SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
COMMISSION FILE NUMBER: 000-51160
ACE MARKETING & PROMOTIONS, INC.
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(Exact name of Registrant as specified in its charter)
NEW YORK 11-3427886
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(State of jurisdiction of I.R.S. Employee
incorporation or organization) Identification Number)
457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 256-7766
Check whether the Registrant is not required to file reports pursuant to Section
13 of 15(d) of the Exchange Act. [ ]
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: COMMON STOCK,
$.0001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $4,506,807.
As of March 1, 2007, the number of shares held by non-affiliates was
approximately 3,800,000 shares. The approximate market value based on the last
sale (i.e. $1.76 per share as of March 1, 2007) of the Company's Common Stock
was approximately $6,688,000.
The number of shares outstanding of the Registrant's Common Stock, as of March
1, 2007 was 8,028,363.
FORWARD-LOOKING STATEMENTS
We believe this annual report contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of our management, based on information currently available to
our management. When we use words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "should," "likely" or similar expressions, we
are making forward-looking statements. Forward-looking statements include
information concerning our possible or assumed future results of operations set
forth under "Business" and/or "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Our future results and stockholder values
may differ materially from those expressed in the forward-looking statements.
Many of the factors that will determine these results and values are beyond our
ability to control or predict. Stockholders are cautioned not to put undue
reliance on any forward-looking statements. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. For a discussion of some of
the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the
information under "Risk Factors." In addition to the Risk Factors and other
important factors discussed elsewhere in this annual report, you should
understand that other risks and uncertainties and our public announcements and
filings under the Securities Exchange Act of 1934, as amended could affect our
future results and could cause results to differ materially from those suggested
by the forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Ace Market & Promotions, Inc. incorporated under laws of the State of New
York in March 1998, is a full service advertising specialties and promotional
products distributor company. We distribute items manufactured by others to our
customers typically with our customers' logos on them. Several of our customer
categories include large corporations, local schools, universities, financial
institutions, hospitals and not-for-profit organizations. Our promotional
products are a useful, practical, informative, entertaining, and/or decorative
item, most often imprinted with the sponsoring advertiser's name, logo, slogan
or message, and typically retained and appreciated by the end recipients who
receive them, in many cases free of charge in marketing and communication
programs.
Promotional products are also effective for the following:
o dealer/distribution programs;
o co-op programs;
o company stores;
o generating new customers or new accounts;
o nonprofit fundraising; public awareness campaigns;
o promotion of brand awareness and brand loyalty;
o employee incentive programs;
o new product or service introduction; and
o marketing research for survey and focus group participants.
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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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COMPANY HISTORY
We have been in business since 1998. We have grown our business through
internal growth without acquisitions and without us having the benefits of any
trademarks, patents, service marks, franchises, concessions, royalty agreements
or labor contracts. Our growth has been achieved through cash flow from
operations and the private sale of our restricted common stock. See "Notes to
Consolidated Financial Statements" for additional information on the sale of our
common stock during the last three years.
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;
o writing instruments;
o glassware and ceramics;
o desk/office/business accessories;
o calendars;
o recognition awards/trophies; and
o magnets.
MARKET SIZE
According to the Promotional Products Association International, which is
available online at no cost to the public at
www.ppai.com/MediaInformation/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 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 million and 180
million, respectively. Nearly 80% of the distributors surveyed are reported to
be privately owned family businesses. Management believes that control of sales
lies predominantly with the independent sales representatives, as there is
little brand recognition at this time.
According to the Promotional Products Association International, which is
available online at no cost to the public at www.ppai.com/ProductsResources/
Research/TopBuyers/, the following ranks the top ten purchasers of promotional
products in descending order according to the findings of a 2003 study by
Louisiana State University and Glenrich Business Studies. Industries were named
by distributors according to the volume spent on promotional products by each
industry.
o education: schools, seminars
o financial: banks, savings and loans, credit unions, stock brokers
o health care: hospitals, nursing homes, clinics
o not-for-profit organizations
o construction: building trades and building supplies
o government: public offices, agencies, political candidates
o trade, professional associations and civic clubs
o real estate: agents, title companies and appraisers
o automotive: manufacturers, dealers, parts suppliers
o professionals: doctors, lawyers, cpa's, architects
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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.
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.
