AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER __, 2006
REGISTRATION NO. 333-138918
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
ACE MARKETING & PROMOTIONS, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
------------
NEW YORK 5093 11-3427886
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.
457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
DEAN L. JULIA, 457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581 (516) 256-7766
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------
COPIES TO:
STEVEN MORSE, ESQ.
MORSE & MORSE PLLC.
1400 OLD COUNTRY ROAD , SUITE 302
WESTBURY, NEW YORK 11590
PHONE (516) 4871446
FACSIMILE (516)4871452
------------
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. |X|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
1
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY (N1) PRICE FEE
----------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par value (n2) 951,575 2.10 $1,998,307.50 $213.82
Common Stock, $.0001 par value (n3) 475,788 2.10 999,154.80 106.91
------------- -------------
Total 1,427,363 $2,997,462.30 $320.73 (1)
============= =============
----------------------------------------------------------------------------------------------------------------
(1) Previously paid.
------------
(n1) In accordance with Rule 457(c), the aggregate offering price of shares of
common stock of Ace Marketing & Promotions, Inc. is estimated solely for
purposes of calculating the registration fees payable pursuant hereto, as
determined in accordance with Rule 457(c), using the average of the high
and low sales price reported by the OTC Bulletin Board for the Common
Stock on November 20, 2006 (which was $2.10 per share) and, with respect
to shares of common stock issuable upon exercise of outstanding warrants,
the higher of (1) such average sales price or (2) the $1.75 exercise price
of such warrants.
(n2) Represents 951,575 outstanding shares to be sold by certain selling
security holders.
(n3) Represents 475,788 shares of common stock issuable upon exercise of Class
C Common Stock Purchase Warrants at an exercise price of $1.75 per share.
The company hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the company shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
section 8(a), may determine.
================================================================================
2
PROSPECTUS
ACE MARKETING & PROMOTIONS, INC.
The Resale of Up to 1,427,363 shares of Common Stock
The selling price of the shares will be determined by market factors at the time
of their resale.
---------------
This prospectus relates to the resale by the selling security holders of up to
1,427,363 shares of common stock. The selling security holders may sell the
stock from time to time in the over-the-counter market at the prevailing market
price or in negotiated transactions.
We will receive no proceeds from the sale of the shares by the selling security
holders. We may receive additional proceeds from the exercise of warrants held
by selling security holders.
Our common stock is quoted on the over-the-counter Electronic Bulletin Board
under the symbol "AMKT." The closing sales price of our common stock was $2.10
on November 14, 2006.
Investing in the common stock involves a high degree of risk. You should invest
in the common stock only if you can afford to lose your entire investment. See
"Risk Factors" beginning on page 6 of this prospectus.
Please read this prospectus carefully. It describes our company, finances and
products. Federal and state securities laws require that we include in this
prospectus all the important information that you will need to make an
investment decision.
You should rely only on the information contained in this prospectus to make
your investment decision. We have not authorized anyone to provide you with
different information. The selling security holders are not offering these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front page of this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this prospectus is December __, 2006
The following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus.
TABLE OF CONTENTS
SECTION PAGE
1. Prospectus Summary
2. Cautionary Statement Concerning Forward Looking Statements
3. Risk Factors
4. Use of Proceeds
5. Description of Business
6. Description of Property
7. Legal Proceedings
8. Market for Common Stock and Related Shareholder Matters
9. Management's Discussion and Analysis
10. Directors and Executive Officers
11. Ownership of Securities by Beneficial Owners and Management
12. Executive Compensation
13. Certain Relationships and Related Transactions
14. Selling Security holders
15. Plan of Distribution
16. Description of Securities
17. Indemnification Disclosure For Securities Act Liabilities
18. Experts
19. Legal Matters
20. Where You Can Find More Information
21. Index to Financial Statements
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and related notes.
OVERVIEW
Ace Marketing & Promotions, Inc. incorporated under laws of the State of
New York in March 1998. We are a full service advertising specialties and
promotional products distributor company. We distribute items manufactured by
others to our customers typically with our customers' logos on them. Several of
our customer categories include large corporations, local schools, universities,
financial institutions, hospitals and not-for-profit organizations. Our
promotional products are a useful, practical, informative, entertaining, and/or
decorative item, most often imprinted with the sponsoring advertiser's name,
logo, slogan or message, and typically retained and appreciated by the end
recipients who receive them, in many cases free of charge in marketing and
communication programs.
Promotional products are also effective for the following:
o dealer/distribution programs;
o co-op programs;
o company stores;
o generating new customers or new accounts;
o nonprofit fundraising; public awareness campaigns;
o promotion of brand awareness and brand loyalty;
o employee incentive programs;
o new product or service introduction; and
o marketing research for survey and focus group participants.
We have the ability to distribute over 500,000 promotional product items
ranging from stickers that cost pennies all the way through jewelry, sporting
goods, awards, and electronics that cost thousands of dollars per unit. Specific
categories of promotional products include:
o Advertising Specialties-build awareness, goodwill and remembrance of
the advertiser's name, product, purpose, advantages or other timely
message. These products are generally lower priced goods and are
usually distributed for free.
o Business Gifts, Awards and Commemoratives - generally lower priced
goods and are given for goodwill, often at trade shows to generate
traffic.
o Incentives and Awards-focus on motivation, workplace safety, goal
setting and recognition. These are typically higher priced items used
in incentive programs to promote employee retention and recognition.
They may also be used in recruitment programs as well.
o Premiums-given after a specific behavior has been performed.
The most popular products that we have distributed over the last several
years and account for over 50% of our business are as follows:
o Wearables, such as t-shirts, golf shirts and hats.
o Glassware, such as mugs and drinking glasses.
o Writing instruments, such as pens, markers and highlighters.
o Bags, such as tote bags, gift bags and brief cases.
3
THE OFFERING
Securities Offered Up to 1,427,363 shares of Common Stock.
Exercise Price
Securities Outstanding: Amount Per Share
------ ---------
Common Stock 8,028,363 --
Class A Warrants 737,000 $ 2.00
Class B Warrants 100,000 2.00
Class C Warrants 475,788 1.75
Other Warrants 100,000 2.50
The foregoing summary of our outstanding
securities does not reflect options held by our
officer, directors, employees and consultants. See
"2005 Employee Benefit and Consulting Services
Plan."
Offering Price The shares being registered hereunder are being
offered by the selling security holders from time
to time at the then current market price.
Dividend Policy We do not anticipate paying dividends on our
Common Stock in the foreseeable future.
Use of Proceeds The shares offered herein are being sold by the
selling security holders and as such, we will not
receive any of the proceeds of the offering.
Material Risk Factors This offering involves a high degree of risk,
elements of which include, without limitation,
lack of profitability, intense competition,
dependency upon third parties, both domestically
and overseas primarily in China for the
manufacture and supply of our products and risks
of expansion through acquisitions. There is a risk
to investors due to the speculative nature of this
investment, historical losses from operations,
limited working capital, lack of dividends,
dilution factors, control by present shareholders
and economic conditions in general. There is a
material risk that we may have insufficient
funding to engage in acquisition activities.
4
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus and documents incorporated by reference contain
forward-looking statements. Forward-looking statements relate to our future
operations. They estimate the occurrence of future events and are not based on
historical facts. Forward-looking statements may be identified by terms such as:
o believes
o intends
o projects
o forecasts
o predicts
o may
o will
o expects
o estimates
o anticipates
o probable
o continue
This list is not comprehensive. Similar terms, variations of those terms,
and the negative of those terms may also identify forward-looking statements.
The risk factors discussed in this prospectus are cautionary statements.
They identify some of the factors that could cause actual results to be
significantly different from those predicted in the forward-looking statements.
The forward-looking statements were compiled by us based upon assumptions it
considered reasonable. These assumptions are subject to significant business,
economic, and competitive uncertainties and contingencies, many of which are
beyond our control. Therefore, forecasted and actual results will likely vary,
and these variations may be material.
There can be no assurance that the statements, estimates, and projections
contained in this prospectus will be achieved. Thus, we make no representation
or warranty as to their accuracy or completeness. In addition, we cannot
guarantee that any forecast in this prospectus will be achieved.
These forward-looking statements were compiled as of the date of this
prospectus. We do not intend to update these statements, except as required by
law. Therefore, you should evaluate them by considering any changes that may
have occurred after the date these forward-looking statements appear.
We cannot guarantee the assumptions relating to the forward-looking
statements will prove to be accurate. Therefore, while these forward-looking
statements contain our best good faith estimates as of the date of this
prospectus, we urge you and your advisors to review these forward-looking
statements, to consider the assumptions upon which they are based, and to
ascertain their reasonableness.
5
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES MAJOR RISKS. BEFORE YOU INVEST
IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE VARIOUS RISKS, INCLUDING
THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS TOGETHER
WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE
TO PURCHASE SHARES OF OUR COMMON STOCK. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS
PROSPECTUS, IN EVALUATING US AND OUR BUSINESS. ANY OF THE FOLLOWING RISKS, AS
WELL AS OTHER RISKS AND UNCERTAINTIES, COULD HARM OUR BUSINESS AND FINANCIAL
RESULTS AND CAUSE THE VALUE OF OUR SECURITIES TO DECLINE, WHICH IN TURN COULD
CAUSE YOU TO LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
THE PROMOTIONAL PRODUCTS DISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY
NOT BE ABLE TO COMPETE SUCCESSFULLY.
We compete with over 20,000 distributor companies. Some of our competitors
have greater financial and other resources than we do which could allow them to
compete more successfully. Most of our promotional products are available from
several sources and our customers tend to have relationships with several
distributors. Competitors could obtain exclusive rights to market particular
products which we would then be unable to market. Industry consolidation among
promotional products distributors, the unavailability of products, whether due
to our inability to gain access to products or interruptions in supply from
manufacturers, or the emergence of new competitors could also increase
competition. In the future, we may be unable to compete successfully and
competitive pressures may reduce our revenues.
WE EXPERIENCE FLUCTUATIONS IN QUARTERLY EARNINGS. AS A RESULT, WE MAY FAIL TO
MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our business has been subject to seasonal and other quarterly fluctuations.
Net sales and operating profits generally have been higher in the third and
fourth quarters, particularly in the months of September through November, due
to the timing of sales of promotional products and year-end promotions. Net
sales and operating profits have been lower in the first quarter, primarily due
to increased sales in the prior two quarters. Quarterly results may also be
adversely affected by a variety of other factors, including:
o costs of developing new promotions and services;
o costs related to acquisitions of businesses;
o The timing and amount of sales and marketing expenditures;
o general economic conditions, as well as those specific to the
promotional product industry; and
o our success in establishing additional business relationships.
Any change in one or more of these or other factors could cause our annual
or quarterly operating results to fluctuate. If our operating results do not
meet market expectations, our stock price may decline in the event a market
should develop.
6
BECAUSE WE DO NOT MANUFACTURE THE PRODUCTS WE DISTRIBUTE, WE ARE DEPENDENT UPON
THIRD PARTIES FOR THE MANUFACTURE AND SUPPLY OF OUR PRODUCTS.
We obtain all of our products from third-party suppliers, both domestically
and overseas primarily in China. We submit purchase orders to our suppliers who
are not committed to supply products to us. Therefore, suppliers may be unable
to provide the products we need in the quantities we request. Because we lack
control of the actual production of the products we sell, we may be subject to
delays caused by interruption in production based on conditions outside of our
control. In the event that any of our third-party suppliers were to become
unable or unwilling to continue to provide the products in required volumes, we
would need to identify and obtain acceptable replacement sources on a timely
cost effective basis. There is no guarantee that we will be able to obtain such
alternative sources of supply on a timely basis, if at all. An extended
interruption in the supply of our products would have an adverse effect on our
results of operations, which most likely would adversely affect the value of our
common stock.
WE MAY NOT BE ABLE TO EXPAND THROUGH INTERNAL GROWTH AND MEET CHANGES IN THE
INDUSTRY.
Our plans for internal growth include hiring in-house sales representatives
from our competitors and offering stock incentives and generous commissions to
keep them. Additionally, we have room for growth by building direct
relationships with advertising agencies and major corporations. Because of
potential industry changes, our products and promotions must continue to evolve
to meet changes in the industry. Our future expansion plans may not be
successful due to competition, competitive pressures and changes in the
industry.
OUR LIMITED CASH RESOURCES AND LACK OF A LINE OF CREDIT MAY RESTRICT OUR
EXPANSION OPPORTUNITIES.
An economic issue that can limit our growth is lack of extensive cash
resources, due to the typical payment terms of a transaction. Most suppliers
require us to pay within 30 days of delivery of an order; however, we may not
receive our customer's payment in the same time frame. This requires us to have
available cash resources to finance most of our customers' orders. Any lack of
cash resources would limit our ability to take orders from customers, thus
limiting our ability to grow. An infusion of capital and a good line of credit
can enable us to service a broader base of customers. We can provide no
assurances that we will obtain an adequate line of credit in the future, if at
all.
OUR PROPOSED EXPANSION THROUGH ACQUISITIONS INVOLVES SEVERAL RISKS.
We may expand our domestic markets in part through acquisitions in the
future. Such transactions would involve numerous risks, including possible
adverse effects on our operating results or the market price of our common
stock. Some of our future acquisitions could give rise to an obligation by us to
make contingent payments or to satisfy certain repurchase obligations, which
payments could have an adverse effect on our results of operations. In addition,
integrating acquired businesses:
o may result in a loss of customers of the acquired businesses;
o requires significant management attention; and
o may place significant demands on our operations, information systems
and financial resources.
There can be no assurance that our future acquisitions will be successful.
Our ability to successfully effect acquisitions will depend upon the following:
o The availability of suitable acquisition candidates at acceptable
prices;
7
o The development of an established market for our common stock; and
o The availability of financing on acceptable terms, in the case of
non-stock transactions.
OUR REVENUES DEPEND ON OUR RELATIONSHIPS WITH CAPABLE INDEPENDENT SALES
PERSONNEL OVER WHOM WE HAVE NO CONTROL AS WELL AS KEY CUSTOMERS, VENDORS AND
MANUFACTURERS OF THE PRODUCTS WE DISTRIBUTE.
Our future operating results depend on our ability to maintain satisfactory
relationships with qualified independent Sales personnel as well as key
customers, vendors and manufacturers. We are dependent upon our independent
sales representatives to sell our products and do not have any direct control
over these third parties. If we fail to maintain our existing relationships with
our independent sales representatives, key customers, vendors and manufacturers
or fail to acquire new relationships with such key persons in the future, our
business may suffer.
OUR FUTURE PERFORMANCE IS MATERIALLY DEPENDENT UPON OUR MANAGEMENT AND THEIR
ABILITY TO MANAGE OUR GROWTH.
Our future success is substantially dependent upon the efforts and
abilities of members of our existing management, particularly Dean L. Julia,
Chief Executive Officer and Michael Trepeta, President. The loss of the services
of Mr. Julia or Mr. Trepeta could have a material adverse effect on our
business. We have a three year employment agreement with each of Mr. Julia and
Mr. Trepeta effective March 1, 2005. However, we lack "key man" life insurance
policies on any of our officers or employees. Competition for additional
qualified management is intense, and we may be unable to attract and retain
additional key personnel. Our management personnel is currently limited and they
may be unable to manage our expansion successfully and the failure to do so
could have a material adverse effect on our business, results of operations and
financial condition.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future to fund more aggressive
expansion of our business or make strategic acquisitions or investments. We may
require additional equity or debt financings or funds from other sources for
these purposes. No assurance can be given that these funds will be available for
us to finance our development on acceptable terms, if at all. Such additional
financings may involve substantial dilution of our stockholders or may require
that we relinquish rights to certain of our technologies or products. In
addition, we may experience operational difficulties and delays due to working
capital restrictions. If adequate funds are lacking from operations or
additional sources of financing, we may have to delay or scale back our growth
plans.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
WE LACK AN ESTABLISHED TRADING MARKET FOR OUR COMMON STOCK, AND YOU MAY BE
UNABLE TO SELL YOUR COMMON STOCK AT ATTRACTIVE PRICES OR AT ALL.
There is currently a limited and sporadic trading market for our common
stock in the OTC electronic bulletin board under the symbol "AMKT." There can be
no assurances given that an established public market will be obtained for our
common stock or that any public market will last. The trading price of the
common stock depends on many factors, including:
o The markets for similar securities;
o our financial condition, results of operations and prospects;
o The publication of earnings estimates or other research reports and
speculation in the press or investment community;
8
o Changes in our industry and competition; and
o general market and economic conditions.
As a result, we cannot assure you that you will be able to sell your common
stock at attractive prices or at all.
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE.
The market price for our common stock may be highly volatile. A variety of
factors may have a significant impact on the market price of our common stock,
including:
o The publication of earnings estimates or other research reports and
speculation in the press or investment community;
o Changes in our industry and competitors;
o our financial condition, results of operations and prospects;
o any future issuances of our common stock, which may include primary
offerings for cash, issuances in connection with business
acquisitions, and the grant or exercise of stock options from time to
time;
o general market and economic conditions; and
o any outbreak or escalation of hostilities, which could cause a
recession or downturn in our economy.
In addition, the markets in general can experience extreme price and volume
fluctuations that can be unrelated or disproportionate to the operating
performance of the companies listed or quoted. Broad market and industry factors
may negatively affect the market price of our common stock, regardless of actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against companies. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would harm our business.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FUTURE.
No cash dividends have been paid by our company on our common stock. The
future payment by us of cash dividends on our common stock, if any, rests within
the discretion of our board of directors and will depend, among other things,
upon our earnings, our capital requirements and our financial condition as well
as other relevant factors. We do not intend to pay cash dividends upon our
common stock for the foreseeable future.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND AGREEMENTS COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF OUR COMPANY.
Certain provisions of our articles of incorporation may discourage, delay,
or prevent a merger or acquisition that a shareholder may consider favorable.
These provisions include:
o Authority of the board of directors to issue preferred stock.
o Prohibition on cumulative voting in the election of directors.
9
WE LACK INDEPENDENT DIRECTORS AND COMMITTEES THEREOF.
The Sarbanes-Oxley Act of 2002 requires us as a public corporation to have
an audit committee composed solely of independent directors. Currently, we have
no independent directors or committees of directors. Without independent
directors, our board may have no way to resolve conflicts of interest,
including, without limitation, executive compensation, employment contracts and
the like.
OUR FUTURE SALES OF COMMON STOCK BY MANAGEMENT AND OTHER STOCKHOLDERS MAY HAVE
AN ADVERSE EFFECT ON THE THEN PREVAILING MARKET PRICE OF OUR COMMON STOCK.
