8-K: Current report filing
Published on January 5, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 29, 2005
Digicorp
(Exact name of registrant as specified in its charter)
Utah 000-33067 87-0398271
(State or Other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification Number)
4143 Glencoe Avenue, Marina Del Rey, CA 90292
(Address of principal executive offices) (zip code)
(310) 728-1450
(Registrant's telephone number, including area code)
100 Wilshire Blvd., Ste. 1750, Santa Monica, CA 90401
(Former name or former address, if changed since last report)
Copies to:
Marc J. Ross, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
This Current Report responds to the following items on Form 8-K:
Item 1.01 Entry into a Material Definitive Agreement.
Item 2.01 Completion of Acquisition or Disposition of Assets.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant. Item 3.02 Unregistered Sales of
Equity Securities.
Item 5.01 Changes in Control of Registrant.
Item 5.02 Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
Item 5.06 Change in Shell Company Status.
Item 9.01 Financial Statements and Exhibits.
ENTRY IN A MATERIAL DEFINITIVE AGREEMENT; COMPLETION OF ACQUISITION OF ASSETS;
CREATION OF A DIRECT FINANCIAL OBLIGATION; UNREGISTERED SALES OF EQUITY
SECURITIES; CHANGE IN CONTROL OF REGISTRANT; CHANGE IN FISCAL YEAR; CHANGE IN
SHELL COMPANY STATUS
In a Form 8-K of Digicorp (the "Company") dated December 20, 2005, the
Company reported that it entered into a Stock Purchase Agreement to acquire (the
"Acquisition") all of the issued and outstanding capital stock of Rebel Crew
Films, Inc. a California corporation ("Rebel Crew Films"). On December 29, 2005,
the transaction closed and the Company completed the acquisition of Rebel Crew
Films. In connection with the Acquisition, the Company changed its fiscal year
from June 30 to December 31.
The Company issued 21,207,080 shares of common stock (the "Purchase
Price") to the shareholders of Rebel Crew Films as compensation for the issued
and outstanding capital stock 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. The issuance
of the foregoing shares of common stock was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), and Rule 506 promulgated thereunder.
In addition, on December 29, 2005 the Company entered into a Securities
Purchase Agreement with one of the shareholders of Rebel Crew Films, Rebel
Holdings, LLC, pursuant to which the Company 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 the Company's assets now owned or hereafter acquired. The secured convertible
note is convertible into 500,000 shares of common stock of the Company at the
rate of $1.112614 per share. Jay Rifkin, the Company's present Chief Executive
Officer and a Director Nominee of the Company, is the sole managing member of
Rebel Holdings, LLC. The issuance of the foregoing secured convertible note was
exempt from registration requirements pursuant to Section 4(2) of the Securities
Act and Rule 506 promulgated thereunder.
The Company agreed to prepare and file a registration statement with the
Securities and Exchange Commission registering the resale of the shares
comprising the Purchase Price and the shares issuable upon conversion of the
secured convertible note no later than March 29, 2006.
In connection with the Acquisition, Jay Rifkin and certain other
shareholders of the Company entered into a voting agreement authorizing Mr.
Rifkin to vote the shares of the Company's common stock owned by such parties to
designate or elect a simple majority of the Company's Board of Directors, one of
whom will be Mr. Rifkin, and to designate or elect the remaining directors
chosen by Milton "Todd" Ault, III, former Chairman and Chief Executive Officer
of the Company.
1
DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS
Effective December 29, 2005, the following persons resigned from the
indicated positions as executive officers and/or directors of the Company: (1)
William B. Horne, Chief Executive Officer; (2) Kathryn Macenzie Queen, President
of Operations; (3) Lynne Silverstein, Secretary and Director; (4) Melanie
Glazer, Director and Vice Chairman of the Board of Directors; and (5) Darrell
Grimsley, Jr., Director. Ms. Glazer was a member of the Company's Audit
Committee at the time of her resignation. No other resigning director was a
member of any committee of the Company's Board of Directors at the time he or
she resigned.
The Company's Board of Directors appointed Jay Rifkin Chief Executive
Officer of the Company effective as of September 30, 2005, which is the date Mr.
Rifkin began acting as interim President of the Company.
The Board of Directors also nominated the following directors to fill
vacancies created by the resignations of Ms. Silverstein, Ms. Glazer and Mr.
Grimsley: Jay Rifkin, Alan Morelli and David M. Kaye. The Company plans to
appoint Messrs. Rifkin, Morelli and Kaye to its Board of Directors approximately
ten days after the date the Company transmits to all holders of record of the
Company's common stock information required by Rule 14f-1 under the Exchange
Act, at which time Mr. Rifkin will serve as Chairman of the Company's Board of
Directors.
Except as described under "Certain Relationships and Related Transactions"
beginning on page 13 of this report, there has been no transaction during the
last two years, or any proposed transaction, to which the Company was or is to
be a party, and in which any of Messrs. Rifkin, Morelli or Kaye had or is to
have a direct or indirect material interest.
Below are the names and certain information regarding the Company's
executive officers, directors and director nominees following the Acquisition.
- ----------------------- ------- ------------------------------------------------
Name Age Position
- ----------------------- ------- ------------------------------------------------
Jay Rifkin 50 Chief Executive Officer, Director Nominee
- ----------------------- ------- ------------------------------------------------
William B. Horne 37 Chief Financial Officer and Director
- ----------------------- ------- ------------------------------------------------
Philip Gatch 41 Chief Technology Officer
- ----------------------- ------- ------------------------------------------------
Alice M. Campbell 55 Director
- ----------------------- ------- ------------------------------------------------
Alan Morelli 44 Director Nominee
- ----------------------- ------- ------------------------------------------------
David M. Kaye 51 Director Nominee
- ----------------------- ------- ------------------------------------------------
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 the Company's directors, director
nominees and executive officers also serve in various capacities with the
Company's subsidiaries. There are no family relationships among any of the
Company's directors, director nominees and executive officers.
Background of Executive Officers and Directors
Jay Rifkin, Chief Executive Officer and Director Nominee. Effective
September 30, 2005, the Board of Directors of the Company appointed Mr. Rifkin
interim President of the Company pending closing of the Acquisition. On December
29, 2005, Mr. Rifkin's title was changed to Chief Executive Officer of the
Company 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.
