10QSB 1 june10q-823.txt QUARTERLY FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-QSB (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL QUARTER ENDED JUNE 30, 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) 28309 Ave. Crocker, Valencia, California 91355 ---------------------------------------------- (Address of Principal executive offices) (Zip code) (661) 257-8000 ----------------------- Issuer's telephone number Securities registered pursuant to 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.001 PAR VALUE ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of June 30, 2004 the issuer had 25,042,048 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 June 30, 2004 and the results of their operations and their cash flows for the three months ended June 30, 2004. These consolidated financial statements include the accounts of ValCom, Inc. and its subsidiary companies (together "the Company"). Results for the three and nine months ended June 30, 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. -2- VALCOM, INC. FORM 10-QSB INDEX Page PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheet as of June 30, 2004 (unaudited) 4 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2004 and 2003 (unaudited) 8 Notes to Condensed Consolidated Financial State- ments (unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Disclosure Controls and Procedures 19 Part II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 SIGNATURES 23 Item 6. Exhibits and Reports on Form 8-K 24 Part III. EXHIBITS -3- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET June 30, 2004 ------ ASSETS (Unaudited) ------ Current Assets: Cash & Cash equivalents $ 73,794 Accounts receivable, net 11,512 ----------- Total Current Assets 85,306 Property and equipment - net 3,446,394 Prepaid development costs 66,625 Deposits and other assets 46,807 ------------ Total Assets $ 3,645,132 ============ 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 $ 355,602 Accrued interest 324,753 Accrued expenses 169,955 Advanced Rent 30,600 Due to related parties 455,771 Notes payable 14,043 ----------- Total Current Liabilities 1,350,724 Mortgage payable-Nevada 2,593,661 Liabilities Subject To Compromise Prepetition trade accounts payable 206,249 Prepetition Payables due to related parties 95,000 Prepetition accrued expenses 126,173 ------- Total Liabilities 4,371,807 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 Common stock, par value $.001; 100,000,000 shares authorized; 25,042,048 shares issued and outstanding 25,527 Additional Paid-in capital 15,423,767 Accumulated deficit (16,177,487) Total Stockholders' Equity (726,675) ----------- Total Liabilities and Stockholders' Equity $3,645,132 =========== See accompanying notes to the condensed consolidated financial statements -5- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three For the three months ended months ended June 30, 2004 June 30, 2003 Revenue: Rental . . . . . . . . . . . . .$ 540,204 $536,978 Production . . . . . . . . . . . . 28,427 182,453 Other. . . . . . . . . . . . . . . 1,596 (76,573 ----------------------------------------- . . . . . . . . . 570,227 642,858 ----------------------------------------- Cost and Expenses: Production . . . . . . . . . . 122,509 17,354 Loss on impairment of Property Litigation Settlement Selling and promotion 75,858 4,074 Depreciation and amortization. . 20,020 85,545 General and administrative . . . 571,826 408,847 Consulting and professional services 452,705 Total Cost and Expenses. . . . 1,242,918 515,820 ----------------------------------------- Operating loss . . . . . . . (672,691) 127,038 Other Income (Expense): Interest Expense (122,247). (203,095) Gain on sale of assets - 34,000 Loss on equity investment (49,713) ----------------------------------------- Total Other Income (Expense) . . (122,247) (218,808) ----------------------------------------------- Loss from continuing operations (91,770) Discontinued operations: Operating loss from discontinued operations. 0 (109,167) --------------- ------------------------ Net gain on disposal of discontinued operations.0 80,388 --------------- ------------------------ Net loss . . . . . . . . . . .$ (794,938) $ (120,549) =============================================== Basic and diluted loss per share from continuing operations . . . . . . . . . $(0.04) $ 0.01 =============================================== Weighted average shares outstanding: Basic and diluted. 21,366,619 12,600,064 ===============================================