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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
We have built our business around the concept of reliability, quality,
innovative and custom promotional products at competitive prices while
maintaining a high level of customer service and good relationships with
industry suppliers. Our research licensed software technology, that we purchased
from an outside vendor and is available for licensing to other distributors in
the industry, affords us the ability to locate and purchase industry product in
an efficient manner rather than to have to manually research products through
hundreds of catalogs and/or reference books. Our in-house art capabilities
through our salaried employees make us a "one stop shop" for custom merchandise
and provide our customers with comfort in knowing logo modifications will not
delay valuable production days on tight turn-around projects. Our in-house art
department consists of two employees who work on Apple computers using licensed
software programs such as Illustrator, Photoshop and Quark to create new logos
or manipulate current ones. These logos are then sent to the supplier who
arranges to put them on the product whether internally or through an outside
source in one of the following manners:
o silkscreen printing
o embroidery
o hot stamp
o heat transfer
o embossing/debossing
o engraving
Our reliability stems from our own customized and detailed tracking system
that we structured and implemented to ensure an order is processed correctly and
on time. In general, customers contact us when they have a need for items that
have corporate logos. They provide us with general information that helps us
determine what products to suggest, including the following:
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.
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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 STRATEGY
Our objective is to be a leading full service advertising specialties and
promotional products company. Key elements of our strategy are:
o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES. We have
been in business 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.
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o MAINTAIN A COMPETITIVE GROSS PROFIT PERCENTAGE ON ALL SALES ORDERS.
In 2006, 2005 and 2004, our gross profit percentage was 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.
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
As a result of the fact that about 20,000 of the estimated 21,000
distributors are doing $2.5 million or less in annual sales in our estimated
$17.85 billion annual industry, we believe the environment for growth and
consolidation in the promotional products industry is appealing, and that we
would like to take advantage of this if a satisfactory opportunity arises. There
are some issues that our company must address to be successful. The main issues
are motivating previous owners, retaining sales people, and integrating
operations.
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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.
In February 2007, we entered into a letter of intent to acquire the
customer lists and intangible assets of Bright Ideas Marketing & Promotions,
Inc. The anticipated purchase price is estimated at $380,000 to be paid one-half
in cash and one-half in our restricted Common Stock, subject to adjustment. In
connection with said acquisition, we intend to enter into three-year employment
contracts with two key employees and owners of Bright Ideas. We can provide no
assurances that our acquisition of the customer lists and other intangible
assets of Bright Ideas will be completed. For 2006, Bright Ideas had
approximately $1,000,000 in gross sales and $380,000 in gross profit
(unaudited). As of the date hereof, there is no other agreement to acquire any
other company or distributor and there can be no assurances given that our plans
will be realized to grow through acquisitions of one or more distributors or, if
successful, that any acquisitions can be profitably integrated into our
company's operations.
JOINT VENTURE WITH ATRIUM ENTERPRISES
We have entered into a Joint Venture 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
will provide its sales services to us on an exclusive basis in our business that
will consist of selling promotional products, print sales and the like to
Atrium's clients. In this respect, Ace has received its first sales order
through Atrium which was in excess of $400,000.
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."
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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.
EMPLOYEES
As of March 1, 2007, we had 12 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 50 additional salespeople for Ace over the next 12
months. 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. 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.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE
OTHER INFORMATION PRESENTED IN THIS FORM 10-KSB, 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.
11
RISKS RELATING TO OUR BUSINESS
THE PROMOTIONAL PRODUCTS DISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY
NOT BE ABLE TO COMPETE SUCCESSFULLY.
We compete with over 20,000 distributor companies. Some of our competitors
have greater financial and other resources than we do which could allow them to
compete more successfully. Most of our promotional products are available from
several sources and our customers tend to have relationships with several
distributors. Competitors could obtain exclusive rights to market particular
products which we would then be unable to market. Industry consolidation among
promotional products distributors, the unavailability of products, whether due
to our inability to gain access to products or interruptions in supply from
manufacturers, or the emergence of new competitors could also increase
competition. In the future, we may be unable to compete successfully and
competitive pressures may reduce our revenues.
WE MAY FAIL TO HIRE ADDITIONAL EXPERIENCED SALESPERSONS, EACH OF WHOM HAVE A
TRACK RECORD OF GENERATING AT LEAST $400,000 IN ANNUAL REVENUE.
We have an agreement with Aon Consulting, a division of Aon Corporation,
whereby Aon will recruit 50 additional salespeople for Ace over the next 12
months. 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. 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.
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.
12
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 ACQUISITION OF BRIGHT IDEAS MAY NOT BE COMPLETED.
