UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 1
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
|_| TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION
FILE NUMBER ________________________________
DIGICORP
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(Name of small business issuer in its charter)
UTAH 87-0398271
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4143 Glencoe Avenue, Marina Del Rey, CA 90292
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(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: (310) 728-1450
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
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 |_| No |X|
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 |X|
State issuer's revenues for its most recent fiscal year. $334,110
The aggregate market value of the voting and non-voting common equity held
by non-affiliates, computed by reference to the average bid and asked price of
such common equity as of March 30, 2006, was $18,156,019.
As of March 30, 2006, the issuer had 37,028,320 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
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 and Related Stockholder Matters........................................................10
Item 6. Management's Discussion and Analysis or Plan of Operation.......................................................13
Item 7. Financial Statements............................................................................................18
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................................................34
Item 8A. Controls and Procedures.........................................................................................34
Item 8B. Other Information...............................................................................................34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act...............................................................35
Item 10. Executive Compensation..........................................................................................37
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................................................40
Item 12. Certain Relationship and Related Transactions...................................................................42
Item 13. Exhibits........................................................................................................43
Item 14. Principal Accountant Fees and Services..........................................................................45
SIGNATURES..................................................................................................................46
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
ORGANIZATIONAL HISTORY
Digicorp was incorporated on July 19, 1983 under the laws of the State of
Utah 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 June 30, 1995, we became a development stage enterprise when we sold
our assets. Since June 30, 1995, we have been in the developmental stage and
until September 19, 2005 have had no operations other than issuing shares of
common stock for financing the preparation of financial statements and for
preparing filings for the SEC. In August 2001, we elected to file a Form 10-SB
registration statement with the SEC on a voluntary basis in order to become a
reporting company under the Exchange Act.
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.
In connection with the acquisition of Rebel Crew Films, on December 29,
2005 we entered into a Securities Purchase Agreement with one of the
shareholders of Rebel Crew Films, Rebel Holdings, LLC, pursuant to which we
purchased a $556,307 principal amount loan receivable owed by Rebel Crew Films
to Rebel Holdings, LLC in exchange for the issuance of a $556,307 principal
amount secured convertible note to Rebel Holdings, LLC. The secured convertible
note accrues simple interest at the rate of 4.5%, matures on December 29, 2010
and is secured by all of our assets now owned or hereafter acquired. The secured
convertible note is convertible into 500,000 shares of our common stock at the
rate of $1.112614 per share. Jay Rifkin, our Chief Executive Officer and one of
our directors, is the sole managing member of Rebel Holdings, LLC.
Also in connection with the acquisition of Rebel Crew Films, Jay Rifkin
and certain other of our shareholders entered into a voting agreement
authorizing Mr. Rifkin to vote the shares of common stock owned by such parties
to designate or elect a simple majority of our Board of Directors, one of whom
will be Mr. Rifkin, and to designate or elect the remaining directors chosen by
Milton "Todd" Ault, III, our former Chairman and Chief Executive Officer.
Rebel Crew Films was organized under the laws of the State of California
on August 7, 2002 to distribute Latino home entertainment products. Rebel Crew
Films currently maintains approximately 300 Spanish language films and plans to
serve the nation's largest wholesale, retail, catalog, and e-commerce accounts.
The below description of our business includes the operations of our
wholly owned subsidiary Rebel Crew Films.
OVERVIEW
We are an aggregator and distributor of programming content and a
developer of multi-media technologies with operations concentrated primarily in
the internet and television business segments.
Together with our subsidiaries, 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 to video and music-on-demand ("VOD"), as well as
other alternative music and video programming formats 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.
1
We currently generate revenue through either licensing agreements with
third parties that distribute our licensed content or through direct sales. Our
typical licensing agreement consists of a three to five-year contract that
carries a 15% - 50% royalty on gross sales of licensed product. We are currently
expanding our sales force to focus on direct sales of our licensed content and
expect to see a significant shift in revenues, which have historically been
predominately from licensing agreements, to direct sales.
We believe that opportunities exist in the VOD space to reach a larger
customer base for the distribution of our content as well as an opportunity to
generate advertising revenue. We will actively pursue this potential source of
revenue during the year ending December 31, 2006.
Our primary operations are conducted through our wholly owned subsidiary:
Rebel Crew Films, Inc. In addition, we have focused and will continue to focus
development efforts in our iCodemedia assets that we acquired on September 19,
2005. We are organized in a single operating segment with no long-lived assets
outside of the United States of America. All of our revenues to date have been
generated in the United States, but with the asset acquisitions of iCodemedia
and PerreoRadio.com (described below) we expect a portion of our future revenues
will be from other countries. Revenue sources could be from distribution of
content, advertising and licensing.
REBEL CREW FILMS, INC.
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.
Our specialty orientation provides our content partners with focused
attention and value-added marketing services that are not accessible from major
Hollywood studios or rental product distributors. We currently maintain and
distribute approximately 300 Spanish language films, of which we control the
exclusive distribution rights to approximately 40. The films in which we control
the exclusive distribution rights are expected to provide us with greater profit
margins as we expand our direct sales force. We believe that the overall
percentage of our titles, as compared to the total amount of titles that we
distribute, will increase as this happens. Our content library currently
consists of approximately 130 titles for which we directly control the
distribution rights and as we expand our direct sales force and increase the
number of customers that purchase content directly from us we believe that we
will be able to effectively promote our content such that it will begin to
represent a larger percentage of the total numbers of films that we distribute.
Our titles can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and
hundreds of independent video outlets across the United States of America and
Canada. Our diverse Spanish language programming includes: new releases, classic
Mexican cinema, animation, cult, sports, martial arts, family entertainment, and
more.
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. 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.
On February 7, 2006, in accordance with the purchase of the Assets, we
entered a three-year employment agreement with Mr. Stuart and granted Mr. Stuart
options to acquire 400,000 shares of common stock at an exercise price equal to
the closing price on the date of grant. The exercise of such options is subject
to certain vesting provisions.
2
PerreoRadio.com is a Latino based community website that offers online
radio shows from some of the top DJ's in the Reggaeton genre. Our intent is to
become a recognized leader in the Spanish-language and Hispanic-targeted markets
by capturing the top DJ's in this area and expanding into 12 - 15 markets to
syndicate the shows. Currently, we operate in four markets: San Francisco, Los
Angeles, Chicago and New York City.
ICODEMEDIA
On September 19, 2005, upon entering into an asset purchase agreement with
Philip Gatch, our Chief Technology Officer, we completed the initial transaction
to transform us from that of a development stage enterprise to a digital media
and content delivery company. The assets purchased consisted 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. We plan to use
these websites and the related intellectual property to provide a suite of
applications and services to enable content creators the ability to publish and
deliver content to existing and next generation digital media devices, such as
the Apple iPod and the Sony PSP, based upon the consumers' expectation for
broader and on-demand access to content and services.
Initially the Company plans to utilize the iCodemedia Assets for
distribution of its content but ultimately the Company expects to license the
technology to others for distribution of third-party content.
Ultimately, we intend to develop our iCodemedia Assets as an enterprise
software publishing solution for next generation content delivery devices such
as the Apple iPod, Sony Playstation and multimedia enabled mobile phones. We are
developing a suite of applications and services that allow for the enterprise
workflow management, processing, distribution and control of content for these
next generation devices and for emerging content delivery platforms. The
applications provide content producers, advertisers, and marketers new revenue
models built around these emerging platforms with enhanced user data, reporting,
and accountability.
Our strategy for the iCodemedia Assets is to pinpoint unexploited and
unrealized market opportunities that emerge from this evolving media landscape
and build solutions around them. In particular, the company is focusing on new
markets that arise from the following sources:
o Podcasting (the distribution of audio or video files over the
Internet for listening or viewing on mobile devices and personal
computers); and
o Advertising
We will work with content developers, entertainment companies, advertising
agencies, music talent, labels, reps, distributors, as well as software and
engineering companies to address the needs and requirements of the next
generation of content development delivery technologies.
We have focused on extending our marketing platform and access to Internet
users beyond www.perreoradio.com through our distribution network of third party
entities who have integrated our links to websites and through other co-branding
opportunities.
We plan to utilize the proprietary assets from the iCodemedia asset
acquisition to podcast not only the music videos created and produced by us but
also our library of Spanish language films which we licensed or have purchased
form third parties. Source content is available through www.perreoradio.com. The
site also offers the ability to increase our presence through online traffic to
Rebel Crew Films as well as offline through live events in the 12 - 15 markets
that we will target.
CONTENT AND TECHNOLOGY DEVELOPMENT
We will seek to enhance our product suite and content library through
internal development and acquisition opportunities.
Our programming for PerreoRadio.com currently originates in four markets:
Los Angeles, Chicago, New York City, and San Francisco. We intend that studio
facilities in Marina Del Rey, CA will house our music library, facilities for
programming origination, programming personnel and facilities to transmit
programming in those markets.
3
Our development and production teams are located in Marina Del Rey, CA. We
did not incur any product development expenses in the prior years but have begun
to incur these expenses as a result of our initial music video production that
is scheduled for release in May of 2006.
CUSTOMERS
For direct sales, our sales associates focus on small retail stores across
the country. Currently, the sales force manages more than 1,100 active retail
store customers. For other 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 to large retailers like
Wal-Mart. 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.
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.
SUPPLIERS
We have three categories of suppliers - movie licensors, DVD
manufacturers, and finished goods suppliers. Movie licensors consist of
Spanish-language movie license holders primarily from Mexico who enter licensing
agreements with us to manufacture and distribute their movies. We are currently
in contract with eight different licensors of content. From these agreements, we
have manufactured approximately ten titles. Agreements with these companies
consist of either a fixed license fee or a 40-60% royalty on net revenues for
the right to manufacture, promote and distribute the films for four to five
years, depending on title.
For the manufacture of DVDs, our principal supplier is a company called
Reptek. We do not have a written agreement with this supplier. There is no
dependency on this supplier as the supply of DVD manufacturing companies is
broad and there are many potential firms that can be employed to supply our
products.
For DVD titles not owned or licensed by us, a number of finished goods
vendors are utilized. Among them are Ventura Distribution, Inc., Venevision
International, Inc., Universal Music and Video Distribution, Inc. ("UMVD"),
Lions Gate Entertainment Corp and Cozumel Films. Ventura Distribution currently
supplies us with approximately 21 movies distributed by Unicine, a division of
Univision Communications, Inc. Venevision International has the highest number
of titles, providing us with approximately 51 films. UMVD currently supplies us
with approximately 36 films and Cozumel Films provides us with three films.
There are no written agreements with any of these companies to supply us with
films.
We are currently expanding our sales force to focus on direct sales of our
licensed content. We are shifting our efforts on direct selling due to two
primary reasons: (1) poor reliability of third party distributors generally to
pay royalties on time; and (2) to eliminate dependence on third party
distributors to distribute our product as one of many other products they also
sell.
MARKETING
We market our products and services through a broad array of programs and
media formats, including video, internet, advertising campaigns, telemarketing,
print advertisements, retail distribution, and web advertising. Other marketing
strategies include online and offline cross-promotion and co-branding with a
wide variety of partners.
COMPETITION
We operate in the market for media products, services and content
development and delivery, which is a highly competitive market characterized by
rapid change, converging technologies, and increasing competition from companies
offering communication, video, music, on-demand information and entertainment
services integrated into other products and media properties. Globally, our most
significant competition is from Univision Communications, Inc. and Navarre Corp.
4
The principal competitive factors relating to attracting and retaining
users include the quality and relevance of our advertising; the effectiveness
and efficiency of our marketing services; the accessibility, integration and
personalization of the online services that we offer on our website; and the
creativity of the marketing solutions that we offer.
We also face competition from companies focused on markets where expertise
in a particular segment of the market (e.g., radio, internet, television) may
provide them a competitive advantage.
Although accurate numbers are difficult to obtain due to the hesitation of
privately owned distribution companies to divulge sales figures, an independent
study by Estrenos magazine (a Latin Entertainment Trade Journal) estimates that
the Latino home video distribution market for the first six months of 2005 sold
more than three million units in the United States. According to Estrenos
magazine, of that number three distributors accounted for approximately 80% of
those sales - Laguna Films (43%), Ventura/Studio Latino (26%), and
Xenon/Televisa (13%) (data provided by each distributor or source). Other
participants in the Latino home video distribution market include Image
Entertainment (7%), Latin Vision (5%), Brentwood Home Video (3%), Pro-Active
Entertainment (2%), and Vanguard Latino (1%) (Source: Estros magazine,
September/October 2005). Based on these sales performance figures, our monthly
sales average currently represents approximately 1.25% of the monthly average of
DVD sales volume in the Latino video entertainment industry
Additionally, major U.S. movie studios have ventured into servicing the
Latino home video market as well, selling approximately 1.5 million units in the
first half of 2005. Of that amount, approximately 60% of sales were dominated by
three studios - MGM Home Entertainment (26%), Columbia Tri-Star (18%) and Lions
Gate Films (16%). Other such competitors include UMVD/Visual Entertainment
(12%), BVHE/Disney (8%), Warner Home Video (8%), and Fox Home Entertainment (3%)
(Source: Estros magazine, September/October 2005).
We also compete with retail music and video stores, including online
stores, dominated by large companies such as Netflix, Blockbuster, Trans World
Entertainment, and Movie Gallery Inc.
