AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 2007
REGISTRATION NO. 333-138918
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ACE MARKETING & PROMOTIONS, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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NEW YORK 5093
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
11-3427886
I.R.S. EMPLOYER
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)
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COPIES TO:
STEVEN MORSE, ESQ.
MORSE & MORSE PLLC.
1400 OLD COUNTRY ROAD , SUITE 302
WESTBURY, NEW YORK 11590
PHONE (516) 4871446
FACSIMILE (516)4871452
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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. |_|
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
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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 (1) PRICE FEE
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Common Stock, $.0001 par value (2) 951,575 2.10 $1,998,307.50 $213.82
Common Stock, $.0001 par value (3) 475,788 2.10 999,154.80 106.91
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Total 1,427,363 $2,997,462.30 $320.73 (4)
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(1) 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.
(2) Represents 951,575 outstanding shares to be sold by certain selling
security holders.
(3) 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.
(4) Previously paid.
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.
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PROSPECTUS
ACE MARKETING & PROMOTIONS, INC.
The Resale of Up to 1,412,160 shares of Common Stock
The selling price of the shares will be determined by market factors at the time
of their resale.
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This prospectus relates to the resale by the selling security holders of up to
1,412,160 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 $1.02
on November 30, 2007.
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__ 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.
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The date of this prospectus is ________, 2007
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 3
2. Cautionary Statement Concerning Forward Looking Statements 7
3. Risk Factors 8
4. Use of Proceeds 12
5. Description of Business 13
6. Description of Property 22
7. Legal Proceedings 22
8. Market for Common Stock and Related Shareholder Matters 22
9. Management's Discussion and Analysis 25
10. Directors and Executive Officers 30
11. Ownership of Securities by Beneficial Owners and Management 33
12. Executive Compensation 34
13. Certain Relationships and Related Transactions 40
14. Selling Security holders 41
15. Plan of Distribution 43
16. Description of Securities 44
17. Indemnification Disclosure For Securities Act Liabilities 45
18. Experts 46
19. Legal Matters 46
20. Where You Can Find More Information 46
21. Index to Financial Statements F-1
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 promotional marketing company
offering a wide array of business solutions. We distribute advertising
specialties and promotional 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
A FRAGMENTED PROMOTIONAL PRODUCT INDUSTRY
The promotional products industry plays an increasingly vital role in
corporate and product brand development. As a whole the industry generates about
$18.6 billion in sales annually. However, the industry is highly fragmented,
with over 21,000 distributorships and no single distributor accounting for more
than 2% of the market. The Promotional Products Association International
estimates that in 2005 only 1,000 of the 21,000 distributorships achieved annual
sales in excess of $2.5 million. Nearly 80% of the distributors are believed to
be privately owned family businesses with no growth or exit strategies. These
distributorships, each ranging from $1 million to $15 million in sales, present
opportunities for acquisition. Ace management believes the industry environment
is favorable for consolidation and acquisition is the fastest strategy to
large-scale growth.
ACE ADVANTAGES
Ace presently has over 2000 customer accounts ranging from Fortune 500
companies to local schools and small businesses. We have built our business
around the concept of high quality innovative branded merchandise, competitive
pricing, and consistently superior customer service. Our operational platform,
using top-line technology, is designed for economies of scale and ensures
superior relations with major industry suppliers. The platform also provides
superior support to an expanding team of experienced, well-connected salespeople
who are key to acquiring new business.
The major advantage we hold over most companies in the promotional product
industry is the ability to provide integrated business solutions to its
customers as trusted advisors. The majority of companies in the promotional
product industry offer only branded merchandise, whereas, we offer solutions in:
o Branded Merchandise;
o Importing;
o Incentive / Rewards programs;
o Printing / Forms Management;
o Fulfillment / Warehousing;
o E-commerce / Website Design; and
o Database Management / Integrated Marketing Solutions.
The ability to offer multiple solutions and integrate them is what separates us
from the average promotional product distributor. Where nearly all of the
competition continues to be viewed as commodity based "order takers", our
solutions based services deepen the relationship with our clients as our sales
consultants become trusted advisors and Ace becomes a valued business partner.
POSITIONED FOR GROWTH
Ace has grown organically through referrals based on its high quality
service and external financings to support our growth. We are also expanding
through hiring leading independent salespersons who are well supported by the
Ace proprietary business structure. By offering more services and solutions to
our customers, new recruits will have the ability to expand their present
business by simply making the move to Ace. Upon integrating their client base
into our system they too become trusted advisors that provide integrated
business solutions instead of a commodity based promotional product salesperson.
These achievements position us to accelerate growth through potential
acquisition and consolidation of other companies as well as simply recruiting
experienced salespeople. In the event a company is acquired by us, of which no
assurances can be given in this regard, the new clients would all be introduced
to the additional services that are now available in our promotional marketing
model.
4
We have effectively carved out a niche for Ace. Marketing and branding
companies create an image and direction for clients. Ad agencies develop print,
TV, radio and other campaigns aimed at goals of recruiting and introducing new
products or services. Traditional promotional product companies offer imprinted
merchandise and apparel. Ace finds itself in a position of providing value added
services that compliment those of the ad agency, as well as branding and
marketing companies while at the same time far exceeding the capabilities of a
standard promotional products distributor.
A MARKET ON THE MOVE
Promotional products include advertising specialties, premiums,
incentives, business gifts, awards, prizes, commemoratives and other imprinted
or decorated items. Sales of these products rose from $5.13 billion in 1991 to
$18.6 billion in 2006
Driving this growth is the corporate trend toward integrated and targeted
marketing strategies. These involve not only advertising, but also sales
promotions, internal communications, public relations and other disciplines.
Business objectives include building brand awareness, raising company profile,
promoting products and services, improving employee awareness, and increasing
customer loyalty.
While the majority of promotional products businesses are small, the top
40 distributors in the industry had sales between $33 million and $240 million
for 2006. Currently control of sales lies predominantly with independent sales
representatives, as there is little brand recognition of individual
distributors.
Ace management has addressed this growing market by employing leading
technology for research, ordering, tracking, fulfillment and warehousing, print
and forms management, e-commerce, database management and value-added services,
as well as advanced communications to build a wide-ranging sales force with deep
industry knowledge and connections not limited by location.
BUSINESS STRATEGY
Ace Marketing's growth to date is based on a scalable corporate structure,
using top-of-the-line technology, to create advantages over most small
distributors by:
o Quickly targeting the best products and prices to meet a client's needs,
o Providing in-house art capabilities for rapidly customizing merchandise,
o Providing fulfillment and warehousing services for inventory or custom
programs,
o Offering direct overseas importing for large quantities,
o Providing incentive and reward programs for both customers and employees,
o Providing full service print and forms management solutions,
o Providing full e-commerce solutions, including company stores and website
design,
o Managing purchase orders consistently from query to final order,
o Tracking shipments effectively regardless of size or the overseas location
of the supplier, and
o Offering database management software, which integrates with each service
offered and allows the customer the ability to quantify the results of any
given marketing campaign or promotion.
In addition, Ace offers a wide array of services not offered by most
distributors. These additional services allow our salespeople the opportunity to
open new doors and create more sales with both new and old customers. By
providing all the necessary back-office support, these efficiencies also free
salespersons to focus on selling. The in-house computer system allows access
from off-site, enabling sales staff to operate from any location.
5
THE OFFERING
Securities Offered Up to 1,412,160 shares of Common Stock.
Securities Outstanding: AMOUNT EXERCISE PRICE PER SHARE EXPIRATION DATE
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Common Stock 8,026,615 --
Class A Warrants 737,000 $2.00 1/2/08
Class B Warrants 100,000 2.00 1/2/08
Class C Warrants 475,788 1.75 6/30/09
Other Warrants 100,000 2.50 8/14/10
Options 2,221,222* 1.18 various dates
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.
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* Average exercise price of all options, 1, 652,247 which are vested at
September 30, 2007 with an average exercise price of $1.13 per share.
6
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.
7
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 and may provide business
solutions related to promotional products competitive with those provided by us.
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.
8
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;
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.
9
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 an employment agreement with each of Messrs.. Julia and Mr.
Trepeta expiring February 28, 2011. 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;
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:
10
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.
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. On November 15, 2007, the SEC approved amendments to Rule 144
and Rule 144(k) which when they become effective in 2008 will effectively lower
the holding period under Rule 144 to six months and the holding period under
Rule 144(k) to 12 months in addition to other changes to be made to these rules.
Future sales of shares of our public float or by restricted common stock made in
compliance with Rule 144 may have an adverse effect on the then prevailing
market price, if any, of our common stock.
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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.
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DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We are a full service promotional marketing company offering a wide array
of business solutions. We distribute advertising specialties and promotional
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.
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ACE ADVANTAGES
Ace presently has over 2000 customer accounts ranging from Fortune 500
companies to local schools and small businesses. We have built our business
around the concept of high quality innovative branded merchandise, competitive
pricing, and consistently superior customer service. Our operational platform,
using top-line technology, is designed for economies of scale and ensures
superior relations with major industry suppliers. The platform also provides
superior support to an expanding team of experienced, well-connected salespeople
who are key to acquiring new business.
The major advantage we hold over most companies in the promotional product
industry is the ability to provide integrated business solutions to its
customers as trusted advisors. The majority of companies in the promotional
product industry offer only branded merchandise, whereas, we offer solutions in:
o Branded Merchandise;
o Importing;
o Incentive / Rewards programs;
o Printing / Forms Management;
o Fulfillment / Warehousing;
o E-commerce / Website Design; and
o Database Management / Integrated Marketing Solutions.
The ability to offer multiple solutions and integrate them is what separates us
from the average promotional product distributor. Where nearly all of the
competition continues to be viewed as commodity based "order takers", our
solutions based services deepen the relationship with our clients as our sales
consultants become trusted advisors and Ace becomes a valued business partner.
POSITIONED FOR GROWTH
Ace has grown organically through referrals based on its high quality
service and external financings to support our growth. We are also expanding
through hiring leading independent salespersons who are well supported by the
Ace proprietary business structure. By offering more services and solutions to
our customers, new recruits will have the ability to expand their present
business by simply making the move to Ace. Upon integrating their client base
into our system they too become trusted advisors that provide integrated
business solutions instead of a commodity based promotional product salesperson.
These achievements position us to accelerate growth through potential
acquisition and consolidation of other companies as well as simply recruiting
experienced salespeople. In the event a company is acquired by us, of which no
assurances can be given in this regard, the new clients would all be introduced
to the additional services that are now available in our promotional marketing
model.
