AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
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
PART I.........................................................................1
ITEM 1. DESCRIPTION OF BUSINESS............................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........15
ITEM 3. DESCRIPTION OF PROPERTY...........................................19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....19
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS......21
ITEM 6. EXECUTIVE COMPENSATION............................................25
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................28
ITEM 8. DESCRIPTION OF SECURITIES.........................................28
PART II.......................................................................30
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS...................................30
ITEM 2. LEGAL PROCEEDINGS.................................................30
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.....................30
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES...........................31
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.........................31
PART III......................................................................34
ITEM 1. INDEX TO EXHIBITS.................................................34
SIGNATURES.................................................................35
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.
We are a full service advertising specialties and promotional products
distributor company. We distribute items typically with logos on them to
clients. Several client categories include large corporations, local schools,
universities, financial institutions, hospitals and not-for-profit
organizations. 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 purchase or 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.
There are over 500,000 items listed within the industry ranging from
stickers that sell for pennies all the way through jewelry, sporting goods,
awards, and electronics that sell for 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.
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THE MARKET
Promotional products are everywhere. There are literally tens of 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, 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,
promotional product distributor's sales were $5.2 billion in 1992 and $16.34
billion in 2003. This is a 200% increase from 1992 to 2003. A revitalized
economy, increased competition in the marketplace, and a trend toward integrated
and targeted marketing strategies has contributed to this growth. Management
believes that this trend is expected to continue, providing further growth for
2005.
DISTRIBUTORS
------------
With no single company dominating the market, the promotional products
industry is highly fragmented with over 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. Management believes that control of sales lies predominantly
with the independent sales representatives, as there is little brand recognition
at this time.
The following ranks the top ten purchasers of promotional products
according to the findings of a 2000 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 Financial: Banks, S&Ls Credit Unions, Stock Brokers
o Health Care: Hospitals, Nursing Homes, Clinics
o Not-for-Profit Organizations
o Education: Schools, Seminars
o Manufacturers not otherwise specified
o Insurance: Companies, Agents, Adjusters
o Automotive: Manufacturers, Dealers, Parts Suppliers
o Government: Public Offices, Agencies, Political Candidates
o Entertainment and Sporting Events
o Media: Broadcast/Print Media, Advertising/Public Relation Agencies
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SUPPLY CHAIN
------------
Domestic and overseas manufacturers generally sell their promotional
product items directly to suppliers. Suppliers sell to distributors like Ace
Marketing and distributors sell promotional products to clients users such as
large corporations, financial institutions, universities and schools, hospitals,
not-for-profit organizations and small businesses.
The industry is set up so that the clients do not work directly with the
supplier. The supplier will only sell directly to distributors. The suppliers
know that if they worked directly with clients of distributors, they would
probably alienate every distributor that found out, in essence losing a sales
force of 20,000 companies that sell their product. 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 client 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 client 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 client 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. Distributors may distinguish themselves by attractive pricing,
by sourcing unique items, obtaining exclusive products and/or offering superior
in house service and customer support. Most suppliers require a distributor to
pay within 30 days of delivery of an order; however, a distributor such as us
may not receive our customer's payment in the same time frame. This requires us
to have available cash revenues to finance most of the 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 size can enable us
to service a broader base of customers. We have never sought to establish a line
of credit, although we may seek to establish one with an institutional lender in
the future.
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PURCHASING TRENDS
Price is no longer the sole motivator of purchasing behavior. With the
availability of similar products from multiple sources, companies are
increasingly looking for distributors who provide a tangible value-added to
their products. This is true in many distribution industries, not just
promotional products. As a result, distributors must incorporate and provide a
broader range of products and services in their portfolio. Specifically, many
distributors are providing research and consultancy services, design services,
and fulfillment services to their customers. This can be very important to
future success in the industry and is also driving greater profitability for the
distributors.
