10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-QSB (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2002 Commission file Number 0-28416 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ============================================================================== VALCOM, INC. (Name of small business issuer specified in its charter) ============================================================================== Delaware 58-1700840 -------- ---------- (State or other jurisdiction of (IRS 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 pursuant to 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.001 PAR VALUE ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of December 31, 2002 the issuer had 11,395,833 shares of its $0.001 par value common stock outstanding. VALCOM, INC. FORM 10-QSB INDEX Page PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of December 31, 2002 (unaudited) and September 30, 2002 3 Condensed Consolidated Statements of Operations for the three months ended December 31, 2002 and 2001 (unaudited) 5 Condensed Consolidated Statement of Changes of Shareholders' Equity for the three months ended December 31, 2002 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2002 and 2001 (unaudited) 8 Notes to Condensed Consolidated Financial Statements (unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Disclosure Controls and Procedures 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 Part III. EXHIBITS PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31 September 30, 2002 2002 ------ ----- ASSETS (Unaudited) ------- Current Assets: Cash $ 53,677 $ 343,374 Accounts receivable, net 127,499 99,864 Other receivables 206,879 281,471 Prepaid development costs 110,760 80,932 Related party receivables, net 5,000 29,000 Note receivable, current 71,566 71,566 Deferred compensation 442,587 404,548 ----------- ----------- Total Current Assets 1,017,968 1,310,755 Property and equipment - net 11,791,837 11,849,037 Deferred financing costs 244,680 275,220 Deposits and other assets 40,288 39,413 Note receivable, long-term 38,224 64,892 ------------ ----------- Total Assets $ 13,132,997 $ 13,539,317 ============ ============ See accompanying notes to the condensed consolidated financial statements -3- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable $ 309,027 263,539 Accrued interest 105,401 38,764 Accrued expenses 283,743 300,850 Due to related parties, current portion 111,385 51,635 Notes payable, current portion 1,266,117 1,238,357 Preferred stock payable 12,600 12,600 ----------- --------- Total Current Liabilities 2,088,273 1,905,745 Due to related parties, net of current portion 40,000 40,000 Notes payable, net of current portion 6,663,190 6,702,593 ----------- ---------- Total Liabilities $ 8,791,463 $ 8,648,338 ----------- ---------- 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; 1,780,000 and 1,400,000 shares issued and outstanding, respectively 1,780 1,400 Series D, 1,250,000 shares authorized;1,250,000 shares issued and outstanding, respectively 1,250 1,250 Common stock, par value $.001; 100,000,000 shares authorized; 11,395,833 and 11,011,933 shares issued and outstanding, respectively 11,396 11,012 Series C preferred stock to be issued (380,000 Shs) 0 239,400 Additional paid-in capital 13,253,508 12,787,591 Accumulated deficit (8,902,916) (8,126,190) Treasury stock, at cost (35,000 shares) (23,522) (23,522) ----------- ----------- Total Stockholders' Equity 4,341,534 4,890,979 ----------- ----------- Total Liabilities and Stockholders' Equity $13,132,997 $13,539,317 =========== =========== See accompanying notes to the condensed consolidated financial statements -4- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended December 31, 2002 2001 ---- ---- Revenue Rental $ 563,655 $ 886,472 Production 122,892 2,819,239 Other 78,382 0 ---------- ---------- Total Revenue 764,929 3,705,711 ---------- ---------- Cost and Expenses: Production 191,023 2,540,890 Selling and promotion 12,417 18,085 Depreciation and amortization 87,740 52,412 General and administrative 1,083,637 875,570 ---------- ---------- Total Costs and Expenses 1,374,817 3,486,957 ---------- ---------- Operating (loss) Income (609,888) 218,754 Other Income (Expense): Interest expense (174,838) (169,537) Other income 8,000 - ---------- ---------- Total Other Income (Expense)(166,838) (169,537) ---------- ---------- Net (loss) income $ (776,726) $ 49,217 ========== ========== Net (loss) income per common share Basic and diluted $ (0.07) $ 0.01 ========== ========== Weighted Average Shares Outstanding: Basic and diluted 11,165,249 9,135,419 ========== =========== See accompanying notes to the condensed consolidated financial statements -5-
VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) Common Preferred Series B Preferred Series C ------ ---------------- ------------------ Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ Balance, September 30, 2002. . . . . . . . 11,011,933 $11,012 38,000 $ 38 1,400,000 $ 1,400 Shares issued for services . . . . . . . . 275,000 275 - - - - Shares issued for debt retirement. . . . . 26,400 26 - - - - Shares issued to employees as compensation 82,500 83 - - - - Preferred stock issued in acquisition. . . - - - - 380,000 380 Issuance of common stock options . . . . . - - - - - - Net loss . . . . . . . . . . . . . . . . . - - - - - - ---------- ------ ------ ------ --------- ------ Balance December 31, 2002. . . . . . . . . 11,395,833 $11,396 38,000 $ 38 1,780,000 $ 1,780 ========== ====== ====== ====== ========= ======
See accompanying notes to the condensed consolidated financial statements -6-
VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED) (UNAUDITED) Series C Preferred Series D Preferred Stock Additional to be Issued Paid-In Treasury Accumulated Shares Amount Shares Amount Capital Stock Deficit ------ ------ ------ ------ ----------- -------- ----------- Balance, September 30, 2002 . . . . . . . . 1,250,000 $ 1,250 380,000 $239,400 $12,787,591 $(23,522) $(8,126,190) Shares issued for services. . . . . . . . . - - - - 56,225 - - Shares issued for debt retirement . . . . . - - - - 3,844 - - Shares issued to employees for compensation - - - - 23,992 - - Preferred stock issued in acquisition . . . (380,000) (239,400) 239,020 - - - - Issuance of common stock options. . . . . . - - - - 142,836 - - Net loss. . . . . . . . . . . . . . . . . . - - - - - - (776,726) --------- --------- -------- ------- ---------- ------- ----------- Balance December 31, 2002 . . . . . . . . . 1,250,000 $ 1,250 0 $ 0 $13,253,508 $(23,522) $(8,902,916) ========= ======== ======== ======= ========== ======= =========== Total Balance, September 30, 2002 . . . . . . . . $4,890,979 Shares issued for services. . . . . . . . . 56,500 Shares issued for debt retirement . . . . . 3,870 Shares issued to employees for compensation 24,075 Preferred stock issued in acquisition Issuance of common stock options. . . . . . 142,836 Net loss. . . . . . . . . . . . . . . . . . (776,726) ---------- Balance December 31, 2002 . . . . . . . . . $4,341,534 ==========
See accompanying notes to the condensed consolidated financial statements -7- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months ended December 31, 2002 2001 ----- ----- Operating Activities: Net (loss) income $ (776,726) $ 49,217 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 87,740 52,412 Bad debt expense 24,000 0 Gain on sale of fixed assets (8,000) 0 Stock issued for services 56,500 56,088 Stock issued for compensation 24,075 0 Options issued for compensation 142,836 0 Other 0 153,177 Changes in assets and liabilities: Receivables ( 27,635) ( 55,843) Prepaid expenses ( 29,828) 0 Other assets 74,592 0 Deferred Compensation (38,039) 0 Accounts payable and accrued expenses 95,018 64,012 Production deposits 0 (755,512) Deposits ( 875) 1,459 ---------- ----------- Net Cash used by Operating Activities ( 376,342) (434,990) ---------- ----------- Investing Activities: Acquisition of fixed assets 0 ( 14,356) Notes receivable payments 26,668 115,000 Proceeds from sale of fixed assets 8,000 0 ----------- ----------- Net Cash Provided by Investing Activities 34,668 100,644 ----------- ----------- Financing Activities: Principal borrowings on notes 185,000 0 Principal repayments on notes (192,773) 0 Loans payable 0 ( 26,671) Due to related party 59,750 0 ----------- ----------- Net Cash provided (used) by Financing Activities 51,977 ( 26,671) ----------- ----------- Net decrease in Cash (289,697) (361,017) Cash at beginning of year 343,374 420,857 ----------- ----------- Cash at end of period $ 53,677 $ 59,840 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 108,201 $ 169,537 =========== =========== Income taxes paid $ 0 $ 0 =========== =========== Supplemental disclosure of non cash investing and financing activity: 26,400 Shares of common stock $ 3,870 $ 0 issued for retirement of debt =========== ============ See accompanying notes to the condensed consolidated financial statements -8- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 8). 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. 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 8). 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. -9- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 three months ended December 31, 2002 and 2001, respectively. As of December 31, 2002, five sound and production stages were under non-cancelable operating leases for one year from a major production company. 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 December 31, 2002, accounts receivable is reported net of a $496,190 allowance for bad debts. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------- The condensed consolidated financials statements as of December 31, 2002 and for the three months ended December 31, 2002 and 2001 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the three months ended December 31, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of September 30, 2002 was derived from the audited consolidated financial statements included in the Company's annual report Form 10-KSB. The interim condensed consolidated financial statements should be read in conjunction with that report. GOING CONCERN -------------- The Company's condensed consolidated financial statements as of December 31, 2002 and for the three months then ended have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company had a net loss of $776,726 and a negative cash flow from operations of $376,342 for the three months ended December 31, 2002, and a working capital deficiency of $1,070,305 and an accumulated deficit of $8,902,916 at December 31, 2002, respectively. 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. 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 or that it will be sold for $11,850,000 or on terms otherwise favorable to the Company. -10- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. RECLASSIFICATION ---------------- Certain prior period amounts have been reclassified to conform to the current Period's presentation. NOTE 2 NET INCOME (LOSS) PER SHARE ---------------------------------------- The Company's net income (loss) per share was calculated using weighted average shares outstanding of 11,165,249 for the three months ended December 31, 2002 and 9,135,419 for the three months ended December 31, 2001, respectively. Although convertible preferred stock, convertible debt, and warrants are common stock equivalents, they are not included in the calculation of diluted earnings per share as their effect would be anti-dilutive or their conversion price was greater than the average market price of the Company's common stock. NOTE 3 NOTE RECEIVABLE - RELATED PARTY -------------------------------------------- At December 31, 2002, related party receivables, net represents $5,000 due from a former officer of the Company. The amount due is due on demand.
