10KSB 1 r10k-213.txt ANNUAL FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2003 Securities and Exchange Commission File Number O-28416 VALCOM, INC. (Name of small business issuer specified in its charter) Delaware 58-1700840 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 26030 Avenue Hall - Studio #5, Valencia, California 91355 --------------------------------------------------------- (Address of Principal executive offices) (Zip Code) (661) 257-8000 -------------- (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $0.001 - Preferred Stock, Par Value $0.001 ------------------------------------------------------------------ (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of the issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most current fiscal year: $2,281,879 Aggregate market value of the voting stock as of September 30, 2003 : $5,558,108 Number of common shares outstanding as of 9/30/03 at $.001 par value: 12,925,833 Documents Incorporated By Reference: None Transitional Small Business Disclosure Format: Yes ____ No _X_ DATED FEBRUARY 13, 2004 Table of Contents Item Page Number Number Item Caption ------ ------ ------------ Part I ------ Item 1. 3 Description of Business Item 2. 7 Description of Properties Item 3. 8 Legal Proceedings Item 4. 8 Submission of Matters to a Vote of Security Holders Part II ------- Item 5. 9 Market for Common Equity and Related Stockholder Matters Item 6. 11 Management's Discussion and Analysis or Plan of Operation Item 7. 14 Financial Statements and Summary Financial Data Item 8. 37 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III -------- Item 9. 37 Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10. 41 Executive Compensation Item 11. 43 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. 44 Certain Relationships and Related Transactions Item 13. 44 Exhibits, Financial Statement Schedules, and Reports on Form 8-K Item 14. 45 Disclosure Controls and Procedures Signatures 47 Ex. 99.1 48 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Ex. 99.2 49 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 2 PART I ------ Statements contained in this Annual Report on Form 10-KSB that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risk and uncertainties, which could cause actual results to differ materially from estimated results. Certain of such risks and uncertainties are described in the Company's filings with the Securities and Exchange Commission and in Item 1 ("DESCRIPTION OF BUSINESS") and Item 6 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION") below. ITEM I. DESCRIPTION OF BUSINESS ----------------------------------- GENERAL ------- ValCom, Inc., a publicly held Delaware corporation (the "Company"), was originally organized in the State of Utah on September 23, 1983, under the corporate name Alpine Survival Products, Inc. Its name was changed to Justin Land and Development, Inc. during October of 1984, and to Supermin, Inc. on November 20, 1985. The Company was originally formed to engage in the acquisition of any speculative investment or business opportunity without restriction as to type or classification. On September 29, 1986, Supermin, Inc. concluded a reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1954, as amended, pursuant to which it exchanged 200,000 shares of its common stock, $.001 par value (all share numbers, unless otherwise stated, have been adjusted to reflect a one-for-20 reverse stock split) for all of the capital stock of Satellite Bingo, Inc., a Georgia corporation organized on January 10, 1986, and the originator of the Company's current business (the "SBI Subsidiary"). In conjunction with such reorganization, the former stockholders of the SBI Subsidiary acquired control of the Company and the Company changed its name to Satellite Bingo, Inc. On March 10, 1988, the Company changed its name to SBI Communications, Inc., and on January 28, 1993, the Company reincorporated in Delaware through a statutory merger with a wholly-owned Delaware subsidiary in reliance on the exemption from registration requirements of Section 5 of the Securities Act of 1933, as amended, provided by Rule 145(a)(2) promulgated thereunder. On July 20, 2000, the Board of Directors approved a "2-1 forward stock split" with a distribution date of August 14, 2001 and a stockholder record date of August 10, 2000. The purpose of the forward split was to strengthen the Company's flexibility and address the liquidity issue in increasing the available float in the market. On August 21, 2000, the principals of Valencia Entertainment International, LLC ("VEI") and SBI Communications, Inc. ("SBI") executed a letter of intent to consummate a merger. On October 16, 2000, the majority stockholders approved the Agreement and Plan of Merger. Pursuant to the Merger Agreement, the Company appointed new Board members, changed the par value of the Preferred Stock, increased the authorized Common Stock and changed its name to ValCom, Inc. ("ValCom"). A Schedule 14C Information Statement was filed with the Securities and Exchange Commission. The Securities and Exchange Commission approved the definitive Schedule 14C Information Statement on February 13, 2001. The Merger was finalized on March 6, 2001. VALCOM'S CORPORATE STRUCTURE ------------------------------ As of September 30, 2003, ValCom, Inc. had three subsidiaries: Valencia Entertainment International, LLC, a California limited liability company; Half Day Video, Inc., a California corporation; and 45% equity interest in ValCom Broadcasting, LLC, a New York limited liability company, which operates KVPS (Channel 8), an independent broadcaster. Unless the context requires otherwise, the term "Company" includes ValCom, Inc., a publicly held Delaware corporation and, its subsidiaries, predecessors and affiliates whose operations or assets have been taken over by ValCom, Inc. 3 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. 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. BUSINESS OVERVIEW ------------------ ValCom's business includes television production for network and syndication programming, motion pictures, and real estate holdings, However, revenue is primarily generated through the lease of the sound stages. ValCom, which owns six acres of real property and a 120,000 square foot production facility in Valencia, California, is currently the studio set for JAG, produced by Paramount Pictures and NCIS produced by Don Belisarious Productions. The Company's sound stages have been operating at full capacity since 1996. ValCom also leases an additional three acres and a 52,000 square foot production facility that includes two full-service sound stages, for a total of eight sound stages. ValCom's past and present clients in addition to Paramount Pictures and Don Belisarious Producitons, include Warner Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network. In addition to leasing its sound stages, ValCom also owns a small library of television content, which is ready for worldwide distribution, and several major television series in advanced stages of development. EXPANSION PLANS ---------------- The Company continuously reviews industry developments and regulations for potential expansion opportunities. As a public company, the Company benefits from operating in highly regulated markets, which levels the competitive playing field. It is imperative that the Company continues to grow its operational revenues. The Company has made a significant investment in assembling its management team and operational infrastructure. This investment cost is now relatively fixed, however, the Company has the potential to significantly leverage its profitability through incremental revenue increases. The Company will therefore continue to employ an aggressive yet methodical growth strategy. It intends to make strategic expansions in markets with: (i) accommodating regulations; (ii) favorable demographics; (iii) successful operations management; and (iv) customer acceptance and patronization. The Company intends to grow through both acquisitions and developments. It uses extensive review procedures to evaluate expansion opportunities, including market studies, legal evaluations, financial analyses and operational reviews. The Company determines development budgets and acquisition prices based on the proposed investment's expected financial performance, competitive market position, risk profile and overall strategic fit within the Company's operational plans. Acquisition terms typically include cash payments, issuance of Company securities and seller-financed notes. Consulting and non-competition agreements with the target companies' principals may also be included. 4 The development of telecommunications, the emergence of new technology and the international nature of the Internet has created opportunities to develop new, efficient and secure ways to deliver entertainment to customers. As one of the companies that plans to employ these new technologies on the Internet, ValCom intends to capitalize on its expertise in the analysis of consumer data and information to become a world leader in online entertainment. HALF DAY VIDEO, INC. ----------------------- On March 8, 2001, the Company executed a definitive agreement for the purchase of 100% of the stock of Half Day Video, Inc. ("Half Day"). Half Day specializes in supporting the entertainment industry with television and film equipment rentals. Half Day's client list includes The Academy Awards, Emmy Awards, NBC, Entertainment Tonight, MTV, Oscar Awards, General Hospital and other major entertainment and production companies. Half Day has approximately $492,000 in assets, not including depreciation, with current revenues of $379,000. Half Day leases its offices and warehouse facility in Valencia, California and will continue to operate and service its clients using its current employees. JOINT VENTURE AGREEMENT WITH NEW GLOBAL COMMUNICATIONS, INC. - VALCOM ------------------------------------------------------------------------------ BROADCASTING, LLC ------------------ In May 2002, the Company entered into a joint venture agreement with New Global Communications, Inc. ("Global") whereby Global agreed to contribute $500,000 to the joint venture in exchange for a 55% equity interest in a new entity known as Valcom Broadcasting, LLC, a New York limited liability company, and the Company would contribute certain fixed assets and manage the operations of the joint venture for a 45% equity interest in Valcom Broadcasting, LLC. The joint venture operates a newly developed low power television broadcast station K08MX-LP in Indio-Palm Springs, California operating on Channel 8. The Company believes that the investment in the joint venture adds to the Company's infrastructure of becoming a full-service television and motion picture company. The amount contributed to the joint venture by Global will be used to purchase the license for the television station from the licensee. The effectiveness of the joint venture agreement was dependent on approval by the Federal Communications Commission (the "FCC"). On September 20, 2002, the FCC approved the transaction. DISPOSAL OF PTL PRODUCTIONS, INC. DBA BRENTWOOD MAGAZINE --------------------------------------------------------------- On August 2, 2002, the Company executed an Agreement and Plan of Reorganization, pursuant to which the Company acquired 100% of the stock of PTL Productions, Inc. dba Brentwood Magazine. Brentwood Magazine, a Southern California entertainment publication, has been setting trends in Southern California from Santa Barbara to San Diego for over seven years, covering entertainment, business, luxurious lifestyles, travel and fashion. The Company anticipated that its acquisition of Brentwood Magazine would help promote and establish the Company as a total entertainment company with several promotional avenues. Effective December 27, 2002, the Company terminated Phillip Troy Linger, the President of PTL Productions, Inc. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization and sell PTL Productions, Inc. back to Mr. Linger. This transaction did not result in any loss to the Company. 