AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
ACE MARKETING & PROMOTIONS, INC.
(Name of Small Business Issuer in Its Charter)
NEW YORK 11-3427886
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581
(Address of Principal Executive Offices) (Zip Code)
(516) 256-7766
(Issuer's Telephone Number)
Name of each exchange on which registered:
NONE
Securities to be Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.0001 PER SHARE
(Title of Class)
TABLE OF CONTENTS
Page
----
PART I....................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS.......................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................17
ITEM 3. DESCRIPTION OF PROPERTY......................................................21
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............22
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................24
ITEM 6. EXECUTIVE COMPENSATION.......................................................28
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................31
ITEM 8. DESCRIPTION OF SECURITIES....................................................32
PART II..................................................................................33
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS................................................34
ITEM 2. LEGAL PROCEEDINGS............................................................34
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................................34
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES......................................34
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS....................................35
PART III.................................................................................39
ITEM 1. INDEX TO EXHIBITS............................................................39
SIGNATURES............................................................................40
FORWARD-LOOKING STATEMENTS
This Form 10-SB contains certain forward-looking statements that
involve risks and uncertainties. These statements refer to objectives,
expectations, intentions, future events, or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, level of activity, performance, or achievements to be
materially different from any results expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by words such as "may," "will," "should," "could," "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "predict," "potential,"
and similar expressions. Our actual results could differ materially from those
included in forward-looking statements. Factors that could contribute to these
differences include those matters discussed in "Risk Factors" and elsewhere in
this Form 10-SB.
In addition, such forward-looking statements necessarily depend on
assumptions and estimates that may prove to be incorrect. Although we believe
the assumptions and estimates reflected in such forward-looking statements are
reasonable, we cannot guarantee that our plans, intentions, or expectations will
be achieved. The information contained in this Form 10-SB, including the section
discussing risk factors, identifies important factors that could cause such
differences.
The cautionary statements made in this Form 10-SB are intended to be
applicable to all forward-looking statements wherever they appear in this Form
10-SB. We assume no obligation to update such forward-looking statements or to
update the reasons that actual results could differ materially from those
anticipated in such forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
We are a full service advertising specialties and promotional products
distributor company. We distribute items manufactured by others to our customers
typically with our customers' logos on them. Several of our customer categories
include large corporations, local schools, universities, financial institutions,
hospitals and not-for-profit organizations. Our promotional products are a
useful, practical, informative, entertaining, and/or decorative item, most often
imprinted with the sponsoring advertiser's name, logo, slogan or message, and
typically retained and appreciated by the end recipients who receive them, in
many cases free of charge in marketing and communication programs.
Promotional products are also effective for the following:
o dealer/distribution programs;
o co-op programs;
o company stores;
o generating new customers or new accounts;
o nonprofit fundraising; public awareness campaigns;
o promotion of brand awareness and brand loyalty;
o employee incentive programs;
o new product or service introduction; and
o marketing research for survey and focus group participants.
We have the ability to distribute over 500,000 promotional
product items ranging from stickers that cost pennies all the way
through jewelry, sporting goods, awards, and electronics that cost
thousands of dollars per unit. Specific categories of promotional
products include:
o Advertising Specialties-build awareness, goodwill and
remembrance of the advertiser's name, product, purpose,
advantages or other timely message. These products are
generally lower priced goods and are usually distributed for
free.
o Business Gifts, Awards and Commemoratives - generally lower
priced goods and are given for goodwill, often at trade shows
to generate traffic.
o Incentives and Awards-focus on motivation, workplace safety,
goal setting and recognition. These are typically higher
priced items used in incentive programs to promote employee
retention and recognition. They may also be used in
recruitment programs as well.
o Premiums-given after a specific behavior has been performed.
1
The most popular products that we have distributed over the last two
years and account for over 50% of our business are as follows:
o Wearables, such as t-shirts, golf shirts and hats.
o Glassware, such as mugs and drinking glasses.
o Writing instruments, such as pens, markers and highlighters.
o Bags, such as tote bags, gift bags and brief cases.
COMPANY HISTORY
Our company was established under the laws of the state of New York in
March 1998. We have been in business since 1998 and have grown our business
through internal growth without acquisitions. Our business has been established
without us having the benefits of any trademarks, patents, service marks,
franchises, concessions, royalty agreements or labor contracts. Our growth from
inception through December 31, 2004 has been achieved through cash flow from
operations and the private sale of our restricted common stock totaling
approximately $1,030,000. See "Note 5 to the Notes to Consolidated Financial
Statements" on page F-9 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 2004
Survey, which is available online at no cost to the public at
WWW.THECOUNSELOR.NET, the most popular promotion products sold between 1999 and
2003 were the following:
o wearables;
o writing instruments;
o desk and office accessories;
o glassware and ceramics; and
o calendars.
Market Size
-----------
According to the Promotional Products Association International, which
is available online at no cost to the public at WWW.PPAI.COM/MEDIAINFORMATION/
INSTUSTRY/STATATISTICS/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 and increased to $16.34 billion
in 2003. 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.
2
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 20,150
distributors in the industry with revenues of less than $2.5 million and 815
distributors with revenues of $2.5 million or more. According to The Counselor -
State of the Industry 2004 Survey, the top ten distributors in our industry are
believed to have sales of between $118 million and $186 million for 2003. Halo
Branded Solutions, American Identity and 4 Imprint Inc. are the top three
distributors with 2003 sales of $186 million, $179.5 million and $176.5 million,
respectively. Nearly 80% of the distributors surveyed are reported to be
privately owned family businesses. Management believes that control of sales
lies predominantly with the independent sales representatives, as there is
little brand recognition at this time.
According to the Promotional Products Association International, which
is available online at no cost to the public at WWW.PPAI.COM/PRODUCTRESOURCES/
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
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.
3
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.
4
OUR CUSTOMERS - CHOOSING US AS YOUR RIGHT DISTRIBUTOR
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. Except for orders from Starbucks and its franchisees,
which accounted for 27% of sales in 2003, no customer has accounted for more
than 10% of sales during the past two 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. Our promotional products bear their corporate name and are a
reflection of their corporate image. The events they use these items for are of
the utmost importance. If they go with another distributor who gives them run of
the mill ideas possibly at a lower cost, a poor quality product with inferior
quality decoration and/or the goods arrive late, then they quickly realize there
should be other factors that determine which distributor they should be working
with.
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
5
Our reliability stems from our own customized and detailed tracking
system that we structured and implemented to ensure an order is processed
correctly and on time. In general, customers contact us when they have a need
for items that have corporate logos. They provide us with general information
that helps us determine what products to suggest, including the following:
o The type of event and the targeted audience;
o The number of units that are required and the budget; and
o The timing of the event and the theme of the event.
The aforementioned parameters will narrow the field of items suggested
from a broad list of 500,000 to possibly a dozen or less. Once a customer calls
in or e-mails us requesting ideas for an upcoming event, we begin to research
ideas based on their parameters and we use our research software to look up
dozens of products, prepare a competitive analysis between similar products to
find just the right one, send a picture to the customer by email and prepare and
send a quotation to the customer also by email. This provides us an immediate
time saving advantage over other distributors who still do things manually. Many
of these distributors still scan a reference book which is called a register.