See accompanying notes to the condensed consolidated financial statements -6- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the nine For the nine months ended months ended June 30, 2004 June 30, 2003 Revenue: Rental . . . . . . . . . . . . . . . . . . . . . . $ 1,633,979 $ 1,560,005 Production . . . . . . . . . . . . . . . . . . . . . 87,612 385,422 Other. . . . . . . . . . . . . . . . . . . . . . . . . 7,433 0 -------------- ------------------------ 1,729,024 1,945,427 Cost and Expenses: Production . . . . . . . . . . . . . . . . . . . . . . 139,212 273,070 Loss on Impairment of Property. . . . . . . . . . . 1,438,250 Litigation costs . . . . . . . . . . . . . . . 1,405,656 Selling and promotion. . . . . . . . . . . . . . . . . 105,423 18,542 Depreciation and amortization. . . . . . . . . . . . . . 490,87 261,820 General and administrative . . . . . . . . . . . . . . .2,273,975 2,474,591 Consulting and professional services . . . . . . . . . . .967,224 Total Cost and Expenses. . . . . . . . . . . . . 6,819,927 3,028,023 --------------- ------------------------------- Operating loss . . . . . . . . . . . . . . . . . . . (5,090,903) (1,082,596) Other Income (Expense): Interest expense . . . . . . . . . . . . . . . . . . (803,624) (774,508) Gain on sale of assets. . . . . . . . . . . . . . . 60,230 61,642 Impairment of property Loss on Equity Investment . . . . . . . . . . . . . (6,679) (49,713) Other income. . . . . . . . . . . . . . . . . . . . 0 50,000 --------------- ------------------------------ Total Other Income (Expense) . . . . . . . . . . (750,073) (712,579) Total Other Expenses Net Loss . . . . . . . . . . . . . . . . . . . . . . (5,840,976) (1,795,175) =============== ============================= Discontinued operations: Operating loss from discontinued operations. . . 0 (109,167) --------------- ------------------------------ Net gain on disposal of discontinued operations. . . . . . 0 80,388 --------------- ------------------------------ Net Loss .. . . . . . . . . . . . . . . . . . . . (5,840,976) (1,823,954) --------------- ------------------------------ Basic and diluted loss per share from continuing operations . . . . . . . . . . . . . . . . . . . . . . (0.29) $ (0.15) --------------- ------------------------------ Weighted average shares outstanding: Basic and diluted. 20,372,661 11,858,208
See accompanying notes to the condensed consolidated financial statements -7- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) For the nine For the nine months ended months ended June 30, 2004 June 30, 2003 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) income $(5,840,976) $(1,823,955) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of property and equipment 1,438,250 Litigation costs 1,405,656 Depreciation and amortization 490,187 261,820 Bad debt expense - 56,606 Gain on sale of fixed assets (60,230) (61,642) Stock issued for debt retirement. . . . . . . . . . . . . . . 401,800 3,870 Stock issued for services 594,000 140,376 Stock issued for compensation. . . . . . . . . . . . . . . . 256,125 54,475 Changes in operating assets and liabilities: Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,080 (18,973) Prepaid development costs (287,679) (31,952) Other assets 241,897 Deferred Compensation . . . . . . . . . . . . . . . . . . . . . 33,022 129,357 Deposits (185,146) (63,979) Accounts payable and accrued expenses . . . . . . . . . . . . . (18,387) 710,951 ---------------- -------------- Net Cash Used by Operating Activities . . . . . . . . . . . . . (1,574,879) (405,019) ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Fixed Assets . . . . . . . . . . . . . . . . . . (46,566) - Notes receivable payments . . . . . . . . . . . . . . . . . . . . . 35,178 66,101 Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 57,200 84,159 ---------------- ---------------- Net Cash Provided by Investing Activities. . . . . . . . . . . . . 45,812 150,260 ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash proceeds from sale of stock 1,147,000 Principal repayment of notes. . . . . . . . . . . . . . . . . . . . (174,807) Principal borrowings on notes and mortgages . . . . . . . . . . . . 153,102 234,463 Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . 397,281 (91,635) Net Cash Provided By Financing Activities . . . . . . . . 1,391,179 (31,979) ---------------- ---------------- NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . (137,888) (286,738) CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . 211,682 343,374 ---------------- ---------------- CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . $ 73,794 $ 56,636 ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: --------------------------------------------------------------------------- Interest paid . . . . . . . . . . . . . . . . .. . . . . . . . $ 347,824 $ 284,402 ---------------- ---------------- Income taxes paid . . . . . . . . . . . . . . . . . . . . . . $ $ 0 ---------------- ---------------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY: 26,400 Shares of common stock issued for retirement debt 3,870