We may also face competition from businesses that have announced plans to
deliver entertainment and media content through cell phones and other wireless
devices. Sprint Nextel, Comcast, Time Warner Cable, Cox Communications and
Advance/Newhouse Communications recently announced they are forming a joint
venture to work toward accelerating the convergence of video entertainment,
wireline and wireless data and communications products and services to provide
customers throughout the United States access to advanced integrated
entertainment, including streaming television programming, music, video clips,
games and pre-recorded DVR programs, communications and wireless products.
We believe that we can effectively compete in the Latino home video
markets primarily by offering competitive prices on a wide variety of quality
titles through direct selling efforts targeted at retail stores across the
entire United States.
SEASONALITY
Our performance may be affected by seasonal revenue fluctuations and
variation in demand between local and national advertisers. The Company's
revenues may vary throughout the year. As is typical in the distribution of
content, the first calendar quarter generally produces the lowest revenues.
GOVERNMENT REGULATION
We are not aware of any existing or probable governmental regulations that
may have a material effect on the normal operations of our business. There also
are no relevant environmental laws that require compliance by us that may have a
material effect on the normal operations of the business.
5
EMPLOYEES
As of March 27, 2006, we employed 14 full time employees and 2 part time
employees. None of our employees are covered by a collective bargaining
agreement. We believe that relations with our employees are good.
AVAILABLE INFORMATION
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.
RISK FACTORS
Our business involves a high degree of risk. Potential investors should
carefully consider the risks and uncertainties described below and the other
information in this report before deciding whether to invest in shares of our
common stock. Each of the following risks may materially and adversely affect
our business, results of operations and financial condition. These risks may
cause the market price of our common stock to decline, which may cause you to
lose all or a part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
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.
For the years ended December 31, 2005 and 2004, we generated revenues of
$334,110 and $27,963, respectively, and incurred net losses of $357,561 and
$37,643, respectively. At December 31, 2005, we had a working capital surplus of
$32,276 and an accumulated deficit of $397,862. Our failure to increase our
revenues significantly or improve our gross margins will harm our business. Even
if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. If our revenues grow
more slowly than we anticipate, our gross margins fail to improve, or our
operating expenses exceed our expectations, our operating results will suffer.
If we are unable to sell or license our products at acceptable prices relative
to our costs, or if we fail to develop and introduce on a timely basis new
products from which we can derive additional revenues, our financial results
will suffer.
OUR LICENSE REVENUES ARE DEPENDENT UPON THE REVENUES OF OUR CUSTOMERS. IF THE
CONTENT WHICH WE LICENSE TO CUSTOMERS IS NOT USED IN VIDEOS WHICH BECOME POPULAR
AMONG THE VIEWING PUBLIC, OUR REVENUES MAY DECLINE.
We generate revenue through either licensing agreements with third parties
that distribute our licensed content or through direct sales. Our typical
licensing agreement consists of a three to five-year contract that carries a 15%
- - 50% royalty on gross sales of licensed product. If the content which we
license to customers is not used in videos which become popular among the
viewing public, our revenues may decline.
6
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.
Our operating subsidiary Rebel Crew Films was organized under the laws of
the State of California on August 7, 2002. Because Rebel Crew Films has a
limited operating history, our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by growing companies in
evolving markets, such as the Latino home video distribution market in which we
operate. While to date we have not experienced these problems, we must meet many
challenges including:
o Establishing and maintaining broad market acceptance of our products
and converting that acceptance into direct and indirect sources of
revenue;
o Establishing and maintaining our brand name;
o Timely and successfully developing new content and films;
o Developing content that results in high popularity among the viewing
public;
o Developing and maintaining strategic relationships to enhance the
distribution and features of our video content.
Our business strategy may be unsuccessful and we may be unable to address
the risks we face in a cost-effective manner, if at all. If we are unable to
successfully address these risks our business will be harmed and we may
experience a decrease in revenues.
IF WE ARE UNABLE TO LICENSE OR ACQUIRE COMPELLING CONTENT AT REASONABLE COSTS OR
IF WE DO NOT DEVELOP COMPELLING CONTENT, THE NUMBER OF USERS OF OUR SERVICES MAY
NOT GROW AS ANTICIPATED, OR MAY DECLINE, WHICH COULD HARM OUR OPERATING RESULTS.
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.
7
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.
The decreasing cost of electronic and computer equipment and related
technology has made it easier to create unauthorized versions of audio and
audiovisual products such as compact discs, videotapes and DVDs. Similarly,
advances in Internet technology have increasingly made it possible for computer
users to share audio and audiovisual information without the permission of the
copyright owners and without paying royalties to holders of applicable
intellectual property or other rights. Unauthorized copies and piracy of these
products compete against legitimate sales of these products. Our revenues are
derived from our licensed video content that is potentially subject to
unauthorized copying and widespread, uncompensated dissemination on the
Internet. If our proprietary video content is copied and distributed without
authorization we may incur substantial costs enforcing our intellectual property
rights. If we fail to obtain appropriate relief or enforcement through the
judicial process, or if we fail to develop effective means of protecting our
intellectual property, our results of operations and financial condition may
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.
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH POTENTIAL WOULD BE DETRIMENTAL
TO HOLDERS OF OUR SECURITIES.
Since we have limited operating history and our total assets at December
31, 2005 consisted only of $54,518 in cash and total current assets of $502,727,
any significant growth will place considerable strain on our financial resources
and increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employees and maintain
close coordination among our technical, accounting, finance, marketing, sales
and editorial staff. We cannot guarantee that we will be able to do so, or that
if we are able to do so, we will be able to effectively integrate them into our
existing staff and systems. We may fail to adequately manage our anticipated
future growth. We will also need to continue to attract, retain and integrate
personnel in all aspects of our operations. Failure to manage our growth
effectively could hurt our business.
IF WE DO NOT MAINTAIN THE CONTINUED SERVICE OF OUR EXECUTIVE OFFICERS, WE MAY
NEVER DEVELOP BUSINESS OPERATIONS.
Our success is dependent upon the continued service of our current
executive officers. To date, we have entered into a written employment agreement
with Jay Rifkin, our Chief Executive Officer, and Philip Gatch, our Chief
Technology Officer, and none of our other executive officers. We do not have key
man life insurance on any of our executive officers. While none of our executive
officers currently has any definitive plans to retire or leave our company in
the near future, any of such persons could decide to leave us at any time to
pursue other opportunities. The loss of services of any of our executive
management team could cause us to lose revenue.
8
RISKS RELATED TO OUR COMMON STOCK
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET
FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR
YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The public market for our common stock has historically been very
volatile. Over the past two fiscal years, the market price for our common stock
as quoted on the OTC Bulletin Board has ranged from $0.06 to $2.05. The closing
sale price for our common stock on March 27, 2006 was $1.30 per share. Any
future market price for our shares is likely to continue to be very volatile.
This price volatility may make it more difficult for you to sell shares when you
want at prices you find attractive. We do not know of any one particular factor
that has caused volatility in our stock price. However, the stock market in
general has experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies.
Broad market factors and the investing public's negative perception of our
business may reduce our stock price, regardless of our operating performance.
Further, the market for our common stock is limited and we cannot assure you
that a larger market will ever be developed or maintained. The average daily
trading volume of our common stock has historically been insignificant. Market
fluctuations and volatility, as well as general economic, market and political
conditions, could reduce our market price. As a result, this may make it
difficult or impossible for you to sell our common stock or to sell our common
stock for a positive return on your investment.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The SEC has adopted Rule 3a51-1 which establishes the definition of a
"penny stock," for the purposes relevant to us, as any equity security that has
a market price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, Rule 15g-9 requires:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o 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.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o 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.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
9
ITEM 2. DESCRIPTION OF PROPERTY.
We lease our principal executive office located at 4143 Glencoe Avenue,
Marina Del Rey, California 90292. The leased office space is approximately 3,800
rentable square feet. The lease contract term is seven years and two months
commencing August 1, 2005 and ending September 30, 2012. Base rent under the
lease is $5,890 per month payable on the first day of each month commencing
August 15, 2005. Additionally, the first two months (August to September 2005)
had a base rent of $8,835 and a security deposit of $5,890 was required upon
signing.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending legal proceeding, nor is our property
the subject of a pending legal proceeding, that is not in the ordinary course of
business or otherwise material to the financial condition of our business. None
of our directors, officers or affiliates is involved in a proceeding adverse to
our business or has a material interest adverse to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "DGCO." For the periods indicated, the following table sets forth the
high and low sales prices per share of common stock. These prices represent
inter-dealer quotations without retail markup, markdown, or commission and may
not necessarily represent actual transactions.
Fiscal 2006 Fiscal 2005 Fiscal 2004
--------------------- --------------------- ----------------------
Fiscal Quarter High Low High Low High Low
- --------------------------------- ---------- ---------- ---------- ---------- ----------- ----------
First Quarter Ended March 31 $ 2.05 $ 1.10 $ 0.35 $ 0.13 $ 0.13 $ 0.06
Second Quarter Ended June 30 $ -- $ -- $ 0.45 $ 0.18 $ 0.18 $ 0.07
Third Quarter Ended September 30 $ -- $ -- $ 1.37 $ 0.20 $ 0.35 $ 0.06
Fourth Quarter Ended December 31 $ -- $ -- $ 1.90 $ 0.65 $ 0.35 $ 0.07
HOLDERS
As of March 27, 2006, our shares of common stock were held by
approximately 289 stockholders of record.
DIVIDENDS
We have not declared any dividends to date. We have no present intention
of paying any cash dividends on our common stock in the foreseeable future, as
we intend to use earnings, if any, to generate growth. The payment by us of
dividends, if any, in the future, rests within the discretion of our Board of
Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
RECENT SALES OF UNREGISTERED SECURITIES
We sold the following equity securities during the fiscal year ended
December 31, 2005 that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
All of the below unregistered issuances of securities were made pursuant
to the exemptions from registration requirements provided by Section 4(2) of the
Securities Act and/or Regulation D, promulgated thereunder. Except as expressly
set forth below the individuals and entities to which we issued securities are
unaffiliated with us. For each of such sales, no advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors,
business associates of ours or our executive officers, and transfer was
restricted by us in accordance with the requirements of the Securities Act. For
each transaction exempt pursuant to Regulation D, each of the below security
holders who were not our executive officers represented that the are accredited
and sophisticated investors, that they are capable of analyzing the merits and
risks of their investment, and that they understand the speculative nature of
their investment. Furthermore, all of the below-referenced persons had access to
our Securities and Exchange Commission filings.
10
All warrants described below generally expire five years from the date of
grant and all options described below expire ten years from the date of grant.
On May 18, 2005, we sold 2,941,176 shares of common stock and warrants
(the "May Warrants") to purchase an aggregate of 3,000,000 shares of common
stock with exercise prices ranging from $0.25 to $1.50 per share to Bodnar
Capital Management, LLC ("Bodnar Capital"). On October 27, 2005, we entered into
an agreement with Bodnar Capital to cancel the May Warrants in exchange for the
issuance of a warrant to purchase 500,000 shares of common stock with a an
exercise price of $0.01 per share exercisable for a period of five years. On
November 2, 2005, Bodnar Capital exercised its warrant for cash and we issued
Bodnar Capital 500,000 shares of common stock. The issuance of these securities
was exempt from registration requirements pursuant to Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder.
On July 20, 2005, as consideration for investor relation consulting
services, we granted options to Steve Jafarzadeh to purchase 100,000 shares of
common stock with an exercise price of $0.25 per share. 25,000 of these options
have vested and the remaining 75,000 options were cancelled on December 29,
2005. This grant was exempt from registration requirement pursuant to Section
4(2) of the Securities Act.
On July 20, 2005, as consideration for business development consulting
services, we granted options to Nicolas Soichet to purchase 100,000 shares of
common stock with an exercise price of $0.25 per share. 50,000 of these options
have vested and the remaining 50,000 options were cancelled on December 29,
2005. This grant was exempt from registration requirement pursuant to Section
4(2) of the Securities Act.
On July 20, 2005, as consideration for service on our Board of Directors,
we granted to each of Melanie Glazer, Alice M. Campbell, Darrell Grimsley, Lynne
Silverstein and William B. Horne options to purchase 250,000 shares of common
stock with an exercise price of $0.25 per share. 62,500 of such options vested
to Ms. Glazer, 250,000 vested to Ms. Campbell, 62,500 vested to Mr. Grimsley,
75,000 vested to Ms. Silverstein, 200,000 vested to Mr. Horne, and the remaining
options of such individuals were cancelled on December 29, 2005. The issuance of
these stock options was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
On July 20, 2005, as consideration for service as Chairman of our Audit
Committee, we granted Alice M. Campbell options to purchase 100,000 shares of
common stock with an exercise price of $0.25 per share. All of these stock
options are vested. The issuance of these stock options was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act.
On July 20, 2005, as consideration for service as a member of our Audit
Committee, we granted Melanie Glazer options to purchase 50,000 shares of common
stock with an exercise price of $0.25 per share. 12,500 of such options have
vested and the remaining options were cancelled upon Ms. Glazer's resignation
from the Board of Directors on December 29, 2005. The issuance of these stock
options was exempt from registration requirements pursuant to Section 4(2) of
the Securities Act.
