-----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, EMAtSKssOoIE8/iQ/MuNLzCowrBCxWzaIjy4WjCDUFrioFMzEZUNDqPruUH1v5xj lR/D1vNoKt78jCHJ22nrWw== 0001227528-06-000272.txt : 20060821 0001227528-06-000272.hdr.sgml : 20060821 20060821165144 ACCESSION NUMBER: 0001227528-06-000272 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060821 DATE AS OF CHANGE: 20060821 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-28416 FILM NUMBER: 061046669 BUSINESS ADDRESS: STREET 1: 920 COMMERCE STREET CITY: LAS VEGAS STATE: NV ZIP: 89106-4501 BUSINESS PHONE: 702-385-9000 MAIL ADDRESS: STREET 1: 920 COMMERCE STREET CITY: LAS VEGAS STATE: NV ZIP: 89106-4501 FORMER COMPANY: FORMER CONFORMED NAME: VALCOM INC DATE OF NAME CHANGE: 20040816 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 10QSB 1 l10qsb082106.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C., 20549 FORM 10-QSB (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file Number 0-28416 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 No.) 920 S. Commerce Street, Las Vegas, NV 89106 ------------------------------------------- (Address of Principal executive offices) (702) 385-9000 --------------------------- (Issuer's telephone number) Check whether the issuer (1) 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of August 7, 2006 the issuer had 76,223,346 shares of its $0.001 par value common stock issued and 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, 2006 and the results of their operations and their cash flows for the nine months ended June 30, 2006. These consolidated financial statements include the accounts of ValCom, Inc. and its subsidiary companies (together "the Company"). Results for the nine months ended June 30, 2006, are not necessarily indicative of the operations, which may occur during the year ending September 30, 2006. Refer to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2005 for further information. 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, 2006 (unaudited) 4 Condensed Consolidated Statements of Operations for the three month period ended June 30, 2006 and 2005 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine month period ended June 30, 2006 and 2005 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis and Plan of Operation 13 Item 3. Controls and Procedures 14 Part II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits SIGNATURES 16 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
As of June 30, 2006 (unaudited) --------------- CURRENT ASSETS Cash $ 117,681 Accounts receivable, net 166,522 Prepaid expenses 25,000 Notes receivable 449,000 --------------- Total Current Assets 758,203 NET PROPERTY & EQUIPMENT 122,520 OTHER ASSETS Deposits 108,350 Other assets 1,150,000 --------------- Total Other Assets 1,258,350 --------------- TOTAL ASSETS $ 2,139,073 ===============
See accompanying notes to the condensed consolidated financial statements VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 (unaudited) --------------- CURRENT LIABILITIES Accounts payable $ 655,901 Accrued interest 43,061 Accrued expenses 133,670 Deferred income Due to related parties 949,537 Notes payable 1,418,440 --------------- Total Current Liabilities 3,200,609 LIABILITIES SUBJECT TO COMPROMISE Mortgage payable - Long term loans --------------- Total Liabilities - --------------- TOTAL LIABILITIES 3,200,609 STOCKHOLDERS' EQUITY Convertible preferred stock: all with par value of $0.001; shares authorized and outstanding as of September 30, 2005 and 2004 are as follow: Series B, 1,000,000 shares authorized; 38,000 shares issued and outstanding. 38 Series C, 15,000,000 shares authorized; 10,517,000 shares issued and outstanding as of December 31, 2005 10,517 Common stock ($0.001 par value, 100,000,000 shares authorized; 74,752,247 shares issued and outstanding as of June 30, 2006 74,752 Treasury stock (35) Additional paid-in capital 13,076,956 Retained (deficit) (14,223,764) --------------- Total Stockholders' Equity (1,061,536) --------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,139,073 ===============
See accompanying notes to the condensed consolidated financial statements 4 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
3 Month Period Ended 9 Month Period Ended June 30 June 30 June 30 June 30 2006 2005 2006 2005 (unaudited) (unaudited) (unaudited) (unaudited) ----------- ----------- ----------- ----------- REVENUES Rental income $ 69,421 $ 37,270 201,351 $ 446,042 Production income 562,578 239,435 2,537,461 369,963 Other income - - 350 - ----------- ----------- ----------- ----------- Total Revenues 631,999 276,705 2,739,162 816,005 COSTS AND EXPENSES Production 415,714 200,701 3,013,097 289,015 Selling and promotion 563,936 1,590 636,002 8,020 Depreciation and amortization 8,650 32,638 25,950 63,222 General and administrative 499,586 161,409 1,208,635 1,000,638 Consulting and professional fees 89,794 59,009 1,069,465 724,357 Bad debts - - 19,757 - Impairment of assets - - - - ----------- ----------- ----------- ----------- Total Costs and Expenses 1,577,680 455,347 5,972,906 2,085,252 OPERATING LOSS (945,681) (178,642) (3,233,744) (1,269,247) OTHER INCOME & (EXPENSES) Interest expense (18,523) (1,680) (49,910) (8,239) Other expense (360,745) (636,056) - Gain on sale of assets - - 321,395 Other income 3,977 - 41,296 28,971 ----------- ----------- ----------- ----------- Total Other Income & (Expenses) (375,290) (1,680) (644,670) 342,127 ----------- ----------- ----------- ----------- NET GAIN (LOSS) $ (1,320,972) $ (180,322) (3,878,414) $ (927,120) =========== =========== =========== =========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (0.06) $ 0.02 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - 35,787,925 =========== ===========
See accompanying notes to the condensed consolidated financial statements 5 VALCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