2
William B. Horne, Chief Financial Officer and Director. Mr. Horne has been
the Company's Chief Financial Officer and a director since July 20, 2005. From
September 30, 2005 until December 29, 2005, Mr. Horne also served as the
Company's Chief Executive Officer and Chairman of the Company's 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 the Company's
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.
Alice M. Campbell, Director. Ms. Campbell has been a member of the
Company's 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 Nominee. 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 PT Holdings, Inc., RADD Holdings, Inc. and Precise Exercise
Equipment. PT Holdings, Inc. is a development-stage company in the physical
therapy industry. RADD Holdings licenses intellectual property to retail
distributors. Precise develops innovative commercial fitness or rehabilitation
technology currently used in most health clubs today. Mr. Morelli received a
B.S. from Rutgers University (1983) and a J.D. from Georgetown University Law
Center (1986).
David M. Kaye, Director Nominee. 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).
3
Audit Committee
The Audit Committee is appointed by the Board of Directors in fulfilling
its responsibilities to oversee: (1) the integrity of the Company's 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 the Company's 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 Exchange Act.
Compensation Committee
The Compensation Committee is appointed by the Board of Directors to
discharge the responsibilities of the Board relating to compensation of the
Company's executive officers. Alice M. Campbell is currently the only member of
the Compensation Committee and she is Chairman of the Compensation Committee.
Employment Agreements
On September 20, 2005, the Company entered into an employment agreement
with Philip Gatch documenting the terms of his employment as the Company's 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, the Company
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 the Company's
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, and (b) veto a decision to sell the Company or any of the
Company's core assets or technologies related to the iCodemedia Assets in the
event the Company is 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 the Company terminates 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 the Company voluntarily terminates
the agreement without cause, the Company 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.
In connection with the Acquisition, on December 29, 2005, the Company
entered into an employment agreement with Jay Rifkin as the Company's 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 the Company's common stock with an
exercise price equal to the FMV of the Company's 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 Company's 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 the Company
terminates the agreement for cause, the Company 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 the Company
terminates 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 the Company 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
the Company 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 of the Company to
maintain in effect directors' and officers' liability insurance covering Mr.
Rifkin; (iv) any assignment or transfer by the Company of any of its rights or
obligations under the agreement; or (v) any change in control of the Company
including, without limitation, if Mr. Rifkin shall cease to own a majority of
the voting securities of the Company.
4
Involvement in Certain Legal Proceedings
Jay Rifkin 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.
Except as described above, no director, person nominated to become a
director, executive officer or control person of the Company:
(1) was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the
bankruptcy or two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action),
the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended
or vacated.
No director, officer or 5% or other shareholder of the Company is a party
to any legal proceeding in which such person is adverse to the Company or has an
interest adverse to the Company.
BUSINESS OF THE COMPANY AFTER THE ACQUISITION
FORWARD-LOOKING STATEMENTS
Except for historical information, matters discussed in this report are
forward-looking statements based on management's estimates, assumptions and
projections. In addition, from time to time, the Company may make
forward-looking statements relating to such matters as anticipated business
prospects, new products, research and development activities, plans for
expansion, acquisitions and similar matters. Words such as "expects,"
"anticipates," "targets," "goals," "projects," "intends," "plans," "believes,"
"seeks," "estimates," "continue," or the negatives thereof, or variations on
such words, and similar expressions are intended to identify such forward
looking statements. The Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. These forward-looking statements are mere
predictions and are uncertain. These forward-looking statements speak only as of
the date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in its expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
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, the Company's sales and investments were attributable to the
sale of computer software and investments related to oil, gas and mining.
On June 30, 1995, the Company became a development stage enterprise when
the Company sold its assets and changed its business plan. Since June 30, 1995,
the Company has been in the developmental stage and until September 19, 2005 has
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, the Company 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.
5
Acquisition of iCodemedia Assets
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.
Since completing the Acqusition, the Company may sell the iCodemedia Assets or
use the websites to provide applications and services to enable content creators
to publish and deliver content to existing and next generation devices such as
the Apple iPod and the Sony PSP. As consideration for the iCodemedia Assets, the
Company issued Mr. Gatch 1,000,000 shares of common stock. The issuance of
shares of common stock to Mr. Gatch was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Acquisition of Rebel Crew Films
As further described on page 1 of this report, on December 29, 2005, the
Company 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. The Acquisition was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder. 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 more than 200
Spanish language films and plans to serve the nation's largest wholesale,
retail, catalog, and e-commerce accounts.
Except as specifically stated otherwise, in the remainder of this report
references to "the Company" refer to Digicorp together with its wholly owned
subsidiary Rebel Crew Films, Inc.
OVERVIEW
The Company currently maintains more than 200 Spanish language films and
serves some of the nation's largest wholesale, retail, catalog, and e-commerce
accounts. The Company's 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. The Company's diverse programming includes: New Releases,
Classic Mexican Cinema, animation, cult, sports, martial arts, family
entertainment, and more.
The Company generates revenue through either licensing agreements with
third parties that distribute the Company's licensed content or through direct
sales. The Company's typical licensing agreements consist of a three to
five-year contract that carries a 15% - 50% royalty on gross sales of licensed
product. The Company is currently expanding its sales force to focus on direct
sales of its licensed content.
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.
CUSTOMERS
For direct sales, the Company's sales associates focus on small retail
stores across the country. Currently, the sales force manages over 1,100 active
retail store customers. For other licensing activities, there are two companies,
BCI Eclipse LLC, which has licensed 20 titles, and VAS Entertainment/Rise Above
Entertainment ("VAS/RA") which has licensed 17 titles from the Company. They
function as manufacturers for the Company's DVD inventory for those titles, as
well as a distributor 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.
6
Besides its direct selling effort through telemarketing, the Company
markets its products by placing print ads in a variety of Latino trade magazines
as well as through its website. The Company has a dedicated 1-800 toll free
number for sales inquiries.
SUPPLIERS
The Company has 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 the Company to manufacture and distribute their movies. The
Company is currently in contract with eight different licensors of content. From
these agreements, the Company has manufactured 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 DVD's, the Company's principal supplier is a
company called Reptek. The Company does 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 the Company's products.