On July 20, 2005, as consideration for service as our Chief Executive
Officer, we granted Milton "Todd" Ault, III options to purchase 2,000,000 shares
of common stock with an exercise price of $0.25 per share. These stock options
vest quarterly over two years beginning September 30, 2005. Effective September
30, 2005, the Board of Directors accelerated the vesting of 475,000 of such
options and fixed the expiration date of the options to 18 months after
completing the acquisition of Rebel Crew Films. The remaining stock options were
cancelled upon Mr. Ault resigning as an officer and director. The issuance of
these stock options was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
On July 20, 2005, as consideration for service as our President of
Operations, we granted Kathryn Queen options to purchase 750,000 shares of
common stock with an exercise price of $0.25 per share. 237,500 of these options
have vested and the remaining options were cancelled upon Ms. Queen's
resignation on December 29, 2005. Also on July 20, 2005, as an incentive bonus,
subject to certain milestones being achieved prior to December 31, 2006, we
agreed to grant Ms. Queen options to purchase 750,000 shares of common stock.
These stock options were cancelled upon Ms. Queen's resignation on December 29,
2005. The issuance of these stock options was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act.
11
On July 20, 2005, as consideration for service as our Chief Technology
Officer, we granted Philip Gatch options to purchase 250,000 shares of common
stock with an exercise price of $0.25 per share. All of these options are
vested. Also on July 20, 2005, we agreed to issue restricted stock valued at
$12,500 quarterly during the three-year term of his employment as Chief
Technology Officer. The issuance of these stock options was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act.
On July 20, 2005, as consideration for service as our Chief Financial
Officer, we granted William B. Horne options to purchase 250,000 shares of
common stock with an exercise price of $0.25 per share. 200,000 of these options
are vested and the remaining 50,000 were cancelled. The issuance of these stock
options was exempt from registration requirements pursuant to Section 4(2) of
the Securities Act.
On July 20, 2005, as consideration for service as our Controller, we
granted Jeanne Olsky options to purchase 100,000 shares of common stock with an
exercise price of $0.25 per share. These stock options vest quarterly over two
years beginning September 30, 2005. 50,000 of these options have vested and the
remaining options were cancelled upon Ms. Olsky's resignation on December 29,
2005. The issuance of these stock options was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act.
On July 20, 2005, as consideration for service as the our Corporate
Secretary, we granted Lynne Silverstein options to purchase 150,000 shares of
common stock with an exercise price of $0.25 per share. These stock options vest
quarterly over two years beginning September 30, 2005. 37,500 of these options
have vested and the remaining options were cancelled upon Ms. Silverstein's
resignation on December 29, 2005. The issuance of these stock options was exempt
from registration requirements pursuant to Section 4(2) of the Securities Act.
On July 20, 2005, as consideration for consulting services valued at
$11,563.59, we granted Sothi Thillairajah warrants to purchase 50,000 shares of
common stock with an exercise price of $0.25 per share. 50% of these warrants
vested on July 20, 2005 and the remaining 50% vested on September 30, 2005. The
issuance of these warrants was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
On September 19, 2005, we purchased the certain website domain names and
related intellectual property from Phlip Gatch, our Chief Technology Officer. As
consideration for these assets we issued Mr. Gatch 1,000,000 shares of common
stock. The issuance of these shares to Mr. Gatch was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder.
On September 30, 2005, we granted Jay Rifkin, our Chief Executive Officer,
options to purchase 4,400,000 shares of common stock with an exercise price of
$0.85 per share, which stock options vest annually over a period of three years
from the date of closing the acquisition of Rebel Crew Films. The issuance of
these stock options was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
On September 30, 2005, we granted Cesar Chatel, as President of Rebel Crew
Films, options to purchase 800,000 shares of common stock with an exercise price
of $0.85 per share, which stock options vest annually over a period of three
years from the date of closing the acquisition of Rebel Crew Films. The issuance
of these stock options was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
On September 30, 2005, we granted Oscar Carreno, as Director of Sales of
Rebel Crew Films, options to purchase 150,000 shares of common stock with an
exercise price of $0.85 per share, which stock options vest annually over a
period of four years from the date of closing the acquisition of Rebel Crew
Films. The issuance of these stock options was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act.
On September 30, 2005, we granted Ian Monsod, as Manager of Operations of
Rebel Crew Films, options to purchase 125,000 shares of common stock with an
exercise price of $0.85 per share, which stock options vest annually over a
period of four years from the date of closing the acquisition of Rebel Crew
Films. The issuance of these stock options was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act.
On September 30, 2005, as consideration for M&A advisory services in
connection with the acquisition of Rebel Crew Films, Inc., we granted Aegis
Equity LLC warrants to purchase 300,000 shares of common stock with an exercise
price of $0.65 per share which were valued at $325,871.59. The issuance of these
warrants was exempt from registration requirements pursuant to Section 4(2) of
the Securities Act.
On December 29, 2005, we granted Alan Morelli warrants to purchase 250,000
shares of common stock with an exercise price of $0.145 per share, which
warrants vested immediately. These warrants were issued to Mr. Morelli as
compensation for advisory services rendered in connection with structuring the
acquisition of Rebel Crew Films. The issuance of these stock options was exempt
from registration requirements pursuant to Section 4(2) of the Securities Act.
12
On December 29, 2005, we issued Rebel Holdings, LLC 19,086,372 shares of
common stock as compensation for its 90% equity interest in Rebel Crew Films.
Jay Rifkin, our Chief Executive Officer and one of our directors, is the sole
managing member of Rebel Holdings, LLC. 3,600,000 of such shares are held in
escrow pending satisfaction of certain performance milestones through March 31,
2007. This issuance was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.
On December 29, 2005, we issued Cesar Chatel 2,120,708 shares of common
stock as compensation for his 10% equity interest in Rebel Crew Films. Mr.
Chatel is President of Rebel Crew Films. 400,000 of such shares are held in
escrow pending satisfaction of certain performance milestones through March 31,
2007. This issuance was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.
On December 29, 2005 we issued a $556,307 principal amount secured
convertible note to Rebel Holdings, LLC in exchange for a $556,307 loan
receivable owed by Rebel Crew Films to Rebel Holdings, LLC. The secured
convertible note is convertible into 500,000 shares of common stock at the rate
of $1.112614 per share. Jay Rifkin, our Chief Executive Officer and one of our
directors, is the sole managing member of Rebel Holdings, LLC.
On December 29, 2005, we granted Alan Morelli, as a director nominee,
options to purchase 350,000 shares of common stock with an exercise price of
$1.50 per share, which stock options vest annually over a period of three years
from the date Mr. Morelli's board appointment was effective, March 26, 2006. The
issuance of these stock options was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act.
On December 29, 2005, we granted David M. Kaye, as a director nominee,
options to purchase 350,000 shares of common stock with an exercise price of
$1.50 per share, which stock options vest annually over a period of three years
from the date Mr. Kaye's board appointment was effective, March 26, 2006. The
issuance of these stock options was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act.
On December 29, 2005, we issued 530,000 shares of common stock to Aegis
Equity LLC as additional consideration for M&A advisory services in connection
with the acquisition of Rebel Crew Films, Inc., valued at $795,000. The issuance
of these shares was exempt from registration requirements pursuant to Section
4(2) of the Securities Act.
On December 29, 2005, we issued 300,000 shares of common stock to
Elizabeth Gaynes as consideration for M&A advisory services in connection with
the acquisition of Rebel Crew Films, Inc., valued at $450,000. The issuance of
these shares was exempt from registration requirements pursuant to Section 4(2)
of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the related notes thereto contained elsewhere in this Form
10-KSB. This discussion contains forward-looking statements that involve risks
and uncertainties. All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing plans
are forward-looking statements. In many cases, you can identify forward-looking
statements by terminology, such as "may," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of such terms and other comparable terminology. These
statements are only predictions. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those
projected in any forward-looking statements. In evaluating these statements, you
should specifically consider various factors, including, but not limited to,
those set forth under "Risk Factors" appearing under "Item 1. Description of
Business." and elsewhere in this report on Form 10-KSB.
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.
OVERVIEW
On June 30, 1995, Digicorp, 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.
13
On September 19, 2005, the Company entered into an asset purchase
agreement with Philip Gatch, the Company's 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 December 29, 2005, we acquired all of the issued and outstanding
capital stock of Rebel Crew Films in consideration for the issuance of
21,207,080 shares of common stock to the shareholders of Rebel Crew Films. Rebel
Crew Films was organized under the laws of the State of California on August 7,
2002 to distribute Latino home entertainment products. Rebel Crew Films
currently maintains approximately 300 Spanish language films and plans to serve
the nation's largest wholesale, retail, catalog, and e-commerce accounts.
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 to video and music-on-demand ("VOD"), and other alternative music
and video programming formats 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.
We currently generate the majority our revenue through direct sales of our
film content. In the past we generated the majority of our revenue from
licensing agreements which consisted of a three to five-year contract that
carried a 15% - 50% royalty on gross sales of licensed product. We are currently
expanding our sales force to focus on direct sales of our licensed content and
expect to see a significant shift in revenues, which have historically been
predominately from licensing agreements, to direct sales.
Our primary operations are conducted through our wholly owned subsidiary:
Rebel Crew Films, Inc. In addition, we have focused and will continue to focus
development efforts in our iCodemedia assets that we acquired on September 19,
2005.
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.
We currently maintain and distribute approximately 300 Spanish language
films. Our titles can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and
hundreds of independent video outlets across the United States of America and
Canada. Our diverse programming includes: new releases, classic Mexican cinema,
animation, cult, sports, martial arts, family entertainment, and more.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The below discussion and analysis of our financial condition and results
of operations is based upon the accompanying financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Critical accounting policies are those that are both important to
the presentation of our financial condition and results of operations and
require management's most difficult, complex, or subjective judgments. Our most
critical accounting policy relates to the assessment of impairment of our
intangible assets.
We assess the impairment of intangible assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
grouping may not be recoverable. Factors that we consider in deciding when to
perform an impairment review include significant under-performance of a product
line in relation to expectations, significant negative industry or economic
trends, and significant changes or planned changes in our use of the assets.
Recoverability of intangible assets that will continue to be used in our
operations is measured by comparing the carrying amount of the asset grouping to
our estimate of the related total future net cash flows. If an asset grouping's
carrying value is not recoverable through the related cash flows, the asset
grouping is considered to be impaired. The impairment is measured by the
difference between the asset grouping's carrying amount and its fair value,
based on the best information available, including market prices or discounted
cash flow analysis. Impairments of intangible assets are determined for groups
of assets related to the lowest level of identifiable independent cash flows.
Due to our limited operating history and the early stage of development of some
of our intangible assets, we must make subjective judgments in determining the
independent cash flows that can be related to specific asset groupings. To date
we have not recognized impairments on any of our intangible assets.
14
ACCOUNTING DEVELOPMENTS
In December 2004, Statement of Financial Accounting Standards ("SFAS") No.
123(R), "Share-Based Payment," which addresses the accounting for employee stock
options, was issued. SFAS 123(R) revises the disclosure provisions of SFAS 123,
"Accounting for Stock Based Compensation" and supersedes Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." 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
based on the estimated fair value of the awards. This statement is effective for
us as of the beginning of the first interim or annual reporting period that
begins after December 15, 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 123(R) in an earlier
period.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets were $1,430,921 at December 31, 2005 versus $195,981 at
December 31, 2004. The change in total assets is primarily attributable to
increases in every asset class as a result of our acquisition of Rebel Crew
Films which resulted in an increase in our assets of approximately $750,000.
On December 29, 2005, we completed the acquisition of Rebel Crew Films.
Pursuant to the stock purchase agreement, we acquired all of the outstanding
equity stock of Rebel Crew Films from the Rebel Crew Films Shareholders. As
consideration for the acquisition we agreed to issue 21,207,080 shares of our
common stock (the "Purchase Price") to the shareholders of Rebel Crew Films. In
connection with the acquisition of Rebel Crew Films, on December 29, 2005 we
entered into a Securities Purchase Agreement with one of the shareholders of
Rebel Crew Films, Rebel Holdings, LLC, a California limited liability company
("Rebel Holdings"), pursuant to which we purchased a $556,307 principal amount
loan receivable owed by Rebel Crew Films to Rebel Holdings, LLC in exchange for
the issuance of a $556,307 principal amount secured convertible note to Rebel
Holdings, LLC. The secured convertible note accrues simple interest at the rate
of 4.5%, matures on December 29, 2010 and is secured by all of our assets now
owned or hereafter acquired. The secured convertible note is convertible into
500,000 shares of our common stock at the rate of $1.112614 per share. Jay
Rifkin, our Chief Executive Officer and one of our directors, is the sole
managing member of Rebel Holdings, LLC. Following completion of the acquisition
our previous shareholders now own 14,700,104 common shares. Upon completion of
the merger, Rebel Crew Films shareholders owned approximately 57.7% of the
outstanding shares of common stock of Digicorp. For accounting purposes the
transaction is considered to be a recapitalization where Digicorp is the
surviving legal entity, and Rebel Crew Films is considered to be the accounting
acquirer. Accordingly, the historical financial statements prior to December 29,
2005 are those of Rebel Crew Films. Following the acquisition, Digicorp changed
its fiscal year end from June 30 to December 31.