9 Month Period Ended June 30 June 30 2006 2005 (unaudited) (unaudited) ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $ (3,878,414) $ (927,120) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Accrued interest expense 35,868 Depreciation expense 25,950 63,772 Bad Debt Expense - 70,646 Stock issued for settelments 390,311 Stock issued for services & compensation 543,723 550,866 Preferd Stock issued for services & compensation 200,000 Changes in operating assets and liabilities: Receivables 78,902 (128,246) Note receivables 449,000 91,201 Production in progress 45,332 Deposits (100,000) Prepaid Expenses (25,000) Accounts payable and accrued expenses (231,039) 178,055 ------------ ------------ Net Cash Provided by (Used in) Operating Activities (2,510,699) (52,734) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property plant and equipment (44,442) - Disposition of property and equipment - (363,663) ------------ ------------ Net Cash Provided by (Used in) Investing Activities (44,442) (363,663) CASH FLOWS FROM FINANCING ACTIVITIES Principal repayment of notes payable - - Preferred stock issued for cash - - Cash proceeds from sale of stock - 93,673 Common tock issued for cash 713,000 - Principal borrowings on notes 1,001,960 334,813 Net borrowings from related parties 681,582 (1,726) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 2,396,542 426,760 ------------ ------------ Net Increase (Decrease) in Cash (158,599) 10,363 ------------ ------------ Cash at Beginning of Year 276,280 21,468 ------------ ------------ Cash at End of Year $ 117,681 $ 31,831 ============ ============ Supplemental Cash Flow Disclosures: Cash paid during period for interest $ - $ - ============ ============ Cash paid during period for taxes $ - $ - ============ ============ Supplemental Cash Flow Disclosures: ============ ============ Stock issued for services $ 543,723 $ - ============ ============ Stock issued for note conversions & Settlements $ 390,311 $ - ============ ============
See accompanying notes to the condensed consolidated financial statements 6 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 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. 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, Laurus had the Property 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: 1. STUDIO RENTAL. ValCom's business includes television production for network and syndication programming, motion pictures, and real estate holdings, however, revenue is primarily generated through the lease of the sound stages and production. ValCom's past and present clients in addition to Paramount Pictures and Don Belisarious Productions, include Warner Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network. In addition to leasing its sound stages, ValCom also owns a small library of television content, which is ready for worldwide distribution and several major television series in advanced stages of development. ValCom's Studio Division is composed of two properties: 920 South Commerce which is leased and 41 North Mojave which ValCom has 1/3 equity in the real estate of 7.5 acres, 160,000 square feet of commercial space, giving ValCom a total of 9 sound stages and a recording studio. Corporate offices are located at the Commerce Studios which houses a state- of-the art production studio, broadcast facilities, recording studios, production design construction, animation and post-production. 2. FILM, PRODUCTION DIVISION. ValCom, Inc. entered a joint venture with entertainment giant, Stan Lee's POW! Entertainment. POW! (Purveyors of Wonder) Entertainment, Inc. is founded by Stan Lee, together with Gill Champion and Arthur Lieberman. POW's principals combined have over a hundred years experience creating, producing, and licensing original intellectual properties. POW! Specializes in franchises for the entertainment industry, including animation and live-action feature films, plus television, DVDs, video games, merchandising, and related ancillary markets. POW! partners with studios and networks in creating new and exciting characters. In some cases, POW! creates `custom-tailored' properties for a specific star or director. Stan Lee, chairman and chief creative officer of POW!, is the creator and inventor of the modern superhero. A prolific author, Lee revolutionized the comic book industry by creating compelling characters who, despite extraordinary powers and talents, are nonetheless plagued by the same doubts and difficulties experienced by ordinary people. Some of his most enduring characters, like Spider-Man{reg-trade-mark} (a), The Hulk{reg-trade-mark} (a),and the X-Men{reg-trade-mark} (a), have spun off into television programs and feature films that have grossed hundreds of millions of dollars at the box office. 3. LIVE THEATRE. February 9, 2006, ValCom Inc. named Jeff Kutash as President of their Live Theatre Division. The first venture, a theatre production called "Headlights and Tailpipes" opened at the Las Vegas Stardust Casino and Hotel on April 3, 2006. Kutash's experience in the field of theatre, television and film create a vast knowledge of the entertainment field. Several large-scale productions put Kutash on the map for live entertainment including the first rock n' roll revue "Gold Ol' Rock n' Roll," "Dancin' Machine" and most notably "Splash," which recently celebrated its 20 year anniversary. Kutash received accolades for the choreography he staged for John Travolta's appearance in the film "Saturday Night Fever." Kutash continued staging and began co-producing television for ABC, NBC, CBS, Viacom and Film ways. His television work garnered an Emmy{reg-trade-mark} and Golden Globe{reg-trade-mark} for his participation on "Taxi", and was responsible for staging the 20th Anniversary Grammy{reg-trade-mark} Awards. He has spent the last several years commuting to and from Europe on a regular basis, coordinating international talent, music, theatrical, and television productions. 