T ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

¨ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER 000-33067

DELAWARE (State or other jurisdiction of incorporation or organization)

87-0398271 (I.R.S. Employer Identification No.)

 

Issuer’s telephone Number: (310) 728-1450

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ¨

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 T No ¨

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No T

Transitional Small Business Disclosure Format (check one): Yes ¨ No T

 

			Page
	PART I
Item 1.	Description of Business		1
Item 2.	Description of Property		10
Item 3.	Legal Proceedings		10
Item 4.	Submission of Matters to a Vote of Security Holders		10
	PART II
Item 5.	Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities		10
Item 6.	Management’s Discussion and Analysis or Plan of Operation		12
Item 7.	Financial Statements		18
Item 8.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		38
Item 8A.	Controls and Procedures		38
Item 8B.	Other Information		38
	PART III
Item 9.	Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
	Compliance With Section 16(a) of the Exchange Act		38
Item 10.	Executive Compensation		40
Item 11.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters		43
Item 12.	Certain Relationship and Related Transactions, and Director Independence		45
Item 13.	Exhibits		46
Item 14.	Principal Accountant Fees and Services		49
SIGNATURES			50

 

Digicorp, Inc. (referred to herein as the “Company,” “we,” “us,” and “our”) was incorporated on July 19, 1983 under the laws of the State of Utah under the name of Digicorp for the purpose of developing and marketing computer software programs. From 1983 to 1995, our sales and investments were attributable to the sale of computer software and investments related to oil, gas and mining.

On December 29, 2005, we acquired all of the issued and outstanding capital stock of Rebel Crew Films, Inc., a California corporation (“Rebel Crew Films”), in consideration for the issuance of 21,207,080 shares of common stock (the “Purchase Price”) to the shareholders of Rebel Crew Films. From the Purchase Price, 4,000,000 shares are held in escrow pending satisfaction of certain performance milestones. In addition, from the Purchase Price, 16,666,667 shares are subject to lock up agreements as follows: (a) 3,333,333 shares are subject to lockup agreements for one year; (b) 6,666,667 shares are subject to lockup agreements for two years; and (c) 6,666,667 shares, of which the 4,000,000 escrowed shares are a component, are subject to lockup agreements for three years.

On February 22, 2007, we changed the Company’s domicile from the State of Utah to the State of Delaware effected by the merger of the Company, a Utah corporation, with and into, Digicorp, Inc., a newly formed wholly owned subsidiary of the Company that was incorporated under the Delaware General Corporation Law for the purpose of effecting the change of domicile.

The below description of our business includes the operations of our wholly owned subsidiary Rebel Crew Films.

We are an aggregator and distributor of programming content and a developer of multi-media technologies with operations concentrated primarily in the internet and home video business segments.

 

Together with our subsidiary, we are primarily engaged in the business of developing and distributing programming content, multi-media technologies, and advertising via the internet. We expect that within the next 12 months we will expand our advertising areas further into online as well as other alternative music and video programming formats, including video-on-demand (“VOD”) in the United States and internationally. We will focus a significant amount of our available resources to obtain the exclusive distribution rights for additional content through development, acquisition or licensing arrangements.

 

 

REBEL CREW FILMS, INC. 

On February 7, 2006, we entered into an asset purchase agreement with Matthew B. Stuart pursuant to which we purchased the following Internet domain names and all materials, intellectual property, goodwill and records in connection therewith (the “Assets”): PerreoRadio.com, Radioperreo.com, Perreomobile.com, Perreotv.com, Puroperreo.com, Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com, Machetemusic.net, Machetemusic.org, Machetemusica.com and Musicamachete.com.

 

On September 19, 2005, upon entering into an asset purchase agreement with Philip Gatch, we completed the initial transaction to transform the company from that of a development stage enterprise to a digital media and content delivery company. The assets purchased consisted of the iCodemedia url’s and all related intellectual property (the “iCodemedia Assets”). The iCodemedia url’s consist of: www.icodemedia.com, www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com and www.tunespromo.com.

 

 

·	Podcasting (the distribution of audio or video files over the Internet for listening or viewing on mobile devices and personal computers);

·	Online Advertising; and

·	Viral Marketing (marketing and advertising techniques that use pre-existing social networks to produce increases in brand awareness through self-replicating viral processes).