We have effectively carved out a niche for Ace. Marketing and branding
companies create an image and direction for clients. Ad agencies develop print,
TV, radio and other campaigns aimed at goals of recruiting and introducing new
products or services. Traditional promotional product companies offer imprinted
merchandise and apparel. Ace finds itself in a position of providing value added
services that compliment those of the ad agency, as well as branding and
marketing companies while at the same time far exceeding the capabilities of a
standard promotional products distributor.
BUSINESS STRATEGY
Ace's growth to date is based on a scalable corporate structure, using
top-of-the-line technology, to create advantages over most small distributors
by:
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o Quickly targeting the best products and prices to meet a client's
needs;
o Providing in-house art capabilities for rapidly customizing
merchandise;
o Providing fulfillment and warehousing services for inventory or
custom programs,
o Providing research, consulting and design services to our customers;
o Offering direct overseas importing for large quantities;
o Providing incentive and reward programs for both customers and
employees;
o Providing full service print and forms management solutions;
o Providing full e-commerce solutions, including company stores and
website design;
o Managing purchase orders consistently from query to final order;
o Tracking shipments effectively regardless of size or the overseas
location of the supplier; and
o Offering database management software, which integrates with each
service offered and allows the customer the ability to quantify the
results of any given marketing campaign or promotion.
In addition, Ace offers a wide array of services not offered by most
distributors. These additional services allow our salespeople the opportunity to
open new doors and create more sales with both new and old customers. By
providing all the necessary back-office support, these efficiencies also free
salespersons to focus on selling. The in-house computer system allows access
from off-site, enabling sales staff to operate from any location.
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 2006 Survey,
which is available online at no cost to the public at www.thecounselor.net, the
most popular promotion products sold in 2005 were the following:
o Wearables (which also accounts for one- third of the overall
industry revenue);
o writing instruments;
o glassware and ceramics;
o desk/office/business accessories;
o calendars;
o Bags
o Caps and headwear
o recognition awards/trophies; and
o Sporting goods.
According to the Promotional Products Association International, which is
available online at no cost to the public at
www.ppai.com/MediaInformation/Industry/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, to $17.3 billion in 2004 and to $18.01 in
2005. 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 20,350
distributors in the industry with revenues of less than $2.5 million and 947
distributors with revenues of $2.5 million or more. According to The Counselor -
State of the Industry 2007 Survey, the top ten distributors in our industry are
believed to have sales of between $131 million and $240 million for 2006.
Wearguard-Crest Co., Corporate Express Promotional Marketing, Proforma Inc.,
Group II Communications and Bensussen Deutsch & Associates, Inc. are the top
five distributors with 2006 sales of $240 million, $235 million, $228 million,
$222 million and 199 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.
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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.
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; and
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.
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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 - CHOOSING US AS YOUR RIGHT DISTRIBUTOR
Most of our promotional products bear our customers' 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. 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. No customer has accounted for more than 10%
of sales during the past three years. Our customer base grows mainly through
business and personal referrals and the efforts of our sales representatives.
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
In this regard, we recently agreed to develop an online store for one of the
fastest growing privately held hospices in the United States to consolidate the
customer's purchasing from us for its multiple locations across the country.
SERVICING OUR CUSTOMERS
The major advantage we hold over most companies in the promotional product
industry is the ability to provide integrated business solutions to its
customers as trusted advisors. The majority of companies in the promotional
product industry offer only branded merchandise, whereas, we offer solutions in:
o Branded Merchandise
o Importing
o Incentive / Rewards programs
o Printing / Forms Management
o Fulfillment / Warehousing
o E-commerce / Website Design
o Database Management / Integrated Marketing Solutions
We have built our distribution 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:
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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:
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.
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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 DISTRIBUTION AND MARKETING STRATEGY
Key elements of our distribution and marketing strategy are:
o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES. We have been
in business 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. For
the nine months ended September 30, ,2007 and years ended December 31,
2006, 2005 and 2004, our gross profit percentage was 33.5%, 31.3%, 32.1%
and 29% , respectively. According to The Counselor - State of the Industry
2006 Survey, the average reported gross profit margin for distributors
during 2000 through 2005 ranged from 32.5% to 33.8%.
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.
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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
primarily our 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
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
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.
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As of the date hereof, there is no firm agreement to acquire any 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.
JOINT MARKETING AND SALES AGREEMENT WITH ATRIUM ENTERPRISES
We have entered into a Joint Marketing and Sales Agreement with Atrium
Enterprises, a leader in the motivational, incentive and rewards industry,
whereby we have received the exclusive rights to market and sell a customized
version of Atriums technology platform called, WWW.EXPERIENCETHEREWARDS.COM. In
addition, Atrium provides its sales services to us on an exclusive basis in our
business which consists of selling promotional products, print sales and the
like to Atrium's clients.
Atrium has agreed to develop a fully functional customized "Points
Banking" platform for us called, "ACE REWARDS". "This platform will allow us to
differentiate ourselves from our competition by offering reward points and
incentives to all our customers who purchase promotional products through us and
to our employees. Atrium will also provide an enhanced Solata marketing and
communication module to the platform that would allow us to re-sell this "ACE
REWARDS" platform to other entities within the promotional products industry. In
addition Atrium agreed to create and introduce a sponsored Mobile Banking Debit
Card to Ace Marketing and its customers. Atrium has granted us exclusive sales
and marketing rights to both the "ACE REWARD" platform and the Mobile Banking
Debit Card within the promotional products industry, and related industry
organizations such as ASI and PPAI. For additional information, see "Note 10 to
our financial statements."
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 2006 Survey, the top
ten distributors in our industry are believed to have sales of between $113.8
million and $229 million for 2005. Corporate Express Promotional Marketing,
Wearguard-Crest Co., Proforma Inc., Group II Communications and American
Identity are the top five distributors with 2005 sales of $229 million, $224
million $202 million, $186.0million and 180.0 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.
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.
21
EMPLOYEES
As of November 30, 2007, we had 13 full time employees, including two
executive officers who provide in-house sales, our Chief Financial Officer, two
part-time support staff employees and four sales representatives who provide
services to us on a non-exclusive basis as independent consultants.
We have an agreement with Aon Consulting, a division of Aon Corporation,
whereby Aon will recruit up to 50 additional salespeople for Ace. Aon is seeking
to implement a targeted national recruiting campaign to help us attract top
producing industry experienced sales talent generating at least $400,000 in
annual revenue. As of November 30, 2007, Aon is awaiting Ace's approval to
commence the recruiting plan. To date, Ace has not determined the commencement
date. While management has confidence in Aon's ability to fulfill its
contractual commitment to Ace, we can provide no assurances that Aon will
succeed and that we will in turn hire any experienced salespersons that meet our
targeted goals pursuant to our agreement with Aon. [
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.
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
December 31, 2006.............................. 2.25 1.46
March 31, 2007................................. 2.05 1.32
June 30, 2007.................................. 1.95 1.25
September 30, 2007............................. 2.00 .86
The closing sales price on November 30, 2007 was $1.02 per share. All
quotations provided herein reflect inter-dealer prices, without retail mark-up,
markdown or commissions.
22
We have 8,026,615 shares outstanding at November 15, 2007. Except for the
1,412,160 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, substantially 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. On November 15, 2007, the SEC approved amendments to Rule
144 and Rule 144(k) which will effectively lower the holding period under Rule
144 to six months and under Rule 144(k) to 12 months in addition to other
changes to be made to these rules. 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 through January 2, 2008. 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.
Between July 20, 2006 and November 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 15, 2007, there were approximately 80 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
Since January 2005, 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 PRICE OR
CONVERTIBLE SECURITY, IF OPTION, WARRANT OR
TITLE OF NUMBER AFFORDED TO EXEMPTION FROM CONVERTIBLE SECURITY, TERMS
DATE OF SALE SECURITY SOLD PURCHASERS REGISTRATION CLAIMED OF EXERCISE OR CONVERSION
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
Jan. 2005 Common Stock 600,000 For services rendered - Section 4(2) - granted Options exercisable at $1.00
Options Options no other consideration to officers, directors per share; immediately
received; no commissions and legal counsel under exer-cisable; expire Jan.
paid. our 2005 Incentive Plan. 2015; contain cashless
Each grantee is a exercise provisions.
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.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
23
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
Jan. -Feb. Common Stock 100,000 $100,000 received; no Rule 506 of Regulation Class B Warrants exercisable
2005 and Class B Shares and commissions paid; no D; a Form D was filed on at $2.00 per share through
Warrants Class B placement agent was February 22, 2005; Jan. 2, 2008.
Warrants utilized. securities sold to two
accredited investors
only.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
Jan. 2005 Common Stock 31,076 Conversion of $31,076 of Section 3a(9); no Not Applicable.
Shares debt; no commissions commissions paid.
paid; no placement agent
was utilized.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
July - Common Stock 951,575 $1,665,250 received, Rule 506 of Regulation D; Warrants to purchase 95,160
November 2006 Shares, $209,830 paid to A Form D was Filed. shares issued to the
475,788 placement agent and its placement agent, which are
Warrants counsel. exercisable at $1.00 per
issued to share through June 30, 2011.
investors; Class C warrants issued to
139,680 investors are exercisable at
shares and $1.75 per share and expire
95,160 on June30 2009.
warrants
issued to
the
Placement
agent
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
April 2006 Common stock 50,000 Services rendered; no Section 4(2). A Options exercisable at $.10
underlying shares commissions paid restrictive legend per share; expire April
options appears on each 25, 2016;
contain cashless certificate
exercise provisions.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
July 2007 Common stock 7,500 Services rendered; no Section 4(2). A Not Applicable.
shares commissions paid restrictive legend
appears on each
certificate
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
July 2007 Common 4,086 Cancellation of 8,671 Section 3(a)9 of the Not applicable
Stock shares warrants on a cashless Securities Act
basis
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
October 2007 Common 5,000 Services rendered; No Section 4(2). A Not applicable
Stock shares commissions paid restrictive legend
appears on each
certificate
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
24
RECENT PURCHASES OF SECURITIES
Since January 2005, we have had no repurchases of our common stock.
However, 23,334 shares were cancelled by agreement with a former consultant in
settlement of a dispute involving the number of shares consultant was entitled
to retain for services previously rendered.
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 promotional marketing and distribution company
offering a wide array of business solutions. Ace has grown organically through
referrals based on its high quality service and external financings to support
our growth of approximately $2,800,000. We are also expanding through hiring
leading independent salespersons who are well supported by the Ace proprietary
business structure. By offering more services and solutions to our customers,
new recruits will have the ability to expand their present business by simply
making the move to Ace. Upon integrating their client base into our system they
too become trusted advisors that provide integrated business solutions instead
of a commodity based promotional product salesperson.
These achievements position us to accelerate growth through potential
acquisition and consolidation of other companies as well as simply recruiting
experienced salespeople. In the event a company is acquired by us, of which no
assurances can be given in this regard, the new clients would all be introduced
to the additional services that are now available in our promotional marketing
model.