For DVD titles not owned or licensed by the Company, a number of finished
goods vendors are utilized. Among them are Ventura Distribution Inc., Cozumel
Films, Venevision International, and Universal (UMVD). Ventura Distribution
currently supplies the Company with 21 movies distributed by Unicine, a division
of Univision. Venevision International has the highest number of titles,
providing the Company with 51 films. Universal (UMVD) currently supplies the
Company with 36 films and Cozumel Films provides the Company with three films.
There are no written agreements with any of these companies to supply the
Company with films.
The Company is currently expanding its sales force to focus on direct
sales of its licensed content. The Company is shifting its 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 the Company's product as one of many
other products they also sell.
COMPETITION
Although accurate numbers are difficult to obtain due to the hesitation of
privately owned distribution companies to divulge sales figures, it is generally
estimated by an independent study by Estrenos magazine (a Latin Entertainment
Trade Journal) that the Latino home video distribution market for the first six
months of 2005 sold over three million units in the U.S. 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
players 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, the Company's monthly sales average currently represents approximately
1.25% of the monthly average of DVD sales volume in the Latino video
entertainment industry
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)
The Company also competes with retail music and video stores, including
online stores, dominated by large companies such as Netflix, Blockbuster, Trans
World Entertainment, and Movie Gallery Inc.
The Company competes in the Latino home video market primarily by offering
competitive prices on a wide variety of quality titles through its direct
selling efforts targeted at retail stores across the entire United States.
7
GOVERNMENT REGULATION
The Company is not aware of any existing or probable governmental
regulations that may have a material effect on the normal operations of the
Company's business. There also are no relevant environmental laws that require
compliance by the Company that may have a material effect on the normal
operations of the business.
EMPLOYEES
As of January 4, 2006, the Company employed eight full time employees and
three part time employees. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that relations with its
employees are good.
DESCRIPTION OF PROPERTY
The Company leases its 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.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding, nor is its
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 the
Company's business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Critical Accounting Policies
A discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Note 2 to our audited financial statements included as an
exhibit to this Form 8-K describes the significant accounting policies and
methods used in the preparation of the financial statements. On an ongoing
basis, management evaluates its estimates, the most critical 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.
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. The impact on our operating results or financial
position based on the adoption of SFAS No. 123(R) has not yet been determined.
8
Liquidity and Capital Resources
Our total assets were $519,442 at September 30, 2005 versus $195,981 at
December 31, 2004. The change in total assets is primarily attributable to an
increase in our intangible assets and inventory of $240,175 and $36,243,
respectively. The increases in intangible assets and inventory were primarily
financed through monies loaned from related parties in the amount of $552,321.
At September 30, 2005 and December 30, 2004, we had $3,404 and $7,856 in
cash and cash equivalents, respectively. During the nine months ended September
30, 2005, we borrowed $519,321 from Rebel Holdings, LLC, a California limited
liability company ("Rebel Holdings"), an entity that during 2005 acquired
approximately 90% of the outstanding shares of the our common stock. In
September 2005, we borrowed an additional $33,000 from the sole member of Rebel
Holdings. At September 30, 2005 and December 31, 2004, the Company had a
combined liability of $601,307 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 September 30, 2005 as well as additional funds borrowed during the
fourth quarter of 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.
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 September 30, 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 such financing.
Operating activities provided $336,762 of cash for the nine months ended
September 30, 2005, compared to providing $161,856 and $62,765 for the years
ended December 31, 2004 and 2003, respectively.
Cash used in investing activities for the nine months ended September 30,
2004 and the years ended December 31, 2004 and 2003, of $341,214, $154,000, and
$72,000, respectively, resulted almost exclusively from the purchases of
licensed Spanish language film content that was capitalized.
Results of Operations
Revenues
We recognized revenues of $140,333 and $27,963 for the nine months ended
September 30, 2005 and the year ended December 31, 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 $75,411 and
$162,971 at September 30, 2005 and December 31, 2004, respectively, represent
advance royalty payments that are expected to be earned over the subsequent
twelve month periods.
During the nine months ended September 30, 2005, licensing revenue of
$85,205 accounted for approximately 61% of our total revenue. The remaining
revenue of $55,128 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
9
Expenses
Operating expenses were $247,854 and $80,889 in the nine months ended
September 30, 2005 and 2004, respectively and $144,434 and $112,364 in the
fiscal years ended December 31, 2004 and 2003, respectively. Operating expenses
in all periods primarily consisted of professional fees, rent expense,
amortization expense and general and administrative expenses.
Professional fees were approximately $40,000 higher in the nine months
ended September 30, 2005 compared to the nine months ended September 30, 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
$24,000 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 $12,000
due to the preparation and review of an increased amount of license agreements.
Accounting fees, which increased by approximately $4,000, relate to costs
incurred to update our accounting system to facilitate a larger volume of
transactions.
Professional fees were approximately $36,000 higher in the year ended
December 31, 2004 compared to the year ended December 31, 2003 due to
significant increases in amounts paid to consultants as well as legal fees.
Amounts paid to various consultants during 2003 related solely for services to
locate Spanish language content for acquisition whereas during 2004 we incurred
expenses related not only for services to locate Spanish language content, but
also technical assistance in preparing the content for production, and sales and
marketing of the titles. Legal fees increased by approximately $8,000 due to the
preparation and review of an increased amount of license agreements.
Rent expense increased by approximately $15,000 in the nine months ended
September 30, 2005 compared to the nine months ended September 30, 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
nine months ended September 30, 2004.
Rent expense increased by approximately $4,000 in the year ended December
31, 2004 compared to the year ended December 31, 2003 and is attributed to
periods of low rates of rent during 2003.
Amortization expense increased by approximately $56,000 in the nine months
ended September 30, 2005 compared to the nine months ended September 30, 2004
due to an increased number of license agreements.
Amortization expense increased by approximately $26,000 in the year ended
December 31, 2004 compared to the year ended December 31, 2003 due to an
increased number of license agreements.
General and administrative expense increased by approximately $50,000 in
the nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004 and is attributed to the overall expansion of the business
during the nine months ended September 30, 2005 combined with the financial
constraints placed on us as a result of limited amounts of available working
capital in the nine months ended September 30, 2004.