OUR CLIENTS - CHOOSING THE RIGHT DISTRIBUTOR
Ace Marketing presently has several hundred accounts ranging from fortune
500 companies to local schools and small businesses. 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
client base grows mainly through business and personal referrals and the efforts
of our sales representatives. Generally buyers do not actively seek distributors
to bid on their projects. There are many reasons why a buyer may work with one
distributor over another. 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
still important, they also count on dependability, creativity and efficiency.
Their 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 the least expensive distributor who gives them run
of the mill ideas, 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 CLIENTS
---------------------
We have built our business around the concept of reliability, high quality,
innovative promotional products and incentives at competitive prices while
maintaining a high level of customer service and superior relationships with
industry suppliers. Our research systems afford us the ability to locate and
purchase industry product in an efficient manner. Our in house art capabilities
make us a "one stop shop" for custom merchandise and provide our clients with
comfort in knowing logo modifications will not delay valuable production days on
tight turn-around projects.
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:
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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
the broad list of 500,000 to possibly a dozen or less. Once a client calls in or
e-mails us requesting ideas for an upcoming event, we begin to research ideas
based on their parameters and we use a top of the line research software. This
provides us an immediate advantage over small distributors who still do things
the old fashioned way. Many of these smaller 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. This
is an extremely inefficient way to research. Our software system allows us to do
in minutes what may literally take some of our competitors hours.
Once we have chosen products that we believe the client may be interested
in, we generally clip an image of the products and send them along with pricing
to our clients via e-mail. Other less efficient distributors may still send
catalogs with tabbed pages via mail. Again, we save time and money using our
software technology. This is usually a business where time is an issue. Many
clients plan major events and tend to leave the orders of promotional products
until the last minute.
When the client decides on the product that they would like to order, the
order is processed in our order entry department utilizing top of the line
software to do this. The salesperson submits the specifics of the order to our
order entry department where the order is keyed into the system. 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 client
via fax along with a hard copy of the artwork that will be used on the
order. The order is not submitted until our client signs off on the
acknowledgment and the artwork. No order runs without the sign offs
thus protecting us in the long run of a client claiming they were not
aware of some aspect of the order.
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o PURCHASE ORDER The Purchase order is submitted to the supplier only
after the acknowledgment and art are signed by our client. 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 client 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 client, 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 client 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 client, 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 led to outstanding results and very few
disputes with either factories or clients.
OUR STRATEGY
Our objective is to be a leading full service advertising specialties and
promotional products company. Key elements of our strategy are:
o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES. We have
been in business for over six years. Our revenues are derived from
existing customers and new customers through word of mouth
recommendations, attendance at trade shows, our sales representatives
and advertising and promotion in trade journals.
o MOTIVATING RETAILERS TO UTILIZE PROMOTIONAL AND SPECIALTY PRODUCTS IN
THEIR BUSINESS. A trend in our industry is for the use of promotional
items to customers rather than cash incentives for gaining customer
loyalty and motivating sales people. Management believes that
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.
6
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 support from Ace Marketing that is not
typically found in smaller distributorships. In smaller
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 all 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 highly 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
clients for us rather than 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 the 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 clients and provide consulting services in connection
therewith. We utilize high-end research technology and order entry
systems to provide the best services to our customers in the most
timely fashion possible.
o UTILIZING THE INTERNET AND ITS CAPABILITIES AND OPPORTUNITIES FOR
SALES OF PROMOTIONAL PRODUCTS AND COST SAVINGS. Our website is
www.Acemarketing.net. Our website is utilized for multiple purposes,
including providing information to potential customers who want to
learn about us and research our available product line. We also
develop online company stores for clients to help facilitate re-orders
at cost savings to them based upon a pre-determined product line.
7
ADVERTISING/MARKETING INDUSTRY TRENDS
The promotional products industry is growing at a strong pace. This growth
is being fueled by 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. As this
trend continues, the market will continue to grow.
Another trend in marketing is the use of promotional items, rather than
cash incentives for gaining customer loyalty and motivating sales people.
Studies conducted show that 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.