We have effectively carved out a niche for Ace. Marketing and branding
companies create an image and direction for clients. Ad agencies develop print,
TV, radio and other campaigns aimed at goals of recruiting and introducing new
products or services. Traditional promotional product companies offer imprinted
merchandise and apparel. Ace finds itself in a position of providing value added
services that compliment those of the ad agency, as well as branding and
marketing companies while at the same time far exceeding the capabilities of a
standard promotional products distributor.
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.
25
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.
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. Effective January 1, 2006, the Company began
recording compensation expense associated with stock options and other
equity-based compensation in accordance with SFAS 123(R), using the modified
prospective transition method and therefore has not restated results for prior
periods. Under the modified prospective transition method, share-based
compensation expense for 2006 includes 1) compensation expense for all
share-based awards granted on or after January 1, 2006 as determined based on
the grant-date fair value estimated in accordance with the provisions of SFAS
123(R) and 2) compensation expense for share-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123. The
Company recognizes compensation expense on a straight-line basis over the
requisite service period of the award.
RESULTS OF OPERATIONS
2006 VERSUS 2005
The following table sets forth certain selected condensed statement of
operations data for the periods indicated in dollars. In addition, we note that
the period-to-period comparison may not be indicative of future performance.
-------------------------------------- -----------------------------------------
Year Ended December 31
-------------------------------------- -----------------------------------------
2006 2005
---- ----
-------------------------------------- -------------------- --------------------
Revenue $ 4,506,807 3,422,665
-------------------------------------- -------------------- --------------------
Cost of Revenues 3,183,825 2,324,185
-------------------------------------- -------------------- --------------------
Gross Profit 1,322,982 1,098,480
-------------------------------------- -------------------- --------------------
Operating Expenses 1,806,684 1,776,710
-------------------------------------- -------------------- --------------------
(Loss) from operations (483,702) (678,230)
-------------------------------------- -------------------- --------------------
Net (Loss) $ (481,026) $ (682,538)
-------------------------------------- -------------------- --------------------
Net (Loss) per common Share $ (.07) $ (.12)
-------------------------------------- -------------------- --------------------
Weighted average common Shares
Outstanding 7,142,594 5,880,531
-------------------------------------- -------------------- --------------------
We generated revenues of $4,506,807 for 2006 as compared to $3,422,665 for
2005. The 31.7% increase in revenues of $1,084,142 in 2006 compared to 2005 is
primarily due to our utilizing additional in-house and independent sales
representatives to obtain additional customers.
Gross profit was $1,322,982 for 2006 as compared to $1,098,480 for 2005.
Our gross profit percentage was 29.4% as compared to 32.1% for 2005. 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 2006 relates to the mix of product sold and size of
orders.
26
Operating expenses consisting of selling, general, and administrative
expenses were $1,806,684 for 2006 as compared to $1,776,710 for fiscal 2005.
Operating costs as a percentage of net revenue was 40.0% for 2006 compared to
51.9% for 2005. Operating expenses in 2006 increased over 2005 by approximately
$30,000 or 1.7% primarily due to increased salaries of executive officers.
Our net loss was $(481,026) for 2006 as compared to $(682,538) for 2005.
In 2006, we experienced a reduction in stock based compensation of approximately
$380,000, increased gross profit of approximately $225,000 and decreased sales
commissions of approximately $62,000, while incurring increased salaries and
benefits of approximately $380,000. The foregoing are the primary reasons for
our 2006 net loss decreasing by a net amount of approximately $200,000 as
compared to 2005.
INTERIM FINANCIALS - 2007
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 SEPTEMBER 30,: 2007 2006
-------------------------------------------
Revenue $1,639,182 $1,357,655
Cost of Revenue 1,050,799 918,632
-------------------- --------------------
Gross Profit 588,383 439,023
Selling, general & Administrative expenses 869,277 459,791
-------------------- --------------------
Loss from operations (280,894) (20,768)
==================== ====================
NINE MONTHS ENDED SEPTEMBER 30,: 2007 2006
-------------------------------------------
Revenue $4,322,848 $3,521,251
Cost of Revenue 2,876,397 2,448,096
-------------------- --------------------
Gross Profit 1,446,451 1,073,155
Selling, general & Administrative expenses 2,004,185 1,330,275
-------------------- --------------------
Loss from operations (557,734) (257,120)
==================== ====================
We generated revenue of $1,639,182 in the three months ended September 30, 2007
compared to $1,357,655 in the same three month period ending September 30, 2006.
We generated revenue of $4,322,848 in the nine months ended September 30, 2007
compared to $3,521,251 in the same nine month period ending September 30, 2006.
The increases in revenue of $281,527 or 20.7% in the three months ended
September 30, 2007 and $801,597 or 22.8% in the nine months ended September 30,
2007 as compared to the comparable periods of 2006 are 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 revenue was $1,050,798 or 64.1% of revenue in the three months ended
September 30, 2007 compared to $918,632 or 67.7% of revenues in the same three
months of 2006. Cost of revenue was $2,876,397 or 66.5% of revenues in the nine
months ended September 30, 2007 compared to $2,447,724 or 69.5% of revenue in
the same nine months of 2006. Cost of revenue includes purchases and freight
costs associated with the shipping of merchandise to our customers. Increases in
cost of revenues in 2007 as compared to 2006 are related to an increase in
revenue.
Gross profit was $588,383 in the three months ended September 30, 2007 or 35.9%
of net revenue compared to $439,023 in the same three months of 2006 or 32.3% of
revenue. Gross profit was $1,446,451 in the nine months ended September 30, 2007
or 33.5% of net revenue compared to $1,073,527 in the same nine months of 2006
or 30.5% of revenues. Increased margins were primarily attributable to Ace
retaining a sales coach to assist its sales representatives with techniques to
sell products at higher prices as trusted advisors. Gross profit will vary
period-to-period depending upon a number of factors including the mix of items
sold, pricing of the items, costs of freight which are passed onto our customers
and the volume of product sold.
27
Selling, general, and administrative expenses were $869,277 in the three months
ended September 30, 2007 compared to $459,791 in the same three months of 2006.
Selling, general, and administrative expenses were $2,004,185 in the nine months
ended September 30, 2007 compared to $1,330,275 in the same nine months of 2006.
Such costs include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees. For the three months ended
September 30, 2007, the overall increase of $409,486 was primarily due to a
$99,420 increase in salaries, commissions and other compensation paid to our
employees to sustain our growth and a $280,865 increase in stock based
compensation. For the nine months ended September 30, 2007, the overall increase
of $673,910 was primarily due to a $290,569 increase in salaries, commissions
and other compensation paid to our employees to sustain our growth, one time
cash fees for public awareness/investor relations of approximately $45,000 and a
$267,719 increase in stock based compensation.
For the three months ended September 30, 2007 we incurred a loss before income
taxes of $275,164 as compared to a loss before income taxes of $19,286 for the
same three months in 2006. The increase in the pre-tax loss for the three month
period ended September 30, 2007 as compared to the comparable period in 2006 is
primarily attributable to an increase in stock based payments (non-cash) of
approximately $281,000, which was as a result of grants to certain officers of
the Company for a bonus in connection with extension of employment contracts.
For the nine months ended September 30, 2007 we incurred a loss before income
taxes of $535,710 as compared to a loss before income taxes of $254,767 for the
same nine months in 2006. The increase in the pre-tax loss for the nine month
period ended September 30, 2007 as compared to the comparable period in 2006 is
primarily attributable to an increase in stock based payments (non-cash) of
approximately $268,000, which was as a result of grants to certain officers of
the Company for a bonus in connection with extension of employment contracts. It
also includes a one time cash fee for public awareness/investor relations of
approximately $45,000.
Our results of operations for the three and nine months ended September 30, 2007
were significantly impacted as a result of a non-recurring (non-cash) stock
option grant to certain officers of the Company in consideration of extending
their employment contract. The option grant resulted in a charge of
approximately $260,000 to the three and nine month periods ended September 30,
2007. Our stock-based payments to employees and consultants can vary period to
period based upon the terms of the underlying grants. For comparison purposes,
the three months ended September 30, 2007 and 2006, income before income taxes,
excluding stock-based payments of $303,686 and $22,821, was $28,522 and $3,535,
respectively, and for the nine months ended September 30, 2007 and 2006, (loss)
before income taxes, excluding stock-based payments of $354,853 and $87,134, was
($108,857) and ($167,633), respectively.
No benefit for income taxes is provided for in 2007 and 2006 due to the full
valuation allowance on the net deferred tax assets as a result of the
uncertainty of the future realization of deferred tax assets. As a result our
pre-tax loss and net loss are the same.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $938,506 at September 30, 2007.
Cash used by operating activities for the nine months ended September 30, 2007
was $(388,544). This resulted primarily from a net loss of $(537,710), an
increase in accounts receivable of $(283,271) and an increase in accounts
payable and accrued expenses of $127,439 partially offset by stock based
payments of $354,853.
The Company 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), decrease in customer deposits of
$(98,000), offset by an increase in accounts payable and accrued expenses of
$73,522 and stock based compensation of $87,135.
For 2006, net cash was used in operating activities of $(466,041)
substantially due to our net loss of $(481,026), increased by a reduction in
customer deposits of $98,000 and partially offset by non-cash stock based
compensation of $109,959. For 2006, net cash of $1,420,937 was provided by
financing activities due to proceeds from a private placement of our Common
Stock and Class C Common Stock Purchase Warrants. During 2005, net cash was used
in operating activities of $252,040. This was primarily due to net loss of
$(694,809) 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.
28
Our company commenced operations in 1998 and was initially funded by our
three founders, each of whom has made demand loans to our Company 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.
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 the Offering
have the following additional rights:
o REGISTRATION RIGHTS - On December 21, 2006, we obtained an effective
Registration Statement to register the resale of 951,575 shares of our
Common Stock and 475,788 shares of our Common Stock underlying a like
number of Class C Warrants. This prospectus updates the information
included in the original Registration Statement.
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 (i.e. December 21, 2006) 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 the
Company 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 475,788 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. Exemption
from registration is claimed under Rule 506 of Regulation d promulgated under
Section 4(2) of the Securities Act.
29
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 ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes." This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides a guidance on
de-recognition, classification interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 on January 1, 2007
did not have a material impact on the Company's financial statements.
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 40 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.
30
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.