The remaining increase in our assets is attributed to monies borrowed
during the year from Rebel Holdings and the sole member of Rebel Holdings, who
is also our Chief Executive Officer of $519,321 and $73,000, respectively. At
December 31, 2005 and December 31, 2004, the Company had a combined liability of
$629,307 and $48,986, respectively, due to either Rebel Holdings or the sole
member of Rebel Holdings. On December 29, 2005, we issued a promissory note in
the amount of $73,000 to the sole member (the "Promissory Note") of Rebel
Holdings. The Promissory Note represented the outstanding amount borrowed at
December 29, 2005. The Promissory Note has a term of approximately six months
and bears 5.0% simple interest. On December 29, 2005, in connection with the
closing of the Acquisition we also issued a convertible note in the amount of
$556,307 to Rebel Holdings (the "Note"). The Note has a term of five years from
December 29, 2005, bears 4.5% simple interest and is convertible into shares of
our common stock at a conversion price of $1.112614 per share.
15
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 future revenues combined with either
loans or direct equity investments into the Company will be sufficient to fund
our operations for the 12 months subsequent to December 31, 2005. We expect to
undertake additional debt or 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. 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.
Operating activities used $305,677 of cash for the year ended December 31,
2005, compared to providing $112,870 for the year ended December 31, 2004.
Cash used in investing activities for the year ended December 31, 2005 and
2004 of $407,982, and $154,000, respectively, resulted almost exclusively from
the purchases of licensed Spanish language film content that was capitalized.
RESULTS OF OPERATIONS
REVENUES
We generated revenues of $334,110 and $27,963 for the years ended December
31, 2005 and 2004, respectively. During 2004 all of our revenues were generated
through licensing agreements. The licensing agreements provide for us to receive
advance payments as consideration for rights granted to third parties that
distribute our licensed content. The advance payments are initially recorded as
deferred revenue and subsequently recognized in income as royalties are earned
upon shipment of licensed content to customers by the sub-licensor. Deferred
revenue balances of $80,211 and $162,971 at December 31, 2005 and 2004,
respectively, represent advance royalty payments that are expected to be earned
over the subsequent twelve month periods.
During the year ended December 31, 2005, licensing revenue of $82,761
accounted for approximately 24.8% of our total revenue. The remaining revenue of
$251,349 represents revenue generated through the direct sales of our licensed
content. We expect that direct sales, as a percentage of total revenue, will
significantly increase over the next year as we focus our efforts on expanding
our existing sales force. Further, we anticipate that licensing revenues will
significantly be reduced or eliminated in future years as we shift our focus
away from licensing agreements with third parties.
EXPENSES
Operating expenses were $690,871 and $144,434 in the years ended December
31, 2005 and 2004, respectively. A significant component of operating expenses
during the year ended December 31, 2005, related to cost of sales of $212,188
and an increase in salaries and employee benefits of approximately $72,000.
These costs, which were insignificant or non-existent during the prior year,
reflect a shift in our revenue mix from revenue generated primarily through
licensing agreements which do not have any costs of sales to that of direct
sales which not only have cost of sales but also the need of a sales force. The
remaining operating expenses consisted of professional fees, rent expense,
amortization expense and general and administrative expenses.
Professional fees were approximately $62,000 higher in the year ended
December 31, 2005 compared to the year ended December 31, 2004 due to
significant increases in amounts paid to consultants as well as legal and
accounting fees. Amounts paid to various consultants increased by approximately
$17,000 and related to services to locate Spanish language content for
acquisition, technical assistance in preparing the content for production, and
sales and marketing of the titles. Legal fees increased by approximately $5,000
due to the preparation and review of an increased amount of license agreements.
Accounting fees, which increased by approximately $40,000, primarily relate to
costs associated with the audit of our December 31, 2004 financial statements
and review of our September 30, 2005 financial statements. Additionally, we
accrued audit fees of approximately $29,000 for work necessary to complete an
audit of our December 31, 2005 financial statements.
16
Rent expense increased by approximately $24,000 in the year ended December
31, 2005 compared to the year ended December 31, 2004 due in part to our
relocation into commercial office space in August 2005, with base rent of $5,890
per month combined with periods of low rates of rent during the year ended
December 31, 2004.
Amortization expense increased by approximately $78,000 in the year ended
December 31, 2005 compared to the year ended December 31, 2004 due to an
increased number of license agreements.
General and administrative expense increased by approximately $78,000 in
the year ended December 31, 2005 compared to the year ended December 31, 2004
and is attributed to the overall expansion of the business during the year ended
December 31, 2005 combined with the financial constraints placed on us as a
result of limited amounts of available working capital in the year ended
December 31, 2004.
TAXES
We are taxed under Title 26, Chapter 1, Subchapter C of the Internal
Revenue Code of 1986, as amended, and therefore subject to federal income tax on
the portion of our taxable income.
At December 31, 2005, we had a net operating loss carryforward of
approximately $1,942,000 to offset future taxable income for federal income tax
purposes. The utilization of the loss carryforward to reduce any future income
taxes will depend on our ability to generate sufficient taxable income prior to
the expiration of the net operating loss carryforwards. The carryforward expires
beginning in 2021.
A change in the ownership of a majority of the fair market value of our
common stock can delay or limit the utilization of existing net operating loss
carryforwards pursuant to Internal Revenue Code Section 382. We believe that
such a change occurred during the year ended December 31, 2005 and are
evaluating the amount that our net operating loss carryforward utilization will
be limited to.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
17
ITEM 7. FINANCIAL STATEMENTS.
DIGICORP
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm.......................19
Consolidated Balance Sheets as of
December 31, 2005 and 2004...........................................20
Consolidated Statements of Operations for the years ended
December 31, 2005, and 2004..........................................21
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2005 and 2004...........................................22
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004...........................................23
Notes to Financial Statements..............................................24-33
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Digicorp
Marina Del Rey, California
We have audited the accompanying consolidated balance sheets of Digicorp (the
"Company") as of December 31, 2005, and 2004, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digicorp and subsidiaries as of
December 31, 2005, and 2004, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Peterson & Co., LLP
PETERSON & CO., LLP
San Diego, California
March 31, 2006
19
DIGICORP
================================================================================
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31, December 31,
2005 2004
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 54,518 $ 7,856
Accounts receivable, net 64,408 --
Inventories 130,168 --
Other current assets 253,633 --
---------------- ----------------
TOTAL CURRENT ASSETS 502,727 7,856
Other long term assets 48,922 --
Property and equipment, net 83,016 --
Intangible assets, net 796,256 188,125
---------------- ----------------
TOTAL ASSETS $ 1,430,921 $ 195,981
================ ================
- ------------------------------------------------------------------------------------------------------ ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 189,095 $ --
Accrued liabilities 128,145 9,700
Due to related party 73,000 48,986
Deferred revenue 80,211 162,971
---------------- ----------------
TOTAL CURRENT LIABILITIES 470,451 221,657
LONG TERM LIABILITIES
Convertible note payable - related party 556,307 --
Debt discount - beneficial conversion feature (193,694) --
---------------- ----------------
TOTAL LONG TERM LIABILITIES 362,613 0
TOTAL LIABILITIES 833,064 221,657
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value: 50,000,000 shares authorized;
36,737,184 shares issued and outstanding as of December 31, 2005; 15,530,104
shares issued and outstanding at December 31, 2004 36,737 15,530
Paid-in capital 958,982 (905)
Accumulated deficit (397,862) (40,301)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 597,857 (25,676)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,430,921 $ 195,981
================ ================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
20
DIGICORP
================================================================================
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Years Ended
December 31, December 31,
2005 2004
--------------- ---------------
REVENUE
Sales $ 251,349 $ --
Licensing fees 82,761 27,963
--------------- ---------------
Total revenue 334,110 27,963
OPERATING EXPENSES
Cost of sales 212,188 --
--------------- ---------------
Selling, general and administrative expenses 478,683 144,434
--------------- ---------------
Total operating expenses 690,871 144,434
--------------- ---------------
Operating loss (356,761) (116,471)
OTHER INCOME -- 79,628
--------------- ---------------
LOSS BEFORE INCOME TAXES (356,761) (36,843)
PROVISION FOR INCOME TAXES 800 800
--------------- ---------------
NET LOSS $ (357,561) $ (37,643)
=============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.02) $ (0.00)
=============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,704,409 15,530,104
=============== ===============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
21
DIGICORP
================================================================================
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Total
Common Stock Shareholders'
---------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
---------- ---------- ---------- ----------- ------------
BALANCES, December 31, 2003 15,530,104 $ 15,530 $ (905) $ (2,658) $ 11,967
Net loss -- -- -- (37,643) (37,643)
---------- ---------- ---------- ----------- ------------
BALANCES, December 31, 2004 15,530,104 $ 15,530 $ (905) $ (40,301) $ (25,676)
Effects of recapitalization 21,207,080 21,207 766,194 -- 787,401
Beneficial conversion feature in connection with convertible debt -- -- 193,693 -- 193,693
Net loss -- -- -- (357,561) (357,561)
---------- ---------- ---------- ----------- ------------
BALANCES, December 31, 2005 36,737,184 $ 36,737 $ 958,982 $ (397,862) $ 597,857
========== ========== ========== =========== ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
22
DIGICORP
================================================================================
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Years Ended
December 31, December 31,
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss $ (357,561) $ (37,643)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 1,577 --
Amortization of licenses 123,869 45,875
Changes in operating assets and liabilities:
Accounts receivable (64,408) --
Inventories (130,168) --
Other current assets (14,147) --
Accounts payable and accrued liabilities 217,921 (17,900)
Deferred revenue (82,760) 122,538
------------- -------------
Net cash provided by (used in) operating activities (305,677) 112,870
------------- -------------
Cash flows from investing activities:
Cash acquired in acquisition 43,408
Purchases of licenses (432,000) (154,000)
Purchases of property and equipment (19,390) --
------------- -------------
Net cash used in investing activities (407,982) (154,000)
------------- -------------
Cash flows from financing activities:
Proceeds from pre-acquisition advances 180,000 --
Proceeds from note financing 507,321 --
Proceeds from related party note 73,000 48,986
------------- -------------
Net cash provided by financing activities 760,321 48,986
------------- -------------
Net increase in cash and cash equivalents 46,662 7,856
Cash and cash equivalents at beginning of period 7,856 --
------------- -------------
Cash and cash equivalents at end of period $ 54,518 $ 7,856
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 1,600 $ --
Non-cash investing and financing activity:
Assets acquired and liabilities assumed for issuance of common stock in
connection with recapitalization:
Acquisition of intangible assets $ 300,000 $ --
Acquisition of other current assets $ 239,486 $ --
Acquisition of property and equipment $ 65,203 $ --
Acquisition of other long term assets $ 48,922 $ --
Assumption of accrued liabilities $ 89,619 $ --
Reclassification of amount due to related party $ 48,986 $ --
to convertible note payable - related party
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
23
DIGICORP
Notes to Consolidated Financial Statements
December 31, 2005
1. DESCRIPTION OF BUSINESS
Digicorp ("the Company") was organized under the laws of the State of Utah on
July 19, 1983. On July 1, 1995, the Company became a development stage
enterprise as defined in Statements of Financial Accounting Standards ("SFAS")
No. 7 when it sold its assets and changed its business plan. On December 29,
2005, the Company ceased being a development stage enterprise when it acquired
all of the issued and outstanding capital stock of Rebel Crew Films, Inc., a
California corporation ("Rebel Crew Films"), pursuant to a reverse merger
transaction (see note 3).
Rebel Crew Films operates as a wholly-owned operating subsidiary of the Company.
Rebel Crew Films was organized under the laws of the State of California on
August 7, 2002 to distribute Latino home entertainment products. Rebel Crew
Films distributes Spanish language films and serves wholesale, retail, catalog,
and e-commerce accounts. Rebel Crew Film's titles can be found at major retail
outlets and independent video outlets across the United States of America and
Canada.
The Company, including its operating subsidiary, generated revenue through the
direct sales of licensed content and licensing agreements with third parties
that distributed the Company's licensed content. The Company is expanding its
sales force to focus on direct sales of its licensed content and intends to
significantly reduce or eliminate future licensing agreements with third
parties.
The Company is organized in a single operating segment. All of the Company's
revenues are generated in the United States, and the Company has no long-lived
assets outside the United States.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Rebel Crew Films. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Liquidity
The accompanying financial statements are prepared assuming the Company is a
going concern which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has a working capital
surplus of $32,276 at December 31, 2005, which includes deferred revenue balance
of $80,211, as discussed below. During the year ended December 31, 2005, the
Company primarily relied upon revenues generated from the direct sales of its
Latino home entertainment content and on loans by a related party to fund its
operations. Management believes that future revenues combined with either loans
or direct equity investments into the Company will be sufficient to fund the
Company's operations for the 12 months subsequent to December 31, 2005 (See Note
16).
Use of Estimates
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates are based on knowledge of
current events and anticipated future events and accordingly, actual results may
differ from those estimates.
Cash and Cash equivalents
The Company considers only highly liquid investments such as money market funds
and commercial paper with maturities of 90 days or less at the date of their
acquisition as cash and cash equivalents.
24
DIGICORP
Notes to Consolidated Financial Statements (continued)
The Company maintains cash in bank and deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Intangible Assets
The Company accounts for intangible assets in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", which provides accounting and reporting
standards for acquired intangible assets. Under SFAS No. 142, goodwill and other
intangible assets with indefinite useful lives are no longer amortized but
tested for impairment at least annually. The Company will perform an impairment
test on all intangible assets, in accordance with the guidance provided by SFAS
No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets", at
least annually, unless events and circumstances indicate that such assets might
be impaired.