General and administrative expense decreased by approximately $15,000 in
the year ended December 31, 2004 compared to the year ended December 31, 2003
due to financial constraints placed on us as a result of limited amounts of
available working capital in the year ended December 31, 2004. During the year
ended December 31, 2003, as reflected by our deferred revenue balance of
approximately $40,000 and licensing revenues of approximately $116,000, we
received a large amount of advance payments from our licensing agreements with
third parties. These advance payments exceeded the cost of our licensed content
in 2003, thus, providing an adequate amount of working capital for general and
administrative purposes. During 2004 the amount of advance payments approximated
the cost of our licensed content thus eliminating a source of funds for general
and administrative expenses.
10
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, 2004, we had a net operating loss carryforward of
approximately $27,000 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 2024.
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.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that the Company has paid or that has accrued on behalf of the
Company's chief executive officer and other executive officers with annual
compensation exceeding $100,000 during the years ended December 31, 2005, 2004
and 2003.
SUMMARY COMPENSATION TABLE
(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.
11
(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. The Company did not have during such fiscal year any
plans providing for the grant of stock appreciation rights ("SARs").
Option/SAR Grants in Last Fiscal Year
- --------------------------------------------------------------------------------
(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,
the Company 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, the Company 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 the Company's 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 the
Company's common stock were cancelled.
(3) On July 20, 2005, as consideration for service as Chief Financial
Officer and Director, the Company 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 the Company's common stock immediately
vested and are exercisable for a period of 18 months from the date
the individual no longer performs services to the Company. The
remaining options to purchase 100,000 shares of the Company's common
stock were cancelled.
(4) On July 20, 2005, as consideration for service as Chief Technology
Officer, the Company 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 the Company's common stock immediately
vested and are exercisable for a period of 18 months from the date
the individual no longer performs services to the Company.
12
(5) On September 30, 2005, as consideration for service as Interim
President, the Company 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.
Aggregate Option Exercises in Last Fiscal Year
No options of the Company were exercised by the named executive officers
during the most recent fiscal year ended December 31, 2005.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management of the Company 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, the Company's then current directors along with
several other shareholders sold 2,229,527 shares of the Company's common stock,
representing 22.3% of the outstanding shares of common stock of the Company on
such date, to Patient Safety Technologies, Inc. (formerly, Franklin Capital
Corporation) ("PST"). The Company's 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 the Company's common stock.
13
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, the Company granted the parties piggyback registration
rights with respect to the sale of the Additional Shares. In the Amendment
Agreement, the Company agreed that if it does not register the resale of the
Additional Shares on or before June 30, 2005, then the Company will redeem the
Additional Shares at a price of $0.145 per share and the Company will thereupon
sell 224,000 shares of the Company's common stock to PST and 1,000,000 shares of
the Company's common stock to Mr. Morelli at a price of $0.145 per share. Mr.
Morelli is a current Director Nominee of the Company.
Pursuant to the stock purchase agreement with PST, Melanie Glazer was
appointed as Chairman of the Company's 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, the Company's 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 on December 29, 2005.
On June 30, 2005, the Company appointed Philip Gatch as the Company's
Chief Technology Officer. On September 19, 2005, the Company entered into an
asset purchase agreement with Mr. Gatch, and thereby purchased the iCodemedia
Assets. As consideration for the iCodemedia Assets, the Company 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, the Company appointed Alice M. Campbell,
Milton "Todd" Ault, III and Darrell Grimsley as directors. Upon his appointment,
Mr. Ault was named Chairman of the Company's Board of Directors. Ms. Campbell
was appointed to chair the Company's Audit Committee and to chair the Company's
Compensation Committee. Mr. Ault resigned as a director on September 30, 2005.
Effective July 20, 2005, the Company appointed Lynne Silverstein and
William B. Horne as directors. Ms. Silverstein subsequently resigned as a
director on December 29, 2005.
Effective July 20, 2005, the Company appointed William B. Horne as the
Company's 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, the Company 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. The Company's present Chief
Executive Officer and Director Nominee, Jay Rifkin, is the sole managing member
of Rebel Holdings, LLC. Mr. Chatel is an employee of the Company and is
President of the Company's now wholly owned subsidiary Rebel Crew Films.
On December 29, 2005 the Company entered into a Securities Purchase
Agreement with Rebel Holdings, LLC, pursuant to which the Company 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 the Company's assets now owned or hereafter acquired. The
secured convertible note is convertible into 500,000 shares of common stock of
the Company at the rate of $1.112614 per share. As described above, Jay Rifkin,
the Company's present Chief Executive Officer and a Director Nominee of the
Company, is the sole managing member of Rebel Holdings, LLC.
14
Between September 2005 and October 2005, Jay Rifkin loaned an aggregate
total principal amount of $73,000 to Rebel Crew Films. The Company has 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, the Board of Directors ratified a grant to Alan
Morelli made on September 15, 2005, as a consultant to the Company, warrants to
purchase 250,000 shares of the Company's 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 to the Company in
connection with structuring the Acquisition. Mr. Morelli is presently a director
nominee of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of January 4, 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 and directors of the Company; and (iii) the Company's directors 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.
* 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 36,721,113 shares of
common stock outstanding as of January 4, 2006, together with
securities exercisable or convertible into shares of common stock
within 60 days of January 4, 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
January 4, 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) Includes: (a) 475,000 shares issuable upon exercise of stock options
with an exercise price of $0.25 per share and which expire June 29,
2007; (b) 512,500 shares beneficially owned by certain private
investment funds and individual accounts managed by Ault Glazer &
Company Investment Management LLC, for which Mr. Ault serves as
Chief Investment Officer and managing member; and (c) 2,792,027
shares of the common stock held by Patient Safety Technologies,
Inc., for which Mr. Ault serves as Chairman and Chief Executive
Officer. Mr. Ault and Patient Safety Technologies, Inc. each have
granted Mr. Rifkin an irrevocable proxy to vote the shares of common
stock owned by them for certain directors of the Company.
15
(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 to the Company 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 of the Company.
(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 to the Company 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 of the Company.
(6) 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 by the Company for which certain shareholders of the
Company have granted Mr. Rifkin an irrevocable proxy to vote for
directors of the Company.
(7) 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 to the Company terminate.
Mr. Gatch has granted Mr. Rifkin an irrevocable proxy to vote the
shares of common stock owned by him for certain directors of the
Company.
(8) Includes 400,000 shares which are held in escrow pending
satisfaction of certain performance milesontes 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
of the Company.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, $.001 par value per share, and no shares of preferred stock.
