10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-QSB (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2003 Commission file Number 0-28416 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ============================================================================== VALCOM, INC. (Name of small business issuer specified in its charter) ============================================================================== Delaware 58-1700840 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 26030 Avenue Hall - Studio #5, Valencia, California 91355 --------------------------------------------------------- (Address of Principal executive offices) (Zip code) (661) 257-8000 --------------- Issuer's telephone number Securities registered pursuant to 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.001 PAR VALUE ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of December 31, 2003 the issuer had 15,292,166 shares of its $0.001 par value common stock outstanding. VALCOM, INC. FORM 10-QSB INDEX Page PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of December 31, 2003 (unaudited) 3 Condensed Consolidated Statements of Operations for the three months ended December 31, 2003 and 2002 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2003 and 2002 (unaudited) 6 Notes to Condensed Consolidated Financial State- ments (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Disclosure Controls and Procedures 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 Part III. EXHIBITS -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31, 2003 ------ ASSETS (Unaudited) ------ Current Assets: Cash & Cash equivalents $ 234,990 Accounts receivable, net 41,131 Note receivable, current 35,179 ----------- Total Current Assets 311,300 Property and equipment - net 11,586,309 Deferred Compensation 242,169 Prepaid development costs 340,767 Deferred financing costs 122,520 Deposits and other assets 140,402 ------------ Total Assets $ 12,743,467 ============ See accompanying notes to the condensed consolidated financial statements -3- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Not Subject To Compromise Current liabilities: Accounts payable $ 316,521 Accrued interest 749,053 Accrued expenses 431,889 Due to related parties 50,000 Notes payable 7,854,545 ----------- Total Current Liabilities 9,402,008 Liabilities Subject To Compromise Prepetition trade accounts payable 206,249 Prepetition Payables due to related parties 95,000 Prepetition accrued expenses 131,902 ----------- Total Liabilities 9,835,159 ----------- 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 15,293 Additional Paid-in capital 13,970,810 Accumulated deficit (11,080,563) ----------- Total Stockholders' Equity 2,908,308 ----------- Total Liabilities and Stockholders' Equity $12,743,467 =========== See accompanying notes to the condensed consolidated financial statements -4- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three For the three months ended months ended December 31, 2003 December 31, 2002 Revenue: Rental . . . . . . . . . . . . . . . . . . . .$599,638 $563,655 Production . . . . . . . . . . . . . . . . . . . 30,237 122,892 Other. . . . . . . . . . . . . . . . . . . . . . .2,340 78,382 ----------------------------- Total Revenue. . . . . . . . . . . . . . . . . .632,215 764,929 ----------------------------- Cost and Expenses: Production . . . . . . . . . . . . . . . . . . . 10,942 191,023 Selling and promotion. . . . . . . . . . . . . . 13,972 12,417 Depreciation and amortization. . . . . . . . . . 87,840 87,740 General and administrative . . . . . . . . . . .680,784 848,143 Consulting and professional fees . . . . . . . .142,569 235,494 ----------------------------- Total Cost and Expenses. . . . . . . . . . . . .936,107 1,374,817 Operating loss . . . . . . . . . . . . . . . . (303,892) (609,888) Other Income (Expense): Interest expense . . . . . . . . . . . . . (267,592) (174,838) Gain on sale of assets. . . . . . . . . . 53,950 - Loss on Equity Investment. . . . . . . . . . . . (6,679) - Other income. . . . . . . . . . . . . . . . . . . .- 8,000 ----------------------------- Total Other Income (Expense) . . . . . . . . . (220,321) (166,838) ----------------------------- Net loss . . . . . . . . . . . . . . . . . . $(524,213) $(776,726) ============================== Basic and diluted loss per share from continuing operations . . . . . . . . . (0.04) (0.07) Weighted average shares outstanding: Basic and diluted. 14,277,554 11,165,249
See accompanying notes to the condensed consolidated financial statements -5- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) For the three For the three months ended months ended December 31, 2003 December 31, 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) income $(524,213) $(776,726) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 87,840 87,740 Bad debt expense - 24,000 Gain on sale of fixed assets (53,950) (8,000) Options issued for compensation 232,000 142,836 Stock issued for debt retirement 57,959 - Stock issued for compensation 82,000 24,075 Stock issued for services 94,000 56,500 Changes in operating assets and liabilities: Receivables 30,776 (27,635) Prepaid development costs (125,767) - Related party receivables (14,220) - Deferred Compensation 16,511 (38,039) Deposits (24,864) (875) Accounts payable and accrued expenses 85,886 95,018 Net Cash Used In Operating Activities (56,043) (376,342) --------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (46,556) - Notes receivable payments 17,589 - Proceeds from sale of fixed assets 57,200 8,000 Net Cash Provided Investing Activities 28,233 34,668 --------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal repayment of notes. . . . . . . . . . . . . . . . . . . . . . . . (48,883) (192,773) Principal borrowings on notes . . . . . . . . . . . . . . . . . . . . . . . 100,000 185,000 Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . - 59,750 Net Cash Provided By Financing Activities . . . . . . . . . . . . 51,117 51,977 ---------- ----------- NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . .. . 23,308 (289,697) CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . 211,682 343,374 CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . $ 234,990 $ 53,677 --------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: --------------------------------------------------------------------------- Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 191,116 $ 108,201 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0 ---------- -----------