In the event a public market for our common stock is sustained in the
future, sales of our common stock may be made by holders of our public float or
by holders of restricted securities in compliance with the provisions of Rule
144 of the Securities Act of 1933. In general, under Rule 144, a person who has
satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of shares which does not exceed the
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume in shares during the four calendar weeks
immediately prior to such sale. Rule 144 also permits under certain
circumstances, the sale of shares without any quantity or other limitation by a
person who is not an affiliate of our company and who has satisfied a two-year
holding period. Future sales of shares of our public float or by
restrictedcommon stock made in compliance with Rule 144 may have an adverse
effect on the then prevailing market price, if any, of our common stock.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
security holders. Any net proceeds from the exercise of warrants are intended to
be used for general corporate purposes.
10
DESCRIPTION OF BUSINESS
We are a full service advertising specialties and promotional products
distributor company. We distribute items manufactured by others to our customers
typically with our customers' logos on them. Several of our customer categories
include large corporations, local schools, universities, financial institutions,
hospitals and not-for-profit organizations. Our promotional products are a
useful, practical, informative, entertaining, and/or decorative item, most often
imprinted with the sponsoring advertiser's name, logo, slogan or message, and
typically retained and appreciated by the end recipients who receive them, in
many cases free of charge in marketing and communication programs.
Promotional products are also effective for the following:
o dealer/distribution programs;
o co-op programs;
o company stores;
o generating new customers or new accounts;
o nonprofit fundraising; public awareness campaigns;
o promotion of brand awareness and brand loyalty;
o employee incentive programs;
o new product or service introduction; and
o marketing research for survey and focus group participants.
We have the ability to distribute over 500,000 promotional product items
ranging from stickers that cost pennies all the way through jewelry, sporting
goods, awards, and electronics that cost thousands of dollars per unit. Specific
categories of promotional products include:
o Advertising Specialties-build awareness, goodwill and remembrance of
the advertiser's name, product, purpose, advantages or other timely
message. These products are generally lower priced goods and are
usually distributed for free.
o Business Gifts, Awards and Commemoratives - generally lower priced
goods and are given for goodwill, often at trade shows to generate
traffic.
o Incentives and Awards-focus on motivation, workplace safety, goal
setting and recognition. These are typically higher priced items used
in incentive programs to promote employee retention and recognition.
They may also be used in recruitment programs as well.
o Premiums-given after a specific behavior has been performed.
The most popular products that we have distributed over the last several
years and account for over 50% of our business are as follows:
o Wearables, such as t-shirts, golf shirts and hats.
o Glassware, such as mugs and drinking glasses.
o Writing instruments, such as pens, markers and highlighters.
o Bags, such as tote bags, gift bags and brief cases.
COMPANY HISTORY
We have been in business since 1998. We have grown our business through
internal growth without acquisitions and without us having the benefits of any
trademarks, patents, service marks, franchises, concessions, royalty agreements
or labor contracts. Our growth has been achieved through cash flow from
operations and the private sale of our restricted common stock totaling
approximately $2,800,000.
11
THE MARKET
There are thousands of different types and styles of promotional products.
In many cases, it is even possible to obtain custom items that are not found in
any catalog. According to The Counselor - State of the Industry 2005 Survey,
which is available online at no cost to the public at www.thecounselor.net, the
most popular promotion products sold in 2004 were the following:
o wearables;
o writing instruments;
o glassware and ceramics;
o desk/office/business accessories;
o calendars;
o recognition awards/trophies; and
o magnets.
Market Size
According to the Promotional Products Association International, which is
available online at no cost to the public at
www.ppai.com/MediaInformation/Instustry/Statistics/SalesVolumeEstimates/,
promotional product distributor's sales were $5.13 billion in 1991, with steady
increases in sales until they reached $17.85 billion in 2000. Promotional
Product sales then declined to $16.55 billion in 2001, $15.63 billion in 2002,
increased to $16.34 billion in 2003 and $17.3 billion in 2004. A revitalized
economy, increased competition in the marketplace, and a trend toward integrated
and targeted marketing strategies has contributed to this growth. Integrated
marketing campaigns involve not only advertising, but also sales promotions,
internal communications, public relations, and other disciplines. The objectives
of integrated marketing are to promote products and services, raise employee
awareness, motivate personnel, and increase productivity through a wide array of
methods including extensive use of promotional products.
DISTRIBUTORS
According to the Promotional Products Association International, which is
available online at no cost to the public at www.ppai.com/MediaInformation/
Instustry/Statatistics/SalesVolumeEstimates/, with no single company dominating
the market, the promotional products industry is highly fragmented with 20,249
distributors in the industry with revenues of less than $2.5 million and 919
distributors with revenues of $2.5 million or more. According to The Counselor -
State of the Industry 2005 Survey, the top ten distributors in our industry are
believed to have sales of between $137 million and $230 million for 2004.
Wearguard-Crest Co., Halo Branded Solutions/Lee Wayne Corporation, Corporate
Express Promotional Marketing, 4 Imprint Inc. and American Identity are the top
five distributors with 2004 sales of $230 million, $207 million $200 million,
$191.5 million and $179.5 million, respectively. Nearly 80% of the distributors
surveyed are reported to be privately owned family businesses. Management
believes that control of sales lies predominantly with the independent sales
representatives, as there is little brand recognition at this time.
According to the Promotional Products Association International, which is
available online at no cost to the public at www.ppai.com/ProductsResources/
Research/TopBuyers/, the following ranks the top ten purchasers of promotional
products in descending order according to the findings of a 2003 study by
Louisiana State University and Glenrich Business Studies. Industries were named
by distributors according to the volume spent on promotional products by each
industry.
12
o education: schools, seminars
o financial: banks, savings and loans, credit unions, stock brokers
o health care: hospitals, nursing homes, clinics
o not-for-profit organizations
o construction: building trades and building supplies
o government: public offices, agencies, political candidates
o trade, professional associations and civic clubs
o real estate: agents, title companies and appraisers
o automotive: manufacturers, dealers, parts suppliers
o professionals: doctors, lawyers, cpa's, architects
SUPPLY CHAIN
Domestic and overseas manufacturers generally sell their promotional
product items directly to suppliers. Suppliers sell to distributors like Ace
Marketing and distributors sell promotional products to customer users such as
large corporations, financial institutions, universities and schools, hospitals,
not-for-profit organizations and small businesses. However, manufacturers have
the ability to sell their promotional products directly to distributors and
customers. Suppliers have the ability to sell promotional products directly to
customers who are not distributors.
Whereas the majority of the items are made overseas, often in China, and
the suppliers are simply importing from actual manufacturers, we generally
consider the supplier as the beginning of the industry supply chain. They choose
specified product lines and import blank goods to be warehoused until a
distributor orders one of their items with a customer logo on it. The suppliers
generally run the risk of inventory exposure and fluctuations in an item's
popularity. This is generally why most distributors stick to distributing and
not importing. There are situations where importing directly from the
manufacturer and thus cutting out the supplier does in fact make sense.
Generally, this happens when a distributor has a large quantity order and has
enough lead time from the customer to import the item. Since ocean freight from
overseas generally takes 30-45 days and manufacturing may take several weeks,
this only makes sense when a customer orders far in advance and in large
quantity. The benefits of this are outstanding since the margins and cost
savings can be substantial. But, in general, the average order in the industry
is below $1,000 and thus the need for individual suppliers to carry specified
product lines and hold inventory to fill the need of the average distributor
with the average order.
SUPPLIERS
Management believes that while there are an estimated 3,000 suppliers in
the industry, most of the promotional products distributors have access to the
same suppliers. Currently, we utilize approximately 500 suppliers in our
business with only one supplier accounting for about 10% of our purchasing
requirements over the last two years. We seek to distinguish ourselves from
other distributors by attractive pricing, by sourcing unique items, creating
custom products and/or offering superior in- house service and customer support
through our employees. Most suppliers require us to pay within 30 days of
delivery of an order; however, we may not receive our customers' payments in the
same time frame. This requires us to have available cash resources to finance
most of our customers' orders. The possible lack of available cash resources
would limit our ability to take orders from customers, thus limiting our ability
to grow. An infusion of additional capital, a line of credit and better payment
terms based on volume can enable us to service a broader base of customers. We
have never sought to establish a line of credit, although we may seek to
establish one with an institutional lender in the future.
13
PURCHASING TRENDS - NEED FOR VALUE ADDED PRODUCTS AND RELATED SERVICES
Price is no longer the sole motivator of purchasing behavior for our
customers. With the availability of similar products from multiple sources,
customers are increasingly looking for distributors who provide a tangible
value-added to their products. As a result, we provide a broad range of products
and related services. Specifically, we provide research and consultancy
services, artwork and design services, and fulfillment services to our
customers. These services are provided in-house by our current employees.
Management believes that by offering these services, we can attempt to attract
new customers.
OUR CUSTOMERS
We presently have over 500 customer accounts ranging from Fortune 500
companies to local schools and small businesses. A customer account is a person
or entity who has purchased promotional products from us in the past on a
non-exclusive basis and may or may not purchase from us additional promotional
products in the future. Generally our customers do not actively seek
distributors to bid on their projects. There are many reasons why our customers
may work with us over another distributor. The average buyer first believes that
price is the sole issue with the lowest bidding distributor on a project
obtaining the business. Once they gain more experience and understand the
difficulties in processing and fulfilling an order on time and correctly, they
generally analyze the rationale on how they choose a distributor differently.
Although pricing is important to our customers, they also count on our
dependability, creativity and efficiency. Our promotional products bear their
corporate name and are a reflection of their corporate image. The events they
use these items for are of the utmost importance. If they go with another
distributor who gives them run of the mill ideas possibly at a lower cost, a
poor quality product with inferior quality decoration and/or the goods arrive
late, then they quickly realize there should be other factors that determine
which distributor they should be working with. For each of the years ended
December 31, 2005 and 2004, a customer accounted for approximately 15% and 9% of
net revenues, respectively. Aggregate revenues from these customers are
dispersed among many different franchises and storefront locations.
SERVICING OUR CUSTOMERS
We have built our business around the concept of reliability, quality,
innovative and custom promotional products at competitive prices while
maintaining a high level of customer service and good relationships with
industry suppliers. Our research licensed software technology, that we purchased
from an outside vendor and is available for licensing to other distributors in
the industry, affords us the ability to locate and purchase industry product in
an efficient manner rather than to have to manually research products through
hundreds of catalogs and/or reference books. Our in-house art capabilities
through our salaried employees make us a "one stop shop" for custom merchandise
and provide our customers with comfort in knowing logo modifications will not
delay valuable production days on tight turn-around projects. Our in-house art
department consists of two employees who work on Apple computers using licensed
software programs such as Illustrator, Photoshop and Quark to create new logos
or manipulate current ones. These logos are then sent to the supplier who
arranges to put them on the product whether internally or through an outside
source in one of the following manners:
o silkscreen printing
o embroidery
o hot stamp
o heat transfer
o embossing/debossing
o engraving
Our reliability stems from our own customized and detailed tracking system
that we structured and implemented to ensure an order is processed correctly and
on time. In general, customers contact us when they have a need for items that
have corporate logos. They provide us with general information that helps us
determine what products to suggest, including the following:
14
o The type of event and the targeted audience;
o The number of units that are required and the budget; and
o The timing of the event and the theme of the event.
The aforementioned parameters will narrow the field of items suggested from
a broad list of 500,000 to possibly a dozen or less. Once a customer calls in or
e-mails us requesting ideas for an upcoming event, we begin to research ideas
based on their parameters and we use our research software to look up dozens of
products, prepare a competitive analysis between similar products to find just
the right one, send a picture to the customer by email and prepare and send a
quotation to the customer also by email. This provides us an immediate time
saving advantage over other distributors who still do things manually. Many of
these distributors still scan a reference book which is called a register. They
search for a particular product, such as clocks, then find the sub-category they
are interested in, such as plastic, and there they find all the suppliers who
carry the specific item they are looking to purchase. They must then either
cross reference each supplier to find their phone number or web address, or they
can physically pull as many of the catalogs they have on hand and search for the
products that they are interested in and send catalogs with tabbed pages via
regular mail or overnight service. This is an inefficient way to research and
deliver images of products. We are not aware of any statistical information
which allows us to tell the percentages of distributors who use publicly
available licensed research software systems like ours versus the manual way
described above.
When the customer decides on the product that they would like to order, the
order is processed in our order entry department utilizing our order-entry
software which is available for licensing to anyone in the industry from third
party vendors. The salesperson submits the specifics of the order to our order
entry department where the order is keyed into the system by our employees.
Three parts to each order are printed:
o ACKNOWLEDGEMENT This outlines the product ordered along with a
description of the product and how the logo will be placed and in what
colors. It includes the quantity ordered, the price per piece, total
cost, ship to address, and the delivery date. It is sent to our
customer via fax along with a hard copy of the artwork that will be
used on the order. The order will not move forward until our customer
signs off on the acknowledgment and the artwork. No order runs without
the sign offs thus protecting us in the long run of a customer
claiming they were not aware of some aspect of the order.
o PURCHASE ORDER The Purchase order is submitted to the supplier only
after the acknowledgment and art are signed by our customer. It
contains all the information that the acknowledgment contains except
the price of the product is now shown as the price we will be paying.
The art is sent via e-mail to the factory and the purchase order
requires that the supplier send back a paper proof of the art to
insure accuracy before proceeding with the order. Now the supplier has
the exact same parameters to complete the order that the customer
signed off on. They must meet the delivery date for the quantity
specified, with the logo specified, at the price we submitted. Orders
are drop shipped from the supplier directly to the customer, except on
rare occasions where packaging is done in our office.
o SALES ORDER COPY This is a print out that essentially shows all of the
components on the acknowledgment and the purchase order combined side
by side. It shows what we pay for the product and what price our
customer pays for the product. It also shows the gross profit, the
gross profit percentage, and the commission due to the salesperson.
15
Once the above process takes place, the entire work folder goes to the
tracking department. We have developed a system to follow each order from the
time it is processed, through the time it is shipped. This is yet another
safeguard to protect us from a supplier not fulfilling their obligations, which
in turn may lead to us losing money, a customer, or both. The tracking process
consists of us contacting the factory at various points in the production
process to ensure that the order is on schedule. We verbally verify the item,
quantity, and ship date and document who at the supplier verified the
information. We then call again at a certain point in the process to verify it
is on schedule and lastly call on the day of shipping to receive tracking
numbers. The above processes have historically led to eliminating disputes with
both suppliers and customers.
OUR STRATEGY
Our objective is to be a leading full service advertising specialties and
promotional products company. Key elements of our strategy are:
o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES. We have
been in business for over eight years since March 1998. Our revenues
are derived from existing customers and new customers through word of
mouth recommendations, attendance at trade shows, our sales
representatives and advertising and promotion in trade journals.
o MOTIVATING RETAILERS TO UTILIZE PROMOTIONAL AND SPECIALTY PRODUCTS IN
THEIR BUSINESS. It is our management's belief from conversations with
persons in our industry and trade show attendance that a trend in our
industry is often for the use of promotional items to customers rather
than cash incentives for gaining customer loyalty and motivating sales
people. In this regard, customers who received a promotional item
tended to purchase more and repeat purchases more often than customers
who received a discount coupon of equivalent value. Additionally,
sales forces show a tendency for greater motivation when receiving a
trip or merchandise as opposed to the cash equivalent. We must show
our customers the benefits of utilizing promotional and specialty
items in their business and for their sales force and build customer
loyalty through the use of point systems that are exchanged for
promotional merchandise.
o OUR COMPANY WAS BUILT AS A PLATFORM THAT COULD GROW EASILY.
Scalability is the key and we have separate departments with defined
roles which will allow this to occur and for our salesperson to sell.
Our sales persons receive helpful support from us. In many other
distributorships, the salesperson is often responsible for everything
from answering phones, doing all their own research, processing
orders, billing, tracking and collections. At our company, we provide
all the backup to allow our sales persons to just sell. Since our
technology is currently up to date, including in house servers to
allow access to our systems from off-site, we have the ability to pick
up salespeople from any location in the United States.
o KEY ACQUISITIONS OF SMALL DISTRIBUTORS AND INTEGRATING THEIR WORKFORCE
INTO OURS. We will target one or more of the estimated 20,000 small
distributors for potential acquisition. However, we can provide no
assurances that we will be successful in acquiring any distributors on
terms satisfactory to us, if at all.
o PROVIDING GENEROUS INCENTIVES TO OUR SALES PEOPLE TO INCREASE
PERFORMANCE LEVELS. We offer competitive commissions in addition to
back office support and research assistance to allow our independent
sales representatives to optimize their sales time and to provide them
with adequate incentives to sell promotional products to our customers
rather than for our competitors. In the future, we may offer a stock
option program for additional incentives.
o MAINTAIN A COMPETITIVE GROSS PROFIT PERCENTAGE ON ALL SALES ORDERS. In
2005, 2004 and 2003 our gross profit percentage was 32.1%, 29% and
31%, respectively. According to The Counselor - State of the Industry
2005 Survey, the average reported gross profit margin for distributors
during 2000 through 2004 ranged from 32.5% to 34.3%.
16
o PROVIDE RESEARCH, CONSULTING, DESIGN AND FULFILLMENT SERVICES TO OUR
CUSTOMERS TO INCREASE PROFITABILITY. We design promotional products
for our customers and provide consulting services in connection
therewith. We utilize licensed research software technology and order
entry systems that are available to anyone in the industry for license
to provide the best services to our customers in the most timely
fashion possible.
o UTILIZING THE INTERNET AND ITS CAPABILITIES AND OPPORTUNITIES FOR
SALES OF PROMOTIONAL PRODUCTS AND COST SAVINGS. Our website is
www.Acemarketing.net. Our website is utilized for multiple purposes,
including providing information to potential customers who want to
learn about us and research our available product line. We also
develop online company stores for customers to help facilitate
re-orders at cost savings to them based upon a pre-determined product
line.
SALES AND MARKETING
Our revenues are derived from existing customers and new customers through
word of mouth recommendations, attendance at trade shows, our sales
representatives and advertising and promotion in trade journals. Except for two
executive officers, our sales representatives receive commissions and are not
paid a salary. They work at their own location or at our facility and may sell
products on behalf of other companies. We encourage our sales representatives to
sell promotion products for us on the basis of sales incentives which include
competitive commissions and appropriate sales support and research which is
provided in-house by our employees. In the future, we intend to offer stock
and/or stock options as part of their incentive programs.
Our website is www.Acemarketing.net. Our website is utilized for multiple
purposes, including providing information to potential customers who want to
learn about us and research our available product line.