In February 2007, we entered into a letter of intent to acquire the
customer lists and intangible assets of Bright Ideas Marketing & Promotions,
Inc. The anticipated purchase price is estimated at $380,000 to be paid one-half
in cash and one-half in our restricted Common Stock, subject to adjustment. In
connection with said acquisition, we intend to enter into three-year employment
contracts with two key employees and owners of Bright Ideas. We can provide no
assurances that our acquisition of the customer lists and other intangible
assets of Bright Ideas will be completed pursuant to the aforementioned terms,
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:
13
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.
OUR REVENUES DEPEND ON OUR RELATIONSHIPS WITH CAPABLE INDEPENDENT SALES
PERSONNEL OVER WHOM WE HAVE NO CONTROL AS WELL AS KEY CUSTOMERS, VENDORS AND
MANUFACTURERS OF THE PRODUCTS WE DISTRIBUTE.
Our future operating results depend on our ability to maintain
satisfactory relationships with qualified independent Sales personnel as well as
key customers, vendors and manufacturers. We are dependent upon our independent
sales representatives to sell our products and do not have any direct control
over these third parties. If we fail to maintain our existing relationships with
our independent sales representatives, key customers, vendors and manufacturers
or fail to acquire new relationships with such key persons in the future, our
business may suffer.
OUR FUTURE PERFORMANCE IS MATERIALLY DEPENDENT UPON OUR MANAGEMENT AND THEIR
ABILITY TO MANAGE OUR GROWTH.
Our future success is substantially dependent upon the efforts and
abilities of members of our existing management, particularly Dean L. Julia,
Chief Executive Officer and Michael Trepeta, President. The loss of the services
of Mr. Julia or Mr. Trepeta could have a material adverse effect on our
business. We have a three year employment agreement with each of Mr. Julia and
Mr. Trepeta effective March 1, 2005. However, we lack "key man" life insurance
policies on any of our officers or employees. Competition for additional
qualified management is intense, and we may be unable to attract and retain
additional key personnel. Our management personnel is currently limited and they
may be unable to manage our expansion successfully and the failure to do so
could have a material adverse effect on our business, results of operations and
financial condition.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future to fund more
aggressive expansion of our business or make strategic acquisitions or
investments. We may require additional equity or debt financings or funds from
other sources for these purposes. No assurance can be given that these funds
will be available for us to finance our development on acceptable terms, if at
all. Such additional financings may involve substantial dilution of our
stockholders or may require that we relinquish rights to certain of our
technologies or products. In addition, we may experience operational
difficulties and delays due to working capital restrictions. If adequate funds
are lacking from operations or additional sources of financing, we may have to
delay or scale back our growth plans.
14
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:
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.
15
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 restricted stock
pursuant to and in compliance with the provisions of Rule 144 of the Securities
Act of 1933 and pursuant to a Registration Statement that became effective on
December 21, 2006. Such Registration Statement registers for sale 951,575
outstanding shares and 475,788 shares underlying presently exercisable and
outstanding warrants exercisable at $1.75 per share. In general, under Rule 144,
a person who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of shares which does
not exceed the greater of one percent of the then outstanding shares of common
stock or the average weekly trading volume in shares during the four calendar
weeks immediately prior to such sale. Rule 144 also permits under certain
circumstances, the sale of shares without any quantity or other limitation by a
person who is not an affiliate of our company and who has satisfied a two-year
holding period. Future sales of shares of our common stock made under Rule 144
or otherwise may have an adverse effect on the then prevailing market price, if
any, of our common stock.
ITEM 2. 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.
16
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2006.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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 14, 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 2.25 1.01
June 30, 2006 2.99 1.70
September 30, 2006 2.75 2.00
December 31, 2006 2.25 1.45
All quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions, and may not necessarily represent actual transactions.
All of our restricted common stock may be eligible for sale in compliance
with Rule 144 of the Securities Act of 1933, as amended. Rule 144 provides among
other things and subject to certain limitations that a person holding restricted
securities for a period of one year may sell those securities in brokerage
transactions every 90 days in an amount equal to the greater of the average
weekly trading volume over the four preceding weeks or 1% of our company's
outstanding common stock. Persons who have owned our restricted common stock for
a period of at least two years and are not affiliates of our company may sell or
otherwise transfer their common shares pursuant to Rule 144(k) of the Securities
Act. Possible or actual sales of our company's 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.
The Company currently has outstanding Class A Warrants to purchase 737,000
shares of Common Stock exercisable at $2.00 per share. The Class A Warrants
which were originally scheduled to expire on January 2, 2006 have been extended
through March 31, 2007.
