-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V3fpBcrhDF5hcDWxU6qt3VwB5qsas6sNhszxF8AX9h1Wr941M5uPLZmtahQKwZ6L k9mj2oD9Ut3bK5GMBwS1og== 0001013453-04-000025.txt : 20040520 0001013453-04-000025.hdr.sgml : 20040520 20040519192015 ACCESSION NUMBER: 0001013453-04-000025 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALCOM INC CENTRAL INDEX KEY: 0001013453 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 581700840 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28416 FILM NUMBER: 04819854 BUSINESS ADDRESS: STREET 1: 26030 AVENUE HALL STUDIO 5 CITY: VALENCIA STATE: CA ZIP: 91355 BUSINESS PHONE: 6612578000 MAIL ADDRESS: STREET 1: 26030 AVENUE HALL - STUDIO #5 CITY: VALENCIA STATE: CA ZIP: 91355 FORMER COMPANY: FORMER CONFORMED NAME: SBI COMMUNICATIONS INC DATE OF NAME CHANGE: 20030204 FORMER COMPANY: FORMER CONFORMED NAME: VALCOM INC /CA/ DATE OF NAME CHANGE: 20010620 FORMER COMPANY: FORMER CONFORMED NAME: SBI COMMUNICATIONS INC DATE OF NAME CHANGE: 19960502 10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-QSB (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL QUARTER ENDED MARCH 31, 2004 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 March 31, 2004 the issuer had 15,182,553 shares of its $0.001 par value common stock outstanding. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying financial statements are unaudited and are prepared in accordance with rules and regulations of the Securities and Exchange Commission for interim quarterly reporting. Accordingly, these financial statements do not include all disclosures required under generally accepted accounting principles. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of ValCom, Inc. and subsidiaries as of March 31, 2004, and the results of their operations and their cash flows for the three months ended March 31, 2004. These consolidated financial statements include the accounts of ValCom, Inc. and its subsidiary companies (together "the Company"). Results for the three months ended March 31, 2004, are not necessarily indicative of the operations, which may occur during the year ending September 30, 2004. Refer to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2003 for further information. The Company is required to have its consolidated financial statements reviewed by its independent accountants prior to filing. As of the date of this report, we have not submitted our financial statements to our independent accountants for their review. We will file an amendment to this Form 10-QSB when our independent accountants complete their review of these financial statements. -2- VALCOM, INC. FORM 10-QSB INDEX Page PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheet as of March 31, 2004 (unaudited) 3 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2004 and 2003 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2004 and 2003 (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 -3- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2004 ------ ASSETS (Unaudited) ------ Current Assets: Cash & Cash equivalents $ 229,724 Accounts receivable, net 61,269 Note receivable, current 15,787 ----------- Total Current Assets 306,780 Property and equipment - net 14,846,614 Deferred Compensation 225,600 Prepaid development costs 339,074 Deposits and other assets 135,683 ------------ Total Assets $ 15,853,751 ============ See accompanying notes to the condensed consolidated financial statements -4- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Not Subject To Compromise Current liabilities: Accounts payable $ 695,767 Accrued interest 840,052 Accrued expenses 194,262 Due to related parties 80,000 Notes payable 7,894,535 ----------- Total Current Liabilities 9,704,616 Mortgage payable-Nevada 2,500,000 Liabilities Subject To Compromise Prepetition trade accounts payable 206,249 Prepetition Payables due to related parties 95,000 Prepetition accrued expenses 131,902 ------- 433,151 ----------- Total Liabilities 12,637,767 ----------- 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; 1,863,333 shares issued and outstanding 1,863 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; 15,182,553 shares issued and outstanding 15,183 Additional Paid-in capital 14,967,234 Accumulated deficit (11,769,584) Total Stockholders' Equity 3,215,984 ----------- Total Liabilities and Stockholders' Equity $15,853,751 =========== See accompanying notes to the condensed consolidated financial statements -5- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three For the three months ended months ended March 31, 2004 March 31, 2003 Revenue: Rental . . . . . . . . . . . . .$ 734,624 $ 459,372 Production . . . . . . . . . . . . 7,147 80,077 Other. . . . . . . . . . . . . . . 27,882 48,191 ----------------------------------------- Total Revenue. . . . . . . . . . 769,653 587,640 ----------------------------------------- Cost and Expenses: Production . . . . . . . . . . .48,052 64,693 Depreciation and amortization. . 75,330 88,535 General and administrative . . . 902,172 984,158 Total Cost and Expenses. . . . 1,025,554 1,137,386 ----------------------------------------- Operating loss . . . . . . . . (255,901) (549,746) Other Income (Expense): (316,418) (376,933) Gain on sale of assets. 0 19,642 - - ----------------------------------------- Total Other Income (Expense) . . (316,418) (376,933) ----------------------------------------------- Net loss . . . . . . . . . . .$ (572,319) $ (926,679) =============================================== Basic and diluted loss per share from continuing operations . . . . . . . . . (0.04) ----------------------------------------------- Weighted average shares outstanding: Basic and diluted. 15,010,000 11,816,467