4. ANIMATION DIVISION. October 1, 2003 we formed New Zoo Revue LLC pursuant to a joint venture agreement with O Atlas Enterprises Inc., a California corporation. New Zoo Revue LLC was formed for the development and production of "New Zoo Revue" a feature film and television series and marketing of existing episodes. ValCom shall contribute all funding required for the development of the above to a maximum of $1,000,000 and O Atlas shall contribute an exclusive ten (10) year worldwide license in and to all rights, music and characters as its equal contribution towards Capital. The net profit after all expenses will be shared equally by ValCom Inc. and O Atlas. New Zoo Review LLC is expected to generate revenue by 2005 and expected to grow based on our ability to sell the TV Series of New Zoo Revue. The Company has secured a seven year marketing contract with BCI Navarre, a video marketing company. On September 27, 2005,ValCom, Inc. signed a letter of intent to acquire Digital Animation Media, Ltd., a privately held Irish corporation headquartered in Dublin, Ireland. Digital Animation Media, Ltd., one of the premier independent animation companies in Europe and a leading provider of animation software to other production companies worldwide. With its production capability and proprietary technology, the company is well positioned to take advantage of the growth in existing animation markets as well as a burgeoning market for wireless animation tools and content with clients such as Disney, Warner and The New Zoo Revue. 5. 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. ValCom's business includes television production for network and syndication programming, motion pictures, and real estate holdings, however, revenue is primarily generated through the lease of the sound stages and production. ValCom's past and present clients in addition to Paramount Pictures and Don Belisarious Productions, include Warner Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network. In addition to leasing its sound stages, ValCom also owns a small library of television content, which is ready for worldwide distribution and several major television series in advanced stages of development. ValCom's Studio Division is composed of two properties: 920 South Commerce which is leased and 41 North Mojave which ValCom has 1/3 equity in the real estate of 7.5 acres, 160,000 square feet of commercial space, giving ValCom a total of 9 sound stages and a recording studio. Corporate offices are located at the Commerce Studios which houses a state-of-the art production studio, broadcast facilities, recording studios, production design construction, animation and post-production. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the financial position of Valcom, Inc. (the "Company"), as of March 31, 2006, and the results of its operations and cash flows for the six-month period ended March 31, 2006 and 2005. The results of operations for such interim periods are not necessarily indicative of the results for a full year. The accompanying unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions to Form 10-QSB and, accordingly, do not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed financial statements should be read in conjunction with the audited financial statements and the notes to the audited financial statements included in the Company's Form 10- KSBregistration report for the period ending September 30, 2005 filed with the Securities and Exchange Commission. The accounting policies followed for interim financial reporting are the same as those disclosed under Note 1 in the notes to the financial statements included in the Company's Form 10-KSB registration report for the year ended June 30, 2005. 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 $3,878,414 and a working capital deficiency of $2,442,406 and an accumulated deficit of $14,233,764 at June 30, 2006. 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. As of May 30th, 2005, we have closed the operation at Valencia Entertainment International, California. Management has taken various steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue on in next twelve months. Management devoted considerable effort during the period ended June 30, 2006, towards management of liabilities and improving the operations. The management believes that the above actions will allow the Company to continue its operations through the next twelve months. VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "{ellipsis} under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges{ellipsis}" This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company. On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), Shared-Based Payment ("SFAS 123R). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective as of the first interim period that begins after June 15, 2005. Accordingly, the Company will implement the revised standard in the third quarter of fiscal year 2005. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary transactions ("SFAS 153"). This statement amends APB Opinion 29 to eliminate the exception for no monetary exchanges of similar productive assets and replaces it with a general exception of exchanges of no monetary assets that do not have commercial substance. Under SFAS 153, if a no monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows. 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 45,197,572 for the nine months ended June 30, 2006 and 35,787,925 for the six months ended June 30, 2005, 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. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following at: June September 30, 2006 30, 2005 --------- --------- Building Improvements 4,500 4,500 Production Equipment 68,708 68,708 Leasehold Improvements 62,677 62,677 Autos and Trucks 33,971 33,971 Office Furniture and Equipment 44,814 44,814 Video Equipment 181,877 181,877 Recording Studio 44,442 - --------- --------- 440,989 396,547 Less: accumulated depreciation (318,469) (301,125) --------- --------- Net book value . . . . . . . $ 122,520 $ 95,422 ========= ========= Depreciation expense for the periods ended June 30, 2006 and September 30, 2005 was $17,300 and $92,001, respectively. NOTE 4. NOTES PAYABLE The following are notes issued as of March 31, 2006. All of these notes incur interest at 10% per annum with different due dates. All related interest has been accrued and reflected in the financial statements. 