They search for a particular product, such as clocks, then find the sub-category
they are interested in, such as plastic, and there they find all the suppliers
who carry the specific item they are looking to purchase. They must then either
cross reference each supplier to find their phone number or web address, or they
can physically pull as many of the catalogs they have on hand and search for the
products that they are interested in and send catalogs with tabbed pages via
regular mail or overnight service. This is an inefficient way to research and
deliver images of products. We are not aware of any statistical information
which allows us to tell the percentages of distributors who use publicly
available licensed research software systems like ours versus the manual way
described above.
When the customer decides on the product that they would like to order,
the order is processed in our order entry department utilizing our order-entry
software which is available for licensing to anyone in the industry from third
party vendors. The salesperson submits the specifics of the order to our order
entry department where the order is keyed into the system by our employees.
Three parts to each order are printed:
o ACKNOWLEDGEMENT This outlines the product ordered along with a
description of the product and how the logo will be placed and
in what colors. It includes the quantity ordered, the price
per piece, total cost, ship to address, and the delivery date.
It is sent to our customer via fax along with a hard copy of
the artwork that will be used on the order. The order will not
6
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 Ace Marketing 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 Ace Marketing pays
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.
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 Ace Marketing from a supplier not fulfilling their
obligations, which in turn may lead to us losing money, a customer, or both. The
tracking process consists of us contacting the factory at various points in the
production process to ensure that the order is on schedule. We verbally verify
the item, quantity, and ship date and document who at the supplier verified the
information. We then call again at a certain point in the process to verify it
is on schedule and lastly call on the day of shipping to receive tracking
numbers. The above processes have historically led to eliminating disputes with
both suppliers and customers.
OUR STRATEGY
Our objective is to be a leading full service advertising specialties
and promotional products company. Key elements of our strategy are:
o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES.
We have been in business for seven years since March
1998. Our revenues are derived from existing customers and new
customers through word of mouth recommendations, attendance at
trade shows, our sales representatives and advertising and
promotion in trade journals.
7
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 ACE MARKETING 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 Ace Marketing. 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 Ace Marketing, we
provide all the backup to allow our sales persons to just
sell. Since our technology is currently up to date, including
in house servers to allow access to our systems from off-site,
we have the ability to pick up salespeople from any location
in the United States.
o KEY ACQUISITIONS OF SMALL DISTRIBUTORS AND INTEGRATING THEIR
WORKFORCE INTO OURS. We will target one or more of the
estimated 20,000 small distributors for potential acquisition.
However, we can provide no assurances that we will be
successful in acquiring any distributors on terms satisfactory
to us, if at all.
o PROVIDING GENEROUS INCENTIVES TO OUR SALES PEOPLE TO INCREASE
PERFORMANCE LEVELS. We offer competitive commissions in
addition to back office support and research assistance to
allow our independent sales representatives to optimize their
sales time and to provide them with adequate incentives to
sell promotional products to our CUSTOMERS rather than for our
competitors. In the future, we may offer a stock option
program for additional incentives.
o MAINTAIN A COMPETITIVE GROSS PROFIT PERCENTAGE ON ALL SALES
ORDERS. In 2004 and 2003 our gross profit percentage was 29%
and 31%, respectively. According to The Counselor - State of
the Industry 2004 Survey, the average gross profit margin for
distributors during 1999 through 2003 averaged between 33.2%
and 34.1%.
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.
8
o UTILIZING THE INTERNET AND ITS CAPABILITIES AND OPPORTUNITIES
FOR SALES OF PROMOTIONAL PRODUCTS AND COST SAVINGS. Our
website is www.Acemarketing.net. Our website is utilized for
multiple purposes, including providing information to
potential customers who want to learn about us and research
our available product line. We also develop online company
stores for CUSTOMERS to help facilitate re-orders at cost
savings to them based upon a pre-determined product line.
SALES AND MARKETING
Our revenues are derived from existing customers and new customers
through word of mouth recommendations, attendance at trade shows, our sales
representatives and advertising and promotion in trade journals. Except for two
executive officers, our sales representatives receive commissions and are not
paid a salary. They work at their own location or at our facility and may sell
products on behalf of other companies. We encourage our sales representatives to
sell promotional products for us on the basis of sales incentives which include
competitive commissions and appropriate sales support and research which is
provided in-house by our employees. In the future, we intend to offer stock
and/or stock options as part of their incentive programs.
Our website is www.Acemarketing.net. Our website is utilized for
multiple purposes, including providing information to potential customers who
want to learn about us and research our available product line.
TECHNOLOGY
Technology affects most industries, and specifically the internet,
which enables many capabilities and opportunities for cost savings. Sales of
promotional products are often catalog-based. The cost of producing and mailing
a catalog can be high. Placing a catalog on a website takes less manpower to
maintain and less money to update and distribute new versions. Additionally,
integrating the catalog with the order processing system can save time and money
in placing and filling orders, also eliminating manual errors.
The proliferation of open architecture software and hardware makes an
increasing number of systems available for automating processes and integrating
back office systems. By doing this, we reduce support requirements and further
enhance margins. Additionally, the ability to provide more direct support to our
sales force has led to increased retention of our sales team.
POSSIBLE GROWTH THROUGH ACQUISITIONS
As a result of the fact that about 20,000 of the estimated 21,000
distributors are doing $2.5 million or less in annual sales in our estimated $16
billion annual industry, we believe the environment for growth and consolidation
in the promotional products industry is appealing, and that we would like to
take advantage of this if a satisfactory opportunity arises. There are some
issues that our company must address to be successful. The main issues are
motivating previous owners, retaining sales people, and integrating operations.
9
We have had conversations with the owners of several distributors of
promotional products and have observed that they are open to further
conversations taking place for the possible sale of their business. These
conversations are preliminary in nature and have not reached the level that any
transaction is probable or likely to occur.
We believe that if 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 the event we enter into an agreement to acquire a distributor, it
would likely involve the payment by us of cash and restricted common stock. We
may also have to arrange to borrow funds from an institutional lender. We have
not had any preliminary discussions with any institutional lender to determine
the likelihood that institutional financing would be available to us on terms
satisfactory to us, if at all. As of the date hereof, there is no agreement to
acquire any other company or distributor and there can be no assurances given
that our plans will be realized to grow through acquisitions of one or more
distributors or, if successful, that any acquisitions can be profitably
integrated into our company's operations.
COMPETITION
While our competition is extensive with over 20,000 distributors, we
believe that there are no companies that dominate the market in which we
operate. Our company competes within the industry on the basis of service,
competitive prices, personnel relationships and competitive commissions to our
sales representatives to sell promotional products for us rather than our
competitors. Competitors' advantages over us may include better financing,
greater experience and better service, cheaper prices and personal relationships
than us. According to The Counselor - State of the Industry 2004 Survey, the top
ten distributors in our industry are believed to have sales of between $118
million and $186 million for 2003. Halo Branded Solutions, American Identity and
4 Imprint Inc. are the top three distributors with 2003 sales of $186 million,
$179.5 million and $176.5 million, respectively. Nearly 80% of the distributors
surveyed are reported to be privately owned family businesses. We can provide no
assurances that we will be able to successfully compete in the future with
competitors that have greater experience and financial assets than us.
