-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/J1c0Te9gK6VzPd6yTrjdUMD8VvLaYrzxRfInvQidqEqMy1FE3yxDkq542zs3Tf gUaSYIt4sZYhNwDoKPg3pQ== 0001013453-03-000035.txt : 20030814 0001013453-03-000035.hdr.sgml : 20030814 20030814135519 ACCESSION NUMBER: 0001013453-03-000035 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALCOM INC CENTRAL INDEX KEY: 0001013453 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 581700840 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28416 FILM NUMBER: 03845864 BUSINESS ADDRESS: STREET 1: 26030 AVENUE HALL STUDIO 5 CITY: VALENCIA STATE: CA ZIP: 91355 BUSINESS PHONE: 6612578000 MAIL ADDRESS: STREET 1: 26030 AVENUE HALL - STUDIO #5 CITY: VALENCIA STATE: CA ZIP: 91355 FORMER COMPANY: FORMER CONFORMED NAME: SBI COMMUNICATIONS INC DATE OF NAME CHANGE: 20030204 FORMER COMPANY: FORMER CONFORMED NAME: VALCOM INC /CA/ DATE OF NAME CHANGE: 20010620 FORMER COMPANY: FORMER CONFORMED NAME: SBI COMMUNICATIONS INC DATE OF NAME CHANGE: 19960502 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 JUNE 30, 2003 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 June 30, 2003 the issuer had 12,590,833 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 Sheet as of June 30, 2003 (unaudited) 3 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2003 and 2002 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and 2002 (unaudited) 7 Notes to Condensed Consolidated Financial State- ments (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Disclosure Controls and Procedures 19 Part II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 22 Part III. EXHIBITS -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 2003 ASSETS ------ Current Assets: Cash & cash equivalents $ 56,636 Accounts receivable, net 91,231 Other receivables 39,574 Note receivable, current 70,357 ----------- Total Current Assets 257,798 Property and equipment - net 11,656,320 Prepaid development costs 112,884 Deferred financing costs 183,600 Deposits and other assets 103,392 ------------ Total Assets $ 12,313,994 ============ See accompanying notes to the condensed unaudited consolidated financial statements -3- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Not Subject To Compromise Current Liabilities: Accounts payable $ 277,110 Accrued interest 536,260 Accrued expenses 175,163 Due to related parties, current portion 9,400 Notes payable 7,862,373 ----------- Total Current Liabilities 8,860,306 Liabilities Subject To Compromise Prepetition trade accounts payable 206,249 Prepetition Payables due to related parties 124,963 Prepetition accrued expenses 131,902 ----------- Total Liabilities $ 9,323,420 ----------- 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 38 Series C, 5,000,000 shares authorized; 1,780,000 shares issued and outstanding 1,780 Series D, 1,250,000 shares authorized; 1,250,000 shares issued and outstanding 1,250 Common stock, par value $.001; 100,000,000 shares authorized, 12,590,833 shares issued and outstanding 12,611 Additional paid-in capital 13,223,753 Deferred compensation (275,191) Accumulated deficit (9,950,145) Treasury stock, at cost (35,000 shares) (23,522) ----------- Total Stockholders' Equity 2,990,574 ----------- Total Liabilities and Stockholders' Equity $12,313,994 =========== See accompanying notes to the condensed unaudited consolidated financial statements -4- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended June 30, 2003 2002 ---- ---- Revenue Rental $ 536,978 $ 787,952 Production 182,453 2,838,936 Other (76,573) - ---------- ---------- Total Revenue 642,858 3,626,888 ---------- ---------- Cost and Expenses: Production 17,354 2,760,600 Selling and promotion 4,074 37,006 Depreciation and amortization 85,545 180,570 General and administrative 408,847 771,881 ---------- ---------- Total Costs and Expenses 515,820 3,750,057 ---------- ---------- Operating Income (loss) 127,038 (123,169) Other Income (Expense): Interest expense, net (203,095) (715,195) Gain on sale of assets 34,000 - Loss on Equity Investment (49,713) - ---------- ---------- Total Other Expense (218,808) (715,195) ---------- ---------- Loss from continuing operations (91,770) (838,364) Discontinued Operations: Operating loss from discontinued operations (109,167) - Net gain on disposal of Discontinued operations 80,388 - ---------- ---------- Net loss $ (120,549) $ (838,364) ========== ========== Basic and diluted loss per share from continuing operations $ (0.01) $ (0.09) ========== ========== Basic and diluted loss per share From discontinued operations $ (0.00) $ (0.00) ---------- ----------- Basic and diluted loss per share $ (0.01) $ (0.09) ---------- ----------- Weighted Average Shares Outstanding: Basic and diluted 12,600,064 9,757,649 ========== =========== See accompanying notes to the condensed unaudited consolidated financial statements -5- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Nine months ended June 30, 2003 2002 ---- ---- Revenue