TECHNOLOGY
Technology affects most industries, and specifically the internet, which
enables many capabilities and opportunities for cost savings. Sales of
promotional products are often catalog-based. The cost of producing and mailing
a catalog can be high. Placing a catalog on a website takes less manpower to
maintain and less money to update and distribute new versions. Additionally,
integrating the catalog with the order processing system can save time and money
in placing and filling orders, also eliminating manual errors.
The proliferation of open architecture software and hardware makes an
increasing number of systems available for automating processes and integrating
back office systems. By doing this, we reduce support requirements and further
enhance margins. Additionally, the ability to provide more direct support to our
sales force has led to increased retention of our sales team.
POSSIBLE GROWTH THROUGH ACQUISITIONS
As a result of the fact that about 20,000 of the estimated 21,000
distributors are doing $2.5 million or less in annual sales in our estimated $16
billion annual industry, we believe the environment for growth and consolidation
in the promotional products industry is appealing, and that we would like to
take advantage of this if a satisfactory opportunity arises. There are some
issues that our company must address to be successful. The main issues are
motivating previous owners, retaining sales people, and integrating operations.
We have had conversions with the owners of several distributors of
promotional products and have observed that they are open to conversions taking
place for the possible sale of their business.
We believe that when a distributor is acquired, a decision must be made
about the existing management team, most typically the owner. An evaluation must
be made regarding the skills of the owner and desirability of having them
involved in our company. Acquisitions would be typically made for the customer
17
accounts; however, due to the size of the target companies, the owner would most
likely also be a key employee or sales person. The motivation of the previous
owner to work for others may be an issue. We must address this issue and ensure
the continued participation of the owners. In general, the best way to mitigate
this risk is to tie up much of the previous owners' payment in stock, thus
providing incentive for the overall company's success.
We believe that one of the most difficult tasks in our acquiring a company
is transitioning the new acquisition into us. It is important to have flexible,
open systems and technology to integrate the back office operations, as well as
strong controls and processes to put in place. Having the appropriate technology
and strong management team will help alleviate some of the issues here.
As of the date hereof, there is no agreement to acquire any other company
or distributor and there can be no assurances given that our plans will be
realized to grow through acquisitions of one or more distributors or, if
successful, that any acquisitions can be profitably integrated into our
company's operations.
COMPETITION
While our competition is extensive with over 20,000 distributors, we
believe that there are no companies that dominate the market in which we
operate. Our company competes within the industry on the basis of service,
competitive prices, personnel relationships and competitive commissions to our
sales representatives to sell promotional products for us rather than our
competitors. Competitors' advantages over us may include better financing,
greater experience and better service, cheaper prices and personal relationships
than us.
According to The Counselor - State of the Industry 2005 Survey, the top ten
distributors in our industry are believed to have sales of between $137 million
and $230 million for 2004. Wearguard-Crest Co., Halo Branded solutions/Lee Wayne
Corporation, Corporate Express Promotional Marketing, 4 Imprint Inc. and
American Identity are the top five distributors with 2004 sales of $230 million,
$207 million $200 million, $191.5 million and $179.5 million, respectively.
Nearly 80% of the distributors surveyed and reported to be privately owned
family businesses. We can provide no assurances that we will be able to
successfully compete in the future with competitors that have greater experience
and financial assets than us.
We believe that in the promotional products industry, sales people
typically have a large amount of autonomy and control the relationships with
their customers. This works both for and against us. To avoid losing customers,
we must provide the appropriate incentives to keep sales people. At the same
time, while there can be no assurances, management believes our company will be
able to obtain new customers by luring sales people away from competitors. The
offering of stock incentives and health care benefits are ways to retain sales
people, especially in an industry where these types of benefits are rare.
EMPLOYEES
As of the filing date of this Prospectus, we had three executive officers
who are employees of our Company. We also employ nine other persons, each of
whom provide in-house sales and other services to our Company. During 2005, 15
independent sales representatives provided multiple service orders for our
Company.
SEC REPORTS AVAILABLE ON WEBSITE
--------------------------------
The SEC maintains an Internet site (http://www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. Our Annual Reports on Form
10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and other
SEC filings are available on the SEC's website as well as our company website at
www.acemarketing.net.
18
DESCRIPTION OF PROPERTY
Our principal executive offices are located at 457 Rockaway Avenue, Valley
Stream, NY 11581. We currently lease approximately 4,000 square feet of office
space at this facility at an annual cost of approximately $57,000 pursuant to a
month-to-month lease. We are currently exploring our options of obtaining a new
location and/or entering into a long-term lease at our current facility. We also
lease approximately 1,000 square feet of space at an annual cost of
approximately $15,000 at 1105 Portion Road, Farmingville, NY 11738.
LEGAL PROCEEDINGS
We are currently not subject to any threatened or pending legal
proceedings. Nevertheless, we may from time to time become a party to various
legal proceedings arising in the ordinary course of our business.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Since June 9, 2005, our common stock has been traded on the OTC Bulletin
Board under the symbol "AMKT." Our common stock trades on a limited basis on the
OTC Electronic Bulletin Board in the Over-the-Counter Market. The following
table sets forth the range of high and low closing sales prices of our Common
Stock for the periods indicated (it being understood that prices for the quarter
ended June 30, 2005 are for the period June 9 through June 30, 2005).
Quarters Ended High Low
----------------------------------------------------------------------
June 30, 2005 .................................. $ 3.50 $ .50
September 30, 2005 ............................. 2.00 .50
December 31, 2005 .............................. 2.00 .57
March 31, 2006 ................................. 1.80 1.70
June 30, 2006 .................................. 2.25 2.25
September 30, 2006 ............................. 2.25 2.15
The closing sales price on November 14, 2006 was $2.10 per share. All
quotations provided herein reflect inter-dealer prices, without retail mark-up,
markdown or commissions.
We have 8,028,363 shares outstanding at November 14, 2006. Except for the
951,575 shares registered in the offering and 139,680 shares that were recently
issued to the Placement Agent (and its designees) of our recent 2006 financing,
all of our remaining outstanding shares of common stock are either in the public
float or restricted securities which may be currently sold in compliance with
Rule 144 of the Securities Act of 1933, as amended. Rule 144 provides among
other things and subject to certain limitations that a person holding restricted
securities for a period of one year may sell those securities in brokerage
transactions every 90 days in an amount equal to the greater of the average
weekly trading volume over the four preceding weeks or 1% of our company's
outstanding common stock. Persons who have owned our restricted common stock for
a period of at least two years and are not affiliates of our company may sell or
otherwise transfer their common shares pursuant to Rule 144(k) of the Securities
Act. Possible or actual sales of our public float or restricted common stock
under Rule 144 may have a depressive effect upon the price of our common stock
if any meaningful market were to develop for our common stock in the future.
Currently, we have outstanding Class A and Class B warrants to purchase
837,000 restricted shares of our common stock exercisable at a price of $2.00
per share. In the event that all of the warrants are exercised, of which there
can be no assurances given, an additional 837,000 shares of restricted common
stock will be issued and may be resold pursuant to Rule 144 after a holding
period of at least one year, unless we elect to voluntarily register the resale
of the shares issuable upon exercise of the warrants for earlier sale. No
registration rights were granted in connection with the issuance of said
warrants.
19
Between July 20, 2006 and October 30, 2006, we sold 951,575 shares of
common stock at a purchase price of $1.75 per share and Class C warrants to
purchase 475,788 shares at an exercise price of $1.75 per share. We also issued
to the placement agent and its designees 139,680 shares of common stock and
placement agent warrants to purchase 95,160 shares exercisable at a price of
$1.00 per share. We agreed to register the resale of the shares of common stock
sold to these investors, including the shares issuable upon exercise of the
Class C warrants.
As of November 14, 2006, there were 81 holders of record of our common
stock, although we believe that there are other persons who are beneficial
owners of our common stock held in street name. Our transfer agent is
Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New
York, NY 10004.
DIVIDEND POLICY
We have never paid any cash dividends and intend, for the foreseeable
future, to retain any future earnings for the development of our business. Our
Board of Directors will determine our future dividend policy on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
RECENT SALES OF UNREGISTERED SECURITIES
During the past two years, we had no sales or issuances of unregistered
common stock, except we made sales or issuances of unregistered securities
listed in the table below:
----------------------------------------------------------------------------------------------------------------------
CONSIDERATION RECEIVED
AND DESCRIPTION OF
UNDERWRITING OR OTHER
DISCOUNTS TO MARKET IF OPTION, WARRANT OR
PRICE OR CONVERTIBLE EXEMPTION FROM CONVERTIBLE SECURITY,
DATE OF TITLE OF SECURITY, AFFORDED TO REGISTRATION TERMS OF EXERCISE OR
SALE SECURITY NUMBER SOLD PURCHASERS CLAIMED CONVERSION
----------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common Stock 600,000 For services rendered - Section 4(2) - Options exercisable
Options Options no other consideration granted to at $1.00 per share;
received; no officers, immediately
commissions paid. directors and exer-cisable; expire
legal counsel Jan. 2015; contain
under our 2005 cashless exercise
Incentive Plan. provisions.
Each grantee is a
sophisticated
investor, who
re-ceived the
options with a
restrictive
legend in
con-nection with
services rendered
and is able to
fend for himself.
A Form S-8
Registration
Statement was
later filed with
the Commission
in April and
September 2005.
----------------------------------------------------------------------------------------------------------------------
20
----------------------------------------------------------------------------------------------------------------------
Jan. -Feb. Common Stock 100,000 $100,000 received; no Rule 506 of Class B Warrants
2005 and Class B Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants Class B placement agent was Form D was filed per share through
Warrants utilized. on February 22, Jan. 2, 2008.
2005; securities
sold to two
accredited
investors only.
----------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common Stock 31,076 Shares Conversion of $31,076 Section 3a(9); no Not Applicable.
of debt; no commissions commissions paid.
paid; no placement
agent was utilized.
----------------------------------------------------------------------------------------------------------------------
July - Common Stock 951,575 $1,665,250 received, Rule 506 of Warrants to purchase
October, 2006 Shares, $209,830 paid Regulation D; 95,160 shares issued
475,788 to placement agent A Form D was to the placement
Warrants and its counsel. Filed. agent, which are
issued to exercisable at $1.00
investors; per share through
139,680 June 30,2011. Class C
shares and warrants issued to
95,160 investors are
warrants exercisable at $1.75
issued to the per share and expire
Placement on June30 2009.
agent
----------------------------------------------------------------------------------------------------------------------
April 2006 Common stock 50,000 shares Services rendered; no Section 4(2). A Options exercisable
underlying commissions paid restrictive at $.10 per share;
options legend appears on expire April 25,
each certificate 2016; contain
cashless exercise
provisions.
----------------------------------------------------------------------------------------------------------------------
RECENT PURCHASES OF SECURITIES
------------------------------
During the last two years, we have had no repurchases of our common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with our financial
statements and the notes thereto appearing elsewhere in this Prospectus. All
statements contained herein that are not historical facts, including, but not
limited to, statements regarding anticipated future capital requirements, our
future plan of operations, our ability to obtain debt, equity or other
financing, and our ability to generate cash from operations, are based on
current expectations. These statements are forward-looking in nature and involve
a number of risks and uncertainties that may cause our actual results in future
periods to differ materially from forecasted results.
OVERVIEW
We are a full service advertising specialties and promotional products
company. Specific categories of the use of promotional products include
advertising specialties, business gifts, incentives and awards, and premiums.
21
Through the services of our in-house sales persons and the use of independent
sales representatives, we distribute items to our customers typically with their
logos on them. Several of our customer categories include large corporations,
local schools, universities, financial institutions, hospitals and
not-for-profit organizations.
The most popular products that we have distributed over the last several
years and account for over 50% of our business are as follows:
o Wearables, such as t-shirts, golf shirts and hats.
o Glassware, such as mugs and drinking glasses.
o Writing instruments, such as pens, markers and highlighters.
o Bags, such as tote bags, gift bags and brief cases.
There are a number of trends in the advertising/marketing industry, the
most significant of which is the trend toward integrated marketing strategies.
Integrated marketing campaigns involve not only advertising, but also sales
promotions, internal communications, public relations, and other disciplines.
The objectives of integrated marketing are to promote products and services,
raise employee awareness, motivate personnel, and increase productivity through
a wide array of methods including extensive use of promotional products.
Price is no longer the sole motivator of purchasing behavior for our
customers. With the availability of similar products from multiple sources,
customers are increasingly looking for distributors who provide a tangible
value-added to their products. As a result, we provide a broad range of products
and related services. Specifically, we provide research and consultancy
services, artwork and design services, and fulfillment services to our
customers. These services are provided in-house by our current employees.
Management believes that by offering these services, we can attempt to attract
new customers.
We expect our revenues to grow as economic conditions in the United States
continue to improve, by adding additional in-house and independent sales
representatives to our sales network. While one or more acquisitions of other
distributors will also be considered by Management, we can provide no assurances
that one or more acquisitions of other distributors will be completed on terms
satisfactory to us, if at all.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require management to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
REVENUE RECOGNITION. Revenues are recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue Task Force Issue No.
99-19, reporting revenue gross as a principal versus net as an agent. Revenue is
recognized on a gross basis since our company has the risks and rewards of
ownership, latitude in selection of vendors and pricing, and bears all credit
risk. Our company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with Emerging Issue Task Force Issue No. 00-10, accounting for shipping and
handling fees and costs.
22
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We are required to make judgments based on
historical experience and future expectations, as to the realizability of our
accounts receivable. We make these assessments based on the following factors:
(a) historical experience, (b) customer concentrations, customer credit
worthiness, (d) current economic conditions, and (e) changes in customer payment
terms.
STOCK BASED COMPENSATION. UNTIL DECEMBER 31, 2005, WE accounted for
employee stock compensation in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
our plans and did not recognize compensation expense for employee stock-based
compensation plans. We adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). We also adopted the
disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure." This pronouncement requires prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reporting results.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Accounting for
Stock-Based Compensation." SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to SFAS No. 123(R), only certain pro forma
disclosures of fair value were required. The provisions of this statement were
effective for the first interim reporting period that began after December 15,
2005. We adopted the provisions of SFAS No.123(R) in the first quarter of Fiscal
2006. Reference is made to the Notes to Financial Statements for a description
of certain other recently issued accounting pronouncements.
Results of Operations
---------------------
The following table sets forth certain selected unaudited condensed statement of
operations data for the periods indicated in dollars and as a percentage of
total net revenues. The following discussion relates to our results of
operations for the periods noted and is not necessarily indicative of the
results expected for any other interim period or any future fiscal year. In
addition, we note that the period-to-period comparison may not be indicative of
future performance.
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $1,357,655 $750,957 $3,521,251 $2,300,150
Cost of Revenues 918,632 477,466 2,448,096 1,518,185
------------ ------------ ------------ ------------
Gross Profit 439,023 273,491 1,073,527 781,965
Selling, general & Administrative expenses 459,791 313,066 1,330,275 1,310,147
------------ ------------ ------------ ------------
(Loss) from operations (20,768) (39,575) (257,120) (528,182)
============ ============ ============ ============
Three Months Ended September 30, 2006 versus Three Months Ended
---------------------------------------------------------------
September 30, 2005
------------------
We generated revenues of $1,357,655 in the third quarter of 2006 compared to
$750,957 in the same three month period ending September 30, 2005. The increase
in revenues of $606,698 in 2006 compared to 2005 is primarily due to our
utilizing additional sales representations to obtain additional customers and
our new and existing customers buying products with higher average prices.
Cost of revenues was $918,632 or 68% of revenues in the third quarter of 2006
compared to $477,466 or 64% of revenues in the same three months of 2005. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Increase in cost of revenues of $441,166 in 2006
is related to an increase in revenues.
23
Gross profit was $439,023 in the third quarter of 2006 or 32% of net revenues
compared to $273,491 in the same three months of 2005 or 36% of revenues. Gross
profits will vary period-to-period depending upon a number of factors including
the mix of items sold, pricing of the items and the volume of product sold.
Also, it is our practice to pass freight costs on to our customers.
Reimbursement of freight costs which are included in revenues have lower profit
margins than sales of our promotional products and has the effect of reducing
our overall gross profit margin on sales of products, particularly on smaller
orders.
Selling, general, and administrative expenses were $459,791 in the third quarter
of 2006 compared to $313,066 in the same three months of 2005. Such costs
include payroll and related expenses, insurance and rents. The overall increase
of $146,725 is primarily due to the increase in stock based compensation and an
increase in salaries.
Net loss was $(20,768) in the third quarter of 2006 compared to a net loss of
$(39,575) for the same three months in 2005. The third quarter net loss for 2006
includes stock based payments (non-cash) of $22,821 as compared to $5,094 for
the comparable period of 2005. No benefit for income taxes is provided for in
2006 and 2005 due to the full valuation allowance on the net deferred tax
assets.
Nine months ended September 30, 2006 versus September 30, 2005
--------------------------------------------------------------
We generated revenues of $3,521,251 in the first nine months of 2006 compared to
$2,300,150 in the same nine month period ending September 30, 2005. The increase
in revenues of $1,221,101 in 2006 compared to 2005 is primarily due to our
utilizing additional sales representations to obtain additional customers and
our new and existing customers buying products with higher average prices.
Cost of revenues was $2,448,096 or 70% of revenues in the first nine months of
2006 compared to $1,518,185 or 66% of revenues in the same nine months of 2005.
Cost of revenues includes purchases and freight costs associated with the
shipping of merchandise to our customers. Increase in cost of revenues of
$929,911 in 2006 is related to an increase in revenues.
Gross profit was $1,073,155 in the first nine months of 2006 or 30% of net
revenues compared to $781,965 in the same nine months of 2005 or 34% of
revenues. Gross profits will vary period-to-period depending upon a number of
factors including the mix of items sold, pricing of the items and the volume of
product sold. Also, it is our practice to pass freight costs on to our
customers. Reimbursement of freight costs which are included in revenues have
lower profit margins than sales of our promotional products and has the effect
of reducing our overall gross profit margin on sales of products, particularly
on smaller orders. The decrease in gross profit percentage during the first nine
months of 2006 relates to the mix of product sold and size of orders.
Selling, general, and administrative expenses were $1,330,275 in the first nine
months of 2006 compared to $1,310,147 in the same nine months of 2005. Such
costs include payroll and related expenses, insurance and rents. The overall
increase of $20,128 is primarily due to the increase in salaries.
Net loss was $(257,120) in the first nine months of 2006 compared to a net loss
of $(528,182) for the same nine months in 2005. The first nine months of 2006
include stock based payments (non-cash) of $87,135 as compared to $481,786 for
the comparable period of the prior year. No benefit for income taxes is provided
for in 2006 and 2005 due to the full valuation allowance on the net deferred tax
assets.