For direct home video DVD sales, our sales associates focus on the largest retail chains in the country, including Wal-Mart and Blockbuster, via Anderson Merchandisers and other such sub-distributors. Currently, the sales force manages more than 100 active retail store customers. Besides our direct selling effort through telemarketing, we market our products by placing print ads in a variety of Latino trade magazines as well as through our website. We have a dedicated 1-800 toll free number for sales inquiries. For licensing activities, there are two companies: BCI Eclipse LLC, which has licensed approximately 20 titles: and VAS Entertainment/Rise Above Entertainment ("VAS/RA"), which has licensed approximately 20 titles from us. They function as manufacturers for our DVD inventory for those titles, as well as distributors. The agreements with these companies consist of a term of three to five years granting the companies the right to manufacture, promote, and distribute the licensed movies for a 15% - 50% royalty on gross sales, depending on title. The company intends to expand its licensing activities into the broadcast, satellite and cable markets.

 

 

The target customers for our media software are:

·	Premium Advertisers and Content Owners, including advertising agencies like WPP, Omnicom and Interpublic; content owners with their own advertising, such as NBC, CBS, ABC and The New York Times; and infomercial creators, like QVC and Williams Group;

·	Independent producers, artists, designers and filmmakers who own untapped content; and

·	Advertising Networks, including Advertising.com, ValueClick, ClickBooth, CJ.com and Zedo.

 

 

We currently employ 8 full time employees and 3 part time employees. None of our employees are covered by a collective bargaining agreement. We believe that relations with our employees are good.

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

 

 

WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE AND WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES AND OUR FINANCIAL RESULTS. 

At December 31, 2006, we had an accumulated deficit of $5.5 million and a working capital deficit of $1.1 million, which includes a deferred revenue balance of $70,000. During the year ended December 31, 2006, we incurred a loss of approximately $5.1 million. During the year ended December 31, 2006, we primarily relied upon revenues generated from the direct sales of our Latino home entertainment content and on debt and equity investments to fund our operations. As a result, the report of our independent registered public accounting firm, dated April 16, 2007, for the year ended December 31, 2006, states that these conditions raise substantial doubt about our ability to continue as a going concern. Management is currently seeking additional financing and believes, however no assurances can be made, that these avenues will continue to be available to us to fund our operations.

OUR OPERATING SUBSIDIARY REBEL CREW FILMS HAS A LIMITED OPERATING HISTORY AND THEREFORE WE CANNOT ENSURE THE LONG-TERM SUCCESSFUL OPERATION OF OUR BUSINESS OR THE EXECUTION OF OUR BUSINESS PLAN. 

·	Establishing and maintaining broad market acceptance of our products and converting that acceptance into direct and indirect sources of revenue;

·	Establishing and maintaining our brand name;

·	Timely and successfully developing new content and films;

·	Developing content that results in high popularity among the viewing public;

 

 

·	Developing and maintaining strategic relationships to enhance the distribution and features of our video content.

Our future success depends in part upon our ability to aggregate compelling content and deliver that content through our online and other multi-media properties and programming and delivery technologies.  We distribute some of the content that we license on our online properties, such as audio and video content from third parties.  We have been providing increasing amounts of audio and video content to our users as reflected in the increase in direct sales of our content and we believe that users will increasingly demand high-quality audio and video content, such as music, film, and other special events.  Such content may require us to make substantial payments to third parties from whom we license or acquire such content.  For example, our entertainment properties rely on film producers and distributors, and other organizations for a large portion of the content available on our properties.  Our ability to maintain and build relationships with third-party content providers will be critical to our success.  In addition, as new methods for accessing and delivering content through media formats becomes available, including through alternative devices, we may need to enter into amended content agreements with existing third-party content providers to cover the new devices.   We may be unable to enter into new, or preserve existing, relationships with the third parties whose content we seek to obtain.  In addition, as competition for compelling content increases both domestically and internationally, our content providers may increase the prices at which they offer their content to us, and potential content providers may not offer their content on terms agreeable to us.  An increase in the prices charged to us by third-party content providers could harm our operating results and financial condition.  Further, some of our content licenses with third parties may be non-exclusive.  Accordingly, content providers and other media sources such as radio or television may be able to offer similar or identical content and technologies.  This increases the importance of our ability to deliver compelling content and media technologies in order to differentiate from other businesses.  If we are unable to license or acquire compelling content at reasonable prices, if other companies acquire, develop and/or distribute content that is similar to or the same as that provided by us, or if we do not develop compelling content or media technologies, the number of users of our services may not grow as anticipated, or may decline, which could harm our operating results.