Rental $ 1,560,005 $ 2,743,572 Production 385,422 6,195,214 ---------- ---------- Total Revenue 1,945,427 8,938,786 ---------- ---------- Cost and Expenses: Production 273,070 5,683,232 Selling and promotion 18,542 79,119 Depreciation and amortization 261,820 315,410 General and administrative 2,474,591 2,295,988 ---------- ---------- Total Costs and Expenses 3,028,023 8,373,749 ---------- ---------- Operating (loss) Income (1,082,596) 565,037 Other Income (Expense): Interest expense, net (774,508) (1,134,510) Gain on sale of assets 61,642 - Loss on Equity Investment (49,713) - Other income 50,000 - ---------- ---------- Total Other Expense (712,579) (1,134,510) ---------- ---------- Loss from continuing operations (1,795,175) (569,473) Discontinued Operations: Operating loss from discontinued operations (109,167) - Net gain on disposal of discontinued operations 80,388 - ---------- ---------- Net loss $ (1,823,954) $ (569,473) ============ ========== Basic and diluted loss per share From continuing operations $ (0.15) $ (0.06) ========== ========== Basic and diluted loss per share from discontinued operations $ (0.00) $ (0.00) ---------- ---------- Basic and diluted loss per share $ (0.15) $ (0.06) ---------- ---------- Weighted Average Shares Outstanding: Basic and diluted 11,858,208 9,577,079 ========== =========== See accompanying notes to the condensed unaudited consolidated financial statements -6- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months ended June 30, 2003 2002 ----- ----- Operating Activities: Net loss $ (1,823,955) $ (569,473) Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 261,820 315,410 Bad debt expense 56,606 - Gain on sale of fixed assets (61,642) - Stock issued for services 140,376 98,333 Stock issued for compensation 54,475 - Changes in assets and liabilities: Receivables (18,973) (127,180) Prepaid expenses (31,952) (434,192) Other assets 241,897 - Deferred Compensation 129,357 - Accounts payable and accrued expenses 710,951 (23,953) Production deposits - (765,656) Deposits (63,979) (2,669) ---------- ----------- Net Cash used by Operating Activities ( 405,019) (1,509,380) ---------- ----------- Investing Activities: Acquisition of fixed assets - ( 71,896) Notes receivable payments 66,101 115,000 Proceeds from sale of fixed assets 84,159 - ----------- ----------- Net Cash Provided by Investing Activities 150,260 43,104 ----------- ----------- Financing Activities: Principal borrowings on notes 234,463 1,489,143 Principal repayments on notes (174,807) (150,837) Issuance of preferred stock and warrants - 930,000 Due to related party (91,635) - Deferred financing costs - (221,999) ----------- ----------- Net Cash (used) provided by Financing Activities (31,979) 2,046,307 ----------- ----------- Net (decrease) increase in Cash & cash equivalents (286,738) 580,031 Cash & cash equivalents at beginning of period 343,374 420,857 ----------- ----------- Cash & cash equivalents at end of period $ 56,636 $ 1,000,888 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 284,402 $ 1,129,646 =========== =========== Income taxes paid $ 0 $ 0 =========== =========== Supplemental disclosure of non cash investing and financing activity: 26,400 shares of common stock issued for retirement of debt $ 3,870 $ 132,797 ============ ============ See accompanying notes to the condensed unaudited consolidated financial statements -7- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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, in addition to producing its own television and motion picture programming, has an exclusive facilities agreement in place for productions in Los Angeles County for a three-year term with Woody Fraser/Woody Fraser Productions (see note 5). d) Broadcast Television - The Company owns a 45% equity interest in ValCom Broadcasting, LLC, a New York limited liability company, which operates KVPS (Channel 8), an independent television broadcaster in the Palm Springs, California market, which is strategically located in the middle of four major markets including Los Angeles, Phoenix, Las Vegas and San Diego. e) Magazine publication - Operating under the name Brentwood Magazine, the Company derived advertising revenues from the publishing of a southern California magazine covering entertainment, business, luxurious lifestyles, travel and fashions. 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. The Company is still in process of consummating the transaction while the accompanying condensed consolidated financial statements include the recording of disposal of PTL Productions, Inc. BASIS OF PRESENTATION - ----------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes included in the Company's Form 10-KSB. The audited consolidated financial statements of the Company for the year ended September 30, 2002 were filed on February 19, 2003 with the Securities and Exchange Commission and are hereby referenced. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) considered necessary for fair presentation has been included. The results of operations for the three months and nine months ended June 30, 2003 are not necessarily indicative of the results to be expected for the entire year. PRINCIPLES OF CONSOLIDATION - ----------------------------- The consolidated financial statements include the accounts of ValCom, Inc. and two wholly-owned subsidiaries, Valencia Entertainment International, LLC, which was acquired effective February 2001 and Half Day Video, Inc., which was acquired effective March 2001. -8- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 two customers who accounted for approximately 99% of total rental revenues for the nine months ended June 30, 2003. As of June 30, 2003, all eight 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 June 30, 2003, accounts receivable is reported net of a $91,231 allowance for bad debts. GOING CONCERN - -------------- The Company's condensed consolidated financial statements as of June 30, 2003 and for the three and nine 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 $120,549 and $1,823,954 for the three and nine months then ended and a negative cash flow from operations of $405,019 for the nine months ended June 30, 2003, and a working capital deficiency of $8,602,508 and an accumulated deficit of $9,950,145 at June 30, 2003. On April 7, 2003, Valencia Entertainment International, LLC, a California limited liability company and the Registrant's subsidiary filed a voluntary petition in bankruptcy for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California (note 8). These conditions raise doubt about the Company's ability to continue as a going concern. 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. On February 13 and 19, 2003, Notices of Default were filed with the Los Angeles County Recorder by the first and second trust deed holders of the Company's subsidiary, Valencia Entertainment International, LLC's commercial promissory note against its real property. On February 27, 2003, a judge of the Los Angeles Superior Court appointed a receiver over the real property on behalf of the first trust deed holder. -9- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's subsidiary, Valencia Entertainment International, LLC, is currently leasing all eight of the Company's production stages to Paramount Pictures under a 1-year contract with a 5-yearly renewal options. The Company will offer Paramount its renting production equipment and personnel from Half Day Video, Inc., another Company subsidiary. Thus, the Company's synergistic relationship with Half Day Video, Inc. can 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, (3) reducing the number of its employees or (4) selling unused property and equipment. RECENT PRONOUNCEMENTS SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The adoption of SFAS 144 does not have a material effect on the Company's earnings or financial position. In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of gains or losses from extinguishments of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes various technical corrections to existing pronouncements. The provisions of SFAS 145 related to the rescission of FASB Statement 4 are effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. All other provisions of SFAS 145 are effective for transactions occurring after May 15, 2002, with early adoption encouraged. The adoption of SFAS 145 does not have a material effect on the Company's earnings or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost, as defined, was recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged. The adoption of SFAS 146 does not have a material effect on the Company's earnings or financial position. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition, this statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include certain financial institution-related intangible assets. The adoption of SFAS 147 does not have a material effect on the Company's earnings or financial position. -10- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN45 does not have a material effect on the Company's financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used, on reported results. The Statement is effective for the Companies' interim reporting period ending January 31, 2003. The adoption of SFAS 148 does not have a material effect on the Company's earnings or financial position. On April 30, the FASB issued FASB Statement No. 149 (FAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. FAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of FASB Statement No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. FAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. FAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have a material impact on its financial position or results of operations or cash flows. On May 15, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 