Industry Advisor
In April 2006, we hired Paul S. Pickard as an industry advisor and
consultant to our Company. His contract currently runs through April 2009. Paul
Pickard's previous experience is in running two of the largest distributors in
the promotional products industry and having led the strategic build up of a $1
Billion company. Mr. Pickard most recently served as CEO at American Identity,
one of the largest distributors of promotional products, where he expanded the
sales force over 25% in less than one year and propelled the company to record
earnings. Previously, he led National Pen through a demanding three-year
repositioning initiative, where he transformed a vertically integrated pen
manufacturing company into a direct marketer of promotional products. This
resulted in revenue growing from $100 million to almost $200 million in less
than 48 months. Before joining National Pen, Mr. Pickard was one of four
executives that lead a strategic build up in the manufactured housing retail
business. This build up consisted of seven acquisitions and 14 greenfield
start-ups as a $1 billion division of Fleetwood Enterprises. Fleetwood selected
Mr. Pickard for the task due to his previous contribution in growing Fleetwood's
operations in northern California.
Mr. Pickard's earlier career was with the Taco Bell Division of PepsiCo,
where he was responsible for the Los Angeles market, an information technology
department, and a key marketing initiative. He introduced many new products into
the Taco Bell system, achieved dramatic cost savings for information technology,
and contributed leading-edge ideas to the marketing program. Mr. Pickard began
his post-MBA career as a management consultant with McKinsey & Co. Prior to
attending business school, he worked for Texas Instruments and Hewlett-Packard
in engineering, sales, and strategy development roles. Mr. Pickard holds an
M.B.A. with a concentration in Finance and Marketing and a B.S. in Engineering
with a major in Mechanical Engineering and Material Science, earning both
degrees at Duke University. He currently sits on the board of Luth Research, a
market research supplier.
31
Lack of Committees
Our Company has 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.
Under the National Association of Securities Dealers Automated Quotations
definition, an "independent director means a person other than an officer or
employee of the Company or its subsidiaries or any other individuals having a
relationship that, in the opinion of the Company's board of directors, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of the director. The board's discretion in determining director
independence is not completely unfettered. Further, under the NASDAQ definition,
an independent director is a person who (1) is not currently (or whose immediate
family members are not currently), and has not been over the past three years
(or whose immediate family members have not been over the past three years),
employed by the company; (2) has not (or whose immediate family members have
not) been paid more than $60,000 during the current or past three fiscal years;
(3) has not (or whose immediately family has not) been a partner in or
controlling shareholder or executive officer of an organization which the
company made, or from which the company received, payments in excess of the
greater of $200,000 or 5% of that organizations consolidated gross revenues, in
any of the most recent three fiscal years; (4) has not (or whose immediate
family members have not), over the past three years been employed as an
executive officer of a company in which an executive officer of Ace has served
on that company's compensation committee; or (5) is not currently (or whose
immediate family members are not currently), and has not been over the past
three years (or whose immediate family members have not been over the past three
years) a partner of Ace's outside auditor.
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, its first
responsibility would be to 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.
32
OWNERSHIP OF SECURITIES BY BENEFICIAL OWNER AND MANAGEMENT
As of November 15, 2007, the Company had outstanding 8,026,615 shares of
Common Stock. The only persons of record who presently hold or are known to own
(or believed by the Company 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 the Company's Common Stock of all
officers and directors individually, and all officers and directors as a group.
-------------------------------------------------- ------------------------- -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF COMMON APPROXIMATE
SHARES PERCENTAGE
-------------------------------------------------- ------------------------- -----------------------
OFFICERS AND DIRECTORS:
-------------------------------------------------- ------------------------- -----------------------
-------------------------------------------------- ------------------------- -----------------------
Scott Novack
457 Rockaway Avenue
Valley Stream, NY 11583 1,052,402 13.1
-------------------------------------------------- ------------------------- -----------------------
-------------------------------------------------- ------------------------- -----------------------
Michael D. Trepeta
457 Rockaway Avenue
Valley Stream, NY 11583(2) 1,516,402 17.8
-------------------------------------------------- ------------------------- -----------------------
Dean L. Julia
457 Rockaway Avenue
Valley Stream, NY 11583 (2) 1,486,901 17.5
-------------------------------------------------- ------------------------- -----------------------
-------------------------------------------------- ------------------------- -----------------------
Sean McDonnell
457 Rockaway Avenue
Valley Stream, NY 11583 (3) 50,000 .6
-------------------------------------------------- ------------------------- -----------------------
-------------------------------------------------- ------------------------- -----------------------
All Directors and Officers as a
Group (four persons) (4) 4,085,705 45.3
-------------------------------------------------- ------------------------- -----------------------
-------------------------------------------------- ------------------------- -----------------------
Glenwood Capital Corporation
2070 South Hibiscus Drive
North Miami Beach, FL 33181 (5) 1,245,002 15.3
-------------------------------------------------- ------------------------- -----------------------
Domenico Iannucci
One Windsor Drive
Muttontown, NY 11753 (6) 789,660 9.7
-------------------------------------------------- ------------------------- -----------------------
---------------
(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 500,000 shares. Excludes options to purchase
100,000 shares which will vest in December 2008.
(3) Includes options to purchase 50,000 shares.
(4) Includes options to purchase 1,000,000 shares.
(5) Includes 1,079,032 shares and 50,000 Class B Warrants owned by Glenwood
Capital and 73,880 shares owned by Peter S. Chung. [NEED UPDATED
INFORMATION FROM PETER TO CORRECT NOTES AND CHART.]
(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.
33
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following summary information is as of September 30, 2007 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 Weighted average future issuance under
common stock to be issued exercise price of equity compensation plans
upon exercise outstanding (excluding shares
Plan category of outstanding options options reflected in column (a)
------------------------ ---------------------------- --------------------- ---------------------------
Equity compensation
Plans 2,221,222 1.18 1,778,778
------------------------ ---------------------------- --------------------- ---------------------------
(1) Options exercisable at September 30,2007 include 1,652,247 shares with a
weighted average exercise price of $1.13 per share and aggregate intrinsic
value of $93,945.
EXECUTIVE COMPENSATION
The following table sets forth the overall compensation earned over the
fiscal year ended December 31, 2006 by (1) each person who served as the
principal executive officer of the Company during fiscal year 2006; (2) the
Company's most highly compensated (up to a maximum of two) executive officers as
of December 31, 2006 with compensation during fiscal year 2006 of $100,000 or
more; and (3) those two individuals, if any, who would have otherwise been in
included in section (2) above but for the fact that they were not serving as an
executive of the Company as of December31, 2006.
SALARY COMPENSATION
---------------------------------------
NON-EQUITY NONQUALIFIED
NAME AND OPTIONS INCENTIVE PALN DEFFERED ALL OTHER
PRINCIPAL FISCAL BONUS STOCK AWARDS COMPENSATION COMPENSATION COMPENSATION
POSITION YEAR SALARY ($) ($) AWARDS ($)(1) ($) EARNINGS ($) ($)(2)(3) TOTAL ($)
------------------- ------ ------------ ------- -------- --------- -------------- ------------ ------------- --------------
Dean L. Julia 2006 $164,000 -- -- $ 16,667 -- -- $ 15,600 $ 196,267
Chief Executive
Officer
Michael D. Trepeta 2006 164,000 -- -- $ 16,667 -- -- $ 15,387 $ 196,054
President
(1) Reflects dollar amount expensed by the company during applicable fiscal
year for financial statement reporting purposes pursuant to FAS 123R. FAS
123R requires the company to determine the overall value of the options as
of the date of grant based upon the Black-Scholes method of valuation, and
to then expense that value over the service period over which the options
become exercisable (vest). As a general rule, for time-in-service-based
options, the company will immediately expense any option or portion
thereof which is vested upon grant, while expensing the balance on a pro
rata basis over the remaining vesting term of the option. For a
description FAS 123 R and the assumptions used in determining the value of
the options under the Black-Scholes model of valuation, see the notes to
the financial statements included with this Form 10-KSB.
(2) Includes all other compensation not reported in the preceding columns,
including (i) perquisites and other personal benefits, or property, unless
the aggregate amount of such compensation is less than $10,000; (ii) any
"gross-ups" or other amounts reimbursed during the fiscal year for the
payment of taxes; (iii) discounts from market price with respect to
securities purchased from the company except to the extent available
generally to all security holders or to all salaried employees; (iv) any
amounts paid or accrued in connection with any termination (including
without limitation through retirement, resignation, severance or
constructive termination, including change of responsibilities) or change
in control; (v) contributions to vested and unvested defined contribution
plans; (vi) any insurance premiums paid by, or on behalf of, the company
relating to life insurance for the benefit of the named executive officer;
and (vii) any dividends or other earnings paid on stock or option awards
that are not factored into the grant date fair value required to be
reported in a preceding column.
34
(3) Includes compensation for service as a director described under Director
Compensation, below.
For a description of the material terms of each named executive officers'
employment agreement, including the terms of the terms of any common share
purchase option grants, see that section of this Form 10-KSB captioned
"Employment Agreements."
No outstanding common share purchase option or other equity-based award
granted to or held by any named executive officer in 2006 were repriced or
otherwise materially modified, including extension of exercise periods, the
change of vesting or forfeiture conditions, the change or elimination of
applicable performance criteria, or the change of the bases upon which returns
are determined, nor was there any waiver or modification of any specified
performance target, goal or condition to payout.
For a description of the material terms of any contract, agreement, plan
or other arrangement that provides for any payment to a named executive officer
in connection with his or her resignation, retirement or other termination, or a
change in control of the company see "Employment Agreements".
EXECUTIVE OFFICER OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table provides certain information concerning any common
share purchase options, stock awards or equity incentive plan awards held by
each of our named executive officers that were outstanding as of December 31,
2006.
OPTION AWARDS STOCK AWARDS
-------------------------------------------------------------------------------- -------------------------------------------------
EQUITY
INCENTIVE EQUITY
PLAN INCENTIVE
AWARDS: PLAN
EQUITY NUMBER AWARDS:
INCENTIVE OF MARKET OR
PLAN UNEARNED PAYOUT
AWARDS; MARKET SHARES, VALUE OF
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VALUE OF UNITS OR UNEARNED
SECURITIES SECURITIES SECURITIES SHARES OF SHARES OR OTHER SHARES,
UNDERLYING UNDERLYING UNDERLYING UNITS OF UNITS OF RIGHTS UNITS OR
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION STOCK THAT STOCK THAT HAVE OTHER RIGHTS
OPTIONS(#) OPTIONS(#) UNEARNED EXERCISE EXPIRATION HAVE NOT HAVE NOT NOT THAT HAVE NOT
NAME EXERCISABLE UNEXERCISABLE OPTIONS (#) PRICE ($) DATE VESTED (#) VESTED VESTED VESTED
--------- ------------ -------------- ------------- ---------- ------------ ---------- ---------- ---------- -------------
Dean L.