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 -------------------------------------------------------------------------------- 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, our independent accountants were unable to complete their review of these financial statements. We will file an amendment to form 10-QSB when our independent accountants complete their review of these financial statements. 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, one of the Company's subsidiaries filed on an emergency basis a voluntary Chapter 11 bankruptcy petition. The Subsidiary 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. In May 2004, Laurus paid off Finance Unlimited and was subrogated to Finance's $6,565,998 claim, which became included in the senior of Laurus' two claims. Laurus then sought to conduct a non-judicial foreclosure sale of the Property, and VEI objected. The Bankruptcy Court issued an order on June 3, 2004, that while Laurus could conduct a non-judicial foreclosure sale of the Property, Laurus would not be entitled to any deficiency claim against either VEI or Valcom, or any other assets other than the Property itself (and the rents and leases appurtenant thereto). On June 10, 2004, the court ordered the property to be sold. At this sale, Laurus claimed that its senior note had a balance of $7,407,873 and its junior note a balance of $2,405,093. Virtually all of the disputed penalties, along with a disproportionate share of disputed legal fees and expenses, were incorporated into the junior balance, while the senior included the $6,565,998 million subrogated from the Finance claim. The sale was conducted through the junior note, and the Property was sold for $2.9 million to a third party. An affiliate of this third party then purchased the senior note directly from Laurus, without a second sale. As a result of the Bankruptcy Court's order and the subsequent trustee's sale of the Property, neither VEI nor Valcom are subject to any further liabilities on account of the notes and deeds of trust previously held by Finance and Laurus. Even though the senior note still technically exists, it has been rendered non-recourse by the Bankruptcy Court's order, and could only be enforced against the Property itself (which no longer belongs to VEI). Any liability owed to the third party, which purchased the Property with regard to the rents collected for June 2004, has been resolved by settlement with that party. 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. See accompanying notes to the condensed consolidated financial statements -9- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company is a diversified entertainment company with the following operating activities: a) Studio rental - The Company and its subsidiary, Valencia Entertainment International, LLC, operated eight sound stages in Valencia, California until June 10,2004 when six of the sound stages were sold off to pay the debts of Laurus and Finance Unlimited. The Company leases the other two sound stages. Beginning June 2003, the Company and its subsidiary signed one-year lease with five one-year options for its sound stages. 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. 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. 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 and nine months ended June 30, 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 nine months ended June 30, 2004 and 2003, respectively. As of June 30, 2004, all 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. See accompanying notes to the condensed consolidated financial statements -10- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. 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. However, as per Court order dated June 3, 2004 and based on the deed of trust bearing instrument nos. 99-2400871, 02-1209820 and 02-1209821, the property belonging to VEI, as defined in the instruments was auctioned for sale. The properties which were valued at Land $7,392,292 Building $4,028,785 and Building improvements $1,154,406 and Accumulated Depreciation of $1,294,088 at March 31,2004 were sold to repay the obligations to Laurus (Laurus having paid the obligations owed to Finance Unlimited) under Trust Sale Nos: 8413-40 and 8414-30.Consequently the loss incurred due to this sale is recorded as $1,405,656 under the heading "Impairment of Property and Equipment" in the Profit and loss account of VEI for the nine months ending June 30, 2004. 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 June 30, 2004 and for the three and nine months ended June 30, 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 nine months ended June 30, 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 $5,840,976 and a working capital deficiency of $1,265,419 and an accumulated deficit of $16,177,487 at June 30, 2004. The Company had a net loss of $794,938 for the three months ended June 30, 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 21,366,619 and 20,372,661 for the three and nine months ended June 30, 2004 and 12,600,064 and 11,858,208 for the three and nine months ended June 30, 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 June 30, 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 $64,444. NOTE 4 SEGMENT INFORMATION ----------------------------- Studio Studio & Film & TV Rental Equip. Rental Production Total ------- ------------ ---------- ----- As of and for the nine months ended June 30, 2004 ---- Revenues 1,343,258 43,766 42,000 1,729,024 Operating (Loss) Income (5,015,878) (20,637) (54,388) (5,090,903) Total Assets 3,264,198 220,412 160,522 3,645,132 Depreciation and Amortization 451,687 36,400 2,100 490,187 2003 ---- Revenues $ 1,602,313 $ 343,114 $ 0 $ 1,945,427 Operating loss (929,978) (7,692) (144,926) (1,082,596) Total Assets 12,141,320 172,674 0 12,313,994 Depreciation and Amortization 224,620 37,200 0 261,820 -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, 