10KSB 1 ace_10ksb-123107.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB {X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 COMMISSION FILE NUMBER: 000-51160 ACE MARKETING & PROMOTIONS, INC. -------------------------------- (Exact name of Registrant as specified in its charter) NEW YORK 11-3427886 -------------------------------------------------------------------------------- (State of jurisdiction of I.R.S. Employee incorporation or organization) Identification Number) 457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 256-7766 Check whether the Registrant is not required to file reports pursuant to Section 13 of 15(d) of the Exchange Act. [ ] Securities registered pursuant to Section 12 (b) of the Act: None ------------------------------------------------------------------ Securities registered pursuant to Section 12 (g) of the Act: ------------------------------------------------------------ Common Stock, $.0001 Par Value ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-KSB or any amendment to this Form 10-KSB [ ]. Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X] State issuer's revenues for its most recent fiscal year: $5,665,413. As of March 24, 2008, the number of shares held by non-affiliates was approximately 3,790,000 shares. The approximate market value based on the last sale (i.e. $.75 per share as of March 24, 2008) of the Company's Common Stock was approximately $2,842,500. The number of shares outstanding of the Registrant's Common Stock, as of March 24, 2008 was 8,101,615. -1- FORWARD-LOOKING STATEMENTS We believe this annual report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, based on information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "likely" or similar expressions, we are making forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations set forth under "Business" and/or "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results and stockholder values may differ materially from those expressed in the forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Stockholders are cautioned not to put undue reliance on any forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information under "Risk Factors." In addition to the Risk Factors and other important factors discussed elsewhere in this annual report, you should understand that other risks and uncertainties and our public announcements and filings under the Securities Exchange Act of 1934, as amended could affect our future results and could cause results to differ materially from those suggested by the forward-looking statements. PART I ITEM 1. DESCRIPTION OF BUSINESS -------------------------------- COMPANY OVERVIEW Ace Marketing & Promotions, Inc. (the "Company" or "Ace") is a full service promotional marketing company offering a wide array of business solutions. These solutions include: fulfillment and warehousing, incentives and rewards programs, importing, e-commerce and web design, printing and forms management, database management and branded merchandise. Although we offer several business solutions, our core business still remains to be distributing advertising specialties and promotional items manufactured by others to our customers typically with our customers' logos on them. Several of our customer categories include large corporations, local schools, universities, financial institutions, hospitals and not-for-profit organizations. Our promotional products are a useful, practical, informative, entertaining, and/or decorative item, most often imprinted with the sponsoring advertiser's name, logo, slogan or message, and typically retained and appreciated by the end recipients who receive them, in many cases free of charge in marketing and communication programs. Promotional products are also effective for the following: o dealer/distribution programs; o co-op programs; o company stores; o generating new customers or new accounts; o nonprofit fundraising; public awareness campaigns; -2- o promotion of brand awareness and brand loyalty; o employee incentive programs; o new product or service introduction; and o marketing research for survey and focus group participants. We have the ability to distribute over 500,000 promotional product items ranging from stickers that cost pennies all the way through jewelry, sporting goods, awards, and electronics that cost thousands of dollars per unit. Specific categories of promotional products include: o Advertising Specialties-build awareness, goodwill and remembrance of the advertiser's name, product, purpose, advantages or other timely message. These products are generally lower priced goods and are usually distributed for free. o Business Gifts, Awards and Commemoratives - generally lower priced goods and are given for goodwill, often at trade shows to generate traffic. o Incentives and Awards-focus on motivation, workplace safety, goal setting and recognition. These are typically higher priced items used in incentive programs to promote employee retention and recognition. They may also be used in recruitment programs as well. o Premiums-given after a specific behavior has been performed. The most popular products that we have distributed over the last several years and account for over 50% of our business are as follows: o Wearables, such as t-shirts, golf shirts and hats. o Glassware, such as mugs and drinking glasses. o Writing instruments, such as pens, markers and highlighters. o Bags, such as tote bags, gift bags and brief cases. ACE ADVANTAGES Ace presently has over 2000 customer accounts ranging from Fortune 500 companies to local schools and small businesses. We have built our business around the concept of high quality innovative branded merchandise, competitive pricing, and consistently superior customer service. Our operational platform, using top-line technology, is designed for economies of scale and ensures superior relations with major industry suppliers. The platform also provides superior support to an expanding team of experienced, well-connected salespeople who are key to acquiring new business. The major advantage we hold over most companies in the promotional product industry is the ability to provide integrated business solutions to its customers as trusted advisors. The majority of companies in the promotional product industry offer only branded merchandise, whereas, we offer solutions in: o Branded Merchandise; o Importing; o Incentive / Rewards programs; o Printing / Forms Management; -3- o Fulfillment / Warehousing; o E-commerce / Website Design; and o Database Management / Integrated Marketing Solutions. The ability to offer multiple solutions and integrate them is what separates us from the average promotional product distributor. Where nearly all of the competition continues to be viewed as commodity based "order takers", our solutions based services deepen the relationship with our clients as our sales consultants become trusted advisors and Ace becomes a valued business partner. POSITIONED FOR GROWTH Ace has grown organically through referrals based on its high quality service and external financings to support our growth. We are also expanding through hiring leading independent salespersons who are well supported by the Ace proprietary business structure. By offering more services and solutions to our customers, new recruits will have the ability to expand their present business by simply making the move to Ace. Upon integrating their client base into our system they too become trusted advisors that provide integrated business solutions instead of a commodity based promotional product salesperson. These achievements position us to accelerate growth through potential acquisition and consolidation of other