5 FILM ENTERTAINMENT OVERVIEW ----------------------------- Competition in the film entertainment business is diverse and fragmented, with scores of companies operating at various levels of product budget and scope. The market is overwhelmingly dominated by the major Hollywood studios, with the top-ranked company, Disney in 1999, usually commanding 15 to 20 percent of the domestic market share in any given year. ValCom plans to succeed by choosing its projects and markets carefully, and selecting segments and geographic areas where it can build proprietary competitive advantages. With the proper positioning and segment focus, the Company believes it can insulate itself from the brunt of competition in the entertainment content business. Since the sector's revenues from foreign markets are growing rapidly, a sound niche strategy should ensure superior profitability. INDEPENDENT PRODUCTION COMPANIES ---------------------------------- Consolidation through acquisition has recently reduced the number of independent production companies in operation. However, barriers to entry remain relatively low, and management anticipates that the market segments in which it intends to compete will remain highly competitive. THE COMPANY'S COMPETITIVE POSITION ------------------------------------- The Company's operations are in competition with all aspects of the entertainment industry, locally, nationally and worldwide. ValCom experiences competition from three market segments: 1) Traditional television, game shows and reality television drama 2) Movies for television and theatrical releases 3) Other entertainment/media companies OTHER ACTIVITIES ----------------- INTERACTIVE TECHNOLOGY ----------------------- The Company has experience in the interactive communications and entertainment fields, which brings together elements of the "Information Superhighway." It has created and broadcast interactive national and international television programs using state-of-the-art computer technology, proprietary software programs, satellite communications, and advanced telecommunications systems. The Company's management believes that its experience in developing and delivering interactive television programs, as well as its ownership of proprietary systems and software, enhance its ability to launch new entertainment and information programs based on comparable resources. Dependence on One or a Few Major Customers ------------------------------------------------- The Company has two customers who accounted for approximately 99% of total real estate rental revenues for the year ended September 30, 2003. As of September 30, 2003, all eight sound and production stages were under non-cancelable operating leases for one year from two major production companies. The Company's subsidiary, Half Day Video, Inc., does not rely on a small group of customers. It may rent production equipment and personnel to any motion picture studio or production company. The Company's television broadcast operations do not rely on a small group of customers; rather, any advertiser who wishes to advertise on Channel 8 in Indio-Palm Springs, California may generate revenues. EMPLOYEES --------- As of September 30, 2003, the Company had 14 full-time employees, including two officers and three professional staff. No employee of the Company is represented by a labor union or is subject to a collective bargaining agreement. 6 ITEM 2. DESCRIPTION OF PROPERTY ----------------------------------- PREMISES The Company's corporate offices are located at 26030 Avenue Hall, Studio #5, Valencia, California. The Company owns six acres and leases three acres of land in Valencia, California. The Company operates eight production sound stages consisting of approximately 170,000 square feet, 120,000 square feet of which are owned and the balance of which are leased. PATENTS, TRADEMARKS, COPYRIGHTS, LICENSES, FRANCHISES, CONCESSIONS, ------------------------------------------------------------------------ ROYALTY AGREEMENTS OR LABOR CONTRACTS, INCLUDING DURATION --------------------------------------------------------------- The Company has no patent rights. It has the following service marks: SATELLITE BINGO: ----------------- International Class 41 (production and distribution of television game shows) granted Registration Number 1,473,709 on January 19, 1988 to Satellite Bingo, Inc. 20 years. "HANGIN WITH THE BOYZ": -------------------------- International Class 25 (Clothing) and 41 (Production and distribution of television game shows) application filed on March 1,2000, Serial NO. 75/932,583, "WHO CAN YOU TRUST?" ----------------------- Mark granted March 9,1999 for 20 years International Class 41(production and distribution of television game shows) serial NO.75/485225, "FUHGETABOWTIT": ---------------- International Class 41 (production and distribution of television game shows) Serial NO. 75/784,763 application filed on August 26, 1999. GLOBALOT BINGO: ---------------- International Class 41 (production and distribution of television game shows) applied for on September 24, 1993, by SBI Communications, Inc. RICO BINGO: ------------ International Class 41 (production and distribution of television game shows) applied for on September 24, 1993, by SBI Communications, Inc. C-NOTE: ------- International Class 41 (production and distribution of television game shows) applied for on September 24, 1993, by SBI Communications, Inc. The Company obtained an assignment to a copyright for "The Works," copyright registrations for Globalot Bingo and derivatives: Number PAU 855-931 (June 10, 1986); Number Pau 847-876 (March 11, 1986); Number PAU 788-031 (September 19, 1985); Number PAU 927-410 (November 4, 1986); Number PA 370-721 (February 9, 1988); Number PA 516-494 (January 17, 1991); Number PA 533-697 (January 17,1991); from Satellite Bingo, Inc. to SBI Communications, Inc., dated September 14, 1993. The Company applied for registration of copyright of "The Final Round-The Gabriel Ruelas Story" on December 2, 2000. The Company obtained an assignment of copyright of "The Life",Txu 744-678 June 12, 1996. The Company obtained a copyright by assignment of "PCH" Pau 2-040-426 September 12, 1995. 7 ITEM 3 - 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. Clay Harrison v. SBI Communications, Inc. and Valcom, Inc. (Los Angeles Superior ---------------------------------------------------------- Court Case No. BC 035014) 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. Euromerica Capital Group v. Valcom, Inc. and Valencia Entertainment --------------------------------------------------------------------------- International. -------------- Euromerica Capital Group filed a lawsuit against ValCom, Inc. and Valencia Entertainment International on August 26, 2002 based on alleged breach of contract. The Plaintiff is seeking monetary damages of $47,556. ValCom filed a cross-complaint for breach of contract, intentional misrepresentation and concealment. ValCom asked for monetary damages in the amount of $45,000 plus punitive damages. Valencia Entertainment subsequently filed bankruptcy under Chapter 11 and the automatic stay has prevented the case from moving forward. It is expected that the case will be settled upon completion of the bankruptcy proceeding. 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------------------- The Company held an annual meeting of stockholders on July 10, 2003. 8 PART II ITEM 5. MARKET FOR COMMONEQUITY AND RELATED STOCKHOLDER MATTERS; PREFERRED STOCK -------------------------------------------------------------------------------- At September 30, 2003, the Company had three series of convertible preferred stock: B, C and D. Series B Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a one for five basis. In the event of any liquidation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series C Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a one for one basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series D Preferred Stock has no voting rights, no dividends and can be converted at any time to common stock on a one for one basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share. With respect to rights on liquidation, Series B, C and D Preferred Stock shall rank senior to the common stock but Series C Preferred Stock shall be senior to both Series B and D Preferred Stock while Series D Preferred Stock shall be junior to both Series B and C Preferred Stock. The Board of Directors has not declared any dividends for any of the series of convertible preferred stock. MARKET FOR COMMON EQUITY --------------------------- The Company's common stock is traded on the NASD Over-the-Counter Electronic Bulletin Board under the symbol of VACM. As of September 30, 2003, the Company had 12,925,833 shares of common stock outstanding, with approximately 4,000,000 in the public float and approximately 3,200 shareholders of record. For the fiscal year ended September 30, 2003, the Company reported revenues of $2,281,879 and a net loss of $2,430,159. The Company's trading symbol on the Frankfurt XETRA is "VAM" and its security code is #940589. No common equity is subject to options or warrants to purchase or securities convertible into common stock, except for the currently issued 2,768,000 shares of preferred stock which are convertible into common stock and 1,733,333 warrants to purchase common stock. In addition to this, Laurus Master Fund (see note 5 below) has an option to convert unpaid principle and interest Into shares. Due to bankruptcy proceedings, they cannot convert any amount of interest and principle into Common Stock. The following table sets forth in United States dollars the high and low bid and ask quotations for the Company's common stock for each quarter within the last two fiscal years. Such bid and ask quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and do not necessarily represent actual transactions. The source of the following information is the NASD Over-the-Counter Electronic Bulletin Board. 9 Common Stock Date Bid Ask ---- --- --- ----- ----- Low High Low High --- ---- --- ---- 2002 ---- First Quarter $ 0.240 $ 1.350 $ 0.250 $ 1.990 Second Quarter $ 0.310 $ 1.350 $ 0.330 $ 1.450 Third Quarter $ 0.690 $ 1.260 $ 0.720 $ 1.350 Fourth Quarter $ 0.310 $ 0.690 $ 0.390 $ 0.750 2003 ---- First Quarter $ 0.200 $ 0.400 $ 0.140 $ 0.390 Second Quarter $ 0.060 $ 0.210 $ 0.050 $ 0.210 Third Quarter $ 0.050 $ 0.100 $ 0.050 $ 0.090 Fourth Quarter $ 0.080 $ 0.510 $ 0.080 $ 0.440 Prices quoted reflect a one share-for-twenty reverse split effective on February 1, 1993, a two share-for-one forward split effective on August 14, 2000 and a one share-for-ten reverse split effective on September 27, 2001. MARKET ------ The Company's securities are currently quoted on the Nation Association of Securities Dealers, Inc.'s NASDAQ Over-the-Counter Bulletin Board: VACM and on the Frankfurt XETRA: "VAM". SECURITY HOLDERS ----------------- As of September 30, 2003, the Company had approximately 3,200 common stock holders. DIVIDENDS --------- There have been no cash dividends declared or paid since the inception of the Company. However, the Board of Directors declared a dividend through the acquisition of assets for stock in Eye Span Entertainment Network, Inc. (ESEN), a newly formed soon to be public company, to be disseminated to ValCom shareholders of record as of December 15, 2003, payable February 28, 2004. Shareholders will receive shares of ESEN as a pro-rata of the amount of ValCom shares being held. Fractional shares will not be disseminated. The amount of shares of the newly formed ESEN to be disseminated will be announced at a later date. DESCRIPTION OF SECURITIES --------------------------- GENERAL ------- The Company is authorized to issue 110,000,000 shares of capital stock, 100,000,000 shares of which are designated as common stock, $0.001 par value per share, and the balance of which are designated as preferred stock, $0.001 par value per share. As of September 30, 2003, 12,925,833 shares of Common Stock were outstanding and held of record by approximately 3,200 persons. In addition, 2,768,000 shares of preferred stock were outstanding, and held by approximately six persons. Continental Stock Transfer & Trust Company, 17 Battery Place; New York, New York 10004, acts as transfer agent and registrar for the Company's common and preferred stock. 10 EQUITY COMPENSATION PLAN -------------------------- The Company has a 2001 Employee Stock Compensation Plan (the "ESCP") to enhance its ability to attract, retain and compensate experienced employees, officers, directors and consultants. The effective date of the ESCP is January 15, 2001. A total of 2,600,000 shares of common stock were registered for issuance under the ESCP on three Form S-8 registration statements filed January 16, 2001, March 26, 2001 and October 19, 2001. Pursuant to the ESCP, the Compensation Committee or the Board of Directors may award registered shares of the Company's common stock to employees, officers, directors or consultants for cash, property, services rendered or other form of payment constituting lawful consideration. Plan shares awarded for other than services rendered shall be sold at not less than fair market value on the date of grant. During the fiscal year ended September 30, 2003, the Company issued an aggregate of 1,033,900 shares of registered common stock to employees, officers, directors and consultants pursuant to the ESCP for services rendered. RECENT SALES OF UNREGISTERED SECURITIES ------------------------------------------- On December 2, 2002, the Company issued 75,000 shares of its common stock to its employees at a price of $.30 per share as a bonus for services rendered. These issuances of shares were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On April 2, 2003, the Company issued 490,000 shares of its common stock to directors, consultants and employees at a price of $.05 per share for services rendered. These issuances of shares were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On August 6, 2002, the Company issued 350,000 shares of its common stock to a director of the Company for a purchase price of $42,000. This issuance of shares was exempt from registration pursuant to Regulation D under the Securities Act of 1933, as amended. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of September 30, 2003, ValCom, Inc. operations were comprised of four divisions: (1) Studio Rental, (2) Studio Equipment and Personnel Rental, (3) Film and Television, (4) Broadcast Television Film. 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. 11 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. 