150 (FAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. FAS 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, FAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. FAS 150 affects an entity's classification of the following freestanding instruments: a) Mandatorily redeemable instruments b) Financial instruments to repurchase an entity's own equity instruments c) Financial instruments embodying obligations that the issuer must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on (i) a fixed monetary amount known at inception or (ii) something other than changes in its own equity instruments d) FAS 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The guidance in FAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. For private companies, mandatorily redeemable financial instruments are subject to the provisions of FAS 150 for the fiscal period beginning after December 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material impact on its financial position or results of operations or cash flows. RECLASSIFICATION - ---------------- Certain prior period amounts have been reclassified to conform to the current period's presentation. NOTE 2 NET INCOME (LOSS) PER SHARE - ---------------------------------------- The Company's net loss per share was calculated using weighted average shares outstanding of 12,600,064 and 11,858,208 for the three and nine months ended June 30, 2003 and 9,757,649 and 9,577,079 for the three and nine months ended June 30, 2002, 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. -11- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 SEGMENT INFORMATION - ----------------------------- Studio Studio Equip Film & TV Rental Rental Production Total --------- ------------- ---------- ----- As of and for the nine months ended June 30, 2003 - ---- Revenues $ 1,602,313 $ 343,114 $ 0 $ 1,945,427 Operating loss (929,978) ( 7,692) (144,926) (1,082,596) Total Assets 12,141,320 172,674 0 12,313,994 Depreciation and Amortizatio 224,620 37,200 0 261,820 2002 - ---- Revenues $ 3,297,914 $ 1,041,356 $4,599,516 $ 8,938,786 Operating Income 418,584 40,394 106,059 565,037 Total Assets 15,064,066 416,964 107,124 15,588,154 Depreciation and Amortization 278,410 37,000 0 315,410 NOTE 4: INVESTMENT - -------------------- The investment held by the Company consists of a 45% ownership interest in ValCom Broadcasting, LLC, a New York limited liability company. The investment is accounted for on the equity method. Pertinent financial information for ValCom Broadcasting, LLC as of June 30, 2003 is as follows: BALANCE SHEET: Assets $ 839,368 ------------- Liabilities $ 50,000 Equity 789,368 ------------- $ 839,368 ------------- INCOME STATEMENT: Revenues $ 0 Expenses 110,473 ------------- Net loss 110,473 X 45% ------------ Company's share of net loss $ 49,713 ------------- 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. -12- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Therefore management believes it should not be a party to this action. The complaint now seeks damages in the amount of $4.2 million, together with interest from the date of entry of prior judgement. The trial date is currently October 27, 2003. Discovery in the case is currently ongoing. The parties have exchanged documents and written responses to discovery. Plaintiffs have been deposed, but none of the defendants has yet been deposed. The Company filed a motion for summary judgement seeking dismissal of claims against it. 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 it. In addition, a related party has agreed to indemnify the Company if the Company sustains any loss in this case. The parties executed a settlement agreement on August 6, 2003 resolving this dispute in full. The Plaintiffs have dismissed ValCom with prejudice and at no cost to the Company. 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. The parties executed a settlement agreement on July 10, 2003 resolving this dispute in full. 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 June 30, 2003. The parties executed a settlement agreement on July 10, 2003 resolving this dispute in full. 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 Parties have entered mediation to resolve the dispute. 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 between ValCom and WFP arose out of the Joint Venture Agreement. On February 10, 2003, ValCom and WFP began to arbitrate the dispute and on February 11, 2003, ValCom and WFP attempted to resolve the dispute in mediation. The parties resolved the dispute and have finalized a settlement agreement with the following terms: - - ValCom received an undisclosed settlement. - - ValCom is no longer liable for the fee's due WFP for the remaining 2 years of the Joint Venture. - - 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 facility's contract generated. 