Annual report pursuant to Section 13 and 15(d)

NOTE N - STOCK OPTIONS AND WARRANTS

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NOTE N - STOCK OPTIONS AND WARRANTS
 12 Months Ended
Dec. 31, 2011
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
NOTE N – STOCK OPTIONS AND WARRANTS

Employee Stock Options

The Company maintains two stock option plans. The first plan was initiated in the year 2000 and was established as a long term incentive plan for employees and consultants, including board of director members. The second plan was established in 2010 also as an incentive plan for officers, employees, non employee directors, prospective employees and other key persons. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a better alignment of their interests with those of the Company and its stockholders.

The Company considers employee stock options a component of the compensation package necessary to attract, retain and motivate key employees. The value of these options is dependent upon an increase in the Company’s stock price relative to the exercise price, which is determined on the date of grant. Due to declines in the Company’s stock price, the exercise prices of the options held by Messrs. Tienor, Sobieski and Koch exceeded the Company’s recent stock price to the extent that the Compensation Committee became concerned that their original incentive value had been substantially depleted. In order to restore the incentive value of the stock options held by these key executives, the Compensation Committee determined that it was in the best interests of the Company to modify Messrs. Tienor, Sobieski and Koch’s stock options based on the Company’s stock closing price on December 30, 2011.  The exercise price for Mr. Tienor was modified from $1.80 to $.14.  The exercise prices for Messrs. Sobieski and Koch were modified from $1.00 to $.14.

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

Options Outstanding
   
Options Exercisable
 
Exercise Prices
   
Number
Outstanding
   
Weighted Average
Remaining
Contractual Life
 (Years)
   
Weighted Average
Exercise Price
   
Number
Exercisable
   
Weighted Average
Exercise Price
 
$
0.01 - $0.99
     
175,000
     
5.82
   
$
0.14
     
151,479
   
$
.14
 
$
1.00 - 1.99
     
305,000
     
2.68
     
1.00
     
305,000
     
1.00
 
$
2.00 - 2.99
     
110,000
     
3.69
     
2.52
     
100,000
     
2.51
 
$
3.00 - 3.99
     
40,000
     
4.20
     
3.09
     
40,000
     
3.09
 
$
4.00 - 4.99
     
35,000
     
3.74
     
4.27
     
35,000
     
4.27
 
$
5.00 - 5.99
     
20,000
     
3.58
     
5.60
     
20,000
     
5.60
 
         
685,000
     
3.81
   
$
1.45
     
651,479
   
$
1.48
 

Transactions involving stock options issued to employees are summarized as follows:

   
Number of
Shares
   
Weighted Average
Price Per Share
 
Outstanding at January 1, 2010
 
$
6,120,883
   
$
1.56
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled or expired
   
(3,572,083
)
   
1.62
 
Outstanding at December 31, 2010
 
$
2,548,800
   
$
1.57
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled or expired
   
(1,863,800
)
   
1.10
 
Outstanding at December 31, 2011
 
$
685,000
   
$
1.45
 

The expected life of awards granted represents the period of time that they are expected to be outstanding. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures. We estimate the volatility of our common stock based on the calculated historical volatility of our own common stock using the trailing 24 months of share price data prior to the date of the award. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation for those awards that are expected to vest. In accordance with ASC 718-10, we adjust share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.

There were no options granted or exercised during the years ended December 31, 2011 and 2010.  Additionally, the total fair value of shares vested during the year ended December 31, 2011 and 2010 was $26,887 and $132,386, respectively.

Total stock-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2011 and 2010 was $51,887 and $247,081, respectively.

Non-Employee Stock Options

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to the Company consultants.  These options were granted in lieu of cash compensation for services performed.