 

 

WE MAY INCUR SUBSTANTIAL COSTS ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS AND ANY DIFFICULTY WITH ENFORCING SUCH RIGHTS MAY CAUSE OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION TO SUFFER. 

       

OUR CONTENT ASSETS MAY NOT BE COMMERCIALLY SUCCESSFUL WHICH WOULD CAUSE OUR REVENUES TO DECLINE. 

Our revenue comes from the production and distribution of video content for use in Latino home video. The success of content offerings depends primarily upon their acceptance by the public, which is difficult to predict. The market for these products is highly competitive and competing products are often released into the marketplace at the same time. The commercial success of a video production depends on several variable factors, including the quality and acceptance of competing offerings released into the marketplace at or near the same time and the availability of alternative forms of entertainment and leisure time activities. Our business is particularly dependent on the success of a limited number of releases, and the commercial failure of just a few of these releases can have a significant adverse impact on results. Our failure to obtain broad consumer appeal in the Latino community could materially harm our business, financial condition and prospects for growth.

 

 

·	that a broker or dealer approve a person's account for transactions in penny stocks; and

·	the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

·	obtain financial information and investment experience objectives of the person; and

·	make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

·	sets forth the basis on which the broker or dealer made the suitability determination; and

·	that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

 

We lease our principal executive office located at 4143 Glencoe Avenue, Marina Del Rey, California, 90292. The leased executive office space is approximately 3,800 rentable square feet. The lease contract term commenced August 1, 2005 and ends September 30, 2012. Base rent under the lease is $5,890 per month payable on the first day of each month. Additionally, a security deposit of $5,890 was required upon signing. In addition to our principal executive office lease, we lease additional office space at 4120 Del Rey Avenue, Marina Del Rey, California, 90292. The additional office space is approximately 10,000 rentable square feet. Base rent under the additional office lease is $12,475 per month payable on the first day of each month commencing September 1, 2006 and ending December 15, 2010. Additionally, a security deposit of $12,475 was required upon signing

		Fiscal 2007						Fiscal 2006						Fiscal 2005
Fiscal Quarter		High			Low			High			Low			High			Low
First Quarter Ended March 31		$	0.19		$	0.08		$	2.05		$	1.10		$	0.35		$	0.13
Second Quarter Ended June 30			—			—		$	1.25		$	0.61		$	0.45		$	0.18
Third Quarter Ended September 30			—			—		$	0.85		$	0.25		$	1.37		$	0.20
Fourth Quarter Ended December 31			—			—		$	0.30		$	0.08		$	1.90		$	0.65

 

 

We sold the following equity securities during the fiscal year ended December 31, 2006 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

On February 7, 2006, we purchased the following Internet domain names and all materials, intellectual property, goodwill and records in connection therewith (the “Assets”) from Matthew D. Stuart: Perreoradio.com, Radioperreo.com, Perreomobile.com, Perreotv.com, Puroperreo.com, Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com, Machetemusic.net, Machetemusic.org, Machetemusica.com and Musicamachete.com. As consideration for the Assets, we issued Mr. Stuart and his nominees an aggregate of 100,000 shares of common stock. All such shares of common stock are subject to lock up agreements as follows; 25,000 shares are subject to a lock up agreement for one year; 25,000 shares are subject to a lock up agreement for two years; and 50,000 shares are subject to a lock up agreement for three years. These securities were issued pursuant to the exemption from registration requirements provided by the Securities Act.

On April 3, 2006, the Company sold 50,000 shares of common stock to William B. Horne, the Company’s Chief Financial Officer and current director, at a price of $1.10 per share, resulting in gross proceeds of $55,000. These securities were sold pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. No advertising or general solicitation was employed in offering the securities, the sales were made to a limited number of persons, all of whom represented to the Company that they are accredited investors, and transfer of the securities is restricted in accordance with the requirements of the Securities Act.