Fiscal 2006 and fiscal 2005
---------------------------
Year Ended December 31
----------------------
2005 2004
---- ----
Revenue $3,422,665 $2,379,186
Cost of Revenues 2,324,185 1,688,248
Gross Profit 1,098,480 690,938
Operating Expenses 1,776,710 844,574
(Loss) from operations (678,230) (153,636)
Net (Loss) (682,538) $ (157,150)
Net (Loss) per common Share $ (.12) $ (.03)
24
We generated revenues of $3,422,665 for 2005 compared to $2,379,186 for
fiscal 2004. The 44% increase in revenues of $1,043,479 in 2005 compared to 2004
is primarily due to our utilizing additional in-house and independent sales
representatives to obtain additional customers.
Gross profit was $1,098,480 for 2005 or 32.1% of net revenues compared to
$690,938 or 29.0% for fiscal 2004. Gross profits will vary period-to-period
depending upon a number of factors including the mix of items sold, pricing of
the items and the volume of product sold. Also, it is our practice to pass
freight costs associated with shipping of merchandise to our customers which are
included in costs of revenues and net revenue. Reimbursement of freight costs
have lower profit margins than sales of our promotional products and has the
effect of reducing our overall gross profit margin on sales of products,
particularly on smaller orders. The change in gross profit percentage for fiscal
2005 relates to the mix of product sold and size of orders.
Operating expenses consisting of selling, general, and administrative
expenses were $1,776,710 for fiscal 2005 compared to $844,574 for fiscal 2004.
Operating costs as a percentage of net revenue was 51.9% for 2005 compared to
35.5% for 2004. Operating expenses in 2005 increased over 2004 primarily due to
the following reasons:
o A non-recurring and non-cash charge to operations of $451,000 in the
second quarter of 2005 relating to the grant of warrants to purchase
1,100,000 shares at an exercise price of $.10 per share to a financial
advisor with cashless exercise provisions, which warrants were
exercised as of February 27, 2006 and resulted in the issuance of
1,029,032 shares as of that date.
o Commencing in March 2005, a $2,000 per month increase in salary of
each of our President and Chief Executive Officer totaling $40,000 for
2005 and the hiring of a Chief Financial Officer at an annual cost of
$50,000.
o Directors and officers liability insurance at a cost of $26,000.
o Professional and other fees relating to being a publicly held
corporation totaling approximately $124,000 for 2005.
o A non-cash charge of $34,421 to operations relating to the grant of
options to consultants of our Company.
Our net loss was $(682,538) for 2005 as compared to $(157,150) for 2004.
Our 2005 increase in net loss relates primarily to non-cash charges incurred in
operations during 2005 totaling $489,421 relating to the granting of options and
warrants to consultants and advisors.
Liquidity and Capital Resources
-------------------------------
We had cash and cash equivalents of $1,299,928 at September 30, 2006. Cash
used by operating activities for the nine months ended September 30, 2006 was
$(298,977). This resulted primarily from a net loss of $(254,767), an increase
in accounts receivable of $(61,399) and a increase in accounts payable and
accrued expenses of $73,522 partially offset by customer deposits of $(98,000)
and stock based compensation of $87,135.
We had cash and cash equivalents of $544,805 at September 30, 2005. Cash
used by operating activities for the nine months ended September 30, 2005 was
$(122,556). This resulted primarily from a net loss of $(532,581), an increase
in accounts receivable of $(29,057) and a decrease in accounts payable and
accrued expenses of $(77,761) partially offset by prepaid expenses of $31,144
and stock based compensation of $481,786. Cash provided from financing
activities was $101,076 resulting from a private placement of common stock and
warrants which netted $95,000 and the conversion of a note payable with accrued
interest into common stock of the company at a reduced conversion rate of $1.00
per share, which resulted in the issuance of 31,076 shares of common stock.
At December 31, 2005, we had cash and cash equivalents of $398,235. We
consider highly liquid debt instruments with a maturity of three months or less,
as well as bank money market accounts, to be cash equivalents. During 2005, net
cash was used in operating activities of $252,040. This was primarily due to net
25
loss of $682,538 and an increase in accounts receivable of $408,452, partially
offset by a non-cash stock-based compensation charge of $489,421 and increases
in liabilities and customer deposits of $211,171 and $98,000, respectively.
During 2005, net cash of $11,010 was used in investing activities to purchase
property and equipment. During 2005, net cash of $95,000 was provided from
financing activities due to the sale of our common stock and warrants. During
2004, net cash was used in operating activities of $171,068. This was primarily
due to our net loss of $157,150 and decreases in accounts payable and accrued
expenses of $9,750. During 2004, cash was used in investing activities to
purchase property and equipment of $14,273. During 2004, net cash of $696,901
was provided by financing activities from the proceeds of sale of our common
stock and warrants totaling $713,201 less payments on notes payable of $16,300.
Our company commenced operations in 1998 and was initially funded by our
three founders, each of whom has made demand loans to us that have been repaid.
Since 1999, we have relied on equity financing and borrowings from outside
investors to supplement our cash flow from operations.
We anticipate that our future liquidity requirements will arise from the
need to finance our accounts receivable and inventories, hire additional sales
persons, capital expenditures and possible acquisitions. The primary sources of
funding for such requirements will be cash generated from operations, raising
additional capital from the sale of equity or other securities and borrowings
under debt facilities which currently do not exist. We believe that we can
generate sufficient cash flow from these sources to fund our operations for at
least the next fifteen months. In the event we should need additional financing
for operations and to consummate acquisitions, we can provide no assurances that
we will be able to obtain financing on terms satisfactory to us, if at all.
2006 Financing
--------------
We recently engaged Brookshire Securities Corporation, a licensed
broker-dealer and member of the NASD, to act as Placement Agent to raise
financing for our company through the sale of our unregistered securities solely
to "accredited investors" as defined in Rule 501 of Regulation D of the
Securities Act of 1933, as amended.
Pursuant to the offering, we raised gross proceeds of $1,665,250 from the
sale of Units. Each Unit consisted of 60,000 shares of our Common Stock and
Class C Warrants to purchase 30,000 shares of Common Stock at an offering price
of $105,000 per Unit. We had the right to sell fractional Units, but not
fractional shares or fractional Class C Warrants. The Class C Warrants are
exercisable at $1.75 per share at anytime from the date of issuance through the
earlier of June 30, 2009 or the redemption date of the Class C Warrants,
whichever is earlier.
Each Class C Warrant may be redeemed by us at a redemption price of $.001
per Warrant, on at least 30 days prior written notice (the "Redemption Date'),
at anytime after the average closing sales price of our Common Stock as reported
in the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or if
listed on a national securities exchange, equals or exceeds $3.00 per share for
a period of 20 consecutive trading days ending within 10 days prior to the date
of the notice of redemption is mailed or otherwise delivered by us to each
holder of Class C Warrants.
All investors who purchased Units in our Offering have the following
additional rights:
o LIQUIDATED DAMAGES RELATING TO REGISTRATION STATEMENT - We have agreed
to file a Registration Statement with the Securities and Exchange
Commission within 60 days (automatically extended to 120 days if we
have executed an agreement to acquire the stock or assets of another
promotional product distributor) after the final closing date of the
Offering (i.e. October 30, 2006), to provide for the resale by
purchasers of Units of the shares of Common Stock and the Warrant
Shares issuable upon exercise of the Class C Warrants under the
Securities Act. We have agreed to use our best efforts to have the
Registration Statement declared effective as soon as possible after
26
filing and we have agreed to obtain an effective Registration
Statement within 210 days after the final closing date of the Offering
(i.e. October 30, 2006), subject to a 30-day extension if the
Registration Statement receives a "full review" from the Commission.
These intervals would be extended by 30 days if fiscal year end
audited financial statements would be required, and which were not
issued prior to the closing. If the Registration Statement is not
effective within the aforementioned time parameters, we will pay
liquidated damages in cash or, at our discretion, in Common stock
(based upon the fair market value of our Common Stock) equal to 1% of
the amount invested to each investor for each subsequent 30-day period
that we fail to have an effective Registration Statement, up to a
maximum of 9%. In the event the SEC establishes policy preventing the
use of or prohibiting the effectiveness of a registration statement,
and the Registration Statement is still pending with liquidated
damages accruing, we shall be responsible for said damages up to the
date of the policy change. We have agreed to use our best efforts to
maintain the effectiveness of the registration statement until the
earlier of five years from the final closing date of the Offering or
until the Shares and Warrant Shares may be sold pursuant to provisions
of Rule 144(k) without volume limitations. Any registration costs
(other than costs of counsel to subscribers or commissions related to
the sales of the Shares and Warrant Shares) will be paid by us.
o ANTI-DILUTION PROTECTION - In the event we seek to raise money on a
capital raise transaction during the period commencing on October 30,
2006 and terminating on the earlier of 24 months from that date or 12
months from the initial effective date of the Registration Statement
(the "Covered Period") and we sell shares of our Common Stock or issue
options or warrants at a price below $1.75 per share during the
Covered Period, the investors in the Offering will have the following
anti-dilution protection during the Covered Period:
"Most Favored Nation Provision - Purchasers of Units sold by Ace
Marketing during the Covered Period may elect at the time of each
capital raise transaction by us to exchange their unsold Units
multiplied by $105,000 per Unit in exchange for an equivalent
amount of our securities offered in any new capital raise
transaction based upon the new terms offered by us. A capital
raise transaction shall not include the issuance of securities to
officers, directors, employees, advisors or consultants or
securities issued in connection with acquisitions, consolidations
or mergers."
Pursuant to the Offering, we sold 951,575 shares of our Common Stock and
Class C Warrants to purchase 475,787 shares of our Common Stock. We also issued
to the Placement Agent 139,680 shares of Common Stock and five-year Warrants to
purchase 95,160 shares of Common Stock exercisable at $1.00 per share. Exemption
from registration is claimed under Rule 506 of Regulation d promulgated under
Section 4(2) of the Securities Act.
Recently Issued Accounting Pronouncements
-----------------------------------------
On September 15, 2006 the Financial Accounting Standards Board ("FASB")
issued Statement No. 157, FAIR VALUE MEASUREMENTS. The Statement provides
guidance for using fair value to measure assets and liabilities. This Statement
references fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The
Statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The Statement does not expand the use
of fair value in any new circumstances. It is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The adoption of SFAS No. 157 is not expected to have
a material impact on our financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109," (FIN
48). FIN 48 prescribes a recognition threshold and measurement criterion for the
financial statement recognition and measurement of tax positions taken or
27
expected to be taken in a tax return, among other items. In addition, FIN 48
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition with respect to
uncertainty in income taxes. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We do not anticipate that the adoption of this
Statement will have a material effect on our financial position or results of
operation.
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors which is currently comprised of three members. Each
director holds office until the next annual meeting of shareholders or until a
successor is elected or appointed. The members of our Board of Directors and our
executive officers and their respective age and position are as follows:
The names, ages and principal occupations of our present officers and
directors are listed below.
First Became Director
Name (1) Age and/or Officer Position
-------- --- -------------- --------
Dean Julia 39 1998 Chief Executive Officer/
Secretary/Treasurer/Director/
Co-Founder
Michael Trepeta 35 1998 President/Director/Co-Founder
Scott Novack 39 1998 Director/Co-Founder
Sean McDonnell 46 2005 Chief Financial Officer
---------
(1) Directors are elected at the annual meeting of stockholders and hold office
until the following annual meeting.
The terms of all officers expire at the annual meeting of directors
following the annual stockholders meeting. Officers serve at the pleasure of the
Board and may be removed, either with or without cause, by the Board of
Directors, and a successor elected by a majority vote of the Board of Directors,
at any time.
MANAGEMENT TEAM
Our officers, directors and founders each have experience in the
development of early stage companies including business strategies, products and
services and financing.
DEAN L. JULIA
Mr. Julia holds a Bachelor of Business Administration from Hofstra
University received in 1990. Since that time, Mr. Julia has been associated with
various broker/dealers as a stockbroker where he was involved in the funding of
numerous development stage and growth companies. From 1991 to 1996, Mr. Julia
served as a Vice President for Reich & Co. From 1993 to 1994, he was Vice
President for D. Blech & Co. From 1994 to 1995, he served as a Vice President
for GKN Securities; and from 1995 to 1996 he served as Vice President for Rickel
& Associates. From September 1996 through February 1998, Mr. Julia served as
President and Chief Executive Officer of DLJ Consulting, a financial
intermediary consultant for public and private companies. In 1998, Mr. Julia
co-founded us and became an officer, director and principal stockholder of our
company and a full time employee.
28
MICHAEL D. TREPETA
Mr. Trepeta received a Bachelor of Science Degree in Applied Economics and
Business Management with a minor in Communications from Cornell University in
1993. Since that time, Mr. Trepeta has been associated with various
broker/dealers as a stockbroker where he was involved in the funding of numerous
development stage and growth companies. Mr. Trepeta was a Vice President of
Investments at Joseph Roberts & Co. in 1994 and a Vice President of Investments
at Rickel & Associates from 1995-1996. From September of 1996 through February
1998, he has served as President of MDT Consulting Group, Inc., a corporation
contracted by publicly traded companies to serve as a financial intermediary to
investment bankers and to assist in developing products, services, and business
strategies. In 1998, Mr. Trepeta co-founded us and he became an officer,
director and principal owner of our company and a full time employee.
SCOTT J. NOVACK
Mr. Novack holds a Bachelor of Business Administration from Hofstra
University received in 1990. From 1993-1994, Mr. Novack was a Vice President at
D. Blech & Co., a New York investment bank specializing in raising venture
capital money for early stage companies. From 1994-1995, Mr. Novack was a Vice
President at GKN Securities, a New York based investment bank. From 1995-1996,
Mr. Novack was a Vice President at Rickel Associates, a New York based
investment bank. Mr. Novack was the President of SJN Consulting Group, Inc., a
privately held company, from 1996 to 2003. SJN was a corporation contracted by
publicly traded companies to serve as a financial intermediary to investment
bankers and to assist in developing products, services, and business strategies.
Since 2003, Mr. Novack is a private investor who invests for his own account. In
1998, Mr. Novack co-founded us and became a director of our company.
SEAN MCDONNELL
Sean J. McDonnell, Certified Public Accountant, has been self employed and
in private accounting practice since January 1990 handling many different types
of business entities and associations. Mr. McDonnell has spent much of his time
helping his customers grow their companies and acquire financing for the
purchase of buildings and equipment. Prior to starting his own practice, he was
employed from 1985 - 1990 as a senior staff member in the accounting firm of
Breiner & Bodian CPA's. After graduating from Dowling College in 1984, he was
employed by Kenneth Silver C.P.A. from 1984 - 1985. He is currently serving on
the boards of the Police Athletic League, North East Youth Sports Association
and Sound Beach Soccer Club, Inc. Mr. McDonnell has served as our Chief
Financial Officer since January 3, 2005 and currently as an employee, he devotes
such time to our affairs as is necessary for the performance of his duties.
LACK OF COMMITTEES
------------------
We have no audit, compensation or nominating committees of our board of
directors or committees performing similar functions. We are currently seeking
to nominate and appoint to the board two independent directors and to form an
audit committee consisting of the two independent directors. It is our goal that
at least, one of the two independent directors would be deemed a "Financial
Expert" within the meaning of Sarbanes-Oxley Act of 2002, as amended. An
independent director is defined in Rule 4200(a)(14) of the NASD's Listing
Standards to mean a person other than an officer or employee of our company or
any other individual having a relationship which, in the opinion of our board of
directors, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director. The following persons should not be
considered independent:
o A director who is employed by us or any of its affiliates for the
current year or any of the past three years;
o A director who accepts any compensation from us or any of its
affiliates in excess of $60,000 during the previous fiscal year other
than compensation for Board service, benefits under a tax qualified
retirement plan, or non discretionary compensation;
29
o A director who is a member of the immediate family of an individual
who is, or has been in any of the past three years, employed by us or
any of its affiliates as an executive officer. Immediate family
includes a person's spouse, parents, children, siblings,
mother-in-law, father-in-law, sister-in-law, brother-in-law,
son-in-law, daughter-in-law, and anyone who resides in such person's
home;
o A director who is a partner in, or a controlling shareholder or an
executive officer of, any for-profit business organization to which we
made, or from which we received, payments (other than those arising
solely from investments in our securities) that exceed 5% of our
business organizations consolidated gross revenues for that year, or
$200,000, whichever is more, in any of the past three years;
o A director who is employed as an executive of another entity where any
of our executives serve on that entity's compensation committee.
The term "Financial Expert" is defined as a person who has the following
attributes: an understanding of generally accepted accounting principles and
financial statements; has the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals and
reserves; experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the company's financial statements, or
experience actively supervising one or more persons engaged in such activities;
an understanding of internal controls and procedures for financial reporting;
and an understanding of audit committee functions.
We can provide no assurances that our board's efforts to select two persons
to serve as independent directors on the Board of Directors (at least one of
which is a "Financial Expert") and on the proposed audit committee will be
successful. In the event an audit committee is established, the Board would
adopt a written charter. Such charter would be expected to include, among other
things:
o being directly responsible for the appointment, compensation and
oversight of our independent auditor, which shall report directly to
the audit committee, including resolution of disagreements between
management and the auditors regarding financial reporting for the
purpose of preparing or issuing an audit report or related work;
o annually reviewing and reassessing the adequacy of the committee's
formal charter;
o reviewing the annual audited financial statements with our management
and the independent auditors and the adequacy of our internal
accounting controls;
o reviewing analyses prepared by our management and independent auditors
concerning significant financial reporting issues and judgments made
in connection with the preparation of our financial statements;
o reviewing the independence of the independent auditors;
o reviewing our auditing and accounting principles and practices with
the independent auditors and reviewing major changes to our auditing
and accounting principles and practices as suggested by the
independent auditor or its management;
o reviewing all related party transactions on an ongoing basis for
potential conflict of interest situations; and
o all responsibilities given to the audit committee by virtue of the
Sarbanes-Oxley Act of 2002, which was signed into law by President
George W. Bush on July 30, 2002.
30
OWNERSHIP OF SECURITIES BY BENEFICIAL OWNER AND MANAGEMENT
As of December 19, 2006, we had outstanding 8,028,363 shares of Common
Stock. The only persons of record who presently hold or are known to own (or
believed by us to own) beneficially more than 5% of the outstanding shares of
such class of stock is listed below. The following table also sets forth certain
information as to holdings of our Common Stock of all officers and directors
individually, and all officers and directors as a group.