1. Vince Vellardita $ 360,000 2. ICAG, Inc. $ 125,000 3. Condor Financial $ 40,000 4. Other Notes $ 1,722,000 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 June 30, 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, Laurus had the Property 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 October 5, 2004, Valcom, Inc. and Valencia Entertainment International, LLC, commenced a lawsuit in the Los Angeles Superior Court, State of California, against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an accounting of the amount due in connection with a non-judicial foreclosure of a deed of trust securing a promissory note executed by Valcom and Valencia. It also alleges that Chicago Title breached its trustee's duties and Laurus breached the terms of the promissory note and deed of trust securing it. Valcom's attorney has expressed his belief that the lawsuit it meritorious but at this stage in the proceeding, he is unable to state how much, if any, will be recovered in the lawsuit. The trial date has been set for July 17, 2006. Lloyd Kurtz Pending or Threatened Litigation, Claims and Assessments by the prior contractor for the renovations, at ValCom Studios in Nevada has been replaced. Mr. Lloyd Kurtz filed suit on October 25, 2004 against ValCom, Inc., A private Nevada Corporation which is 80% owned by ValCom, Inc. a Delaware Corporation, ValCom, Inc. a Delaware Corporation and Vincent Vellardita. The suit alleges a violation of Securities Act of 1933 and states that Mr. Kurtz purchased 600,000 shares of ValCom - Delaware at $0.25 per share and that the shares were not registered. He claims he is owed an additional $303,000. Mr. Kurtz has filed a Mechanic's Lien for $303,000. A motion to dismiss the claim of Mr. Kurtz has been filed. If the corporation does not prevail on its Motions to Dismiss the corporation will file its full defense and counterclaims which exceed the amount claimed by Mr. Kurtz. Farkhanda Rana On October 20, 2004 a shareholder of ValCom initiated suit against the Company and its President alleging violations of State and Federal Securities Law along with Fraud and Breach of Contract. The lawsuit captioned Farkhanda Rana vs. ValCom, Inc., Valencia Entertainment and Vince Vellardita et al. were filed in Los Angeles Superior Court as Case Number PC035673. On November 23, 2004 after a hearing the Plaintiff in this matter obtained a pre-judgment writ of attachment against the Company for $325,000.00. The case has been settled as of November 2005. NOTE 6 RELATED PARTY TRANSACTIONS Mr. Vince Vellardita, CEO is owed 496,106 from advances, cash and accrued wages from the Company as of December 31, 2005. NOTE 7 STOCKHOLDERS' EQUITY (A) CONVERTIBLE PREFERRED STOCK On June 31, 2006, 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 three months ended December 31, 2005. Assumption used (for Black Scholes calculations): ====================================================== Exercise Price $.25 Life 12 months Volatility 125% Interest Rate 8% The following is the summary of warrants as of June 30, 2005: Warrants as of September 30, 2003 0 Warrants issued during the period 300,000 Warrants exercised during the period 0 Warrants expired during the period 0 Warrants outstanding as of June 30, 2004 300,000 VALCOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) COMMON STOCK ISSUED During the three months ended June 30, 2006, the Company issued 61,165 shares of common stock in lieu of compensation for legal and consulting services performed. The value of the legal and consulting services performed totaled approximately $3,085, which was computed based upon the market prices of the common stock on the applicable payment dates. During the three months ended June 30, 2006, the Company issued 7,500,000 shares of common stock for cash. Total cash received for these shares was approximately $515,000. During the three months ended June 30, 2006, the Company issued 900,000 shares of common stock to convert $115,000 for liabilities and legal settlements. NOTE 8 DISPOSAL OF BUILDING (UNDER THE ORDER OF BANKRUPTCY COURT) 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, Laurus had the Property 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. 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. On October 5, 2004, Valcom, Inc. and Valencia Entertainment International, LLC, commenced a lawsuit in the Los Angeles Superior Court, State of California, against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an accounting of the amount due in connection with a non-judicial foreclosure of a deed of trust securing a promissory note executed by Valcom and Valencia. It also alleges that Chicago Title breached its trustee's duties and Laurus breached the terms of the promissory note and deed of trust securing it. Valcom's attorney has expressed his belief that the lawsuit it meritorious but at this stage in the proceeding, he is unable to state how much, if any, will be recovered in the lawsuit. The trial date has been set for July 17, 2006. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION PLAN OF OPERATION As of June 30, 2006, ValCom, Inc. operations were comprised of five divisions: STUDIO RENTAL ValCom's business includes television production for network and syndication programming, motion pictures, and real estate holdings, however, revenue is primarily generated through the lease of the sound stages and production. ValCom's past and present clients in addition to Paramount Pictures and Don Belisarious Productions, include Warner Brothers, Universal Studios, MGM, HBO, NBC, 20th Century Fox, Disney, CBS, Sony, Showtime, and the USA Network. In addition to leasing its sound stages, ValCom also owns a small library of television content, which is ready for worldwide distribution and several major television series in advanced stages of development. ValCom's Studio Division is composed of two properties: 920 South Commerce which is leased and 41 North Mojave which ValCom has 1/3 equity in the real estate of 7.5 acres, 160,000 square feet of commercial space, giving ValCom a total of 11 sound stages and a recording studio. Corporate offices are located at the Commerce Studios which houses a state-of-the art production studio, broadcast facilities, recording studios, animation and post-production. VALCOM BURBANK STUDIOS, one of Burbank's finest television production facilities, with three edit bays, two sound stages and over 25,000 square feet of production support was recently acquired by ValCom, Inc. The Burbank Studios was the home of 'Jeopardy' and the 'Wheel of Fortune' post production for many years in addition to a past client base consisting of: HGTV, D.I.V., History Channel, Discovery, Food Network, Sony Pictures T.V., PAX, MTV, Disney Channel, HBO, ABC, CBS, NBC, Sci Fi, GSN, Comedy Central, VH-1, FOX Television, Lifetime, over a period of 12 years. FILM PRODUCTION DIVISION ValCom, Inc. entered a joint venture with entertainment giant, Stan Lee's POW! Entertainment. POW! (Purveyors of Wonder) Entertainment, Inc. is founded by Stan Lee, together with Gill Champion and Arthur Lieberman. POW's principals combined have over a hundred years experience creating, producing, and licensing original intellectual properties. POW! specializes in franchises for the entertainment industry, including animation and live-action feature films, plus television, DVDs, video games, merchandising, and related ancillary markets. POW! partners with studios and networks in creating new and exciting characters. In some cases, POW! creates `custom-tailored' properties for a specific star or director. Stan Lee, chairman and chief creative officer of POW!, is the creator and inventor of the modern superhero. A prolific author, Lee revolutionized the comic book industry by creating compelling characters who, despite extraordinary powers and talents, are nonetheless plagued by the same doubts and difficulties experienced by ordinary people. Some of his most enduring characters, like Spider-Man{reg-trade-mark} (a), The Hulk{reg-trade-mark} (a), and the X-Men{reg-trade-mark} (a), have spun off into television programs and feature films that have grossed hundreds of millions of dollars at the box office. 8 LIVE THEATRE DIVISION February 9, 2006, ValCom Inc. named Jeff Kutash as President of their Live Theatre Division. The first venture, a theatre production called "Headlights and Tailpipes" opened at the Las Vegas Stardust Casino and Hotel on April 3, 2006. Kutash's experience in the field of theatre, television and film create a vast knowledge of the entertainment field. Several large-scale productions put Kutash on the map for live entertainment including the first rock n' roll revue "Gold Ol' Rock n' Roll," "Dancin' Machine" and most notably "Splash," which recently celebrated its 20 year anniversary. Kutash received accolades for the choreography he staged for John Travolta's appearance in the film "Saturday Night Fever." Kutash continued staging and began co-producing television for ABC, NBC, CBS, Viacom and Filmways. His television work garnered an Emmy{reg-trade-mark} and Golden Globe{reg-trade-mark} for his participation on "Taxi", and was responsible for staging the 20th Anniversary Grammy{reg-trade-mark} Awards. He has spent the last several years commuting to and from Europe on a regular basis, coordinating international talent, music, theatrical, and television productions. ValCom, Inc. introduced a live theatre production debuting April 4, 2006 entitled "Headlights and Tailpipes" at the Stardust Resort & Casino. "Headlights and Tailpipes", starring Playboy Playmate Lauren Anderson (July 2002), recently captured the city's top spot as the number one adult-style production in Las Vegas. The show, performing in the Stardust Theater at the Stardust Resort & Casino, is a sexy and seductive production that celebrates America's love affair with fast cars, beautiful girls, and heart-pounding rock `n roll. The show consist of a series of exotic dance numbers that are choreographed to hit rock `n roll songs around a motorcycle or hot rod. Featured cars range from a vintage Ford Thunderbird to a new 2007 Shelby Cobra. Perhaps the most famous of these automobiles is Starsky & Hutch's 1976 Ford Gran Torino. 9 ANIMATION DIVISION October 1, 2003, we formed New Zoo Revue LLC pursuant to a joint venture agreement with O Atlas Enterprises Inc., a California corporation. New Zoo Revue LLC was formed for the development and production of "New Zoo Revue" a feature film and television series and marketing of existing episodes. ValCom shall contribute all funding required for the development of the above to a maximum of $1,000,000 and O Atlas shall contribute an exclusive ten (10) year worldwide license in and to all rights, music and characters as its equal contribution towards Capital. The net profit after all expenses will be shared equally by ValCom Inc. and O Atlas. New Zoo Review LLC is expected to generate revenue by 2005 and expected to grow based on our ability to sell the TV Series of New Zoo Revue. On September 27, 2005,ValCom, Inc. signed a letter of intent to acquire Digital Animation Media, Ltd., a privately held Irish corporation headquartered in Dublin, Ireland. Digital Animation Media, Ltd., one of the premier independent animation companies in Europe and a leading provider of animation software to other production companies worldwide. With its production capability and proprietary technology, the company is well positioned to take advantage of the growth in existing animation markets as well as a burgeoning market for wireless animation tools and content with clients such as Disney, Warner and The New Zoo Revue. 