companies as well as simply recruiting experienced salespeople. In the event a company is acquired by us, of which no assurances can be given in this regard, the new clients would all be introduced to the additional services that are now available in our promotional marketing model. We have effectively carved out a niche for Ace. Marketing and branding companies create an image and direction for clients. Ad agencies develop print, TV, radio and other campaigns aimed at goals of recruiting and introducing new products or services. Traditional promotional product companies offer imprinted merchandise and apparel. Ace finds itself in a position of providing value added services that compliment those of the ad agency, as well as branding and marketing companies while at the same time far exceeding the capabilities of a standard promotional products distributor. BUSINESS STRATEGY Ace's growth to date is based on a scalable corporate structure, using top-of-the-line technology, to create advantages over most small distributors by: o Quickly targeting the best products and prices to meet a client's needs; o Providing in-house art capabilities for rapidly customizing merchandise; o Providing fulfillment and warehousing services for inventory or custom programs, o Providing research, consulting and design services to our customers; o Offering direct overseas importing for large quantities; o Providing incentive and reward programs for both customers and employees; o Providing full service print and forms management solutions; o Providing full e-commerce solutions, including company stores and website design; -4- o Managing purchase orders consistently from query to final order; o Tracking shipments effectively regardless of size or the overseas location of the supplier; and o Offering database management software, which integrates with each service offered and allows the customer the ability to quantify the results of any given marketing campaign or promotion. In addition, Ace offers a wide array of services not offered by most distributors. These additional services allow our salespeople the opportunity to open new doors and create more sales with both new and old customers. By providing all the necessary back-office support, these efficiencies also free salespersons to focus on selling. The in-house computer system allows access from off-site, enabling sales staff to operate from any location. ACE MOBILE MARKETING In February 2008, we entered into an agreement with Blue Bite, LLC, a distributor of Wilico Wireless Networking Solutions, SA (hereinafter referred to as "Blue Bite"), to become an authorized provider and reseller in the United States of mobile advertising solutions, in the Mobile Advertising & Proximity Marketing Industry. Management believes that proximity marketing has unlimited marketing possibilities to thousands of different businesses. Proximity marketing is the localized wireless distribution of advertising content associated with a particular place. If we place a Blue Bite proximity transmitting box in a location of an advertiser/business, transmissions (messages) will be sent to and received by cell phones and PDA's equipped with Bluetooth technology within approximately 100 meters of a marketing broadcast. A person receiving the transmission can elect to download the transmission, read the message and potentially act upon the message sent by the advertiser. The message will remain on the cell phone or PDA until proactively removed by the user. The user also has the ability to forward the message to other users, which generates multiple views over an extended period of time. Management believes that advertisers are constantly seeking new measurable media channels that can accurately target and engage key consumer segments, and deliver compelling, relevant content that can be enjoyed for what it is, shared with friends, interactively engaged with or commercially acted upon instantaneously. All messages received by the public are free of charge meaning there is no charge on any content a consumer downloads. We will enable our advertising customers to promote their business by sending still images, animated images, audio files, video clips, text files, promotional or discount contents, bar codes, mobile games and java applications and business card files. We can also send live data such as news and sports updates to targeted mobile phones. Management believes that proximity marketing is completely spam-free and compliant with all applicable governmental regulations. It asks the users if they would like to receive the content. It tracks how many people accept and reject the content, providing the sender with a detailed time and date for every transmission. The system maintains a unique Bluetooth ID assigned to each device, and therefore will not send users the same advertisement more than once, and if rejected will not contact the user again. The ABI Research report published in January 2008 on mobile marketing refers to the industry as still being in its "wild west" years but forecasts it will settle down and become a $24 billion slice of the worldwide marketing and advertising pie by 2013. It estimates there was about $1.8 billion spent in 2007 on all forms of mobile marketing. -5- Ace intends to market its Blue Bite proximity boxes under the name "Ace Mobile Marketing" as a premiere mobile technology. This will allow Ace to create a new channel in the mobile marketplace for existing brands and marketers to leverage the inherent strengths of mobile advertising. Ace has formed a new wholly-owned subsidiary under the name Ace Mobile Marketing, Inc. to market its new services to clients. Ace also plans to leverage the technology to develop niche vertical sites. These services will be scalable for both large and small businesses to monetize high traffic areas. Additionally, the platform shall be dynamically scalable for worldwide partnerships, where a multi-location business will be able to send a different marketing campaign for each demographic. Ace has loaned Blue Bite $50,000 pursuant to a Note (due March 1, 2009) convertible at Ace's option into a 10% ownership interest of Blue Bite. At the time of conversion, Ace would also have to deliver to Blue Bite $75,000 in fair market value of its restricted Common Stock as additional consideration. THE MARKET There are thousands of different types and styles of promotional products. In many cases, it is even possible to obtain custom items that are not found in any catalog. According to The Counselor - State of the Industry 2006 Survey, which is available online at no cost to the public at www.thecounselor.net, the most popular promotion products sold in 2006 were the following: o Wearables (which also accounts for one- third of the overall industry revenue); o writing instruments; o glassware and ceramics; o desk/office/business accessories; o calendars; o Bags o Caps and headwear o recognition awards/trophies; and o Sporting goods. According to the Promotional Products Association International, which is available online at no cost to the public at www.ppai.com/MediaInformation/Industry/Statistics/SalesVolumeEstimates/, promotional product distributor's sales were $5.13 billion in 1991, with steady increases in sales until they reached $17.85 billion in 2000. Promotional Product sales then declined to $16.55 billion in 2001, $15.63 billion in 2002, increased to $16.34 billion in 2003, to $17.3 billion in 2004 and to $18.6 in 2006. A revitalized economy, increased competition in the marketplace, and a trend toward integrated and targeted marketing strategies has contributed to this growth. Integrated marketing campaigns involve not only advertising, but also sales