10
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 15, 2005, we had four full time employees, including two
executive officers who provide in-house sales, and ten sales representatives who
provide services to us on a non-exclusive basis as independent consultants. Upon
the effectiveness of this Form 10-SB, our Chief Financial Officer, who currently
serves as a consultant to our company, will become an employee devoting such
time as is necessary to our business for the performance of his duties.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE
OTHER INFORMATION PRESENTED IN THIS FORM 10-SB, IN EVALUATING US AND OUR
BUSINESS. ANY OF THE FOLLOWING RISKS, AS WELL AS OTHER RISKS AND UNCERTAINTIES,
COULD HARM OUR BUSINESS AND FINANCIAL RESULTS AND CAUSE THE VALUE OF OUR
SECURITIES TO DECLINE, WHICH IN TURN COULD CAUSE YOU TO LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATING TO OUR BUSINESS
THE PROMOTIONAL PRODUCTS DISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY
NOT BE ABLE TO COMPETE SUCCESSFULLY.
We compete with over 20,000 distributor companies. Some of our
competitors have greater financial and other resources than we do which could
allow them to compete more successfully. Most of our promotional products are
available from several sources and our customers tend to have relationships with
several distributors. Competitors could obtain exclusive rights to market
particular products which we would then be unable to market. Industry
consolidation among promotional products distributors, the unavailability of
products, whether due to our inability to gain access to products or
interruptions in supply from manufacturers, or the emergence of new competitors
could also increase competition. In the future, we may be unable to compete
successfully and competitive pressures may reduce our revenues.
11
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.
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
12
of potential industry changes, our products and promotions must continue to
evolve to meet changes in the industry. Our future expansion plans may not be
successful due to competition, competitive pressures and changes in the
industry.
OUR LIMITED CASH RESOURCES AND LACK OF A LINE OF CREDIT MAY RESTRICT OUR
EXPANSION OPPORTUNITIES.
An economic issue that can limit our growth is lack of extensive cash
resources, due to the typical payment terms of a transaction. Most suppliers
require us to pay within 30 days of delivery of an order; however, we may not
receive our customer's payment in the same time frame. This requires us to have
available cash resources to finance most of our customers' orders. Any lack of
cash resources would limit our ability to take orders from customers, thus
limiting our ability to grow. An infusion of capital and a good line of credit
can enable us to service a broader base of customers. We can provide no
assurances that we will obtain an adequate line of credit in the future, if at
all.
OUR PROPOSED EXPANSION THROUGH ACQUISITIONS INVOLVES SEVERAL RISKS.
We intend to expand our domestic markets in part through acquisitions
in the future. Such transactions involve numerous risks, including possible
adverse effects on our operating results or the market price of our common
stock. Some of our future acquisitions may also give rise to an obligation by us
to make contingent payments or to satisfy certain repurchase obligations, which
payments could have an adverse effect on our results of operations. In addition,
integrating acquired businesses:
o may result in a loss of customers of the acquired businesses;
o requires significant management attention; and
o may place significant demands on our operations, information
systems and financial resources.
There can be no assurance that our future acquisitions will be
successful. Our ability to successfully effect acquisitions will depend upon the
following:
o the availability of suitable acquisition candidates at
acceptable prices;
o the development of an established market for our common stock;
and
o the availability of financing on acceptable terms, in the case
of non-stock transactions.
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.
13
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. Our sales representatives work at
their own location or at our facility and may sell promotional products on
behalf of our competitors, which could cause our business to suffer. We are
dependent upon our 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 sales representatives, key customers, vendors and
manufacturers or fail to acquire new relationships with such key persons in the
future, our business may be adversely affected by the occurrence of any of these
events.
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 entered into a three year employment agreement with each of
Mr. Julia and Mr. Trepeta effective March 1, 2005. However, we lack "key man"
life insurance policies on any of our officers or employees. Competition for
additional qualified management is intense, and we may be unable to attract and
retain additional key personnel. Our management personnel is currently limited
and they may be unable to manage our expansion successfully and the failure to
do so could have a material adverse effect on our business, results of
operations and financial condition.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future to fund more
aggressive expansion of our business or make strategic acquisitions or
investments. We may require additional equity or debt financings or funds from
other sources for these purposes. No assurance can be given that these funds
will be available for us to finance our development on acceptable terms, if at
all. Such additional financings may involve substantial dilution of our
stockholders or may require that we relinquish rights to certain of our
technologies or products. In addition, we may experience operational
difficulties and delays due to working capital restrictions. If adequate funds
are lacking from operations or additional sources of financing, we may have to
delay or scale back our growth plans.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
WE LACK A 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 no trading market for our common stock. We do not
intend to list our common stock on any national or other securities exchange, or
on the Nasdaq Market. Our common stock may in the future be quoted in the otc
electronic bulletin board or listed in the over the counter pink sheets.
Accordingly, no public market for the common stock may develop, and any market
that develops may not last. The trading price of the common stock will depend on
many factors, including:
14
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 were to develop in
the future, sales of our common stock may be made by management and other
stockholders pursuant to and in compliance with the provisions of Rule 144 of
the Securities Act of 1933. In general, under Rule 144, a person who has
satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of shares which does not exceed the
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume in shares during the four calendar weeks
immediately prior to such sale. Rule 144 also permits under certain
circumstances, the sale of shares without any quantity or other limitation by a
person who is not an affiliate of our company and who has satisfied a two-year
holding period. Future sales of shares of our common stock made under Rule 144
may have an adverse effect on the then prevailing market price, if any, of our
common stock.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with our
financial statements and the notes thereto appearing elsewhere in this Form
10-SB. 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.
PROPERTY AND EQUIPMENT. We are required to make judgments based on
historical experience and future expectations, as to the realizability of our
property and equipment. We made these assessments based on the following
factors: (a) the estimated useful lives of such assets, (b) technological
changes in our industry, and (c) the changing needs of our customers.
17
OVERVIEW
We are a full service advertising specialties and promotional products
company. tSpecific categories of the use of promotional products include
advertising specialties, business gifts, incentives and awards, and premiums.
Through the services of our two in-house sales persons, who also serve as
executive officers of our company, 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 two
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 independent sales
representatives to our sales network and through one or more acquisitions of
other distributors. We can provide no assurances that our expectations described
above will be realized.
18
Results of Operations
---------------------
Our revenue for fiscal 2004 was $2,379,186, a decrease of $174,771 or
7% from fiscal 2003. Revenue in 2003 included $429,000 as a result of a contract
we were awarded from Starbucks' corporate office for a national promotion
campaign which was not awarded in 2004 and resulted in the overall decrease in
revenue for fiscal 2004. Our revenue is generally derived from a recurring
customer base.
Our gross profit percentage for fiscal 2004 was 29.1% as compared to
30.8% from fiscal 2003. The 1.7% decrease is attributed to the increased costs
of shipping merchandise to our customers. Despite the 7% decrease in revenues in
fiscal 2004, shipping costs rose .7% from 2003 to 2004, and although we pass on
the cost of shipping to our customers, we only charge a minimal mark up which
resulted in the reduction in the overall gross profit %.
Selling, general and administrative operating expenses for fiscal 2004
were $844,574, an increase of $65,592 or 8.4% from fiscal 2003. This increase is
primarily attributable to an increase in salaries (4.2%), entertainment and
travel (3.0%), insurance (1.0%) and rent (.8%), offset by a reduction in
commission expense of (-1.7%). Operating expenses when expressed as a percentage
of revenues was 35.5% for 2004 as compared to 30.4% for 2003.