 

 

The following “Overview” section is a brief summary of the significant issues addressed in this Management’s Discussion and Analysis (“MD&A”). Investors should read the relevant sections of the MD&A for a complete discussion of the issues summarized below. The entire MD&A should be read in conjunction with Item 7. Financial Statements and supplementary information appearing elsewhere in this Form 10-KSB.

On June 30, 1995, Digicorp, Inc., then a Utah corporation, (referred to herein as the “Company,” “we,” “us,” and “our”) became a development stage enterprise when we sold our assets. Until September 19, 2005 we had no operations other than issuing shares of common stock for financing the preparation of financial statements and for preparing filings for the SEC.

On September 19, 2005, the Company entered into an asset purchase agreement with Philip Gatch, the Company's former Chief Technology Officer, and thereby completed the purchase of certain assets from Mr. Gatch consisting of the iCodemedia suite of websites and internet properties and all related intellectual property (the "iCodemedia Assets"). The iCodemedia suite of websites consists of the websites www.icodemedia.com, www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com and www.tunespromo.com.

On February 22, 2007, we changed the Company’s domicile from the State of Utah to the State of Delaware effected by the merger of the Company, a Utah corporation, with and into, Digicorp, Inc., a newly formed wholly owned subsidiary of the Company that was incorporated under the Delaware General Corporation Law for the purpose of effecting the change of domicile.

We are an aggregator and distributor of programming content and a developer of multi-media technologies with operations concentrated primarily in the internet and home video business segments.

 

 

We are primarily engaged in the business of developing, marketing and distributing programming content, multi-media technologies, and advertising via the internet. We expect that within the next 12 months we will expand our advertising areas further into online as well as other alternative music and video programming formats, including video-on-demand (“VOD”) in the United States and internationally. We will focus a significant amount of our available resources to obtain the exclusive distribution rights for additional content through development, acquisition or licensing arrangements.

 

Rebel Crew Films was founded in 2001 and our goal is to become a leading distributor of Latino home entertainment products.  Developed to target Spanish speaking consumers who increasingly demand new Latino content and classic Spanish language movies, we offer producers and content-providers a flexible option to the larger Hollywood studio distributors and have emerged as a company that attracts premiere home entertainment products. 

 

Stock-Based Compensation

We have adopted the provisions of SFAS No. 123(R), Share-Based Payment, effective January 1, 2005. Since we had no outstanding options as of December 31, 2004, SFAS 123(R) would have had no impact on our financial statements had we elected to adopt the provisions of SFAS 123(R) in an earlier period. The fair value of each option grant, nonvested stock award and shares issued under the employee stock purchase plan were estimated on the date of grant using the Black-Scholes option pricing model and various inputs to the model. Expected volatilities were based on historical volatility of our stock. The expected term represents the period of time that grants and awards are expected to be outstanding. The risk-free interest rate approximates the U.S. treasury rate corresponding to the expected term of the option, and dividends were assumed to be zero. These inputs are based on our assumptions, which include complex and subjective variables. Other reasonable assumptions could result in different fair values for our stock-based awards.

Stock-based compensation expense, as determined using the Black-Scholes option pricing model, is recognized on a straight line basis over the service period, net of estimated forfeitures. Forfeiture estimates are based on historical data. To the extent actual results or revised estimates differ from the estimates used, such amounts will be recorded as a cumulative adjustment in the period that estimates are revised.

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. FIN 48 will be effective beginning January 1, 2007. We are currently evaluating the impact of implementation on our consolidated financial statements but we do not believe the adoption of this statement will have a material impact on our financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. This statement is effective for us in the first quarter of fiscal 2008. The statement applies whenever other statements require, or permit, assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. We do not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

 

The aggregate decrease in other current assets and other long term assets, of $410,000, is primarily due to the write-off of prepaid legal fees. At December 31, 2005, pursuant to the terms of the May 5, 2005 legal retainer agreement, as amended, with Sichenzia Ross Friedman Ference LLP ("Sichenzia"), prepaid legal fees of $245,000 were reflected in our financial statements. During the year ended December 31, 2006, we recorded $98,000 related to the amortization of prepaid legal fees. The term of the legal retainer agreement was through March 31, 2007, however, on September 15, 2006, Sichenzia terminated the agreement. As a result of Sichenzia’s termination of the agreement, the Company recognized an expense of $147,000 due to the write-off of the unamortized balance of the prepaid expense. The remaining decrease of $165,000 is attributed to a decrease in inventories, cash and an amount due the Company from a related party.