promotions, internal communications, public relations, and other disciplines. The objectives of integrated marketing are to promote products and services, raise employee awareness, motivate personnel, and increase productivity through a wide array of methods including extensive use of promotional products. DISTRIBUTORS According to the Promotional Products Association International, which is available online at no cost to the public at www.ppai.com/MediaInformation/ Instustry/Statatistics/SalesVolumeEstimates/, with no single company dominating the market, the promotional products industry is highly fragmented with 20,350 distributors in the industry with revenues of less than $2.5 million and 947 -6- distributors with revenues of $2.5 million or more. According to The Counselor - State of the Industry 2007 Survey, the top ten distributors in our industry are believed to have sales of between $131 million and $240 million for 2006. Wearguard-Crest Co., Corporate Express Promotional Marketing, Proforma Inc., Group II Communications and Bensussen Deutsch & Associates, Inc. are the top five distributors with 2006 sales of $240 million, $235 million, $228 million, $222 million and 199 million, respectively. Nearly 80% of the distributors surveyed are reported to be privately owned family businesses. Management believes that control of sales lies predominantly with the independent sales representatives, as there is little brand recognition at this time. According to the Promotional Products Association International, which is available online at no cost to the public at www.ppai.com/ProductsResources/ Research/TopBuyers/, the following ranks the top ten purchasers of promotional products in descending order according to the findings of a 2003 study by Louisiana State University and Glenrich Business Studies. Industries were named by distributors according to the volume spent on promotional products by each industry. o education: schools, seminars; o financial: banks, savings and loans, credit unions, stock brokers; o health care: hospitals, nursing homes, clinics; o not-for-profit organizations; o construction: building trades and building supplies; o government: public offices, agencies, political candidates; o trade, professional associations and civic clubs; o real estate: agents, title companies and appraisers; o automotive: manufacturers, dealers, parts suppliers; and o professionals: doctors, lawyers, cpa's, architects. SUPPLY CHAIN Domestic and overseas manufacturers generally sell their promotional product items directly to suppliers. Suppliers sell to distributors like Ace Marketing and distributors sell promotional products to customer users such as large corporations, financial institutions, universities and schools, hospitals, not-for-profit organizations and small businesses. However, manufacturers have the ability to sell their promotional products directly to distributors and customers. Suppliers have the ability to sell promotional products directly to customers who are not distributors. Whereas the majority of the items are made overseas, often in China, and the suppliers are simply importing from actual manufacturers, we generally consider the supplier as the beginning of the industry supply chain. They choose specified product lines and import blank goods to be warehoused until a distributor orders one of their items with a customer logo on it. The suppliers generally run the risk of inventory exposure and fluctuations in an item's popularity. This is generally why most distributors stick to distributing and not importing. There are situations where importing directly from the manufacturer and thus cutting out the supplier does in fact make sense. Generally, this happens when a distributor has a large quantity order and has enough lead time from the customeR to import the item. Since ocean freight from overseas generally takes 30-45 days and manufacturing may take several weeks, this only makes sense when a customer orders far in advance and in large quantity. The benefits of this are outstanding since the margins and cost savings can be substantial. But, in general, the average order in the industry is below $1,000 and thus the need for individual suppliers to carry specified product lines and hold inventory to fill the need of the average distributor with the average order. -7- SUPPLIERS Management believes that while there are an estimated 3,000 suppliers in the industry, most of the promotional products distributors have access to the same suppliers. Currently, we utilize approximately 500 suppliers in our business with only one supplier accounting for about 10% of our purchasing requirements over the last two years. We seek to distinguish ourselves from other distributors by attractive pricing, by sourcing unique items, creating custom products and/or offering superior in house service and customer support through our employees. Most suppliers require us to pay within 30 days of delivery of an order; however, we may not receive our customers' payments in the same time frame. This requires us to have available cash resources to finance most of our customers' orders. The possible lack of available cash resources would limit our ability to take orders from customers, thus limiting our ability to grow. An infusion of additional capital, a line of credit and better payment terms based on volume can enable us to service a broader base of customers. We have never sought to establish a line of credit, although we may seek to establish one with an institutional lender in the future. PURCHASING TRENDS - NEED FOR VALUE ADDED PRODUCTS AND RELATED SERVICES ---------------------------------------------------------------------- Price is no longer the sole motivator of purchasing behavior for our customers. With the availability of similar products from multiple sources, customers are increasingly looking for distributors who provide a tangible value-added to their products. As a result, we provide a broad range of products and related services. Specifically, we provide research and consultancy services, artwork and design services, and fulfillment services to our customers. These services are provided in-house by our current employees. Management believes that by offering these services, we can attempt to attract new customers. OUR CUSTOMERS - CHOOSING US AS YOUR RIGHT DISTRIBUTOR Most of our promotional products bear our customers' corporate name and are a reflection of their corporate image. The events they use these items for are of the utmost importance. If they go with another distributor who gives them run of the mill ideas possibly at a lower cost, a poor quality product with inferior quality decoration and/or the goods arrive late, then they quickly realize there should be other factors that determine which distributor they should be working with. We presently have over 500 customer accounts ranging from fortune 500 companies to local schools and small businesses. A customer account is a person or entity who has purchased promotional products from us in the past on a non-exclusive basis and may or may not purchase from us additional promotional products in the future. No customer has accounted for more than 10% of sales during the past three years. Our customer base grows mainly through business and personal referrals and the efforts of our sales representatives. Generally our customers do not actively seek distributors to bid on their projects. There are many reasons why our customers may work with us over another distributor. The average buyer first believes that price is the sole issue with the lowest bidding distributor on a project obtaining the business. Once they gain more experience and understand