Stock-Based Compensation
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) revises the disclosure
provisions of SFAS 123 and supercedes APB Opinion No. 25. 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. This statement
is effective for the Company as of the beginning of the first annual reporting
period that begins after June 15, 2005. The Company adopted SFAS 123(R) as of
January 1, 2005. Since the Company had no outstanding options as of December 31,
2004, SFAS 123(R) would have had no impact on the Company's financial statements
had the Company elected to adopt the provisions of SFAS 123(R) in an earlier
period. During the year ended December 31, 2005, stock-based compensation
totaling approximately $2.90 million was recorded by the Company prior to the
reverse merger with Rebel Crew Films, and as such is included in the pre-merger
net loss. Outstanding stock-based compensation awards were granted by the
Company during 2005, prior to the reverse merger, at the per share fair market
value on the grant date. Vesting of outstanding options and warrants differ
based on the terms of each award.
Revenue Recognition
The Company generates revenue through either the direct sales of licensed
content or through licensing agreements whereby the Company receives advance
payments as consideration for rights granted to third parties that distribute
the Company's licensed content. The Company may be entitled to receive
additional royalty payments under the licensing agreements, but only to the
extent that royalties calculated under the terms of the licensing agreements
exceed the amount of the advance payments. Advance payments are initially
recorded as deferred revenue. The Company recognizes revenue under its licensing
agreements as royalties are earned upon shipment of licensed content to
customers by the sub-licensor. Deferred revenue balances of $80,211 and $162,971
at December 31, 2005 and 2004, respectively, represent advance royalty payments
that are expected to be earned over the subsequent twelve month periods.
Revenues from direct sales are recorded upon shipment.
25
DIGICORP
Notes to Consolidated Financial Statements (continued)
Accounts Receivable
Accounts receivable are recorded at the invoice amount and do not bear interest.
Accounts receivable at December 31, 2005 are presented net of an allowance for
doubtful accounts of approximately $15,000. The allowance for doubtful accounts
is the Company's estimate of the amount of probable credit losses in the
Company's existing accounts receivable. The Company determines the allowance
based on historical write-off experience. The Company reviews its allowance for
doubtful accounts monthly. Past due balances are reviewed individually for
collectibility. Account balances are charged off against the allowance after all
means of collection have been exhausted and potential for recovery is considered
remote. The Company does not have any off-balance-sheet exposure related to its
customers.
Inventory
Inventories, consisting primarily of Spanish language DVD titles, are stated at
the lower of cost (average) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the useful lives of the assets, generally from three
to seven years.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally related
to net operating loss carryforwards. Valuation allowances are provided to the
extent realization of recorded tax assets is not considered likely.
3. RECAPITALIZATION
On December 29, 2005, the Company completed the acquisition of Rebel Crew Films.
Pursuant to the stock purchase agreement, the Company acquired all of the
outstanding equity stock of Rebel Crew Films from the Rebel Crew Films
Shareholders. As consideration for the acquisition the Company agreed to issue
21,207,080 shares of the Company's common stock (the "Purchase Price") to the
shareholders of Rebel Crew Films.
Following completion of the acquisition the Company's previous shareholders
owned 15,530,104 common shares and Rebel Crew Films shareholders owned
21,207,080, or approximately 57.7% of the outstanding shares of the Company's
common stock. For accounting purposes the transaction is considered to be a
recapitalization where Digicorp is the surviving legal entity, and Rebel Crew
Films is considered to be the accounting acquirer. Accordingly, the historical
financial statements prior to December 29, 2005 are those of Rebel Crew Films.
Following the acquisition, Digicorp changed its fiscal year end from June 30 to
December 31.
26
DIGICORP
Notes to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and 2004 consist of the following:
2005 2004
----------------------------
Computer Software and Equipment $ 78,698 $ --
Office Furniture and Equipment 6,629 --
----------------------------
Total Property and Equipment 85,327 --
----------------------------
Less: accumulated depreciation (2,311) --
----------------------------
Property and equipment, net $ 83,016 $ --
============================
Depreciation expense for the year ended December 31, 2005 was $1,577.
5. OTHER CURRENT ASSETS
The Company has an agreement with Sichenzia Ross Friedman Ference LLP
("Sichenzia") for legal representation that extends through March 31, 2007. In
consideration for Sichenzia's services, the Company agreed to a fixed fee of
$50,000 and to issue Sichenzia 500,000 shares of the Company's common stock. The
common stock issued to Sichenzia was valued at approximately $325,000 and is
being amortized over the term of the agreement. At December 31, 2005, the
unamortized balance is $244,565. Of this balance $195,643 is included in other
current assets and $48,922 is included in other long term assets. The remaining
balance recorded in other current assets relates to an amount due the Company
for reimbursable expenses from a related party of $35,794 and other items which
amount to $22,196.
6. INTANGIBLE ASSETS
Intangible assets consist of capitalized license fees for licensed content the
Company acquired from owners including producers, studios and distributors as
well as the Company's 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. The iCodemedia Assets are presently under development. As
consideration for the iCodemedia Assets, the Company issued 1,000,000 shares of
its common stock valued at $300,000. The iCodemedia Assets were determined to
have an indefinite useful life based primarily on the renewability of the
proprietary domain names. Intangible assets with an indefinite life are not
subject to amortization, but will be subject to periodic evaluation for
impairment
Licensed content acquired is capitalized at the time of purchase. The term of
the licensed content agreements usually vary between one to five years (the
"Title Term"). At the end of the Title Term, the Company generally has the
option of discontinuing distribution of the title or extending the Title Term.
The Company amortizes the capitalized license fees, on a straight line basis
over the Title Term. During the years ended December 31, 2005 and 2004,
amortization expense related to the licensed content was $123,869 and $45,875,
respectively.
Intangible assets and accumulated amortization consisted of the following:
Years Ended
December 31, December 31,
2005 2004
------------ ------------
iCodemedia Assets $ 300,000 $ --
Licensed content 686,000 254,000
Less: accumulated amortization (189,744) (65,875)
------------ ------------
Intangible Assets, net $ 796,256 $ 188,125
============ ============
27
DIGICORP
Notes to Consolidated Financial Statements (continued)
In connection with these agreements, the Company expects to record the following
amortization expense over the next five years:
Fiscal year ended Amortization
- ----------------------- --------------
December 31, 2006 $ 146,675
December 31, 2007 $ 146,675
December 31, 2008 $ 100,738
December 31, 2009 $ 79,977
December 31, 2010 $ 22,191
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of the
Company's deferred tax assets as of December 31, 2005 and 2004 are as follows:
2005 2004
----------- -----------
Deferred tax assets
Federal net operating loss carryforward $ 660,302 $ 9,185
State net operating loss carryforward 171,386 2,175
Stock based compensation 704,137 --
Deferred revenue 34,362 5,343
----------- -----------
Total gross deferred tax asset 1,570,187 16,703
Less valuation allowance (1,570,187) (16,703)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The ultimate realization of deferred tax assets depends upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Based upon the Company's loss for the year ended December 31,
2005 the Company has provided a valuation allowance in the amount of $1,570,187,
an increase of $1,553,484. The amount of deferred tax assets considered
realizable could change if future taxable income is realized. A component of the
Company's deferred tax assets are federal and state net operating loss
carryforwards of approximately $1,942,000 and $1,939,000 respectively. Included
in the federal and state net operating loss carryforwards are federal and state
net operating losses of Digicorp prior to the recapitalization (see note 3) of
approximately $554,000 and $144,000, respectively. A greater than 50% change in
the ownership of the Company's common stock can delay or limit the utilization
of existing net operating loss carryforwards pursuant to the Internal Revenue
Code Section 382. The Company believes that such a change occurred on December
29, 2005. The Company is evaluating the net operating loss carryforward
limitation imposed by Internal Revenue Code Section 382 for net operating losses
incurred before the change date. The net operating losses will begin to expire
in 2021 and 2011, respectively.
28
DIGICORP
Notes to Consolidated Financial Statements (continued)
At December 31, 2005 and 2004, the Company's tax provision consists of:
2005 2004
----------- -----------
Current
Federal $ -- $ --
State 800 800
Deferred
Federal -- --
State -- --
----------- -----------
Total $ 800 $ 800
=========== ===========
For the years ended December 31, 2005 and 2004, a reconciliation of the federal
statutory tax rate to the Company's effective tax rate is as follows:
2005 2004
------- -------
Federal statutory tax rate (34.00)% (34.00)%
State and local income taxes, net of federal tax 0.15 1.43
benefit
Non deductible items 0.39 0.75
Valuation allowance 33.70 33.99
------- -------
Total effective tax rate 0.24% 2.17%
======= =======
8. INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based on the weighted average number of common
shares outstanding. The Company complies with SFAS No. 128, "Earnings Per
Share," which requires dual presentation of basic and diluted earnings per share
on the face of the statements of operations. Basic per share earnings or loss
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted per share earnings or loss reflects the potential dilution that could
occur if convertible preferred stock or debentures, options and warrants were to
be exercised or converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity
Options and warrants issued pursuant to our Stock Option Plan and warrants that
were issued outside our Stock Option Plan which were outstanding as of December
31, 2005 to purchase 8,312,500 and 550,000 shares of common stock, respectively,
and 500,000 shares issuable upon conversion of an outstanding convertible note
were not included in the computation of diluted net loss per common share for
the year ended December 31, 2005, as their inclusion would have been
antidilutive. At December 31, 2004 there were no outstanding options, warrants
or convertible notes.
29
DIGICORP
Notes to Consolidated Financial Statements (continued)
9. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2005 and 2004 are
comprised of the following:
December 31, December 31,
2005 2004
--------------- --------------
Obligations on license agreements $ 58,500 $ --
Accrued salaries 37,500 --
Accrued professional fees 29,000 4,625
Income taxes payable 800 2,400
Other 2,345 2,675
--------------- --------------
$ 128,145 $ 9,700
=============== ==============
10. CONVERTIBLE NOTE PAYABLE - RELATED PARTY
In connection with the acquisition of Rebel Crew Films, on December 29, 2005 the
Company entered into a Securities Purchase Agreement with one of the
shareholders of Rebel Crew Films, Rebel Holdings, LLC, a California limited
liability company ("Rebel Holdings"), pursuant to which the Company purchased a
$556,307 principal amount loan receivable owed by Rebel Crew Films to Rebel
Holdings, LLC in exchange for the issuance of a $556,307 principal amount
secured convertible note to Rebel Holdings, LLC. The secured convertible note
accrues simple interest at the rate of 4.5%, matures on December 29, 2010 and is
secured by all of the Company's assets now owned or hereafter acquired. The
secured convertible note is convertible into 500,000 shares of the Company's
common stock at the rate of $1.112614 per share. Jay Rifkin, the Company's Chief
Executive Officer and a director, is the sole managing member of Rebel Holdings,
LLC.
As the effective conversion price of the note on the date of issuance was below
the fair market value of the underlying common stock, the Company recorded debt
discount in the amount of $193,694 based on the intrinsic value of the
beneficial conversion feature of the note. The debt discount recorded as a
result of the beneficial conversion feature will be amortized as non-cash
interest expense over the term of the debt. Through December 31, 2005, no
interest expense had been recorded from the debt discount amortization, and as
of December 31, 2005, the remaining debt discount balance attributable to the
beneficial conversion feature was $193,694.
30
DIGICORP
Notes to Consolidated Financial Statements (continued)
11. COMMITMENT AND CONTINGENCIES
During part of 2005 and all of 2004 the Company rented space on a month to month
basis. Rent expense during the years ended December 31, 2005 and 2004 was
$36,400 and $11,505, respectively. In August 2005 the Company entered into a
commercial lease agreement for office space. The lease requires monthly payments
of base rent in the amount of $5,890 from August 21, 2005 through September 30,
2012. Further, on each anniversary date the base rent is subject to a 3%
increase over the previous year. Approximate future minimum rent payments under
this lease are as follows:
Years ended December 31,
- ------------------------------------------------------------------------------------- -----------
2006 2007 2008 2009 2010 Thereafter Total
- ------------- ----------- ----------- ---------- ---------- ------------- -----------
$ 71,400 $ 73,500 $ 75,700 $ 78,000 $ 80,400 $ 139,000 $ 518,000
12. STOCK OPTION PLANS
Effective July 20, 2005, the Board of Directors of the Company approved the 2005
Stock Option and Restricted Stock Plan (the "2005 SOP"). 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.
As of December 31, 2005, the Company has granted a total 11,325,000 shares,
3,012,500 of which were subsequently cancelled, and of which 2,137,500 are
vested.
The following is a summary of the Stock Option Plan activity:
Outstanding Options & Warrants
Shares
Available for Number of Weighted Average
Grant Shares Exercise Price
--------------- --------------- ----------------
December 31, 2004 -- -- $ --
Adoption of 2005 SOP 15,000,000
Grants (11,325,000) 11,325,000 $ 0.62
Cancellations 3,012,500 (3,012,500) $ 0.25
--------------- --------------- ----------------
December 31, 2005 6,687,500 8,312,500 $ 0.75
Options and warrants exercisable at:
December 31, 2004 -- $ --
December 31, 2005 2,137,500 $ 0.25
31
DIGICORP
Notes to Consolidated Financial Statements (continued)
The outstanding options and warrants, all of which are issued under the 2005
SOP, have a remaining contractual life of approximately 8.4 years.