Julia 250,000 -- -- $ 1.00 01/03/15 -- -- -- --
(1) 100,000 100,000 $ 1.20 12/28/15
Michael D.
Trepeta 250,000 -- -- $ 1.00 01/03/15 -- -- -- --
(1) 100,000 100,000 $ 1.20 12/28/15
--------------
(1) Common share purchase options to acquire 250,000 shares of common stock at
$1.00 per share were granted on January 3, 2005. These options were fully
exercisable (vested) upon grant. Options granted on December 28, 2005 vest
and are exercisable immediately as to one-half of the options and the
balance shall vest and become exercisable on December 28, 2008. All
options contain cashless exercise provisions.
EMPLOYMENT AGREEMENTS
Each of the following executive officers is a party to an employment
agreement with the Company.
NAME POSITION ANNUAL SALARY(1) BONUS (2)
Dean L. Julia Chief Financial Officer $ 188,000 Annual bonuses of at least 5% of pre-tax earnings
Michael Trepeta President $ 188,000 Annual bonuses of at least 5% of pre-tax earnings
----------
(1) Annual salary is for 2007. Compensation of each executive officer named in
the table above has his monthly base salary increased by $2,000 each
subsequent March 1st during the term of the agreement and any extensions
thereof. The current monthly base salary of $14,000 increased to $16,000
on March 1, 2007.
35
(2) Annual bonuses are paid by us by the last business day of March for the
preceding calendar (fiscal) year, except in the event of termination prior
to the end of any fiscal year (other than termination for cause), a pro
rata portion of the annual bonus shall be paid within 30 days of
termination.
A summary of each Executive's employment agreement, as amended, is as
follows:
Each employment agreement, as amended, expires on February 29, 2011. The
Agreement shall be automatically renewed for a period of two years thereafter
unless the Executive gives 60 days prior written notice of his intention not to
renew this Agreement prior to the end of the initial Term. Each employment
agreement may not be terminated without cause. However, it may be terminated at
any time by the Executive upon written three-month notice. In such event, the
Company shall be relieved of all of its obligations under the Agreement, except
for payment of the Executive's Base Salary and Annual Bonus earned and unpaid
through the effective date of termination, those obligations with respect to
indemnification and director and officer insurance and severance pay as
described below.
We may terminate the Executive's employment for cause ("Cause") as defined
in the Agreement. In the event this Agreement is terminated for cause, the
Executive's Base Salary and any unearned Annual Bonus, severance pay and all
benefits shall terminate immediately upon such discharge, and we shall have no
further obligations to the Executive except for payment and reimbursement for
any monies due which right to payment or reimbursement accrued prior to such
termination.
We may terminate this Agreement upon the disability as defined in the
Agreement or death of the Executive by giving written notice to the Executive.
In the case of disability, such termination will become effective immediately
upon the giving of such notice unless otherwise specified by us. Upon any such
termination, we shall be relieved of all our obligations under the Executive's
employment, except for payment of the Executive's Base Salary and Annual Bonus
earned and unpaid through the effective date of termination and severance pay.
We have agreed to defend and indemnify each Executive in his capacity as
an officer against all claims, judgments, damages, liabilities, costs and
expenses (including reasonable attorney's fees) arising out of, based upon, or
related to his performance of services to us, to the maximum extent permitted
under law. We will also use our reasonable best efforts to include each
Executive as an insured under all applicable directors' and officers' liability
insurance policies maintained by us.
Each Executive is also entitled to the following additional benefits:
o $2,000 per month pay raise on each March 1 during the term of the
Agreement 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
December 28, 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 irrespective of employment or termination thereof; Pursuant
to a three-year extension of their employment agreements, the
automatic grant of 50,000 options at fair market value on each
anniversary date of the contract will recommence on March 1, 2008. A
signing bonus was paid to each executive consisting of options to
purchase 150,000 shares, fully vested at the date of grant and
exercisable at $1.20 per share at any time through August 22, 1017;
o Election to the Board of Directors and during the term of
employment, the Board's nomination for re-election to the Board;
o Paid disability insurance and term life insurance for the benefit of
each Executive's family in an amount fixed by the Board at a cost
not to exceed $10,000 per annum;
o Use of company automobile with all related costs paid for by us;
o Health insurance;
o Right to participate in any pensions of our company;
36
o Termination pay of one-year base salary based upon the scheduled
annual salary of each executive officer for the next contract year,
plus the amount of bonuses paid or entitled to be paid to the
executive for the current fiscal year or the preceding fiscal year,
whichever is higher;
o Health insurance; and
o Right to participate in any pensions of our company.
CORPORATE GOVERNANCE
BOARD OF DIRECTORS
BOARD MEMBERS WHO ARE DEEMED INDEPENDENT
Our board of directors has determined that none of our directors are
"independent" as that term is defined by the National Association of Securities
Dealers Automated Quotations ("NASDAQ"). See "Lack of Committees" for the NASDAQ
definition of "Independent Director."
DIRECTOR COMPENSATION
STOCK OPTIONS
Stock options and equity compensation awards to our non-employee /
non-executive director are at the discretion of the Board. To date, no options
or equity awards have been made to our non-employee / non-executive director.
CASH COMPENSATION
Our non-employee / non-executive director is eligible to receive a fee of
$500 to be paid for attending each Board meeting; however, no fees were paid in
2006.
TRAVEL EXPENSES
All directors shall be reimbursed for their reasonable out of pocket
expenses associated with attending the meeting.
DIRECTOR COMPENSATION
The following table shows the overall compensation earned for the 2006
fiscal year with respect to each non-employee and non-executive director as of
December 31, 2006.
DIRECTOR COMPENSATION
------------------------------------------------------------------------------------------------------
FEES
EARNED NONQUALIFIED
NAME AND OR PAID DEFERRED
PRINCIPAL IN CASH STOCK AWARDS ($) COMPENSATION COMPENSATION COMPENSATION ($)
POSITION ($) AWARDS ($) (1) ($) (2) EARNINGS ($) (3) TOTAL ($)
----------------------- --------- ----------- ----------- -------------- --------------- ----------------- -------------
Scott Novack, Director -- -- -- -- -- -- --
-----------------
(1) Reflects dollar amount expensed by the company during applicable fiscal
year for financial statement reporting purposes pursuant to FAS 123R. FAS
123R requires the company to determine the overall value of the options as
of the date of grant based upon the Black-Scholes method of valuation, and
to then expense that value over the service period over which the options
become exercisable (vest). As a general rule, for time-in-service-based
options, the company will immediately expense any option or portion
thereof which is vested upon grant, while expensing the balance on a pro
rata basis over the remaining vesting term of the option. For a
description FAS 123 R and the assumptions used in determining the value of
the options under the Black-Scholes model of valuation, see the notes to
the financial statements included with this prospectus.
(2) Excludes awards or earnings reported in preceding columns.
37
(3) Includes all other compensation not reported in the preceding columns,
including (i) perquisites and other personal benefits, or property, unless
the aggregate amount of such compensation is less than $10,000; (ii) any
"gross-ups" or other amounts reimbursed during the fiscal year for the
payment of taxes; (iii) discounts from market price with respect to
securities purchased from the company except to the extent available
generally to all security holders or to all salaried employees; (iv) any
amounts paid or accrued in connection with any termination (including
without limitation through retirement, resignation, severance or
constructive termination, including change of responsibilities) or change
in control; (v) contributions to vested and unvested defined contribution
plans; (vi) any insurance premiums paid by, or on behalf of, the company
relating to life insurance for the benefit of the director; (vii) any
consulting fees earned, or paid or payable; (viii) any annual costs of
payments and promises of payments pursuant to a director legacy program
and similar charitable awards program; and (ix) any dividends or other
earnings paid on stock or option awards that are not factored into the
grant date fair value required to be reported in a preceding column.
2005 EMPLOYEE BENEFIT AND CONSULTING SERVICES COMPENSATION PLAN
On January 3, 2005, our company established an Employee Benefit and
Consulting Services Compensation Plan (the "2005 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
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.
38
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 December 31, 2006, the Company has granted non-statutory stock
options to purchase 1,961,222 shares of the company's common stock which are
currently outstanding at exercise prices ranging from $1.00 per share to $ 2.50
per share, exclusive of options which have been cancelled since the date of
grant. The board has granted options with varying terms.
It is not possible to predict the individuals who will receive future
awards under the 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.
The table below contains information as of September 30, 2007 on the known
benefits provided to certain persons and group of persons under the Plan.
---------------------------------------------------- -------------------- --------------------- --------------------------
VALUE OF UNEXERCISED
NUMBER OF SHARES RANGE OF EXERCISE OPTIONS AT
SUBJECT TO OPTIONS PRICE ($) PER SHARE SEPTEMBER 30, 2007 (1)
---------------------------------------------------- -------------------- --------------------- --------------------------
---------------------------------------------------- -------------------- --------------------- --------------------------
Dean L. Julia, Chief Executive Officer 600,000 $1.00 - $1.20 $ 60,000
---------------------------------------------------- -------------------- --------------------- --------------------------
Michael D. Trepeta, President 600,000 $1.00 - $1.20 60,000
---------------------------------------------------- -------------------- --------------------- --------------------------
Sean McDonnell, Chief Financial officer 50,000 $1.00 5,000
---------------------------------------------------- -------------------- --------------------- --------------------------
Three Executive Officers As a group 1,250,000 $1.00 - $1.20 125,000
---------------------------------------------------- -------------------- --------------------- --------------------------
Non-Executive Officer, Employees and Consultants 971,222 $1.00-$ 2.50 $ 21,263
---------------------------------------------------- -------------------- --------------------- --------------------------
----------
(1) Value is normally calculated by multiplying (a) the difference between the
market value per share at period end (i.e. $1.10 based upon a last sale on
September 30, 2007) and the option exercise price by (b) the number of
shares of Common Stock underlying the option.
ELIGIBILITY
Our officers, employees, directors and consultants of Ace and our
subsidiaries are eligible to be granted stock options, and common stock awards.
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.
39
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, 2005 and 2006, we purchased a total of $20,471,
$10,313 and $8,657, 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
In 2006, we 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.
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:
40
"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 varioue
dates in October 2007, 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
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 131,000 90,000 41,000 1.6 / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
KENNETH A. SEBREE 45,000 45,000 -0- * / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
STERNE AGEE & LEACH INC.
C/F FLORENCE NELSON ROTH IRA 31,000 22,500 8,500 * / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
STERNE AGEE & LEACH INC.