the difficulties in processing and fulfilling an order on time and correctly, they generally analyze the rationale on how they choose a distributor differently. Although pricing is important to our customers, they also count on our dependability, creativity and efficiency. In this regard, we recently agreed to develop an online store for one of the fastest growing privately held hospices in the United States to consolidate the customer's purchasing from us for its multiple locations across the country. -8- SERVICING OUR CUSTOMERS The major advantage we hold over most companies in the promotional product industry is the ability to provide integrated business solutions to its customers as trusted advisors. The majority of companies in the promotional product industry offer only branded merchandise, whereas, we offer solutions in: o Branded Merchandise o Importing o Incentive / Rewards programs o Printing / Forms Management o Fulfillment / Warehousing o E-commerce / Website Design o Database Management / Integrated Marketing Solutions We have built our distribution business around the concept of reliability, quality, innovative and custom promotional products at competitive prices while maintaining a high level of customer service and good relationships with industry suppliers. Our research licensed software technology, that we purchased from an outside vendor and is available for licensing to other distributors in the industry, affords us the ability to locate and purchase industry product in an efficient manner rather than to have to manually research products through hundreds of catalogs and/or reference books. Our in-house art capabilities through our salaried employees make us a "one stop shop" for custom merchandise and provide our customers with comfort in knowing logo modifications will not delay valuable production days on tight turn-around projects. Our in-house art department consists of two employees who work on Apple computers using licensed software programs such as Illustrator, Photoshop and Quark to create new logos or manipulate current ones. These logos are then sent to the supplier who arranges to put them on the product whether internally or through an outside source in one of the following manners: o silkscreen printing o embroidery o hot stamp o heat transfer o embossing/debossing o engraving Our reliability stems from our own customized and detailed tracking system that we structured and implemented to ensure an order is processed correctly and on time. In general, customers contact us when they have a need for items that have corporate logos. They provide us with general information that helps us determine what products to suggest, including the following: o The type of event and the targeted audience; o The number of units that are required and the budget; and o The timing of the event and the theme of the event. The aforementioned parameters will narrow the field of items suggested from a broad list of 500,000 to possibly a dozen or less. Once a customer calls in or e-mails us requesting ideas for an upcoming event, we begin to research -9- ideas based on their parameters and we use our research software to look up dozens of products, prepare a competitive analysis between similar products to find just the right one, send a picture to the customer by email and prepare and send a quotation to the customer also by email. This provides us an immediate time saving advantage over other distributors who still do things manually. Many of these distributors still scan a reference book which is called a register. They search for a particular product, such as clocks, then find the sub-category they are interested in, such as plastic, and there they find all the suppliers who carry the specific item they are looking to purchase. They must then either cross reference each supplier to find their phone number or web address, or they can physically pull as many of the catalogs they have on hand and search for the products that they are interested in and send catalogs with tabbed pages via regular mail or overnight service. This is an inefficient way to research and deliver images of products. We are not aware of any statistical information which allows us to tell the percentages of distributors who use publicly available licensed research software systems like ours versus the manual way described above. When the customer decides on the product that they would like to order, the order is processed in our order entry department utilizing our order-entry software which is available for licensing to anyone in the industry from third party vendors. The salesperson submits the specifics of the order to our order entry department where the order is keyed into the system by our employees. Three parts to each order are printed: o ACKNOWLEDGEMENT This outlines the product ordered along with a description of the product and how the logo will be placed and in what colors. It includes the quantity ordered, the price per piece, total cost, ship to address, and the delivery date. It is sent to our customer via fax along with a hard copy of the artwork that will be used on the order. The order will not move forward until our customer signs off on the acknowledgment and the artwork. No order runs without the sign offs thus protecting us in the long run of a customer claiming they were not aware of some aspect of the order. o PURCHASE ORDER The Purchase order is submitted to the supplier only after the acknowledgment and art are signed by our customer. It contains all the information that the acknowledgment contains except the price of the product is now shown as the price we will be paying. The art is sent via e-mail to the factory and the purchase order requires that the supplier send back a paper proof of the art to insure accuracy before proceeding with the order. Now the supplier has the exact same parameters to complete the order that the customer signed off on. They must meet the delivery date for the quantity specified, with the logo specified, at the price we submitted. Orders are drop shipped from the supplier directly to the customer, except on rare occasions where packaging is done in our office. o SALES ORDER COPY This is a print out that essentially shows all of the components on the acknowledgment and the purchase order combined side by side. It shows what we pay for the product and what price our customer pays for the product. It also shows the gross profit, the gross profit percentage, and the commission due to the salesperson. Once the above process takes place, the entire work folder goes to the tracking department. We have developed a system to follow each order from the time it is processed, through the time it is shipped. This is yet another safeguard to protect us from a supplier not fulfilling their obligations, which in turn may lead to us losing money, a customer, or both. The tracking process consists of us contacting the factory at various points in the production process to ensure that the order is on schedule. We verbally verify the item, quantity, and ship date and document who at the supplier verified the information. We then call again at a certain point in the process to verify it is on schedule and lastly call on the day of shipping to receive tracking numbers. The above processes have historically led to eliminating disputes with both suppliers and customers. -10- OUR DISTRIBUTION AND MARKETING STRATEGY Key elements of our distribution and marketing strategy are: o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES. We have been in business since March 1998. Our revenues are derived from existing customers and new customers through word of mouth recommendations, attendance at trade