-----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, Ewt8hFrcGNTpD3EMH3tGJPIB0JFh7MhNjwf0/0u17UvWhj9vZm4wHCuGiUrwCy40 SdKEsUnghHUn0kV1VvlAJQ== 0001013453-04-000044.txt : 20041216 0001013453-04-000044.hdr.sgml : 20041216 20041216172756 ACCESSION NUMBER: 0001013453-04-000044 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20041216 DATE AS OF CHANGE: 20041216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALCOM INC CENTRAL INDEX KEY: 0001013453 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 581700840 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28416 FILM NUMBER: 041209171 BUSINESS ADDRESS: STREET 1: 28309 AVENUE CROCKER CITY: VALENCIA STATE: CA ZIP: 91355 BUSINESS PHONE: 6612578000 MAIL ADDRESS: STREET 1: 28309 AVENUE CROCKER CITY: VALENCIA STATE: CA ZIP: 91355 FORMER COMPANY: FORMER CONFORMED NAME: VALCOM INC DATE OF NAME CHANGE: 20030213 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 10QSB/A 1 march10q-8212.txt AMENDED QUARTERLY FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-QSB/A (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) 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 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. -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 (UNAUDITED) March 31, 2004 ------ ASSETS (Unaudited) ------ Current assets: Cash & Cash equivalents $ 229,723 Accounts receivable, net 51,827 Note receivable, current 17,590 ----------- Total current assets 299,140 Property and equipment - net 12,965,255 Deferred Compensation 225,658 Prepaid development costs 440,739 Deposits and other assets 300,684 ------------ Total assets $ 14,231,476 ============ See accompanying notes to the condensed consolidated financial statements -4- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities not subject to compromise Current liabilities: Accounts payable $ 354,756 Accrued interest 324,753 Accrued expenses 293,892 Advanced rent 272,100 Due to related parties 431,538 Notes payable 14,043 Notes payable - Laurus 9,812,966 - ------------------------------------------------------------- Liabilities subject to compromise - ---------------------------------- Prepetition trade accounts payable 206,249 Prepetition payable due to related parties 95,000 Prepetition accured expenses 131,902 ------------- Total current liabilities 11,937,199 - ------------------------------------------------------------- Mortgage payable-nevada 2,519,536 Total lablilties 14,456,536 - ------------------------------------------------------------- Commitments and contingencies Stockholders' deficit: Convertible preferred stock: all with par value $0.001; Series B, 1,000,000 shares authorized; 38,000 shares issued and outstanding 38 Series C, 5,000,000 shares authorized; 1,480,000 shares issued and outstanding 1,480 Series D, 1,250,000 shares authorized;1,250,000 shares issued and outstanding - Common stock, par value $.001; 100,000,000 shares authorized; 21,144,913 shares issued and outstanding 21,144 Additional paid-in capital 15,354,666 Preferred stock to be issued Accumulated deficit (15,602,388) Total Stockholders' deficit (225,060) ----------- Total Liabilities and Stockholders' deficit $14,231,476 =========== See accompanying notes to the condensed consolidated financial statements -5- VALCOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the six For the six months ended months ended March 31, 2004 March 31, 2003 Revenue: Rental . . . . . . . . . . . . .$ 1,093,775 $1,023,027 Production . . . . . . . . . . . . 59,185 202,969 Other. . . . . . . . . . . . . . . 5,837 76,573 ----------------------------------------- . . . . . . . . 1,158,797 1,302,569 ----------------------------------------- Cost and expenses: Production . . . . . . . . . . 16,703 255,716 Impairment of property & equipment 1,438,250 - Litigation accrual 1,405,656 - Selling and promotion 29,564 14,468 Depreciation and amortization. 470,167 176,275 General and administrative . . 1,702,150 2,065,744 Consulting and professional services 514,519 ----------------- ------------ Total Cost and Expenses. . . 5,577,150 2,512,203 ----------------------------------------- Operating loss . . . . . . . (4,418,212) (1,209,634) Other income (expense): Interest expense net (681,377) (571,413) Gain on sale of assets 60,230 27,642 Loss on equity investment (6,679) - Other income - 50,000 ----------------------------------------- Total other income (expense) . . (627,826) (493,771) ----------------------------------------------- Net loss . . . . . . . . . . .$ (5,046,038) $ (1,703,405 =============================================== Basic and diluted loss per share from continuing operations . . . . . . . . . $ ( 0.26) $ ( 0.14) -------------------- ----------------- Weighted average shares outstanding basic and diluted 19,170,824 11,487,280