 

 

The increase in property and equipment is primarily attributed to our April 24, 2006, purchase of a software application known as ITunesBucks and its associated assets therewith (the “Assets”) from EAI Technologies, LLC, (“EAI”) a Virginia corporation. As consideration for the Assets, we issued EAI an aggregate of 138,182 shares of our common stock valued at $152,000. Such amount represented value attributed to the common stock at the April 24, 2006 closing price of  $1.10 per share, as reported on OTC Bulletin Board.

We had a working capital deficit of $1.1 million at December 31, 2006 and we continue to have recurring losses. In the past we have primarily relied upon loans from related parties to fund our operations and, to a lesser extent, revenues generated from licensing our film content, on a non-exclusive basis, to other distributors of Latino home entertainment content. We believe that expected future revenues combined with either loans or direct equity investments into the Company will be sufficient to fund our operations during 2007. We expect to undertake additional debt and equity financings to better enable us to grow and meet our future operating and capital requirements, however, there is no assurance that we will be successful in obtaining the necessary level of funding. The last equity financing that we received was in April 2006 from our Chief Financial Officer. From July 13, 2006 through April 10, 2007, as a result of any new funding being received through debt or equity financings, a series of loans totaling $659,000 were made to us primarily from Jay Rifkin, our Chairman and Chief Executive Officer. As consideration for the loans, we have issued demand promissory notes at rates that range from the prime rate, as published in The Wall Street Journal, to the prime rate plus one percent to the date of payment in full. We cannot guarantee that Mr. Rifkin would be willing to further invest in the Company and if we are unable to secure additional sources of financing our operations would be negatively materially impacted.

During the three months ended March 31, 2006 we entered into subscription agreements with unrelated accredited investors, pursuant to which we sold a total of 213,636 shares of our common stock at a price of $1.10 per share. We received gross proceeds of $235,000 from the sale of the stock. During the three months ended June 30, 2006, we entered into a Subscription Agreement with our Chief Financial Officer relating to the issuance and sale of our common stock. Pursuant to the Subscription Agreement, we received gross proceeds of $55,000 from the issuance of 50,000 shares at a price of $1.10 per share. Additionally, from March 23, 2006 through September 28, 2006, the Company was a party to a Revolving Line of Credit Agreement (the “Revolving Line of Credit”) with Ault Glazer Bodnar Acquisition Fund, LLC (“AGB Acquisition Fund”). The Revolving Line of Credit allowed us to request advances totaling an aggregate of up to $150,000 from AGB Acquisition Fund. At December 31, 2006, we had borrowed $50,000 against the Revolving Line of Credit, all of which was due January 31, 2007 This note was not repaid by the scheduled maturity and to date has not been extended. Accordingly, the note is currently in default. The Company is in discussion with AGB Acquisition Fund to extend the due date. Amounts borrowed against the Revolving Line of Credit are evidenced by Convertible Secured Promissory Notes (the “Convertible Notes”) which allow for the conversion of all or any part of the outstanding principal balance of the Convertible Notes, including any accrued interest thereon, into shares of our common stock at a price equal to the lesser of the closing price of our common stock on March 23, 2006 or the share price of our common stock offered in our next round of financing in a private placement offering completed while the principal balance of the Convertible Notes are outstanding.

 

 

 

 

As discussed above, in Liquidity and Capital Resources, we have a working capital deficit of $1.1 million and have primarily relied upon loans from related parties to fund our operations. These financial constraints have prevented us from continuing the planned build-out of the iCodemedia Assets. We had intended to use the ICodemedia Assets to provide a suite of applications and services to enable content creators to publish and deliver content to existing and next generation devices. As consideration for the iCodemedia Assets, we had issued 1,000,000 shares of our common stock valued at $300,000. Recognizing that revenues and cash flows would be lower than expected from the iCodemedia Assets, we determined that a triggering event had occurred and conducted an impairment analysis in the quarter ended December 31, 2006 which resulted in the recording of an impairment charge of $300,000. 