shows, our sales representatives and advertising and promotion in trade journals. o MOTIVATING RETAILERS TO UTILIZE PROMOTIONAL AND SPECIALTY PRODUCTS IN THEIR BUSINESS. It is our management's belief from conversations with persons in our industry and trade show attendance, that a trend in our industry is often for the use of promotional items to customers rather than cash incentives for gaining customer loyalty and motivating sales people. In this regard, customers who received a promotional item tended to purchase more and repeat purchases more often than customers who received a discount coupon of equivalent value. Additionally, sales forces show a tendency for greater motivation when receiving a trip or merchandise as opposed to the cash equivalent. We must show our customers the benefits of utilizing promotional and specialty items in their business and for their sales force and build customer loyalty through the use of point systems that are exchanged for promotional merchandise. o OUR COMPANY WAS BUILT AS A PLATFORM THAT COULD GROW EASILY. Scalability is the key and we have separate departments with defined roles which will allow this to occur and for our salesperson to sell. Our sales persons receive helpful support from us. In many other distributorships, the salesperson is often responsible for everything from answering phones, doing all their own research, processing orders, billing, tracking and collections. At our company, we provide all the backup to allow our sales persons to just sell. Since our technology is currently up to date, including in house servers to allow access to our systems from off-site, we have the ability to pick up salespeople from any location in the United States. o KEY ACQUISITIONS OF SMALL DISTRIBUTORS AND INTEGRATING THEIR WORKFORCE INTO OURS. We will target one or more of the estimated 20,000 small distributors for potential acquisition. However, we can provide no assurances that we will be successful in acquiring any distributors on terms satisfactory to us, if at all. o PROVIDING GENEROUS INCENTIVES TO OUR SALES PEOPLE TO INCREASE PERFORMANCE LEVELS. We offer competitive commissions in addition to back office support and research assistance to allow our independent sales representatives to optimize their sales time and to provide them with adequate incentives to sell promotional products to our customers rather than for our competitors. In the future, we may offer a stock option program for additional incentives. o MAINTAIN A COMPETITIVE GROSS PROFIT PERCENTAGE ON ALL SALES ORDERS. For the years ended December 31, 2007, 2006, 2005 and 2004, our gross profit percentage was 32.6%, 29.4%, 32.1% and 29% , respectively. According to The Counselor - State of the Industry 2006 Survey, the average reported gross profit margin for distributors during 2000 through 2005 ranged from 32.5% to 33.8%. -11- o PROVIDE RESEARCH, CONSULTING, DESIGN AND FULFILLMENT SERVICES TO OUR CUSTOMERS TO INCREASE PROFITABILITY. We design promotional products for our customers and provide consulting services in connection therewith. We utilize licensed research software technology and order entry systems that are available to anyone in the industry for license to provide the best services to our customers in the most timely fashion possible. o UTILIZING THE INTERNET AND ITS CAPABILITIES AND OPPORTUNITIES FOR SALES OF PROMOTIONAL PRODUCTS AND COST SAVINGS. Our website is www.Acemarketing.net. Our website is utilized for multiple purposes, including providing information to potential customers who want to learn about us and research our available product line. We also develop online company stores for CUSTOMERS to help facilitate re-orders at cost savings to them based upon a pre-determined product line. SALES AND MARKETING Our revenues are derived from existing customers and new customers through word of mouth recommendations, attendance at trade shows, our sales representatives and advertising and promotion in trade journals. Except primarily our two executive officers, our sales representatives receive commissions and are not paid a salary. They work at their own location or at our facility and may sell products on behalf of other companies. We encourage our sales representatives to sell promotion products for us on the basis of sales incentives which include competitive commissions and appropriate sales support and research which is provided in-house by our employees. In the future, we intend to offer stock and/or stock options as part of their incentive programs. Our website is www.Acemarketing.net. Our website is utilized for multiple purposes, including providing information to potential customers who want to learn about us and research our available product line. TECHNOLOGY ---------- Technology affects most industries, and specifically the internet, which enables many capabilities and opportunities for cost savings. Sales of promotional products are often catalog-based. The cost of producing and mailing a catalog can be high. Placing a catalog on a website takes less manpower to maintain and less money to update and distribute new versions. Additionally, integrating the catalog with the order processing system can save time and money in placing and filling orders, also eliminating manual errors. The proliferation of open architecture software and hardware makes an increasing number of systems available for automating processes and integrating back office systems. By doing this, we reduce support requirements and further enhance margins. Additionally, the ability to provide more direct support to our sales force has led to increased retention of our sales team. POSSIBLE GROWTH THROUGH ACQUISITIONS ------------------------------------ We believe the environment for growth and consolidation in the promotional products industry is appealing, and that we would like to take advantage of this if a satisfactory opportunity arises. There are some issues that our company must address to be successful. The main issues are motivating previous owners, retaining sales people, and integrating operations. We have had conversions with the owners of several distributors of promotional products and have observed that they are open to conversions taking place for the possible sale of their business. -12- 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 firm agreement to acquire any company or distributor and there can be no assurances given that our plans will be realized to grow through acquisitions of one or more distributors or, if successful, that any acquisitions can be profitably integrated into our company's operations. JOINT MARKETING AND SALES AGREEMENT WITH ATRIUM ENTERPRISES We have entered into a Joint Marketing and Sales Agreement with Atrium Enterprises, a leader in the motivational, incentive and rewards industry, whereby we have received the exclusive rights to market and sell a customized version of Atriums technology platform called, WWW.EXPERIENCETHEREWARDS.COM. In addition, Atrium provides its sales services to us on an exclusive basis in our business which consists of selling promotional products, print sales and the like to Atrium's clients. Atrium has agreed to develop a fully functional customized "Points Banking" platform for us called, "ACE REWARDS". "This platform will allow us to differentiate ourselves from our competition by offering reward points and incentives to all our customers who purchase promotional products through us and to our employees. Atrium will also provide an enhanced Solata marketing and communication module to the platform that would allow us to re-sell this "ACE REWARDS" platform to other entities within the promotional products industry. In addition Atrium agreed to