See accompanying notes to the condensed consolidated financial statements -6- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the six For the six months ended months ended March 31, 2004 March 31, 2003 Revenue: Rental . . . . . . . . . . . . .$ 1,265,195 $1,023,027 Production . . . . . . . . . . . . 37,474 202,969 Other. . . . . . . . . . . . . . . 30,222 126,573 ----------------------------------------- Total Revenue. . . . . . . . . .1,332,891 1,352,569 ----------------------------------------- Cost and Expenses: Production . . . . . . . . . . .58,944 255,716 Depreciation and amortization. .175,690 176,275 General and administrative . . .1,781,430 2,080,212 Total Cost and Expenses. . . . 2,016,064 2,512,203 ----------------------------------------- Operating loss . . . . . . . . (683,173) (1,159,634) Other Income (Expense): (584,010) (571,413) Gain on sale of assets. 53,949 27,642 - - ----------------------------------------- Total Other Income (Expense) . . (530,061) (543,771) ----------------------------------------------- Net loss . . . . . . . . . . .$ (1,213,234) $ (1,703,405 =============================================== Basic and diluted loss per share from continuing operations . . . . . . . . . . (0.08) (0.15) ----------------------------------------------- Weighted average shares outstanding: Basic and diluted. 15,010,000 11,487,280
See accompanying notes to the condensed consolidated financial statements -7- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) For the six For the six months ended months ended March 31, 2004 March 31, 2003 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) income $(1,213,234) $(1,703,405) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 297,690 176,275 Bad debt expense - 70,313 Gain on sale of fixed assets (53,949) (27,642) Stock issued for debt retirement. . . . . . . . . . . . . . . . . . . . . . 57,950 0 Stock issued for services and compensation. . . . . . . . . . . . . . . . 1,280,056 170,351 Changes in operating assets and liabilities: Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,638 (14,952) Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,145) 163,070 Production Development Costs . . . . . . . . . . . . . . . . . . . . . (339,074) 0 Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,080 112,846 Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 418,503 549,904 ---------------- -------------- Net Cash Used In Operating Activities . . . . . . . . . . . . . . . . . . 471,515 (503,240) ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . (3,441,547) (3,899) Notes receivable payments . . . . . . . . . . . . . . . . . . . . . . . . . 36,981 55,179 Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . 57,200 50,159 ---------------- ---------------- Proceeds from sale of common and preferred stock . . . . . . . . . . . . . 219,000 0 ---------------- ---------------- Net Cash Provided(used) Investing Activities. . . . . . . . . . . . . . . . (3,128,366) 101,439 CASH FLOWS FROM FINANCING ACTIVITIES: Principal repayment of notes. . . . . . . . . . . . . . . . . . . . . . . . (41,107) (107,827) Principal borrowings on notes and mortgages . . . . . . . . . . . . . . . . 2,700,000 234,463 Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 (28,539) Net Cash Provided By (Used In) Financing Activities . . . . . . . . . . . . 2,674,893 98,097 ---------------- ---------------- NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . 18,042 (303,704) CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . 211,682 343,374 ---------------- ---------------- CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 229,724 $ 39,670 ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - --------------------------------------------------------------------------- Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 390,000 $ 193,250 ---------------- ---------------- Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0 ---------------- ----------------
See accompanying notes to the condensed consolidated financial statements -8- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Following is a summary of the significant accounting policies followed in the preparation of these consolidated financial statements, which policies are in accordance with accounting principles generally accepted in the United States of America. 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 March 31, 2004. 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 grants 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 April 28th 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 May 31, 2004. The court approved an extension and granted the restructuring of notes/debt with Finance Unlimited and Laurus for settlement and to be discharge from bankruptcy. 