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. RESULTS OF OPERATIONS FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- 2002 ---- Revenues for the year ended September 30, 2003 decreased by $9,929,450 or 81.3% from $12,211,329 for the year ended September 30, 2002 to $2,281,879 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. Production costs for the year ended September 30, 2003 decreased by $7,351,136 or 94.7% from $7,765,360 for the year ended September 30, 2002 to $414,224 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 year ended September 30, 2003 decreased by $143,531 or 87.4% from $164,276 for the year ended September 30, 2002 to $20,745 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 year ended September 30, 2003 decreased by $53,135 or 13.2% from $401,512 for the year ended September 30, 2002 to $348,377 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 year ended September 30, 2003 decreased by $2,067,956 or 48.8% from $4,235,788 for the year ended September 30, 2002 to $2,167,832 for the same period in 2003. The decrease was due principally to decreased personnel costs, outside services, utilities, settlement fees, and goodwill impairment. Consulting and professional fees for the year ended September 30, 2003 decreased by $157,537 or by 20.4% from $768,876 for the year ended September 30, 2002 to $611,339 for the same period in 2003. The decrease in consulting and professional fees was principally due to decreased consulting fees partially offset by an increase in legal and accounting costs. Bad debt expense for the year ended September 30, 2003 decreased by $1,809,122 or 95.5% from $1,889,302 for the year ended September 30, 2002 to $80,180 for the same period in 2003. The decrease in bad debts was primarily due to the write-off of an uncollectible note receivable from a former officer and director of the Company and write-offs associated with various production agreements, all occurring in the 2002 year. 12 The impairment of goodwill represents goodwill associated with the Brentwood Magazines acquisition being fully impaired in the 2002. Interest expense for the year ended September 30, 2003 decreased by $285,597 or 20.4% from $1,397,836 for the year ended September 30, 2002 to $1,112,239 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 for the year ended September 30, 2003 increased by $62,548 from $8,437 for the year ended September 30, 2002 to $70,985 for the same period in 2003. The increase 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 year ended September 30, 2003 were $28,087 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 $2,397,659 from $4,827,818 for the year ended September 30, 2002 to $2,430,159 for the same period in 2003. STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE ----------------------------------------------------------- See Notes To Consolidated Financial Statements in Part F/S for a description of the Company's calculation of earnings per share. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has a net loss of $2,430,159 and a negative cash flow from operations of $300,582 for the year ended September 30, 2003, and a working capital deficiency of $8,962,906 and an accumulated deficit of $10,556,350 at September 30, 2003. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $211,682 on September 30, 2003, compared to $343,374 at September 30, 2002. During the fiscal year 2003, net cash used by operating activities totaled $300,582 compared to $2,005,392 for the year ended September 30, 2002. A significant portion of operating activities included payments for accounting and legal fees, consulting fees, salaries, and rent. Net cash used by financing activities for fiscal year 2003 totaled $16,067 compared to cash provided of $1,917,900 for the year ended September 30, 2002. Net cash provided by investing activities during fiscal year 2003 totaled $184,957 compared to of $10,009 during the year ended September 30, 2002, for proceeds from sales of fixed assets and decreased expenditures for the purchase of equipment. The above cash flow activities yielded a net cash decrease of $131,692 during fiscal year 2003 compared to $77,483 during the year ended September 30, 2002. Net working capital (current assets less current liabilities) was a negative $8,962,906 as of September 30, 2003. During the twelve months ended September 30, 2003, the Company raised $42,000 from private placements of common stock. The Company will need to continue to raise funds through various financings to maintain its operations until such time as cash generated by operations is sufficient to meet its operating and capital requirements. There can be no assurance that the Company will be able to raise such capital on terms acceptable to the Company, if at all. 13 Total shareholders' equity decreased to $2,701,561 in fiscal year 2003. Additional paid in capital increased to $13,242,200 in fiscal year ended September 30, 2003. INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY During the last fiscal year, the Company financed its operations with cash from its operating activities and through sales of equipment and private offerings of its securities to a director of the Company. The Company anticipates that its stock issuances and projected positive cash flow from operations collectively will generate sufficient funds for the Company's operations for the next 12 months. If the Company's existing cash combined with cash from operating activities is not adequate to finance the Company's operations during the next 12 months, the Company will consider one or more of the following options: (1) issuing equity securities in exchange for services, (2) selling additional equity or debt securities or (3) reducing the number of its employees. FUTURE FUNDING REQUIREMENTS The Company's capital requirements have been and will continue to be significant. The Company's adequacy of available funds during the next fiscal year and thereafter will depend on many factors, including whether the Company will be able to: (1) retain its existing tenants (2) rent its production equipment and personnel profitably, (3) develop additional distribution channels for its programming. Assuming funds are available, during the next fiscal year, the Company expects to spend approximately $100,000 for plant and equipment. There can be no assurance that additional private or public financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to the Company. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of the Company's existing common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on the operating flexibility of the Company. The Company's failure to successfully obtain additional future funding may jeopardize its ability to continue its business and operations. ITEM 7. FINANCIAL STATEMENTS AND SUMMARY FINANCIAL DATA -------------------------------------------------------------- FINANCIAL STATEMENTS -------------------- The audited consolidated balance sheet of the Company as of September 30, 2003 and the related consolidated statements of operations, stockholder's equity and cash flows for the years ended September 30, 2003 and 2002 are submitted herewith. CONTENTS OF REPORT Independent Auditors' Reports F-1 Consolidated Balance Sheets F-2/F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders Equity F-5/F-6 Consolidated Statements of Cash Flow F-7 Notes to Consolidated Financial Statements F-8/F-22 14 INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders ValCom Inc, We have audited the accompanying consolidated balance sheet of ValCom Inc,and subsidiaries as of September 30, 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended September 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ValCom Inc,and subsidiaries as of September 30, 2003, and the consolidated results of their operations and cash flows for the years ended September 30, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the years ended September 30, 2003 and 2002, the Company incurred net losses of $2,430,159 and 4,827,818, respectively. In addition, the Company's net cash used in operating activities was $300,582 for the year ended September 30, 2003, and the Company's accumulated deficit was $10,556,350 as of September 30, 2003. In addition, the Company is in default on numerous of its debt obligations. Valencia Entertainment International, LLC, a California limited liability company and a subsidiary of the Company filed on April 7, 2003, 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 10). The main income of the Company is from the operations of Valencia Entertainment International. These factors, among others, as discussed in Note 15 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 15. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KABANI & COMPANY, INC. CERTIFIED PUBLIC ACCOUNTANTS Fountain Valley, California February 5, 2004 F-1 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 ASSETS ------ Current Assets: Cash & Cash equivalents $ 211,682 Accounts receivable, net 71,907 Note receivable, current 52,768 ----------- Total Current Assets 336,357 Property and equipment - net 11,600,303 Deferred Compensation 258,680 Deferred financing costs 153,060 Deposits and other assets 115,538 ------------ Total Assets $ 12,463,938 ============ The accompanying notes are an integral part of these consolidated financial statements. F-2 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) September 30, 2003 ------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Not Subject To Compromise Current liabilities: Accounts payable $ 373,143 Accrued interest 672,577 Accrued expenses 365,858 Due to related parties 34,257 Notes payable 7,853,428 ----------- Total Current Liabilities 9,299,263 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 $ 9,762,377 ----------- 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; 1,480,000 shares issued and outstanding 1,480 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; 12,925,833 shares issued and outstanding 12,926 Additional Paid-in capital 13,242,217 Accumulated deficit (10,556,350) Total Stockholders' Equity 2,701,561 ----------- Total Liabilities and Stockholders' Equity $12,463,938 =========== The accompanying notes are an integral part of these consolidated financial statements. F-3 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended For the Year Ended September 30, 2003 September 30, 2002 Revenue: Rental $1,945,422 $3,426,405 Production 336,457 8,733,278 Other - 51,646 Total Revenue 2,281,879 12,211,329 Cost and Expenses Production 414,224, 765,360 Selling and promotion 20,745 164,276 Depreciation and amortization 348,377 401,512 General and administrative 2,167,832 4,235,788 Consulting and professional fees 611,339 768,876 Bad debts 80,180 1,889,302 Goodwill impairment - 424,634 Total Cost and Expenses 3,642,697 15,649,748 Operating loss (1,360,818) (3,438,419) Other Income (Expense): Interest expense (1,112,239) (1,397,836) Gain on sale of assets 78,750 - Loss on Equity Investment (57,765) - Other income 50,000 8,437 Total Other Income (Expense) (1,041,254) (1,389,399 ) Loss from continuing operations (2,402,072) (4,827,818) Discontinued Operations Operating loss from discontinued operations (108,445) - Net gain on disposal of discontinued operations 80,358 - Net loss $(2,430,159) $(4,827,818) Basic and diluted loss per share from Continuing operations $(0.19) $(0.48) Basic and diluted loss per share from discontinued operations. $0.00 $0.00 Basic and diluted loss per share $(0.19) $(0.48) Weighted average shares outstanding: Basic and diluted 12,100,650 10,152,597 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-4 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002
Common Preferred Series B Preferred Series C ------ ------------------ ------------------ Shares Amount Shares Amount Shares Amount Balance, December 31, 2001. . . 8,909,401 $ 8,909 38,000 $ 38 1,500,000 $ 1,500 Shares issued for services. . . . 440,284 440 - - - - Shares issued for debt retirement 552,748 553 - - - - Shares issued to employees as additional compensation . . . 759,500 760 - - - - Stock issued for payment of fees and penalties. . . . . . . 350,000 350 - - - - Series D preferred stock issued for cash, net - - Warrants issued with Series D preferred stock - - Warrants issued with convertible notes - - Warrants issued to placement agent - - Issuance of common stock warrants and options - - Cancellation of series C Preferred Stock @ par. . . . . . . - - - - (100,000) (100) Preferred stock to be issued in connection with the acquisition of Brentwood Magazine Treasury Stock, 35,000 Net Loss for the year ended 9/30/02 ---------- ----- ------ -- --------- ----- BALANCE SEPTEMBER 30, 2002. . . . . . . . . . . . . . . .11,011,933 11,012 38,000 38 1,400,000 1,400 Shares issued for services. . . . . . . . . . . . . . . . . 975,000 975 - - - - Shares issued for debt retirement . . . . . . . . . . . . . .26,400 26 - - - - Shares issued to employees as compensation. . . . . . . . . 597,500 598 - - - - Preferred stock to be issued. . . . . . . . . . . . . . . . - - 380,000 380 Private placement issuances . . . . . . . . . . . . . . . . 350,000 350 - - - - Reclass funds received for stock issuance . . . . . . . . . . . . - - - - - - Treasury Stock Cancellation 35,000 shares . . . . . . . . .(35,000) (35) - - - - Cancellation of series C Preferred Stock @ par. . . . . . . . . . - - - - (300,000) (300) Net Loss for the year ended 9/30/03. . . . . . . . . . . . . - - - - - - ---------- ------ ------ -- --------- ----- Balance at September 30, 2003 . . . . . . . . . . . . . .12,925,833 12,926 38,000 38 1,480,000 1,480 ========== ====== ====== == ========= =====
The accompanying notes are an integral part of these consolidated financial statements. F-5 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002