create and introduce a sponsored Mobile Banking Debit Card to Ace Marketing and its customers. Atrium has granted us exclusive sales and marketing rights to both the "ACE REWARD" platform and the Mobile Banking Debit Card within the promotional products industry, and related industry organizations such as ASI and PPAI. For additional information, see "Note 10 to our financial statements." COMPETITION While our competition is extensive with over 20,000 distributors, we believe that there are no companies that dominate the market in which we operate. Our company competes within the industry on the basis of service, competitive prices, personnel relationships and competitive commissions to our sales representatives to sell promotional products for us rather than our competitors. Competitors' advantages over us may include better financing, greater experience and better service, cheaper prices and personal relationships than us. -13- According to The Counselor - State of the Industry 2006 Survey, the top ten distributors in our industry are believed to have sales of between $113.8 million and $229 million for 2005. Corporate Express Promotional Marketing, Wearguard-Crest Co., Proforma Inc., Group II Communications and American Identity are the top five distributors with 2005 sales of $229 million, $224 million $202 million, $186 million and 180.0 million, respectively. Nearly 80% of the distributors surveyed are reported to be privately owned family businesses. Management believes that control of sales lies predominantly with the independent sales representatives, as there is little brand recognition at this time. We believe that in the promotional products industry, sales people typically have a large amount of autonomy and control the relationships with their customers. This works both for and against us. To avoid losing customers, we must provide the appropriate incentives to keep sales people. At the same time, while there can be no assurances, management believes our company will be able to obtain new customers by luring sales people away from competitors. The offering of stock incentives and health care benefits are ways to retain sales people, especially in an industry where these types of benefits are rare. EMPLOYEES As of March 24, 2008, we had 12 full time employees, including two executive officers who provide in-house sales, our Chief Financial Officer, two part-time support staff employees and eight sales representatives of which four are employees who provide services on an exclusive basis and four additional persons who provide services to us on a non-exclusive basis as independent consultants. We have an agreement with Aon Consulting, a division of Aon Corporation, whereby Aon will recruit up to 50 additional salespeople for Ace. Aon is seeking to implement a targeted national recruiting campaign to help us attract top producing industry experienced sales talent generating at least $400,000 in annual revenue. As of the filing date of this Form 10-KSB, this recruiting plan has not been implemented as Ace will require additional financing estimated at $2,000,000 to support the hiring of a substantial number of additional personnel. -14- RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS FORM 10-KSB, IN EVALUATING US AND OUR BUSINESS. ANY OF THE FOLLOWING RISKS, AS WELL AS OTHER RISKS AND UNCERTAINTIES, COULD HARM OUR BUSINESS AND FINANCIAL RESULTS AND CAUSE THE VALUE OF OUR SECURITIES TO DECLINE, WHICH IN TURN COULD CAUSE YOU TO LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATING TO OUR BUSINESS THE PROMOTIONAL PRODUCTS DISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY. We compete with over 20,000 distributor companies. Some of our competitors have greater financial and other resources than we do which could allow them to compete more successfully. Most of our promotional products are available from several sources and our customers tend to have relationships with several distributors. Competitors could obtain exclusive rights to market particular products which we would then be unable to market and may provide business solutions related to promotional products competitive with those provided by us. Industry consolidation among promotional products distributors, the unavailability of products, whether due to our inability to gain access to products or interruptions in supply from manufacturers, or the emergence of new competitors could also increase competition. In the future, we may be unable to compete successfully and competitive pressures may reduce our revenues. WE EXPERIENCE FLUCTUATIONS IN QUARTERLY EARNINGS. AS A RESULT, WE MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. Our business has been subject to seasonal and other quarterly fluctuations. Net sales and operating profits generally have been higher in the third and fourth quarters, particularly in the months of September through November, due to the timing of sales of promotional products and year-end promotions. Net sales and operating profits have been lower in the first quarter, primarily due to increased sales in the prior two quarters. Quarterly results may also be adversely affected by a variety of other factors, including: o costs of developing new promotions and services; o costs related to acquisitions of businesses; o The timing and amount of sales and marketing expenditures; o general economic conditions, as well as those specific to the promotional product industry; and o our success in establishing additional business relationships. Any change in one or more of these or other factors could cause our annual or quarterly operating results to fluctuate. If our operating results do not meet market expectations, our stock price may decline in the event a market should develop. -15- BECAUSE WE DO NOT MANUFACTURE THE PRODUCTS WE DISTRIBUTE, WE ARE DEPENDENT UPON THIRD PARTIES FOR THE MANUFACTURE AND SUPPLY OF OUR PRODUCTS. We obtain all of our products from third-party suppliers, both domestically and overseas primarily in China. We submit purchase orders to our suppliers who are not committed to supply products to us. Therefore, suppliers may be unable to provide the products we need in the quantities we request. Because we lack control of the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control. In the event that any of our third-party suppliers were to become unable or unwilling to continue to provide the products in required volumes, we would need to identify and obtain acceptable replacement sources on a timely cost effective basis. There is no guarantee that we will be able to obtain such alternative sources of supply on a timely basis, if at all. An extended interruption in the supply of our products would have an adverse effect on our results of operations, which most likely would adversely affect the value of our common stock. WE MAY NOT BE ABLE TO EXPAND THROUGH INTERNAL GROWTH AND MEET CHANGES IN THE INDUSTRY. Our plans for internal growth include hiring in-house sales representatives from our competitors and offering stock incentives and generous commissions to keep them. Additionally, we have room for growth by building direct relationships with advertising agencies and major corporations. Because of potential industry changes, our products and promotions must continue to evolve to meet changes in the industry. Our future expansion plans may not be successful due to competition, competitive pressures and changes in the industry. OUR LIMITED CASH RESOURCES AND LACK OF A LINE OF CREDIT MAY RESTRICT OUR EXPANSION OPPORTUNITIES. An economic issue that can limit our growth is lack of extensive cash resources, due to the typical payment terms of a transaction. Most suppliers require us to pay