 

 

 

Years ended December 31,
2007			2008			2009			2010			2011			Thereafter			Total
$	225,500		$	232,200		$	239,200		$	239,600		$	82,800		$	63,500		$	1,082,800

Effective July 20, 2005, the Board of Directors of the Company approved the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”). The Plan reserves 15,000,000 shares of common stock for grants of incentive stock options, nonqualified stock options, warrants and restricted stock awards to employees, non-employee directors and consultants performing services for the Company. Options and warrants granted under the Plan have an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. The options expire 10 years from the date of grant whereas warrants generally expire 5 years from the date of grant. Restricted stock awards granted under the Plan are subject to a vesting period determined at the date of grant.

The Company accounts for stock-based compensation awards in accordance with the provisions of SFAS No. 123(R), Share-Based Payment, which addresses the accounting for employee stock options. SFAS 123(R) requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements over the vesting period based on the estimated fair value of the awards. The Company adopted SFAS 123(R) as of January 1, 2005. Prior to the adoption date, there were no stock options or other equity-based compensation awards outstanding.

Notes to Consolidated Financial Statements (continued) 

					Outstanding Options
		Shares Available for Grant			Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (years)			Aggregate Intrinsic Value
December 31, 2005			6,687,500			8,312,500		$	0.75			8.64
Grants			(1,450,000	)		1,450,000		$	0.62			9.46
Cancellations			41,667			(41,667	)	$	1.1			4.67
December 31, 2006			5,279,167			9,720,833		$	0.73			7.92		$	—
Options exercisable at:
December 31, 2005						2,137,500		$	0.25			5.34		$	—
December 31, 2006						4,204,167		$	0.58			6.51		$	—

Nonvested Shares		Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2005			6,175,000		$	0.85
Granted			1,450,000		$	0.56
Vested			(2,066,667	)	$	0.86
Forfeited			(41,667	)	$	0.99
Nonvested at December 31, 2006			5,516,667		$	0.78

 

All outstanding stock-based compensation awards that the Company granted in 2006 and 2005 were granted at the per share fair market value on the grant date. Vesting of options differs based on the terms of each option. The Company utilized the Black-Scholes option pricing model and the assumptions used for each period are as follows:

		Year ended December 31,
		2006			2005
Weighted average risk free interest rate			4.27	%		3.75	%
Weighted average life (in years)			5.0			3.55
Volatility			138 - 155	%		155	%
Expected dividend yield			0	%		0	%
Weighted average grant-date fair value per share of options granted		$	0.56		$	0.56

During the period February 2006 through April 2006, the Company entered into a Subscription Agreement with several accredited investors, relating to the issuance and sale by the Company of shares of its common stock (the "Shares"). The Company received gross proceeds of $290,000 from the issuance of 263,636 Shares at a price of $1.10 per share.

 

Outstanding											Exercisable
Exercise Price		Number Outstanding			Weighted Average Remaining Contractual Life (Years)			Weighted Average Exercise Price			Number Exercisable			Weighted Average Exercise Price
$ 0.10 - 0.25			250,000			4.00		$	0.145			250,000		$	0.145
$ 0.50 - 0.75			300,000			3.75			0.65			300,000			0.65
$ 0.10 - 0.75			550,000			3.86		$	0.42			550,000		$	0.42

18. RELATED PARTY TRANSACTIONS

The Company was a party to a Production Services Agreement (the “Services Agreement”) between RC3 Cine, Arte & Entretenimiento S.A. de C.V. (“Producer”) and Rebel Crew Films, with an effective date of May 18, 2006. Pursuant to the terms of the Agreement, the Company was obligated to pay the Producer a series of payments totaling $120,000 of which the Company had made payments of $12,000. On November 1, 2006, due to the Company’s current financial condition and its inability to fund the additional $108,000 financial obligation the Company’s Board of Directors approved and authorized the Company to assign to Jay Rifkin its rights in the Services Agreement and write-off the previously capitalized payments of $12,000.

Other current assets at December 31, 2006 includes $11,000 owed to the Company by Ault Glazer Bodnar & Company, Inc. (“AGB & Company”) based on an agreement to reimburse the Company for salaries paid in connection with the recapitalization of the Company. The Company’s Chief Financial Officer is also the Chief Financial Officer of AGB & Company.