--------------------------------------------------------------------------------
NAME AND ADDRESS OF NUMBER OF COMMON APPROXIMATE
BENEFICIAL OWNER (1) SHARES PERCENTAGE
--------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
--------------------------------------------------------------------------------
Scott Novack 1,052,402 13.1
457 Rockaway Avenue
Valley Stream, NY 11583
--------------------------------------------------------------------------------
Michael D. Trepeta 1,346,402 16.1
457 Rockaway Avenue
Valley Stream, NY 11583(2)
--------------------------------------------------------------------------------
Dean L. Julia 1,336,901 16.0
457 Rockaway Avenue
Valley Stream, NY 11583 (2)
--------------------------------------------------------------------------------
Sean McDonnell 50,000 .6
457 Rockaway Avenue
Valley Stream, NY 11583 (3)
--------------------------------------------------------------------------------
All Directors and Officers as a 3,785,705 43.1
Group (four persons) (4)
--------------------------------------------------------------------------------
Glenwood Capital Corporation
2070 South Hibiscus Drive
North Miami Beach, FL 33181 (5) 1,245,002 15.3
--------------------------------------------------------------------------------
Domenico Iannucci 789,660 9.7
One Windsor Drive
Muttontown, NY 11753 (6)
--------------------------------------------------------------------------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, and is generally determined by
voting powers and/or investment powers with respect to securities. Unless
otherwise noted, all of such shares of common stock listed above are owned
of record by each individual named as beneficial owner and such individual
has sole voting and dispositive power with respect to the shares of common
stock owned by each of them. Such person or entity's percentage of
ownership is determined by assuming that any options or convertible
securities held by such person or entity, which are exercisable within
sixty (60) days from the date hereof, have been exercised or converted as
the case may be, but not for the purposes of determining the number of
outstanding shares held by any other named beneficial owner.
(2) Includes options to purchase 350,000 shares.
(3) Includes options to purchase 50,000 shares.
(4) Includes options to purchase 750,000 shares.
(5) Includes 1,029,032 shares and 50,000 Warrants owned by Glenwood
Capital, 74,560 shares and 26,000 warrants owned by Peter S. Chung, 57,500
shares of common stock and warrants to purchase 7,910 shares owned by
Brookshire Securities, Inc., a corporation controlled by Mr. Chung.
(6) Includes 339,660 shares of Common Stock, Class A Warrants to purchase
300,000 shares and Class B Warrants to purchase 50,000 shares and includes
options to purchase 100,000 shares.
31
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
-------------------------------------------------------------------
The following summary information is as of September 30, 2006 and relates
to our 2005 Plan described elsewhere herein pursuant to which we have granted
options to purchase our common stock:
-----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of shares of common future issuance under
stock to be issued upon Weighted average equity compensation plans
Plan category exercise of outstanding exercise price of (excluding shares
options outstanding options reflected in column (a)
-----------------------------------------------------------------------------------------------------------------
Equity compensation
Plans 1,921,222 1.17 2,078,778
-----------------------------------------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
The following table provides a summary compensation table with respect to
our four executive officers. During the past three fiscal years, we have not
granted stock appreciation rights to its executive officers. In addition, we do
not have a defined benefit or actuarial plan other than a 401(k) plan.
SUMMARY COMPENSATION TABLE
--------------------------
-------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) Other Annual Restricted Number of LTIP All Other
Compensation Stock Options Payout Compensation
($)(1) Award(s) ($) ($)
PRINCIPAL POSITION ($)
-------------------------------------------------------------------------------------------------------------------------------
Dean L. Julia, Chief 2005 $ 141,000 $2,500 -0- -0- 450,000 0 0
Executive Officer 2004 121,500 -0- -0- -0- -0- 0 0
2003 108,000 -0- -0- -0- -0- 0 0
-------------------------------------------------------------------------------------------------------------------------------
Michael D. Trepeta 2005 141,000 2,500 -0- -0- 450,000 0 0
President and Chief 2004 121,500 -0- -0- -0- -0- 0 0
Operating Officer 2003 108,000 -0- -0- -0- -0- 0 0
-------------------------------------------------------------------------------------------------------------------------------
-----------
(1) Does not include the value of a leased automobile provided to the executive
officers for business purposes as each officer has his own separate
automobile that he uses for personal reasons.
EMPLOYMENT AGREEMENTS
Michael Trepeta, our president and Dean Julia, our chief executive officer,
received salaries at the rate of $9,000 per month between 2002 through March
2004, which was raised to $10,500 per month in April, 2004, $12,000 per month in
March 2005 and $14,000 per month in March 2006. Historically, all compensation
of our executive officers and directors including, without limitation, the
payment of salaries, bonuses and the grant of options and employment contracts
have been determined solely by our Board of Directors, which is controlled by
our founders. Effective March 1, 2005, we entered into employment contracts with
each of Messrs. Julia and Trepeta. These contracts contain the following
material provisions:
o A term of three years, with the Executive having the option to renew
the agreement for a period of an additional two years.
32
o A current monthly base salary of $14,000, which salary will increase
each subsequent March 1 by at least $2,000 per month during the term
of the agreements and any extension thereof.
o The annual grant on March 1 of each year of ten-year stock options to
purchase 50,000 shares at an exercise price equal to the then fair
market value of our common stock as determined by the Board. On
December28, 2005, Messrs. Trepeta and Julia each agreed to amend their
employment contracts to eliminate the automatic annual grant of
options in consideration of the grant of ten year options to purchase
200,000 shares exercisable at $1.20 per share, with one-half
immediately vested and the other half to vest on December 28, 2008.
o Annual bonuses of at least 5% of pre-tax earnings.
o Use of company automobile with all related costs paid for by us.
o Health insurance.
o Indemnification to the extent permitted by New York law.
o Right to participate in any pensions of our company.
Directors' Compensation
-----------------------
Our directors are not expected to receive cash compensation for their
services as such. However, our non-employee directors will receive a fee of $500
to be paid to them for attending each meeting of the Board of Directors. All
directors will also be reimbursed for actual travel expenses incurred in
attending board meetings. Members of the board of directors are eligible to
participate under our company's stock incentive plan. Messrs. Julia and Trepeta
will receive compensation and options as executive officers pursuant to their
employment contracts and not in their capacity as directors of our company.
Equity incentive awards issued to other board members will not be a fixed amount
or granted on a pre-determined timetable. Equity incentive awards will be
determined and granted in the sole discretion of the board and/or a compensation
committee of the board at such times and in such amounts as the board or a
committee thereof determines to make such awards.
2005 Employee Benefit and Consulting Services Compensation Plan
---------------------------------------------------------------
On January 3, 2005, our company established an Employee Benefit and
Consulting Services Compensation Plan covering 2,000,000 shares, which 2005 Plan
was ratified by our stockholders on February 9, 2005. On August 12, 2005, the
company's stockholders approved a 2,000,000 share increase in the 2005 Plan to
4,000,000 shares.
ADMINISTRATION
--------------
Our board of directors administers the 2005 Plan, has the authority to
determine and designate officers, employees, directors and consultants to whom
awards shall be made and the terms, conditions and restrictions applicable to
each award (including, but not limited to, the option price, any restriction or
limitation, any vesting schedule or acceleration thereof, and any forfeiture
restrictions). The board may, in its sole discretion, accelerate the vesting of
awards.
TYPES OF AWARDS
---------------
The 2005 Plan is designed to enable us to offer certain officers,
employees, directors and consultants of us and our subsidiaries equity interests
in us and other incentive awards in order to attract, retain and reward such
individuals and to strengthen the mutuality of interests between such
individuals and our stockholders. In furtherance of this purpose, the 2005 Plan
contains provisions for granting non-statutory stock options and incentive stock
options and common stock awards.
STOCK OPTIONS. A "stock option" is a contractual right to purchase a number
of shares of common stock at a price determined on the date the option is
granted. An incentive stock option is an option granted under the Internal
33
Revenue Code of 1986 to our employees with certain tax advantages to the grantee
over non-statutory stock options. The option price per share of common stock
purchasable upon exercise of a stock option and the time or times at which such
options shall be exercisable shall be determined by the Board at the time of
grant. Such option price in the case of incentive stock options shall not be
less than 100% of the fair market value of the common stock on the date of grant
and may be granted below fair market value in the case of non-statutory stock
options. Incentive stock options granted to owners of 10% or more of our common
stock must be granted at an exercise price of at least 110% of the fair market
value of our common stock and may not have a term greater than five years. Also,
the value of incentive options vesting to any employee cannot exceed $100,000 in
any calendar year. The option price of our options must be paid in cash, money
order, check or common stock of the company. The non-statutory stock options may
also contain at the time of grant, at the discretion of the board, certain other
cashless exercise provisions. These cashless exercise provisions are included in
the currently outstanding non-statutory stock options granted by the board.
Options shall be exercisable at the times and subject to the conditions
determined by the Board at the date of grant, but no option may be exercisable
more than ten years after the date it is granted. If the optionee ceases to be
an employee of our company for any reason other than death, any incentive stock
option exercisable on the date of the termination of employment may be exercised
for a period of thirty days or until the expiration of the stated term of the
option, whichever period is shorter. In the event of the optionee's death, any
incentive stock option exercisable at the date of death may be exercised by the
legal heirs of the optionee from the date of death until the expiration of the
stated term of the option or six months from the date of death, whichever event
first occurs. In the event of disability of the optionee, any incentive stock
options shall expire on the stated date that the Option would otherwise have
expired or 12 months from the date of disability, whichever event first occurs.
The termination and other provisions of a non-statutory stock option shall be
fixed by the board of directors at the date of grant of each respective option.
COMMON STOCK AWARD. Common stock awards are shares of common stock that
will be issued to a recipient at the end of a restriction period, if any,
specified by the board if he or she continues to be an employee, director or
consultant of us. If the recipient remains an employee, director or consultant
at the end of the restriction period, the applicable restrictions will lapse and
we will issue a stock certificate representing such shares of common stock to
the participant. If the recipient ceases to be an employee, director or
consultant of us for any reason (including death, disability or retirement)
before the end of the restriction period unless otherwise determined by the
board, the restricted stock award will be terminated.
AWARDS
------
As of September 30, 2006, we granted under our 2005 Plan non-statutory
stock options to purchase 1,921,222 shares of our common stock with a weighted
average exercise price of $1.17 per share, exclusive of options which have been
cancelled since the date of grant. The board has granted options with varying
terms. Dean L. Julia, Michael D. Trepeta and Sean McDonnell have been granted
options to purchase 450,000 shares, 450,000 shares and 50,000 shares,
respectively, at exercise prices ranging from $1.00 to $1.20 per share. Options
to purchase an additional 971,222 shares are held by other employees and
consultants. All 1,921,222 outstanding options have an intrinsic value of
$2,077,000 at September 30, 2006.
It is not possible to predict the individuals who will receive future
awards under the 2005 Plan or the number of shares of Common Stock covered by
any future award because such awards are wholly within the discretion of the
Board.
34
ELIGIBILITY
-----------
Our officers, employees, directors and consultants of Ace and our
subsidiaries are eligible to be granted stock options, and common stock awards
under our 2005 Plan.
TERMINATION OR AMENDMENT OF THE 2005 PLAN
-----------------------------------------
The board may at any time amend, discontinue, or terminate all or any part
of the 2005 Plan, provided, however, that unless otherwise required by law, the
rights of a participant may not be impaired without his or her consent, and
provided that we will seek the approval of our stockholders for any amendment if
such approval is necessary to comply with any applicable federal or state
securities laws or rules or regulations.
OPTION GRANTS TABLE
-------------------
The information provided in the table below provides information with
respect to individual grants of stock options during 2005 of each of the
executive officers named in the summary compensation table above. We did not
grant any stock appreciation rights during 2005.
Option Grants in Last Fiscal Year
---------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Individual Grants Appreciation
----------------- for Option Term (2)
-------------------
(c)% of Total
Options/Granted
to Employees
Options (Consultants) in Exercise Price Expiration 5% ($) 10% ($)
Name Granted (#) Fiscal Year (1) ($/Sh) Date ------ -------
---- ----------- --------------- ------ ----
Dean L. Julia 250,000 14.0% 1.00 01/03/15 157,500 397,500
Michael D. Trepeta 250,000 14.0% 1.00 01/03/15 157,500 397,500
Dean L. Julia 200,000 11.2% 1.20 12/28/15 150,000 382,000
Michael D. Trepeta 200,000 11.2% 1.20 12/28/15 150.000 382,000
-----------
N/A - Not Applicable.
(1) The percentage of total options granted to employees in the fiscal year is
based upon options granted to officers, directors, employees and
consultants, exclusive of options cancelled before the filing date of this
prospectus.
(2) The potential realizable value of each grant of options assumes that the
market price of our Common Stock appreciates in value from the date of
grant to the end of the option term at annualized rates of 5% and 10%,
respectively, and after subtracting the exercise price from the potential
realizable value.
EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The information provided in the table below provides information with
respect to each exercise of stock option during 2005 by each of the executive
officers named in the summary compensation table and the fiscal year end value
of unexercised options.
35
(a) (b) (c) (d) (e)
Value
of
Number of Unexercised
Unexercised In-the-Money
Shares Options at Options
Acquired on Value FY-End (#) at Fy-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable(1)
---- ----------- -------- ------------- ----------------
Dean L. Julia 0 0 350,000 / 100,000 37,500/ -0-
Michael D. Trepeta 0 0 350,000 / 100,000 37,500/ -0-
-----------
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock (based upon a last sale of $1.15 on December 23, 2005, which was the
last date of sale in December 2005), underlying the options and the
exercise price of the options at exercise or fiscal year end, respectively.
In calculating the dollar value realized upon exercise, the value of any
payment of the exercise price is not included.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The transaction described in paragraph (i) below was approved by the Board
of directors and was an arms-length transaction which did not involve a director
or executive officer of our company. The transactions described in paragraph
(ii) below were approved by the Board of Directors based upon obtaining at least
three competitive quotes and Mr. Trepeta's wife being the best price. The
transactions described in paragraphs (i) and (ii) were on terms to us that are
at least as favorable as the terms we could have obtained from an unaffiliated
party.
Related Party Transactions
--------------------------
(i) On August 5, 2002, we issued to David McCooey, who is currently the
beneficial owner of 5.0% of our outstanding shares of common stock, a debenture
in the principal amount of $25,000 originally convertible at $1.50 per share.
The debenture bore interest at the rate of 10% per annum. On January 13, 2005,
we agreed with Mr. McCooey to convert his $25,000 of principal and accrued
interest thereon of $6,076, which payments were in arrears, into 31,076 shares
of our common stock at a conversion price of $1.00 per share.
(ii) Mr. Trepeta's wife has a company which is a candle supplier. From
time-to-time, we have in the past and may in the future purchase candle supplies
from her company. During 2004 and 2005, we purchased a total of $20,471 and
$10,313, respectively, from her company.
In the future, we expect to have one or more members of our Board be
independent directors of our company. It is anticipated that future transactions
between us and our executive officers and directors and other affiliated parties
will be approved by the then disinterested members of the Board and, if not a
majority of the Board, then by our independent director(s) through a committee
appointed by the Board.
Other Transactions
------------------
We recently engaged Brookshire Securities Corporation, a licensed
broker-dealer and member of the NASD, to act as Placement Agent to raise
financing for our company through the sale of our unregistered securities solely
36
to "accredited investors" as defined in Rule 501 of Regulation D of the
Securities Act of 1933, as amended. Pursuant to the offering, we raised gross
proceeds of $1,665,250 from the sale of Units. Each Unit consisted of 60,000
shares of our Common Stock and Class C Warrants to purchase 30,000 shares of
Common Stock at an offering price of $105,000 per Unit.
Pursuant to the Offering, we sold 951,575 shares of our Common Stock and
Class C Warrants to purchase 475,788 shares of our Common Stock. We also issued
to the Placement Agent 139,680 shares of Common Stock and five-year Warrants to
purchase 95,160 shares of Common Stock exercisable at $1.00 per share. We have
agreed to file a Registration Statement with the Securities and Exchange
Commission within 60 days of October 30,2006 (automatically extended to 120 days
if we have executed an agreement to acquire the stock or assets of another
promotional product distributor), to provide for the resale by purchasers of
Units of the shares of Common Stock and the Warrant Shares issuable upon
exercise of the Class C Warrants under the Securities Act. We have agreed to use
our best efforts to have the Registration Statement declared effective as soon
as possible after filing and we have agreed to obtain an effective Registration
Statement within 210 days of October 30, 2006, subject to a 30-day extension if
the Registration Statement receives a "full review" from the Commission. These
intervals would be extended by 30 days if fiscal year end audited financial
statements would be required, and which were not issued prior to the closing. If
the Registration Statement is not effective within the aforementioned time
parameters, we will pay liquidated damages in cash or, at our discretion, in
Common stock (based upon the fair market value of our Common Stock) equal to 1%
of the amount invested to each investor for each subsequent 30-day period that
we fail to have an effective Registration Statement, up to a maximum of 9%. In
the event the SEC establishes policy preventing the use of or prohibiting the
effectiveness of a registration statement, and the Registration Statement is
still pending with liquidated damages accruing, we shall be responsible for said
damages up to the date of the policy change. We have agreed to use our best
efforts to maintain the effectiveness of the registration statement until the
earlier of five years from October 30, 2006, the final closing date of the
Offering or until the Shares and Warrant Shares may be sold pursuant to
provisions of Rule 144(k) without volume limitations. Any registration costs
(other than costs of counsel to subscribers or commissions related to the sales
of the Shares and Warrant Shares) will be paid by us.
In the event we seek to raise money on a capital raise transaction during
the period commencing on October 30, 2006 and terminating on the earlier of 24
months from that date or 12 months from the initial effective date of the
Registration Statement (the "Covered Period") and we sell shares of our Common
Stock or issue options or warrants at a price below $1.75 per share during the
Covered Period, the investors in the Offering will have the following
anti-dilution protection during the Covered Period:
"Most Favored Nation Provision - Purchasers of Units sold by Ace
Marketing during the Covered Period may elect at the time of each
capital raise transaction by us to exchange their unsold Units
multiplied by $105,000 per Unit in exchange for an equivalent amount
of our securities offered in any new capital raise transaction based
upon the new terms offered by us. A capital raise transaction shall
not include the issuance of securities to officers, directors,
employees, advisors or consultants or securities issued in connection
with acquisitions, consolidations or mergers."
SELLING SECURITY HOLDERS
The following table provides certain information with respect to the
selling security holders' beneficial ownership of our common stock as of October
31, 2006, and as adjusted to give effect to the sale of all of the shares
offered hereby. None of the selling security holders is an affiliate of Ace
Marketing, and none of them has had a material relationship with us during the
past three years. See "Plan of Distribution." The selling security holders
possess sole voting and investment power with respect to the securities shown.