within 30 days of delivery of an order; however, we may not receive our customer's payment in the same time frame. This requires us to have available cash resources to finance most of our customers' orders. Any lack of cash resources would limit our ability to take orders from customers, thus limiting our ability to grow. An infusion of capital and a good line of credit can enable us to service a broader base of customers. We can provide no assurances that we will obtain an adequate line of credit in the future, if at all. OUR PROPOSED EXPANSION THROUGH ACQUISITIONS INVOLVES SEVERAL RISKS. We may expand our domestic markets in part through acquisitions in the future. Such transactions would involve numerous risks, including possible adverse effects on our operating results or the market price of our common stock. Some of our future acquisitions could give rise to an obligation by us to make contingent payments or to satisfy certain repurchase obligations, which payments could have an adverse effect on our results of operations. In addition, integrating acquired businesses: o may result in a loss of customers of the acquired businesses; o requires significant management attention; and o may place significant demands on our operations, information systems and financial resources. There can be no assurance that our future acquisitions will be successful. Our ability to successfully effect acquisitions will depend upon the following: -16- o The availability of suitable acquisition candidates at acceptable prices; o The development of an established market for our common stock; and o The availability of financing on acceptable terms, in the case of non-stock transactions. OUR REVENUES DEPEND ON OUR RELATIONSHIPS WITH CAPABLE INDEPENDENT SALES PERSONNEL OVER WHOM WE HAVE NO CONTROL AS WELL AS KEY CUSTOMERS, VENDORS AND MANUFACTURERS OF THE PRODUCTS WE DISTRIBUTE. Our future operating results depend on our ability to maintain satisfactory relationships with qualified independent Sales personnel as well as key customers, vendors and manufacturers. We are dependent upon our independent sales representatives to sell our products and do not have any direct control over these third parties. If we fail to maintain our existing relationships with our independent sales representatives, key customers, vendors and manufacturers or fail to acquire new relationships with such key persons in the future, our business may suffer. OUR FUTURE PERFORMANCE IS MATERIALLY DEPENDENT UPON OUR MANAGEMENT AND THEIR ABILITY TO MANAGE OUR GROWTH. Our future success is substantially dependent upon the efforts and abilities of members of our existing management, particularly Dean L. Julia, Chief Executive Officer and Michael Trepeta, President. The loss of the services of Mr. Julia or Mr. Trepeta could have a material adverse effect on our business. We have an employment agreement with each of Messrs. Julia and Mr. Trepeta expiring February 28, 2011. However, we lack "key man" life insurance policies on any of our officers or employees. Competition for additional qualified management is intense, and we may be unable to attract and retain additional key personnel. Our management personnel is currently limited and they may be unable to manage our expansion successfully and the failure to do so could have a material adverse effect on our business, results of operations and financial condition. WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING. We may need to raise additional funds in the future to fund more aggressive expansion of our business or make strategic acquisitions or investments. We may require additional equity or debt financings or funds from other sources for these purposes. No assurance can be given that these funds will be available for us to finance our development on acceptable terms, if at all. Such additional financings may involve substantial dilution of our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are lacking from operations or additional sources of financing, we may have to delay or scale back our growth plans. RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK WE LACK AN ESTABLISHED TRADING MARKET FOR OUR COMMON STOCK, AND YOU MAY BE UNABLE TO SELL YOUR COMMON STOCK AT ATTRACTIVE PRICES OR AT ALL. -17- There is currently a limited and sporadic trading market for our common stock in the OTC electronic bulletin board under the symbol "AMKT." There can be no assurances given that an established public market will be obtained for our common stock or that any public market will last. The trading price of the common stock depends on many factors, including: o The markets for similar securities; o our financial condition, results of operations and prospects; o The publication of earnings estimates or other research reports and speculation in the press or investment community; o Changes in our industry and competition; and o general market and economic conditions. As a result, we cannot assure you that you will be able to sell your common stock at attractive prices or at all. THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE. The market price for our common stock may be highly volatile. A variety of factors may have a significant impact on the market price of our common stock, including: o The publication of earnings estimates or other research reports and speculation in the press or investmentcommunity; 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. -18- WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FUTURE. No cash dividends have been paid by our company on our common stock. The future payment by us of cash dividends on our common stock, if any, rests within the discretion of our board of directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition as well as other relevant factors. We do not intend to pay cash dividends upon our common stock for the foreseeable future. PROVISIONS OF OUR ARTICLES OF INCORPORATION AND AGREEMENTS COULD DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY. Certain provisions of our articles of incorporation may discourage, delay, or prevent a merger or acquisition that a shareholder may consider favorable. These provisions include: o Authority of the board of directors to issue preferred stock. o Prohibition on cumulative voting in the election of directors. WE LACK INDEPENDENT DIRECTORS AND COMMITTEES THEREOF. The Sarbanes-Oxley Act of 2002 requires us as a public corporation to have an audit committee composed solely of independent directors. Currently, we have no independent directors or committees of directors. Without independent directors, our board may have no way to resolve conflicts of interest, including, without limitation, executive compensation, employment contracts and the like. OUR FUTURE SALES OF COMMON STOCK BY MANAGEMENT AND OTHER STOCKHOLDERS MAY HAVE AN ADVERSE EFFECT ON THE THEN PREVAILING MARKET PRICE OF OUR COMMON STOCK. In the event a public market for our common stock is sustained in the future, sales of our common stock may be made by holders of our public float (believed to be 4,890,995 shares) or by holders of restricted securities in compliance with the provisions of Rule 144 of the Securities Act of 1933. In general, under Rule 144, a non-affiliated person who has satisfied a six-month holding period in a fully reporting company under the Securities Exchange Act of 1934, as amended, may, sell their restricted Common Stock without volume limitation, so long as the issuer is current with all reports under the Exchange Act in order for there to be adequate common public information. Affiliated persons may also sell their common shares held for at least six months, but affiliated persons will be required to meet certain other