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 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 have 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. The Company has acquired seven and one half acres of property in Nevada with 162,000 square feet of buildings, which are being renovated into seven sound stages for 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. b) Film, TV, & Animation 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. c) 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 -9- 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 six months ended March 31, 2004 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. USE OF ESTIMATES - ------------------ The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Management is required 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 six months ended March 31, 2004 and 2003, respectively. As of March 31, 2004, 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. See accompanying notes to the condensed consolidated financial statements -10- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) IMPAIRMENT OF LONG-LIVED ASSETS - ---------------------------------- Effective January 1, 2003, 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. 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 3) INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------- The condensed consolidated financials statements as of March 31, 2004 and for the three and six months ended March 31, 2004 and 2003 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 and six months ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a net loss to date of $1,213,234 and a working capital deficiency of $9,397,836 and an accumulated deficit of $11,769,584 at March 31, 2004. The Company had a net loss of $572,319 for the three months ended March 31, 2004. 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. See accompanying notes to the condensed consolidated financial statements -11- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) ----------- 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. 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 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" 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. 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. -12- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 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. 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 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. -13- 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 15,010,000 for the three and six months ended March 31, 2004 and 11,816,467 for the three and six months ended March 31, 2003, respectively. Although convertible preferred stock, convertible debt, and warrants are common stock equivalents, they are not included in the calculation of diluted earnings per share as their effect would be anti-dilutive or their conversion price was greater than the average market price of the Company's common stock. NOTE 3 EQUITY INVESTMENT - --------------------------- As of March 31, 2004, ValCom has a 45% interest in a broadcasting company in Palm Springs, California, which had assets of $766,000, net worth of $740,000, and a net loss of $14,843. The entity has received a $106,000 advance from ValCom, Inc. NOTE 4 SEGMENT INFORMATION - ----------------------------- Studio & Equip Film & TV Rental 1 Production Total ------- ---- ---------- ----- As of and for the six months ended March 31, 2004 - ---- Revenues $ 1,265,195 $ 67,696 $1,332,891 Operating (Loss) Income (631,925) (51,248) (683,173) Total Assets 15,514,677 339,074 15,853,751 Depreciation and Amortization 175,690 0 175,690 2003 - ---- Revenues $ 1,023,027 $ 329,542 $ 1,352,569 Operating loss (1,133,460) (26,174) ( 1,159,634) Total Assets 12,250,000 113,000 12,363,000 Depreciation and Amortization 176,275 0 176,275 -14- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5 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 March 31, 2004, the Company was in compliance of all of 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 March 31, 2004. On April 28, 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 May 31, 2004. The court approved an extension and granted the restructuring of notes/debt with Finance Unlimited and Laurus for settlement and to be discharged from bankruptcy. NOTE 6 STOCKHOLDERS' EQUITY - ------------------------------ (A) CONVERTIBLE PREFERRED STOCK - ---------------------------------- On 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 8% per share, per year. Series B Preferred Stock is 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 8% 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 D 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. 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, 2003. 