Finally, the use of rewards and incentives to maintain customer loyalty is
increasing. Companies are building customer loyalty through the use of point
systems that are exchanged for promotional merchandise.
TECHNOLOGY
Technology affects every industry, and specifically the internet 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. Providing our employees and
customers with powerful tools improves our position in the marketplace.
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 the
sales force will increase retention of our sales team.
POSSIBLE GROWTH THROUGH ACQUISITIONS
We believe that the environment for growth and consolidation in the
promotional products industry is compelling, and that we are poised to take
advantage of this opportunity. There are few barriers and many forces working in
our company's favor. 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.
8
We believe that when a distributor is acquired, a decision must be made
about the existing management team, most typically the owner. An evaluation must
be made regarding the skills of the owner and desirability of having them
involved in our company. Acquisitions would be typically made for the customer
accounts; however, due to the size of the target companies, the owner would most
likely also be a key employee or sales person. The motivation of the previous
owner to work for others may be an issue. We must address this issue and ensure
the continued participation of the owners. In general, the best way to mitigate
this risk is to tie up much of the previous owners' payment in stock, thus
providing incentive for the overall company's success.
We believe that one of the most difficult tasks in our acquiring a company
is transitioning the new acquisition into us. It is important to have flexible,
open systems and technology to integrate the back office operations, as well as
strong controls and processes to put in place. Having the appropriate technology
and strong management team will help alleviate some of the issues here.
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. 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. With Halo Branded Solutions, American
Identity and 4 Imprint Inc. as 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.
We believe that in the promotional products industry, sales people
typically have a large amount of autonomy and control the relationships with
their accounts. This works both for and against us. To avoid losing accounts, 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 accounts 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.
9
EMPLOYEES
As of February 9, 2005, we had four full time employees and ten sales
representatives who provide services to us on a non-exclusive basis as
independent consultants.
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. THE RISKS BELOW ARE NOT THE ONLY ONES THAT WE FACE. ADDITIONAL RISKS
NOT CURRENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR
OUR BUSINESS.
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, including several major
distributors. Some of our competitors have greater financial and other resources
than we do which could allow them to compete more successfully. Most of our
promotional products are available from several sources and our customers tend
to have relationships with several distributors. Competitors could obtain
exclusive rights to market particular products which we would then be unable to
market. Industry consolidation among promotional products distributors, the
unavailability of products, whether due to our inability to gain access to
products or interruptions in supply from manufacturers, or the emergence of new
competitors could also increase competition. In the future, we may be unable to
compete successfully and competitive pressures may reduce our revenues.
WE EXPERIENCE FLUCTUATIONS IN QUARTERLY EARNINGS. AS A RESULT, WE MAY FAIL TO
MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our business has been subject to seasonal and other quarterly fluctuations.
Net sales and operating profits generally have been higher in the third and
fourth quarters, particularly in the months of September through November, due
to the timing of sales of promotional products and year-end promotions. Net
sales and operating profits have been lower in the first quarter, primarily due
to increased sales in the prior two quarters. Quarterly results may also be
adversely affected by a variety of other factors, including:
o costs of developing new promotions and services;
o costs related to acquisitions of businesses;
10
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 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.
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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.
Our future operating results depend on our ability to maintain satisfactory
relationships with qualified independent Sales personnel as well as key
customers, vendors and manufacturers. We are dependent upon our 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
suffer.
OUR FUTURE PERFORMANCE IS MATERIALLY DEPENDENT UPON OUR MANAGEMENT AND THEIR
ABILITY TO MANAGE OUR GROWTH.
Our future success is substantially dependent upon the efforts and
abilities of members of our existing management, particularly Dean L. Julia,
Chief Executive Officer and Michael Trepeta, President. The loss of the services
of Mr. Julia or Mr. Trepeta could have a material adverse effect on our
12
business. We intend to have a minimum three year employment agreement with each
of Mr. Julia and Mr. Trepeta. 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: 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.
13
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE.