Preferred Series D Preferred Stock to be Issued Shares Amount Shares Amount Balance, December 31, 2001 - $- - $- --------- -------- -------- ---------- Shares issued for services. . . . . - - - - Shares issued for debt retirement . .- - - - Shares issued to employees as additional compensation . . . . . . - - - - Stock issued for payment of fees and penalties. . - - - 255,650 Series D preferred stock issued for cash, net . .1,250,000 1,250 - - Warrants issued with Series D preferred stock . . . . Warrants issued with convertible notes. . . . . . . . - - - - Warrants issued to placement agent. . . . . . . . . . - - - - Issuance of common stock warrants and options . . . . - - - - Cancellation of series C Preferred Stock @ par. . . . - - - - Preferred stock to be issued in connection with the acquisition of Brentwood Magazine - - 380,000 239,400 Treasury Stock, 35,000. . . . . . . . . . . . . . . . - - - - Net Loss for the year ended 9/30/02 . . . . . . . . . - - - - --------- ----- ------- ------- BALANCE SEPTEMBER 30, 2002. . . . . . . . . . . . .1,250,000 1,250 380,000 239,400 Shares issued for services. . . . . . . . . . . . . . - - - - Shares issued for debt retirement . . . . . . . . . . - - - - Shares issued to employees as compensation. . . . . . - - 53,877 - Preferred stock to be issued. . . . . . . . . . . . . - - (380,000) (239,400) Private placement issuances . . . . . . . . . . . . . - - - - Reclass funds received for stock issuance . . . . . . - - - - Treasury Stock Cancellation 35,000 shares . . . . . . - - - - Cancellation of series C Preferred Stock @ par. . . . - - - - Net Loss for the year ended 9/30/03. . . . . . . - - --------- ----- ------- ------- Balance at 9/30/03. . . . . . . . . . . . . . . . .1,250,000 1,250 - - ========= ===== ======= ======= Additional Paid-In Treasury Accumulated Capital Stock Deficit Total Balance, December 31, 2001 $9,512,699 $- $(3,298,372) $6,224,774 Shares issued for services. . . . . . . . . . . . . 430,843 - - 431,283 Shares issued for debt retirement . . . . . . . . . 144,959 - - 145,512 Shares issued to employees as additional compensation . . . . . . . . . . . . . . .718,846 - - 719,606 Stock issued for payment of fees and penalties. . . .255,650 .- - 256,000 Series D preferred stock issued for cash, net . . . .468,797 - - 470,047 Warrants issued with Series D preferred stock 441,203 441,203 Warrants issued with convertible notes. . . . . . . . 77,300 - - 77,300 Warrants issued to placement agent. . . . . . . . . . 60,995 - - 60,995 Issuance of common stock warrants and options . . . .676,199 - - 676,199 Cancellation of series C Preferred Stock @ par. . . . . 100 - - Preferred stock to be issued in connection with the acquisition of Brentwood Magazine - - 239,400 Treasury Stock, 35,000. . . . . . . . . . . . . . . - (23,522) - (23,522) Net Loss for the year ended 9/30/02 . . . . . . . . . . - - (4,827,818) (4,827,818) ---------- ------- --------- --------- BALANCE SEPTEMBER 30, 2002. . . . . . . . . . . . 12,787,591 (23,522) (8,126,190) 4,890,979 Shares issued for services. . . . . . . . . . . . . 139,401 - - 140,376 Shares issued for debt retirement . . . . . . . . . . .3,844 - - 3,870 Shares issued to employees as compensation. . . . . . 53,877 - 54,475 Preferred stock to be issued. . . . . . . . . . . . .239,020 - - Private placement issuances . . . . . . . . . . . . . 41,650 - - 42,000 Reclass funds received for stock issuance . . . . . . . . 20 - - 20 Treasury Stock Cancellation 35,000 shares . . . . . .(23,487) 23,522 - Cancellation of series C Preferred Stock @ par. . . . . .300 - Net Loss for the year ended 9/30/03. . . . . . . . . - - (2,430,159) (2,430,159) ---------- ------- ----------- --------- Balance at 9/30/03. . . . . . . . . . . . . . . 13,242,216 - (10,556,349) 2,701,561 ========== ======= =========== =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended For the Year Ended September 30, 2003 September 30, 2002 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(2,430,159) $(4,827,818) Adjustments to reconcile net loss to net cash operating activities: Depreciation and amortization 348,377 401,512 Bad debt expense 80,180 1,889,302 Goodwill impairment - 424,634 Gain on sale of fixed assets (78,750) - Discount on note receivable - 16,875 Warrants and options issued for compensation 42,000 271,651 Warrants issued to placement agent - 42,245 Stock issued for payment of fees and penalties - 256,000 Stock issued for compensation - 719,606 Stock issued for services 140,376 431,283 Changes in operating assets and liabilities: Receivables 339,180 (295,878) Other receivables (281,471) - Prepaid development costs - (40,233) Related party receivables - (65,000) Deferred Compensation 145,868 - Deposits (76,125) (7,063) Accounts payable and accrued expenses 1,133,996 (175,381) Production advances - 765,656 Net Cash Used In Operating Activities (300,582) (2,005,392) -------------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures. . . . . . . . . . . . . . . . . . . . . - (111,658) Notes receivable payments . . . . . . . . . 83,690 121,667 Proceeds from sale of fixed assets 101,267 - Net Cash Provided By Investing Activities . . . . . . 184,957 10,009 -------------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of convertible debt. . . . . . . . . - 2,000,000 Loan costs on new debt . . . . . . . . . . . . . . - (221,999) Principal repayment of notes . . . . . . . . . . . . . . . ..(184,395) (757,214) Principal borrowings on notes 259,963 - Due to related parties . . . . . . . . . . (91,635) (9,365) Treasury stock. . . . . . . . . . . . . . . . . . - (23,522) Issuance of preferred stock and warrants. . . . - 930,000 Net Cash Provided By (Used In) Financing Activities . . . . (16,067) 1,917,900 -------------------- --------------- NET DECREASE CASH AND CASH EQUIVALENTS. . . . . . . . . . . .(131,692) (77,483) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . .343,374 420,857 CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . $211,682 $343,374 ============ ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ================================================= Interest paid. . . . . . . . . . . . . . $489,029 $1,371,810 Income taxes paid. . . . . . . . . . . . - $ 800 ----------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: ------------------------------------------------------------------------------ During the year ended September 30, 2003, the Company issued 26,400 shares of common stock to convert $3,870 of principal and interest on convertible debentures (See Note 5). During the year ended September 30, 2003, the Company cancelled 300,000 shares of Series C Preferred Stock for no consideration. F-8 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 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. On April 7, 2003, the Company filed on an emergency basis a voluntary Chapter 11 bankruptcy petition. The case is pending in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division The Company requires the use of its secured creditor''s cash collateral to operate. Throughout the pendency of this case, the Company has worked with its two real estate secured lenders, Finance Unlimited, LLC and Laurus Master Fund, Limited on the details of cash collateral stipulation. An order approving a global interim cash collateral stipulation with Finance Unlimited and Laurus was entered on August 26, 2003. This stipulation permitted the Company's use of the lenders'' cash collateral through December 31, 2003. On January 15, 2004, the Court approved two additional cash collateral stipulations, one each with Finance Unlimited and Laurus, authorizing the Company's continued use of cash collateral through March 31, 2004 (Second Interim Stipulation). The Second Interim Stipulation generally grant Finance Unlimited and Laurus relief from the automatic bankruptcy stay effective March 31, 2004, and the right to hold foreclosures sales on their real and personal property collateral as early as April 1, 2004. 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. 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. 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. F-9 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 PRINCIPLES OF CONSOLIDATION ----------------------------- The consolidated financial statements include the accounts of ValCom, Inc. and two wholly-owned subsidiaries, VEI, which was acquired effective February 2001, and Half Day Video, Inc., which was acquired effective March 2001. 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 financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATIONS AND CREDIT RISK --------------------------------- The Company has two customers who accounted for approximately 99% of total rental revenues for the year ended September 30, 2003. As of September 30, 2003, all eight sound and production stages were under non-cancelable operating leases for one year from two major production companies. 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 --------------------------------------- Statement of financial accounting standard No. 107, Disclosures about fair value of financial instruments, requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value. DEPRECIATION AND AMORTIZATION ------------------------------- For financial and reporting purposes, the Company follows the policy of providing depreciation and amortization on the straight-line method over the estimated useful lives of the assets, which are as follows: Building 39 years Building Improvements 39 years Production Equipment 5 years Office Furniture and Equipment 5 to 7 years Leasehold Improvements 5 years Autos and Trucks 5 years DEFERRED LOAN COSTS --------------------- Deferred loan costs represent ancillary costs incurred to obtain loans. These are being amortized on the straight-line method over the term of the related loan. F-10 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 INCOME TAXES ------------- Deferred income tax assets or liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. STOCK-BASED COMPENSATION ------------------------- The Company accounts for its stock-based employee compensation plans using the intrinsic value based method, under which compensation cost is measured as the excess of the stock's market price at the grant date over the amount an employee must pay to acquire the stock. Expenses related to stock options and warrants issued to non-employees are accounted for using the fair value based method, under which the fair value of the security is measured at the date of grant based on the Black-Scholes pricing model. IMPAIRMENT OF LONG-LIVED ASSETS ---------------------------------- Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and 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 for a Disposal of a Segment of a Business." The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of September 30, 2003, there were no significant impairments of its long-lived assets. REVENUE RECOGNITION -------------------- Revenues from studio and equipment rentals are recognized ratably over the contract terms. Revenues from the production and licensing of television programming are recognized when the films or series are available for telecast and certain contractual terms of the related production and licensing agreements have been met. Advertising revenues are recognized in the period during which the advertising is published in the Company's magazine, Brentwood Magazine. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions (dba Brentwood Magazine) and sell PTL Productions, Inc. (dba Brentwood Magazine) back to the seller. EQUITY INVESTMENT ------------------ The Company accounts for its investments in companies over which the Company has significant influence or ownership of more than 20% but less than or equal to 50% under the equity method. The Company's 45% investment in a recently acquired television station has been accounted for as an investment under the equity method (See Note 15) F-11 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 TREASURY STOCK --------------- Treasury stock is accounted for by the cost method. Issuance of treasury shares is accounted for on a first-in, first-out basis. Differences between the cost of treasury shares and the re-issuance proceeds are charged to additional paid-in capital, if reissued. During July 2002, the Company purchased 35,000 shares of its common stock at a total cost of $23,522. No shares have been reissued as of September 30, 2003. In September 2003, the Company retired these shares back into the treasury. LOSS PER COMMON SHARE ------------------------ Basic loss per common share is based on net loss divided by the weighted average number of common shares outstanding. Common stock equivalents were not included in the calculation of diluted loss per share as their effect would be anti-dilutive. RECLASSIFICATIONS ----------------- Certain amounts from prior periods have been reclassified to conform to the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS ------------------------------- The Financial Accounting Standards Board has recently issued several new Statements of Financial Accounting Standards ("SFAS"). Statement No. 141, "Business Combinations" supersedes Accounting Principles Board ("APB") Opinion No. 16 and various related pronouncements. Pursuant to the new guidance in Statement No. 141, all business combinations must be accounted for under the purchase method of accounting; the pooling-of-interests method is no longer permitted. SFAS 141 also establishes new rules concerning the recognition of goodwill and other intangible assets arising in a purchase business combination and requires disclosure of more information concerning a business combination in the period in which it is completed. This statement is generally effective for business combinations initiated on or after July 1, 2001. Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion 17 and related interpretations. Statement No. 142 establishes new rules on accounting for the acquisition of intangible assets acquired in a business combination and the manner in which goodwill and all other intangibles should be accounted for subsequent to their initial recognition in a business combination accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should be recorded at fair value. Intangible assets with finite useful lives should be amortized over such period and those with indefinite lives should not be amortized. All intangible assets being amortized as well as those that are not, are both subject to review for potential impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that goodwill arising in a business combination should not be amortized but is subject to impairment testing at the reporting unit level to which the goodwill was assigned at the date of the business combination. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. 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. F-12 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 The adoption of above pronouncements, did not materially impact the Company's financial position or results of operations. 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 earnings or financial position of the Company. 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 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 adoption of SFAS 146 does not have a material effect on the earnings or financial position of the Company. 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 did not have a material effect on the earnings or financial position of the Company. 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 this pronouncement does not have a material effect on the earnings or financial position of the Company. F-13 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 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 Company does not expect the adoption of SFAS No. 148 would have a material impact on its financial position or results of operations or cash flows. On April 30, 2003, the FASB issued FASB Statement No. 149 ("SFAS 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 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 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. SFAS 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 2003, the FASB issued FASB Statement No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 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, SFAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS 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) SFAS 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The guidance in SFAS 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 SFAS 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. In December 2003, the Financial Accounting Standards Board (FASB) issued a revised Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R addresses consolidation by business enterprises of variable interest entities and significantly changes the consolidation application of consolidation policies to variable interest entities and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities. The Company does not hold any variable interest entities. F-14 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 NOTE 2 PROPERTY AND EQUIPMENT --------------------------------- Property and equipment consists of the following at:
September 30, 2003 ------------ Land . . . . . . . . . . . . . $ 7,392,292 Building . . . . . . . . . . . 4,028,785 Building Improvements. . . . . 1,154,406 Production Equipment . . . . . 512,648 Leasehold Improvements . . . . 62,677 Autos and Trucks . . . . . . . 66,656 Office Furniture and Equipment 79,892 ------------ 13,297,356 Less: accumulated depreciation (1,697,053) Net book value . . . . . . . . $11,600,303 ===========
NOTE 3 NOTE RECEIVABLE ------------------------- In September 2001, the Company sold production equipment to an unrelated third party under an asset purchase agreement for $350,000. Under the terms of the agreement, $150,000 was to be paid at signing and the remaining $200,000 was to be paid in 24 monthly installments of $8,333. The $150,000 was paid to the Company, however, none of the $8,333 monthly payments were made. In July 2002, the Company restructured the note to forgive $40,000 of the note and extend the maturity date one year, thereby reducing the monthly payments to $6,667. In connection with the sale, the Company recorded a loss of $25,312, which is included in general and administrative expenses for the fiscal year ended September 30, 2002. Additionally, the Company recorded a $40,000 loss on the restructuring of the note which is also included in general and administrative expenses. The note is non-interest bearing. The Company recorded a discount on the note amounting to $25,312 and the discount is accreted to interest income over the term of the note. In connection with the discount, the Company recorded interest income of $9,648 for the fiscal year ended September 30, 2003. As of September 30, 2003, the balance due on the note is $60,000. The third party is current with the $6,667 monthly payments on the note. The note is secured by the equipment sold. In January 2003, the Company received $40,000 of the equipment back from the seller. F-15 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002
NOTE 4 NOTES PAYABLE ------------------------- September 30, 2003 ------------ Promissory note payable to Finance Unlimited, formerly known as Hawthorne Savings (formerly known as First Fidelity), monthly installments of principal and interest of $54,648. Interest is variable based on a 6-month US T-Bill rate. The note is secured by a Deed of Trust on the Valencia Studio property and matures June 2004. According to the agreement, as a result of default in installment, the whole note becomes current. The company defaulted in payments of the note in 2002, as a result of which the note is classified as a current liability. $ 5,858,378 Convertible promissory note, net of discount of $25,764 at September 30, 2003. See Note 7 for further description. 1,805,706 Promissory note payable to City National Bank, interest at 11.25%, maturing February 28, 2006. The note is collateralized by production equipment. 106,587 Other, 8.00% - 11.00% interest, maturing from 2003 to 2006 82,757 ---------- Total 7,853,428 Less current maturities (7,801,551) ---------- Long-term notes payable $ 51,877 ===========
F-16 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 Future maturities on the notes are as follows:
Year ending September 30 2004 $7,801,551 2005 25,938 2006 25,939 ---------- $7,853,428 ==========
NOTE 5 CONVERTIBLE NOTES PAYABLE ------------------------------------ On June 6, 2001 and September 7, 2001, the Company borrowed $750,000 and $250,000, respectively, from the Laurus Master Fund, Ltd. The borrowings were evidenced by convertible promissory notes due June 7, 2003 and September 7, 2003, respectively. Interest at 8% per annum was payable quarterly. Any or all principal or interest was convertible into common stock of the Company at 80% of the average of the lowest closing stock prices during the preceding 60 trading days. The convertible notes were also issued with detachable warrants to purchase up to 72,737 shares of common stock of the Company at the lesser of $.548 per share or 120% of the average three lowest closing stock prices during the immediately preceding 10 trading days prior to exercise of the warrants. A discount of $375,000 was recognized on the beneficial conversion features of this debt and the detachable warrants. On May 24, 2002, the Company repaid the remaining $1,089,616 convertible note due to the Laurus Master Fund, Ltd. In connection with the payoff of the note, the Company expensed $109,000 in unamortized prepaid loan fees, $245,000 of unamortized discounts and $295,000 of interest expense. In May and June 2002, the Company issued to the Laurus Master Fund, Ltd. 12 % convertible notes in the aggregate principal amount of $2,000,000. The notes mature on May 24, 2004, are convertible into the Company's common stock at a fixed conversion price of $.95 per share and are payable monthly over 22 months. The interest rate escalates to 13% for the months seventh to eighteen, after which it is 14% till maturity. In addition, in connection with the issuance of the convertible notes, the Company issued warrants to purchase 300,000 shares of common stock at an exercise price of $1.20 exercisable until May 24, 2007. The convertible notes are secured by a second mortgage on the Company's properties. The fair value assigned to the warrants amounted to $77,300 and was determined using the Black-Scholes pricing model. Such amount is included in additional paid-in-capital at September 30, 2002. The convertible note is presented in the accompanying consolidated balance sheet at September 30, 2003 net of a discount of $25,764. During the year ended September 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 year ended September 30, 2003 totaled $3,870, which was computed based upon terms stipulated in the applicable convertible notes. During the year ended September 30, 2002, the Company issued 552,748 shares of common stock to the holders of its convertible notes payable for payment of principal and accrued interest. Principal and accrued interest converted during the year ended September 30, 2002 totaled approximately $145,512, which was computed based upon terms stipulated in the applicable convertible notes. In connection with the repayment of the June 6, 2001 and September 7, 2001 convertible notes and the issuance of the May and June 2002 convertible notes, the Company issued 350,000 restricted shares of its common stock to Laurus Master Fund, Ltd. for payment of late fees and penalties. The total amount of the late fees and penalties paid with common stock amounted to approximately $256,000, which was computed based upon the market prices of the common stock on the applicable conversion dates and is included in general and administrative expenses in the accompanying consolidated statement of operations for the year ended September 30, 2002. F-17 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 NOTE 6 INCOME TAXES ---------------------- No provision for Federal and state income taxes has been recorded as the Company has incurred net operating losses through September 30, 2003. At September 30, 2003, the Company had approximately $10,201,055 of net operating loss carryforwards for Federal income tax reporting purposes available to offset future taxable income. Such carryforwards expire beginning in 2003. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses and capital losses carried forward may be impaired or limited in certain circumstances. Events, which may cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Deferred tax assets at September 30, 2003 and 2002 consist primarily of the tax effect of net operating loss carryforwards, which amounted to approximately $2,813,027 and $1,844,079, respectively. Other deferred tax assets and liabilities are not significant. The Company has provided a full valuation allowance on the deferred tax assets at September 30, 2003 and 2002 to reduce such deferred income tax assets to zero, as it is management's belief that realization of such amounts is not considered more likely than not. The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations: September 30, 2003 -------------------- Tax expense (credit) at statutory rate-federal (34)% State tax expense net of federal tax (6) Changes in valuation allowance 40 Tax expense at actual rate - The components of the net deferred tax asset are summarized below: September 30, 2003 -------------------- Deferred tax asset Net operating losses $ 2,813,027 Less: valuation allowance ( 2,813,027) ------------- $ - =================== NOTE 7 RELATED PARTY TRANSACTIONS ------------------------------------- At September 30, 2003, related party payables represent $39,220 due to the President and $120,000 due to a director and shareholder of the Company, resulting from a loan. NOTE 8 COMMITMENTS -------------------- In May 2000, the Company leased additional facilities adjacent to its location in Valencia. The lease has a term of five years. Initial monthly base rent was $29,000 with annual increases until 2004 when base rent will be $34,585. Rent expense for the year ended September 30, 2003 and 2002 were $430,989 and $470,354, respectively. F-18 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 NOTE 9 SEGMENT INFORMATION ------------------------------ The Company classifies its business interests into three fundamental areas: Studio Rental, consisting principally of sound and production stage rentals to production companies, Studio Equipment Rental, consisting principally of personnel, camera and other production equipment rentals to various production companies on a short-term or long-term basis, and Film and TV Productions, consisting principally of television productions for the broadcast networks, cable networks or first-run television syndication.