See accompanying notes to the condensed consolidated financial statements -6- 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 Net revenue: Rental . . . . . . . . . . . . $ 494,137 $ 459,372 Production . . . . . . . . . . 28,948 80,077 Other. . . . . . . . . . . . . 3,497 1,809 ----------------------------------------- Total net revenues 526,582 537,640 ----------------------------------------- Cost and expenses: Production . . . . . . . . . . 5,761 64,693 Impairment of property & equipment 1,438,250 - Litigation accrual 1,405,656 - Selling and promotion 15,592 2,051 Depreciation and amortization. 382,329 88,535 General and administrative . . 1,021,366 982,107 Consulting and professional services 371,950 - Total cost and expenses. . . 4,640,902 1,137,386 ----------------------------------------- Operating loss . . . . . . . (4,114,320) (599,746) Other income (expense): Interest expense . (413,785) (376,933) Impairment of property (53,950) 19,642 Loss on equity Investment 0 50,000 Other income ----------------------------------------- Total other income (expense) net (413,785) (396,575) Gain on sale of assets 6,280 19,642 ----------------------------------------------- Net loss . . . . . . . . . $ (4,521,825) $ (926,679) =============================================== Basic and diluted loss per share from continuing operations . . . . . . . . $ ( 0.23) $ ( 0.08) Weighted average shares outstanding basic and diluted. 19,018,382 11,816,467
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 $(5,046,038) $(1,703,405) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of property and equipment 1,438,250 Depreciation and amortization 470,176 176,275 Bad debt expense - 70,313 Gain on sale of fixed assets (60,230) (27,642) Stock issued for retirement debt . . . . . . . . . . . . . . . . . . . . . . 57,959 Stock issued for interest payable 3,000 Stock issued for compensation. . . . . . . . . . . . . . . . 715,458 170,351 Changes in operating assets and liabilities: Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,080 (14,952) Prepaid expenses (287,679) (31,897) Other assets 195,987 Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . 33,022 112,846 Deposits (185,146) ( 875) Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 1,964,469 549,904 ------------ -------------- Net Cash Used by Operating Activities . . . . . . . . . . . . . . . . ( 876,688) ( 503,240) ------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment. . . . . . . . . . . . . . . . . . ( 332,047) (3,899) Repayments of note receivable . . . . . . . . . . . . . . . . . . . . . . 35,178 55,179 Proceeds from sale property and equipment . . . . . . . . . . . . . . . . 63,700 50,179 ------------- -------------- Net Cash Provided by Investing Activities. . . . . . . . . . . . . . . . ( 233,169) 101,439 ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash proceeds from sale of stock 467,500 Stock issued for options exercised 232,000 Principal repayment of notes payable . . . . . . . . . . . . . . . . ( 68,883) (107,827) Principal borrowings on notes payable and mortgages . . . . . . . . 100,000 234,463 Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . 397,281 (28,539) Net cash provided by financing activities . . . . . . . . . (1,127,898 98,097 -------------- ----------- NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . 18,041 (303,704) CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 211,682 343,374 ------------- --------------- CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . .. $ 229,723 $ 39,670 ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - --------------------------------------------------------------------------- Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 347,824 $ 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 BANKRUPTCY PROCEEDINGS,DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- on April 7, 2003, the Company filed on an emergency basis a voluntary Chapter 11 bankruptcy petition. The Company's 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 Finance 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. 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. On August 3, 2004, the Bankruptcy Court granted the motion for dismissal of Chapter 11 bankruptcy case against the Company. 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, 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. This interest was sold to Eye Span Entertainment Network, Inc. on February 16, 2004 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. Following is a summary of the significant accounting policies followed in the prepartion of these consolidated financial statements, which policies are in accordanc with accounting principles generally accepted in the United States of America. 