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. -13- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. There have been no dividends 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 June 30, 2003, 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. 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. 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. 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. As of June 30, 2003 the terms of the sell back have not been consummated and the Company is not operating PTL Productions, Inc. As a result, the accompanying condensed consolidated financial statements include the recording of disposal of PTL Productions, Inc. The Company contemplates legal action to enforce the terms of the agreement. At June 30, 2003, the Company is in the process of canceling approximately 1.1 million shares of Series C Preferred Stock. (B) COMMON STOCK - ------------------ During the nine months ended June 30, 2003, the Company issued 975,000 shares of common stock in lieu of compensation for legal and consulting services performed. The value of the legal and consulting services performed totaled approximately $140,376, which was computed based upon the market prices of the common stock on the applicable payment dates. During the nine months ended June 30, 2003, the Company issued 597,500 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $54,475, which was computed based upon the market prices of the common stock on the applicable payment dates. During the nine months ended June 30, 2003, the Company issued 26,400 shares of common stock in lieu of debt retirement. Total value of the debt retired was approximately $3,870, which was computed based upon the market prices of the common stock issued on the applicable payment dates. -14- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At June 30, 2003, the Company is in the process of canceling approximately 350,000 shares of common stock. (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. During the three months ended March 31, 2003, the Company cancelled all of the options issued. None of the options had been exercised. NOTE 7 DEBT - ------------- During the nine months ended June 30, 2003, 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 nine months ended June 30, 2003 totaled $3,818, which was computed based upon terms stipulated in the applicable convertible notes (see note 6). 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. As of June 30, 2003 the terms of the sell back have not been consummated and the Company is not operating PTL Productions, Inc. The Company contemplates legal action to enforce the terms of the agreement. Bankruptcy On December 22, 1999, Valencia Entertainment International, LLC, a California limited liability company and the Company's subsidiary ("Valencia Entertainment"), entered into a loan transaction with First Fidelity Investment and Loan, the predecessor-in-interest of Hawthorne Savings, F.S.B., a federal savings bank ("Hawthorne Savings"), evidenced by a Commercial Promissory Note in the original principal amount of $6,000,000. The Commercial Promissory Note is secured by a Deed of Trust, Assignment of Rents, Security Agreement & Fixture Filing (the "Deed of Trust") with respect to real property with a street address of 26030 Avenue Hall and 28343 Avenue Crocker, Valencia, California, owned by Valencia Entertainment (the "Real Property"), with a 90-day right to cure the default. On December 30, 1999, Hawthorne Savings recorded the Deed of Trust with the Los Angeles County Recorder. Valencia Entertainment was placed in default on February 19, 2003 for defaulting on its monthly payment under the Commercial Promissory Note. The Notice of Default states that the Registrant owes $212,675.43, plus default interest at three percent effective December 21, 2002 as of February 18, 2003. On February 26, 2003, Valencia Entertainment received a Notice of Default and Election to Sell Under Deed of Trust from Hawthorne Savings. On February 13, 2003, Hawthorne Savings filed the Notice of Default with the Los Angeles County Recorder. On February 27, 2003, Hawthorne Savings filed an Ex Parte Application for the Appointment of a Receiver and for Issuance of a Temporary Restraining Order Pending Order to Show Cause, or Alternative Relief in Case No. BC 291002 in the Superior Court of the State of California, County of Los Angeles, Central District. On February 27, 2003, Hawthorne Savings also filed a Verified Complaint for Specific Performance of Provisions of Deed of Trust and Absolute Assignment of Rents and Leases for the Appointment of Receiver; Injunctive Relief Pending Receiver Taking Possession and Control of Property; and Judicial Foreclosure of Deed of Trust. Valencia Entertainment has a 90-day right to cure the default. On February 27, 2003, a Judge of the Los Angeles Superior Court signed an Ex Parte Order Appointing Receiver and Order to Show Cause and Temporary Restraining Order - Rents, Issues, and Profits appointing Kenneth