Net (loss) income for fiscal 2004 was $(153,636) or $(.03) per share as
compared to $7,554 or $.00 per share for fiscal 2003. The decrease in earnings
from 2003 to 2004 was primarily due to the Starbucks national promotional
contract that was awarded in fiscal 2003, which contributed approximately
$90,000 to earnings in fiscal 2003, as well as the increases in operating
expenses.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In January 2003, the FASB issued
FASB Interpretation No. 46 ("FIN 46"),"Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51," as revised, A Variable Interest
Entity ("VIE") is an entity with insufficient equity investment or in which the
equity investors lack some of the characteristics of a controlling financial
interest. Pursuant to FIN 46, an enterprise that absorbs a majority of the
expected losses of the variable interest entity must consolidate the VIE. The
full adoption of FIN 46 in fiscal 2004 did not have a material effect on our
financial position and results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value
19
of such equity instruments be recognized as an expense in the historical
financial statements as services are performed. Prior to SFAS No. 123(R), only
certain pro forma disclosures of fair value were required. The provisions of
this Statement are effective for the first interim reporting period that begins
after June 15, 2005. If our company had included the cost of employee stock
option compensation in our financial statements it would not have had a material
effect on out net income (loss) for the years ended December 31, 2004 and 2003.
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so
abnormal" criterion that under certain circumstances could have led to the
capitalization of these items. SFAS No. 151 requires that idle facility expense,
excess spoilage, double freight and re-handling costs be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." SFAS 151 also requires that allocation of fixed production overhead
expenses to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for all fiscal years beginning
after June 15, 2005. We do not believe there will be a significant impact as a
result of adopting this Statement.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets. Statement No. 153 replaces the exception from fair value measurement in
APB No. 29, with a general exception from fair value measurement for exchanges
of non-monetary assets that do not have commercial substance. The Statement is
to be applied prospectively and is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. We do not believe
that SFAS No. 153 will have a material impact on our results of operations or
cash flows.
Controls and Procedures
Prior to the filing of our first Form 10-QSB following the
effectiveness of this Form 10-SB, our management, including the chief executive
officer, president and chief financial officer, intends to complete an
evaluation of the effectiveness of the design, maintenance and operation of our
disclosure controls and procedures and to implement any corrective actions. We
intend to maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities an Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our 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).
20
In designing and evaluating the disclosure controls and procedures,
management recognizes 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 is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Liquidity and Capital Resources
-------------------------------
At December 31, 2004, we had cash and cash equivalents of $566,285. We
consider highly liquid debt instruments with a maturity of three months or less,
as well as bank money market accounts, to be cash equivalents.
During 2004, net cash was used in operating activities of $(171,068).
This was primarily due to our net loss of ($(157,150) and decreases in accounts
payable and accrued expenses of $(9,750). During 2004, cash was used in
investing activities to purchase property and equipment of $(14,273). During
2004, net cash of $696,901 was provided by financing activities from the
proceeds of sale of our common stock and warrants totaling $713,201 less
payments on notes payable of $(16,300).
During 2003, net cash was used in operating activities of $(1,424).
This was primarily due a decrease in prepaid expenses and current assets of
$(64,286) and accounts payable and accrued expenses of $(4,337) partially offset
by our net income of $7,554 and a decrease of accounts receivable of $53,297.
During 2003, no cash was used in investing activities and $6,300 was provided by
financing activities from advances received on notes payable.
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. As of March 15,
2005, all borrowings from outside investors have been repaid or converted into
our company's common stock. We raised net proceeds of $95,000 from the sale of
our common stock and warrants to purchase additional common stock.
We anticipate that our future liquidity requirements will arise from
the need to finance our accounts receivable and inventories, 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. We believe that we can generate sufficient cash flow from these
sources to fund our operations for at least the next twelve months.
ITEM 3. DESCRIPTION OF PROPERTY.
Our offices are located at 457 Rockaway Avenue, Valley Stream, NY
11581. We currently lease approximately 3,100 square feet of office space at
this facility at an annual cost of approximately $43,000 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.
21
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
We have set forth in the following table certain information regarding
our common stock beneficially owned as of March 15, 2005 for (i) each
stockholder we know to be the beneficial owner of 5% or more of our outstanding
common stock, (ii) each of our executive officers and directors, and (iii) all
executive officers and directors as a group. Generally, a person is deemed to be
a "beneficial owner" of a security if that person has or shares the power to
dispose or to direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which the person has the right to
acquire beneficial ownership within 60 days. At March 15, 2005, 5,888,076 shares
of our common stock were outstanding.
--------------------------------------------------------------------------------
NAME AND AMOUNT OF PERCENT
ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (1)
--------------------------- ------------------------ ------------
(1)
DIRECTORS AND OFFICERS:
Scott Novack
457 Rockaway Avenue
Valley Stream, NY 11583 1,167,000 19.9
Michael D. Trepeta
457 Rockaway Avenue
Valley Stream, NY 11583(2) 1,382,000 22.5
Dean L. Julia
457 Rockaway Avenue
Valley Stream, NY 11583 (2) 1,352,500 22.0
Sean McDonnell
457 Rockaway Avenue
Valley Stream, NY 11583 (3) 50,000 .8
All Directors and Officers as a
Group (four persons) (4) 3,951,500 61.4
5% STOCKHOLDERS
James Simanton
4816 S. Pender Lane
Spokane, WA 99224 487,000 8.3
David McCooey
50 Urso Drive
Westerly, RI 02891 297,143 5.0
--------------------------------------------------------------------------------
--------------
(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.
22
(2) Includes options to purchase 250,000 shares.
(3) Includes options to purchase 50,000 shares.
(4) Includes options to purchase 550,000 shares.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth the names, ages, and titles of our
executive officers and directors.
Name Age Title
----------------------- --- ----------------------------------
Dean Julia 37 Chief Executive Officer/Secretary/
Treasurer/Director/Co-Founder
Michael Trepeta 33 President/Director/Co-Founder
Scott Novack 37 Director/Co-Founder
Sean McDonnell 44 Chief Financial Officer
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.
MICHAEL D. TREPETA
Mr. Trepeta received a Bachelor of Science Degree in Applied Economics
and Business Management with a minor in Communications from Cornell University
in 1993. Since that time, Mr. Trepeta has been associated with various
broker/dealers as a stockbroker where he was involved in the funding of numerous
development stage and growth companies. Mr. Trepeta was a Vice President of
Investments at Joseph Roberts & Co. in 1994 and a Vice President of Investments
at Rickel & Associates from 1995-1996. From September of 1996 through February
1998, he has served as President of MDT Consulting Group, Inc., a corporation
contracted by publicly traded companies to serve as a financial intermediary to
investment bankers and to assist in developing products, services, and business
strategies. In 1998, Mr. Trepeta co-founded us and he became an officer,
director and principal owner of our company.
23
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.
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 as an independent contractor. Mr.
McDonnell intends to become an employee of our company upon the effectiveness of
this Form 10-SB Registration Statement and devote such time to us as is
necessary for the performance of his duties.
24
Executive officers are appointed by the board and serve at the
discretion of the board. The board members serve for a period of one year until
their successors are elected and shall qualify.