Studio Rental Studio Equip Rental Film & TV Production Total --------------- --------------------- --------------------- ------------ For the year ended September 30, 2003 -------------------------------------- Revenues $1,902,621 $379,258 $- $2,281,879 Operating (Loss) Income (1,323,245) (37,573) - (1,360,818) Total Assets 12,013,289 191,969 - 12,205,258 Depreciation and Amortization 298,896 49,391 - 348,377 For the year ended September 30, 2002 -------------------------------------- Revenues . . . . . . . . . . . . . $ 3,426,405 $ 1,314,797 $ 7,470,127 $12,211,329 Operating Income (Loss). . . . . . . . (3,511,871) (54,776) 128,228 (3,438,419) Total Assets . . . . . . . . . . . . . 13,197,107 212,918 129,292 13,539,317 Depreciation and Amortization. . . . . 352,805 48,707 - 401,512
The Studio Rental segment above includes the operating activities of the -------------------------------------------------------------------------------- corporate division. -------------------- NOTE 10 LITIGATION -------------------- On April 7, 2003, the Company filed on an emergency basis a voluntary Chapter 11 bankruptcy petition. The case is pending in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division, as Case No. SV 03-12998-GM. As of December 31, 2003, the company was in compliance of all its duties under the Bankruptcy Code and all applicable guidelines of the Office of the United States Trustee. The Company requires the use of its secured creditor's cash collateral to operate. Throughout the pendency of this case, the Company has worked with its two real estate secured lenders, Finance Unlimited, LLC and Laurus Master Fund, Limited on the details of cash collateral stipulation. An order approving a global interim cash collateral stipulation with Finance Unlimited and Laurus was entered on August 26, 2003. This stipulation permitted the Company's use of the lenders'' cash collateral through December 31, 2003. On January 15, 2004, the Court approved two additional cash collateral stipulations, one each with Finance Unlimited and Laurus, authorizing the Company's continued use of cash collateral through March 31, 2004 (Second Interim Stipulation). The Second Interim Stipulation generally grant Finance Unlimited and Laurus relief from the automatic bankruptcy stay effective March 31, 2004, and the right to hold foreclosures sales on their real and personal property collateral as early as April 1, 2004. On June 26, 2003, the Company filed within its bankruptcy case an adversary complaint against six creditors for injunctive relief and to extend the protections of the automatic stay arising under section 362 of Bankruptcy Code. Through this action, the Company seeks to bar temporarily the defendant creditors from attempting to collect on their allowed claims from the Company's key personnel. F-19 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 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. Clay Harrison v. SBI Communications, Inc. and Valcom, Inc. (Los Angeles Superior ---------------------------------------------------------- Court Case No. BC 035014) 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. Euromerica Capital Group v. Valcom, Inc. and Valencia Entertainment --------------------------------------------------------------------------- International. -------------- Euromerica Capital Group filed a lawsuit against ValCom, Inc. and Valencia Entertainment International on August 26, 2002 based on alleged breach of contract. The Plaintiff is seeking monetary damages of $47,556. ValCom filed a cross-complaint for breach of contract, intentional misrepresentation and concealment. ValCom asked for monetary damages in the amount of $45,000 plus punitive damages. Valencia Entertainment subsequently filed bankruptcy under Chapter 11 and the automatic stay has prevented the case from moving forward. It is expected that the case will be settled upon completion of the bankruptcy proceeding. 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 11 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. F-20 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 With respect to rights on liquidation, Series B, C and D Preferred Stock shall rank senior to the common stock but Series C Preferred Stock shall be senior to both Series B and D Preferred Stock while Series D Preferred Stock shall be junior to both Series B and C Preferred Stock. No dividends have been declared by the Board of Directors for any of the Series of convertible Preferred Stock for the fiscal year ended September 30, 2002. On June 6, 2002, the Company received $930,000, net for the issuance of 1,250,000 shares of Series D Convertible Preferred Stock to an accredited investor. In connection with the transaction, the Company also issued warrants to the preferred stockholder to purchase an aggregate of 1,300,000 shares of the Company's common stock at an exercise price of $.80 per share, expiring on June 18, 2007. The Company allocated the net proceeds received from the sale of the preferred stock to the warrants using the Black-Scholes pricing model. The allocation of the net proceeds to the warrants amounted to $466,908 and is included in additional paid-in capital in the accompanying condensed consolidated balance sheet at September 30, 2002. Also in connection with the sale of the Series D Convertible Preferred Stock, the Company incurred a 7% placement agent fee and also issued the placement agents 125,000 "VACM Units", each unit comprised of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.80 per share. The Company recorded the $70,000 placement agent fee as a reduction of the proceeds received, thereby reducing additional paid-in capital by $70,000 at September 30, 2002. Each VACM Unit is exercisable at $.80 per unit and the unit and the underlying warrant expire June 18, 2007. The Company valued the VACM Unit by apportioning value to the underlying warrant and common stock using the Black-Scholes pricing model, and by measuring the intrinsic value of the common stock. The value of the 125,000 VACM Units amounted to $60,745 and was recorded as an increase in additional paid-in capital at September 30, 2002. In connection with the Series D Preferred Stock financing, the Company has also issued 2,800,000 shares of its common stock to be held in escrow based upon the terms of the financing agreement. The financing agreement requires the Company to hold in escrow 1,250,000 shares of common stock as a deposit in anticipation of the preferred stockholder's conversion of 1,250,000 shares of Series D Preferred Stock, an additional 1,300,000 shares of common stock as a deposit in anticipation of the preferred stockholder's exercise of warrants to purchase 1,300,000 shares of common stock, and an additional 250,000 shares of common stock as a deposit in anticipation of the placement agents' exercise of its VACM Units. As discussed above, the Series D Preferred Stock can be converted at any time to common stock on a 1 for 1 basis. At September 30, 2002, none of the 2,800,000 common shares have been released from escrow and are not considered outstanding for purposes of computing weighted average shares outstanding. (B) COMMON STOCK ------------------ During the fiscal year ended September 30, 2003, the Company issued 1,572,500 shares of common stock in lieu of compensation for consulting and professional services performed. The value of the consulting and professional services performed totaled approximately $194,851, which was computed based upon the market prices of the common stock on the applicable payment dates. F-21 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 During the fiscal year ended September 30, 2002, the Company issued 440,284 shares of common stock in lieu of compensation for consulting and professional services performed. The value of the consulting and professional services performed totaled approximately $431,283, which was computed based upon the market prices of the common stock on the applicable payment dates. See Note 5 for common stock issued for debt repayment. (C) WARRANTS ------------- During the fiscal year ended September 30, 2003, the Company issued warrants to purchase 2,083,334 shares of the Company's common stock to a director in connection with services provided and to be provided to the company. The weighted average exercise price for the warrants issued was $0.12, and all of the warrants begin to expire in September 2005. The director has exercised 350,000 warrants up to September 30, 2003. During the fiscal year ended September 30, 2002, the Company issued warrants to purchase 2,075,000 shares of the Company's common stock to certain individuals and companies in connection with the issuance of Series D Preferred Stock (see Note 13(A)) and consulting agreements. The weighted average exercise price for the warrants issued was $0.75, and all of the warrants begin to expire in fiscal year 2007. There were no warrants outstanding prior to fiscal year 2002. Additionally, the Company recorded consulting expense of $271,651 in connection with warrants issued to consultants. These warrants were valued using the Black Scholes pricing model. The Company also recorded $324,724 of deferred compensation in connection with the consulting agreements in the accompanying consolidated balance sheet at September 30, 2002. NOTE 12 EMPLOYEESTOCK COMPENSATION PLAN AND NON-QUALIFIED STOCK OPTIONS ------------------------------------------------------------------------------- The Company has a 2001 Employee Stock Compensation Plan (the "ESCP") to enhance its ability to attract, retain and compensate experienced employees, officers, directors and consultants. The effective date of the ESCP is January 2001. A total of 2,600,000 shares of common stock were registered for issuance under the ESCP on three Form S-8 registration statements filed January 16, 2001, March 26, 2001 and October 19, 2001. Pursuant to the ESCP, the Compensation Committee or Board of Directors may award registered shares of the Company's common stock to employees, officers, directors or consultants for cash, property, services rendered or other form of payment constituting lawful consideration. Plan shares awarded for other than services rendered shall be sold at not less than the fair market value on the date of grant. During the fiscal year ended September 30, 2003, the Company issued an aggregate of 1,033,900 shares of registered common stock to employees, officers, directors and consultants pursuant to the ESCP. The expense recorded during fiscal year 2003 under the ESCP amounted to $151,722 and was based on the closing trading price of the Company's common stock on the date granted. NOTE 13 JOINT VENTURE ------------------------ In May 2002, the Company entered into a joint venture agreement with New Global Communications, Inc. ("Global") whereby Global would contribute $500,000 to the joint venture in exchange for a 55% interest and the Company would contribute certain fixed assets and manage the operations of the joint venture for a 45% interest. The newly formed joint venture is Valcom Broadcasting, LLC. The net book value of the fixed assets contributed are insignificant and are maintained on the Company's premises. The joint venture operated a newly developed low power television broadcast station K08MX-LP in Indio-Palm Springs, California operating on Channel 8. The Company believes that the investment in the joint venture adds to the Company's infrastructure of becoming a full service television and motion picture company. The amount contributed to the joint venture by Global will be used to purchase the license for the television station from the licensee. The effectiveness of the joint venture agreement was dependent on the approval by the Federal Communications Commission ("FCC"). On September 20, 2002, the FCC approved the transaction. As of September 30, 2002, Global contributed $400,000 to the joint venture. NOTE 14 SUBSEQUENT EVENTS ---------------------------- Subsequent to September 30,2003, the Company issued 1,410,333 shares of common stock at prices ranging from $0.12 to $0.25 amounting to $1,202,000 through private placements. In addition to this the Company also issued 200,000 shares for $0.47 per share against services rendered and 50,000 shares for $0.25 per share as per the terms of the employment agreements. NOTE 15 GOING CONCERN ------------------------ The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a net loss of $2,430,159 and a negative cash flow from operations