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 from 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. 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. GOING CONCERN - ------------------------------------------------------- The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a net loss to date of $5,046,083 and a working capital deficiency of $11,638,059 and an accumulated deficit of $15,602,388 at March 31, 2004. The Company had a net loss of $5,046,038 for the six 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. Management has taken varioussteps to revise its operating and financial requirments, which it believes are sufdficient to provide the Company with the ability to continue on in twelve months. Management devoted considerable effort during the period ended March 31, 2004, towards management of liablities and improving the operations. The management believes that the above actions will allow the Company to continue its operations through the next twelve months. See accompanying notes to the condensed consolidated financial statements -11- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) ----------- NEW ACCOUNTING PRONOUNCEMENTS - ------------------------------- 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 adoption of SFAS No. 150 does not have a material impact on the Company's 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 19,018,382 and 19,170,824 the three and six months ended March 31, 2004 and 11,816,467 and 11,487,280 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 December 31, 2003, ValCom had a 45% interest in a broadcasting company in Palm Springs, California. This interest was sold to Eye Span Entertainment Network, Inc. (ES), a related party, in exchange for 750,000 shares of common stock of ES on February 16, 2004. valued at $14,519. The Company distributed shares of ES to its shareholders as dividend in their ratio of ownership as of December 15, 2003. NOTE 4 SEGMENT INFORMATION - ----------------------------- Studio & Equip Film & TV Magazine Rental Production Puvlication Total ------- ---------- ------------ ----- As of and for the six months ended March 31, 2004 - ---- Revenues $ 1,093,775 $ 65,022 - $1,158,797 Operating (Loss) Income (4,293,893) ( 124,319) - (4,418,212) Total Assets 14,231,467 - - 14,231,476 Depreciation and Amortization 470,167 - - 470,167 Interest Expense 681,377 - - 681,377 Capital Expenditures 2,925,514 - - 2,925,514 2003 - ---- Revenues $ 1,225,996 $ - $ 76,573 $ 1,302,569 Operating loss ( 957,165) (144,926) (107,543) ( 1,209,634) Total Assets 12,362,562 - - 12,362,562 Depreciation and Amortization 176,275 - - 176,275 -14- VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5 LITIGATION - ------------------- On April 7, 2003, Valencia Entertainment International (VEI) a 100% subsidiary of ValCom, Inc., Delaware 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. On January 15, 2004, the Court approved two additional cash collateral stipulations, one each with Finance Unlimited and Laurus, authorizing the VEI'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 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. The Company had recorded liability of $ 8,407,310 for the Laurus loan (including Finance Unlimited loan) as of March 31, 2004 but the bankruptcy court valued the liability at $ 9,812,966 for the loans due to Laurus (including subrogation from Finance Unlimited loan). The Company recorded difference of $ 1,405,656 as the litigation settlement expense and reflected it on the income statement for the period ending March 31, 2004. NOTE 6 IMPAIRMENT OF PROPERTY AND EQUIPMENT The property and equipment was recorded in the books at net value of $11,251,216 (net of depreciation of $ 1,324,266). On June 10, 2004, the property was foreclosed for $ 9,812,966 and the proceeds were used to pay off the notes from Laurus. The Company has adjusted the value of the property to its subsequent disposal value. The Company recorded difference between the liabilities settled from foreclosure of the property and the net book value, as an impairment of the property and equipment and recorded imapirement costs of $ 1,438,250 during the period ending March 31, 2004. The impaired property and equipment comprised of the following: Land $ 7,392,292 Building 5,183,190 Accumulated depreciation (1,324,266) 11,251,216 Exchange for payment of liability (9,812,966) Impairment loss $ (1,438,250) NOTE 7 RELATED PARTY TRANSACTIONS On February 16, 2004, the Company sold its 45% interest in ValCom Broadcasting, consisting of a joint venture agreement with New Global Communications, Inc. The joint venture operates a newly developed low power television broadcast station, K08MX-LP, in Palm Springs, California. The February 16, 2004 Asset Purchase Agreement with Eye Span Entertainment Network, Inc. also included the sale by the