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. In May 2004, Laurus paid off Finance and was subrogated to Finance's $6,565,998 claim, which became included in the senior of Laurus' two claims. Laurus then sought to conduct a non-judicial foreclosure sale of the Property, and VEI objected. The Bankruptcy Court issued an order on June 3, 2004, that while Laurus could conduct a non-judicial foreclosure sale of the Property, Laurus would not be entitled to any deficiency claim against either VEI or ValCom, or any other assets other than the Property itself (and the rents and leases appurtenant thereto). On June 10, 2004, the court ordered the property to be sold. At this sale, Laurus claimed that its senior note had a balance of $7,407,873 and its junior note a balance of $2,405,093. Virtually all of the disputed penalties, along with a disproportionate share of disputed legal fees and expenses, were incorporated into the junior balance, while the senior included the $6,565,998 million subrogated from the Finance claim. The sale was conducted through the junior note, and the Property was sold for $2.9 million to a third party. An affiliate of this third party then purchased the senior note directly from Laurus, without a second sale. As a result of the Bankruptcy Court's order and the subsequent trustee's sale of the Property, neither VEI nor ValCom are subject to any further liabilities on account of the notes and deeds of trust previously held by Finance and Laurus. Even though the senior note still technically exists, it has been rendered non-recourse by the Bankruptcy Court's order, and could only be enforced against the Property itself (which no longer belongs to VEI). Any liability owed to the third party, which purchased the Property with regard to the rents collected for June 2004, has been resolved by settlement with that party. NOTE 6 STOCKHOLDERS' EQUITY ------------------------------ (A) CONVERTIBLE PREFERRED STOCK ---------------------------------- On June 30, 2004, 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 nine months ended June 30, 2004. -15- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (B) COMMON STOCK ------------------ During the nine months ended June 30, 2004, the Company issued 208,333 shares of common stock in lieu of debt retirement. The value of the debt retired totaled approximately $25,000. During the nine months ended June 30, 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 nine months ended June, 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 $266,500, 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 nine months ended June 30, 2004, the Company issued 1,290,000 shares of common stock in lieu of compensation consultancy services performed and compensation. The value of the services performed totaled approximately $620,400, which was computed based upon the market prices of the common stock on the applicable payment dates. During the nine months ended June, 2004, the Company issued 30,000 shares of common stock to a director in lieu of an interest payment of $3,000, which was computed based upon the market price of common stock at the applicable payment date. During the nine months ended June 30, 2004, the Company issued 300,000 shares of common stock to a director in lieu of retirement of a loan which was computed based upon the market prices of common stock on the applicable payment dates. During the nine months ended June 30, 2004, the Company issued an aggregate of 1,315,750 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $436,458, 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 nine months ended June 30, 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 nine months ended June 30, 2004, the Company issued 4,454,999 shares of common stock to individuals through a Private Placement Memorandum for $1,015,000. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. NOTE 7 SUBSEQUENT EVENTS --------------------------- Sale of Building VEI filed a voluntary chapter 11 bankruptcy petition on April 7, 2003. By May 2004, the Property was subject to three (3) secured claims. These were a note and first-priority deed of trust held by Finance Unlimited, LLC ("Finance") in the amount of $6,565,998 and two notes, secured by second-priority and third-priority deeds of trust, both held by Laurus Master Fund, Ltd. ("Laurus"). Laurus claimed that it was owed a total of $2,978,876 plus additional penalties and additional legal fees on the two notes but VEI disputed many of the penalty claims by Laurus. The Finance note was solely the obligation of VEI, but ValCom, Inc. was also an obligor on the two Laurus notes. In May 2004, Laurus paid off Finance and was subrogated to Finance's $6,565,998 claim, which became included in the senior of Laurus' two claims. Laurus then sought to conduct a non-judicial foreclosure sale of the Property, and VEI objected. The Bankruptcy Court issued an order on June 3, 2004, that while Laurus could conduct a non-judicial foreclosure sale of the Property, Laurus would not be entitled to any deficiency claim against either VEI or valium, or any other assets other than the Property itself (and the rents and leases appurtenant