C/F WENDELL FAIRBANKS IRA 45,000 45,000 -0- * /
---------------------------------- ------------------- ----------------- ---------------- -------------------
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 17,000 17,000 -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
---------------------------------- ------------------- ----------------- ---------------- -------------------
41
---------------------------------- ------------------- ----------------- ---------------- -------------------
KEVIN AND BRENDA NARCOMEY JTWROS 85,714 90,000 -0- 1.1 / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
WILLIAM R. MARSH 81,113 81,113 -0- 1.1 / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
RICHARD J. AND JOAN M. BROWN
JTWROS 45,000 45,000 -0- * / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
HAROLD E. AND CONNIE L.
CROWLEY JTWROS 45,000 45,000 -0- * / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
LOUISE E. REHLING TRUST 16,329 16,329 -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
---------------------------------- ------------------- ----------------- ---------------- -------------------
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.
PARTNERSHIP 45,000 45,000 -0- * / 0
---------------------------------- ------------------- ----------------- ---------------- -------------------
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."
42
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;
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.
43
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
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).
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 November 15, 2007,
there were 8,026,615 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 2, 2008 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.
44
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
In 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 currently exercisable in whole or in part until the close of business
on January 2, 2008.
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 November 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.
45
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.
EXPERTS
The audited financial statements of Ace Marketing & Promotions, Inc. as of
December 31, 2006 and 2005 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.
46
ACE MARKETING &
PROMOTIONS, INC.
CONTENTS
--------------------------------------------------------------------------------
PAGES
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Years Ended December 31, 2006 and 2005
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets F-2
Statements of Operations F-3
Statement of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-15
Three and Nine Months Ended September 30, 2007 and 2006
Condensed Balance Sheet (Unaudited) Q-1
Condensed Statements of Operations (Unaudited) Q-2
Condensed Statements of Cash Flows (Unaudited) Q-3
Notes to Condensed Financial Statements (Unaudited) Q-4 - Q-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2006 and 2005, 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, 2006 and 2005 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.
As discussed in Note 1 to the financial statements, effective January 1, 2006,
the Company adopted Statement of Financial Accounting Standards No. 123(R),
SHARE-BASED PAYMENT.
Melville, New York
February 12, 2007
--------------------------------------------------------------------------------
F-1
ACE MARKETING &
PROMOTIONS, INC.
BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2006 2005
-------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,353,131 $ 398,235
Accounts receivable, net of allowance for doubtful accounts of
$10,000 at December 31, 2006 and 2005, respectively 721,986 711,056
Prepaid expenses and other current assets 47,683 41,282
-----------------------------------
Total Current Assets 2,122,800 1,150,573
Property and Equipment, net 16,899 21,100
Other Assets 5,492 5,492
-----------------------------------
Total Assets $ 2,145,191 $ 1,177,165
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 359,518 $ 355,475
Accrued expenses 137,598 125,485
Customer deposits - 98,000
-----------------------------------
Total Current Liabilities 497,116 578,960
-----------------------------------
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;
8,028,363 and 5,888,076 shares issued and outstanding
at December 31, 2006 and 2005, respectively 803 589
Additional paid-in capital 3,176,791 1,646,109
Accumulated deficit (1,529,519) (1,048,493)
-----------------------------------
Total Stockholders' Equity 1,648,075 598,205
-----------------------------------
Total Liabilities and Stockholders' Equity $ 2,145,191 $ 1,177,165
===================================
-------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-2
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 2005
------------------------------------------------------------------------------------------------------
Revenue, net $ 4,506,807 $ 3,422,665
Cost of Revenue 3,183,825 2,324,185
-------------------------------------
Gross Profit 1,322,982 1,098,480
-------------------------------------
Operating Expenses:
Selling (including stock based compensation of
$63,280 and $17,533 for the years ended
December 31, 2006 and 2005, respectively) 444,192 461,233
General and administrative (including stock based
compensation of $46,679 and $471,888 for the
years ended December 31, 2006 and 2005, respectively) 1,362,492 1,315,477
-------------------------------------
Total Operating Expenses 1,806,684 1,776,710
-------------------------------------
Loss from Operations (483,702) (678,230)
-------------------------------------
Other Income (Expense):
Interest expense - (4,532)
Interest income 2,676 224
-------------------------------------
Total Other Income (Expenses) 2,676 (4,308)
-------------------------------------
Net Loss $ (481,026) $ (682,538)
=====================================
Net Loss Per Common Share:
Basic $ (0.07) $ (0.12)
=====================================
Diluted $ (0.07) $ (0.12)
=====================================
Weighted Average Common Shares Outstanding:
Basic 7,142,594 5,880,531
=====================================
Diluted 7,142,594 5,880,531
=====================================
------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-3
ACE MARKETING &
PROMOTIONS, INC.
Statement of Stockholders' Equity
------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
------------------------------------------------------------------------------------------------------------------------
Total Common Stock Additional
Stockholders' ------------------------------ Paid-in
Equity Shares Amount Capital (Deficit)
-------------- -------------- -------------- -------------- --------------
Balance, January 1, 2005 $ 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 -
Stock Based Payments 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)
Securities Issued to Private
Placement Investors, net 1,420,937 1,091,255 109 1,420,828 -
Cashless Exercise of Stock
Purchase Warrants - 1,029,032 103 (103) -
Cashless Exercise of Stock Options - 20,000 2 (2) -
Stock Based Payments 109,959 - - 109,959 -
Net Loss (481,026) - - - (481,026)
-------------- -------------- -------------- -------------- --------------
Balance, at December 31, 2006 $ 1,648,075 8,028,363 $ 803 $ 3,176,791 $ (1,529,519)
============== ============== ============== ============== ==============
------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-4
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 2005
-----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (481,026) $ (682,538)
------------------------------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4,201 5,590
Allowance for doubtful accounts - 10,000
Stock-based compensation 109,959 489,421
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (10,930) (408,452)
Prepaid expenses and other assets (6,401) 24,768
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses 16,156 211,171
Customer deposits (98,000) 98,000
-------------------------------------
Total adjustments 14,985 430,498
-------------------------------------
Net Cash Used in Operating Activities (466,041) (252,040)
-------------------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment - (11,010)
-------------------------------------
Net Cash Used in Investing Activities - (11,010)
-------------------------------------
Cash Flows from Financing Activities:
Proceeds from private placement, net 1,420,937 95,000
-------------------------------------
Net Cash Provided by Financing Activities 1,420,937 95,000
-------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 954,896 (168,050)
Cash and Cash Equivalents, beginning of year 398,235 566,285
-------------------------------------
Cash and Cash Equivalents, end of year $ 1,353,131 $ 398,235
=====================================
------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-5
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
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, 2006 and 2005, 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, 2006 and 2005.
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, 2006 AND 2005
--------------------------------------------------------------------------------
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, 2006 and 2005 approximated $500 and
$6,100, respectively.
SHARE-BASED COMPENSATION - Prior to January 1, 2006, the Company accounted
for share-based compensation under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Therefore, the Company measured
compensation expense for its share-based compensation using the intrinsic
value method, that is, as the excess, if any, of the fair market value of
the Company's stock at the grant date over the amount required to be paid to
acquire the stock, and provided the disclosures required by SFAS 123,
"Accounting for Stock-Based Compensation" (SFAS 123) and SFAS 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" (SFAS
148).
Effective January 1, 2006, the Company began recording compensation expense
associated with stock options and other equity-based compensation in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123
(revised 2004), SHARE-BASED PAYMENT, using the modified prospective
transition method and therefore has not restated results for prior periods.
Under the modified prospective transition method, share-based compensation
expense for 2006 includes, (1) compensation expense for all share-based
awards granted on or after January 1, 2006 as determined based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123R and, (2) compensation expense for share-based compensation awards
granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions
of SFAS 123. The Company recognizes compensation expense on a straight-line
basis over the requisite service period of the award.
PRO FORMA FINANCIAL INFORMATION - For stock options granted prior to the
adoption of SFAS 123R, the following table illustrates the pro forma effect
on net income and earnings per common share for the year ended December 31,
2005, as if the Company had applied the fair value recognition provisions of
SFAS 123 in determining stock-based compensation (except loss per share
data):
YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------------------------
Net Loss, as reported $ (682,538)
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)
===============
Loss Per Share:
Basic and Diluted - as reported $ (.12)
===============
Basic and Diluted - Pro forma $ (.15)
===============
--------------------------------------------------------------------------------
F-7
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
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, 2006 and 2005, due to their short term nature.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In July 2006, the FASB issued
Financial Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
("FIN 48"), as an interpretation of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS
No. 109 and prescribes a recognition threshold of more-likely-than-not to be
sustained upon examination. Measurement of the tax uncertainty occurs if the
recognition threshold has been met. FIN 48 also provides guidance on
derecognition, classification, interest, penalties, accounting in interim
periods, disclosure, and transition. FIN 48 will be effective in the first
quarter of Fiscal 2007. Differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the
amounts reported after adoption should be accounted for as a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. The Company does not anticipate that the adoption of this
Statement will have a material effect on its financial position or results
of operation.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR
MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL
STATEMENTS ("SAB 108"). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff
believes that registrants should quantify errors using both a balance sheet
and an income statement approach and evaluate whether either approach
results in quantifying a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. SAB 108 was effective
for the Company's fiscal fourth quarter ending December 31, 2006. The
Company does not anticipate that the adoption of this Statement will have a
material effect on its financial position or results of operation.
On September 15, 2006, the Financial Accounting Standards Board ("FASB")
issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157
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. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company does not anticipate that the adoption of this Statement will have a
material effect on our financial position or results of operation.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans ("SFAS 158"). SFAS 158 requires an employer to
recognize the over-funded or under-funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to
recognize changes in funded status in the year in which the changes occur
through comprehensive income. SFAS 158 will have no impact on the Company's
financial position or results of operation.
--------------------------------------------------------------------------------
F-8
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at December 31:
USEFUL LIVES 2006 2005
-----------------------------------------------------------------------------------------------
Furniture and Fixtures 5 years $ 47,844 $ 47,844
Leasehold Improvements 5 years 8,919 8,919
--------------------------------------
56,763 56,763
Less Accumulated Depreciation 39,864 35,663
--------------------------------------
$ 16,899 $ 21,100
======================================
Depreciation expense for the years ended December 31, 2006 and 2005 was
$4,201 and $5,590, respectively.
3. INCOME TAXES
The provision for income taxes for the years ended December 31, 2006 and
2005 is summarized as follows:
2006 2005
----------------------------------------------------------------------------------------
Current:
Federal $ - $ -
State - -
-------------------------------------
- -
-------------------------------------
Deferred:
Federal - -
State - -
-------------------------------------
$ - $ -
=====================================
The Company has federal and state net operating loss carryforwards of
approximately $2,485,000, which can be used to reduce future taxable income
through 2026.