See accompanying notes to the condensed consolidated financial statements -6- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- Following is a summary of the significant accounting policies followed in the preparation of these consolidated financial statements, which policies are in accordance with accounting principles generally accepted in the United States of America. 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. See accompanying notes to the condensed consolidated financial statements -7- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION ----------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes included in the Company's Form 10-KSB. The audited consolidated financial statements of the Company for the year ended September 30, 2003 were filed on February 13, 2004 with the Securities and Exchange Commission and are hereby referenced. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) considered necessary for fair presentation has been included. The results of operations for the three months ended December 31, 2003 are not necessarily indicative of the results to be expected for the entire year. PRINCIPLES OF CONSOLIDATION ----------------------------- The consolidated financial statements include the accounts of ValCom, Inc. and two wholly-owned subsidiaries, Valencia Entertainment International, LLC, which was acquired effective February 2001 and Half Day Video, Inc., which was acquired effective March 2001. 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. See accompanying notes to the condensed consolidated financial statements -8- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) USE OF ESTIMATES ------------------ The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ form those estimates. CONCENTRATIONS AND CREDIT RISK --------------------------------- The Company has two customers who accounted for approximately 99% of total rental revenues for the three months ended December 31, 2003 and 2002, respectively. As of December 31, 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. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------- The condensed consolidated financials statements as of December 31, 2003 and for the three months ended December 31, 2003 and 2002 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the three months ended December 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. 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 $524,213 and a negative cash flow from operations of $56,043 for the three months ended December 31, 2003, and a working capital deficiency of $9,090,708 and an accumulated deficit of $11,080,563 at December 31, 2003. The Company had a net loss of $776,726 and a negative cash flow from operations of 376,342 for the three months ended December 31, 2002. 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 if suitable remedies are not undertaken. In view of this, the Company is actively pursuing a re-organization plan, which includes cost reductions in various fronts, refinancing of property, debt restructuring, issuing equity securities in exchange for services and selling additional equity or debt securities. All of the above measures will enable the Company to overcome its financial difficulties. 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. 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. -9- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) This statement is generally effective for business combinations initiated on or after July 1, 2001. Statement No. 142, "Goodwill and Other Intangible Assets" supersedes 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. 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. -10- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. -11- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) RECLASSIFICATION ---------------- Certain prior period amounts have been reclassified to conform to the current period's presentation. NOTE 2 NET INCOME (LOSS) PER SHARE ---------------------------------------- The Company's net loss per share was calculated using weighted average shares outstanding of 14,277,554 for the three months ended December 31, 2003 and 11,165,249 for the three months ended December 31, 2002, respectively. Although convertible preferred stock, convertible debt, and warrants are common stock equivalents, they are not included in the calculation of diluted earnings per share as their effect would be anti-dilutive or their conversion price was greater than the average market price of the Company's common stock. NOTE 4 SEGMENT INFORMATION ----------------------------- Studio Studio Equip Film & TV Rental Rental Production Total --------- ------------- ------------ ---------- As of and for the three months ended December 31, 2003 ---- Revenues $ 579,516 $ 22,462 $ 30,237 $ 632,215 Operating loss (300,598) (22,589) 19,295 (303,892) Total Assets 12,646,305 97,162 0 12,743,467 Depreciation and Amortization 75,640 12,200 0 87,840 2002 ---- Revenues $ 634,843 $ 7,194 $ 122,892 $ 764,929 Operating (Loss) Income (509,374) (32,383) (68,131) (609,888) Total Assets 12,814,730 281,837 36,430 13,132,997 Depreciation and Amortization 75,540 12,200 0 87,740 -12- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5 INVESTMENT ------------------- The investment held by the Company consists of a 45% ownership interest in ValCom Broadcasting, LLC, a New York limited liability company. The investment is accounted for on the equity method. Pertinent financial information for ValCom Broadcasting, LLC as of December 31, 2003 is as follows: BALANCE SHEET: Assets $ 765,882 --------------- Liabilities $ 25,000 Equity 740,882 --------------- $ 765,882 --------------- INCOME STATEMENT: Revenues $ 0 Expenses 14,843 --------------- Net loss 14,843 X 45% --------------- Company's share of net loss $ 6,679 --------------- NOTE 6 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. 