Currently, we have outstanding Class B Warrants to purchase 100,000 shares
of our common stock exercisable at a price of $2.00 per share, warrants to
purchase 95,160 shares exercisable at $1.00 per share and warrants to purchase
475,788 shares exercisable at $1.75 per share. In the event that all of the
17
warrants are exercised, of which there can be no assurances given, additional
shares of common stock will be issued and may be resold pursuant to Rule 144
after a holding period of at least one year. No registration rights were granted
in connection with the issuance of said warrants, except for the resale of the
475,788 shares underlying the warrants exercisable at $1.75 per share, which
475,788 shares were registered for resale on December 21, 2006.
As of March 1, 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. The Company's
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.
18
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 2006, the Company 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 IF OPTION,
OTHER DISCOUNTS TO WARRANT OR
MARKET PRICE OR CONVERTIBLE
CONVERTIBLE EXEMPTION FROM SECURITY, TERMS
SECURITY AFFORDED REGISTRATION OF EXERCISE OR
DATE OF SALE TITLE OF SECURITY NUMBER SOLD TO PURCHASERS CLAIMED CONVERSION
----------------------------------------------------------------------------------------------------------------------
October 2006 Common Stock 951,575 shares; $1,665,250 Rule 506 of Warrants to
475,788 warrants received; $209,830 Regulation D; a purchase 95,160
issued to paid to placement Form D was filed. shares issued to
investors; 139,680 agent and its the placement
shares and 95,160 counsel. agent, which are
warrants issued to exercisable at
the placement $1.00 per share
agent (1) and expire June
30, 2011. Class
C Warrants
issued to
investors are
exercisable at
$1.75 per share
and expire on
June 30, 2009.
April 2006 Common Stock 50,000 shares Services rendered; Section 4(2). A
Underlying No commissions restrictive Options
Options Paid legend appears on exercisable at
each $.10 per share;
Certificate. expire April 25,
2016; contain
cashless
exercise
provisions
--------------
(1) On December 31, 2006, the Company obtained an effective registration
statement registering the resale of the 951,575 shares and 475,788 shares
of Common Stock issuable upon exercise of a like number of Warrants.
RECENT PURCHASES OF SECURITIES
During the year ended December 31, 2006, the Company had no repurchases of
its common stock.
19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto appearing elsewhere in this Form 10-KSB. 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 the Company's actual results
in future periods to differ materially from forecasted results.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require management to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
REVENUE RECOGNITION. Revenues are recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue Task Force Issue No.
99-19, reporting revenue gross as a principal versus net as an agent. Revenue is
recognized on a gross basis since our company has the risks and rewards of
ownership, latitude in selection of vendors and pricing, and bears all credit
risk. Our company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with Emerging Issue Task Force Issue No. 00-10, accounting for shipping and
handling fees and costs.
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. Prior to January 1, 2006, we accounted for
employee stock compensation in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
our plans and measured compensation expense for our share-based compensation
using the intrinsic value method, that is, as the excess, if any, of the fair
market value of the our 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 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
20
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.
OVERVIEW
We are a full service advertising specialties and promotional products
company. Specific categories of the use of promotional products include
advertising specialties, business gifts, incentives and awards, and premiums.
Through the services of our in-house sales persons and the use of independent
sales representatives, we distribute items to our customers typically with their
logos on them. Several of our customer categories include large corporations,
local schools, universities, financial institutions, hospitals and
not-for-profit organizations.
The most popular products that we have distributed over the last several
years and account for over 50% of our business are as follows:
o Wearables, such as t-shirts, golf shirts and hats.
o Glassware, such as mugs and drinking glasses.
o Writing instruments, such as pens, markers and highlighters.
o Bags, such as tote bags, gift bags and brief cases.
There are a number of trends in the advertising/marketing industry, the
most significant of which is the trend toward integrated marketing strategies.
Integrated marketing campaigns involve not only advertising, but also sales
promotions, internal communications, public relations, and other disciplines.
The objectives of integrated marketing are to promote products and services,
raise employee awareness, motivate personnel, and increase productivity through
a wide array of methods including extensive use of promotional products.
Price is no longer the sole motivator of purchasing behavior for our
customers. With the availability of similar products from multiple sources,
customers are increasingly looking for distributors who provide a tangible
value-added to their products. As a result, we provide a broad range of products
and related services. Specifically, we provide research and consultancy
services, artwork and design services, and fulfillment services to our
customers. These services are provided in-house by our current employees.