The holders of common stock are entitled to one vote for each share held
of record on all matters to be voted on by the stockholders. The holders of
common stock are entitled to receive dividends ratably, when, as and if declared
by the Board of Directors, out of funds legally available therefore. In the
event of a liquidation, dissolution or winding-up of the Company's business, the
holders of common stock are entitled to share equally and ratably in all assets
remaining available for distribution after payment of liabilities.
The holders of shares of common stock, as such, have no conversion,
preemptive, or other subscription rights and there are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are validly issued, fully paid and non-assessable.
The Company has never paid any cash dividends on its common stock and the
Company does not anticipate paying any cash dividends in the foreseeable future.
The Company intends to retain future earnings to fund ongoing operations and
future capital requirements of its business. Any future determination to pay
cash dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's 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 the Company's common stock.
16
*Upon closing the Acquisition, the Company's fiscal year changed from June
30 to December 31.
Holders
As of January 4, 2006, the Company's shares of common stock were held by
approximately 290 stockholders of record.
Dividends
The Company has not declared any dividends to date. The Company has no
present intention of paying any cash dividends on its common stock in the
foreseeable future, as the Company intends to use earnings, if any, to generate
growth. The payment by the Company of dividends, if any, in the future, rests
within the discretion of the Board of Directors and will depend, among other
things, upon the Company's earnings, capital requirements and our financial
condition, as well as other relevant factors. There are no restrictions in the
Company's articles of incorporation or bylaws that restrict the Company from
declaring dividends.
RECENT SALES OF UNREGISTERED SECURITIES
During September 2003, the Board of Directors authorized the issuance of
700,000 restricted common shares of the Company's stock at price of $0.01 per
share (totaling $7,000) to pay for expenses incurred by the Company for the
audit of its financial statements and to pay for costs associated with
maintaining compliance with the State of Utah along with providing the Company
operating capital for the subsequent year. Of the 700,000 shares issued, 400,000
were issued to Vernal Western Drilling, a company that is owned by Don J. Colton
and Gregg B. Colton, former officers and directors of the Company, 150,000
shares were issued to Bonnie Myers and the other 150,000 shares were issued to
Whisper Investment Company. The shares were issued to the parties above on
October 8, 2003 for cash. The issuance of these securities was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act.
On May 18, 2005, the Company 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, the
Company entered into an agreement with Bodnar Capital to cancel the May Warrants
in exchange for the issuance by the Company 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 the Company 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, the Company 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, the Company 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 the Company's Board of
Directors, the Company 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 the
Company's Audit Committee, the Company granted Ms. 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 the
Company's Audit Committee, the Company granted Ms. 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 Company's Board on December 29, 2005. The issuance
of these stock options was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
17
On July 20, 2005, as consideration for service as the Company's Chief
Executive Officer, the Company granted Mr. Ault 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. The remaining stock options were cancelled upon Mr.
Ault resigning as an officer and director of the Company. 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 Company's President
of Operations, the Company 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,
the Company 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.
On July 20, 2005, as consideration for service as the Company's Chief
Technology Officer, the Company 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, the Company 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 the Company's Chief
Financial Officer, the Company granted Mr. 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 the Company's
Controller, the Company 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 Company's Corporate
Secretary, the Company granted Ms. 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 September 19, 2005, the Company purchased the iCodemedia Assets from
Mr. Gatch, the Company's Chief Technology Officer. As consideration for the
iCodemedia Assets, the Company 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. The issuance of these stock options was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act.
On September 30, 2005, the Company granted Jay Rifkin, the Company's
current Chief Executive Officer, options to purchase 4,400,000 shares of the
Company's 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. The issuance of these stock options was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act. The issuance of
these stock options was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act.
18
On September 30, 2005, the Company granted Cesar Chatel, as President of
Rebel Crew Films, options to purchase 800,000 shares of the Company's 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.
The issuance of these stock options was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act.
On September 30, 2005, the Company granted Oscar Carreno, as Director of
Sales of Rebel Crew Films, options to purchase 150,000 shares of the Company's
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.
The issuance of these stock options was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act.
On September 30, 2005, the Company granted Ian Monsod, as Manager of
Operations of Rebel Crew Films, options to purchase 125,000 shares of the
Company's 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. The issuance of these stock options was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act.
On December 29, 2005, the Company granted Alan Morelli, as consultant to
the Company, warrants to purchase 250,000 shares of the Company's 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 to the Company in connection with structuring the Acquisition. The
issuance of these stock options was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act.
On December 29, 2005, the Company issued Rebel Holdings, LLC 19,086,372
shares of common stock as compensation for its 90% equity interest in Rebel Crew
Films. Jay Rifkin, the Company's current Chief Executive Officer and a director
nominee, 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, the Company 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 the Company issued a $556,306.53 principal amount
secured convertible note to Rebel Holdings, LLC in exchange for a $556,306.53
loan receivable owed by Rebel Crew Films to Rebel Holdings, LLC. The secured
convertible note is convertible into 500,000 shares of common stock of the
Company at the rate of $1.112614 per share. As described above, Jay Rifkin, the
Company's present Chief Executive Officer and a director nominee of the Company,
is the sole managing member of Rebel Holdings, LLC.
On December 29, 2005, the Company granted Alan Morelli, as a director
nominee of the Company, options to purchase 350,000 shares of the Company's
common stock with an exercise price equal to the closing price of the Company's
common stock of $1.50 per share, which stock options vest annually over a period
of three years from the date Mr. Morelli's board appointment is effective. In
the event that Mr. Morelli, for whatever reason, declines the appointment to
serve as a director on the Company's Board of Directors, then these options will
be automatically cancelled. The issuance of these stock options was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act.
On December 29, 2005, the Company granted David M. Kaye, as a director
nominee of the Company, options to purchase 350,000 shares of the Company's
common stock with an exercise price equal to the closing price of the Company's
common stock of $1.50 per share, which stock options vest annually over a period
of three years from the date Mr. Kaye's board appointment is effective. In the
event that Mr. Kaye, for whatever reason, declines the appointment to serve as a
director on the Company's Board of Directors, then these options will be
automatically cancelled. The issuance of these stock options was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act.