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"). -13- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 both causes have been dismissed with prejudice against the Company, where as VEI is in a stay until Chapter 11 is lifted. VEI 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 entered into a settlement agreement in November, 2003. 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 7 STOCKHOLDERS' EQUITY ------------------------------ (A) CONVERTIBLE PREFERRED STOCK ---------------------------------- At September 30, 2002, the Company had three series of convertible Preferred Stock: B, C and D. Series B Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a 1 for 5 basis. In the event of any liquidation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series C Preferred Stock has no voting rights, is entitled to receive cumulative dividends in preference to any dividend on the common stock at a rate of 10% per share, per year, to be issued if and when declared by the Board of Directors and can be converted at any time into common stock on a 1 for 1 basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share, plus an amount equal to declared but unpaid dividends thereon, if any, to the date of payment. Series D Preferred Stock has no voting rights, no dividends and can be converted at any time to common stock on a 1 for 1 basis. In the event of any liquidation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to receive an amount equal to the purchase price per share. With respect to rights on liquidation, Series B, C and D Preferred Stock shall rank senior to the common stock but Series C Preferred Stock shall be senior to both Series B and D Preferred Stock while Series D Preferred Stock shall be junior to both Series B and C Preferred Stock. No dividends have been declared by the Board of Directors for any of the Series of convertible Preferred Stock for the fiscal year ended September 30, 2002. On June 6, 2002, the Company received $930,000, net for the issuance of 1,250,000 shares of Series D Convertible Preferred Stock to an accredited investor. In connection with the transaction, the Company also issued warrants to the preferred stockholder to purchase an aggregate of 1,300,000 shares of the Company's common stock at an exercise price of $.80 per share, expiring on June 18, 2007. The Company allocated the net proceeds received from the sale of the preferred stock to the warrants using the Black-Scholes pricing model. The allocation of the net proceeds to the warrants amounted to $466,908 and is included in additional paid-in capital in the accompanying condensed consolidated balance sheet at September 30, 2002. Also in connection with the sale of the Series D Convertible Preferred Stock, the Company incurred a 7% placement agent fee and also issued the placement agents 125,000 "VACM Units", each unit comprised of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $.80 per share. The Company recorded the $70,000 placement agent fee as a reduction of the proceeds received, thereby reducing additional paid-in capital by $70,000 at September 30, 2002. Each VACM Unit is exercisable at $.80 per unit and the unit and the underlying warrant expire June 18, 2007. The Company valued the VACM Unit by apportioning value to the underlying warrant and common stock using the Black-Scholes pricing model, and by measuring the intrinsic value of the common stock. The value of the 125,000 VACM Units amounted to $60,745 and was recorded as an increase in additional paid-in capital at September 30, 2002. -14- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 three months ended December 31, 2003, the Company issued 538,333 shares of common stock in lieu of debt retirement. The value of the debt retired totaled approximately $57,959. During the three months ended December 31, 2003, the Company issued 500,000 shares of common stock in lieu of prepaid development costs. The value of the development costs totaled approximately $215,000, which was computed based upon the market prices of the common stock on the applicable payment dates. During the three months ended December 31, 2003, the Company issued 200,000 shares of common stock in lieu of compensation consultancy services performed. The value of the consultancy services performed totaled approximately $94,000, which was computed based upon the market prices of the common stock on the applicable payment dates. During the three months ended December 31, 2003, the Company issued 200,000 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $82,000, which was computed based upon the market prices of the common stock on the applicable payment dates. (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 558,333 warrants up to December 31, 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. In connection with the acquisition of PTL Productions, Inc. (dba Brentwood Magazine), the Company was to issue 400,000 shares of Series C preferred stock, convertible 1 for 1 into common shares. The Value of the preferred stock was $252,000 or $.63 per share based on the value of the Company's common stock on the date of acquisition. On December 6, 2002 the Company issued 380,000 shares of Series C Preferred Stock valued at $239,400. The par value of the 380,000 shares of Series C Preferred Stock ($380) is included in preferred stock while the remaining