10 CHANNEL 8 IN PALM SPRINGS, CALIFORNIA In connection with our joint venture with New Global Communications, Inc., we own 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, 2006 VS. JUNE 30, 2005 Revenues for the three months ended June 30, 2006 increased by $355,294 or 128% from $276,705 for the three months ended June 30, 2005 to $631,999 for the same period in 2006. The increase in revenue was principally due to increased production revenues associated with the Valcom's activities. Production costs for the three months ended June 30, 2006 increased by $215,013 from $ 200,701for the three months ended June 30, 2005 to $415,714 for the same period in 2006. The increase in production costs was principally due to increased production associated with Valcom Productions. Depreciation and amortization expense for the three months ended June 30, 2006 decreased by $ 23,99or 73.1% from $32,638 for the three months ended June 30, 2005 to $8,650 for the same period in 2006. General and administrative expenses for the three months ended June 30, 2006 increased by $ 338177 or 210.2 % from $ 161,409 for the three months ended June 30, 2005 to $ 499,586 for the same period in 2006. The increase was due principally to increased overall activities and costs for the new projects. Consulting and professional fees for the three months ended June 30, 2006 increased by $ 30,785 or 52.3% from $59,009 for the three months ended June 30, 2005 to $89,792 for the same period in 2006. The increase was due principally to increases in use of professionals. Interest expense for the three months ended June 30, 2006 increased by $16,843 or 1003% from $1,680 for the three months ended June 30, 2005 to $18,523 for the same period in 2006. The increase was due principally to the increase in notes payables. Due to the factors described above, the Company's net loss increased by $1,140,650 from $180,332 for the three months ended June 30, 2005 to $1,320,972 for the same period in 2006. RESULTS OF OPERATIONS - NINE MONTHS ENDED JUNE 30, 2006 VS. JUNE 30, 2005 Revenues for the nine months ended June 30, 2006 increased by $1,923,157 or 235.5% from $816,009 for the nine months ended June 30, 2005 to $2,739,162 for the same period in 2006. The increase in revenue was principally due to increased production revenues associated with the Valcom's activities. Production costs for the nine months ended June 30, 2006 increased by $2,724,082 from $289,015 for the nine months ended June 30, 2005 to $3,017,097 for the same period in 2006. The increase in production costs was principally due to increased production associated with Valcom Productions. Depreciation and amortization expense for the nine months ended June 30, 2006 decreased by $37,272 or 58.9% from $63,222 for the nine months ended June 30, 2005 to $25,950 for the same period in 2006. General and administrative expenses for the nine months ended June 30, 2006 increased by $207,947 or 20.8% from $1,000,638 for the nine months ended June 30, 2005 to $1,208,635 for the same period in 2006. The increase was due principally to increased overall activities and costs for the new projects. Consulting and professional fees for the nine months ended June 30, 2006 increased by $ 345,108 or 47.6% from $724,357for the nine months ended June 30, 2005 to $1,069,465 for the same period in 2006. The increase was due principally to increases in use of professionals. Interest expense for the nine months ended June 30, 2006 increased by $41,671 or 505.8% from $8,239 for the nine months ended June 30, 2005 to $49,910 for the same period in 2006. The increase was due principally to the increase in notes payables. Due to the factors described above, the Company's net loss increased by $2,951,294 from $927,170 for the nine months ended June 30, 2005 to $3,878,424 for the same period in 2006. 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 entered into agreement with Q Television Network, Palm Springs, CA on April 1, 2005. The Company has granted Q Television Network a License to use 142 films and television shows for a period of seven years. Q Television Network issued 50,000,000 shares of the Company valued at $150,000 as advance. September 22, 2005, ValCom Inc. entered into a production agreement with entertainment industry billion dollar producer Jeff Franklin who also joins ValCom's Strategic Advisory Board. Franklin has brought in more than $2 billion in domestic box office sales and with the addition of the film division. Mr. Franklin is one of producers of the theatrical feature, "Casper" and is executive producer on "Kull, The Conqueror," "Cold Around The Heart," "Stuart Little," and "Stuart Little 2." On September 27, 2005, ValCom, Inc. signed a letter of intent to acquire Digital Animation Media, Ltd., a privately held Irish corporation headquartered in Dublin, Ireland. Digital Animation Media, Ltd., one of the premier independent animation companies in Europe and a provider of animation software to other production companies worldwide. With its production capability and proprietary technology, the company is well positioned to take advantage of the growth in existing animation markets as well as a burgeoning market for wireless animation tools and content with clients such as Disney, Warner and The New Zoo Revue. ValCom, Inc. entered a joint venture in February, 2006 with entertainment giant, Stan Lee's POW! Entertainment. POW! (Purveyors of Wonder) Entertainment, Inc. is founded by Stan Lee, together with Gill Champion and Arthur Lieberman. POW's principals combined have over a hundred years experience creating, producing, and licensing original intellectual properties. POW! specializes in franchises for the entertainment industry, including animation and live-action feature films, plus television, DVDs, video games, merchandising, and related ancillary markets. POW! partners with studios and networks in creating new and exciting characters. In some cases, POW! creates 'custom-tailored' properties for a specific star or director. Stan Lee, chairman and chief creative officer of POW!, is the creator and inventor of the modern superhero. A prolific author, Lee revolutionized the comic book industry by creating compelling characters who, despite extraordinary powers and talents, are nonetheless plagued by the same doubts and difficulties experienced by ordinary people. Some of his most enduring characters, like Spider-Man(R)(a), The Hulk(R)(a), and the X-Men(R)(a), have spun off into television programs and feature films that have grossed hundreds of millions of dollars at the box office. 