13. WARRANTS
During 2005, the Company issued a total of 550,000 warrants to purchase shares
of common stock at prices ranging from $0.145 to $0.65 per share to consultants.
The following table summarizes information about common stock warrants
outstanding at December 31, 2005:
Outstanding Exercisable
- -------------------------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
- ------------- ----------- ----------- ------------ ----------- ---------------
$ 0.10 - 0.25 250,000 5.00 $ 0.145 250,000 $ 0.145
$ 0.50 - 0.75 300,000 4.75 0.65 300,000 0.65
- ------------- ----------- ----------- ------------ ----------- ---------------
$ 0.10 - 0.75 550,000 4.86 $ 0.42 550,000 $ 0.42
============= =========== =========== ============ =========== ===============
14. RELATED PARTY TRANSACTIONS
At December 31, 2005 and 2004, the Company has a liability of $556,307 and
$48,986, respectively, due to Rebel Holdings, LLC, a California limited
liability company ("Rebel Holdings"), an entity that owned approximately 52% of
the outstanding shares of the Company's common stock at December 31, 2005. In
connection with the borrowings, the Company issued a convertible note in the
amount of $556,307 to Rebel Holdings (the "Rebel Note") on December 29, 2005.
The monies loaned by Rebel Holdings to the Company were utilized to pay for
certain capitalized license agreements and operating expenses of the Company.
The Rebel Note has a term of five years from closing, bears 4.5% simple interest
and is convertible into shares of the Company's common stock at a conversion
price of $1.112614 per share (see note 10).
Additionally, at December 31, 2005 the Company has a liability of $73,000 due to
the sole member of Rebel Holdings. In connection with the borrowings, the
Company issued a promissory note in the amount of $73,000 to the member (the
"Note") on December 29, 2005. The monies loaned by the member to the Company
were utilized to pay for certain capitalized license agreements and operating
expenses of the Company. The Note has a term of approximately six months and
bears 5.0% simple interest.
Other current assets at December 31, 2005 includes $35,794 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, William B. Horne, is also
Chief Financial Officer of AGB & Company.
32
DIGICORP
Notes to Consolidated Financial Statements (continued)
15. OTHER INCOME
Other income recognized during 2004 consists primarily of finder's fees received
by the Company from a distributor of the Company's licensed content as
consideration for the Company's efforts in assisting the distributor in securing
rights to other third party film distribution rights
16. SUBSEQUENT EVENTS
Acquisition
On February 7, 2006, the Company entered into an asset purchase agreement
pursuant to which the Company 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. As consideration for the Assets, the Company issued an
aggregate of 100,000 shares of its common stock.
Subscription Agreement
During February 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 $235,000 from the issuance of 213,636 Shares at a price of $1.10 per
share.
Revolving Line of Credit Agreement
Effective March 23, 2006 the Company entered into 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 allows the
Company to request advances totaling an aggregate of up to $150,000 from AGB
Acquisition Fund. The initial term of the Revolving Line of Credit is for a
period of six months and may be extended for one or more additional six-month
periods upon mutual agreement of the parties.
33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 25, 2005, we engaged the firm of Peterson & Co. to serve as our
independent registered public accountants. On October 27, 2005, we notified
Jones Simkins, P.C. ("Jones Simkins") that we were terminating Jones Simkins'
services. The decision to change accountants was recommended and approved by our
Board of Directors.
During the two fiscal years ended June 30, 2005 and 2004, and through
October 27, 2005, (i) there were no disagreements between us and Jones Simkins
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of Jones Simkins would have caused Jones Simkins to make reference
to the matter in its reports on our financial statements, and (ii) except for
Jones Simkins' report on our June 30, 2004 financial statements dated September
1, 2004 which included an explanatory paragraph wherein they expressed
substantial doubt about our ability to continue as a going concern, Jones
Simkins' reports on our financial statements did not contain an adverse opinion
or disclaimer of opinion, or was modified as to uncertainty, audit scope or
accounting principles. During the two fiscal years ended June 30, 2005 and 2004
and through October 27, 2005, there were no reportable events as described in
Item 304(a)(1)(iv) of Regulation S-B.
During the two fiscal years ended June 30, 2005 and 2004, and through
October 27, 2005, we did not consult with Peterson & Co. regarding either:
1. The application of accounting principles to any specific
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, and
neither a written report was provided to Peterson & Co. nor oral
advice was provided that Peterson & Co. concluded was an important
factor considered by us in reaching a decision as to the accounting,
auditing or financial reporting issue; or
2. Any matter that was either subject of disagreement or event, as
defined in Item 304(a)(1)(iv) of Regulation S-B and the related
instruction to Item 304 of Regulation S-B, or a reportable event, as
that term is explained in Item 304(a)(1)(iv) of Regulation S-B.
ITEM 8A. 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: (1) accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure; and (2) recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. There was no change
to 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.
ITEM 8B. OTHER INFORMATION.
Between September 2005 and October 2005, Jay Rifkin loaned an aggregate
total principal amount of $73,000 to Rebel Crew Films. We have agreed to repay
this loan to Mr. Rifkin pursuant to the terms of a $73,000 principal amount
promissory note due June 30, 2006 which accrues interest at 5% per annum. In the
event of breach of the promissory note, the interest rate will increase to 8%
per annum.
34
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the members of our
Board of Directors and our executive officers and the positions held by each.
Name Age Position
Jay Rifkin 50 Chief Executive Officer, Director
William B. Horne 37 Chief Financial Officer and Director
Philip Gatch 41 Chief Technology Officer
Alice M. Campbell 55 Director
Alan Morelli 44 Director
David M. Kaye 51 Director
Officers are elected annually by the Board of Directors (subject to the
terms of any employment agreement), to hold such office until an officer's
successor has been duly appointed and qualified, unless an officer sooner dies,
resigns or is removed by the Board. Some of our directors, director nominees and
executive officers also serve in various capacities with our subsidiary Rebel
Crew Films. There are no family relationships among any of our directors and
executive officers.
Below is a brief description of the above persons' business experience
during the past five years based on information supplied by each of them.
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. Since July 5, 2005, Mr. Horne
has been 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. 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.
Philip Gatch, Chief Technology Officer. Mr. Gatch has been our Chief
Technology Officer since June 30, 2005. From June 30, 2005 until October 14,
2005, Mr. Gatch was also Chief Technology Officer of Patient Safety
Technologies, Inc. Since May 12, 2005, Mr. Gatch has been President and owner of
Cinapse Digital Media, LLC, a company that operates a production and
post-production media content facility. From September 2003 to June 2005, Mr.
Gatch was Director of Technical Services of The DR Group. From February 2002 to
April 2003, Mr. Gatch was Director of Research and Development for Media.net.
From 1999 to 2002, Mr. Gatch was Director of Research and Development for
Digital Entertainment Solutions.
35
Alice M. Campbell, Director. Ms. Campbell has been a member of our Board
of Directors since July 16, 2005. Since June 23, 2005, Ms. Campbell has been a
director of IPEX, Inc., a public company quoted on the OTC Bulletin Board. Since
October 22, 2004, Ms. Campbell has been a director of Patient Safety
Technologies, Inc., a public company listed on the American Stock Exchange.
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).
AUDIT COMMITTEE
The Audit Committee is appointed by the Board of Directors in fulfilling
its responsibilities to oversee: (1) the integrity of our financial statements
and disclosure controls; (2) the qualifications and independence of our
independent accountants; (3) the performance of our independent accountants; and
(4) compliance with legal and regulatory requirements. Alice M. Campbell is
presently the only member of our Audit Committee and she is Chairman of the
Audit Committee. The Board has determined that Ms. Campbell is an "audit
committee financial expert" as defined under Item 401 of Regulation S-B
promulgated pursuant to the Securities Exchange Act of 1934, as amended.
COMPENSATION COMMITTEE
The Compensation Committee is appointed by the Board of Directors to
discharge the responsibilities of the Board relating to compensation of our
executive officers. Alice M. Campbell is currently the only member of the
Compensation Committee and she is Chairman of the Compensation Committee.
CODE OF ETHICS
We have adopted a Code of Ethics and Business Conduct that applies to our
Chief Executive Officer and Chief Financial Officer, which is filed as Exhibit
14.1 to our annual report on Form 10-KSB for the fiscal year ended June 30,
2005. Upon request, we will provide to any person without charge a copy of our
Code of Ethics. Any such request should be made to Attn: Secretary, Digicorp,
4143 Glencoe Avenue, Marina Del Rey, CA 90292. We are in the process of building
a website where our Code of Ethics will be available to investors.
36
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
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 during the most recent fiscal year ended
December 31, 2005:
Number Transactions not Known failures to
Name and Relationship of late reports timely reported file a required form
- --------------------- ---------------- --------------- --------------------
Philip Gatch, Chief Technology Officer 2 2 0
William B. Horne, Chief Financial Officer
and Director 2 2 0
Patient Safety Technologies, Inc., Former
10% Owner 1 1 0
Melanie Glazer, Former Director 2 2 0
Milton "Todd" Ault, III, Former Officer,
Former Director and Former 10% Owner 0 17 0
Kathryn Macenzie Queen, Former Officer 3 3 0
Lynne Silverstein, Former Officer and
Former Director 2 2 0
Alice M. Campbell, Former Director 2 2 0
Darrell W. Grimsley, Jr., Former Director 2 0 2
Don J. Colton, Former Officer, Former Director
and Former 10% Owner 1 3 1
Gregg B. Colton, Former Officer, Former
Director and Former 10% Owner 1 2 1
Pioneer Oil and Gas, affiliate of Former
Director 1 1 1
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the total
compensation that we have paid or that has accrued on behalf of our chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the years ended December 31, 2005, 2004 and 2003 (the
"named executive officers").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ -----------
Other Securities All
Annual Restricted Under-lying LTIP Other
Name and Compen- Stock Award(s) Options/ Payouts Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) ($) SARs (#) ($) sation ($)
- --------------------------- --------- ------------- ---------- ------------ ----------------- ------------ ----------- ------------
Milton "Todd" Ault III (1) 2005 0 0 0 0 2,000,000 0 0
Former CEO and 2004 0 0 0 0 0 0 0
Former Chairman 2003 0 0 0 0 0 0 0
William B. Horne (2) 2005 0 0 0 0 500,000 0 0
CFO, Former CEO and 2004 0 0 0 0 0 0 0
Former Chairman 2003 0 0 0 0 0 0 0
Philip Gatch (3) 2005 $ 23,866 0 0 $ 11,250 250,000 0 0
CTO 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
Jay Rifkin (4) 2005 0 0 0 0 4,400,000 0 0
CEO and President and 2004 0 0 0 0 0 0 0
Principal Executive 2003 0 0 0 0 0 0 0
Officer of Rebel Crew
Films
(1) Mr. Ault was appointed Chief Executive Officer on April 26, 2005, and
director and Chairman of the Board of Directors on July 16, 2005. Mr. Ault
resigned from the positions of Chief Executive Officer and director and
Chairman of the Board of Directors on September 30, 2005.
(2) Mr. Horne was appointed Chief Financial Officer and director on July 20,
2005, and Chief Executive Officer and Chairman of the Board of Directors
on September 30, 2005. Mr. Horne resigned from the position of Chief
Executive Officer on December 29, 2005.
(3) Mr. Gatch was hired as Chief Technology Officer of the Company on
September 20, 2005. As part of his employment agreement Mr. Gatch is
entitled to receive restricted stock awards of $45,000 per year. During
the year ended December 31, 2005 Mr. Gatch was received 16,071 shares of
restricted stock valued at $11,250.
(4) Mr. Rifkin was appointed President on September 30, 2005, and Chief
Executive Officer and director nominee on December 29, 2005.
OPTIONS GRANT TABLE
The following table sets forth information with respect to the named
executive officers concerning the grant of stock options during the fiscal year
ended December 31, 2005. We did not have during such fiscal year any plans
providing for the grant of stock appreciation rights ("SARs").
37
Option/SAR Grants in Last Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock Alternative to
Price Appreciation (f) and (g):
Individual Grants for Option Term Grant Date Value
- ------------------------------------------------------------------------------ ------------------ -----------------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/ Employees or Base Grant Date
SARs in Fiscal Price Expiration Present
Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($) Value ($) (1)
- --------------------------- ------------ ------------- ---------- ----------- ---------- ---------- -------------------
Milton "Todd" Ault III (2) 2,000,000 2,000,000 $ 0.25 7/20/2015 --- --- $ 494,200
William B. Horne (3) 500,000 500,000 $ 0.25 7/20/2015 --- --- $ 123,550
Philip Gatch (4) 250,000 250,000 $ 0.25 7/20/2015 --- --- $ 61,775
Jay Rifkin (5) 4,400,000 4,400,000 $ 0.85 9/30/2015 --- --- $ 3,696,620
(1) The value shown was calculated utilizing the Black-Scholes option pricing
model and are presented solely for the purpose of comparative disclosure
in accordance with certain regulations of the Securities and Exchange
Commission. This model is a mathematical formula used to value traded
stock price volatility. The actual value that an executive officer may
realize, if any, is dependent on the amount by which the stock price at
the time of exercise exceeds the exercise price. There is no assurance
that the value realized by an executive officer will be at or near the
value estimated by the Black-Scholes model. In calculating the grant date
present values, we used the following assumptions: (a) expected volatility
of approximately 155%; (b) risk-free rate of return of approximately
3.75%; (c) no dividends payable during the relevant period; and (d)
exercise at the end of a 10 year period from the date of grant.