Management believes that by offering these services, we can attempt to attract
new customers.
Our revenues are expected by us 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Reference is made to the Notes to Financial Statements for a description
of certain recently issued accounting pronouncements.
21
RESULTS OF OPERATIONS
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had cash and cash equivalents of $1,353,131. We
consider highly liquid debt instruments with a maturity of three months or less,
as well as bank money market accounts, to be cash equivalents.
22
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.
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 LIQUIDATED DAMAGES RELATING TO REGISTRATION STATEMENT - We have
agreed to file a Registration Statement with the SEC within 60 days
(automatically extended to 120 days if we have executed an agreement
to acquire the stock or assets of another promotional product
distributor) after the final closing date of the Offering (i.e.
October 30, 2006), to provide for the resale by purchasers of Units
23
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
after the final closing date of the Offering (i.e. October 30,
2006), subject to a 30-day extension if the Registration Statement
receives a "full review" from the Commission. These intervals would
be extended by 30 days if fiscal year end audited financial
statements would be required, and which were not issued prior to the
closing. If the Registration Statement is not effective within the
aforementioned time parameters, we will pay liquidated damages in
cash or, at our discretion, in Common stock (based upon the fair
market value of our Common Stock) equal to 1% of the amount invested
to each investor for each subsequent 30-day period that we fail to
have an effective Registration Statement, up to a maximum of 9%. In
the event the SEC establishes policy preventing the use of or
prohibiting the effectiveness of a registration statement, and the
Registration Statement is still pending with liquidated damages
accruing, we shall be responsible for said damages up to the date of
the policy change. We have agreed to use our best efforts to
maintain the effectiveness of the registration statement until the
earlier of five years from the final closing date of the Offering or
until the Shares and Warrant Shares may be sold pursuant to
provisions of Rule 144(k) without volume limitations. Any
registration costs (other than costs of counsel to subscribers or
commissions related to the sales of the Shares and Warrant Shares)
will be paid by us. This Registration Statement was filed in
November 2006 and became effective on December 21, 2006.
o ANTI-DILUTION PROTECTION - In the event we seek to raise money on a
capital raise transaction during the period commencing on October
30, 2006 and terminating on the earlier of 24 months from that date
or 12 months from the initial effective date of the Registration
Statement (the "Covered Period") and we sell shares of our Common
Stock or issue options or warrants at a price below $1.75 per share
during the Covered Period, the investors 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.
ITEM 7. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The report of the Independent Accountants, Financial Statements and
Schedules are set forth beginning on page F-1 of this Annual Report on Form
10-KSB, following this page.
24
ACE MARKETING &
PROMOTIONS, INC.
----------------------------------------------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006 AND 2005
ACE MARKETING &
PROMOTIONS, INC.
CONTENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 AND 2005 PAGES
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
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
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
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
ITEM 8.A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of
"disclosure controls and procedures" in Rule 13a-15(e). In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
at the reasonable assurance level at the end of our most recent fiscal year
ended December 31, 2006. There have been no changes in the Company's disclosure
controls and procedures or in other factors that could affect the disclosure
controls subsequent to the date the Company completed its evaluation.
Management has not yet completed, and is not yet required to have
completed, its assessment of the effectiveness of internal control over
financial reporting as required by Section 404 of the Sarbanes-Oxley Act.
ITEM 8.B. OTHER INFORMATION.
Not Applicable.
25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The names, ages and principal occupations of the Company's present
officers and directors are listed below.
FIRST BECAME
DIRECTOR
NAME (1) AGE AND/OR OFFICER POSITION
-------- --- -------------- --------
Dean Julia 39 1998 Chief Executive Officer/ Secretary/
Treasurer/Director/Co-Founder
Michael Trepeta 35 1998 President/Director/Co-Founder
Scott Novack 39 1998 Director/Co-Founder
Sean McDonnell 46 2005 Chief Financial Officer
---------
(1) Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting.
The terms of all officers expire at the annual meeting of directors
following the annual stockholders meeting. Officers serve at the pleasure of the
Board and may be removed, either with or without cause, by the Board of
Directors, and a successor elected by a majority vote of the Board of Directors,
at any time.
MANAGEMENT TEAM
Our officers, directors and founders each have experience in the
development of early stage companies including business strategies, products and
services and financing.