thereto). On June 10, 2004, the court ordered the Property to be sold. At this sale, Laurus claimed that its senior note had a balance of $7,407,873 and its junior note a balance of $2,405,093. Virtually all of the disputed penalties, along with a disproportionate share of disputed legal fees and expenses, were incorporated into the junior balance, while the senior included the $6,565,998 million subrogated from the Finance claim. The sale was conducted through the junior note, and the Property was sold for $2.9 million to a third party. An affiliate of this third party then purchased the senior note directly from Laurus, without a second sale. -16- As a result of the Bankruptcy Court's order and the subsequent trustee's sale of the Property, neither VEI nor ValCom are subject to any further liabilities on account of the notes and deeds of trust previously held by Finance and Laurus. Even though the senior note still technically exists, it has been rendered non-recourse by the Bankruptcy Court's order, and could only be enforced against the Property itself (which no longer belongs to VEI). Any liability owed to the third party, which purchased the Property with regard to the rents collected for June 2004, has been resolved by settlement with that party. BANKRUPTCY DISMISSAL VEI filed a voluntary chapter 11-bankruptcy petition on April 7, 2003 and obtained the status of Debtor in Possession. After successfully settling the debts owed to secured creditors through sale of property as per court order dated June 3, 2004 VEI applied to the United States Bankruptcy Court, Central District of California, San Fernando Valley Division for a Motion to dismiss Chapter 11 Bankruptcy case ("the Motion"). The Court on August 3, 2004, having considered the Motion and pleadings filed in support thereof, having heard argument of counsel, finding that notice was proper, and for good cause appearing therefore, ordered (1) The Motion granted (2) Debtor's Chapter 11 bankruptcy case dismissed. IMPAIRMENT OF PROPERTY AND EQUIPMENT As per Courts order dated June 3, 2004, based on the deed of trust bearing instrument nos. 99-2400871, 02-1209820, and 02-1209821 the property belonging to VEI, as defined in the instruments was auctioned for sale. The properties which were valued at Land $7,392,292 Building $4,028,785 and Building improvements $1,154,406 and Accumulated Depreciation of $1,294,088 at March 31, 2004 were sold to repay the obligations to Laurus (Laurus having paid the obligations owed to Finance Unlimited) under Trust Sale Nos: 8413-40 and 8414-30.Consequently the loss incurred due to this sale is recorded as $1,438,250 in the Profit and loss account of VEI for the period six months ending March 31, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of June 30, 2004, ValCom, Inc. operations were comprised of four divisions: (1) Studio (2) Equipment and Personnel Rental, (3) Broadcast Television and (4) Film and Television Production. RENTAL ------ The Company and its subsidiary, Valencia Entertainment International, LLC, operates two sound stages in Valencia, California, which the Company leases. Beginning June 2003, the Company and its subsidiary have a newly signed one-year lease with five one-year options for two sound stages, which will generate $700,000 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. 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). 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 JUNE 30, 2004 VS. JUNE 30, 2003 ----------------------------------------------------------- -17- VALCOM, INC. AND SUBSIDIARIES Revenues for the three months June 30, 2004 decreased by $72,631 or 11.30% from $642,858 for the three months ended June 30, 2003 to $570,226 for the same period in 2004. The decrease in revenue was principally due to increased studio revenues offset by decreased production revenues associated with the joint venture with Woody Fraser Productions. Production costs for the three months ended June 30, 2004 decreased by $105,155 or 605.94% from $17,354 for the three months ended June 30, 2003 to $122,509 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. Impairment of property increased by $1,438,250 for the three months ended June 30,2004 principally due to the property being sold to pay off Finance Unlimited and Laurus Notes. The litigation costs increased by $1,405,656 for the three months ended June 30, 2004 compared to $0 for the three months ended June 30, 2003 primarily due to additional interest, penalties, acceleration payment and lawyer fees paid for the settlement of Laurus Notes. Depreciation and amortization expense for the three months ended June 30, 2004 decreased by $65,525 or 76.60% from $85,545 for the three months ended June 30, 2003 to $20,020 for the same period in 2004. General and administrative expenses for the three months ended June 30, 2004 increased by $162,978 or 39.86% from $408,847 for the three months ended June 30, 2003 to $571,825 for the same period in 2004. The increase was due principally to increased personnel costs for the new projects. Interest expense for the three months ended June 30, 2004 decreased by $80,848 or 39.81% from $203,095 for the three months