Robert H. Marshall, a selling security holder, is affiliated with a
broker/dealer and is an underwriter. Mr. Marshall purchased his shares as an
investor and at the time of his purchase, he had no agreements or
understandings, directly or indirectly, with any person to distribute his
shares. Whether a shareholder beneficially owns a security is determined by Rule
37
13d-3(a) of the Exchange Act. Rule 13d-3(a) provides that a beneficial owner
includes: "any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or shares: (i).Voting
power which includes the power to vote, or to direct the voting of, such
security; and/or, (ii) Investment power which includes the power to dispose, or
to direct the disposition of, such security." Lastly, Rule 13d-3(a) provides
that a "person shall be deemed to be the beneficial owner of a security... if
that person has the right to acquire beneficial ownership of such security, as
defined in Rule 13d-3(a)...within sixty days, including but not limited to any
right to acquire...through the conversion of a security ...."
---------------------------------------------------------------------------------------------------
SHARES MAXIMUM SHARES % SHARES
BENEFICIALLY SHARES OWNED BENEFICIALLY
NAME OF EACH OWNED PRIOR OFFERED IN AFTER OWNED
SELLING STOCKHOLDER TO OFFERING OFFERING OFFERING BEFORE /AFTER
---------------------------------------------------------------------------------------------------
ROBERT H. MARSHALL 90,000 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
KENNETH A. SEBREE 45,000 45,000 -0- * / 0
---------------------------------------------------------------------------------------------------
STERNE AGEE & LEACH INC. C/F 22,500 22,500 -0- * / 0
FLORENCE NELSON ROTH IRA
---------------------------------------------------------------------------------------------------
STERNE AGEE & LEACH INC. C/F 45,000 45,000 -0- * / 0
WENDELL FAIRBANKS IRA
---------------------------------------------------------------------------------------------------
WILLIAM KEY 90,000 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
WILLIAM F. LOFTUS 45,000 45,000 -0- * / 0
---------------------------------------------------------------------------------------------------
LEON F. SOOTIN 90,000 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
EUGENE GRENIER 22,500 22,500 -0- * / 0
---------------------------------------------------------------------------------------------------
FRANK AND LAURIE GRENIER JTWROS 22,500 22,500 -0- * / 0
---------------------------------------------------------------------------------------------------
JEFFREY D. BARSKY 45,000 45,000 -0- * / 0
---------------------------------------------------------------------------------------------------
KURT & LAURA BOTHNER JTWROS 22,500 22,500 -0- * / 0
---------------------------------------------------------------------------------------------------
MELVIN C. SANDERS 90,000 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
KEVIN AND BRENDA NARCOMEY JTWROS 85,714 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
WILLIAM R. MARSH 85,716 85,716 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
RICHARD J. AND JOAN M. BROWN JTWROS 45,000 45,000 -0- * / 0
---------------------------------------------------------------------------------------------------
HAROLD E. AND CONNIE L. CROWLEY 45,000 45,000 -0- * / 0
JTWROS
---------------------------------------------------------------------------------------------------
LOUISE E. REHLING TRUST 21,429 21,429 -0- * / 0
---------------------------------------------------------------------------------------------------
EDWARD FEIGHAN 21,429 21,429 -0- * / 0
---------------------------------------------------------------------------------------------------
DR. STANLEY RUBENSTEIN 21,429 21,429 -0- * / 0
---------------------------------------------------------------------------------------------------
PHD INVESTMENTS I LP 21,429 21,429 -0- * / 0
---------------------------------------------------------------------------------------------------
MICHAEL & DONNA SPLAIN JTWROS 22,715 22,715 -0- * / 0
---------------------------------------------------------------------------------------------------
ALAN D. REIN 22,500 22,500 -0- * / 0
---------------------------------------------------------------------------------------------------
HANS-GUENTHER KLENK 42,858 42,858 -0- * / 0
---------------------------------------------------------------------------------------------------
38
---------------------------------------------------------------------------------------------------
RAJESH / MANJUSHA RAMCHANDANI JTWROS 21,429 21,429 -0- * / 0
---------------------------------------------------------------------------------------------------
JOHN & GEORGIA RENTOULIS JTWROS 22,500 22,500 -0- * / 0
---------------------------------------------------------------------------------------------------
ERNO BODEK 67,500 67,500 -0- * / 0
---------------------------------------------------------------------------------------------------
GERALD HEUPEL 21,429 21,429 -0- * / 0
---------------------------------------------------------------------------------------------------
DAVID J. MCCOOEY 90,000 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
ANDREAS TYPALDOS FAMILY LTD. 45,000 45,000 -0- * / 0
PARTNERSHIP
---------------------------------------------------------------------------------------------------
ELAINE FIELDS 90,000 90,000 -0- 1.1 / 0
---------------------------------------------------------------------------------------------------
------------
* Represents less than one percent of the total number of shares outstanding.
The percentage beneficially owned is based upon the number of share
outstanding before the offering, plus the number of shares issuable upon
exercise of any warrants by the named selling security holder.
We are registering shares for resale by the selling security holders in
accordance with the registration rights granted to the selling security holders.
We will pay the registration and filing fees, printing expenses, listing fees,
blue sky fees, if any, and fees and disbursements of our counsel in connection
with this offering, but the selling security holders will pay any underwriting
discounts, selling commissions and similar expenses relating to the sale of the
shares, as well as the fees and expenses of their counsel. In addition, we have
agreed to indemnify the selling security holders and certain affiliated parties,
against certain liabilities, including liabilities under the Securities Act, in
connection with the offering. Certain selling security holders have agreed to
indemnify us against certain losses. Insofar as indemnification for liabilities
under the Securities Act may be permitted to our directors or officers, or
persons controlling our company, we have been informed 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.
We will file a prospectus supplement to name any successors to any named
selling security holder who are able to use the prospectus to resell the
securities. All of the shares being registered for resale by the selling
security holders were acquired from us in a private placement transaction, which
is summarized under "Certain Transaction."
PLAN OF DISTRIBUTION
Each Selling Security Holder of the common stock and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of common stock on the OTC Bulletin Board or any other stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. A
Selling Security Holder may use any one or more of the following methods when
selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;
o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
39
o through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers engaged by the selling security holders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, but, except as set forth in a supplement to this
Prospectus, in the case of an agency transaction not in excess of a customary
brokerage commission in compliance with NASDR Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the common stock or interests therein, the
selling security holders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
security holders may also sell shares of the common stock short and deliver
these securities to close out their short positions, or loan or pledge the
common stock to broker-dealers that in turn may sell these securities. The
selling security holders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
Robert Marshall is affiliated with a broker/dealer and is an underwriter.
Mr. Marshall purchased his shares and at the time of his purchase, he had no
agreements or understandings, directly or indirectly, with any person to
distribute his shares.
All other selling security holders not named in the preceding paragraph and
any broker-dealers or agents that are involved in selling the shares on behalf
of all selling security holders may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Security Holder
has informed us that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the Common
Stock. In no event shall any broker-dealer receive fees, commissions and markups
which, in the aggregate, would exceed eight percent (8%).
We are required to pay certain fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Because the selling security holder identified above is an underwriter and
other selling security holders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act including Rule 172 thereunder. In addition,
any securities covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under Rule 144 rather than under
this prospectus. There is no firm or coordinating broker acting in connection
with the proposed sale of the resale shares by the selling security holders.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the selling security holders without
registration and without regard to any volume limitations by reason of Rule
144(k) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to this prospectus or Rule 144 under the
40
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the common stock for the applicable
restricted period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling security holders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the selling security holders or any other
person. We will make copies of this prospectus available to the selling security
holders and have informed them of the need to deliver a copy of this prospectus
to each purchaser at or prior to the time of the sale (including by compliance
with Rule 172 under the Securities Act).
41
DESCRIPTION OF SECURITIES
GENERAL
Pursuant to our certificate of incorporation, we are authorized to issue up
to 25,000,000 shares of Common Stock, par value $.0001 per share and 5,000,000
shares of Preferred Stock, $.0001 par value. As of the date hereof, there were
8,028,363 shares of Common Stock issued and outstanding. There is currently no
Preferred Stock issued and outstanding.
There are issued and outstanding Class A Warrants to purchase 737,000
shares of Common Stock, exercisable through January 3, 2007 at $2.00 per share,
Class B Warrants to purchase 100,000 shares, exercisable at $2.00 per share
through January 2, 2008 and Class C Warrants to purchase 475,788 shares,
exercisable at $1.75 per share through June 30, 2009. There are also outstanding
other unclassified warrants to purchase 100,000 shares, exercisable at $2.50 per
share through August 14, 2010 and unclassified warrants to purchase 95,160
shares, exercisable at $1.00 per share through June 30, 2011, which warrants
contain certain cashless exercise provisions. See "Outstanding Warrants."
Holders of our Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and are not entitled to cumulative
voting for the election of directors. As a result, management of our company
who, in the aggregate hold a majority of shares, are able to elect all of the
directors standing for election and to control our company. Holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
therefore subject to the rights of preferred stockholders, if any. We do not
intend to pay any cash dividends on our Common Stock and anticipate reinvesting
our earnings, if any. In the event of liquidation, dissolution or winding up of
our company, the holders of our Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities and the preferences of
Preferred Stockholders, if any. Shares of Common Stock have no preemptive,
conversion or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Common Stock.
CLASS C WARRANTS
Class C Warrants have the following terms and provisions:
EXERCISE PRICE. Each Class C Warrant entitles the holder to a purchase
share of Common Stock at an exercise price of $1.75 per share, subject to
certain adjustments. The Class C Warrants may be exercised in whole or in part.
EXERCISE PERIOD. The Class C Warrants are exercisable from the date of
issuance until the close of business on June 30, 2009 or the redemption date of
the Class C Warrants, whichever is earlier.
REDEMPTION RIGHTS. Each Class C Warrant may be redeemed by us at a
redemption price of $.001 per Warrant, on at least 30 days prior written notice,
at anytime after the average closing sales price of our Common Stock as reported
in the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or if
listed on a national securities exchange, equals or exceeds $3.00 per share for
a period of 20 consecutive trading days ending within 10 days prior to the date
of the notice of redemption is mailed or otherwise delivered by the Company to
each holder of Class C Warrants.
OTHER OUTSTANDING WARRANTS
Between March and October 2004, we issued Class A Warrants to purchase an
aggregate of 737,000 shares of our common stock at an exercise price of $2.00
per share. Each Class A Warrant is exercisable in whole or in part until the
close of business on January 3, 2007.
42
Between January and February 2005, we issued Class B Warrants to purchase
an aggregate of 100,000 shares of our common stock at an exercise price of $2.00
per share. Each Class B Warrant is exercisable in whole or in part until the
close of business on January 2, 2008.
The Class A Warrants and Class B Warrants are not redeemable. The Class A
Warrants and Class B Warrants are subject to anti-dilution protection in the
event of stock dividends, stock splits, combinations and reclassifications.
In August 2005, we granted a financial advisor unclassified warrants to
purchase 100,000 shares of our Common Stock exercisable through August 14, 2010
at $2.50 per share. These Warrants contain cashless exercise provisions and
subject to anti-dilution protection in the event of stock dividends, stock
splits, combinations, reclassifications and the like.
In October 2006, we issued to Brookshire Securities Corporation warrants to
purchase 95,160 shares of Common Stock exercisable at $1.00 per share through
June 30, 2011. These warrants are subject to adjustment for stock splits, stock
dividends, combinations, reclassifications and the like and contain cashless
exercise provisions.
PREFERRED STOCK
Our certificate of incorporation, as amended, authorizes us to issue
5,000,000 shares of preferred stock, $.0001 par value per share and to create
one or more series of preferred stock, and to designate the rights, privileges,
restrictions, preferences and limitations of any given series of preferred
stock. Accordingly, the board of directors may, without stockholder approval
issue shares of preferred stock with dividend, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
the holders of our common stock. The preferred stock could also be issued to
discourage, control, although we have no present intent to issue any additional
series of our preferred stock. The board of directors' ability to issue
preferred stock serves as a traditional anti-takeover measure installed to
prevent obstacles to takeovers. This provision of our certificate of
incorporation makes it difficult for a majority shareholder to gain control of
us and, therefore, may be beneficial to our company's management and our board
in a hostile tender offer and may have an adverse impact on shareholders who may
want to participate in such a tender offer. Also, the issuance of preferred
stock with voting and conversion rights could materially and adversely affect
the voting power of the holders of the Common Stock and may have the effect of
delaying, deferring or preventing a change in control of our Company.
INDEMNIFICATION DISCLOSURE FOR SECURITIES ACT LIABILITIES
The New York Business Corporation Law contains provisions permitting and,
in some situations, requiring New York corporations to provide indemnification
to their officers and directors for losses and litigation expense incurred in
connection with their service to the corporation. Our articles and bylaws
contain provisions requiring our indemnification of our directors and officers
and other persons acting in their corporate capacities.
We have entered into employment agreements with Dean L. Julia and Michael
D. Trepeta providing contractually for indemnification consistent with the
articles and bylaws. The New York Business Corporation Law also authorizes us to
purchase insurance for our directors and officers insuring them against risks as
to which we may be unable lawfully to indemnify them. We have obtained limited
insurance coverage for our officers and directors as well as insurance coverage
to reimburse us for potential costs of our corporate indemnification of officers
and directors.
As far as exculpation or indemnification for liabilities arising under the
Securities Act of 1933 may be permitted for directors and officers and
controlling persons, we have been advised that in the opinion of the Securities
and Exchange Commission such exculpation or indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
43
EXPERTS
The audited financial statements of Ace Marketing & Promotions, Inc. as of
December 31, 2005 and 2004 and for the years then ended were audited by Holtz
Rubenstein Reminick LLP, and are included herein in reliance upon the authority
of this firm as expert in accounting and auditing.
LEGAL MATTERS
The validity of the securities offered by this prospectus is being passed
upon for us by the law firm of Morse & Morse, PLLC, 1400 Old Country Road, Suite
302, Westbury, NY 11590. The law firm and its members own less than 1% of our
outstanding common stock.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to its registration statement. If you want more information, write or
call us at:
Ace Marketing & Promotions, Inc.
457 Rockaway Avenue
Valley Stream, NY 11581
Attn: Investor Relations
Telephone: (516) 256-7766
Our fiscal year ends on December 31. We are a reporting company and file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any reports,
statements or other information we file at the SEC's public reference room in
Washington, D.C. You can receive copies of these documents, upon payment of a
duplicating fee, by writing to the SEC. Our SEC filings are also available to
the public on the SEC Internet site at http://www.sec.gov.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that,
which is contained in this prospectus. Each selling stockholder named herein
will be offering to sell shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
44
ACE MARKETING &
PROMOTIONS, INC.
CONTENTS
================================================================================
--------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of December 31, 2005 and 2004 F-2
Statements of Operations for the years ended December 31, 2005
and 2004 F-3
Statement of Stockholders' Equity for the two years ended
December 31, 2005 F-4
Statements of Cash Flows for the years ended December 31, 2005
and 2004 F-5
Notes to Financial Statements F-6 - F-13
Condensed Balance Sheet as of September 30, 2006 (unaudited) F-14
Condensed Statements of Operations for the three and nine months
ended September 30, 2006 and 2005 (unaudited) F-15
Condensed Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 (unaudited) F-16
Notes to Unaudited Condensed Financial Statements for the
Nine months ended September 30, 2006 and 2005 F-17 - F-20
ii
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Ace Marketing & Promotions, Inc.
We have audited the accompanying balance sheets of Ace Marketing & Promotions,
Inc. for the years ended December 31, 2005 and 2004, and the related statements
of operations, stockholders' equity 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ace Marketing & Promotions,
Inc. as of December 31, 2005 and 2004 and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ HOLTZ RUBENSTEIN REMINICK LLP
Melville, New York
March 1, 2006
F-1
ACE MARKETING &
PROMOTIONS, INC.
BALANCE SHEETS
=======================================================================================================
DECEMBER 31, 2005 2004
-------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 398,235 $ 566,285
Accounts receivable, net of allowance for doubtful accounts of
$10,000 and $0 at December 31, 2005 and 2004, respectively 711,056 312,604
Prepaid expenses and other current assets 41,282 68,407
------------------------------
Total Current Assets 1,150,573 947,296
Property and Equipment, net 21,100 15,680
Other Assets 5,492 3,135
------------------------------
Total Assets $ 1,177,165 $ 966,111
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable $ -- $ 25,000
Accounts payable 355,475 183,653
Accrued expenses 125,485 92,212
Customer deposits 98,000 --
------------------------------
Total Current Liabilities 578,960 300,865
------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued -- --
Common stock, $.0001 par value; 25,000,000 shares authorized;
5,888,076 and 5,757,000 shares issued and outstanding
at December 31, 2005 and 2004, respectively 589 576
Additional paid-in capital 1,646,109 1,030,625
Accumulated deficit (1,048,493) (365,955)
------------------------------
Total Stockholders' Equity 598,205 665,246
------------------------------
Total Liabilities and Stockholders' Equity $ 1,177,165 $ 966,111
==============================
-----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-2
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF OPERATIONS
================================================================================================================
YEARS ENDED DECEMBER 31, 2005 2004
----------------------------------------------------------------------------------------------------------------
Revenue, net $ 3,422,665 $ 2,379,186
Cost of Revenue 2,324,185 1,688,248
------------------------------
Gross Profit 1,098,480 690,938
------------------------------
Operating Expenses:
Selling (including stock based compensation of $17,533 and $0 for
the years ended December 31, 2005 and 2004, respectively) 461,233 292,034
General and administrative (including stock based compensation of $471,888
and $0 for the years ended December 31, 2005 and 2004, respectively) 1,315,477 552,540
------------------------------
Total Operating Expenses 1,776,710 844,574
------------------------------
Loss from Operations (678,230) (153,636)
------------------------------
Other Income (Expense):
Interest expense (4,532) (3,609)
Interest income 224 95
------------------------------
Total Other Expenses (4,308) (3,514)
------------------------------
Net Loss $ (682,538) $ (157,150)
==============================
Net Loss Per Common Share:
Basic $ (0.12) $ (0.03)
==============================
Diluted $ (0.12) $ (0.03)
==============================
Weighted Average Common Shares Outstanding:
Basic 5,880,531 5,426,389
==============================
Diluted 5,880,531 5,426,389
==============================
----------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-3
ACE MARKETING &
PROMOTIONS, INC.