Options Outstanding
 
Options Exercisable
 
Exercise Prices
   
Number
Outstanding
   
Weighted Average
Remaining
Contractual Life
(Years)
   
Weighted Average
Exercise Price
 
Number
Exercisable
 
Weighted Average
Exercise Price
 
                                       
$
1.00
     
425,000
     
0.12
   
$
1.00
 
425,000
 
$
1.00
 

Transactions involving options issued to non-employees are summarized as follows:

   
Number of
Shares
   
Weighted Average
Price Per Share
 
Outstanding at January 1, 2010
   
675,000
   
$
1.00
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Canceled or expired
   
(250,000
) 
   
-
 
Outstanding at December 31, 2010
   
425,000
   
$
1.00
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Canceled or expired
   
-
     
-
 
Outstanding at December 31, 2011
   
425,000
   
$
1.00
 

There were no non-employee stock options vested during the years ended December 31, 2011 and 2010, respectively.

Warrants

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company.  These warrants were granted in lieu of cash compensation for services performed or financing expenses and in connection with placement of convertible debentures.

     
Warrants Outstanding
         
Warrants Exercisable
 
Exercise Prices
   
Number
Outstanding
   
Weighted Average
Remaining
Contractual Life
(Years)
   
Weighed Average
Exercise Price
   
Number
Exercisable
   
Weighted Average
Exercise Price
 
$
0.13
     
10,346,168
     
3.96
   
$
0.13
     
10,346,168
   
$
0.13
 
 
0.33
     
1,705,539
     
2.76
     
0.33
     
1,705,539
     
0.33
 
 
0.60
     
800,000
     
1.35
     
0.60
     
800,000
     
0.60
 
 
1.00
     
500,000
     
0.03
     
1.00
     
500,000
     
1.00
 
 
3.01
     
1,000,445
     
2.40
     
3.01
     
1,000,445
     
3.01
 
 
4.17
     
359,712
     
0.56
     
4.17
     
359,712
     
4.17
 
         
14,711,864
     
3.36
   
$
0.50
     
14,711,864
   
$
0.50
 

Transactions involving warrants are summarized as follows:

   
Number of
Shares
   
Weighted Average
Price Per Share
 
Outstanding at January 1, 2010
   
12,158,941
   
$
1.60
 
Issued
   
12,819,897
     
0.28
 
Exercised
   
-
     
-
 
Canceled or expired
   
(2,874,096)
     
3.29
 
Outstanding at December 31, 2010
   
22,104,742
   
$
0.51
 
Issued
   
5,336,816
     
0.20
 
Exercised
   
-
     
-
 
Canceled or expired
   
(12,729,694
) 
   
.34
 
Outstanding at December 31, 2011
   
14,711,864
   
$
0.50
 

The Company issued 5,211,542 warrants to Series B preferred stockholders, and 125,274 to former Convertible Senior Note holders during the year ended December 31, 2011.   The Company issued 7,109,557 warrants to a Convertible Debenture holder, 5,134,626 warrants to Series B preferred stockholders, and 515,774 to Convertible Senior Notes holders during the year ended December 31, 2010.  The Company did not issue any compensatory warrants during the years ended December 31, 2011 or 2010.  

The purchase price of the warrants issued to Convertible Senior Note holders was adjusted from $3.41 to $3.01 per share and approximately 125,274 additional warrants were issued during the year ended December 31, 2011 in accordance with the anti-dilution protection provision of the Convertible Senior Notes Payable Agreement (the “Agreement”) dated October 27, 2005, upon the occurrence of certain events as defined in the Agreement.

In August 2010, the Company issued warrants to YA Global Investments LP pursuant to anti-dilution provisions in its existing warrant agreements that were triggered by the completion of the Series B preferred stock private placement.  These warrants entitled the holders to purchase up to 7,109,557 shares of the Company’s common stock at a price per share of $0.13. In August 2010, the Company also issued warrants to Kings Road/Portside pursuant to anti-dilution provisions in its existing warrant agreements that were triggered by the completion of the Series B preferred stock private placement.  These warrants entitled the holders to purchase up to 515,774 shares of the Company’s common stock at a price per share of $3.41.

In December 2010, the Company repurchased all of King’s Road warrants in exchange for the amount of $1,000.

In March 2011, the Company received proceeds of $1,000,000 from the sale of a product line and related assets. In connection with the sale, the Company was lent an additional $700,000. The Company used these proceeds to retire substantially all of its obligations under its $1.6 million senior convertible debenture due May 29, 2011 and to cancel 11,730,769 of related warrants.