of $300,582 for the year ended September 30, 2003, and a working capital deficiency of $8,962,906 and an accumulated deficit of $10,556,350 at September 30, 2003. The Company had a net loss of $4,827,818 and a negative cash flow from operations of 2,005,392 for the year ended September 30, 2002. Valencia Entertainment International, LLC, a California limited liability company and the Registrant's subsidiary filed on April 7, 2003, 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). The main income of the Registrant is from the operations of Valencia Entertainment International. These conditions raise doubt about the Company's ability to continue as a going concern. F-22 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Jay J. Shapiro, C.P.A., P.C., the Company's former auditor, resigned effective April 23, 2002. Mr. Shapiro's reports on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were his reports modified as to uncertainty, audit scope or accounting principles. The Company had no disagreements with Mr. Shapiro. This Company previously disclosed this information in its Form 8-K filed with the Securities and Exchange Commission on April 24, 2002, its Amendment to Form 8-K filed on May 6, 2002 and its Amendment to Form 8-K filed on May 10, 2002. Subsequently , the Board of Directors authorized the engagement of Kabani & Co, Inc. located at 8700 Warmer Ave/ #280 Fountain Valley, CA 92708, as the new principal auditors for the Company and all of its subsidiaries effective May 23, 2003.. PART III -------- ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ---------------------------------------------------------------------------- DIRECTORS AND EXECUTIVE OFFICERS ----------------------------------- The following table sets forth the names and ages of the Company's directors and executive officers, the positions with the Company held by each, and the period during which each such person has held such position. Name Age Position Since ---- --- -------- ----- Vince Vellardita 46 CEO/President/Chairman of the Board 2000 Don Magier 37 Secretary/Treasurer/Director 2002 Krishna Swamy Alladi 57 Director 2003 Richard Shintaku 54 Director 2003 All directors hold office until the next annual meeting of stockholders of the Company and until their successors are elected and qualified. Officers hold office until the first meeting of directors following the annual meeting of stockholders and until their successors are elected and qualified, subject to earlier removal by the Board of Directors. BIOGRAPHIES OF THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS -------------------------------------------------------------------- Vince Vellardita - 46 Chairman of the Board, Chief Executive Officer and President Vince Vellardita has served as the Company's President, Chief Executive Officer and Chairman of the Board since October 2000. Mr. Vellardita was instrumental in having Valencia Entertainment International, LLC acquire a 180,000 square foot production facility in Valencia, California that houses eight film and production 37 sound stages that have been occupied for the past four years by the hit CBS series JAG and Fox's Power Rangers. Mr. Vellardita began his career in 1977 as a music producer and promoter of live shows and is credited with bringing Duran/Duran and U2 to North America for their first US tours. He also produced a benefit tour for the 1980 Presidential campaign of John Anderson. Mr. Vellardita is a 25-year veteran production executive with a successful track record. While in Nashville, Mr. Vellardita was responsible for the turnaround for a production house for music into a television satellite network, housing multiple sound-stages and edit bays. Mr. Vellardita also increased revenues by bringing national accounts to this network. Mr. Vellardita has been involved in over 10,000 episodes of television and 100 films. After Mr. Vellardita's success in Nashville, he moved to Los Angeles, focusing on film and television, where he developed independent production studios. Mr. Vellardita handled everything from the coordination of sales and contracts negotiations, to the launching of marketing strategies to lure some of the biggest names in the television community. These include Paramount, Warner Brothers, and Disney. Mr. Vellardita does not currently serve as a director of any other reporting company. Donald P. Magier - 37 Treasurer, Secretary, Controller and Director Donald P. Magier has served as the Company's Secretary, Treasurer, Controller and Director since November 2002. Mr. Magier commenced working for the Company in April 2002 as its Controller and was subsequently promoted. He received his accounting degree from California Sate University, Northridge and began his accounting career in 1989 as an auditor with Weber Lipshie and Co., CPAs, a small national accounting firm specializing in the garment industry. In 1992, Mr. Magier joined Falcon Cable TV, the fifth largest cable company in the country, as a Regional Controller until he left in 2000. He then joined a publicly traded internet company, Genesis Intermedia, Inc., a Delaware corporation formerly known as GenesisIntermedia.com, Inc., as Controller of both the company and two of its subsidiaries until he joined Valcom, Inc. in 2002. Mr. Magier does not hold a directorship in any other reporting company. Krishna Swamy Alladi-57 Director Krishna Swamy Alladi, Director, 56 years of age, has 30 years of experience in the fields of Consulting, Finance, Corporate Planning and Factory Management. He holds a Bachelor Degree in Science, Post Graduate Diploma in Electronics Engineering from Madras University, India and an MBA from Asian Institute of Management, Philippines. He was a Senior Consultant with Price Waterhouse & Company, India advising various institutions and manufacturing Companies in the fields of Production Management, Information Technology, Financial Restructuring, and Management Audit. Subsequently he became a Finance Director of GlaxoWellcome, Indonesia overseeing Finance, Logistics, IT and Human Resource functions and served for 7 years. He was also Vice President -Strategic Planning for a large Indonesian Conglomerate involved in Infrastructure, Telecommunications, Plantations and Strategic Investments. Other significant positions held were with Hindustan Brown Boveri, India as Production Engineer, Unilever Indonesia as Mergers and Acquisitions Advisor , Digital Systems Corporation, Philippines as Systems Advisor. 38 Richard Shintaku-54 Director The Company appointed Mr. Shintaku to its Board of Directors on August 5, 2003. He is currently President and CEO of Inter-Continental Associates Group, LLC and ICAG, Inc. Mr. Shintaku has been married for 36 years and has two daughters and three grandsons and resides at Lake Las Vegas, Nevada. ICAG has been a leading investment and consulting firm in the Asia/Pacific region since 1973. ICAG is a Merrill Lynch investment "Alliance Partner". He is currently Vice President and principal of MRI International, Inc., one of the nations largest medical receivables funding companies, Executive Vice President and principal of JMR Nevada, Inc. (Harmon Medical Center), and KK JMR (Medical, Japan centers). Mr. Shintaku is also Chairman and CEO of Premier Entertainment Services, Inc., (product placement in Digatech International, Inc. (Gaming technology) and Owner/Proprietor of The Royal Hawaiian Farms (Pistachio/Grapes). He is a Partner of Super Nova Financial Services (NY Mercantile Exchange). He also serves on various board of directors of many Asian and domestic firms. He has recently been asked to serve as the first Honorary Consul General of Japan in the State of Nevada and is presently serving as the Nevada representative on the Republican Presidential Roundtable. Section 16(a) Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires officers, directors and beneficial owners of more than 10% of any class of equity securities of a public company to file with the Securities and Exchange Commission certain individual periodic reports -- (Form 3) (Initial Statement of Beneficial Ownership of Securities), Form 4 (Statement of Changes of Beneficial Ownership of Securities) and Form 5 (Annual Statement of Beneficial Ownership of Securities) -- which disclose their beneficial ownership of the company's securities. Securities and Exchange Commission regulations require officers, directors and greater than 10% stockholders to furnish the Company with copies of all such forms they file. The Company's other directors and executive officers and more than 10% stockholders filed their Section 16(a) reports as required. 39 MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS ------------------------------------------------- Each director is elected to serve for a term of one (1) year until the next annual meeting of stockholders or until a successor is duly elected and qualified. There are no family relationships among directors or persons nominated or chosen by the Company to become a director. The present term of office of each director will expire at the next annual meeting of stockholders. During the fiscal year ended September 30, 2003, the Board of Directors held 23 meetings. No director attended fewer than 75% of the total number of meetings. Outside directors received no cash compensation for their services, however they were reimbursed for their expenses associated with attendance at meetings or otherwise incurred in connection with the discharge of their duties as directors of the Company. No officer of the Company receives any additional compensation for his services as a director, and the Company does not contribute to any retirement, pension, or profit sharing plans covering its directors. The Board of Directors has two committees, the Audit Committee and the Compensation Committee. The sole member of the Audit Committee is Donald Magier. As of September 30, 2003, the members of the Compensation Committee were Vince Vellardita and Krishna Swamy Alladi. 40 ITEM 10 EXECUTIVE COMPENSATION --------------------------------- The Summary Compensation Table below sets forth all compensation paid to the Company's officers and directors during the fiscal years ended September 30, 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE -------------------------- Long Term Compensation ---------------------- Annual Compensation Awards Payouts -------------------- ------ ------- (a) (b) (c) (d) (e) (f) (g) (h) (i) -------- ----------- ----------- -------- ------ -------- ----- --- Name & Principle Position Year Salary Bonus Other Restricted Securities LTIP All ($) ($) ($) ($) (#) ($) ($) -------------------------- -------- ----------- ----------- -------- ------ -------- ----- --- Vince Vellardita, Chairman, CEO & President 2001 130,000 * * * * * * -------------------------- -------- ----------- ----------- -------- ------ -------- ----- --- 2002 140,000 * * * * * * -------- ----------- ----------- -------- ------ -------- ----- --- 2003 140,000 * * * * * * -------- ----------- ----------- -------- ------ -------- ----- --- Donald Magier, Secretary, Treasurer & 2002 80,000 * * * * * * ------- ----------- Director 2003 100,000 * * * * * * -------------------------- -------- ----------- ----------- -------- ------ -------- ----- --- Ronald Foster, Treasurer, Secretary, Vice President, Director (1) 2001 130,000 * * * * * * * * -------------------------- -------- ----------- 2002 130,000 * * * * * * * * -------- ----------- ----------- -------- ------ -------- ----- --- Wayne Lepoff, COO (2) 2001 120,000 * * * * * * * * -------- -----------