DEAN L. JULIA
Mr. Julia holds a Bachelor of Business Administration from Hofstra
University received in 1990. Since that time, Mr. Julia has been associated with
various broker/dealers as a stockbroker where he was involved in the funding of
numerous development stage and growth companies. From 1991 to 1996, Mr. Julia
served as a Vice President for Reich & Co. From 1993 to 1994, he was Vice
President for D. Blech & Co. From 1994 to 1995, he served as a Vice President
for GKN Securities; and from 1995 to 1996 he served as Vice President for Rickel
& Associates. From September 1996 through February 1998, Mr. Julia served as
President and Chief Executive Officer of DLJ Consulting, a financial
intermediary consultant for public and private companies. In 1998, Mr. Julia
co-founded us and became an officer, director and principal stockholder of our
company and a full time employee.
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
26
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 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
27
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.
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;
28
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.
CODE OF ETHICS
Effective March 3, 2003, the Securities & Exchange Commission requires
registrants like the Company to either adopt a code of ethics that applies to
the Company's Chief Executive Officer and Chief Financial Officer or explain why
the Company has not adopted such a code of ethics. For purposes of item 406 of
Regulation S-K, the term "code of ethics" means written standards that are
reasonably designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
o Full, fair, accurate, timely and understandable disclosure in
reports and documents that the Company files with, or submits to,
the Securities & Exchange Commission and in other public
communications made by the Company;
o Compliance with applicable governmental law, rules and regulations;
o The prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
o Accountability for adherence to the code.
In March 2006, the Company adopted a Code of Ethics and Code of Conduct
which have been filed as Exhibit 14.1 to our Form 10-KSB. Changes to the Code of
Ethics and Code of Conduct will be filed under a Form 8-K or quarterly or annual
report under the Exchange Act.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than ten percent stockholders are
required by the Commission's regulations to furnish us with copies of all
Section 16(a) forms they file. During fiscal 2006, none of our officers,
directors or 10% or greater stockholders failed to file or filed any forms late
to the best of our knowledge, except for certain Form 4 filings of Glenwood
Capital and Peter Chung.
29
ITEM 10. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
SUMMARY COMPENSATION TABLE
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 $100,000 or
more; and (3) those two individuals, if any, who would have otherwise been in
included in section (2) above but for the fact that they were not serving as an
executive of the Company as of December31, 2006.
SALARY COMPENSATION
---------------------------------------
NON-EQUITY NONQUALIFIED
NAME AND OPTIONS INCENTIVE PLAN DEFERRED ALL OTHER
PRINCIPAL FISCAL BONUS STOCK AWARDS COMPENSATION COMPENSATION COMPENSATION
POSITION YEAR SALARY ($) 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.
(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.
30
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
PLAN
AWARDS:
EQUITY NUMBER EQUITY
INCENTIVE OF INCENTIVE PLAN
PLAN UNEARNED AWARDS:
AWARDS: MARKET SHARES, MARKET OR
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VALUE OF UNITS OR PAYOUT VALUE OF
SECURITIES SECURITIES SECURITIES SHARES OF SHARES OR OTHER UNEARNED
UNDERLYING UNDERLYING UNDERLYING UNITS OF UNITS OF RIGHTS SHARES, UNITS OR
UNEXERCISE 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.
(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.
31
A summary of each Executive's employment agreement is as follows:
Each Executive is eligible for options to purchase our common stock at the
discretion of our Board of Directors. Each Executive will receive at least five
weeks of paid vacation. Each employment agreement expires on February 29, 2008.
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 this
Agreement, except for payment of the Executive's Base Salary and Annual Bonus
earned and unpaid through the effective date of termination and those
obligations with respect to indemnification and director and officer insurance.
We may terminate the Executive's employment for cause ("Cause") in the
event (i) the Executive's commission of an act involving fraud, embezzlement, or
theft against the property or personnel of Company, or (ii) the Executive shall
be convicted of, or plead NOLO CONTENDERE to a felony or engages in other
criminal conduct that could reasonably be expected to have a material adverse
affect on the business, assets, properties, prospects, results of operations or
financial condition of Company. In the event this Agreement is terminated for
cause, the Executive's Base Salary and any unearned Annual Bonus 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 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. "Disability" shall mean that for a
period of more than six consecutive months in any 12-month period the Executive
is unable to perform the essential functions of his position because of
physical, mental or emotional incapacity resulting from injury, sickness or
disease. 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.
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.
The Executives' employment agreements do not have any severance payments
in the event of termination or change in control provisions, except for their
entitlement to payment as described above. Each Executive is also entitled to
the following additional benefits:
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;
32
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; 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
$500 to be paid for attending each Board meeting; however, no fees were paid in
2006.