A. Krasne of Krasne & Company Res, Inc. as the receiver over the Real Property. As of June 1, the receiver was removed, and the Company once again assumed possession of its real property and operations. -15- VALCOM, INC. AND SUBSIDIARIES On April 7, 2003, Valencia Entertainment International, LLC, a California limited liability company and the Company's subsidiary filed a voluntary petition in bankruptcy for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California. The Company contemplates reorganization subject to the Company being able to enter in to new multi-year lease agreements with third parties for use of all of the eight sound stages and obtain refinancing of the real estate debts or sell the property with leaseback. On May 12, 2003, the Company requested that the court set a claims filing deadline for the earliest date possible. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of June 30, 2003, ValCom, Inc. operations were comprised of four divisions: (1) Studio Rental, (2) Studio Equipment and Personnel Rental, (3) Broadcast Television and (4) Film and Television Production. STUDIO RENTAL - -------------- The Company and its 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. The Company leases the other two sound stages. Beginning June 2003, the Company and its subsidiary has a newly signed one-year lease with five one-year options for all eight sound stages, which will generate $2,100,000 annually with 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 - --------------------------------- The Company, in addition to producing its own television and motion picture programming, has an exclusive facilities agreement in place for productions in Los Angeles County for a three-year term with Woody Fraser/Woody Fraser Productions (See Note 5). CHANNEL 8 IN PALM SPRINGS, CALIFORNIA - ------------------------------------------ In connection with its joint venture with New 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. The Company plans 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. -16- VALCOM, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 VS. JUNE 30, 2002 - ----------------------------------------------------------- Revenues for the three months ended June 30, 2003 decreased by $2,984,030 or 82.3% from 3,626,888 for the three months ended June 30, 2002 to $642,858 for the same period in 2003. The decrease in revenue was principally due to decreased production revenues associated with the joint venture with Woody Fraser Productions and decreased rental revenues. The Company lost a significant sound stage rental customer who had occupied three of the Company's eight sound stages. However, the Company has leased the available sound stage space beginning June 2003 and 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 or its studio rental division. Production costs for the three months ended June 30, 2003 decreased by $2,743,246 or 99.4% from $2,760,600 for the three months ended June 30, 2002 to $17,354 for the same period in 2003. 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 June 30, 2003 decreased by $32,932 or 89.0% from $37,006 for the three months ended June 30, 2002 to $4,074 for the same period in 2003. The decrease was due principally to a decrease in travel and public relations expenses. Depreciation and amortization expense for the three months ended June 30, 2003 decreased by $95,025 or 52.6% from $180,570 for the three months ended June 30, 2002 to $85,545 for the same period in 2003. The decrease in depreciation and amortization expense was due to decreased amortization related to the write off of prepaid loan fees in the prior year period. General and administrative expenses for the three months ended June 30, 2003 decreased by $363,034 or 47.0% from $771,881 for the three months ended June 30, 2002 to $408,847 for the same period in 2003. The decrease was due principally to decreased personnel costs, legal and accounting fees, outside services and consulting fees, insurance and rent expense. Interest expense for the three months ended June 30, 2003 decreased by $512,100 or 71.6% from $715,195 for the three months ended June 30, 2002 to $203,095 for the same period in 2003. The decrease was due principally to the write off of interest associated with convertible debt in the prior year period. Other income and expense for the three months ended June 30, 2003 decreased by $15,713 from 0 for the three months ended June 30, 2002. The decrease was due to a gain recognized from the sale of fixed assets offset by the loss recorded on equity investment of ValCom Broadcasting, LLC. Net Loss from discontinued operations for the three months ended June 30, 2003 were $28,779 compared to 0 for the same period in 2002. These expenses represent the operating loss from discontinued operations partially offset by the gain on disposal of discontinued operations of Brentwood Magazine. Due to the factors described above, the