LACK OF COMMITTEES
Our company has no standing nominating and compensation committees of
our board of directors or committees performing similar functions. We currently
lack an audit committee of our board of directors. We are currently seeking to
nominate and appoint to the board two independent directors and to form an audit
committee consisting of the two independent directors. It is our goal that at
least, one of the two independent directors would be deemed a "financial expert"
within the meaning of Sarbanes-Oxley Act of 2002, as amended. An independent
director is defined in Rule 4200(a)(14) of the NASD's Listing Standards to mean
a person other than an officer or employee of our Company or any other
individual having a relationship which, in the opinion of our board of
directors, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director. The following persons should not be
considered independent:
o A director who is employed by the Company or any of its
affiliates for the current year or any of the past three
years;
o A director who accepts any compensation from the Company or
any of its affiliates in excess of $60,000 during the previous
fiscal year other than compensation for Board service,
benefits under a tax qualified retirement plan, or non
discretionary compensation;
o A director who is a member of the immediate family of an
individual who is, or has been in any of the past three years,
employed by the Company or any of its affiliates as an
executive officer. Immediate family includes a person's
spouse, parents, children, siblings, mother-in-law,
father-in-law, sister-in-law, brother-in-law, son-in-law,
daughter-in-law, and anyone who resides in such person's home;
o A director who is a partner in, or a controlling shareholder
or an executive officer of, any for-profit business
organization to which the Company made, or from which the
Company received, payments (other than those arising solely
from investments in the Company's securities) that exceed 5%
of the Company's or business organizations consolidated gross
revenues for that year, or $200,000, whichever is more, in any
of the past three years;
o A director who is employed as an executive of another entity
where any of the Company's executives serve on that entity's
compensation committee.
The term "Financial Expert" is defined as a person who has the
following attributes: an understanding of generally accepted accounting
principles and financial statements; has the ability to assess the general
application of such principles in connection with the accounting for estimates,
accruals and reserves; experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the company's financial
25
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 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 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 being directly responsible for the appointment, compensation
and oversight of our independent auditor, which shall report
directly to the audit committee, including resolution of
disagreements between management and the auditors regarding
financial reporting for the purpose of preparing or issuing an
audit report or related work;
o 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.
26
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
LONG-TERM
NAME AND OTHER ANNUAL COMPENSATION ALL OTHER
PRINCIPAL CALENDAR COMPENSATION AWARDS AND COMPENSA-
POSITION YEAR SALARY($) BONUS (1) PAYOUTS (2) TION
--------- ---- --------- ----- --- ----------- ----
Dean Julia, 2004 121,500 0 0 0 0
Chief Executive 2003 108,000 0 0 0 0
Officer 2002 108,000 0 0 0 0
Michael Trepeta 2004 121,500 0 0 0 0
President 2003 108,000 0 0 0 0
2002 108,000 0 0 0 0
(1) Does not include the value of a leased automobile provided to the
executive officer for business purposes, as each officer owns his own
separate automobile that he uses for personal reasons.
(2) In January 2005, we adopted the 2005 Employee Benefit and Consulting
Services Compensation Plan pursuant to which we reserved 2,000,000
shares of common stock for the issuance of options to employees,
consultants and non-employee directors. No options or restricted stock
were issued in connection with services rendered to Messrs. Julia and
Trepeta during the past three years ended December 31, 2004. However,
Messrs. Julia and Trepeta were each granted ten-year options to
purchase 250,000 shares at $1.00 per share on January 3, 2005.
EMPLOYMENT AGREEMENTS
Michael Trepeta, our president and Dean Julia, our chief executive
officer, received salaries at the rate of $9,000 per month between 2002 through
March 2004, which was raised to $10,500 per month in April, 2004 and $12,000
per month in March 2005. Historically, all compensation of our executive
officers and directors including, without limitation, the payment of salaries,
bonuses and the grant of options and employment contracts have been determined
solely by our Board of Directors, which is controlled by the founders of the
Company. Effective March 1, 2005, we entered into employment contracts with
each of Messrs. Julia and Trepeta. These contracts contain the following
material provisions:
o A term of three years, with the Executive having the option to
renew the agreement for a period of an additional two years.
27
o A monthly base salary of $12,000, which salary will increase
each subsequent March 1 by at least $2,000 per month during
the term of the agreements and any extension thereof.
o The annual grant on March 1 of each year of ten-year stock
options to purchase 50,000 shares at an exercise price equal
to the then fair market value of our common stock as
determined by the Board.
o Annual bonuses of at least 5% of pre-tax earnings.
o Use of company automobile with all related costs paid for by
us.
o Health insurance.
o Indemnification to the extent permitted by New York law.
o Right to participate in any pensions of our company.
Directors' Compensation
-----------------------
Our directors are not expected to receive cash compensation for their
services as such. However, our non-employee directors will receive a fee of $500
to be paid to them for attending each meeting of the Board of Directors. All
directors will also be reimbursed for actual travel expenses incurred in
attending board meetings. Members of the board of directors are eligible to
participate under our company's stock incentive plan. Over a period of up to
five years, Messrs. Julia and Trepeta will receive compensation and options as
executive officers pursuant to their employment contracts and not in their
capacity as directors of our company. Equity incentive awards issued to other
board members will not be a fixed amount or granted on a pre-determined
timetable. Equity incentive awards will be determined and granted in the sole
discretion of the board and/or a compensation committee of the board at such
times and in such amounts as the board or a committee thereof determines to make
such awards.
2005 Employee Benefit and Consulting Services Compensation Plan
---------------------------------------------------------------
On January 3, 2005, our company established an Employee Benefit and
Consulting Services Compensation Plan covering 2,000,000 shares, which 2005 Plan
was ratified by our stockholders on February 9, 2005. As of March 15, 2005,
there are ten-year non-statutory stock options exercisable at $1.00 per share
granted to the following persons: Dean Julia (250,000 shares), Michael Trepeta
(250,000 shares), Sean McDonnell (50,000 shares), Lester Morse (25,000 shares)
and Steven Morse (25,000 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.
28
TYPES OF AWARDS
---------------
The 2005 Plan is designed to enable us to offer certain officers,
employees, directors and consultants of us and our subsidiaries equity interests
in us and other incentive awards in order to attract, retain and reward such
individuals and to strengthen the mutuality of interests between such
individuals and our stockholders. In furtherance of this purpose, the 2005 Plan
contains provisions for granting non-statutory stock options and incentive stock
options and common stock awards.
STOCK OPTIONS. A "stock option" is a contractual right to purchase a
number of shares of common stock at a price determined on the date the option is
granted. An incentive stock option is an option granted under the Internal
Revenue Code of 1986 to our employees with certain tax advantages to the grantee
over non-statutory stock options. The option price per share of common stock
purchasable upon exercise of a stock option and the time or times at which such
options shall be exercisable shall be determined by the Board at the time of
grant. Such option price in the case of incentive stock options shall not be
less than 100% of the fair market value of the common stock on the date of grant
and may be granted below fair market value in the case of non-statutory stock
options. Incentive stock options granted to owners of 10% or more of our common
stock must be granted at an exercise price of at least 110% of the fair market
value of our common stock and may not have a term greater than five years. Also,
the value of incentive options vesting to any employee cannot exceed $100,000 in
any calendar year. The option price of our options must be paid in cash, money
order, check or common stock of the company. The non-statutory stock options may
also contain at the time of grant, at the discretion of the board, certain other
cashless exercise provisions. These cashless exercise provisions are included in
the currently outstanding non-statutory stock options granted by the board.