NOTE 4 SEGMENT INFORMATION ----------------------------- Studio Studio Equip Film & TV Rental Rental Production Total ------------ -------------- ------------ ------------ As of and for the three months ended December 31, 2002 ---- Revenues. . . . . . . . . . . . . . . . . . . . . $ 634,843 $ 7,194 $ 122,892 $ 764,929 Operating loss. . . . . . . . . . . . . . . . . . (509,374) (32,383) (68,131) (609,888) Total Assets. . . . . . . . . . . . . . . . . . . 12,814,730 281,837 36,430 13,132,997 Depreciation and Amortization . . . . . . . . . . 75,540 12,200 0 87,740 2001 ---- Revenues. . . . . . . . . . . . . . . . . . . . . $ 643,512 $ 242,960 $ 2,819,239 $ 3,705,711 Operating (Loss) Income . . . . . . . . . . . . . (207,033) 147,438 278,349 218,754 Total Assets. . . . . . . . . . . . . . . . . . . 13,398,848 576,766 123,770 14,090,384 Depreciation and Amortization . . . . . . . . . . 40,873 11,539 0 52,412
-11- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5 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. 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 8. 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 December 31, 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 December 31, 2002. -12- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On January 1, 2001, ValCom, Inc. ("ValCom"), Woody Fraser Productions, Inc. and Woody Fraser (collectively, "WFP") entered into a Joint Venture Agreement for the purpose of developing and producing various television projects. In August 2002, a dispute arose between ValCom and WFP arising out of the Joint Venture Agreement. On February 10, 2003, ValCom and WFP began to arbitrate the dispute. However, on February 11, 2003, ValCom and WFP agreed to attempt to resolve the dispute in mediation. The parties resolved the dispute during the mediation on the following material general terms: 1. WFP will pay ValCom a percentage of cash of the profits generated. 2. ValCom is no longer liable for the fee's due WFP for the remaining 2 years of the Joint Venture. 3. WFP will exclusively rent facilities of ValCom for three years , which can be extended for two additional years. Additionally, WFP will receive a 10% discount on all gross rentals from each facilities' contract generated. The parties are in the process of finalizing the settlement agreement. 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. NOTE 6 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. 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 December 31, 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. -13- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In connection with the acquisition of PTL Productions, Inc. (dba Brentwood Magazine), the Company was to issue 400,000 shares of Series C preferred stock, convertible 1 for 1 into common shares. The Value of the preferred stock was $252,000 or $.63 per share based on the value of the Company's common stock on the date of 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 valued at $239,400. The par value of the 380,000 shares of Series C Preferred Stock ($380) is included in preferred stock while the remaining value ($239,020) is included in additional paid-in-capital. The value of the remaining 20,000 shares $12,600 still to be issued is included in preferred stock payable in the accompanying balance sheet. 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. In connection with the sale, the Company Will receive back 200,000 shares of its Series C Preferred Stock and $300,000 of Trade credit (See Note 8). (B) COMMON STOCK ------------------- During the three months ended December 31, 2002, the Company issued 275,000 shares of common stock in lieu of compensation for legal services performed. The value of the legal services performed totaled approximately $56,500, which was computed based upon the market prices of the common stock on the applicable payment dates. During the three months ended December 31, 2002, the Company issued 82,500 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $24,075, which was computed based upon the market prices of the common stock on the applicable payment dates. (C) NON QUALIFIED STOCK OPTIONS ----------------------------------- During the three months ended December 31, 2002, the Company issued options to consultants to purchase 650,000 shares of the Company's common stock. The options were valued using the Black-Scholes pricing model and resulted in $3,660 of consulting expense and $139,176 of deferred compensation expense. The options expire from October 29, 2005 through October 29, 2012. The exercise price and fair value of the options are $.001 and $.22 per share, respectively. NOTE 7 DEBT ------------- During the three months ended December 31, 2002, the Company issued 26,400 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 three monts ended December 31, 2002 totaled $3,818, which was computed based upon terms stipulated in the applicable convertible notes. NOTE 8 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. In connection with the sale, the Company will receive back 200,000 shares of its Series C Preferred Stock and $300,000 of trade credit.The unaudited, pro forma information and results, as if the PTL Productions, Inc. (dba Brentwood Magazine) acquisition had not occurred as of and for the three months ended December 31, 2002, are: Total assets $ 13,090,919 Total liabilities $ 8,655,629 Net sales $ 686,554 Net loss $ (696,913) Net loss per common share $ (0.06) -14- VALCOM, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of December 31, 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 note 8 (Subsequent Events) to the Condensed Consolidated Financial Statements. 