 

None.

ITEM 8A.  CONTROLS AND PROCEDURES.

ITEM 8B.  OTHER INFORMATION.

Between July 2006 and April 10, 2007, Jay Rifkin loaned an aggregate total principal amount of $654,000 to Rebel Crew Films. We have agreed to repay these loans to Mr. Rifkin pursuant to the terms of various promissory notes issued in connection with such loans, which promissory notes are due on demand and accrue interest at rates ranging from the prime rate to the prime rate plus one percent per annum.

Name		Age		Position
Jay Rifkin		51		Chief Executive Officer, Director
William B. Horne		38		Chief Financial Officer and Director
Alice M. Campbell		56		Director
Alan Morelli		45		Director
David M. Kaye		52		Director

Jay Rifkin, Chief Executive Officer and Director. Effective September 30, 2005, our Board of Directors appointed Mr. Rifkin interim President pending closing of the acquisition of Rebel Crew Films. Mr. Rifkin has been one of our directors since March 26, 2006. On December 29, 2005, Mr. Rifkin's title was changed to Chief Executive Officer effective as of September 30, 2005. From 2004 to Present, Mr. Rifkin has been the sole Managing Member of Rebel Holdings, LLC, through which he is also the majority shareholder of Rebel Crew Films, Inc. In 1995, Mr. Rifkin founded Mojo Music, Inc., a music publishing company, and he has been President of Mojo Music, Inc. since it was founded. Mr. Rifkin is Chairman and a founder of Media Revolution, a marketing agency founded in 1977 that has executed marketing campaigns for major Hollywood studios. Mr. Rifkin has served as Producer and Executive Producer on various motion pictures with his most recent production "Waiting" (Lion's Gate) released on October 7, 2005. Mr. Rifkin is also a music producer, engineer and songwriter. Mr. Rifkin received a Grammy Award for Best Children's Album and an American Music Award for Favorite Pop/Rock Album for his work on Disney's "The Lion King," and received a Tony nomination for "The Lion King" on Broadway. From 1988 to 2004, Mr. Rifkin, through Mojo Music, Inc., served as a Managing Member of Media Ventures, LLC, an entertainment cooperative founded by Mr. Rifkin and composer Hans Zimmer. In 1995, Mr. Rifkin founded Mojo Records, LLC, which in 1996 became a joint venture with Universal Records, and was subsequently sold to Zomba/BMG Records in 2001. Mr. Rifkin also serves as President of Cyberia Holdings, Inc. which is the majority owner of Media Revolution. In 2004, Cyberia Holdings, Inc. filed for bankruptcy under Chapter 7 which cased was dismissed in May 2005.

 

 

William B. Horne, Chief Financial Officer and Director. Mr. Horne has been our Chief Financial Officer and a director since July 20, 2005. From September 30, 2005 until December 29, 2005, Mr. Horne also served as our Chief Executive Officer and Chairman of our Board of Directors. From July 5, 2005 until June 8, 2006, Mr. Horne was also the Chief Financial Officer and a director of Ault Glazer Bodnar & Company, Inc. Since July 5, 2005, Mr. Horne has also been Chief Financial Officer of Patient Safety Technologies, Inc. and its subsidiaries. On January 1, 2007, Mr. Horne’s title was changed to Chief Executive Officer and Chief Financial Officer of Patient Safety Technologies, Inc. From May 2002 to April 2005, Mr. Horne held the position of Chief Financial Officer of Alaska Wireless Communications, a privately held advanced cellular communications company. Since January 2002, Mr. Horne has also provided strategic financial consulting services to both private and public companies. From November 1996 to December 2001, Mr. Horne held the position of Chief Financial Officer of The Phoenix Partners, a venture capital limited partnership located in Seattle, Washington.