Company of 143 titles from the ValCom, Inc. film library, along with the copyrights, trademarks, equipment, legal options, supplies, spare parts, inventory, and all other tangible personal property related to bingo owned and used or useful in the operation of Latino Bingo, Satellite Bingo and all other related items. It also included the sale of 10% ownership interest in Las Vegas Studios located at 41 North Mojave Road, Las Vegas, Nevada 89101. The shareholders of interest of Valcom Inc. as of December 15, 2003 received 750,000 shares of common stock of Eye Span Entertainment Network, Inc, value at $14,519, for the sale of 45% interest in ValCom Broadcasting, LLC, 143 film and television titles, all of the rights, title and interest in Latino Bingo and Satellite Bingo, as well as the 10% interest in Las Vegas Studios. . . The Company distributed shares of ES to its shareholders as dividend in their ratio of ownership as of December 15, 2003. NOTE 8 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) (B) COMMON STOCK - ------------------ During the six months dnded March 31, 2004, the Company converted the Series D Preferred Stock to common stock by issance of 2,800,000 shares of common stock. During the six months ended March 31, 2004, the Company issued 208,333 shares of common stock in lieu of debt retirement. The value of the debt retired totaled $25,000. 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 $215,000. The Company amortized $107,500 of the expenses during the six months period ending March 31, 2004. 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 $266,510. The Company amortized $66,625 of expenses for the period ending March 31, 2004. During the six months ended March 31, 2004, the Company issued 1,200,000 shares of common stock in lieu of compensation for consultant services performed and compensation. The value of the services performed totaled $594,000. During the six months ended March 31, 2004, the Company issued 30,000 shares of common stock to a director in lieu of an interest payment of $3000. 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 300,000 shares of common stock to a director in lieu of retirement of a loan. During the six months ended March 31, 2004, the Company issued 928,000 shares of common stock for options exercised amounting to $ 232,000 During the six months ended March 31, 2004, the Company issued an aggregate of 315,750 shares of common stock in lieu of compensation, salaries and bonuses to employees. Total value of the compensation, salaries and bonuses was $121,458. During the six months ended March 31, 2004, the Company issued 752,000 shares of common stock for cash amounting to $ 467,500. -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 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 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 9 SUBSEQUENT EVENTS - --------------------------- Sale of Building The Company 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 the Company disputed many of the penalties claims by Laurus. The Finance note was solely the obligation of the Company. 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. Based upon court order, the Company has adjusted the value of its property at March 31, 2004 and recorded an impairement of its value (note 6). 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. 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 and Equipment Rental, and Personnel Rental, (2) 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. 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 decreased by $11,058 or 2.09% from $537,640 for the three months ended March 31, 2003 to $526,582 for the same period in 2004. The decrease 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 $58,932 or 91.09% from $64,693 for the three months ended March 31, 2003 to $5,761 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 March 31,2004 principally due to the property being sold subsequently to pay off Finance Unlimited and Laurus Notes. The Litigation costs increased by $1,405,656 for the three months ended March 31, 2004 compared to $0 for the three months ended March 31, 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 March 31, 2004 increased by $293,792 or 432% from $88,535 for the three months ended March 31, 2003 to $382,327 for the same period in 2004. General and administrative expenses for the three months ended March 31, 2004 increased by $39,259 or 3.8% from $982,107 for the three months ended March 31, 2003 to $1,021,366 for the same period in 2004. The increase was due principally to decreased personnel costs, insurance, printing, and bad debt expenses. Interest expense for the three months ended March 31, 2004 increased by $17,210 or 4.16% from $396,575 for the three months ended March 31, 2003 to $413,785 for the