value ($239,020) is included in additional paid-in-capital. The value of the remaining 20,000 shares of $12,600 still to be issued is included in preferred stock payable in the accompanying balance sheet. In January 2003, the Company entered into a Memorandum of Understanding to cancel the Agreement and Plan of Reorganization dated August 2, 2002, pursuant to which the Company acquired PTL Productions, Inc. (dba Brentwood Magazine) and sell PTL Productions, Inc. back to the seller. In connection with the sale, the Company will receive back 200,000 shares of its Series C Preferred Stock and $300,000 of trade credit (See Note 8). NOTE 8 SUBSEQUENT EVENTS --------------------------- Subsequent to December 31,2003, the Company issued 274,000 shares of common stock at $0.25 amounting to $68,500 through private placements. In addition to this the Company also issued 650,000 shares for $0.41 per share against services rendered and 115,750 shares to employees per the terms of the employment agreements and for bonuses -15- VALCOM, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of December 31, 2003, ValCom, Inc. operations were comprised of four divisions: (1) Studio Rental, (2) Studio Equipment and Personnel Rental, (3) Broadcast Television and (4) Film and Television Production. STUDIO RENTAL -------------- The Company and its subsidiary, Valencia Entertainment International, LLC, operates eight sound stages in Valencia, California. Valencia Entertainment International, LLC owns six improved acres on which six of the sound stages are located. The Company leases the other two sound stages. Beginning June 2003, the Company and its subsidiary has a newly signed one-year lease with five one-year options for all eight sound stages, which will generate $2,100,000 annually with cost-of-living increases. STUDIO EQUIPMENT RENTAL ------------------------- The Company's subsidiary, Half Day Video, Inc., supplies personnel, cameras and other production equipment to various production companies on a short-term basis. As a result of additional equipment purchases and increased activity, from both internal and external sources, we anticipate that Half Day Video, Inc.'s revenues should increase significantly. TELEVISION AND FILM PRODUCTION --------------------------------- The Company, in addition to producing its own television and motion picture programming, has an exclusive facilities agreement in place for productions in Los Angeles County for a three-year term with Woody Fraser/Woody Fraser Productions (See Note 5). CHANNEL 8 IN PALM SPRINGS, CALIFORNIA ------------------------------------------ In connection with its joint venture with New Global Communications, Inc., the Company owns a 45% equity interest in ValCom Broadcasting, LLC, a New York limited liability company, which operates KVPS (Channel 8), an independent television broadcaster in the Palm Springs, California market, which is strategically located in the middle of four major markets including Los Angeles, Phoenix, Las Vegas and San Diego. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2003 VS. DECEMBER 31, 2002 ------------------------------------------------------------------- Revenues for the three months December 31, 2003 decreased by $132,714 or 17.3% from $764,929 for the three months ended December 31, 2002 to $632,215 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. Production costs for the three months ended December 31, 2003 decreased by $180,081 or 94.3% from $191,023 for the three months ended December 31, 2002 to $10,942 for the same period in 2003. The decrease in production costs was principally due to decreased production associated with Woody Fraser Productions as described above. Selling and promotion costs for the three months ended December 31, increased by $1,555 or 12.5% from $12,417 for the three months ended December 31, 2002 to $13,972 for the same period in 2003. The increase was due principally to an increase in travel and public relations expenses. -16- VALCOM, INC. AND SUBSIDIARIES Depreciation and amortization expense for the three months ended December 31, 2003 increased by $100 or 0% from $87,740 for the three months ended December 31, 2002 to $87,840 for the same period in 2003. General and administrative expenses for the three months ended December 31, 2003 decreased by $167,359 or 19.7% form $848,143 for the three months ended December 31, 2002 to $680,784 for the same period in 2003. the decrease was due principally to decreased personnel costs, insurance, printing, and bad debt expense. Consulting and professional fees for the three months ended December 31, 2003 decreased by $92,925 or by 39.5% from $235,494 for the three months ended December 31, 2002 to $142,569 for the same period in 2003. the decrease in consulting and professional fees was principally due to decreased legal and accounting costs. Interest expense for the three months ended December 31, 2003 increased by $92,754 or 53.1% from $174,838 for the three months ended December 31, 2002 to $267,592 for the same period in 2003. The increase was due principally to the increase in interest rates associated with the company's mortgage loans. Other income for the three months ended December 31, 2003 increased by $39,271 from $8,000 for the three months ended December 31, 2002 to $47,271 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. Due to the factors described above, the Company's net loss decreased by $252,513 from $776,726 for the three months ended December 31, 2002 to $524,213 for the same period in 2003. FUTURE OUTLOOK The Company has entered into a joint venture agreement with O. Atlas Enterprises to produce an animation movie and an animation TV series called "New Zoo Revue" based on an American Classic of the same name, which was highly successful. The Company has already incurred startup costs, which have been reflected in the financial statements for the three months ended December 31, 2003. The Company is in the process of closing on additional studio facilities comprising 7.5 acres of land and 160,000 sq. ft. of buildings in Las Vegas as part of its expansion plans. Upon closing, the Company will undergo a three phase renovation, which will ensure additional rental revenues to the Company with revenue opportunities for the Company's other related businesses to begin almost immediately. LIQUIDITY AND CAPITAL RESOURCES The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a net loss of $524,213 and a negative cash flow from operations of $56,043 for the three months ended December 31, 2003, and a working capital deficiency of $9,090,708 and an accumulated deficit of $11,080,563 at December 31, 2003. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $316,521 on December 31, 2003, compared to $211,682 at September 30, 2003. During the three months ended December 31, 2003, net cash used by operating activities totaled $56,043 compared to $376,342 for the comparable three month period in 2002. A significant portion of operating activities included payments for accounting and legal fees, salaries and rent. Net cash provided by financing activities for the three months ended December 31, 2003 totaled $51,117 compared to $51,977 for the comparable three-month period in 2002. Net cash provided by investing activities during the three months ended December 31, 2003 totaled $28,233 compared to $34,668 during the comparable prior year period due principally to decreased notes receivable payments. The above cash flow activities yielded a net cash increase of $23,308 during the three months ended December 31, 2003 compared to a decrease of $289,697 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $9,090,708 as of December 31, 2003. The Company will need to raise funds through various financings to maintain its operations until such time as cash generated by operations is sufficient to meet its operating and capital requirements. There can be no assurance that the Company will be able to raise such capital on terms acceptable to the Company, if at all. -17- VALCOM, INC. AND SUBSIDIARIES ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES ----------------------------------------------- Evaluation of Disclosure Controls and Procedures ----------------------------------------------------- Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company's periodic reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the periodic reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the filing date of this Report, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. This evaluation was conducted under the supervision and with the participation of the Company's Chief Executive Officer and Principal Financial Officer. Effective Disclosure Controls ------------------------------- Based upon that evaluation, the Company's officers concluded that many of the Company's disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company's disclosure obligations under the Securities Exchange Act of 1934. For example, the Company's internal controls, particularly the areas of payroll, control of cash and accounts payable, are effective. In addition, the Audit Committee meets with the principal accounting officer on a regular basis to review and evaluate the Company's financial position. The Audit Committee also reports to the Board of Directors on the accounting and finance functions on a regular basis. Weaknesses in Disclosure Controls ------------------------------------ The Company's officers also identified several weaknesses in the Company's disclosure controls. Such weaknesses, and the steps the Company plans to take to remedy the weaknesses, are discussed below. 1. The Company's records of stock and equity related transactions were not updated on a timely basis and do not reflect the current ownership of the Company as accurately as they might. Remedy: The Company intends to engage a stock transfer agent to handle issuances and conversions of all series of its preferred stock. In addition, the Company will maintain more accurate records of all equity transactions during the year. The Board of Directors will ensure that it authorizes all stock, warrants and options granted in accordance with applicable agreements and/or compensation plans to avoid the possibility of unauthorized issuances of stock, warrants and options. 2. The Company recorded a significant number of audit adjustments during the fourth quarter, which were required to properly state the account balances at September 30, 2002. Remedy: The Company will implement comprehensive closing procedures, including an analysis of all balance sheet accounts and significant income statement accounts. 3. The minutes of the Board of Directors' and stockholders' meetings were not always complete. Remedy: The Company will implement procedures to be more comprehensive in the preparation of its minutes to include all important matters that affect the Company's operations. The Company will take appropriate steps to ensure that all minutes are properly approved and signed by the applicable parties. 4. The Company drafted several agreements without consulting its legal counsel. Therefore, some of the agreements had terms and provisions that either changed the purpose of the agreement or undermined the purpose or intent of management. Remedy: The Company will consult its legal counsel as to the legality of future agreements and consult its auditors regarding the proper accounting treatment of such agreements in order to preserve the purpose of the agreements and the intent of management. Changes in Internal Controls ------------------------------- There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls. The Company intends to make extensive improvements, as outlined above, to its disclosure controls. -18- VALCOM, INC. AND SUBSIDIARIES PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ---------------------------- In September 2001, a complaint was filed in the Los Angeles County Superior Court, Russomano et al. v. VEI et al., BC 257989. The plaintiffs are Diane Russomano and Knowledge Booster, Inc. and the defendants include Valcom, Inc. and Valencia Entertainment International ("VEI"), 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 both causes have been dismissed with prejudice against the Company, where as VEI is in a stay until Chapter 11 is lifted. VEI 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 entered into a settlement agreement in November, 2003. 