ended June 30, 2003 to $122,246 for the same period in 2004. The decrease was due principally to the decrease in interest rates associated with the company's mortgage loans. Due to the factors described above, the Company's net loss increased by $674,389 from $120,549 for the three months ended June 30, 2003 to $794,938 for the same period in 2004. NINE MONTHS ENDED JUNE 30, 2004 VS. NINE MONTHS ENDED JUNE 30, 2003 ---------------------------------------------------------------------- Revenues for the nine months ended June 30, 2004 decreased by $216,403 or 11.12% from $1,945,427 for the nine months ended June 30, 2003 to $1,729,024 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 other income. Production costs for the nine months ended June 30, 2004 decreased by $133,858 or 49.02 from $273,070 for the nine months ended June 30, 2003 to $139,212 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. Impairment of property and equipment increased by $1,438,250 for the nine months ended June 30, 2004 compared to $0 for the three months ended June 30, 2003 primarily due to sale of property of VEI to pay off Finance Unlimited and Laurus Notes. The Litigation costs increased by $1,405,656 for the nine months ended June 30, 2004 compared to $0 for the nine months ended June 30, 2003 primarily due to additional interest, penalties, and acceleration payment and lawyer's fee paid for the settlement of Laurus Notes. Depreciation and amortization expense for the nine months ended June 30, 2004 increased by $228,367 or 87.22% from $2,474,591or for the nine months ended June 30, 2003 to $490,187 for the same period in 2004, mainly due to write off of certain balance sheet items. General and administrative expenses for the nine months ended June 30, 2004 decreased by $200,615 or 8.11% from $2,474,591 for the six months ended June 30, 2003 to $2,273,975 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 nine months ended June 30, 2004 increased by $109,964 or 19% from $571,413 for the nine months ended June 30, 2003 to $681,377 for the same period ended June 30, 2004. Other income for the nine months ended June 30, 2004 increased by $29,115 or 3.76% from $774,508 for the nine months ended June 30, 2003 to $803,624 for the same period in 2004. -18- VALCOM, INC. AND SUBSIDIARIES Due to the factors described above, the Company incurred a net loss of $5,840,976 for the nine months ended June 30, 2004 compared to net loss of $1,823,954 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. 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 31, 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 $5,840,976 and a negative cash flow from operations of $1,574,879 for the nine months ended June 30, 2004, a working capital deficiency of $1,265,419, and an accumulated deficit of $16,177,487 at June 30, 2004. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $73,794 on June 30, 2004 compared to $39,670 as at June 30, 2003. During the nine months ended June 30, 2004, net cash used by operating activities totaled $1,574,879 compared to net cash used by operating activities of $405,019 for the comparable nine-month period in 2003. A significant portion of operating activities included payments for interest and production development costs. Net cash used by financing activities for the nine months ended June 30, 2004 totaled $1,391,179 compared to $31,979 for the comparable nine-month period in 2003. Net cash provided by investing activities during the nine months ended June 30, 2004 totaled $45,812 compared to net cash provided of $150,260 during the comparable prior year period due to proceeds from sale of fixed assets. The above cash flow activities yielded a net cash decrease of $137,888 during the nine months ended June 30, 2004 compared to a decrease of $286,738 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $1,265,415as of June 30, 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. -19- VALCOM, INC. AND SUBSIDIARIES 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. 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 --------------------------------- (B) COMMON STOCK ------------------ During the nine months ended June 30, 2004, the Company issued 208,333 shares of common stock in lieu of debt retirement. The value of the debt retired totaled approximately $25,000. During the nine months ended June 30, 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. -20- VALCOM, INC. AND SUBSIDIARIES During the nine months ended June, 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 $266,500, 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 nine months ended June 30, 2004, the Company issued 1,290,000 shares of common stock in lieu of compensation consultancy services performed and compensation. The value of the services performed totaled approximately $620,400, which was computed based upon the market prices of the common stock on the applicable payment dates. During the nine months ended June, 2004, the Company issued 30,000 shares of common stock to a director in lieu of an interest payment of $3,000, which was computed based upon the market price of common stock at the applicable payment date. During the nine