TRAVEL EXPENSES
All directors shall be reimbursed for their reasonable out of pocket
expenses associated with attending the meeting.
DIRECTOR COMPENSATION
The following table shows the overall compensation earned for the 2006
fiscal year with respect to each non-employee and non-executive director as of
December 31, 2006.
DIRECTOR COMPENSATION
--------------------------------------------------------------------------------------
FEES
EARNED NON-EQUITY NONQUALIFIED
NAME AND OR PAID INCENTIVE PLAN DEFERRED ALL OTHER
PRINCIPAL IN CASH STOCK OPTION COMPENSATION COMPENSATION COMPENSATION
POSITION ($) AWARDS ($) AWARDS ($) ($) (2) EARNINGS ($) ($)(3) TOTAL($)
---------------------------- -------- ---------- ---------- -------------- ------------ ------------ --------
Scott Novack, Director -- -- -- -- -- -- --
33
----------
(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.
(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.
34
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.
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 $2.50
per share, exclusive of options which have been cancelled since the date of
grant. The board has granted options with varying terms.
It is not possible to predict the individuals who will receive future
awards under the Plan or the number of shares of Common Stock covered by any
future award because such awards are wholly within the discretion of the Board.
The table below contains information as of December 31, 2006 on the known
benefits provided to certain persons and group of persons under the Plan.
35
----------------------------------------------------- ---------------- ---------------- -----------------------
NUMBER OF RANGE OF VALUE OF UNEXERCISED
SHARES SUBJECT EXERCISE PRICE OPTIONS AT
TO OPTIONS ($) PER SHARE DECEMBER 31, 2006 (1)
----------------------------------------------------- ---------------- ---------------- -----------------------
----------------------------------------------------- ---------------- ---------------- -----------------------
Dean L. Julia, Chief Executive Officer 450,000 $1.00 - $1.20 $ 297,500
----------------------------------------------------- ---------------- ---------------- -----------------------
Michael D. Trepeta, President 450,000 $1.00 - $1.20 297,500
----------------------------------------------------- ---------------- ---------------- -----------------------
Sean McDonnell, Chief Financial officer 50,000 $1.00 37,500
----------------------------------------------------- ---------------- ---------------- -----------------------
Three Executive Officers As a group 950,000 $1.00 - $1.20 632,500
----------------------------------------------------- ---------------- ---------------- -----------------------
Non-Executive Officer
Employees and Consultants 1,011,222 $1.00- $ 2.50 $ 536,917
----------------------------------------------------- ---------------- ---------------- -----------------------
----------
(1) Value is normally calculated by multiplying (a) the difference between the
market value per share at year end (i.e. $1.75 based upon a last sale on
December 29, 2006) 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
As of March 1, 2007, the Company had outstanding 8,028,063 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.
36
-------------------------------------------- ------------------- ---------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF APPROXIMATE
COMMON SHARES PERCENTAGE
-------------------------------------------- ------------------- ---------------
OFFICERS AND DIRECTORS:
--------------------------------------------------------------------------------
-------------------------------------------- ------------------- ---------------
Scott Novack 1,052,402 13.1
457 Rockaway Avenue
Valley Stream, NY 11583
-------------------------------------------- ------------------- ---------------
-------------------------------------------- ------------------- ---------------
Michael D. Trepeta
457 Rockaway Avenue
Valley Stream, NY 11583(2) 1,366,402 16.1
-------------------------------------------- ------------------- ---------------
Dean L. Julia
457 Rockaway Avenue
Valley Stream, NY 11583 (2) 1,366,901 16.0
-------------------------------------------- ------------------- ---------------
-------------------------------------------- ------------------- ---------------
Sean McDonnell 50,000 .6
457 Rockaway Avenue
Valley Stream, NY 11583 (3)
-------------------------------------------- ------------------- ---------------
-------------------------------------------- ------------------- ---------------
All Directors and Officers as a
Group (four persons) (4) 3,785,705 43.1
-------------------------------------------- ------------------- ---------------
-------------------------------------------- ------------------- ---------------
Glenwood Capital Corporation 1,245,002 15.3
2070 South Hibiscus Drive
North Miami Beach, FL 33181 (5)
-------------------------------------------- ------------------- ---------------
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 350,000 shares.
(3) Includes options to purchase 50,000 shares.
(4) Includes options to purchase 750,000 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.
(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.
