors will ensure that it authorizes all stock, warrants and options granted in accordance with applicable agreements and/or compensation plans to avoid the possibility of unauthorized issuances of stock, warrants and options. 2. The Company recorded a significant number of audit adjustments during the fourth quarter, which were required to properly state the account balances at September 30, 2002. Remedy: The Company will implement comprehensive closing procedures, including an analysis of all balance sheet accounts and significant income statement accounts. 3. The minutes of the Board of Directors' and stockholders' meetings were not always complete. Remedy: The Company will implement procedures to be more comprehensive in the preparation of its minutes to include all important matters that affect the Company's operations. The Company will take appropriate steps to ensure that all minutes are properly approved and signed by the applicable parties. 4. The Company drafted several agreements without consulting its legal counsel. Therefore, some of the agreements had terms and provisions that either changed the purpose of the agreement or undermined the purpose or intent of management. Remedy: The Company will consult its legal counsel as to the legality of future agreements and consult its auditors regarding the proper accounting treatment of such agreements in order to preserve the purpose of the agreements and the intent of management. Changes in Internal Controls ------------------------------- There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls. The Company intends to make extensive improvements, as outlined above, to its disclosure controls. 53 ADDITIONAL INFORMATION ---------------------- HEADQUARTERS ------------ VALCOM, INC. ------------- 26030 Avenue Hall Studio #5 Valencia, California 91355 SUBSIDIARIES ------------ VALENCIA ENTERTAINMENT INTERNATIONAL, LLC -------------------------------------------- 26030 Avenue Hall Studio #5 Valencia, California 91355 HALF DAY VIDEO, INC. ----------------------- 28170 Avenue Crocker, Suite 104 Valencia, California 91355 OFFICERS AND DIRECTORS ---------------------- Vince Vellardita: Chairman of the Board, President and Chief Executive Officer Donald P. Magier: Treasurer, Secretary, Controller and Director Stephen A. Weber: Director David Weiner: Director AUDITORS -------- Weinberg & Company, P.A., 6100 Glades Road, Suite 314, Boca Raton, Florida 33434. LEGAL COUNSEL ------------- Sichenzia, Ross, Friedman and Ference LLP - Mr. Gregory Sichenzia, 135 West 50th Street, New York, New York 10020 until October 28, 2002. The Company retained Pollet, Richardson & Patel, 10900 Wilshire Boulevard, Suite 500, Los Angeles, California 90024, effective October 28, 2002. TRANSFER AGENT -------------- Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004 Exhibits to this Form 10-KSB will be provided, subject to payment of actual copy costs, to stockholders of the Company upon written request addressed to Shari Edwards, ValCom, Inc., at the Company's headquarters listed above. 54 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Exchange Act, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 13, 2003 VALCOM, INC., a Delaware corporation By: /s/Vince Vellardita ------------------------ Vince Vellardita Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- By: /s/Vince Vellardita Chief Executive Officer, February 13, 2003 -------------------- Vince Vellardita President, and Chairman of the Board By: /s/Donald P. Magier Treasurer, Controller February 13, 2003 --------------------- Donald P. Magier (principal accounting officer), Secretary and Director By: /s/Stephen A. Weber Director February 13, 2003 -------------------- Stephen A. Weber By: /s/ David Weiner Director February 13, 2003 ------------------ David Weiner 55 EXHIBIT 99.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ValCom, Inc. a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vince Vellardita, the Company's Chief Executive Officer (the "Officer"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations. Dated: February 13, 2003 By: /s/ Vince Vellardita --------------------------- Vince Vellardita Chief Executive Officer In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald Magier, the Company's Treasurer, Controller and principal accounting officer (the "Officer"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations. Dated: February 13, 2003 By: /s/ Donald P. Magier ---------------------------- Donald P. Magier Treasurer, Controller and principal accounting officer 56 EXHIBIT 99.2 CERTIFICATIONS PURSUANT TO RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vince Vellardita, the Company's Chief Executive Officer (the "Officer"), certify, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, that: (1) The Officer has reviewed the Report. (2) Based on the Officer's knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report. (3) Based on the Officer's knowledge, the financial statements and other financial information included in the Report fairly present in all material respects the Company's financial condition and results of operations as of, and for, the periods presented in the Report. (4) The Officer and the other certifying officer: (a) Are responsible for establishing and maintaining "disclosure controls and procedures," as that term is defined by the Securities and Exchange Commission, for the Company. (b) Have designed such disclosure controls and procedures to ensure that material information relating to the Company is made known to them, particularly during the period in which the periodic Report is being prepared. (c) Have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of the Report. (d) Have presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. (5) The Officer and the other certifying officer have disclosed to the Company's auditors and audit committee of the board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls, as that term is defined by the Securities and Exchange Commission, which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. 57 (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 13, 2003 By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald Magier, the Company's Treasurer, Controller and principal accounting officer (the "Officer"), certify, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, that: (1) The Officer has reviewed the Report. (2) Based on the Officer's knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report. (3) Based on the Officer's knowledge, the financial statements and other financial information included in the Report fairly present in all material respects the Company's financial condition and results of operations as of, and for, the periods presented in the Report. (4) The Officer and the other certifying officer: (a) Are responsible for establishing and maintaining "disclosure controls and procedures," as that term is defined by the Securities and Exchange Commission, for the Company. (b) Have designed such disclosure controls and procedures to ensure that material information relating to the Company is made known to them, particularly during the period in which the periodic Report is being prepared. (c) Have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of the Report. (d) Have presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. (5) The Officer and the other certifying officer have disclosed to the Company's auditors and audit committee of the board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls, as that term is defined by the Securities and Exchange Commission, which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and 58 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 13, 2003 By: /s/ Donald P. Magier ----------------------- Donald P. Magier Treasurer, Controller and principal accounting officer 59