19
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On October 25, 2005, the Company engaged the firm of Peterson & Co. to
serve as its independent registered public accountants for the fiscal year
ending June 30, 2006. On October 27, 2005, the Company notified Jones Simkins,
P.C. ("Jones Simkins") that it was terminating Jones Simkins' services. The
decision to change accountants was recommended and approved by the Company's
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 the Company 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 the Company's financial statements, and (ii)
except for Jones Simkins' report on the Company's June 30, 2004 financial
statements dated September 1, 2004 which included an explanatory paragraph
wherein they expressed substantial doubt about the Company's ability to continue
as a going concern, Jones Simkins' reports on the Company's 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 the term 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, the Company has not consulted 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 the Company's 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 the Company 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws require that the Company indemnify and hold harmless
officers, directors and former officers and directors for any obligations
arising by reason of being or having been directors or officers of the Company,
except in relation to matters as to which any such director or officer or former
director or officer or person is adjudged to be liable for negligence or
misconduct in the performance of duty. Such indemnification is not exclusive of
any other rights to which those indemnified may be entitled, under any Bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
The following financial statements of Rebel Crew Films appear on pages F-1
through F-19 at the end of this report and such financial statements are
herein incorporated by reference:
Balance Sheets as of September 30, 2005 and December 31, 2004
(unaudited) Statements of Operations for the three and nine months
ended September 30, 2005 and 2004 (unaudited)
Statements of Cash Flows for the nine months ended September 30,
2005 and 2004 (unaudited)
Notes to September 30, 2005 financial statements
20
Independent Auditor's Report
Balance Sheets as of December 31, 2004 and 2003
Statements of Operations for the years ended December 31, 2004 and 2003
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2004 and 2003 Statements of Cash Flows for the years ended
December 31, 2004 and 2003 Notes to December 31, 2004 financial
statements
(b) Pro forma financial information.
Not applicable.
(c) 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)
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
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
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
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
4.2 Promissory Note due June 30, 2006 in the principal
amount of $73,000 issued to Jay Rifkin 9.1 Voting
Agreement dated December 29, 2005 by and among Jay
Rifkin and the stockholders of Digicorp listed on the
signature pages thereto
10.1 Securities Purchase Agreement dated December 29, 2005 by
and among Rebel Holdings, LLC and Digicorp
10.2 Assignment Agreement dated December 29, 2005 by and
among Rebel Holdings, LLC, Digicorp and Rebel Crew
Films, Inc.
10.3 Security Agreement dated December 29, 2005 by and among
Digicorp and Rebel Crew Holdings, LLC
10.4 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)
10.5 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)
10.6 Employment Agreement effective as of September 30, 2005
by and between Digicorp and Jay Rifkin
10.7 Standard Industrial/Commercial Multi-Tenant Lease dated
July 18, 2005 between The Welk Group, Inc. and Rebel
Crew Films, Inc.
21
10.8 Videogram License Agreement dated August 19, 2003 by and
between Rebel Crew Films and BCI Eclipse, LLC
10.9 Videogram License Agreement dated March 29, 2004 by and
between Rebel Crew Films and BCI Eclipse Company, LLC
10.10 Videogram License Agreement dated May 26, 2004 by and
between Rebel Crew Films and BCI Eclipse Company, LLC
10.11 License Agreement dated November 15, 2002 between Rebel
Crew Films and VAS Entertainment/Rise Above
Entertainment
10.12 License Agreement dated December 31, 2002 between Rebel
Crew Films and VAS Entertainment/Rise Above
Entertainment
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
22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Digicorp
Dated: January 5, 2006 By: /s/ Jay Rifkin
--------------------------------------
Name: Jay Rifkin
Title: Chief Executive Officer
23
REBEL CREW FILMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Periods Ended September 30, 2005
Balance Sheets as of
September 30, 2005 and December 31, 2004 (unaudited)...........F-2
Statements of Operations for the three and nine months
ended September 30, 2005 and 2004 (unaudited)..................F-3
Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (unaudited)..................F-4
Notes to Financial Statements.........................................F-5 - F-8
Fiscal Years Ended December 31, 2004 and 2003
Independent Auditors' Report............................................F-9
Balance Sheets as of
December 31, 2004 and 2003.....................................F-10
Statements of Operations for the years
ended December 31, 2004 and 2003...............................F-11
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2004 and 2003...............................F-12
Statements of Cash Flows for the years
ended December 31, 2004 and 2003...............................F-13
Notes to Financial Statements........................................F-14 - F-19
F-1
REBEL CREW FILMS, INC.
================================================================================
Condensed Balance Sheets (Unaudited)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed
financial statements.
F-2
REBEL CREW FILMS, INC.
================================================================================
Condensed Statements of Operations (Unaudited)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed
financial statements.
F-3
REBEL CREW FILMS, INC.
================================================================================
Condensed Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed
financial statements.
F-4
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2005
1. DESCRIPTION OF BUSINESS
Rebel Crew Films, Inc. ("the Company") was organized under the laws of the State
of California on August 7, 2002 to distribute Latino home entertainment
products. The Company currently maintains more than 200 Spanish language films
and serves wholesale, retail, catalog, and e-commerce accounts. The Company's
titles can be found at major retail outlets and independent video outlets across
the United States of America and Canada.
During the nine months ended September 30, 2004 and 2005, the Company 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
BASIS OF PRESENTATION
The accompanying condensed financial statements do not include all the
information and disclosures required by accounting principles generally accepted
in the United States of America. The preparation of financial statements in
conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The actual results may differ
from management's estimates.
The interim condensed financial information is unaudited, but reflects all
normal adjustments that are, in the opinion of management, necessary to provide
a fair statement of results for the interim periods presented. The condensed
interim financial statements should be read in connection with the Company's
audited financial statements for the year ended December 31, 2004.
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
deficiency of $618,599 at September 30, 2005, which includes deferred revenue of
$75,411 and amounts due to related parties of $601,307, as discussed below.
During the nine months ended September 30, 2005, the Company primarily relied
upon loans from a related party to fund its operations and, to a lesser extent,
revenues generated from licensing its film content, on a non-exclusive basis, to
other distributors of Latino home entertainment content. 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 September 30, 2005.
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 $75,411 and $162,971
at September 30, 2005 and December 31, 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.
F-5
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTS RECEIVABLES
Accounts receivables are recorded at the invoice amount and do not bear
interest. Accounts receivable at September 30, 2005 are presented net of an
allowance for doubtful accounts of $5,000. 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 (first-in, first-out basis) 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 five to
seven years. Property and equipment at September 30, 2005 are presented net of
accumulated depreciation of $577. Depreciation expense for the nine months ended
September 30, 2005 was $577.