Statement of Stockholders' Equity
============================================================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
----------------------------------------------------------------------------------------------------------------------------
Total Common Stock Additional
Stockholders' --------------------------- Paid-in
Equity Shares Amount Capital (Deficit)
----------------------------------------------------------------------------------
Balance, January 1, 2004 $ 109,195 5,020,000 $ 502 $ 317,498 $ (208,805)
Securities Issued to Private
Placement Investors, net 713,201 737,000 74 713,127 --
Net Loss (157,150) -- -- -- (157,150)
---------------------------------------------------------------------------------
Balance at, December 31, 2004 665,246 5,757,000 576 1,030,625 (365,955)
Conversion of Note Payable 31,076 31,076 3 31,073 --
Securities Issued to Private
Placement Investors, net 95,000 100,000 10 94,990 --
Issuance of Stock Purchase Warrants
for Services 455,000 -- -- 455,000 --
Issuance of Stock Options for Services 34,421 -- -- 34,421 --
Net Loss (682,538) -- -- -- (682,538)
---------------------------------------------------------------------------------
Balance at, December 31, 2005 $ 598,205 5,888,076 $ 589 $ 1,646,109 $(1,048,493)
=================================================================================
-----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-4
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF CASH FLOWS
=====================================================================================
YEARS ENDED DECEMBER 31, 2005 2004
-------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Loss $(682,538) $(157,150)
--------------------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 5,590 6,019
Allowance for doubtful accounts 10,000 --
Stock-based compensation 489,421 --
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (408,452) (5,901)
Prepaid expenses and other assets 24,768 (4,286)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses 211,171 (9,750)
Customer deposits 98,000 --
--------------------------
Total adjustments 430,498 (13,918)
--------------------------
Net Cash Used in Operating Activities (252,040) (171,068)
--------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (11,010) (14,273)
--------------------------
Net Cash Used in Investing Activities (11,010) (14,273)
--------------------------
Cash Flows from Financing Activities:
Proceeds from private placement 95,000 713,201
Payments on note payable -- (16,300)
--------------------------
Net Cash Provided by Financing Activities 95,000 696,901
--------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (168,050) 511,560
Cash and Cash Equivalents, beginning of year 566,285 54,725
--------------------------
Cash and Cash Equivalents, end of year $ 398,235 $ 566,285
==========================
-------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-5
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Ace Marketing & Promotions, Inc. (the "Company")
is a full service advertising specialties and promotional products
company that distributes items typically with logos to large
corporations, schools and universities, financial institutions and
not-for-profit organizations. Specific categories of promotional
products include advertising specialties, business gifts, incentives
and awards, and premiums.
REVENUE RECOGNITION - Revenue is recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In
general, title passes to our customers upon the customer's receipt of
the merchandise. Revenue is accounted for in accordance with Emerging
Issue Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent". Revenue is recognized on a gross
basis since the Company has the risks and rewards of ownership,
latitude in selection of vendors and pricing, and bears all credit
risk. Advance payments made by customers are included in customer
deposits.
The Company records all shipping and handling fees billed to customers
as revenues, and related costs as cost of goods sold, when incurred, in
accordance with EITF 00-10, "Accounting for Shipping and Handling Fees
and Costs".
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Management must make estimates of the
uncollectability of accounts receivable. Management specifically
analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic
trends and changes in customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements
are being amortized using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease.
The costs of additions and improvements, which substantially extend the
useful life of a particular asset, are capitalized. Repair and
maintenance costs are charged to expense. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the account and the gain or loss on disposition is
reflected in operating income.
COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) refers to
revenue, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but are
excluded from net income as these amounts are recorded directly as an
adjustment to stockholders' equity. At December 31, 2005 and 2004,
there were no such adjustments required.
CONCENTRATION OF CREDIT RISK - Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist
principally of trade receivables and cash and cash equivalents.
Concentration of credit risk with respect to trade receivables is
generally diversified due to the large number of entities comprising
the Company's customer base and their dispersion across geographic
areas principally within the United States. The Company routinely
addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is
limited.
The Company places its temporary cash investments with high credit
quality financial institutions. At times the Company maintains bank
account balances, which exceed FDIC limits. The Company has not
experienced any losses in such accounts and believes that it is not
exposed to any significant credit risk on cash. Management does not
believe significant credit risk exists at December 31, 2005 and 2004.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments with a maturity of three months or less, as well as
bank money market accounts, to be cash equivalents.
--------------------------------------------------------------------------------
F-6
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NET INCOME PER SHARE - Basic net income per share is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding. Diluted earnings
per share reflect, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of stock options.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
Advertising expense for the years ended December 31, 2005 and 2004
approximated $6,100 and $600, respectively.
STOCK-BASED COMPENSATION - The Company has adopted the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). In compliance with SFAS 123, the Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plans and does not recognize
compensation expense for its employee stock-based compensation plans.
The Company has also adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure".
This pronouncement requires prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reporting results. If the Company had elected to recognize compensation
expense based upon the fair value at the date of grant for awards under
these plans, consistent with the methodology prescribed by SFAS 123,
the Company's net loss and net loss per share as reported would be
reduced for the years ended December 31, 2005 and 2004 to the pro forma
amounts presented below:
YEARS ENDED DECEMBER 31, 2005 2004
----------------------------------------------------------------------------------------------------------------------
Net Loss, as reported $ (682,538) $ (157,150)
Add: Stock based employee compensation expense included in reported net
loss -- --
Deduct: Total stock based employee compensation expense determined under
fair value based method (219,135) --
--------------------------------------
Pro Forma Net Loss $ (901,673) $ (157,150)
======================================
Basic Loss Per Share:
As reported $ (.12) $ (.03)
======================================
Pro forma $ (.15) $ (.03)
======================================
Diluted Loss Per Share:
As reported $ (.12) $ (.03)
======================================
Pro forma $ (.15) $ (.03)
======================================
--------------------------------------------------------------------------------
F-7
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted
average assumptions were used for grants during the years ended
December 31:
2005 2004
-----------------------------------------------------------------------
Dividend Yield 0.00% n/a
Volatility 7.17% n/a
Risk-Free Interest Rate 2.82% n/a
Expected Life 9.85 YEARS n/a
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of our stock options.
INCOME TAXES - Deferred income taxes are recognized for temporary
differences between financial statement and income tax basis of assets
and liabilities for which income tax or tax benefits are expected to be
realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or
some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS - In the opinion of management, the
carrying value of all financial instruments, consisting primarily of
cash and cash equivalents, accounts receivables and accounts payable,
reflected in the accompanying balance sheet, approximates fair value as
of December 31, 2005 and 2004, due to their short term nature.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In December 2004, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 123(R), "Accounting for
Stock-Based Compensation". SFAS No. 123(R) establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This statement focuses primarily on
accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123(R) requires
that the fair value of such equity instruments be recognized as an
expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures
of fair value were required. The provisions of this statement are
effective for the first interim reporting period that begins after
December 15, 2005. The Company will adopt the provisions of SFAS
No.123(R) in the first quarter of Fiscal 2006.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance
related to the interaction between SFAS 123(R) and certain SEC rules
and regulations. It also provides the SEC staff's views regarding
valuation of share-based payment arrangements. In April 2005, the SEC
amended the compliance dates for SFAS 123(R), to allow companies to
implement the standard at the beginning of their next fiscal year,
instead of the next reporting period beginning after June 15, 2005.
Management is currently evaluating the impact SAB 107 will have on the
Company's consolidated financial statements.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board
("APB") Opinion No. 29, which differed from the International
Accounting Standards Board's ("IASB") method of accounting for
exchanges of similar productive assets. Statement No. 153 replaces the
exception from fair value measurement in APB No. 29, with a general
--------------------------------------------------------------------------------
F-8
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. The statement is to be
applied prospectively and was effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS No. 153 did not have a material impact on the
Company's results of operations or cash flows.
In December 2004, the FASB issued two FASB Staff Positions - FSP FAS
109-1, Application of FASB Statement 109 "Accounting for Income Taxes"
to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Creation Act of 2004. Neither of these
affected the Company as it does not participate in the related
activities.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47
provides guidance relating to the identification of and financial
reporting for legal obligations to perform an asset retirement
activity. The Interpretation requires recognition of a liability for
the fair value of a conditional asset retirement obligation when
incurred if the liability's fair value can be reasonably estimated. FIN
47 also defines when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation.
The provision is effective no later than the end of fiscal years ending
after December 15, 2005. The Company will adopt FIN 47 beginning the
first quarter of fiscal year 2006 and does not believe the adoption
will have a material impact on its consolidated financial position or
results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections". This new standard replaces APB Opinion No. 20,
"Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements". Among other changes, SFAS No.
154 requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on
the new accounting principle, unless it is impracticable to do so. SFAS
No. 154 also provides that (1) a change in method of depreciating or
amortizing a long-lived non-financial asset be accounted for as a
change in estimate (prospectively) that was effected by a change in
accounting principle, and (2) correction of errors in previously issued
financial statements should be termed a "restatement". The new standard
is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors
made in fiscal years beginning after June 1, 2005. The Company has
evaluated the impact of the adoption of Statement 154 and does not
believe the impact will be significant to the Company's overall results
of operations or financial position.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at December 31:
USEFUL LIVES 2005 2004
---------------------------------------------------------------------------------------------
Furniture and Fixtures 5 years $ 47,844 $ 42,603
Leasehold Improvements 5 years 8,919 3,150
------------------------------------
56,763 45,753
Less Accumulated Depreciation 35,663 30,073
------------------------------------
$ 21,100 $ 15,680
====================================
Depreciation expense for the years ended December 31, 2005 and 2004 was
$5,590 and $6,020, respectively.
--------------------------------------------------------------------------------
F-9
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
3. NOTES PAYABLE
Note payable to a stockholder in the original principal amount of
$25,000, which bore interest at a rate of 10% per annum.
Prior to the repayment of any of the principal and accrued interest,
the holder converted the note into common stock of the Company at the
conversion rate of $1.50 per share. On January 13, 2005, the Company
agreed to convert the principal and accrued interest into common stock
of the Company at a reduced conversion rate of $1.00 per share, which
resulted in the issuance of 31,076 shares of common stock.
4. INCOME TAXES
The provision for income taxes for the years ended December 31, 2005
and 2004 is summarized as follows:
2005 2004
--------------------------------------------------------------------------
Current:
Federal $ - $ -
State - -
------------------------------------
- -
------------------------------------
Deferred:
Federal - -
State - -
------------------------------------
- -
------------------------------------
$ - $ -
====================================
The Company has federal and state net operating loss carryforwards of
approximately $494,000, which can be used to reduce future taxable
income through 2025.
The tax effects of temporary differences which give rise to deferred
tax assets (liabilities) at December 31, are summarized as follows:
2005 2004
----------------------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryforwards $ 198,000 $ 126,000
Stock based compensation 196,000 -
Allowance for doubtful accounts 4,000 -
-------------------------------------
Deferred Tax Assets 398,000 126,000
Less Valuation Allowance 398,000 126,000
-------------------------------------
Net Deferred Tax Asset $ - $ -
=====================================
--------------------------------------------------------------------------------
F-10
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
YEARS ENDED DECEMBER 31, 2005 2004
-----------------------------------------------------------------------
Federal Statutory Tax Rate 34.00% 34.00%
State Taxes, net of federal benefit 6.00% 6.00%
Change in Valuation Allowance (40.00%) (40.00%)
---------------------------
Total Tax Expense 0.00% 0.00%
===========================
5. STOCKHOLDERS' EQUITY
CAPITALIZATION - On February 9, 2005, the stockholders approved an
amendment to the Company's Certificate of Incorporation to (i) increase
the authorized shares of Common Stock from 22,000,000 shares to
25,000,000; par value $.0001; and (ii) create 5,000,000 shares of
Preferred Stock, $.0001 par value. The Board of Directors has the
authority to issue shares of Preferred Stock from time to time and to
fix such rights, preferences and privileges of such issuances.
PRIVATE PLACEMENT OF SECURITIES - During Fiscal 2004, the Company sold
through a private placement, 14.74 units (each consisting of 50,000
common shares and 50,000 Class A Warrants) at a purchase price of
$50,000 per unit for net proceeds of $713,200, net of closing costs of
approximately $23,800. Each Class A Warrant has an exercise price of
$2.00 and was to expire on January 2, 2006. On February 28, 2006, the
Company extended the expiration date of the Class A Warrants to July 1,
2006.
During Fiscal 2005, the Company completed a private placement through
the sale of 10 units (each consisting of 10,000 common shares and
10,000 Class B Warrants) at a purchase price of $10,000 per unit for
net proceeds of $95,000, net of transaction cost of approximately
$5,000. Each Class B Warrant has an exercise price of $2.00 and expires
on January 2, 2008.
WARRANTS - On June 10, 2005 the Company entered into a consulting
agreement with a financial advisory firm. In connection with this
agreement, the Company granted a warrant for the purchase of 1,100,000
shares of the Company's common stock. The warrant has an exercise price
of $.10 per share and expires on June 10, 2010. In connection with this
grant, the Company recorded a charge of $451,000, which is included in
general and administrative expenses. On February 27, 2006, the holder
exercised the warrants utilizing the cashless exercise provision and
received 1,029,032 shares of common stock in exchange for the exercise
of the 1,100,000 warrants based on the closing price of $1.55 of the
Company's stock on that date.
On September 26, 2005 the Company entered into a consulting agreement
with a financial advisory firm. In connection with this agreement, the
Company granted a warrant for the purchase of 100,000 shares of the
Company's common stock. The warrant has an exercise price of $2.50 per
share and expires on August 14, 2010. In connection with this grant,
the Company recorded a charge of $4,000, which is included in general
and administrative expenses.
STOCK OPTION PLAN - During Fiscal 2005, the Company established, and
the stockholders approved, an Employee Benefit and Consulting Services
Compensation Plan (the "Plan") for the granting of up to 2,000,000
non-statutory and incentive stock options and stock awards to
directors, officers, consultants and key employees of the Company. On
June 9, 2005, the Board of Directors amended the Plan to increase the
number of stock options and awards to be granted under the Plan to
4,000,000.
--------------------------------------------------------------------------------
F-11
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
Additional information with respect to the Plan is as follows:
YEARS ENDED DECEMBER 31, 2005 2004
-----------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
Fixed Stock Options SHARE PRICE Share Price
-----------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year - $ - - $ -
Granted 3,112,000 1.04 - -
Forfeited (335,000) 1.00 - -
------------------ -------------------
Outstanding, end of year 2,777,000 $ 1.05 - $ -
================== ===================
Options exercisable, end of year 887,800 $ 1.05 - $ -
================== ===================
Weighted-Average Fair Values of
Options Granted During Year $ .20 $ -
================== ==================
The following table summarizes information about stock options
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Outstanding Price
---------------------------------------------------------------------------- --------------------------------------
$1.00 2,157,000 5.69 yrs. $1.00 665,800 $1.00
$1.20 - 1.25 620,000 8.13 yrs. $1.22 222,000 $1.20
COMMON SHARES RESERVED
Warrants 2,037,000
==================
Stock Option Plan 4,000,000
==================
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases office space under a
non-cancelable operating lease, which expires in November 2007. The
Company is currently leasing additional office space on a
month-to-month basis. The Company leased additional office space under
a non-cancelable operating lease, which expires on November 30, 2007.
Minimum future rentals under non-cancelable lease commitments are as
follows:
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------
2006 $ 13,000
2007 12,400
--------------------------------------------------------------------------------
F-12
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
Rent expense was approximately $45,000 and $43,000 for the years
December 31, 2005 and 2004, respectively.
EMPLOYMENT CONTRACTS - On March 1, 2005, the Company entered into
employment contracts with two of its officers. The employment
agreements provide for minimum annual salaries plus bonuses equal to 5%
of pre-tax earnings (as defined) and other perquisites commonly found
in such agreements. In addition, pursuant to the employment contracts,
the Company granted the officers options to purchase up to an aggregate
of 400,000 shares of common stock. The employment agreements expire on
March 1, 2008, and are renewable for a two year period. Minimum
aggregate future commitments under the employment contracts is as
follows:
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------
2006 $ 328,000
2007 376,000
2008 64,000
7. TRANSACTIONS WITH MAJOR CUSTOMERS
The Company sells its products to a geographically diverse group of
customers, performs ongoing credit evaluations of its customers and
generally does not require collateral.
For each of the years ended December 31, 2005 and 2004, a customer
accounted for approximately 15% and 9% of net revenues, respectively.
Aggregate revenues from these customers are dispersed among many
different franchises and storefront locations.
8. RELATED PARTY TRANSACTIONS
The Company purchased merchandise with a cost of approximately $10,000
and $20,000 for the years ended December 31, 2005 and 2004,
respectively from an entity that is owned by an individual related to
one of the officers of the Company.
9. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS
Cash paid during the years for:
YEARS ENDED DECEMBER 31, 2005 2004
-----------------------------------------------------------------------
Interest $ 7,066 $ -
=====================================
Income Taxes $ - $ -
=====================================
During the year ended December 31, 2005, the Company issued 31,076
shares of common stock with a value of $31,076 in connection with a
conversion of a note payable.
--------------------------------------------------------------------------------
F-13
ACE MARKETING & PROMOTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
-----------------------------------------------------------------------------------------
SEPTEMBER 30, 2006
-----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,299,928
Accounts receivable, net of allowance for doubtful accounts of $10,000 772,455
Prepaid expenses and other current assets 89,901
-----------
Total Current Assets 2,162,284
Property and Equipment, net 17,949
Other Assets 5,492
-----------
Total Assets $ 2,185,725
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 439,802
Accrued expenses 114,680
-----------
Total Current Liabilities 554,482
-----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; 25,000,000 shares
authorized 7,838,683 shares issued and outstanding 784
Preferred stock $.0001 par value: 500,000 shares
authorized no shares outstanding --
Additional paid-in capital 2,933,719
Accumulated deficit (1,303,260)
-----------
Total Stockholders' Equity 1,631,243
-----------
Total Liabilities and Stockholders' Equity $ 2,185,725
===========
-----------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-14
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------------
Revenues, net $ 1,357,655 $ 750,957 $ 3,521,251 $ 2,300,150
Cost of Revenues 918,632 477,466 2,448,096 1,518,185
----------- ----------- ----------- -----------
Gross Profit 439,023 273,491 1,073,155 781,965
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and administrative expenses 459,791 313,066 1,330,275 1,310,147
----------- ----------- ----------- -----------
Total Operating Expenses 459,791 313,066 1,330,275 1,310,147
----------- ----------- ----------- -----------
Net (Loss) from Operations (20,768) (39,575) (257,120) (528,182)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense -- -- -- (4,532)
Interest income 1,482 12 2,353 133
----------- ----------- ----------- -----------
Total Other Income (Expense) 1,482 12 2,353 (4,399)
----------- ----------- ----------- -----------
(Loss) Before Provision for Income Taxes (19,286) (39,563) (254,767) (532,581)
Provision for Income Taxes -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ (19,286) $ (39,563) $ (254,767) $ (532,581)
=========== =========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.00) $ (0.01) $ (0.04) $ (0.09)
=========== =========== =========== ===========
Diluted $ (0.00) $ (0.01) $ (0.04) $ (0.09)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic 7,389,442 5,888,076 6,859,859 5,877,988
=========== =========== =========== ===========
Diluted 7,389,442 5,888,076 6,859,859 5,877,988
=========== =========== =========== ===========
------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-15
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2006 2005
--------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (254,767) $ (532,581)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,151 3,913
Stock-based payments 87,135 481,786
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (61,399) (29,057)
Prepaid expenses and other assets (48,619) 31,144
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 73,522 (77,761)
Customer deposits (98,000) --
----------- -----------
Total adjustments (44,210) 410,025
----------- -----------
Net Cash Used in Operating Activities (298,977) (122,556)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from private placement, net 1,200,670 126,076
Payment on notes payable -- (25,000)
----------- -----------
Net Cash Provided by Financing Activities 1,200,670 101,076
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 901,693 (21,480)
Cash and Cash Equivalents, beginning of period 398,235 566,285
----------- -----------
Cash and Cash Equivalents, end of period $ 1,299,928 $ 544,805
=========== ===========
-------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-16
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
The Condensed Balance Sheet as of September 30, 2006, the Condensed Statements
of Operations for the three and nine months ended September 30, 2006 and 2005
and the Condensed Statements of Cash Flows for the nine months ended September
30, 2006 and 2005 have been prepared by us without audit. In our opinion, the
accompanying unaudited condensed financial statements contain all adjustments
necessary to present fairly in all material respects our financial position as
of September 30, 2006, results of operations for the three and nine months ended
September 30, 2006 and 2005 and cash flows for the nine months ended September
30, 2006 and 2005.