11 On February 9, 2006 ValCom, Inc. named Jeff Kutash as President of their Live Theatre Division. The first venture Kutash will undertake is a theater production called 'Headlights and Tailpipes' that will be unveiled at a Las Vegas hotel and casino. In heading up this division, Kutash will be responsible for developing and directing new productions and live theatrical events throughout the world. Kutash's experience in the field of theatre, television and film create a vast knowledge of the entertainment field. Several large-scale productions put Kutash on the map for live entertainment including the first rock n' roll revue 'Good Ol' Rock n' Roll,' 'Dancin' Machine' and most notably 'Splash,' which recently celebrated its 20 year anniversary. Kutash received accolades for the choreography he staged for John Travolta's appearance in the film 'Saturday Night Fever.' Kutash continued staging and began co-producing television for ABC, NBC, CBS, Viacom and Filmways. His television work garnered an Emmy(R) and Golden Globe(R) for his participation on 'Taxi,' and was responsible for staging the 20th Anniversary Grammy(R) Awards. He has spent the last several years commuting to and from Europe on a regular basis, coordinating international talent, music, theatrical, and television productions. ValCom Burbank Studios was purchased June 1, 2006, for cash and stock. It is one of Burbank's finest television production facilities, with three edit bays, two sound stages and over 25,000 square feet of production support. Blue Chip Client Base ValCom Burbank Studios' past client base consisted of: HGTV, D.I.V., History Channel, Discovery, Food Network, Sony Pictures T.V., PAX, MTV, Disney Channel, HBO, ABC, CBS, NBC, Sci Fi, GSN, Comedy Central, VH-1, FOX Television, Lifetime, over a period of 12 years. This turn-key, state-of-the-art facility was the home of 'Jeopardy' and the 'Wheel of Fortune' post production for many years. On June 28, 2006, ValCom, Inc. along with entertainment giants, Stan Lee's POW! Entertainment and entertainment industry producer Jeff Franklin announced the second of three upcoming films, a Stan Lee Sci-Fi picture entitled "The Harpy" written by DeClan O'Brien and directed by Josh Becker. "The Harpy" will star Steven Baldwin who appeared in "The Usual Suspects," "28 Days," "Nuts" and "Brief Encounter" and Peter Jason, whose more notable appearances include John Carpenter films such as "The Prince of Darkness," "They Live," "Village of the Damned," "Escape from L.A." and "Ghosts of Mars." 12 "Pre-production of "The Harpy" started Monday, June 26th at ValCom's recently acquired Burbank Studios. This film means $2.5 million worth of revenue for ValCom and is for NBC Universal Sci-Fi Network to be aired in May 2007. Stan Lee, chairman and chief creative officer of POW!, is the creator and inventor of the modern superhero. A prolific author, Lee revolutionized the comic book industry by creating compelling characters who, despite extraordinary powers and talents, are nonetheless plagued by the same doubts and difficulties experienced by ordinary people. Some of his most enduring characters, like Spider-Man(R)(a), The Hulk(R)(a), and the X-Men(R)(a), have spun off into television programs and feature films that have grossed hundreds of millions of dollars at the box office. Jeff Franklin lends years of entertainment production experience where he facilitates the overall vision of each project. 'It's a privilege to join with ValCom and POW! 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 $3,878,414and a negative cash flow from operations of $158599 for the nine monthsended June 30, 2006, a working capital deficiency of $1,061,596 and an accumulated deficit of $14,232,764 at June 30, 2006. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Cash totaled $117,681on June 30, 2006 compared to $31,831 as at June 30, 2005. During the nine months ended June 30, 2006, net cash used by operating activities totaled $2,510,669 compared to net cash provided by operating activities of $52,734 for the comparable nine-month period in 2005. 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, 2006 totaled $2,396,342 compared to $426,760 for the comparable nine-month period in 2005. The above cash flow activities yielded a net cash decrease of $158,599 during the nine months ended June 30, 2006 compared to a increase of $10,363 during the comparable prior year period. Net working capital (current assets less current liabilities) was a negative $2,442,406 as of June 30, 2006. 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. SUBSEQUENT EVENTS Purchase of Media City Studios On May 19, 2006, the Company entered into a letter agreement with Media City Teleproductions ("MCT") pursuant to which parties expressed their intention and set forth the principal terms for the Company's purchase of Media City Studios, including certain equipment and facilities contained therein (the "Studio") such as all studio production equipment. The purchase price for the Studio is: * $750,000, $100,000 of which was paid to MCT by the Company on May 29, 2006 and the balance of $550,000 is to be paid no later than 60 days after the date of execution of final definitive agreements; and * 1,000,000 shares (the "Shares") of the Company's common stock, par value $.001 per share, which the Company issued to MCT on June 12, 2006. The completion of the transaction is contingent upon the completion of satisfactory due diligence by the parties and negotiation and execution of final definitive agreements. 