same period in 2004. The increase was due principally to the increase in interest rates associated with the company's mortgage loans. Due to the factors described above, the Company's net loss increased by$3,595,146 from $926,679 for the three months ended March 31, 2003 to $4,521,825 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 $143,772 or 12.41% from $1,352,569 for the six months ended March 31, 2003 to $1,158,797 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 six months ended March 31, 2004 decreased by $239,013 or 93.5%from $255,716 for the six months ended March 31, 2003 to $16,703 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 six months ended March 31, 2004 compared to $0 for the three months ended March 31, 2003 primarily due to subsequent sale of property of VEI to pay off Finance Unlimited and Laurus Notes. -18- VALCOM, INC. AND SUBSIDIARIES The Litigation costs increased by $1,405,656 for the six months ended March 31, 2004 compared to $0 for the six months ended March 31, 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 six months ended March 31, 2004 increased by $293,892 or 159% from $176,275 or for the six months ended March 31,2003 to $470,396 for the same period in 2004, mainly due to write off of certain balance sheet items. General and administrative expenses for the six months ended March 31, 2004 decreased by $363,093 or 21% from $2,065,744 for the six months ended March 31, 2003 to $1,702,150 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 increased by $109,964 or 19% from $571,413 for the six months ended March 31, 2003 to $681,377 for the same period ended March 31, 2004. Other income for the six months ended March 31, 2004 decreased by $24,091 or 45% from $77,642 for the six months ended March 31, 2003 to $53,551 primarily due to less equipment rental activity. Due to the factors described above, the Company incurred a net loss of $5,046,038 for the six months ended March 31, 2004 compared to net loss of $1,703,405 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 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 $5,046,038 and a negative cash flow from operations of $876,688 for the six months ended March 31, 2004, a working capital deficiency of $11,638,059 and an accumulated deficit of $15,602,388 at March 31, 2004. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $229,723 on March 31, 2004 compared to $39,670 as at March 31,2003. During the six months ended March 31, 2004, net cash used by operating activities totaled $876,688 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 interest and production development costs. Net cash provided by financing activities for the six months ended March 31, 2004 totaled $1,127,898 compared to $98,097 for the comparable six-month period in 2003. Net cash used in investing activities during the six months ended March 31, 2004 totaled $8,247,380 compared to net cash provided $233,169 during the comparable prior year period due to proceeds from sale of fixed assets. The above cash flow activities yielded a net cash increase of $18,041 during the six months ended March 31, 2004 compared to a decrease of $343,374 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $11,538 as of March 31, 2004. The Company will need to raise funds through various financing 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 - --------------------------------- (B) COMMON STOCK - ------------------ During the six months ended March 31, 2004, the Company convertd the Series D Preferred Stock to common staock by issuance of 2,800,000 shares of common stock. During the six months ended March 31, 2004, ths Company issued 208,333 shares of common stock in lieu of debt retirement. The value of the debt retired total $25,000. 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. 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: August 20, 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 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: August 13, 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: August 13, 2004 -------------- /s/Tracey Eland ---------------- Name: Tracey Eland Title: Controller (Principal Accounting Officer) 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, and summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: August 13, 2004 -------------- By: /s/ Vince Vellardita ---------------------- Vince Vellardita Chief Executive Officer 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, and summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. (6) The Officer and the other certifying officer have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: August 13, 2004 --------------- By: /s/ Tracey Eland ------------------ Tracey Eland Secretary and Principal Accounting Officer -25- -----END PRIVACY-ENHANCED MESSAGE-----