(2) On July 20, 2005, as consideration for service as Chief Executive Officer,
we granted Milton "Todd" Ault, III options to purchase 2,000,000 shares of
common stock with an exercise price of $0.25 per share. These stock
options would have vested quarterly over two years, however, on September
30, 2005, the Board of Directors accelerated the vesting of such options
such that options to purchase 475,000 shares of common stock immediately
vested and are exercisable for a period of 18 months from December 29,
2005. The remaining options to purchase 1,525,000 shares of common stock
were cancelled.
(3) On July 20, 2005, as consideration for service as Chief Financial Officer
and Director, we granted William B. Horne options to purchase 500,000
shares of common stock with an exercise price of $0.25 per share. These
stock options would have vested quarterly over two years, however, on
December 29, 2005, the Board of Directors accelerated the vesting of such
options such that options to purchase 400,000 shares of common stock
immediately vested and are exercisable for a period of 18 months from the
date the individual no longer performs services to us. The remaining
options to purchase 100,000 shares of common stock were cancelled.
(4) On July 20, 2005, as consideration for service as Chief Technology
Officer, we granted Philip Gatch options to purchase 250,000 shares of our
common stock with an exercise price of $0.25 per share. These stock
options would have vested quarterly over two years, however, on December
29, 2005, the Board of Directors accelerated the vesting of such options
such that options to purchase 250,000 shares of common stock immediately
vested and are exercisable for a period of 18 months from the date the
individual no longer performs services to us.
(5) On September 30, 2005, as consideration for service as Interim President,
we granted Jay Rifkin options to purchase 4,400,000 shares of common stock
with an exercise price of $0.85 per share. These stock options vest
annually over three years from December 29, 2005.
38
Aggregate Option Exercises and Fiscal Year-End Option Values
The following table sets forth information with respect to the named
executive officers concerning the year-end value of in-the-money options and the
value of unexercised options as of December 31, 2005. No options were exercised
by the named executive officers during the fiscal year ended December 31, 2005.
Number of
securities Value of
underlying unexercised
unexercised in-the-money
options/SARs at options/SARs at
FY-end (#) FY-end ($)
Shares acquired on Value Exercisable/ Exercisable/
Name exercise (#) realized ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ---------------------------------- -------------------- -------------- ----------------- ------------------
Milton "Todd" Ault, III --- --- 475,000 /_--- $783,750/_---
- ---------------------------------- -------------------- -------------- ----------------- ------------------
William B. Horne --- --- 400,000 /_--- $660,000/_---
- ---------------------------------- -------------------- -------------- ----------------- ------------------
Philip Gatch --- --- 250,000 /_--- $412,500/_---
- ---------------------------------- -------------------- -------------- ----------------- ------------------
Jay Rifkin --- --- --- /_4,400,000 --- / $4,620,000
- ---------------------------------- -------------------- -------------- ----------------- ------------------
Benefit Plans
Effective July 20, 2005, the Board of Directors approved our Stock Option
and Restricted Stock Plan. Under the Stock Option and Restricted Stock Plan, we
can issue restricted shares of common stock, options to purchase shares of
common stock (both incentive stock options and non-incentive stock options) and
warrants to purchase shares of common stock to employees, directors and
consultants. The number of shares subject to the Stock Option and Restricted
Stock Plan may not exceed 15,000,000 shares. The Stock Option and Restricted
Stock Plan is administered by our Compensation Committee.
Compensation of Directors
The Company has adopted the following policy for Board compensation. Each
director will receive $1,000 for each meeting of the Board of Directors that
each such director attends (either in person or by teleconference). Such $1,000
may be paid at the Company's option either in cash or in shares of restricted
common stock of the Company valued at the closing price of the common stock on
the date of the meeting or, if such meeting date is a day that the principal
trading market of the common stock is not open for business, then valued at the
closing price of the common stock on the most recent date after the meeting date
on which the principal trading market is open for business. In addition, the
Chairman of the Audit Committee receives $6,000 annually paid in cash. During
2005, the Company did not compensate any of its directors pursuant to the above
policy; however, $6,000 has accrued and is payable to the Company's Audit
Committee Chairman for the 2005 fiscal year. All directors are also reimbursed
for their reasonable out-of-pocket expenses incurred in connection with their
duties to the Company. In addition, directors are eligible to receive restricted
shares of common stock and stock options pursuant to our Stock Option Restricted
Stock Plan described above. Directors were issued stock options for there
service during 2005 as described under "Recent Sales of Unregistered Securities"
in "Item 5. Market for Common Equity and Related Stockholder Matters."
Employment Agreements with Executive Officers
On September 20, 2005, we entered into an employment agreement with Philip
Gatch documenting the terms of his employment as our Chief Technology Officer.
The term of the employment continues for 36 months from September 20, 2005 and
automatically renews for successive one-year terms unless either party delivers
to the other party written notice of termination at least 30 days before the end
of the then current term. Mr. Gatch's base compensation under the agreement is
$95,000 in cash per year and $45,000 in a restricted stock grants each year.
Prior to signing the employment agreement, we granted Mr. Gatch options
entitling him to purchase 250,000 shares of common stock vesting annually over
three years with a strike price of $0.25 per share, which stock options are
reflected in the employment agreement. Mr. Gatch is also eligible to receive an
annual performance bonus determined by our chief executive officer. In addition,
Mr. Gatch was granted rights for three years to (a) veto a chief executive
officer candidate as a replacement to Milton "Todd" Ault, III, which right has
expired since William B. Horne was appointed to replace Mr. Ault and
subsequently Mr. Rifkin was appointed to replace Mr. Horne as chief executive
officer, and (b) veto a decision to sell our company or any of our core assets
or technologies related to the iCodemedia domain names and intellectual property
in the event we are sold for less than $50,000,000. If Mr. Gatch's employment is
terminated for any reason, the veto rights will be forfeited. The agreement also
contains customary provisions for disability, death, confidentiality,
indemnification and non-competition. If Mr. Gatch voluntarily terminates the
agreement or if we terminate the agreement for cause, Mr. Gatch will not be
entitled to any compensation for the period between the effective termination
date and the end of the employment term and all unvested restricted stock and
stock options will be forfeited. If we voluntarily terminates the agreement
without cause, we must pay Mr. Gatch a cash sum equal to (a) all accrued base
salary through the date of termination plus all accrued vacation pay and cash
bonuses, if any, plus (b) as severance compensation, 500,000 unrestricted shares
of common stock and $250,000 cash. In the event of a merger, consolidation,
sale, or change of control, the surviving or resulting company is required to
honor the terms of the agreement with Mr. Gatch.
39
In connection with the acquisition of Rebel Crew Films, on December 29,
2005, we entered into an employment agreement with Jay Rifkin to employ Mr.
Rifkin as our Chief Executive Officer effective as of September 30, 2005. The
term of the employment continues for three years from September 30, 2005 and
automatically renews for successive one-year terms unless either party delivers
to the other party written notice of termination at least 30 days before the end
of the then current term. Mr. Rifkin's base compensation in the first year of
the term is $150,000, will increase at least 10% in the second year of the term
and at least 10% more in the third year of the employment term. Mr. Rifkin was
granted options to purchase 4,400,000 shares of common stock with an exercise
price equal to the FMV of the common stock on September 30, 2005 and vesting
annually over a period of three years from December 29, 2005. Mr. Rifkin is also
eligible to receive shares of common stock and stock options from time to time
and an annual bonus as determined by the Board of Directors. The agreement also
contains customary provisions for disability, death, confidentiality,
indemnification and non-competition. If Mr. Rifkin voluntarily terminates the
agreement without good reason or if we terminate the agreement for cause, we
must pay Mr. Rifkin all accrued compensation through the date of termination and
provide life, accident and disability insurance, and health, dental and vision
benefits to Mr. Rifkin and his dependents for a period of three months after
termination. If we terminate the agreement without cause, if Mr. Rifkin
terminates the agreement for good reason or if the agreement is terminated upon
the death or disability of Mr. Rifkin, then we must pay Mr. Rifkin or his estate
all unpaid compensation through the duration of the three-year employment term
and must provide insurance and health benefits through the duration of such
term. "Good Reason" is defined in the agreement as: (i) material breach of the
agreement by us including, without limitation, any diminution in title, office,
rights and privileges of Mr. Rifkin or failure to receive base salary payments
on a timely basis; (ii) relocation of the principal place for Mr. Rifkin to
provide his services to any location more than 20 miles away from 100 Wilshire
Boulevard, Santa Monica, California 90401; (iii) failure to maintain in effect
directors' and officers' liability insurance covering Mr. Rifkin; (iv) any
assignment or transfer of any of our rights or obligations under the agreement;
or (v) any change in control of our company including, without limitation, if
Mr. Rifkin shall cease to own a majority of our outstanding voting securities.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information, as of March 27, 2006
with respect to the beneficial ownership of the outstanding common stock by (i)
any holder of more than five (5%) percent; (ii) each of the named executive
officers, directors and director nominees; and (iii) our directors, director
nominees and named executive officers as a group. Except as otherwise indicated,
each of the stockholders listed below has sole voting and investment power over
the shares beneficially owned.
Common Stock Percentage of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (2)
----------------------------------------- ------------------------- ---------------------
Patient Safety Technologies, Inc. 2,750,361 (3) 7.4%
Bodnar Capital Management, LLC 2,941,176 7.9%
William B. Horne 400,000 (4) 1.1%
Alice M. Campbell 350,000 (5) *
40
Philip Gatch 1,250,000 (6) 3.4%
Cesar Chatel 2,120,708 (7) 5.7%
Jay Rifkin 19,586,372 (8) 52.2%
Alan Morelli 600,000 (9) *
David M. Kaye 350,000 (10) *
----------------------------------------- ------------------------- ---------------------
All named executive officers and 22,536,372 57.1%
directors as a group (7 persons)
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Digicorp, 4143 Glencoe Avenue, Marina Del Rey, CA 90292.
(2) Applicable percentage ownership is based on 37,028,320 shares of common
stock outstanding as of March 27, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
March 27, 2006 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock that a person has the right to acquire beneficial
ownership of upon the exercise or conversion of options, convertible
stock, warrants or other securities that are currently exercisable or
convertible or that will become exercisable or convertible within 60 days
of March 27, 2006 are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(3) Patient Safety Technologies, Inc. has granted Mr. Rifkin an irrevocable
proxy to vote the shares of common stock owned by them for certain
directors.
(4) Represents shares issuable upon exercise of stock options with an exercise
price of $0.25 per share and an expiration date 18 months from the date
Mr. Horne's services terminate. Mr. Horne has granted Mr. Rifkin an
irrevocable proxy to vote the shares of common stock issuable upon
exercise of such stock options for certain directors.
(5) Represents shares issuable upon exercise of stock options with an exercise
price of $0.25 per share and an expiration date 18 months from the date
Ms. Campbell's services terminate. Ms. Campbell has granted Mr. Rifkin an
irrevocable proxy to vote the shares of common stock issuable upon
exercise of such stock options for certain directors.
(6) Includes 250,000 shares issuable upon exercise of stock options with an
exercise price of $0.25 per share and an expiration date 18 months from
the date Mr. Gatch's services terminate. Mr. Gatch has granted Mr. Rifkin
an irrevocable proxy to vote the shares of common stock owned by him for
certain directors.
(7) Includes 400,000 shares which are held in escrow pending satisfaction of
certain performance milestones through March 31, 2007. Mr. Chatel has
granted Mr. Rifkin an irrevocable proxy to vote the shares of common stock
owned by Mr. Chatel for certain directors.
(8) Includes: (a) 3,600,000 shares which are held in escrow pending
satisfaction of certain performance milestones through March 31, 2007; and
(b) 500,000 shares issuable upon conversion of a $556,306.53 principal
amount secured convertible note with a conversion price of $1.112614 per
share. All of these securities are held by Rebel Crew Holdings, LLC of
which Mr. Rifkin is the sole managing member. Mr. Rifkin's reported
beneficial ownership does not include approximately 8,762,736 shares of
common stock issued and issuable for which certain shareholders have
granted Mr. Rifkin an irrevocable proxy to vote for certain directors.
(9) Includes: (a) options to purchase 350,000 shares of common stock with an
exercise price of $1.50 per share, which stock options vest annually over
a period of three years from March 26, 2006; and (b) shares issuable upon
exercise of warrants with an exercise price of $0.145 per share and an
expiration date of September 15, 2010.
(10) Represents options to purchase 350,000 shares of common stock with an
exercise price of $1.50 per share, which stock options vest annually over
a period of three years from March 26, 2006.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended December 31, 2005.
41
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans approved
by security holders -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans not
approved by security holders 8,312,500 $0.75 6,687,500
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Total 8,312,500 $0.75 6,687,500
- ------------------------------------ ------------------------ ----------------------- ---------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Our management believes that all of the below transactions were on terms
at least as favorable as could have been obtained from unrelated third parties.
Relationships with Patient Safety Technologies, Inc.