The market price for our common stock may be highly volatile. A variety of
factors may have a significant impact on the market price of our common stock,
including:
o the publication of earnings estimates or other research reports and
speculation in the press or investment community;
o Changes in our industry and competitors;
o our financial condition, results of operations and prospects;
o any future issuances of our common stock, which may include primary
offerings for cash, issuances in connection with business
acquisitions, and the grant or exercise of stock options from time to
time;
o general market and economic conditions; and
o any outbreak or escalation of hostilities, which could cause a
recession or downturn in our economy.
In addition, the markets in general can experience extreme price and volume
fluctuations that can be unrelated or disproportionate to the operating
performance of the companies listed or quoted. Broad market and industry factors
may negatively affect the market price of our common stock, regardless of actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against companies. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would harm our business.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FUTURE.
No cash dividends have been paid by our company on our common stock. The
future payment by us of cash dividends on our common stock, if any, rests within
the discretion of our board of directors and will depend, among other things,
upon our earnings, our capital requirements and our financial condition as well
as other relevant factors. We do not intend to pay cash dividends upon our
common stock for the foreseeable future.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND AGREEMENTS COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF OUR COMPANY.
Certain provisions of our articles of incorporation may discourage, delay,
or prevent a merger or acquisition that a shareholder may consider favorable.
These provisions include:
o Authority of the board of directors to issue preferred stock.
o Prohibition on cumulative voting in the election of directors.
14
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.
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
15
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. Revenue is recognized from sales when a product is
shipped and title passes to the customer.
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.
OVERVIEW
We are a full service advertising specialties and promotional products
company that distributes items typically with logos. Specific categories of
promotional products include advertising specialties, business gifts, incentives
and awards, and premiums.
RESULTS OF OPERATIONS
---------------------
Our revenues for 2004 were $2,379,186, a decrease of $174,771 or 7% from
the comparable period of the prior year. This decrease was due to a large
non-recurring order of $429,000 from one client.
Our gross profit percentage for 2004 was 29.1% as compared to 30.8% from
2003. This 1.7% decrease was attributed to the increased costs of freight which
are passed on to clients at our cost with a small handling charge.
Selling, general and administrative operating expenses for 2004 were
$844,574, an increase of $65,592 or 8.4% from the comparable period of the prior
year. This increase is primarily attributable to an increase in salaries,
entertainment and travel. 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 2004 was $(153,636) or $(.03) per share as compared
to $7,554 or $.00 per share for 2003. The decrease in earnings from 2003 to 2004
was primarily due to the loss of one large non-recurring order, which
contributed approximately $90,000 to earnings in 2003, increases in operating
expenses and reduced margins.
16
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
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.
17
Controls and Procedures
Our management, including the chief executive officer, president and chief
financial officer, prior to the effectiveness of this Form 10-SB intend 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-14(c).
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 February 9,
2005, all borrowings from outside investors have been repaid or converted into
our company's common stock.
18
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.
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 February 9, 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 February 9, 2005, 5,888,076
shares of our common stock were outstanding.
19
NAME AND AMOUNT OF PERCENT
ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (1) OF CLASS (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.
20
(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.
21
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 has been the President of SJN Consulting Group,
Inc., a privately held company, since 1996. 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 clients 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.
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"
22
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 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:
23
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.
24
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.
(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. All compensation of our executive officers and directors
including, without limitation, the payment of salaries, bonuses and the grant of
options and employment contracts shall be determined solely by our Board of
Directors, which is controlled by the founders of the Company. Currently, we
lack employment agreements with our executive officers. It is our intention to
execute employment contracts with each of Messrs. Julia and Trepeta effective
March 1, 2005 to provide for the following:
o A term of three years, with the Executive having the option to renew
the agreement for a period of an additional two years.
25
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, except for a fee of $500 to be paid to directors for attending
each meeting of the Board of Directors. Directors will also be reimbursed for
reasonable travel expenses incurred in attending Board meetings. Members of the
Board of Directors are eligible to participate under the Company's Stock Option
Plan.