3. INTANGIBLE ASSETS
Intangible assets consist of capitalized license fees for licensed content the
Company acquired from owners including producers, studios and distributors.
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 nine months ended September 30, 2005 and 2004,
amortization expense related to the licensed content was $86,825 and $31,250,
respectively.
Licensed content and accumulated amortization at September 30, 2005 and December
31, 2004, consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2005 2004
Licensed content $ 581,000 $ 254,000
Less: accumulated amortization (152,700 ) (65,875)
----------------- ---------------
Licensed content, net $ 428,300 $ 188,125
================= ===============
4. 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. For the nine months ended
September 30, 2005 and 2004, there were no potentially dilutive shares
outstanding
F-6
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2005 and December 31,
2004 are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------------ ------------------
Income taxes payable $ 2,400 $ 2,400
Legal fees -- 4,625
Other 16,986 2,675
------------------ ------------------
$ 19,386 $ 9,700
================== ==================
6. COMMITMENT AND CONTINGENCIES
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:
7. RELATED PARTY TRANSACTIONS
At September 30, 2005 and December 31, 2004, the Company has a liability of
$568,307 and $48,986, respectively, due to Rebel Holdings, LLC, a California
limited liability company ("REBEL HOLDINGS"), an entity that during 2005
acquired approximately 90% of the outstanding shares of the Company's common
stock. Additionally, at September 30, 2005 and December 31, 2004, the Company
has a liability of $33,000 and $0, respectively, due to the sole member of Rebel
Holdings. The liabilities are non-interest bearing, due on demand and secured by
all of the assets of the Company.
8. 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. No finder's fees were
received during 2005.
9. SUBSEQUENT EVENTS
Acquisition
On December 20, 2005, the Company entered into a Stock Purchase Agreement with
Digicorp, Inc., a Utah Corporation ("DIGICORP"), whereby Digicorp will purchase
(the "ACQUISITION") all of the issued and outstanding shares of the Company's
capital stock. Upon closing the Acquisition, Digicorp would issue approximately
21 million shares of its common stock to the shareholders of the Company as
compensation for the issued and outstanding capital stock of the Company. Upon
completion of the Acquisition, shareholders of the Company will own
approximately 58% of Digicorp. The Acquisition closed on December 29, 2005.
F-7
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Promissory Notes
Between October 2005 and December 2005, the Company issued a series of
promissory notes in the aggregate principal amount of $180,000 (the "NOTES") to
Digicorp, in consideration for loans from Digicorp to the Company in the amount
of $180,000. The principal amount of the Notes and interest at the rate of 5%
per annum is payable on April 11, 2006. The obligations under the Notes are
collateralized by all of the assets of the Company.
Between October 2005 and December 2005, the Company borrowed additional funds
from the sole member of Rebel Holdings, totaling $40,000, bringing the aggregate
amount owed to the member to $73,000 at December 29, 2005. 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.
F-8
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Rebel Crew Films, Inc.
We have audited the accompanying balance sheets of Rebel Crew Films, Inc. (the
"Company") as of December 31, 2004, and 2003, and the related statements of
operations, stockholders equity (deficit), and cash flows for the years then
ended. These 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. 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 Rebel Crew Films, Inc. as of
December 31, 2004, and 2003, 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
December 29, 2005
F-9
REBEL CREW FILMS, INC.
================================================================================
Balance Sheets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-10
REBEL CREW FILMS, INC.
================================================================================
Statements of Operations
- --------------------------------------------------------------------------------
YEARS ENDED
December 31, DECEMBER 31,
2004 2003
--------- ---------
REVENUE $ 27,963 $ 115,896
--------- ---------
EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 144,434 112,364
--------- ---------
OPERATING INCOME (LOSS) (116,471) 3,532
OTHER INCOME 79,628 800
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (36,843) 4,332
PROVISION FOR INCOME TAXES 800 800
--------- ---------
NET INCOME (LOSS) $ (37,643) $ 3,532
========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.38) $ 0.04
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 100,000 100,000
========= =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-11
REBEL CREW FILMS, INC.
================================================================================
Statements of Stockholders' Equity (Deficit)
YEARS ENDED DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
COMMON STOCK TOTAL
------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
-------- -------- -------- --------
BALANCES, December 31, 2002 100,000 $ 5,500 $ (6,190) $ (690)
Contributed capital 9,125 9,125
Net income -- -- 3,532 3,532
-------- -------- -------- --------
BALANCES, December 31, 2003 100,000 $ 14,625 $ (2,658) $ 11,967
Net loss -- -- (37,643) (37,643)
-------- -------- -------- --------
BALANCES, December 31, 2004 100,000 $ 14,625 $(40,301) $(25,676)
======== ======== ======== ========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-12
REBEL CREW FILMS, INC.
================================================================================
Statements of Cash Flows
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-13
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. DESCRIPTION OF BUSINESS
Rebel Crew Films, Inc. ("the Company") was organized under the laws of the State
of California on August 7, 2002 to distribute Latino home entertainment
products. The Company currently maintains more than 200 Spanish language films
and serves wholesale, retail, catalog, and e-commerce accounts. The Company's
titles can be found at major retail outlets and independent video outlets across
the United States of America and Canada.
During 2003 and 2004, the Company generated revenue through 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
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
deficiency of $213,801 at December 31, 2004, which includes deferred revenue
balance of $162,971, as discussed below. During the year ended December 31,
2004, the Company primarily relied upon revenues generated from licensing its
film content, on a non-exclusive basis, to other distributors of Latino home
entertainment content and, to a lesser extent, from 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, 2004.
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.
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
Licensed content acquired from owners including producers, studios or
distributors is capitalized and amortized on a straight-line basis over the term
of the license agreement, which generally ranges between one and five years. The
carrying values of intangible assets are periodically reviewed and impairments,
if any, are recognized when the expected future benefit to be derived from an
intangible asset is less than its carrying value.
F-14
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCK BASED COMPENSATION
As of December 31, 2004, no stock options or other equity instruments had been
granted to employees. For future stock-based compensation awards, the Company
intends to adopt the provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based
Payment, that requires corporations to account for awards of stock options or
other equity instruments to employees using the fair value method.