On December 29, 2004, our then current directors along with several other
shareholders sold 2,229,527 shares of our common stock, representing 22.3% of
the outstanding shares of our common stock on such date, to Patient Safety
Technologies, Inc. (formerly, Franklin Capital Corporation) ("PST"). Our
directors, Gregg B. Colton, Don J. Colton, Norman Sammis and Glenn W. Stewart,
sold 80% of their holdings to PST at $0.135 per share. Another shareholder who
was not a principal shareholder or director sold all of his shares to PST at
$0.145 per share. The aggregate amount of funds of PST used to purchase the
shares of common stock was approximately $301,998. The source for such funds was
PST's working capital. The directors and shareholders agreed to sell an
additional 1,224,000 shares (the "Additional Shares") of our common stock of to
PST upon the shares being registered with the SEC by December 29, 2005. In
addition, prior to the acquisition and change of control, PST owned 327,500
shares of our common stock.
On December 28, 2005, PST assigned its right to purchase 1,000,000 of the
Additional Shares to Alan Morelli (the "Assignment Agreement") and amended
certain terms of the stock purchase agreement pursuant to which the Original
Purchase Transaction was completed (the "Amendment Agreement"). In the
Assignment Agreement, we granted the parties piggyback registration rights with
respect to the sale of the Additional Shares. In the Amendment Agreement, we
agreed that if we do not register the resale of the Additional Shares on or
before June 30, 2005, then we will redeem the Additional Shares at a price of
$0.145 per share and we will thereupon sell 224,000 shares of common stock to
PST and 1,000,000 shares of common stock to Mr. Morelli at a price of $0.145 per
share. Mr. Morelli is one of our current directors.
Pursuant to the stock purchase agreement with PST, Melanie Glazer was
appointed as Chairman of our Board of Directors on December 30, 2004, following
the resignation of Glenn W. Stewart, Norman Sammis and Don J. Colton as
directors. Effective April 26, 2005, Gregg B. Colton resigned from his positions
as President, Chief Executive Officer and Chief Financial Officer. On April 26,
2005, our Board of Directors appointed the following officers: (a) Milton C.
Ault, III - Chief Executive Officer; (b) Kathryn Macenzie Queen - President of
Operations; and (c) Lynne Silverstein - Secretary. Mr. Ault subsequently
resigned on September 30, 2005 and Ms. Queen and Ms. Silverstein resigned on
December 29, 2005. Upon Mr. Ault's resignation as Chief Executive Officer,
William B. Horne was appointed to succeed Mr. Ault as Chief Executive Officer.
Mr. Horne resigned as Chief Executive Officer upon completing the acquisition of
Rebel Crew Films on December 29, 2005.
42
On June 30, 2005, we appointed Philip Gatch as our Chief Technology
Officer. On September 19, 2005, we entered into an asset purchase agreement with
Mr. Gatch, and thereby purchased certain Internet domain names and related
intellectual property from Mr. Gatch. As consideration for these assets, we
issued Mr. Gatch 1,000,000 shares of common stock.
Effective July 16, 2005, Gregg B. Colton resigned from his position as a
director. Effective July 16, 2005, we appointed Alice M. Campbell, Milton "Todd"
Ault, III and Darrell Grimsley as directors. Upon his appointment, Mr. Ault was
named Chairman of our Board of Directors. Ms. Campbell was appointed to chair
our Audit Committee and to chair our Compensation Committee. Mr. Ault resigned
as a director on September 30, 2005.
Effective July 20, 2005, we appointed Lynne Silverstein and William B.
Horne as directors. Ms. Silverstein subsequently resigned as a director on
December 29, 2005.
Effective July 20, 2005, we appointed William B. Horne as our Chief
Financial Officer.
Each of Melanie Glazer, Milton C. Ault, III, Kathryn Macenzie Queen, Lynne
Silverstein, Philip Gatch, Alice M. Campbell, Darrell Grimsley and William B.
Horne had and/or currently have employment positions, directorships and/or other
relationships with Ault Glazer & Company Investment Management LLC, Patient
Safety Technologies, Inc. and/or Ault Glazer & Company Investment Management's
or Patient Safety Technologies' current officers and directors.
Acquisition of Rebel Crew Films
On December 29, 2005, we acquired all of the issued and outstanding
capital stock of Rebel Crew Films in consideration for the issuance of
21,207,080 shares of common stock to the shareholders of Rebel Crew Films. Of
these shares, 19,086,372 shares were issued or are issuable to Rebel Holdings,
LLC as consideration for its 90% ownership interest in Rebel Crew Films and
2,120,708 were issued or are issuable to Cesar Chatel as consideration for his
10% ownership interest in Rebel Crew Films. Our present Chief Executive Officer
and Director Jay Rifkin is the sole managing member of Rebel Holdings, LLC. Mr.
Chatel is one of our employees and is President of our wholly owned subsidiary
Rebel Crew Films.
On December 29, 2005 we entered into a Securities Purchase Agreement with
Rebel Holdings, LLC, pursuant to which we purchased a $556,306.53 principal
amount loan receivable owed by Rebel Crew Films to Rebel Holdings, LLC in
exchange for the issuance of a $556,306.53 principal amount secured convertible
note to Rebel Holdings, LLC. The secured convertible note accrues simple
interest at the rate of 4.5%, matures on December 29, 2010 and is secured by all
of our assets now owned or hereafter acquired. The secured convertible note is
convertible into 500,000 shares of common stock at the rate of $1.112614 per
share. As described above, Jay Rifkin, our Chief Executive Officer and one of
our directors, is the sole managing member of Rebel Holdings, LLC.
Between September 2005 and October 2005, Jay Rifkin loaned an aggregate
total principal amount of $73,000 to Rebel Crew Films. We have agreed to repay
this loan to Mr. Rifkin pursuant to the terms of a $73,000 principal amount
promissory note due June 30, 2006 which accrues interest at 5% per annum. In the
event of breach of the promissory note, the interest rate will increase to 8%
per annum.
On December 29, 2005, we granted Alan Morelli warrants to purchase 250,000
shares of common stock with an exercise price of $0.145 per share, which
warrants vested immediately. These warrants were issued to Mr. Morelli as
compensation for advisory services rendered in connection with structuring the
acquisition of Rebel Crew Films. Mr. Morelli is presently one of our directors.
Ault Glazer Bodnar & Company Inc.
Other current assets at December 31, 2005 includes $35,794 owed to us by
Ault Glazer Bodnar & Company, Inc. ("AGB & Company") based on an agreement to
reimburse us for salaries paid in connection with our recapitalization on
December 29, 2005. Our Chief Financial Officer and director, William B. Horne,
also Chief Financial Officer of AGB & Company.
ITEM 13. EXHIBITS.
Exhibit
Number Description
- -------- --------------------------------------------------------------------
2.1 Stock Purchase Agreement dated as of December 20, 2005 among
Digicorp, Rebel Crew Films, Inc., Rebel Holdings, LLC and Cesar
Chatel (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 21, 2005)
2.2 Letter Agreement dated December 20, 2005 among Digicorp, Rebel Crew
Films, Inc., Rebel Holdings, LLC and Cesar Chatel (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on December 21, 2005)
43
2.3 Purchaser and Company Disclosure Schedules to Stock Purchase
Agreement dated as of December 20, 2005 among Digicorp, Rebel Crew
Films, Inc., Rebel Holdings, LLC and Cesar Chatel (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
2.4 Lock Up Agreements of Sellers in connection with Stock Purchase
Agreement dated as of December 20, 2005 among Digicorp, Rebel Crew
Films, Inc., Rebel Holdings, LLC and Cesar Chatel (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
2.5 Escrow Agreement dated December 29, 2005 by and among Digicorp,
Rebel Holdings, LLC, Cesar Chatel and Sichenzia Ross Friedman
Ference LLP as Escrow Agent (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission
on January 5, 2006)
3.1 Articles of Incorporation (Incorporated by reference to the
Company's registration statement on Form 10-SB (File No. 000-33067)
filed with the Securities and Exchange Commission on August 9, 2001)
3.2 Bylaws (Incorporated by reference to the Company's registration
statement on Form 10-SB (File No. 000-33067) filed with the
Securities and Exchange Commission on August 9, 2001) 3.3 Amendment
No. 1 to Bylaws (Incorporated by reference to the Company's Form 8-K
filed with the Securities and Exchange Commission on July 21, 2005)
4.1 Secured Convertible Note due December 19, 2010 in the principal
amount of $556,306.53 issued to Rebel Crew Holdings, LLC
(Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on January 5, 2006)
4.2 Promissory Note due June 30, 2006 in the principal amount of $73,000
issued to Jay Rifkin (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on
January 5, 2006)
9.1 Voting Agreement dated December 29, 2005 by and among Jay Rifkin and
the stockholders of Digicorp listed on the signature pages thereto
(Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on January 5, 2006)
10.1 Subscription Agreement dated May 18, 2005 between Digicorp and
Bodnar Capital Management, LLC (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission
on May 24, 2005)
10.2 Asset Purchase Agreement dated September 19, 2005, among Digicorp
and Philip Gatch (Incorporated by reference to the Company's Form
8-K filed with the Securities and Exchange Commission on September
22, 2005)
10.3 Securities Purchase Agreement dated December 29, 2005 by and among
Rebel Holdings, LLC and Digicorp (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission
on January 5, 2006)
10.4 Assignment Agreement dated December 29, 2005 by and among Rebel
Holdings, LLC, Digicorp and Rebel Crew Films, Inc. (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
10.5 Security Agreement dated December 29, 2005 by and among Digicorp and
Rebel Crew Holdings, LLC (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on
January 5, 2006)
10.6 Digicorp Stock Option and Restricted Stock Plan (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on December 22, 2005)
10.7 Employment Agreement dated September 20, 2005, among Digicorp and
Philip Gatch (Incorporated by reference to the Company's Form 8-K
filed with the Securities and Exchange Commission on September 22,
2005)
10.8 Employment Agreement effective as of September 30, 2005 by and
between Digicorp and Jay Rifkin (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission
on January 5, 2006)
10.9 Standard Industrial/Commercial Multi-Tenant Lease dated July 18,
2005 between The Welk Group, Inc. and Rebel Crew Films, Inc.
(Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on January 5, 2006)
44
10.10 Videogram License Agreement dated August 19, 2003 by and between
Rebel Crew Films and BCI Eclipse, LLC (Incorporated by reference to
the Company's Form 8-K filed with the Securities and Exchange
Commission on January 5, 2006)
10.11 Videogram License Agreement dated March 29, 2004 by and between
Rebel Crew Films and BCI Eclipse Company, LLC (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
10.12 Videogram License Agreement dated May 26, 2004 by and between Rebel
Crew Films and BCI Eclipse Company, LLC (Incorporated by reference
to the Company's Form 8-K filed with the Securities and Exchange
Commission on January 5, 2006)
10.13 License Agreement dated November 15, 2002 between Rebel Crew Films
and VAS Entertainment/Rise Above Entertainment (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
10.14 License Agreement dated December 31, 2002 between Rebel Crew Films
and VAS Entertainment/Rise Above Entertainment (Incorporated by
reference to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
14.1 Code of Ethics (Incorporated by reference to the Company's annual
report on Form 10-KSB for the fiscal year ended June 30, 2005, filed
with the Securities and Exchange Commission on September 28, 2005)
16.1 Letter on change in certifying accountant dated October 31, 2005
from Jones Simkins, P.C. (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on
October 31, 2005)
21.1 Subsidiaries (Incorporated by reference to the Company's Form 8-K
filed with the Securities and Exchange Commission on January 5,
2006)
31.1 Certification by Chief Executive Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
31.2 Certification by Chief Financial Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
32.1 Certification by Chief Executive Officer, required by Rule 13a-14(b)
or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
of Title 18 of the United States Code
32.2 Certification by Chief Financial Officer, required by Rule 13a-14(b)
or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
of Title 18 of the United States Code
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our financial statements, for the reviews
of the financial statements included in our annual report on Form 10-KSB, and
for other services normally provided in connection with statutory filings were
$11,235 and $0 for the years ended December 31, 2005 and December 31, 2004,
respectively.
Audit-Related Fees
We did not incur any fees for the years ended December 31, 2005 and
December 31, 2004, respectively, for professional services rendered by our
principal accountants that are reasonably related to the performance of the
audit or review of our financial statements and not included in "Audit Fees."
All Other Fees
We did not incur any fees for other professional services rendered by our
principal accountants during the years ended December 31, 2005 and December 31,
2004.
Audit Committee Pre-Approval Policies and Procedures
Our Audit Committee was recently formed during the year ended December 31,
2005. The fees for audit services were approved by our board of directors and
the full board approved the financial statements filed on Forms 10-QSB and
10-KSB. Management is required to periodically report to the Audit Committee
regarding the extent of services provided by the independent auditor.
45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGICORP
Date: February 23, 2007 By: /s/ Jay Rifkin
-----------------------------
Jay Rifkin
Chief Executive Officer
Date: February 23, 2007 By: /s/ William B. Horne
-----------------------------
William B. Horne
Chief Financial Officer and
Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer February 23, 2007
/s/ Jay Rifkin and Director
- -------------------------------
Jay Rifkin
/s/ William B. Horne Director February 23, 2007
- -------------------------------
William B. Horne
/s/ Alice M.Campbell Director February 23, 2007
- -------------------------------
Alice M.Campbell
/s/ Alan Morelli Director February 23, 2007
- -------------------------------
Alan Morelli
/s/ David M. Kaye Director February 23, 2007
- -------------------------------
David M. Kaye
46