2005 EMPLOYEE BENEFIT AND CONSULTING SERVICES COMPENSATION PLAN
---------------------------------------------------------------
On January 3, 2005, the 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 February 9, 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.
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.
26
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. 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 shall
not be less than 100% of the fair market value of the common stock on the date
of grant, except in the case of non-statutory stock options. The option price
must be paid in cash, money order, check or common stock of the company. The
options may also contain at the time of grant, at the discretion of the Board,
certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions
determined by the Board at the date of grant, but no option may be exercisable
more than ten years after the date it is granted. If the optionee ceases to be
an employee of our company for any reason other than death, any incentive stock
option exercisable on the date of the termination of employment may be exercised
for a period of thirty days or until the expiration of the stated term of the
option, whichever period is shorter. In the event of the optionee's death, any
incentive stock option exercisable at the date of death may be exercised by the
legal heirs of the optionee from the date of death until the expiration of the
stated term of the option or six months from the date of death, whichever event
first occurs. In the event of disability of the optionee, any incentive stock
options shall expire on the stated date that the Option would otherwise have
expired or 12 months from the date of disability, whichever event first occurs.
The termination and other provisions of a non-statutory stock option shall be
fixed by the board of directors at the date of grant of each respective option.
COMMON STOCK AWARD. common stock awards are shares of common stock that
will be issued to a recipient at the end of a restriction period, if any,
specified by the board if he or she continues to be an employee, director or
consultant of us. If the recipient remains an employee, director or consultant
at the end of the restriction period, the applicable restrictions will lapse and
we will issue a stock certificate representing such shares of common stock to
the participant. If the recipient ceases to be an employee, director or
consultant of us for any reason (including death, disability or retirement)
before the end of the restriction period unless otherwise determined by the
board, the restricted stock award will be terminated.
ELIGIBILITY
-----------
Our officers, employees, directors and consultants of Ace and our
subsidiaries are eligible to be granted stock options, and common stock awards.
27
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 6. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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.
In February 2005, our three founders, Dean Julia, Michael Trepeta and Scott
Novack, each privately sold 18,500 shares to friends of Mr. Novack.
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.
ITEM 7. 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
February 9, 2005, our stockholders approved an amendment to our certificate of
incorporation to authorize 3,000,000 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
28
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.
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
3,000,000 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.
29
PART I
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 filing 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.
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.
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. 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.
30
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 February 9, 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. - Feb. common stock 100,000 $100,000 received; no Section 4(2) and Class B Warrants
2005 and Class B shares and commissions paid Rule 506 of exercisable at $2.00
Warrants 100,000 Class Regulation D per share through
A Warrants Jan. 2, 2008.
----------------------------------------------------------------------------------------------------------------------
Jan. 2005 Common stock 31,076 shares Conversion of $31,076 Section 3a(9) Not Applicable.
of debt; no commissions
paid;
----------------------------------------------------------------------------------------------------------------------
March - Nov. common stock 737,000 $737,000 received; no Section 4(2) and Class A Warrants
2004 and Class A shares and commissions paid Rule 506 of exercisable at $2.00
Warrants 737,000 Class Regulation D per share through
A Warrants Jan. 2, 2006.
----------------------------------------------------------------------------------------------------------------------
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.
31
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.
32
PART F/S
ACE MARKETING &
PROMOTIONS, INC.
---------------------------------------------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
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
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 from sales when a product is
shipped and title passes to customers.
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.
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.
F-6
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
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.
SHIPPING AND HANDLING FEES AND COSTS - The Company includes fees billed to
a customer relating to shipping and handling costs in net sales. All
shipping and handling expenses incurred by the Company are included in cost
of sales.
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
F-7
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
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.
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.
F-8
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
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.
(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.
F-9
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
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.
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*
* Filed herewith
** To be filed by amendment.
34
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: February 10, 2005
35
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*
* Filed herewith
** To be filed by amendment.