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 issued the placement agent's 125,000 "VACM Units". Each unit is comprised of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $0.80 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 $0.80 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. -15- 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, 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 at ($0.80 per unit), and 250,000 shares of common stock as a deposit in anticipation of the placement agent's 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 March 31, 2004, 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 six months ended March 31, 2004, the Company issued 538,333 shares of common stock in lieu of debt retirement. The value of the debt retired totaled approximately $57,950. During the six months ended March 31, 2004, 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 six months ended March 31, 2004, the Company issued 1,656,000 shares of common stock in lieu of compensation consultancy services performed and compensation. The value of the services performed totaled approximately $1,280,000, which was computed based upon the market prices of the common stock on the applicable payment dates. During the six months ended March 31, 2004, the Company issued 208,000 shares of common stock in lieu of compensation, for services relative to the acquisition of real estate in Nevada. Total value of the compensation, salaries and bonuses was approximately $80,000, which was computed based upon the market prices of the common stock on the applicable payment dates and capitalized into the acquisition cost. During the six months ended March 31, 2004, the Company received $219,000 in proceeds from the sale of stock in a private placement. During the six months ended March 31, 2004, the Company issued 650,000 shares of common stock in lieu of prepaid acquisition and development costs of the Las Vegas Studios. The value of the development costs totaled approximately $266,000, 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 six months ended March 31, 2004, the Company issued an aggregate of 115,750 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $46,300, 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 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 791,666 warrants up to March 31, 2004. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. During the six months ended March 31, 2004, the Company issued 600,000 shares of common stock in exchange for 600,000 shares of series C preferred convertible on a one on one basis and retired 110,000 to treasury as part of settlement agreement. During the six months ended March 31, 2004, the Company issued 1,150,000 shares of common stock to individuals through a Private Placement Memorandum for $0.25 per share for $ 288,000. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. -16- 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 March 31, 2004. 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 7 SUBSEQUENT EVENTS - --------------------------- NONE ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of March 31, 2004, ValCom, Inc. operations were comprised of three divisions: (1) Studio (2) Equipment Rental, and Personnel Rental, (3) Broadcast Television and (3) Film and Television Production. 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. The Company has acquired seven and one half acres of property in Nevada with 162,000 square feet of buildings, which are being renovated into seven sound stages for 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, FILM, & ANIMATION 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). -17- VALCOM, INC. AND SUBSIDIARIES 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 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004 VS. MARCH 31, 2003 - ------------------------------------------------------------- Revenues for the three months March 31, 2004 increased by $182,013 or 30.97% from $587,640 for the three months ended March 31, 2003 to $769,653 for the same period in 2004. The increase in revenue was principally due to increased studio revenues and decreased production revenues associated with the joint venture with Woody Fraser Productions. Production costs for the three months ended March 31, 2004 decreased by $16,641 or 25.7% from $64,693 for the three months ended March 31, 2003 to $48,052 for the same period in 2004. The decrease in production costs was principally due to decreased production associated with Woody Fraser Productions as described above. Depreciation and amortization expense for the three months ended March 31, 2004 decreased by $13,205 or 15% from $88,535 for the three months ended March 31, 2003 to $75,330 for the same period in 2004. General and administrative expenses for the three months ended March 31, 2004 decreased by $81,986 or 8.3% from $984,158 for the three months ended March 31, 2003 to $902,172 for the same period in 2004. The decrease was due principally to decreased personnel costs, insurance, printing, and bad debt expenses. Interest expense for the three months ended March 31, 2004 decreased by $80,157 or 20.2% from $396,575 for the three months ended March 31, 2003 to $316,418 for the same period in 2004. The decrease was due principally to the decrease in interest rates associated with the company's mortgage loans. Other income for the three months ended March 31, 2004 decreased by $20,309 from $48,191 for the three months ended March 31, 2003 to $27,882 for the same period in 2004. The decrease was due to a gain recognized from the sale of fixed assets offset by the loss recorded on equity investment of ValCom Broadcasting, LLC. Due to the factors described above, the Company's net loss decreased by$354,360 from $926,679 for the three months ended March 31, 2003 to $572,319 for the same period in 2004. SIX MONTHS ENDED MARCH 31, 2004 VS. MARCH 31, 2003 - ----------------------------------------------------------- Revenues for the six months ended March 31, 2004 decreased by $19,678 or 1.45% from $1,352,569 for the six months ended March 31, 2003 