13 ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. (b) Changes in internal controls. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 14 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 5, 2004, Valcom, Inc. and Valencia Entertainment International, LLC, commenced a lawsuit in the Los Angeles Superior Court, State of California, against Chicago Title Company and Laurus Master Fund, Ltd. The suit seeks an accounting of the amount due in connection with a non-judicial foreclosure of a deed of trust securing a promissory note executed by Valcom and Valencia. It also alleges that Chicago Title breached its trustee's duties and Laurus breached the terms of the promissory note and deed of trust securing it. Valcom's attorney has expressed his belief that the lawsuit it meritorious but at this stage in the proceeding, he is unable to state how much, if any, will be recovered in the lawsuit. On June 14, 2006, the defendants won a summary judgment motion. Valcom has filed for a new trial and will vigorously fight for the shareholders. LLOYD KURTZ Pending or Threatened Litigation, Claims and Assessments by the prior contractor for the renovations, at ValCom Studios in Nevada has been replaced. Mr. Lloyd Kurtz filed suit on October 25, 2004 against ValCom, Inc., A private Nevada Corporation which is 80% owned by ValCom, Inc. a Delaware Corporation, ValCom, Inc. a Delaware Corporation and Vincent Vellardita. The suit alleges a violation of Securities Act of 1933 and states that Mr. Kurtz purchased 600,000 shares of ValCom - Delaware at $0.25 per share and that the shares were not registered. He claims he is owed an additional $303,000. Mr. Kurtz has filed a Mechanic's Lien for $303,000. A motion to dismiss the claim of Mr. Kurtz has been filed. If the corporation does not prevail on its Motions to Dismiss the corporation will file its full defense and counterclaims which exceed the amount claimed by Mr. Kurtz. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (A) COMMON STOCK: On May 19, 2006, the Company issued 1,000,000 shares of the Company's common stock, $0.001 par value per share, to Media City Teleproductions as partial consideration of the purchase price to be paid pursuant to a certain Letter Agreement of equal date entered into by the Company and MCT for the Company's purchase of Media City Studios. The Company claims an exemption from the registration requirements of the Act for the issuance of the Preferred Stock and Common Stock, as set forth above, pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, as among other things, the transaction did not involve a public offering, the investors and/or purchasers were each an accredited investor and/or qualified institutional buyer, the investors had access to information about the Company and their investment, the investors took the preferred and common stock for investment and not resale and the Company took appropriate measures to restrict the transfer of the preferred and common stock. 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (A) Exhibits 31.1 Certification by Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002. 31.2 Certification by Chief Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. 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 21, 2006 By: /s/ Vince Vellardita - ------------------------------------- Vince Vellardita Chairman Chief Executive Officer Date: August 21, 2006 By: /s/ Steven Cantrock - ------------------------------------- Steven Cantrock Chief Financial Officer and Principal Accounting Officer 16 EX-1 2 ex_31-1.txt EXHIBIT 31.1 CERTIFICATION I, Vincent Vellardita, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Valcom, Inc. for the quarter ended June 30, 2006; 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)) 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) 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 (c) 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 disclosed, 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. August 21, 2006 /s/ Vincent Vellardita - --------------------------- Vincent Vellardita Chief Executive Officer EX-2 3 ex_31-2.txt EXHIBIT 31.2 CERTIFICATION I, Steven Cantrock, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Valcom, Inc. for the quarter ended June 30, 2006; 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)) 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) 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 (c) 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 disclosed, 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. August 21, 2006 /s/ Steven Cantrock - --------------------------- Steven Cantrock Chief Financial Officer and Principal Accounting Officer EX-3 4 ex_32-1.txt EXHIBIT 32.1 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 quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vincent Vellardita, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 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 and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result 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. August 21, 2006 /s/ Vincent Vellardita - --------------------------- Vincent Vellardita Chief Executive Officer EX-4 5 ex_32-2.txt EXHIBIT 32.2 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 quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven Cantrock, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 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 and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result 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. August 21, 2006 /s/ Steven Cantrock - --------------------------- Steven Cantrock Chief Financial Officer and Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----