Options shall be exercisable at the times and subject to the conditions
determined by the Board at the date of grant, but no option may be exercisable
more than ten years after the date it is granted. If the optionee ceases to be
an employee of our company for any reason other than death, any incentive stock
option exercisable on the date of the termination of employment may be exercised
for a period of thirty days or until the expiration of the stated term of the
option, whichever period is shorter. In the event of the optionee's death, any
incentive stock option exercisable at the date of death may be exercised by the
legal heirs of the optionee from the date of death until the expiration of the
stated term of the option or six months from the date of death, whichever event
first occurs. In the event of disability of the optionee, any incentive stock
options shall expire on the stated date that the Option would otherwise have
expired or 12 months from the date of disability, whichever event first occurs.
The termination and other provisions of a non-statutory stock option shall be
fixed by the board of directors at the date of grant of each respective option.
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
29
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.
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 7. 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 (iii) 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 (iii) 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) In February 2005, our three founders, Dean Julia, Michael Trepeta
and Scott Novack, each privately sold, at a resale price of $2.00 per share,
18,500 shares to close personal friends of Mr. Novack to accommodate their
desire to have an interest in our company before it went public. The shares that
were resold were originally purchased by our founders in 1998 at a nominal price
of $.0001 per share.
(iii) 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 the past two years, we purchased a total of $28,000
from her company.
30
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.
ITEM 8. DESCRIPTION OF SECURITIES.
CAPITAL STOCK
We are authorized to issue 22,000,000 shares of Common Stock, $.0001
par value per share of which 5,888,076 shares are issued and outstanding. On
March 15, 2005, our stockholders approved an amendment to our certificate of
incorporation to authorize 5,000,000 shares of Preferred Stock, $.0001 par
value, and to increase the number of authorized shares of common stock to
25,000,000, $.0001 par value.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and are not entitled to cumulative
voting for the election of directors. As a result, management of our company
who, in the aggregate hold a majority of shares, are able to elect all of the
directors standing for election and to control our company. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
therefore subject to the rights of preferred stockholders, if any. We do not
intend to pay any cash dividends on our common stock and anticipate reinvesting
our earnings, if any. In the event of liquidation, dissolution or winding up of
our company, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities and the preferences of
preferred stockholders, if any. Shares of common stock have no preemptive,
conversion or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock.
OUTSTANDING PRIVATELY HELD WARRANTS
Between March and October 2004, we issued Class A Warrants to purchase
an aggregate of 737,000 shares of our common stock at an exercise price of $2.00
per share. Each Class A Warrant is exercisable in whole or in part until the
close of business on January 2, 2006.
Between January and February 2005, we issued Class B Warrants to
purchase an aggregate of 100,000 shares of our common stock at an exercise price
of $2.00 per share. Each Class B Warrant is exercisable in whole or in part
until the close of business on January 2, 2008.
31
The Class A Warrants and Class B Warrants are not redeemable. The Class
A Warrants and Class B Warrants are subject to anti-dilution protection in the
event of stock dividends, stock splits, combinations and reclassifications.
PREFERRED STOCK
Our certificate of incorporation, as amended, authorizes us to issue
5,000,000 shares of preferred stock, $.0001 par value per share and to create
one or more series of preferred stock, and to designate the rights, privileges,
restrictions, preferences and limitations of any given series of preferred
stock. Accordingly, the board of directors may, without stockholder approval
issue shares of preferred stock with dividend, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
the holders of our common stock. The preferred stock could also be issued to
discourage, control, although we have no present intent to issue any additional
series of our preferred stock. The board of directors' ability to issue
preferred stock serves as a traditional anti-takeover measure installed to
prevent obstacles to takeovers. This provision of our certificate of
incorporation makes it difficult for a majority shareholder to gain control of
us and, therefore, may be beneficial to our company's management and our board
in a hostile tender offer and may have an adverse impact on shareholders who may
want to participate in such a tender offer. Also, the issuance of preferred
stock with voting and conversion rights could materially and adversely affect
the voting power of the holders of the Common Stock and may have the effect of
delaying, deferring or preventing a change in control of the Company.
32
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
There is currently no trading market for our company's common stock. We
presently have about 55 stockholders of record on our company's books and
records.
No cash dividends have been paid by our company on our common stock and
no such payment is anticipated in the foreseeable future.
After the effectiveness of this Form 10-SB, it is anticipated that
Meyers Associates, L.P. will file a Form 152c-11 application for trading of our
common stock on the electronic otc bulletin board. We can provide no assurances
that this application will be filed or that trading on the otc bulletin board
will take place or that an established market for our common stock will develop.
Commencing the later of April 2005 or 90 days after the effectiveness of our
Form 10-SB filing with the Securities and Exchange Commission, 3,836,500 shares
of our restricted common stock held by 15 persons 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. 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. An additional 1,538,000 shares held by 26 persons may be immediately
sold pursuant to Rule 144(k) as these shares were paid for more than two years
ago and are not owned by affiliates of our company. The remaining 513,576 shares
held by 14 persons will become eligible for sale between August 2005 and
February 2006.
Currently, we have outstanding warrants to purchase 837,000 shares of
our common stock at an exercise price of $2.00 per share and outstanding options
to purchase 600,000 shares of our common stock at an exercise price of $1.00 per
share. In the event that all of the warrants and options are exercised, of which
there can be no assurances given, an additional 1,437,000 shares of restricted
common stock will be issued and may be resold pursuant to Rule 144 after a
holding period of at least one year, unless we elect to voluntarily register the
resale of the shares issuable upon exercise of the warrants and options for
earlier sale. No registration rights were granted in connection with the
issuance of said warrants. After the effective date of this Form 10-SB
registration statement, we may file a Form S-8 registration statement to
register the issuance of up to 1,000,000 shares pursuant to our 2005 Employee
and Consulting Services Compensation Plan as described under item 6. The
aforementioned 600,000 options were granted pursuant to this plan.
TRANSFER AGENT AND REGISTRAR
We intend to appoint Continental Stock Transfer & Trust Company, New
York, New York as transfer agent and registrar for our common stock.
33
ITEM 2. LEGAL PROCEEDINGS.
We have not in the past nor are we currently 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 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On November 4, 2004, we engaged Holtz Rubenstein Reminick LLP as our
independent auditors and to audit the two years ended December 31, 2004. Prior
to that, we did not engage an independent auditor to audit our financial
statements. We did not consult with Holtz with respect to either any prior or
current fiscal year or an interim period with respect to either the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on our financial
statements, or any matter that was either the subject of a disagreement or a
reportable event.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
RECENT SALES OF UNREGISTERED SECURITIES
During the three years ended December 31, 2004 and from January 1, 2005
through March 15, 2005, we made the sales or issuances of unregistered
securities listed in the table below.
CONSIDERATION RECEIVED
AND DESCRIPTION OF
UNDERWRITING OR OTHER
DISCOUNTS TO MARKET IF OPTION, WARRANT OR
PRICE OR CONVERTIBLE EXEMPTION FROM CONVERTIBLE SECURITY,
DATE OF TITLE OF SECURITY, AFFORDED TO REGISTRATION TERMS OF EXERCISE OR
SALE SECURITY NUMBER SOLD PURCHASERS CLAIMED CONVERSION
--------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common Stock 600,000 For services rendered Section 4(2) Options exercisable
Options Options no other consideration granted to at $1.00 per share;
received; no officers, immediately
commissions paid. directors and exer-cisable; expire
legal counsel Jan. 2015; contain
under our 2005 cashless exercise
Incentive Plan. provisions.
Each grantee is a
sophisticated
investor, who
received the
options with a
restrictive
legend in
connection with
services rendered
and is able to
fend for himself.