The tax effects of temporary differences which give rise to deferred tax
assets (liabilities) at December 31, are summarized as follows:
2006 2005
----------------------------------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryforwards $ 994,000 $ 198,000
Stock based compensation 55,000 196,000
Allowance for doubtful accounts 4,000 4,000
-------------------------------------
Deferred Tax Assets 1,053,000 398,000
Less Valuation Allowance 1,053,000 398,000
-------------------------------------
Net Deferred Tax Asset $ - $ -
=====================================
--------------------------------------------------------------------------------
F-9
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
YEARS ENDED DECEMBER 31, 2006 2005
----------------------------------------------------------------------------
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%
=============================
4. 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). Each Class A Warrant has an exercise
price of $2.00 and was to expire on January 3, 2007. On January 3, 2007, the
Company extended the expiration date of the Class A Warrants to March 31,
2007.
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.
During Fiscal 2006, the Company completed a private placement through the
sale of 15.859 units (each consisting of 60,000 common shares and 30,000
Class C Warrants) at a purchase price of $105,000 per unit for net proceeds
of $1,420,937, net of transaction costs of approximately $244,000. Each
Class C Warrant has an exercise price of $1.75 per share and expires on June
30, 2009.
Pursuant to the Offering, the Placement Agent was issued 139,680 shares of
the Company's common stock and a warrant to purchase 95,160 shares of common
stock at an exercise price of $1.00 per share. The placement agent warrants
expire on June 29, 2011. In addition, pursuant to the Offering, the Company
issued options to purchase 50,000 shares of the Company's common stock at an
exercise price of $.10 per share to a law firm in connection with legal
services for the Offering. The options were valued at $95,000 and have been
recorded as a cost of the Offering.
5. SHARE-BASED COMPENSATION
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 had 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 for the year ended December 31, 2005. 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.
--------------------------------------------------------------------------------
F-10
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
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
for the year ended December 31, 2005.
PURCHASE OF LISTS AND SEARCH ENGINE - On April 10, 2006, the Company granted
40,000 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 expire on April 10, 2011. 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 year ended December
31, 2006.
SHARE BASED COMPENSATION 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 4,000,000
non-statutory and incentive stock options and stock awards to directors,
officers, consultants and key employees of the Company.
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 generally vest over periods ranging from 1 to 3 years 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 ("SFAS 123(R)"), which replaces SFAS 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. SFAS 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 SFAS 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, SFAS 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.
--------------------------------------------------------------------------------
F-11
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
In adopting SFAS 123(R), the Company applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of SFAS 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
SFAS 123.
As a result of the adoption of SFAS 123(R), the Company's results for the
year ended December 31, 2006 include employee share-based compensation
expense totaling approximately $49,000. Such amounts have been included in
the Statement 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. Employee stock compensation expense recorded under APB No.
25 in the Statement of Operations for the year ended December 31, 2005
totaled $0.
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 took into consideration guidance under SFAS 123(R) and SEC Staff
Accounting Bulletin No. 107 (SAB 107) when reviewing and updating
assumptions. The expected volatility is based upon historical volatility of
the Company's 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 estimated fair value of each option award granted was determined on the
date of grant using the following weighted-average assumptions for option
grants during the years ended December 31, 2006 and 2005:
2006 2005
----------------------------------------------------------------------------
Dividend Yield 0.00% 0.00%
Volatility 25.00% 7.17%
Risk-Free Interest Rate 5.02% 2.82%
Expected Life 5.00 YEARS 9.85 years
A summary of option activity under the Plan as of December 31, 2006, and
changes during the year then ended is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term (years) Value
--------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 2,777,000 $ 1.05 - $ -
Granted 222,000 2.16 - -
Exercised (37,778) 1.00 - -
Forfeited (1,000,000) 1.00 - -
-----------------
Outstanding, end of year 1,961,222 $ 1.20 6.09 $ 1,169,417
========================================================================
Exercisable, end of year 1,087,455 $ 1.11 7.06 $ 724,858
========================================================================
--------------------------------------------------------------------------------
F-12
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
For the year ended December 31, 2006, share-based compensation expense
related to stock options was approximately $92,000. The weighted-average
grant-date fair value of options granted during the years ended December 31,
2006 and 2005 was $.57 and $.20, respectively.
The aggregate intrinsic value of options outstanding and options exercisable
at December 31, 2006 is calculated as the difference between the exercise
price of the underlying options and the market price of the Company's common
stock for the shares that had exercise prices, that were lower than the
$1.75 closing price of the Company's common stock on December 29, 2006. The
total intrinsic value of options exercised in the years ended December 31,
2006 and 2005 was approximately $42,500 and $0, respectively, determined as
of the date of exercise. The Company received no cash proceeds from options
exercised in the years ended December 31, 2006 and 2005. Options exercised
during the year ended December 31, 2006 were completed through cashless
exercise provisions of the Plan. There were no options exercised in the year
ended December 31, 2005.
A summary of the status of the Company's non-vested shares as of December
31, 2006 and the changes during the year ended December 31, 2006, is as
follows:
Weighted
Average
Grant-Date
Non-vested Shares Shares Fair Value
------------------------------------------------------------------------------------
Non-vested at January 1, 2006 1,911,200 $ .18
Granted 222,000 .57
Vested (259,433) .20
Forfeited (1,000,000) .13
-----------------------------------
Non-vested at December 31, 2006 873,767 $ .32
===================================
As of December 31, 2006 and 2005, the fair value of unamortized compensation
cost related to unvested stock option awards was approximately $216,000 and
$199,000, respectively. Unamortized compensation cost as of December 31,
2006 is expected to be recognized over a remaining weighted-average vesting
period of 4.02 years. For the year ended December 31, 2006, the weighted
average fair value of options exercised was $.13.
COMMON SHARES RESERVED
Class A Warrants 737,000
Class B Warrants 100,000
Class C Warrants 475,788
Placement Agent Warrants 95,160
2005 Stock Option Plan 3,962,222
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,
----------------------------------------------------------------------------
2007 $ 14,000
--------------------------------------------------------------------------------
F-13
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
Rent expense was approximately $72,000 and $45,000 for the years December
31, 2006 and 2005, 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 2 year period. Minimum aggregate future commitments under the
employment contracts is as follows:
YEARS ENDING DECEMBER 31,
----------------------------------------------------------------------------
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, 2006 and 2005, a customer accounted
for approximately 21% and 15% 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 $8,700 and
$10,000 for the years ended December 31, 2006 and 2005, 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, 2006 2005
----------------------------------------------------------------------------
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.
10. SUBSEQUENT EVENTS
In February 2007, the Company entered into a non-binding letter of intent to
acquire the customer lists and intangible assets of a promotions company.
The purchase price is estimated to be approximately $380,000, payable 50% in
cash and 50% in restricted Common Stock of the Company.
--------------------------------------------------------------------------------
F-14
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------
In February 2007, the Company entered into a joint marketing and sales
agreement with Atrium Enterprises Ltd. ("Atrium"). Atrium provides solutions
to corporate customers through the design and application of performance
improvement programs.
The agreement provides for the Company to receive the exclusive rights to
market and sell Atrium's products and services to its customers and provides
Atrium the exclusive right to sell and market the Company's promotional
services to its' customers. The Company will receive a 50% commission on
gross profit (as defined) from all sales of Atrium's products and services
generated by the Company. Atrium will receive a 50% commission on gross
profit (as defined) from all sales of the Company's promotional services
generated by Atrium. In addition, Atrium was granted an option to purchase
70,000 shares of the Company's common stock at an exercise price of $2.50
per share. The options vest in three equal installments commencing on
February 15, 2008, and expire four years after the date of grant.
--------------------------------------------------------------------------------
F-15
PART I. FINANCIAL INFORMATION
ACE MARKETING & PROMOTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
-------------------------------------------------------------------------------------------
SEPTEMBER 30, 2007
-------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 938,506
Accounts receivable, net of allowance for doubtful accounts of $10,000 1,005,257
Prepaid expenses and other current assets 101,225
------------
Total Current Assets 2,044,988
Property and Equipment, net 39,040
Other Assets 7,745
------------
Total Assets $ 2,091,773
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 373,032
Accrued expenses 251,523
------------
Total Current Liabilities 624,555
------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; 25,000,000 shares authorized
8,040,863 shares issued and outstanding 804
Preferred stock $.0001 par value: 500,000 shares authorized
no shares outstanding -
Additional paid-in capital 3,563,144
Accumulated deficit (2,065,229)
Less: Treasury Stock, at cost, 23,334 shares (31,501)
------------
Total Stockholders' Equity 1,467,218
------------
Total Liabilities and Stockholders' Equity $ 2,091,773
============
-------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
Q-1
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------------------------------------------
Revenues, net $ 1,639,182 $ 1,357,655 $ 4,322,848 $ 3,521,251
Cost of Revenues 1,050,799 918,632 2,876,397 2,448,096
------------ ------------ ------------ ------------
Gross Profit 588,383 439,023 1,446,451 1,073,155
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 869,277 459,791 2,004,185 1,330,275
------------ ------------ ------------ ------------
Total Operating Expenses 869,277 459,791 2,004,185 1,330,275
------------ ------------ ------------ ------------
Loss from Operations (280,894) (20,768) (557,734) (257,120)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest expense (1) - (44) -
Interest income 5,731 1,482 22,068 2,353
------------ ------------ ------------ ------------
Total Other Income (Expense) 5,730 1,482 22,024 2,353
------------ ------------ ------------ ------------
Loss Before Provision for Income Taxes (275,164) (19,286) (535,710) (254,767)
Provision for Income Taxes - - - -
------------ ------------ ------------ ------------
Net Loss $ (275,164) $ (19,286) $ (535,710) $ (254,767)
============ ============ ============ ============
Net Loss Per Common Share:
Basic $ (0.03) $ - $ (0.07) $ (0.04)
============ ============ ============ ============
Diluted $ (0.03) $ - $ (0.07) $ (0.04)
============ ============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 8,015,708 7,389,442 8,018,885 6,859,859
============ ============ ============ ============
Diluted 8,015,708 7,389,442 8,018,885 6,859,859
============ ============ ============ ============
----------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
Q-2
ACE MARKETING & PROMOTIONS, INC.