months ended June 30, 2004, the Company issued 300,000 shares of common stock to a director in lieu of retirement of a loan which was computed based upon the market prices of common stock on the applicable payment dates. During the nine months ended June 30, 2004, the Company issued an aggregate of 1,315,750 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was approximately $436,458, 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 nine months ended June 30, 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 nine months ended June 30, 2004, the Company issued 4,454,999 shares of common stock to individuals through a Private Placement Memorandum for $1,015,000. This issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. -21- 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 ---------------------------- BANKRUPTCY DISMISSAL VEI filed a voluntary chapter 11-bankruptcy petition on April 7, 2003 and obtained the status of Debtor in Possession. After successfully settling the debts owed to secured creditors through sale of property as per court order dated June 3, 2004 VEI applied to the United States Bankruptcy Court, Central District of California, San Fernando Valley Division for a Motion to dismiss Chapter 11 Bankruptcy case ("the Motion"). The Court on August 3, 2004, having considered the Motion and pleadings filed in support thereof, having heard argument of counsel, finding that notice was proper, and for good cause appearing therefore, ordered (1) The Motion granted (2) Debtor's Chapter 11 bankruptcy case dismissed. IMPAIRMENT OF PROPERTY AND EQUIPMENT As per Courts order dated June 3, 2004, based on the deed of trust bearing instrument nos. 99-2400871, 02-1209820, and 02-1209821 the property belonging to VEI, as defined in the instruments was auctioned for sale. The properties which were valued at Land $7,392,292 Building $4,028,785 and Building improvements $1,154,406 and Accumulated Depreciation of $1,294,088 at March 31, 2004 were sold to repay the obligations to Laurus (Laurus having paid the obligations owed to Finance Unlimited) under Trust Sale Nos: 8413-40 and 8414-30.Consequently the loss incurred due to this sale is recorded as $1,438,250 in the Profit and loss account of VEI for the period six months ending March 31, 2004. -22- VALCOM, INC. AND SUBSIDIARIES 99.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (B) REPORTS ON FORM 8-K 1. F.D. Disclosures pertaining to Option of Shares (filed with Edgar on May 25, 2004). 2. Foreclosure on six of the eight Valencia Sound Stages(filed with Edgar on June 30, 2004). 3. Dismissal of Chapter 11-Bankruptcy for Valencia Entertainment International (filed with Edgar on June 30, 2004). SIGNATURES ---------- In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALCOM, INC. Date: August 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 August 19, 2004 ------------------ Chairman of the Board -------------- Vince Vellardita BY: /s/ Tracey Eland Secretary August 19, 2004 ------------- (Principal Accounting Officer) ------------- Tracey Eland -23- EXHIBIT 99.1 (a) Exhibits. Exhibit Number Description -------------- ----------- 31.1 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. 31.2 Certification of the Chief Financial Officer of ValCom, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) A Form 8-K was filed on ____________ Exhibit 31.1 CERTIFICATION I, Vince Vellardita, certify that: 1. I have reviewed this Form 10-QSB of ValCom, Inc.; 2. Based on my knowledge, this 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 this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have isclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 23, 2004 /s/ Vince Vellardita Vince Vellardita Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Tracey Eland, certify that: 1. I have reviewed this Form 10-QSB of ValCom, Inc.; 2. Based on my knowledge, this 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 this report; 3. Based on my knowledge, the financial statements, and other financial nformation included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the a udit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 23, 2004 /s/ Tracey Eland --------------------------- Tracey Eland Principal Accounting Officer and Secretary EXHIBIT 32.1 ValCom, Inc. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ValCom, Inc. (the Company) on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Vince Vellardita, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to ValCom, Inc. and will be retained by ValCom, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Dated: August 23, 2004 /s/ Vince Vellardita ---------------------------------- Name: Vince Vellardita Title: Chief Executive Officer EXHIBIT 32.2 ValCom, Inc. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ValCom, Inc. (the Company) on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Tracey Eland, Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to ValCom, Inc. and will be retained by ValCom, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Dated: August 23, 2004 /s/ Tracey Eland ------------------------------------- Name: Tracey Eland Title: Principal Accounting Officer and Secretary