After the
effectiveness of
this form 10-SB,
we intend to file
a Form S-8
Registration
Statement.
--------------------------------------------------------------------------------------------------------------------
34
Jan. - Feb. Common Stock 100,000 $100,000 received; no Rule 506 of Class B Warrants
2005 and Class B Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants Class B placement agent was Form D was filed per share through
Warrants utilized. on February 22, Jan. 2, 2008.
2005; securities
sold to
accredited
investors only.
--------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common Stock 31,076 Shares Conversion of $31,076 Section 3a(9); no Not Applicable.
of debt; no commissions commissions paid.
paid; no placement
agent was utilized.
--------------------------------------------------------------------------------------------------------------------
June - Oct. Common Stock 327,000 $327,000 received; no Rule 506 of Class A Warrants
2004 and Class A Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants 327,000 Class placement agent was Form D was filed per share through
A Warrants utilized. on Nov. 15, 2004; Jan. 2, 2006.
securities sold
to accredited
investors only.
--------------------------------------------------------------------------------------------------------------------
March - Common Stock 410,000 $410,000 received; no Rule 506 of Class A Warrants
April 2004 and Class A Shares and commissions paid; no Regulation D; a exercisable at $2.00
Warrants 410,000 Class placement agent was Form D was filed per share through
A Warrants utilized. on Nov. 24, 2003 Jan. 2, 2006.
and April 1,
2004; securities
sold to
accredited
investors only.
--------------------------------------------------------------------------------------------------------------------
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The New York Business Corporation Law contains provisions permitting
and, in some situations, requiring New York corporations to provide
indemnification to their officers and directors for losses and litigation
expense incurred in connection with their service to the corporation. Our
articles and bylaws contain provisions requiring our indemnification of our
directors and officers and other persons acting in their corporate capacities.
In addition, we may enter into agreements with our directors providing
contractually for indemnification consistent with the articles and bylaws.
Currently, we have no such agreements. The New York Business Corporation Law
also authorizes us to purchase insurance for our directors and officers insuring
them against risks as to which we may be unable lawfully to indemnify them. We
intend to obtain limited insurance coverage for our officers and directors as
well as insurance coverage to reimburse us for potential costs of our corporate
indemnification of officers and directors.
As far as exculpation or indemnification for liabilities arising under
the Securities Act of 1933 may be permitted for directors and officers and
controlling persons, we have been advised that in the opinion of the Securities
and Exchange Commission such exculpation or indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
35
PART F/S
ACE MARKETING &
PROMOTIONS, INC.
---------------------------------------------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
36
ACE MARKETING &
PROMOTIONS, INC.
CONTENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
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-10
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Ace Marketing & Promotions, Inc.
We have audited the accompanying balance sheets of Ace Marketing & Promotions,
Inc. for the years ended December 31, 2004 and 2003, 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, 2004 and 2003 and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
January 28, 2005, (except for Note 5 for
which the date is February 9, 2005)
F-1
ACE MARKETING &
PROMOTIONS, INC.
BALANCE SHEETS
--------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 2003
--------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 566,285 $ 54,725
Accounts receivable 312,604 306,703
Prepaid expenses and other current assets 68,407 64,286
-----------------------------
Total Current Assets 947,296 425,714
Property and Equipment, net 15,680 7,426
Other Assets 3,135 2,970
-----------------------------
Total Assets $ 966,111 $ 436,110
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 25,000 $ 41,300
Accounts payable 183,653 205,418
Accrued expenses 92,212 80,197
-----------------------------
Total Current Liabilities 300,865 326,915
-----------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; 22,000,000 shares authorized;
5,757,000 and 5,020,000 shares issued and outstanding
at December 31, 2004 and 2003, respectively 576 502
Additional paid-in capital 1,030,625 317,498
Accumulated deficit (365,955) (208,805)
-----------------------------
Total Stockholders' Equity 665,246 109,195
-----------------------------
Total Liabilities and Stockholders' Equity $ 966,111 $ 436,110
=============================
--------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-2
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 2003
------------------------------------------------------------------------------------
Revenues, net $ 2,379,186 $ 2,563,957
Cost of Revenues 1,688,248 1,773,841
------------------------------
Gross Profit 690,938 790,116
------------------------------
Operating Expenses:
Selling expenses 292,034 305,786
General and administrative expenses 552,540 473,196
------------------------------
Total Operating Expenses 844,574 778,982
------------------------------
(Loss) Income from Operations (153,636) 11,134
------------------------------
Other Income (Expense):
Interest expense (3,609) (3,582)
Interest income 95 2
------------------------------
Total Other Income (3,514) (3,580)
------------------------------
(Loss) Income Before Provision for Income Taxes (157,150) 7,554
Income Tax (Benefit) Expense - -
------------------------------
Net (Loss) Income $ (157,150) $ 7,554
==============================
Net (Loss) Income Per Common Share:
Basic $ (0.03) $ 0.00
==============================
Diluted $ (0.03) $ 0.00
==============================
Weighted Average Common Shares Outstanding:
Basic 5,426,389 5,020,000
==============================
Diluted 5,426,389 5,020,000
==============================
------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-3
ACE MARKETING &
PROMOTIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
----------------------------------------------------------------------------------------------------------
Total Common Stock Additional
Stockholders' ------------------------ Paid-in
Equity Shares Amount Capital (Deficit)
----------------------------------------------------------------------
Balance, January 1, 2003 $ 101,641 5,020,000 $ 502 $ 317,498 $ (216,359)
Net Income 7,554 - - - 7,554
----------------------------------------------------------------------
Balance at, December 31, 2003 109,195 5,020,000 502 317,498 (208,805)
Securities Issued to Private
Placement Investors, net 713,201 737,000 74 713,127 -
Net Loss (157,150) - - - (157,150)
----------------------------------------------------------------------
Balance at, December 31, 2004 $ 665,246 5,757,000 $ 576 $ 1,030,625 $ (365,955)
======================================================================
----------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-4
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 2003
----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (loss) income $ (157,150) $ 7,554
----------------------------
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 6,019 6,348
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (5,901) 53,297
Prepaid expenses and other assets (4,286) (64,286)
(Decrease) in operating liabilities:
Accounts payable and accrued expenses (9,750) (4,337)
----------------------------
Total adjustments (13,918) (8,978)
----------------------------
Net Cash Used in Operating Activities (171,068) (1,424)
----------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (14,273) -
----------------------------
Net Cash Used in Investing Activities (14,273) -
----------------------------
Cash Flows from Financing Activities:
Proceeds from private placement 713,201 -
Advances on notes payable - 6,300
Payments on notes payable (16,300) -
----------------------------
Net Cash Provided by Financing Activities 696,901 6,300
----------------------------
Net Increase in Cash and Cash Equivalents 511,560 4,876
Cash and Cash Equivalents, beginning of year 54,725 49,849
----------------------------
Cash and Cash Equivalents, end of year $ 566,285 $ 54,725
============================
----------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-5
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
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.
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. At December 31, 2004 and 2003 management
does not believe that any allowance for uncollectible accounts is
necessary.
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, 2004 and 2003, 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, 2004 and 2003.
--------------------------------------------------------------------------------
F-6
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
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.
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, 2004 and 2003 approximated $600
and $1,000, respectively.