37
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following summary information is as of December 31, 2006 and relates
to our 2005 Plan described in Item 10 pursuant to which we have granted options
to purchase our common stock:
-------------------------- ---------------------- ---------------- -------------------------
(a) (b) (c)
-------------------------- ---------------------- ---------------- -------------------------
Number of securities
remaining available
Number of shares of Weighted average for future issuance
common stock to be exercise price under equity compensation
issued upon exercise of outstanding plans (excluding shares
Plan category of outstanding options options reflected in column (a)
-------------------------- ---------------------- ---------------- -------------------------
Equity compensation Plans 1,961,222 $1.20 2,001,000
-------------------------- ---------------------- ---------------- -------------------------
ITEM 12. 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.
(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 2006 and 2005, we purchased a total of $8,657 and
$10,313, respectively, from her company.
In the future, we expect to have one or more members of our Board be
independent directors of our company. It is anticipated that future transactions
between us and our executive officers and directors and other affiliated parties
will be approved by the then disinterested members of the Board and, if not a
majority of the Board, then by our independent director(s) through a committee
appointed by the Board.
38
OTHER TRANSACTIONS
On April 10, 2006, the Company granted 40,000 five year non statutory
stock options to an entity controlled by Dean L. Julia and Michael D. Trepeta,
for the purchase of an email list of promotional products professionals and an
industry specific search engine. Messrs. Julia and Trepeta have waived their
right to receive any benefit from the option grant, and the options were granted
in the name of the minority shareholders of the related entity. The options have
an exercise price of $2.50 per share and the email list and search engine were
expensed and have been valued at approximately $18,000, which is included in
general and administrative expenses for the year ended December 31, 2006.
Item 13. EXHIBITS
Exhibit No. 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)
10.1 Employment Agreement - Michael Trepeta (2)
10.2 Employment Agreement - Dean Julia (2)
10.3 Amendment to Employment Agreement - Michael Trepeta (5)
10.4 Amendment to Employment Agreement - Dean L. Julia (5)
10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (3)
10.6 Agreement with Aon Consulting (3)
11.1 Statement re: Computation of per share earnings. See Statement of
Operations and Notes to Financial Statements
14.1 Code of Ethics/Code of Conduct (5)
21.1 Subsidiaries of the Issuer - None
23.1 Consent of by Holtz Rubenstein Reminick LLP (3)
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (3)
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (3)
32.1 Chief Executive Officer Section 1350 Certification (3)
32.2 Chief Financial Officer Section 1350 Certification (3)
99.1 2005 Employee Benefit and Consulting Services Compensation Plan(2)
99.2 Form of Class A Warrant (2)
99.3 Form of Class B Warrant (2)
99.4 Amendment to 2005 Plan (4)
99.5 Form of Class C Warrant (3)
99.6 Release of Earnings - 2006 (3)
-----------
(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) Filed herewith.
(4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with the
Commission on August 18, 2005.
(5) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
year ended December 31, 2005.
39
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
For the fiscal year ended December 31, 2006 and 2005, the aggregate fees
billed for professional services rendered by Holtz Rubenstein Reminick LLP
("independent auditors") for the audit of the Company's annual financial
statements and the reviews of its financial statements included in the Company's
quarterly reports and filings under the Securities Act of 1933 totaled
approximately $61,500 and $43,500, respectively.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For the fiscal years ended December 31, 2006 and 2005, there were $-0- in
fees billed for professional services by the Company's independent auditors
rendered in connection with, directly or indirectly, operating or supervising
the operation of its information system or managing its local area network.
ALL OTHER FEES
For the fiscal years ended December 31, 2006 and 2005, there were no fees
paid or billed for preparation of corporate tax returns, tax research and other
professional services rendered by the Company's independent auditors.
40
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACE MARKETING & PROMOTIONS, INC.
By: /s/ Dean L. Julia
------------------------------------
Dean L. Julia, Chairman of the
Board and Chief Executive Officer
Dated: Valley Stream, New York
March 16, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/ Dean L. Julia Chairman of the Board March 16, 2007
-------------------------- Chief Executive Officer
Dean L. Julia
/s/ Sean McDonnell Chief Financial Officer March 16, 2007
--------------------------
Sean McDonnell
/s/ Michael D. Trepeta President, Director March 16, 2007
--------------------------
Michael D. Trepeta
/s/ Scott Novack Director March 16, 2007
--------------------------
Scott Novack
Dean L. Julia, Michael D. Trepeta and Scott Novack represent all the current
members of the Board of Directors.
41