to $1,332,891 for the same period in 2004. The decrease in revenue was principally due to increased rental income from sound stages leased to Paramount and decreased production revenues associated with the joint venture with Woody Fraser Productions and decreased rental revenues from equipment rental. Production costs for the six months ended March 31, 2004 decreased by $196,772 or 76.9%from $255,716 for the six months ended March 31, 2003 to $58,994 for the same period in 2004. The decrease in production costs was principally due to decreased production associated with Woody Fraser Productions as described above. Depreciation and amortization expense for the six months ended March 31, 2004 decreased by $585 or 0.3% from $176,275or for the six months ended March 31, 2003 to $175,690 for the same period in 2004. General and administrative expenses for the six months ended March 31, 2004 decreased by $298,782 or 14.4% from $2,080,212 for the six months ended March 31, 2003 to $1,781,430 for the same period in 2004. The decrease was due to decreased personnel costs, legal and accounting fees, outside services and consulting fees, and bad debt expense. Interest expense for the six months ended March 31, 2004 decreased by $12,597 or 2.2% from $571,413 for the six months ended March 31, 2003 to $584,010. Other income for the six months ended March 31, 2004 decreased by $ 96,351 or 76.1% from $126,573 for the six months ended March 31, 2003 to $30,222 primarily due to less equipment rental activity. Due to the factors described above, the Company incurred a net loss of $1,213,234 for the six months ended March 31, 2004 compared to net loss of $1,703,405 for the same period in 2003. -18- VALCOM, INC. AND SUBSIDIARIES 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. BCI/Navarre has purchased an exclusive agreement to distribute 195 existing shows of New Zoo Revue for the retail market. We anticipate the New Zoo Revue to be available to consumers through 4,000 Wal-Mart retail outlets by August 10, 2004. The Company has already incurred start-up costs, which have been reflected in the financial statements for the six months ended March 31, 2004. The Company has purchased additional studio facilities comprising 7.5 acres of land and 162,000 sq. ft. of buildings in Las Vegas as part of its expansion plans. The Company is undergoing 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 $1,213,234 and a positive cash flow from operations of $471,515 for the six months ended March 31, 2004, a working capital deficiency of $9,397,836, and an accumulated deficit of $11,769,584 at March 31, 2004. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $229,724 on March 31, 2004 compared to $39,670 as at March 31,2003. During the six months ended March 31, 2004, net cash provided by operating activities totaled $471,515 compared to net cash used by operating activities totaled $503,240 for the comparable six-month period in 2003. A significant portion of operating activities included payments for production development costs. Net cash provided by financing activities for the six months ended March 31, 2004 totaled $2,674,893 compared to $98,097 for the comparable six-month period in 2003. Net cash used by investing activities during the six months ended March 31, 2004 totaled $3,128,366 compared to net cash provided $101,439 during the comparable prior year period due principally to Acquisition of studio facilities in Las Vegas. The above cash flow activities yielded a net cash increase of $18,042 during the six months ended March 31, 2004 compared to a decrease of $303,704 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $9,397,836 as of March 31, 2004. 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. 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 -19- VALCOM, INC. AND SUBSIDIARIES 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. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ---------------------------- The Company is involved from time to time in legal proceedings incident to the normal course of business. Management believes that the ultimate outcome 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 six months ended March 31, 2004, 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 six months ended March 31, 2004, 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. -20- VALCOM, INC. AND SUBSIDIARIES During the six months ended March 31, 2004, 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 six months ended March 31, 2004, 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. During the six months ended March 31, 2004, the Company issued 650,000 shares of common stock in lieu of prepaid acquisition and development costs of the Las Vegas Studios. The value of the development costs totaled approximately $266,000, 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 six months ended January 12, 2004, the Company issued an aggregate of 115,750 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $46,300, 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 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 791,666 warrants up to March 31, 2004. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. - During the six months ended March 31, 2004, the Company issued 600,000 shares of common stock in exchange for 600,000 shares of series C preferred convertible on a one on one basis and retired 110,000 to treasury as part of settlement agreement. During the six months ended March 31, 2004, the Company issued 1,150,000 shares of common stock to individuals through a Private Placement Memorandum for $0.25 per share or $ 288,000. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - -------------------------------------------- Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------------- Not applicable ITEM 5. OTHER INFORMATION - ---------------------------- 1. Donald Magier resigned as secretary, controller and director. 2. Tracey Eland has been appointed to service as Secretary of the Corporation. 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. -21- VALCOM, INC. AND SUBSIDIARIES 99.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (B) REPORTS ON FORM 8-K March 29, 2004 Edgar: Resignation of Donald Magier as officer and director. 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: May 19, 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 May 19, 2004 ------------------ Chairman of the Board -------------- Vince Vellardita BY: /s/ Tracey Eland Secretary May 19, 2004 ------------- (Principal Accounting Officer) ------------- Tracey Eland -22- EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Vince Vellardita, the Chief Executive Officer of ValCom, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-QSB of the Company for the fiscal quarter ended March 31, 2004 (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: May 19, 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, Tracey Eland, the Secretary (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 March 31, 2004 (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: May 19, 2004 -------------- /s/Tracey Eland ---------------- Name: Tracey Eland Title: Controller (Principal Accounting Officer) -23- EXHIBIT 99.2 CERTIFICATIONS PURSUANT TO RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-QSB for the period ending March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vince Vellardita, the Company's Chief Executive Officer (the "Officer"), certify, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, that: (1) The Officer has reviewed the Report. (2) Based on the Officer's knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report. (3) Based on the Officer's knowledge, the financial statements and other financial information included in the Report fairly present in all material respects the Company's financial condition and results of operations as of, and for, the periods presented in the Report. (4) The Officer and the other certifying officer: (a) Are responsible for establishing and maintaining "disclosure controls and procedures," as that term is defined by the Securities and Exchange Commission, for the Company. (b) Have designed such disclosure controls and procedures to ensure that material information relating to the Company is made known to them, particularly during the period in which the periodic Report is being prepared. (c) Have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of the Report. (d) Have presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. (5) The Officer and the other certifying officer have disclosed to the Company's auditors and audit committee of the board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls, as that term is defined by the Securities and Exchange Commission, which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 19, 2004 -------------- By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer -24- In connection with of the Quarterly Report of ValCom, Inc., a Delaware corporation (the "Company"), on Form 10-QSB for the period ending March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Tracey Eland , the Company's Secretary and principal accounting officer (the "Officer"), certify, pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, that: (1) The Officer has reviewed the Report. (2) Based on the Officer's knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report. (3) Based on the Officer's knowledge, the financial statements and other financial information included in the Report fairly present in all material respects the Company's financial condition and results of operations as of, and for, the periods presented in the Report. (4) The Officer and the other certifying officer: (a) Are responsible for establishing and maintaining "disclosure controls and procedures," as that term is defined by the Securities and Exchange Commission, for the Company. (b) Have designed such disclosure controls and procedures to ensure that material information relating to the Company is made known to them, particularly during the period in which the periodic Report is being prepared. (c) Have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of the Report. (d) Have presented in the Report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. (5) The Officer and the other certifying officer have disclosed to the Company's auditors and audit committee of the board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls, as that term is defined by the Securities and Exchange Commission, which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 19, 2004 --------------- By: /s/ Tracey Eland ------------------ Tracey Eland Secretary and Principal Accounting Officer -25- -----END PRIVACY-ENHANCED MESSAGE-----