REVENUE RECOGNITION
The Company generates revenue 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 $162,971 and $40,433
at December 31, 2004 and 2003, respectively, represent advance royalty payments
that are expected to be earned over the subsequent twelve month periods.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF Issue 04-08 The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share, which requires the inclusion of shares related to
contingently convertible debt instruments for computing diluted earnings per
share using the if-converted method, regardless of whether the market price
contingency has been met. EITF 04-08 will be effective for all periods ending
after December 15, 2004 and includes retroactive adjustment to historically
reported diluted earnings per share. The adoption of EITF Issue No. 04-08 does
not currently have an impact on the Company's operating results or financial
position.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS 151 clarifies that abnormal inventory costs such as
costs of idle facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as current period charges.
The provisions of SFAS 151 are effective for fiscal years beginning after June
15, 2005. The adoption of SFAS 151 is not expected to have a significant impact
on the Company's operating results or financial position.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
which eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS No. 153 will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The adoption of SFAS No. 153 is not expected to have an impact on the
Company's operating results or financial position.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard replaces SFAS No. 123 and
supercedes APB Opinion No. 25, Accounting for Stock-based compensation. This
Standard requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. This eliminates the exception to account for such
awards using the intrinsic method previously allowable under APB Opinion No. 25.
SFAS No. 123(R) will be effective for interim or annual reporting periods
beginning on or after December 15, 2005. The impact on the Company's operating
results or financial position based on the adoption of SFAS No. 123(R) has not
yet been determined.
F-15
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INTANGIBLE ASSETS
Intangible assets consist of capitalized license fees for licensed content the
Company acquired from owners including producers, studios and distributors.
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, 2004 and 2003,
amortization expense related to the licensed content was $45,875 and $20,000,
respectively.
Licensed content and accumulated amortization consisted of the following:
YEARS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
Licensed content $ 254,000 $ 100,000
Less: accumulated amortization (65,875) (20,000)
----------------- -----------------
Licensed content, net $ 188,125 $ 80,000
================= =================
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, 2005 $ 58,500
December 31, 2006 $ 58,500
December 31, 2007 $ 58,500
December 31, 2008 $ 12,625
December 31, 2009 $ --
4. 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 our
deferred tax assets as of December 31, 2004 and 2003 are as follows:
2004 2003
-------- --------
Deferred tax assets
Federal net operating loss carryforward $ 9,185 $ 904
State net operating loss carryforward 2,175 93
Deferred revenue 5,343 --
-------- --------
Total gross deferred tax asset 16,703 997
Less valuation allowance (16,703) (997)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
F-16
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 our loss for the year ended December 31, 2004 we
have provided a valuation allowance in the amount of $16,703, an increase of
$15,706. The amount of deferred tax asset considered realizable could change in
the near term if projected future taxable income is realized. Included in
deferred tax assets is federal and state net operating loss carry forwards of
approximately $27,000 and $25,000 respectively. Utilization of operating loss
carryforwards may be limited if a cumulative change in ownership of more than
50% occurs within a three year period. The net operating losses will begin to
expire in 2024 and 2014, respectively.
At December 31, 2004 and 2003, the Company's tax provision consists of:
2004 2003
------------- ------------
Current
Federal $ -- $ --
State 800 800
Deferred
Federal -- --
State -- --
------------- ------------
Total $ 800 $ 800
============= ============
For the years ended December 31, 2004 and 2003, a reconciliation of the federal
statutory tax rate to the Company's effective tax rate is as follows:
5. 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. For the years ended December 31,
2004 and 2003, there were no potentially dilutive shares outstanding
F-17
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2004 and 2003 are
comprised of the following:
DECEMBER 31, DECEMBER 31,
2004 2003
------- -------
Obligations on license agreements $ -- $26,000
Income taxes payable 2,400 1,600
Legal fees $ 4,625 $ --
Other 2,675 --
------- -------
$ 9,700 $27,600
======= =======
7. RELATED PARTY TRANSACTIONS
At December 31, 2004 and 2003, the Company has a liability of $48,986 and $0,
respectively, due to Rebel Holdings, LLC, a California limited liability company
("REBEL HOLDINGS"), an entity that during 2005 acquired approximately 90% of the
outstanding shares of the Company's common stock. The liability is non-interest
bearing, is due on demand and is secured by all of the assets of the Company.
8. OPERATING LEASE
During 2004 and 2003 the Company rented space on a month to month basis. Rent
expense during the years ended December 31, 2004 and 2003 was $11,505 and
$8,700, respectively.
9. 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.
10. CONCENTRATION RISK
During 2003, one sub-licensor accounted for 100% of licensing fee revenues
recognized. During 2004, two sub-licensors accounted for 70% and 30%
respectively, of license fee revenues recognized.
11. SUBSEQUENT EVENTS
Operating Lease
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.
Acquisition
On December 20, 2005, the Company entered into a Stock Purchase Agreement with
Digicorp, Inc., a Utah Corporation ("DIGICORP"), whereby Digicorp will purchase
(the "ACQUISITION") all of the issued and outstanding shares of the Company's
capital stock. Upon closing the Acquisition, Digicorp would issue approximately
21 million shares of its common stock to the shareholders of the Company as
compensation for the issued and outstanding capital stock of the Company. Upon
completion of the Acquisition, shareholders of the Company will own
approximately 58% of Digicorp. The Acquisition closed on December 29, 2005.
Promissory Notes
Between September 2005 and December 2005, the Company borrowed funds from the
sole member of Rebel Holdings, totaling $73,000. In connection with the
borrowings, the Company issued a promissory note in the amount of $73,000 to the
member (the "REBEL 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 Rebel Note has a term of
approximately six months and bears 5.0% simple interest.
F-18
REBEL CREW FILMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Between October 2005 and December 2005, the Company issued a series of
promissory notes in the aggregate principal amount of $180,000 (the "NOTES") to
Digicorp, in consideration for loans from Digicorp to the Company in the amount
of $180,000. The principal amount of the Notes and interest at the rate of 5%
per annum is payable on April 11, 2006. The obligations under the Notes are
collateralized by all of the assets of the Company.
During 2005, the Company borrowed additional funds from Rebel Holdings, totaling
$507,321, bringing the aggregate amount owed to Rebel Holdings to $556,307 at
December 29, 2005. In connection with the borrowings, the Company issued a
convertible note in the amount of $556,307 to Rebel Holdings (the "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 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.
F-19