Company's net loss decreased by $717,815 from $838,364 for the three months ended March 31, 2002 to $120,549 for the same period in 2003. NINE MONTHS ENDED JUNE 30, 2003 VS. JUNE 30, 2002 - ---------------------------------------------------------- Revenues for the nine months ended June 30, 2003 decreased by $6,993,359 or 78.2% from 8,938,786 for the nine months ended June 30, 2002 to $1,945,427 for the same period in 2003. The decrease in revenue was principally due to decreased production revenues associated with the joint venture with Woody Fraser Productions and decreased rental revenues. The Company lost a significant sound stage rental customer who had occupied three of the Company's eight sound stages. However, the Company has leased the available sound stage space beginning June 2003 and 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 or its studio rental division. Production costs for the nine months ended June 30, 2003 decreased by $5,410,162 or 95.2% from $5,683,232 for the nine months ended June, 2002 to $273,070 for the same period in 2003. The decrease in production costs was principally due to decreased production associated with Woody Fraser Productions as described above. -17- VALCOM, INC. AND SUBSIDIARIES Selling and promotion costs for the nine months ended June 30, 2003 decreased by $60,577 or 76.6% from $79,119 for the nine months ended June 30, 2002 to $18,542 for the same period in 2003. The decrease was due principally to a decrease in travel and public relations expenses. Depreciation and amortization expense for the nine months ended June 30, 2003 decreased by $53,590 or 17.0% from $315,410 for the nine months ended June 30, 2002 to $261,820 for the same period in 2003. The decrease in depreciation and amortization expense is due to decreased amortization related to the write off of prepaid loan fees in the prior year period. General and administrative expenses for the nine months ended June 30, 2003 increased by $178,603 or 7.8% from $2,295,988 for the nine months ended June 30, 2002 to $2,474,591 for the same period in 2003. The increase was due principally to increased property taxes, legal and accounting fees, outside services and consulting fees and bad debt expense, partially offset by decreases in personnel costs and reimbursable expenses. Interest expense for the nine months ended June 30, 2003 decreased by $360,002 or 31.7% from $1,134,510 for the nine months ended June 30, 2002 to $774,508 for the same period in 2003. The decrease was due principally to the write off of interest associated with convertible debt in the prior year period. Other income and expense for the nine months ended June 30, 2003 increased by $61,929 from 0 for the nine months ended June 30, 2002. The increase was due to a gain recognized from the sale of fixed assets and an arbitration settlement, partially offset by the loss recorded on equity investment of ValCom Broadcasting, LLC. Net loss from discontinued operations for the nine months ended June 30, 2003 were $28,779 compared to 0 for the same period in 2002. These expenses represent the operating loss from discontinued operations partially offset by the gain on disposal of discontinued operations of Brentwood Magazine. Due to the factors described above, the Company's net loss increased by $1,254,481 from $569,473 for the nine months ended March 31, 2002 to $1,823,954 for the same period in 2003. 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 $1,823,954 and a negative cash flow from operations of $405,019 for the nine months ended June 30, 2003, and a working capital deficiency of $8,602,508 and an accumulated deficit of $9,950,145 at June 30, 2003. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $56,636 on June 30, 2003, compared to $343,374 at September 30, 2002. During the nine months ended June 30, 2003, net cash used by operating activities totaled $405,019 compared to $1,509,380 for the comparable nine month period in 2002. A significant portion of operating activities included payments for accounting and legal fees, salaries and rent. Net cash used by financing activities for the nine months ended June 30, 2003 totaled $31,979 compared to cash provided of $2,046,307 for the comparable nine month period in 2002, due to decreased borrowings and increased repayments on notes during the current period. Net cash provided by investing activities during the nine months ended June 30, 2003 totaled $150,260 compared to $43,104 during the comparable prior year period due principally to proceeds from the sale of fixed assets. The above cash flow activities yielded a net cash decrease of $286,738 during the nine months ended June 30, 2003 compared to a increase of $580,031 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $8,602,508 as of June 30, 2003 compared to $999,538 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 June 30, 2003 and September 30, 2002 was $8,860,306 and $6,702,593 and