*None (1) Mr. Foster served as the Company's Treasurer, Secretary, Vice President and Director during the fiscal year ended September 30, 2002. Effective September 30, 2002, he resigned as an officer and director. Effective November 1, 2002, the Board of Directors appointed Donald Magier as Treasurer, Secretary and Director to replace Mr. Foster. (2) Mr. Lepoff served as the Company's Chief Operating Officer from June 2001 until November 2001. 41 EMPLOYMENT AGREEMENTS ---------------------- The Company is a party to employment agreements with Vince Vellardita and Donald P. Magier. Vince Vellardita The Company entered into an Employment Agreement with Vince Vellardita, the Company's Chairman of the Board, Chief Executive Officer and President, effective October 1, 2000. The term of the Agreement is for five years. The Board of Directors may terminate Mr. Vellardita's employment at any time. The Agreement shall be automatically renewed for successive one-year terms, unless either party gives written notice of termination three months prior to the end of the term. The Agreement provides for an annual salary of $120,000 for the first year, $150,000 for the second year and $200,000 for the third year, plus a bonus if authorized by the Board of Directors. If the Company is involved in a merger or consolidation in which it does not survive, or if the Company transfers substantially all of its assets, the surviving entity in the merger or consolidation or the transferee of the Company's assets shall be bound by the Agreement. With the exception of ownership of up to five percent of the equity securities of another publicly traded corporation, the Agreement prohibits Mr. Vellardita from engaging in any activity competitive with or adverse to the Company's business or welfare without the Company's prior written consent. Donald P. Magier The Company entered into an Employment Agreement with Mr. Magier, the Company's Controller, effective May 20, 2002. The term of the Agreement is for five years. The Board of Directors may terminate Mr. Magier's employment at any time. The Agreement shall be automatically renewed for successive one-year terms, unless either party gives written notice of termination three months prior to the end of the term. Effective January 2004, the Company pays Mr. Magier an annual salary of $110,000, with a $10,000 annual increase. The Agreement requires the Company to grant Mr. Magier 50,000 shares of the Company's common stock each year. If the Company is involved in a merger or consolidation in which it does not survive, or if the Company transfers substantially all of its assets, the surviving entity in the merger or consolidation or the transferee of the Company's assets shall be bound by the Agreement. With the exception of ownership of up to five percent of the equity securities of another publicly traded corporation, the Agreement prohibits Mr. Magier from engaging in any activity competitive with or adverse to the Company's business or welfare without the Company's prior written consent. 42 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT --------------------------------------------------------------------- The following table sets forth, as of September 30, 2003, the number and percentage of shares of common stock owned of record and beneficially by any "group" (as that term is defined in Item 403 of Regulation S-B), person or firm that owns more than five percent (5%) of the Company's outstanding common stock (the Company's only class of voting securities). 48(a) Security Ownership of Certain Beneficial Owners Name and Address of Amount of Nature of Percent of Beneficial Owner Shares (1) Ownership Class ----------------- ----------- --------- ----- Vince Vellardita 1,566,749 Record & 12.1% Common 26030 Avenue Hall Beneficial Valencia, California 91355 E-Blaster International 3,000,000 Record & 23.2% Common JL. H.R. Rasuna Said Kav. Beneficial B-1 6th Floor, Jakarta, 12920 Indonesia (2) Radorm Technology Limited 567,824 Record & 4.4% Common Jakarta, 12920 Beneficial Indonesia (2) Great Asian Holdings Ltd 2,110,422 Record & 16.3% Common Jakarta, 12920 Beneficial Indonesia (2) (1) Includes all stock held either personally or by affiliates. (2) These three entities together comprise a "group" as defined in Item 403 of Regulation S-B. (b) Security Ownership of Management ---------------------------------------- The following table sets forth, as of September 30, 2003, the number and percentage of the equity securities of the Company, its parent or subsidiaries, owned of record or beneficially by each officer, director and person nominated to hold such office and by all officers and directors as a group. 43
Title of Name of Nature of Percent of Ownership Class ---------------------- ------------------------------------- Class Beneficial Owner Amount of Shares (1) -------------------------- ---------------------- ------------------------------------- Common Vince Vellardita 1,566,749 12.10% Common Donald Magier 131,250 1.00% Common Krishna Swamy Alladi 50,000 0.40% Common Richard Shintaku 350,000 2.70% ------- ----- Common All officers and directors 2,097,999 16.20% as a group (4 people)
(1) Includes all stock held either personally or by affiliates. (2) Includes ownership of record and beneficial ownership. CHANGES IN CONTROL -------------------- To the best knowledge and belief of the Company, there are no arrangements, understandings, or agreements relative to the disposition of the Company's securities, the operation of which would, at a subsequent date, result in a change in control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------------------------------------------- There are no family relationships among directors, executive officers or persons chosen by the Company to be nominated as a director or appointed as an executive officer of the Company of any of its affiliated subsidiaries. In connection with the Company's reverse merger with SBI Communications, Inc. in or around February 2001, the Company acquired real property in Piedmont, Alabama (the "Piedmont Property"). In September 2001, the Company sold this property to Ronald Foster, its Treasurer, Secretary, Vice President and Director, who was also the majority stockholder of SBI Communications, Inc. prior to the reverse merger. The Company sold the Piedmont Property to Mr. Foster for $1,200,000, net of the mortgage and accrued expenses of $2,700,000 on the Piedmont Property. The bank mortgage on the Piedmont Property was transferred to Mr. Foster. Mr. Foster executed a Promissory Note, dated September 30, 2001, in favor of the Company in the principal amount of $1,200,000 with interest at five percent per year and all principal and accrued interest due by September 30, 2002. The Promissory Note was subordinated to the bank mortgage. Mr. Foster defaulted on the bank mortgage and the Promissory Note and has been unsuccessful at selling the Piedmont Property. In addition, there are unpaid taxes and insurance on the Piedmont Property. Because Mr. Foster is in default on the bank mortgage and has been unable to sell the Piedmont Property, the Company believes that the collection of the Promissory Note is doubtful and has therefore reserved the entire $1,260,000 in principal and accrued interest owing on the Promissory Note as of September 30, 2002. In addition, the Company has stopped accruing interest on the Promissory Note. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------------------ REPORTS ON FORM 8-K FILED DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 2003: 1. February 19, 2003, Valencia Entertainment was placed in default 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. 2. March 19, 2003, ValCom's Board of Directors accepted the resignation of two Board members, Mr. Steve Weber and Mr. David Weiner, effective immediately. 3. April, 10, 2003, The Joint Venture Agreement between ValCom and Woody Fraser/Woody Fraser Productions, Inc. has been terminated and the parties have resolved and settled all disputes. 4. May 27, 2003, ValCom engaged Kabani & Company, Inc., Certified Public Accountants, as the Registrant's independent accountants to report on the Company's consolidated balance sheet as of September 30, 2003, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. The decision to appoint Kabani & Company, Inc. was approved by ValCom's Board of Directors. 44 ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company's periodic reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the periodic reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the filing date of this Report, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. This evaluation was conducted under the supervision and with the participation of the Company's Chief Executive Officer and Principal Financial Officer. Effective Disclosure Controls ------------------------------- Based upon that evaluation, the Company's officers concluded that many of the Company's disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company's disclosure obligations under the Securities Exchange Act of 1934. For example, the Company's internal controls, particularly the areas of payroll, control of cash and accounts payable, are effective. In addition, the Audit Committee meets with the principal accounting officer on a regular basis to review and evaluate the Company's financial position. The Audit Committee also reports to the Board of Directors on the accounting and finance functions on a regular basis. Weaknesses in Disclosure Controls ------------------------------------ The Company's officers also identified several weaknesses in the Company's disclosure controls. Such weaknesses, and the steps the Company plans to take to remedy the weaknesses, are discussed below. 1. The Company's records of stock and equity related transactions were not updated on a timely basis and do not reflect the current ownership of the Company as accurately as they might. Remedy: The Company intends to engage a stock transfer agent to handle issuances and conversions of all series of its preferred stock. In addition, the Company will maintain more accurate records of all equity transactions during the year. The Board of Directors will ensure that it authorizes all stock, warrants and options granted in accordance with applicable agreements and/or compensation plans to avoid the possibility of unauthorized issuances of stock, warrants and options. 2. The Company recorded a significant number of audit adjustments during the fourth quarter, which were required to properly state the account balances at September 30, 2003. 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. 45 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. ADDITIONAL INFORMATION ---------------------- HEADQUARTERS ------------ VALCOM, INC. ------------- 26030 Avenue Hall Studio #5 Valencia, California 91355 SUBSIDIARIES ------------ VALENCIA ENTERTAINMENT INTERNATIONAL, LLC -------------------------------------------- 26030 Avenue Hall Studio #5 Valencia, California 91355 HALF DAY VIDEO, INC. ----------------------- 26030 Avenue Hall Studio #5 Valencia, California 91355 OFFICERS AND DIRECTORS ---------------------- Vince Vellardita: Chairman of the Board, President and Chief Executive Officer Donald P. Magier: Treasurer, Secretary, Controller and Director Krishna Swamy Alladi: Director Richard Shintaku: Director AUDITORS -------- Kabani & Company, Inc. 8700 Warner Ave., Suite #280 Fountain Valley, CA 92708 TRANSFER AGENT -------------- Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004 Exhibits to this Form 10-KSB will be provided, subject to payment of actual copy costs, to stockholders of the Company upon written request addressed to Shari Edwards, ValCom, Inc., at the Company's headquarters listed above. 46 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Exchange Act, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 13, 2004 VALCOM, INC., a Delaware corporation By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- By: /s/Vince Vellardita Chief Executive Officer, President February 13, 2004 -------------------- Chairman of the Board Vince Vellardita By: /s/ Donald P. Magier Treasurer, Controller February 13, 2004 --------------------- (principal accounting officer) Donald P. Magier Secretary and Director By: /s/ Krishna Swamy Alladi Director February 13, 2004 ------------------------- Krishna Swamy Alladi By: /s/ Richard Shintaku Director February 13, 2004 ---------------------- Richard Shintaku 47 EXHIBIT 99.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations. Dated: February 13, 2004 By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations. Dated: February 13, 2004 By: /s/ Donald P. Magier ----------------------- Donald P. Magier Treasurer, Controller and principal accounting officer 48 EXHIBIT 99.2 CERTIFICATIONS PURSUANT TO RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 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. 49 (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 13, 2004 By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer In connection with the Annual Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-KSB for the period ending September 30, 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 50 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 13, 2004 By: /s/ Donald P. Magier ----------------------- Donald P. Magier Treasurer, Controller and principal accounting officer 51