This report should be read in conjunction with our Form 10-KSB for our fiscal
year ended December 31, 2005.
The results of operations and cash flows for the nine months ended September 30,
2006 are not necessarily indicative of the results to be expected for the full
year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Revenue is recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue Task Force (EITF)
Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent." Revenue is recognized on a gross basis since the Company has the risks
and rewards of ownership, latitude in selection of vendors and pricing, and
bears all credit risk.
The Company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-17
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
2. EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Dilutive earnings per share gives effect to stock options and warrants, which
are considered to be dilutive common stock equivalents. Basic loss per common
share was computed by dividing net loss by the weighted average number of shares
of common stock outstanding. Diluted loss per common share does not give effect
to the impact of options because their effect would have been anti-dilutive.
3. STOCK COMPENSATION
During Fiscal 2005, the Company established, and the stockholders approved, an
Employee Benefit and Consulting Services Compensation Plan (the "Plan") for the
granting of up to 2,000,000 non-statutory and incentive stock options and stock
awards to directors, officers, consultants and key employees of the Company. On
June 9, 2005, the Board of Directors amended the Plan to increase the number of
stock options and awards to be granted under the Plan to 4,000,000.
All stock options under the Plan are granted at or above the fair market value
of the common stock at the grant date. Employee and non-employee stock options
vest over varying periods and generally expire either 5 or 10 years from the
grant date.
Effective January 1, 2006, the Company's Plan is accounted for in accordance
with the recognition and measurement provisions of Statement of Financial
Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS
123(R)"), which replaces FAS No. 123, Accounting for Stock-Based Compensation,
and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and related interpretations. FAS 123 (R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth within Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which
provides the Staff's views regarding the interaction between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations with respect to
the valuation of share-based payments for public companies.
Prior to January 1, 2006, the Company accounted for similar transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option equaled
or exceeded the fair value of the underlying stock at the grant date.
While FAS No. 123 encouraged recognition of the fair value of all stock-based
awards on the date of grant as expense over the vesting period, companies were
permitted to continue to apply the intrinsic value-based method of accounting
prescribed by APB No. 25 and disclose certain pro-forma amounts as if the fair
value approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-forma disclosures
in both the annual and interim financial statements. The Company complied with
these disclosure requirements for all applicable periods prior to January 1,
2006.
In adopting FAS 123(R), the Company applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions of FAS 123
(R) are to be applied to new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of awards for which the requisite service has not been rendered that
are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under FAS 123.
As a result of the adoption of FAS 123 (R), the Company's results for the three
and nine month period ended September 30, 2006 include employee share-based
compensation expense totaling approximately $12,000 and $37,000, respectively.
Such amounts have been included in the Condensed Consolidated Statements of
Operations within selling, general and administrative expenses. No income tax
benefit has been recognized in the statement of operations for share-based
compensation arrangements due to a history of operating losses. Stock
compensation expense recorded under APB No. 25 in the Consolidated Statements of
Operations for the three and nine months ended September 30, 2005 totaled $0 and
$0 respectively.
F-18
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. For option grants in Fiscal 2006, the
Company will take into consideration guidance under SFAS 123R and SEC Staff
Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions.
The expected volatility is based upon historical volatility of our stock and
other contributing factors. The expected term is based upon observation of
actual time elapsed between date of grant and exercise of options for all
employees. Previously such assumptions were determined based on historical data.
The weighted average assumptions made in calculating the fair values of options
granted during the three and nine months ended September 30, 2006 and 2005 are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------- -------- -------- --------
Pro forma Pro Forma
Expected volatility - 25.00% 25.0% 1.00%
Expected dividend yield - - - -
Risk-free interest rate - 3.49% 5.02% 2.41%
Expected term (in years) - 5.00 5.00 9.79
Fair Values - $ 0.20 $ 0.34 $ 0.16
The following table addresses the additional disclosure requirements of 123(R)
in the period of adoption. The table illustrates the effect on net income and
earnings per share as if the fair value recognition provisions of FAS No. 123
had been applied to all outstanding and unvested awards in the prior year
comparable period.
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
----------- -----------
Net loss, as reported $ (39,563) $ (532,581)
Deduct: Total stock based compensation
expense determined under the fair value
based method for all awards (no tax effect) 0 (181,939)
----------- -----------
Pro forma net loss $ (39,563) $ (714,520)
=========== ===========
Net income per share:
Basic - as reported $ (0.01) $ (0.09)
Basic - pro forma $ (0.01) $ (0.12)
Diluted - as reported $ (0.01) $ (0.09)
Diluted - pro forma $ (0.01) $ (0.12)
The following table represents our stock options granted, exercised, and
forfeited during the quarter ended September 30, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price Term Value
--------------------------------------------------------------------------------------------------
Outstanding, beginning of year 2,777,000 $ 1.05
Granted 182,000 2.09
Exercised (37,778) 1.00
Forfeited (1,000,000) 1.00
--------------
Outstanding, end of quarter 1,921,222 $ 1.17 6.13 $ 2,077,000
==============
Options exercisable, end of quarter 1,130,464 $ 1.07 7.14 $ 1,338,000
==============
On May 31, 2006, an option holder exercised 37,778 options utilizing the
cashless exercise provisions and received 20,000 shares of common stock. The
options were exercisable at $1.00 per share with a fair market value of $2.125
per share on the date of exercise.
F-19
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
4. CONSULTING AGREEMENT
On June 10, 2005 the Company entered into a consulting agreement with a
financial advisory firm. In connection with this agreement, the Company granted
a warrant for the purchase of 1,100,000 shares of the Company's common stock
containing cashless exercise provisions. The warrant was exercisable at $.10 per
share and would have expired on June 10, 2010. On February 27, 2006, the holder
exercised the warrants utilizing the cashless exercise provision and received
1,029,032 shares of common stock in exchange for the exercise of the 1,100,000
warrants based on the closing price of $1.55 of the Company's stock on that
date.
5. PRIVATE PLACEMENT
During the nine months ended September 30, 2006 the Company raised proceeds of
$1,200,670 (net of expenses of $202,080) from the sale of 13.36 Units. Each Unit
consisted of 60,000 shares of the Company's Common Stock and Class C Warrants to
purchase 30,000 shares of Common Stock at an offering price of $105,000 per
Unit. The Class C Warrants are exercisable at $1.75 per share at anytime from
the date of issuance through the earlier of June 30, 2009 or the redemption date
of the Class C Warrants, whichever is earlier. In addition, through September
30, 2006, the Company issued 100,000 shares to the placement agent in connection
with the offering.
In connection with the offering, the Company granted 50,000 ten year non
statutory stock options to a law firm for legal services The options have an
exercise price of $0.10 per share and have been valued at $95,000 and were
netted against the proceeds of the offering at September 30, 2006.
6. RELATED PARTY TRANSACTION
On April 10, 2006, the Company granted 40,000 five year non statutory stock
options to an entity controlled by two of the officers of the Company, for the
purchase of an email list of promotional products professionals and an industry
specific search engine. The officers of the Company have waived their right to
receive any benefit from the option grant, and the options were granted in the
name of the minority shareholders of the related entity. The options have an
exercise price of $2.50 per share and the email list and search engine were
expensed and have been valued at approximately $18,000, which is included in
general and administrative expenses for the period ended September 30, 2006.
7. MAJOR CUSTOMER
For the nine months ended September 30, 2006, sales from one customer
approximated 26.7% of total sales.
F-20
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The New York Business Corporation Law contains provisions permitting and, in
some situations, requiring New York corporations to provide indemnification to
their officers and directors for losses and litigation expense incurred in
connection with their service to the corporation. Our articles and bylaws
contain provisions requiring our indemnification of our directors and officers
and other persons acting in their corporate capacities.
We have entered into employment agreements with Dean L. Julia and Michael
D. Trepeta providing contractually for indemnification consistent with the
articles and bylaws. The New York Business Corporation Law also authorizes us to
purchase insurance for our directors and officers insuring them against risks as
to which we may be unable lawfully to indemnify them. We have obtained limited
insurance coverage for our officers and directors as well as insurance coverage
to reimburse us for potential costs of our corporate indemnification of officers
and directors.
As far as exculpation or indemnification for liabilities arising under the
Securities Act of 1933 may be permitted for directors and officers and
controlling persons, we have been advised that in the opinion of the Securities
and Exchange Commission such exculpation or indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting compensation, are:
SEC filing fee for Registration Statement: $ 300
Legal and Accounting Fees 30,000
Miscellaneous 9,700
-------
Total: $40,000
=======
All of the expenses above have been or will be paid by the Company.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of securities of
the Company without registration within the past three fiscal years.
----------------------------------------------------------------------------------------------------------------------
CONSIDERATION RECEIVED
AND DESCRIPTION OF
UNDERWRITING OR OTHER
DISCOUNTS TO MARKET IF OPTION, WARRANT OR
PRICE OR CONVERTIBLE EXEMPTION FROM CONVERTIBLE SECURITY,
TITLE OF NUMBER SECURITY, AFFORDED TO REGISTRATION TERMS OF EXERCISE OR
DATE OF SALE SECURITY SOLD PURCHASERS CLAIMED CONVERSION
----------------------------------------------------------------------------------------------------------------------
July - Common Stock 951,575 $1,665,250 received, Rule 506 of Warrants to purchase
October, 2006 Shares, $209,830 paid Regulation D; 95,160 shares issued
475,788 to placement agent A Form D was to the placement
Warrants and its counsel. Filed. agent, which are
issued to exercisable at $1.00
investors; per share through
139,680 June 30,2011. Class C
shares and warrants issued to
95,160 investors are
warrants exercisable at $1.75
issued to the per share and expire
Placement on June30 2009.
agent
----------------------------------------------------------------------------------------------------------------------
45
----------------------------------------------------------------------------------------------------------------------
April 2006 Common stock 50,000 shares Services rendered; no Section 4(2). A Options exercisable
underlying commissions paid restrictive at $.10 per share;
options legend appears on expire April 25,
each certificate 2016; contain
cashless exercise
provisions.
----------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common Stock 600,000 For services rendered - Section 4(2) - Options exercisable
Options Options no other consideration granted to at $1.00 per share;
received; no officers, immediately
commissions paid. directors and exercisable; expire
legal counsel Jan. 2015; contain
under our 2005 cashless exercise
Incentive Plan. provisions.
Each grantee is a
sophisticated
investor, who
received the
options with a
restrictive
legend in
connection with
services rendered
and is able to
fend for himself.
A Form S-8
Registration
Statement has
been filed.
----------------------------------------------------------------------------------------------------------------------
Jan. - Common Stock 100,000 $100,000 received; no Rule 506 of Class B Warrants
Feb. 2005 and Class B Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants Class B placement agent was Form D was filed per share through
Warrants utilized. on February 22, Jan. 2, 2008.
2005; securities
sold to
accredited
investors only.
----------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common Stock 31,076 Shares Conversion of $31,076 Section 3a(9); no Not Applicable.
of debt; no commissions commissions paid.
paid; no placement
agent was utilized.
----------------------------------------------------------------------------------------------------------------------
June - Oct. Common Stock 327,000 $327,000 received; no Rule 506 of Class A Warrants
2004 and Class A Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants 327,000 Class placement agent was Form D was filed per share through
A Warrants utilized. on Nov. 15, 2004; Jan. 3, 2007.
securities sold
to accredited
investors only.
----------------------------------------------------------------------------------------------------------------------
46
----------------------------------------------------------------------------------------------------------------------
March - Common Stock 410,000 $410,000 received; no Rule 506 of Class A Warrants
April 2004 and Class A Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants 410,000 Class placement agent was Form D was filed per share through
A Warrants utilized. on Nov. 24, 2003 Jan. 3, 2007.
and April 1,
2004; securities
sold to
accredited
investors only.
----------------------------------------------------------------------------------------------------------------------
We believe that the transactions described above were exempt from
registration under Section 4(2) and/or Rule 506 of Regulation D. Each
transaction did not involve a public offering and an appropriate restrictive
legend was placed on each security. Also, no commissions were paid in connection
with the sales of any of the aforementioned unregistered securities of our
company, except as otherwise noted.
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation filed March 26, 1998 (1)
3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders
on February 9, 2005 (1)
3.4 Amended By-Laws (1)
4.1 Form of Class C Warrant (5)
4.2` Specimen of Common Stock (6)
5.1 Legal opinion of Morse & Morse, PLLC (6)
10.1 Letter Employment Agreement - Michael Trepeta (2)
10.2 Letter Employment Agreement - Dean Julia (2)
10.3 Amendment to Employment Agreement - Michael Trepeta (3)
10.4 Amendment to Employment Agreement - Dean L. Julia (3)
11.1 Statement re: Computation of per share earnings. See "Statement
of Operations and Notes to Financial Statements"
14.1 Code of Ethics/Code of Conduct (3)
23.1 Consent of counsel, Morse & Morse, PLLC (Incorporated by
reference to Exhibit 5.1).(6)
23.2 Consent of auditors, Holtz Rubenstein Reminick LLP (6)
99.1 2005 Employee Benefit and Consulting Services Compensation
Plan(2)
99.2 Form of Class A Warrant (2)
99.3 Form of Class B Warrant (2)
99.4 Amendment to 2005 Plan (4)
-------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
10-SB as filed with the Commission on February 10, 2005.
(2) Incorporated by reference to Registrant's Registration Statement on Form
10-SB/A as filed with the Commission March 18, 2005.
(3) Incorporated by reference to Form 10-KSB for fiscal year ended December 31,
2005.
(4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with the
Commission on August 18, 2005 for the quarter ended September 30, 2005.
(5) Incorporated by reference to Form 10-QSB filed with the Commission on
November 13, 2006 for the quarter ended September 30, 2006.
(6) Filed herewith.
47
UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and notwithstanding
the forgoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and (iii) To include any additional or changed material
information on the plan of distribution.
(2) For the purpose of determining any liability under the Securities Act,
to treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
(b) The undersigned Registrant, hereby requesting acceleration of the effective
date of the registration statement under Rule 461 under the Securities Act,
hereby undertakes to include the following:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer 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. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of the expenses
incurred or paid by a director, officer, or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
48
SIGNATURES
In accordance with the Securities Act of 1933, the company certifies that
it has reasonable grounds to believe that it meets all of the requirements of
filing on Form SB-2 and authorized this registration statement to be signed on
its behalf by the undersigned, in the City of Valley Stream, State of New York,
on December 19, 2006.
ACE MARKETING & PROMOTIONS, INC.
By: /s/ Dean L. Julia
-------------------------------------
Dean L. Julia, Chairman of the
Board and Principal Executive Officer
In accordance with the Securities Act of 1933, this registration statement was
signed by the following persons in the capacities and on the dates stated:
Signatures Title Date
---------- ----- ----
/s/ Dean L. Julia Chairman of the Board December 19, 2006
-------------------------- Principal Executive Officer
Dean L. Julia
/s/ Sean McDonnell Principal Financial Officer December 19, 2006
-------------------------- and Principal Accounting Officer
Sean McDonnell
/s/ Michael D. Trepeta President, Director December 19, 2006
--------------------------
Michael D. Trepeta
/s/ Scott Novack Director December 19, 2006
--------------------------
Scott Novack
Dean L. Julia, Michael D. Trepeta and Scott Novack represent all the current
members of the Board of Directors.
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation filed March 26, 1998 (1)
3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders
on February 9, 2005 (1)
3.4 Amended By-Laws (1)
4.1 Form of Class C Warrant (5)
4.2 Specimen of Common Stock (6)
5.1 Legal opinion of Morse & Morse, PLLC (6)
10.1 Letter Employment Agreement - Michael Trepeta (2)
10.2 Letter Employment Agreement - Dean Julia (2)
10.3 Amendment to Employment Agreement - Michael Trepeta (3)
10.4 Amendment to Employment Agreement - Dean L. Julia (3)
11.1 Statement re: Computation of per share earnings. See Statement of
Operations and Notes to Financial Statements
14.1 Code of Ethics/Code of Conduct (3)
23.1 Consent of counsel, Morse & Morse, PLLC (Incorporated by
reference to Exhibit 5.1.).
23.2 Consent of auditors, Holtz Rubenstein Reminick LLP (6)
99.1 2005 Employee Benefit and Consulting Services Compensation Plan
(2)
99.2 Form of Class A Warrant (2)
99.3 Form of Class B Warrant (2)
99.4 Amendment to 2005 Plan (4)
99.5 Release - 2006 Third Quarter Results of Operations (5)
-------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
10-SB as filed with the Commission on February 10, 2005.
(2) Incorporated by reference to Registrant's Registration Statement on Form
10-SB/A as filed with the Commission March 18, 2005.
(3) Incorporated by reference to Form 10-KSB for fiscal year ended December 31,
2005.
(4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with the
Commission on August 18, 2005 for the quarter ended September 30, 2005.
(5) Incorporated by reference to Form 10-QSB filed with the Commission on
November 13, 2006 for the quarter ended September 30, 2006.
(6) Filed herewith.
50