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 lease with a major production company, which lease three of the sound stages and sublease two of the sound stages. Rental income from the eight sound stages if operating at full capacity 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. 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, the Company was to fund $500,000 of annual production development costs. In return, the Company was to 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 had a dispute with Woody Fraser and Woody Fraser Productions, Inc., which was resolved in arbitration (See Note 5). 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. -15- VALCOM, INC. AND SUBSIDIARIES 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 8 (Subsequent Events) to the Consolidated Financial Statements. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2002 VS. DECEMBER 31, 2001 ------------------------------------------------------------------- Revenues for the three months ended December 31, 2002 decreased by $2,940,782 or 79.4% from 3,705,711 for the three months ended December 31, 2001 to $764,929 for the same period in 2002. The decrease in revenue was principally due to decreased production revenues associated with the joint venture with Woody Fraser Productions. Subsequent to December 31, 2002, the Company lost a significant sound stage rental customer who had occupied three of the Company's eight sound stages. The Company is actively seeking to lease the available sound stage space to replace lost revenues. However, as part of the Woody Fraser Productions, Inc. arbitration settlement, the Company will generate substantial revenues from an exclusive three year facilities contract for its Half Day Video, Inc. subsidiary. Production costs for the three months ended December 31, 2002 decreased by $2,349,867 or 92.5% from $2,540,890 for the three months ended December 31, 2001 to $191,023 for the same period in 2002. The decrease in production costs was principally due to decreased production associated with Woody Fraser Productions as described above. Selling and promotion costs for the three months ended December 31, 2002 decreased by $5,668 or 31.3% from $18,085 for the three months ended December 31, 2001 to $12,417 for the same period in 2002. The decrease was due principally to a decrease in travel expenses. Depreciation and amortization expense for the three months ended December 31, 2002 increased by $35,328 or 67.4% from $52,412 for the three months ended December 31, 2001 to $87,740 for the same period in 2002. The increase in depreciation and amortization expense is a result of additional tangible and intangible assets being depreciated. General and administrative expenses for the three months ended December 31, 2002 increased by $208,067 or 23.8% from $875,570 for the three months ended December 31, 2001 to $1,083,637 for the same period in 2002. The increase was due principally to increased personnel costs, legal and accounting fees, outside services and consulting fees. Interest expense for the three months ended December 31, 2002 increased by $5,301 or 3.1% from $169,537 for the three months ended December 31, 2001 to $174,838 for the same period in 2002. The increase was due principally to interest on additional debt. Other income for the three months ended December 31, 2002 increased by $8,000 from 0 for the three months ended December 31, 2001. The increase was due to a gain recognized from the sale of fixed assets. Due to the factors described above, the Company incurred a net loss of $776,726 for the three months ended December 31, 2002 compared to net income of $49,217 for the same period in 2001. 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 or losses. For the three months ended December 31, 2002, PTL Productions, Inc. generated $78,375 or 10.2% of the Company's total sales, while contributing $79,813 or 10.9% of the Company's net loss. -16- VALCOM, INC. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a net loss of $776,726 and a negative cash flow from operations of $376,342 for the three months ended December 31, 2002, and a working capital deficiency of $1,070,305 and an accumulated deficit of $8,902,916 at December 31, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $53,677 on December 31, 2002, compared to $343,374 at September 30, 2002. During the three months ended December 31, 2002, net cash used by operating activities totaled $376,342 compared to $434,990 for the comparable three month period in 2001. A significant portion of operating activities included payments for accounting and legal fees, salaries and rent. Net cash provided by financing activities for the three months ended December 31, 2002 totaled $51,977 compared to cash used of $26,671 for the comparable three-month period in 2001. Net cash provided by investing activities during the three months ended December 31, 2002 totaled $34,668 compared to $100,644 during the comparable prior year period due principally to decreased notes receivable payments. The above cash flow activities yielded a net cash decrease of $289,697 during the three months ended December 31, 2002 compared to a decrease of $361,017 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $1,070,305 as of December 31, 2002 compared to $594,990 as of September 30, 2002. The Company will need to raise funds through various financings to maintain its operations until such time as cash generated by operations is sufficient to meet its operating and capital requirements. There can be no assurance that the Company will be able to raise such capital on terms acceptable to the Company, if at all. Long-term debt as of December 31, 2002 and 2001 was $6,663,190 and $6,702,593 and related primarily to the Company's owned real estate. 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. 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 or that it 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. -17- VALCOM, INC. AND SUBSIDIARIES ITEM 3. 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 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 ------------------------------- The Company's officers also identified several weaknesses in 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. -18- VALCOM, INC. AND SUBSIDIARIES PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ---------------------------- 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. 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 8. 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 December 31, 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 December 31, 2002. -19- VALCOM, INC. AND SUBSIDIARIES On January 1, 2001, ValCom, Inc. ("ValCom"), Woody Fraser Productions, Inc. And Woody Fraser (collectively, "WFP") entered into a Joint Venture Agreement for the purpose of developing and producing various television projects. In August 2002, a dispute arose between ValCom and WFP arising out of the Joint Venture Agreement. On February 10, 2003, ValCom and WFP began to arbitrate the dispute. However, on February 11, 2003, ValCom and WFP agreed to attempt to resolve the dispute in mediation. The parties resolved the dispute during the mediation on the following material general terms: 1) WFP will pay ValCom a percentage of cash of the profits generated. 2) ValCom is no longer liable for the fee's due WFP for the remaining 2 years of the Joint Venture. 3. WFP will exclusively rent facilities of ValCom for three years , which can be extended for two additional years. Additionally, WFP will receive a 10% discount on all gross rentals from each facilities' contract generated. The parties are in the process of finalizing the settlement agreement. 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. ITEM 2. CHANGES IN SECURITIES --------------------------------- On December 2, 2002, the Company issued an aggregate of 75,000 shares of common stock to a group of 25 employees as a holiday bonus. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On December 6, 2002, the Company issued 380,000 shares of Series C Preferred Stock to Phillip Troy Linger for an aggregate purchase price of $239,400, pursuant to that certain Agreement and Plan of Reorganization Between ValCom, Inc. and PTL Productions, Inc., dated August 2, 2002, pursuant to which Mr. Linger sold his company, PTL Productions, Inc. dba Brentwood Magazine, to the Company. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 3. DEFAULTS UPON SENIOR SECURITIES -------------------------------------------- Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------------------------- Not applicable ITEM 5. OTHER INFORMATION ---------------------------- None -20- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------------- (A) EXHIBITS: Exhibit Number Description --------------- ----------- 99.1 Certification of the Chief Executive Officer of ValCom, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer of ValCom, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (B) REPORTS ON FORM 8-K None SIGNATURES ---------- In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALCOM, INC. Date: February 20, 2003 By: /s/Vince Vellardita ------------------------------------- Vince Vellardita Chairman of the Board and Chief Executive Officer (Principal executive officer) In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- BY: /s/Vince Vellardita CEO/President February 20, 2003 -------------------- ------------------ Vince Vellardita Chairman of the Board BY: /s/ Don Magier Controller February 20, 2003 ------------------- (principal accounting officer) ------------------ Don Magier -21- EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Vince Vellardita, the Chief Executive Officer of ValCom, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 20, 2003 ------------------ /s/ Vince Vellardita ---------------------- Name: Vince Vellardita Title: Chief Executive Officer -22- EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Don Magier, the Controller (principal accounting officer) of ValCom, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 20, 2003 ------------------ /s/Don Magier -------------- Name: Don Magier Title: Controller (principal accounting officer) -23-