related primarily to the Company's owned real estate. -18- VALCOM, INC. AND SUBSIDIARIES 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. This Exclusive Sales Listing Agreement has subsequently expired; and the Company is currently seeking a new agent. The Company's subsidiary, Valencia Entertainment International, LLC, is currently leasing all eight of the Company's production stages to Paramount Pictures under a 1-year contract with a 5-yearly renewal options. The Company will offer Paramount its renting production equipment and personnel from Half Day Video, Inc., another Company subsidiary. Thus, the Company's synergistic relationship with Half Day Video, Inc. can 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, (3) reducing the number of its employees or (4) selling unused fixed assets. 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 ------------------------------- 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. -19- VALCOM, INC. AND SUBSIDIARIES 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 and to include any and 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. 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. The complaint now seeks damages in the amount of $4.2 million, together with interest from the date of entry of prior judgement. The trial date is currently October 27, 2003. Discovery in the case is currently ongoing. The parties have exchanged documents and written responses to discovery. Plaintiffs have been deposed, but none of the defendants has yet been deposed. The Company filed a motion for summary judgement seeking dismissal of claims against it. 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 it. In addition, a related party has agreed to indemnify the Company if the Company sustains any loss in this case. On August 6, 2003, the Plaintiffs have dismissed ValCom with prejudice and at no cost to the Company. 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. -20- VALCOM, INC. AND SUBSIDIARIES 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. 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 June 30, 2003. The Company will vigorously defend itself against these claims. The parties executed a settlement agreement on July 10, 2003 resolving this dispute in full. 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 currently in mediation in order to resolve the cause. There is no accrual relating to this matter in the accompanying consolidated balance sheet at June 30, 2003. 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 between ValCom and WFP arose out of the Joint Venture Agreement. On February 10, 2003, ValCom and WFP began to arbitrate the dispute and on February 11, 2003, ValCom and WFP attempted to resolve the dispute in mediation. The parties resolved the dispute and have finalized a settlement agreement with the following terms: - - ValCom received an undisclosed settlement. - - ValCom is no longer liable for the fee's due WFP for the remaining 2 years of the Joint Venture. - - 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 facility's contract generated. 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 -21- VALCOM, INC. AND SUBSIDIARIES 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. 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. 99.2 Certifications pursuant to Section 302 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: August 14, 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 August 14, 2003 -------------------- ---------------- Vince Vellardita Chairman of the Board BY: /s/ Don Magier Controller August 14, 2003 --------------- (principal accounting officer) ---------------- Don Magier -22- 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 June 30, 2003 (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: August 14, 2003 ----------------- /s/ Vince Vellardita ---------------------- Name: Vince Vellardita Title: Chief Executive Officer 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 June 30, 2003 (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: August 14, 2003 ----------------- /s/Don Magier -------------- Name: Don Magier Title: Controller (principal accounting officer) -23- 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 Quarterly Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-QSB for the period ending June 30, 2003, 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. (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: August 14, 2003 By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer -24- In connection with the Quarterly Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-QSB for the period ending June 30, 2003, 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 (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: August 14, 2003 By: /s/ Donald P. Magier ----------------------- Donald P. Magier Treasurer, Controller and Principal accounting officer -25- -----END PRIVACY-ENHANCED MESSAGE-----