Condensed Statements of Cash Flows (unaudited)
-------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2007 2006
-------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (535,710) $ (254,767)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,940 3,151
Stock-based payments 354,853 87,135
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (283,271) (61,399)
Prepaid expenses and other assets (55,795) (48,619)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 127,439 73,522
Customer deposits - (98,000)
------------ ------------
Total adjustments 147,166 (44,210)
------------ ------------
Net Cash Used in Operating Activities (388,544) (298,977)
------------ ------------
Cash Flows from Investing Activities:
Proceeds from private placement, net - 1,200,670
Acquisition of property and equipment (26,081) -
------------ ------------
Net Cash (used in) Provided by Financing Activities (26,081) 1,200,670
------------ ------------
Net Decrease (Increase) in Cash and Cash Equivalents (414,625) 901,693
Cash and Cash Equivalents, beginning of period 1,353,131 398,235
------------ ------------
Cash and Cash Equivalents, end of period $ 938,506 $ 1,299,928
============ ============
-------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
Q-3
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
The Condensed Balance Sheet as of September 30, 2007, the Condensed Statements
of Operations for the three and nine months ended September 30, 2007 and 2006
and the Condensed Statements of Cash Flows for the nine months ended September
30, 2007 and 2006 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, 2007, results of operations for the three and nine months ended
September 30, 2007 and 2006 and cash flows for the nine months ended September
30, 2007 and 2006.
This report should be read in conjunction with our Form 10-KSB for our fiscal
year ended December 31, 2006.
The result of operations and cash flows for the three and/or nine months ended
September 30, 2007 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.
New Accounting Pronouncements - In July 2006, the FASB issued FASB
Interpretation 48, "Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes." This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides a guidance on de-recognition, classification interest and penalties,
accounting in interim periods, disclosure and transition. The adoption of FIN 48
on January 1, 2007 did not have a material impact on the Company's financial
statements.
Q-4
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(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. The number of common shares potentially issuable
upon the exercise of certain options and warrants that were excluded from the
diluted loss per common share calculation was approximately 3,679,000 and
3,304,000 because they are antidilutive as a result of a net loss for the nine
months ended September 30, 2007 and 2006.
3. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company accounts for stock-based compensation
with its employees 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)"). 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.
Stock options and warrants issued in exchange for non-employee services pursuant
to the provisions of FAS 123(R), Emerging Issues Task Force ("EITF") 96-3 and
EITF 96-18 are accounted for at the fair value of the consideration or services
received or the fair value of the equity instruments issued, whichever is more
reliably measurable
The Company's results for the three and nine month periods ended September 30,
2007 and 2006 include share-based compensation expense totaling approximately
$304,000 and $23,000 and $355,000 and $87,000, 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.
The following table summarizes stock-based compensation expense for the three
and nine months ended September 30, 2007 and 2006:
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Employee stock-based compensation - option grants $ 270,865 $ 12,131 $ 296,593 $ 36,621
Employee stock-based compensation - stock grants 12,000 - 12,000 -
Non-Employee stock-based compensation - option grants 12,721 10,690 38,160 50,513
Non-Employee stock-based compensation - stock grants 8,100 - 8,100 -
---------- ---------- ---------- ----------
Total $ 303,686 $ 22,821 $ 354,853 $ 87,134
========== ========== ========== ==========
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.
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.
Q-5
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. For option grants, 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, 2007 and 2006 are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
---- ---- ---- ----
Expected volatility 58.23% - 58.23% 25.00%
Expected dividend yield - - - -
Risk-free interest rate 4.15% - 4.15% 5.02%
Expected term (in years) 10.00 - 10.00 5.00
The following table represents the activity under our stock option plan :
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price Term Value
----------------------------------------------------------------------------------------------------
Outstanding, January 1, 2007 1,921,222 $ 1.17
Granted 300,000 $ 1.20
Exercised -
Forfeited -
------------
Outstanding, September 30, 2007 2,221,222 $ 1.18 6.00 $ 111,922
============
Options exercisable, September 30, 2007 1,652,247 $ 1.13 6.56 $ 93,945
============
The weighted-average grant-date fair value of options granted during the three
and nine months ended September 30, 2007 was $0.86 and $0.86, respectively. The
weighted-average grant-date fair value of options granted during the three and
nine months ended September 30, 2006 was $0.00 and $0.57, respectively.
The aggregate intrinsic value of options outstanding and options exercisable at
September 30, 2007 is calculated as the difference between the exercise price of
the underlying options and the market price of the Company's common stock for
the shares that had exercise prices, that were lower than the $1.10 closing
price of the Company's common stock on September 28, 2007.
As of September 30, 2007, the fair value of unamortized compensation cost
related to unvested stock option awards was approximately $135,800. Unamortized
compensation cost as of September 30, 2007 is expected to be recognized over a
remaining weighted-average vesting period of 3.25 years.
Additionally, the Plan provides for the granting of restricted or non-restricted
share awards. During the nine months ended September 30, 2007, the Company
awarded 7,500 shares of non-restricted common stock to certain employees. The
weighted average fair value of these awards as of the date of grant was $1.60
per share. Compensation expense associated with non-restricted shares is
recognized on the date of grant, compensation expense associated with restricted
share awards is recognized over the time period that the restrictions associated
with the awards lapse. The Company recognized $12,000 of expense for the three
and nine months ended September 30, 2007 in connection with stock awards. There
were no stock awards in the three and nine months ended September 30, 2006.
There are no unvested stock awards as of September 30, 2007.
Q-6
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
4. TRANSACTIONS WITH MAJOR CUSTOMER
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 the three and nine months ended September 30, 2007 and 2006, revenue from
one customer accounted for approximately 31.3% and 25.9%, 37.7 % and 26.3%,
respectively of total revenue.
5. TREASURY SHARES
In April 2007, in connection with a settlement arrangement with a former sales
agent, the Company received 23,334 shares of its common stock from the sales
agent. The shares have been recorded at their fair value on the date of receipt
and presented as treasury shares.
6. EMPLOYMENT CONTRACTS
On August 22, 2007 the Company extended the employment contracts of two
officers. The extensions are on terms similar to the initial contracts and
expire on February 28, 2011, except that the extensions contain one year
severance pay as defined.
7. CONSULTING AGREEMENT
During the three and nine months ended September 30, 2007, the Company issued
5,000 shares of common stock to a consultant in exchange for financial and
marketing services. The services were recorded equal to the value of the shares
and an expense of $8,100 is included in selling, general and administrative for
the three and nine months ended September 3, 2007.
8. SUBSEQUENT EVENTS - WARRANTS
On October 8, 2007, the Company's Board of Directors approved the extension of
the expiration date of the Company's Class A Warrants to January 2, 2008.
Q-7
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 20,000
Miscellaneous 19,700
-----------
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 PRICE OR
CONVERTIBLE SECURITY, IF OPTION, WARRANT OR
TITLE OF NUMBER AFFORDED TO EXEMPTION FROM CONVERTIBLE SECURITY, TERMS
DATE OF SALE SECURITY SOLD PURCHASERS REGISTRATION CLAIMED OF EXERCISE OR CONVERSION
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
July 2007 Common Stock 4,086 Cancellation of 8,671 Section 3(a)9 Not Applicable.
Shares warrants on a cashless
basis; services rendered;
no commissions paid
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
October Common Stock 5,000 Services rendered; no Section 4(2) Not Applicable.
2007 Shares commissions paid
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
July 2007 Common Stock 7,500 Services rendered; no Section 4(2), a Not Applicable.
Shares commissions paid restrictive legend appears
on the certificate .
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
47
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
July - Common Stock 951,575 $1,665,250 received, Rule 506 of Regulation D; Warrants to purchase 95,160
November, 2006 Shares, $209,830 paid to A Form D was Filed. shares issued to the
475,788 placement agent and its placement agent, which are
Warrants counsel. exercisable at $1.00 per
issued to share through June 30,2011.
investors; Class C warrants issued to
139,680 investors are exercisable at
shares and $1.75 per share and expire
95,160 on June30 2009.
warrants
issued to
the
Placement
agent
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
April 2006 Common stock 50,000 Services rendered; no Section 4(2). A Options exercisable at $.10
underlying shares commissions paid restrictive legend per share; expire April 25,
options appears on each 2016; contain
cashless certificate exercise
provisions.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
Jan. 2005 Common Stock 600,000 For services rendered - Section 4(2) - granted Options exercisable at $1.00
Options Options no other consideration to officers, directors per share; immediately
received; no commissions and legal counsel under exercisable; expire Jan.
paid. our 2005 Incentive Plan. 2015; contain cashless
Each grantee is a exercise provisions.
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. -Feb. Common Stock 100,000 $100,000 received; no Rule 506 of Regulation D; Class B Warrants exercisable
2005 and Class B Shares and commissions paid; no a Form D was filed on at $2.00 per share through
Warrants Class B placement agent was February 22, 2005; Jan. 2, 2008.
Warrants utilized. securities sold to
accredited investors
only.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
Jan. 2005 Common Stock 31,076 Conversion of $31,076 of Section 3a(9); no Not Applicable.
Shares debt; no commissions commissions paid.
paid; no placement agent
was utilized.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
June - Oct. 2004 Common Stock 327,000 $327,000 received; no Rule 506 of Regulation D; Class A Warrants exercisable
and Class A Shares and commissions paid; no a Form D was filed on at $2.00 per share through
Warrants 327,000 placement agent was Nov. 15, 2004; securities Jan. 3, 2007.
Class A utilized. sold to accredited
Warrants investors only.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
March - April 2004 Common Stock 410,000 $410,000 received; no Rule 506 of Regulation D; Class A Warrants exercisable
and Class A Shares and commissions paid; no a Form D was filed on at $2.00 per share through
Warrants 410,000 placement agent was Nov. 24, 2003 and April Jan. 3, 2007.
Class A utilized. 1, 2004; securities sold
Warrants to accredited investors
only.
--------------------- ------------- ------------ ------------------------- -------------------------- ------------------------------
48
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 (7)
10.1 Employment Agreement - Michael Trepeta (2)
10.2 Employment Agreement - Dean Julia (2)
10.3 Amendments to Employment Agreements - Michael Trepeta (3)(9)
10.4 Amendments to Employment Agreement - Dean L. Julia (3)(9)
10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (8)
10.6 Agreement with Aon consulting (8)
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).(7)
23.2 Consent of auditors, Holtz Rubenstein Reminick LLP (7)
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 13,
2006 for the quarter ended September 30, 2006.
(6) Previously filed.
(7) Filed herewith.
(8) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
year ended December 31, 2006.
(9) Incorporated by reference to the Registrant's Form 8-K dated September
21, 2007.
49
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.
50
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 7, 2007.
ACE MARKETING & PROMOTIONS, INC.
By: /s/ Dean L. Julia
------------------------------
Dean L. Julia, Chairman of the
Board and Chief 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 7, 2007
----------------------- Chief Executive Officer
Dean L. Julia
/s/ Sean McDonnell Chief Financial Officer December 7, 2007
-----------------------
Sean McDonnell
/s/ Michael D. Trepeta President, Director December 7, 2007
-----------------------
Michael D. Trepeta
/s/ Scott Novack Director December 7, 2007
-----------------------
Scott Novack
Dean L. Julia, Michael D. Trepeta and Scott Novack represent all the current
members of the Board of Directors.
51