Alice M. Campbell, Director. Ms. Campbell has been a member of our Board of Directors since July 16, 2005. Ms. Campbell served as a director of IPEX, Inc., a public company quoted on the OTC Bulletin Board from June 23, 2005 until January 30, 2006. Ms. Campbell served as a director of Patient Safety Technologies, Inc., a public company quoted on the OTC Bulletin Board from October 22, 2004 until January 26, 2007. Since 2001, Ms. Campbell has been, and is currently, an investigator and consultant, specializing in research and litigation services, financial investigations and computer forensics, for major companies and law firms throughout the United States. Ms. Campbell is a certified fraud specialist, as well as a certified instructor for the Regional Training Center of the United States Internal Revenue Service and for the National Business Institute. From 1979 to 2001, Ms. Campbell served as a special agent for the United States Treasury Department where she conducted criminal investigations and worked closely with the United States Attorney's Office and with several federal agencies, including the Internal Revenue Service, Federal Bureau of Investigation, Secret Service, Customs Service, State Department, Drug Enforcement Agency, Bureau of Alcohol, Tobacco and Firearms and U.S. Postal Service.

Alan Morelli, Director. Mr. Morelli has been one of our directors since March 26, 2006. Mr. Morelli is a consultant who has served as Managing Director of Analog Ventures, LLC, a consulting firm located in Pacific Palisades, California, since 1997. Mr. Morelli is also currently serving as a director of Physical Therapy Holdings, Inc. and Precise Exercise Equipment. Physical Therapy Holdings, Inc. is a development-stage company. Precise develops innovative commercial fitness or rehabilitation technology used in health clubs and consumer equipment since 1994. Mr. Morelli received a B.S. from Rutgers University (1983) and a J.D. from Georgetown University Law Center (1986).

David M. Kaye, Director. Mr. Kaye has been one of our directors since March 26, 2006. Mr. Kaye is an attorney and has been a partner in the law firm of Danzig Kaye Cooper Fiore & Kay, LLP located in Florham Park, New Jersey, since the firm's inception in February 1996. Since 1980, Mr. Kaye has been a practicing attorney in the New York City metropolitan area specializing in corporate and securities matters. He is currently a director of Dionics, Inc., a company which designs, manufactures and sells semiconductor electronic products. Mr. Kaye received his B.A. from George Washington University (1976) and his J.D. from the Benjamin N. Cardozo School of Law, Yeshiva University (1979). 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other of our equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, the following persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act with respect to the fiscal year ended December 31, 2006: Jay Rifkin filed six reports late relating to a total of six transactions; William B. Horne filed two reports late relating to a total of two transaction; and each of Alice M. Campbell, and David M. Kaye filed one report late relating to a total of one transaction.

ITEM 10. EXECUTIVE COMPENSATION.

The following summary compensation tables set forth information concerning the annual and long-term compensation for services in all capacities to the Company for the years ended December 31, 2006 and December 31, 2005, of those persons who were, at December 31, 2006 (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company, whose total compensation was in excess of $100,000 (the named executive officers):

 

Name and Principal Position		Year			Salary ($) (2)			Bonus ($)			Stock Awards ($)			Option Awards ($) (3)			Non-Equity Incentive Plan Compensation ($)			Nonqualified Deferred Compensation Earnings ($)			All Other Compensation ($)			Total
Jay Rifkin, CEO			2006		$	150,000		$	0		$	0		$	26,725		$	0		$	0		$	0		$	176,725
and President(1)			2005		$	37,500			0			0		$	3,459,827			0			0			0		$	3,497,327

 

 

(1)	Mr. Rifkin was appointed President on September 30, 2005, and Chief Executive Officer and director nominee on December 29, 2005.

(2)	Consists of accrued salary for 2006 and 2005, none of which has been paid to date.

(3)	Represents the dollar amount recognized for financial reporting purposes of stock options awarded in 2005 and 2006 computed in accordance with SFAS 123(R).

 

The following table provides certain information concerning equity awards held by the named executive officers as of December 31, 2006.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 

 

OPTION AWARDS

STOCK AWARDS

Name

No. of Securities Underlying Unexercised Options (#) Exercisable

Number of Securities Underlying Unexercised Options (#) Unexercisable

Option Exercise Price ($)

Option Expiration Date

Number of Shares or Units of Stock That Have Not Vested (#)

Equity Incentive Plan Awards: Number of Unearned Shares, Units Or Other Rights That Have Not Vested(#)

Jay Rifkin

1,466,666 -0-

2,933,334 150,000

$ $

0.85 0.20

9/30/2015 11/8/2016

-0- -0-

-0- -0-