STOCK-BASED COMPENSATION - The Company has adopted the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). In compliance with SFAS 123, the Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for
its employee stock-based compensation plans. The Company has also adopted
the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This pronouncement requires
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reporting results. If the Company had elected
to recognize compensation expense based upon the fair value at the date of
grant for awards under these plans, consistent with the methodology
prescribed by SFAS 123, the effect on the Company's net income and earnings
per share as reported would not have been material.
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, 2004 and 2003, due to their short term nature.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In January 2003, the FASB
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51," as revised, A Variable
Interest Entity ("VIE") is an entity with insufficient equity investment or
in which the equity investors lack some of the characteristics of a
controlling financial interest. Pursuant to FIN 46, an enterprise that
absorbs a majority of the expected losses of the VIE must consolidate the
VIE. The full adoption of FIN 46 in fiscal 2004 did not have a material
effect on the Company's financial position and results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services. This statement focuses
primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R)
requires that the fair value of such equity instruments be recognized as an
expense in the historical financial statements as services are performed.
Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value
were required. The provisions of this statement are effective for the first
interim reporting period that begins after June 15, 2005. If the Company
had included the cost of employee stock option compensation in our
financial statements it would not have had a material effect on our net
income (loss) for the years ended December 31, 2004 and 2003.
--------------------------------------------------------------------------------
F-7
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151 "Inventory Costs." This statement amends
Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and
removes the "so abnormal" criterion that under certain circumstances could
have led to the capitalization of these items. SFAS No. 151 requires that
idle facility expense, excess spoilage, double freight and re-handling
costs be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." SFAS 151 also requires that allocation
of fixed production overhead expenses to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 is
effective for all fiscal years beginning after June 15, 2005. Management
does not believe there will be a significant impact as a result of adopting
this statement.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets. Statement No. 153 replaces the exception from fair value
measurement in APB No. 29, with a general exception from fair value
measurement for exchanges of non-monetary assets that do not have
commercial substance. The statement is to be applied prospectively and is
effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not believe that SFAS No.
153 will have a material impact on its results of operations or cash flows.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at December 31:
USEFUL LIVES 2004 2003
--------------------------------------------------------------------------
Furniture and Fixtures 5 years $ 42,603 $ 28,330
Leasehold Improvements 5 years 3,150 3,150
-----------------------
45,753 31,480
Less Accumulated Depreciation 30,073 24,054
-----------------------
$ 15,680 $ 7,426
=======================
Depreciation expense for the years ended December 31, 2004 and 2003 was
$6,019 and $6,348, respectively.
3. NOTES PAYABLE
(a) Note payable to a stockholder in the original principal amount of
$25,000. The Note bears interest at a rate of 10% per annum. Repayment
of the note was to commence in August 2003 in twelve equal payments,
but at the request of the note holder repayment of the Note has not
begun as of December 31, 2004. As of December 31, 2004 and 2003,
accrued interest on the Note was approximately $6,000 and $3,500,
respectively and was included in accrued expenses.
Prior to the repayment of any of the principal and accrued interest,
the holder can convert the Note into common stock of the Company at
the conversion rate of $1.50 per share. On January 13, 2005, the
Company agreed to convert the principal and accrued interest into
common stock of the Company at a reduced conversion rate of $1.00 per
share, which resulted in the issuance of 31,076 shares of common
stock.
--------------------------------------------------------------------------------
F-8
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
(b) Note payable to an individual in the original principal amount of
$16,300. The Note bore interest at a rate of 10% per annum and was
repaid during the year ended December 31, 2004.
4. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
2004 and 2003 is summarized as follows:
2004 2003
---------------------------------------------------------------------------
Current:
Federal $ - $ -
State - -
----------------------
- -
----------------------
Deferred:
Federal - -
State - -
----------------------
- -
----------------------
$ - $ -
======================
The Company has federal and state net operating loss carryforwards of
approximately $315,000, which can be used to reduce future taxable income
through 2024. There was no current federal or state income tax provision
for the year ended December 31, 2003, as the Company was able to utilize
net operating loss carryforwards.
The tax effects of temporary differences which give rise to deferred tax
assets (liabilities) at December 31, are summarized as follows:
2004 2003
---------------------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryforwards $ 126,000 $ 70,800
---------------------------
Deferred Tax Assets 126,000 70,800
Less Valuation Allowance (126,000) (70,800)
---------------------------
Net Deferred Tax Asset $ - $ -
===========================
5. STOCKHOLDERS' EQUITY
CAPITALIZATION - On February 9, 2005, the stockholders approved an
amendment to the Company's Certificate of Incorporation to (i) increase the
authorized shares of Common Stock from 22,000,000 shares to 25,000,000; par
value $.0001; and (ii) create 5,000,000 shares of Preferred Stock, $.0001
par value. The Board of Directors has the authority to issue shares of
Preferred Stock from time to time and to fix such rights, preferences and
privileges of such issuances.
PRIVATE PLACEMENT OF SECURITIES - During Fiscal 2004, the Company sold
through a private placement 14.74 units (each consisting of 50,000 common
shares and 50,000 Class A Warrants) at a purchase price of $50,000 per unit
for net proceeds of $713,200, net of closing costs of approximately
$23,800. Each Class A Warrant has an exercise price of $2.00 and expires on
January 2, 2006.
--------------------------------------------------------------------------------
F-9
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
Subsequent to year-end, 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.
STOCK OPTION PLAN - On January 3, 2005, the Company established an Employee
Benefit and Consulting Services Compensation Plan (the "Plan") for the
granting of up to 2,000,000 non-statutory and incentive stock options and
stock awards, and granted non-statutory stock options to purchase 600,000
shares at an exercise price of $1.00 per share. The options vest
immediately and expire on January 3, 2015.
On February 9, 2005, the stockholders ratified the adoption of the Plan.
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leased office space under a non-cancelable
operating lease, which expired on December 31, 2004. The Company is
currently leasing its office space on a month-to-month basis. Rent expense
was approximately $43,000 and $37,000 for the years December 31, 2004 and
2003, respectively.
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 the years ended December 31, 2004 and 2003, one customer accounted for
approximately 9% and 27% of net revenues, respectively. Aggregate revenues
from this customer are dispersed among many different franchises and
storefront locations.
8. RELATED PARTY TRANSACTIONS
The Company purchased merchandise with a cost of approximately $20,000 and
$8,000 for the years ended December 31, 2004 and 2003, respectively from an
entity that is owned by an individual related to one of the officers of the
Company.
--------------------------------------------------------------------------------
F-10
PART III
ITEM 6. INDEX TO EXHIBITS.
Exhibit
No. Description
--- -----------
3.1 Articles of Incorporation filed March 26, 1998*
3.2 Amendment to Articles of Incorporation filed June 10, 1999*
3.3 Amendment to Articles of Incorporation approved by stockholders on
February 9, 2005*
3.4 Amended By-Laws*
10.1 Employment Agreement - Michael Trepeta *
10.2 Employment Agreement - Dean Julia *
11.1 Statement re: Computation of per share earnings. See Statement of
Operations and Notes to Financial Statements
21.1 Subsidiaries of the Issuer - None
99.1 2005 Employee Benefit and Consulting Services Compensation Plan*
99.2 Form of Class A Warrant *
99.3 Form of Class B Warrant *
------------
* Previously filed.
39
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
ACE MARKETING & PROMOTIONS, INC.
By: /S/ MICHAEL TREPETA
--------------------------
Michael Trepeta, President
By: /S/ DEAN JULIA
-----------------------------------
Dean Julia, Chief Executive Officer
Date: April 7, 2005
40