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 2. CHANGES IN SECURITIES --------------------------------- During the three months ended December 1, 2003, the Company issued 538,333 shares of common stock in lieu of debt retirement. The value of the debt retired totaled approximately $57,959. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. During the three months ended December 31, 2003, the Company issued 500,000 shares of common stock in lieu of prepaid development costs. The value of the development costs totaled approximately $215,000, which was computed based upon the market prices of the common stock on the applicable payment dates. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. During the three months ended December 31, 2003, the Company issued 200,000 shares of common stock in lieu of compensation consultancy services performed. The value of the consultancy services performed totaled approximately $94,000, which was computed based upon the market prices of the common stock on the applicable payment dates. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. During the three months ended December 31, 2003, the Company issued 200,000 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $82,000, which was computed based upon the market prices of the common stock on the applicable payment dates. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. -19- VALCOM, INC. AND SUBSIDIARIES ITEM 3. DEFAULTS UPON SENIOR SECURITIES -------------------------------------------- Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------------------------- Not applicable ITEM 5. OTHER INFORMATION ---------------------------- None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------------- (A) EXHIBITS: Exhibit Number Description --------------- ----------- 99.1 Certification of the Chief Executive Officer of ValCom, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of the Chief Financial Officer of ValCom, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (B) REPORTS ON FORM 8-K None -20- SIGNATURES ---------- In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALCOM, INC. Date: February 24, 2004 By: /s/Vince Vellardita ------------------------------------- Vince Vellardita Chairman of the Board and Chief Executive Officer (Principal executive officer) In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- BY: /s/Vince Vellardita CEO/President February 24, 2004 -------------------- ------------------ Vince Vellardita Chairman of the Board BY: /s/Don Magier Controller February 24, 2004 ---------------- (Principal accounting officer) ----------------- Don Magier -21- EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Vince Vellardita, the Chief Executive Officer of ValCom, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 24, 2004 ------------------- /s/ Vince Vellardita ---------------------- Name: Vince Vellardita Title: Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Don Magier, the Controller (principal accounting officer) of ValCom, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 24, 2004 ------------------- /s/Don Magier -------------- Name: Don Magier Title: Controller (principal accounting officer) -22- 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 amendment number 1 of the Quarterly Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-QSB for the period ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vince Vellardita, the Company's Chief Executive Officer (the "Officer"), certify, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, that: (1) The Officer has reviewed the Report. (2) Based on the Officer's knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report. (3) Based on the Officer's knowledge, the financial statements and other financial information included in the Report fairly present in all material respects the Company's financial condition and results of operations as of, and for, the periods presented in the Report. (4) The Officer and the other certifying officer: (a) Are responsible for establishing and maintaining "disclosure controls and procedures," as that term is defined by the Securities and Exchange Commission, for the Company. (b) Have designed such disclosure controls and procedures to ensure that material information relating to the Company is made known to them, particularly during the period in which the periodic Report is being prepared. (c) Have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of the Report. (d) Have presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. (5) The Officer and the other certifying officer have disclosed to the Company's auditors and audit committee of the board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls, as that term is defined by the Securities and Exchange Commission, which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. -23- (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 24, 2004 By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer In connection with amendment number 1 of the Quarterly Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-QSB for the period ending December 31, 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 -24- (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 24, 2004 By: /s/ Donald P. Magier ----------------------- Donald P. Magier Treasurer, Controller and principal accounting officer -25-