requirements, including manner of sale, notice requirements and volume limitations. Non-affiliated persons who hold their common shares for at least one year will be able to sell their common stock without the need for there to be current public information in the hands of the public. Future sales of shares of our public float or by restricted common stock made in compliance with Rule 144 may have an adverse effect on the then prevailing market price, if any, of our common stock. ITEM 2. DESCRIPTION OF PROPERTY -------------------------------- Our principal executive offices are located at 457 Rockaway Avenue, Valley Stream, NY 11581. We currently lease approximately 4,000 square feet of office space at this facility at an annual cost of approximately $57,000 pursuant to a month-to-month lease. We are currently exploring our options of obtaining a new location and/or entering into a long-term lease at our current facility. We also lease approximately 2,000 square feet of space at an annual cost of approximately $31,000 (inclusive of taxes) at 1105 Portion Road, Farmingville, NY 11738. -19- ITEM 3. LEGAL PROCEEDINGS -------------------------- We are currently not subject to any threatened or pending legal proceedings. Nevertheless, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ------------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ------------------------------------------------------------------ Since June 9, 2005, our common stock has been traded on the OTC Bulletin Board under the symbol "AMKT." Our common stock trades on a limited basis on the OTC Electronic Bulletin Board in the Over-the-Counter Market. The following table sets forth the range of high and low closing sales prices of our Common Stock for the periods indicated (it being understood that prices for the quarter ended June 30, 2005 are for the period June 9 through June 30, 2005). QUARTERS ENDED HIGH LOW ------------------------------------------------------------------- June 30, 2005......................................$3.50 $ .50 September 30, 2005................................. 2.00 .50 December 31, 2005.................................. 2.00 .57 March 31, 2006..................................... 1.80 1.70 June 30, 2006...................................... 2.25 2.25 September 30, 2006................................. 2.25 2.15 December 31, 2006.................................. 2.25 1.46 March 31, 2007..................................... 2.05 1.32 June 30, 2007...................................... 1.95 1.25 September 30, 2007................................. 2.00 .86 December 31, 2007.................................. 1.45 .65 The closing sales price on March 24, 2008 was $.75 per share. All quotations provided herein reflect inter-dealer prices, without retail mark-up, markdown or commissions. In the event a public market for our common stock is sustained in the future, sales of our common stock may be made by holders of our public float (believed to be 4,890,995 shares) or by holders of restricted securities in compliance with the provisions of Rule 144 of the Securities Act of 1933. In general, under Rule 144, a non-affiliated person who has satisfied a six-month holding period in a fully reporting company under the Securities Exchange Act of 1934, as amended, may, sell their restricted Common Stock without volume limitation, so long as the issuer is current with all reports under the Exchange Act in order for there to be adequate common public information. Affiliated persons may also sell their common shares held for at least six months, but affiliated persons will be required to meet certain other requirements, including manner of sale, notice requirements and volume limitations. -20- Non-affiliated persons who hold their common shares for at least one year will be able to sell their common stock without the need for there to be current public information in the hands of the public. Future sales of shares of our public float or by restricted common stock made in compliance with Rule 144 may have an adverse effect on the then prevailing market price, if any, of our common stock. Currently, we have outstanding Class A and Class B warrants to purchase 837,000 restricted shares of our common stock exercisable at a price of $2.00 per share through April 1, 2008. In the event that all of the warrants are exercised, of which there can be no assurances given, an additional 837,000 shares of restricted common stock will be issued and may be resold pursuant to Rule 144 after a holding period of at least six months, unless we elect to voluntarily register the resale of the shares issuable upon exercise of the warrants for earlier sale. No registration rights were granted in connection with the issuance of said warrants. Between July 20, 2006 and November 30, 2006, we sold 951,575 shares of common stock at a purchase price of $1.75 per share and Class C warrants to purchase 475,788 shares at an exercise price of $1.75 per share. We also issued to the placement agent and its designees 139,680 shares of common stock and placement agent warrants to purchase 95,160 shares exercisable at a price of $1.00 per share. We registered the resale of the 951,575 shares of common stock sold to these investors, including the 475,788 shares issuable upon exercise of the Class C warrants. As of March 24, 2008, there were 83 holders of record of our common stock, although we believe that there are other persons who are beneficial owners of our common stock held in street name. Our transfer agent is Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New York, NY 10004. DIVIDEND POLICY --------------- We have never paid any cash dividends and intend, for the foreseeable future, to retain any future earnings for the development of our business. Our Board of Directors will determine our future dividend policy on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities. RECENT SALES OF UNREGISTERED SECURITIES --------------------------------------- Since January 2007, we had no sales or issuances of unregistered common stock, except we made sales or issuances of unregistered securities listed in the table below: CONSIDERATION RECEIVED AND DESCRIPTION OF UNDERWRITING OR OTHER DISCOUNTS TO MARKET IF OPTION, WARRANT OR PRICE OR CONVERTIBLE EXEMPTION FROM CONVERTIBLE SECURITY, TITLE OF SECURITY, AFFORDED TO REGISTRATION TERMS OF EXERCISE OR DATE OF SALE SECURITY NUMBER SOLD PURCHASERS CLAIMED CONVERSION ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- February 2007 Common 70,000 shares Services rendered; no Section 4(2) Not applicable. Stock commissions paid Options ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- -21- ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- July 2007 Common Stock 12,500 shares Services rendered; no Section 4(2). A Not applicable. commissions paid restrictive legend appears on each certificate ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- July 2007 Common Stock 4,086 shares Cancellation of 8,671 Section 3(a)9 of Not applicable warrants on a cashless the Securities Act ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- October 2007 Common Stock 5,000 shares Services rendered; Section 4(2). A Not applicable No commissions paid restrictive legend appears on each certificate ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- December 2007 Common Stock 75,000 shares Services rendered; Section 4(2). A Not applicable No commissions paid restrictive legend appears on each certificate ---------------- -------------- ---------------- ------------------------- ------------------- ----------------------- RECENT PURCHASES OF SECURITIES ------------------------------ In 2007, we have had no repurchases of our common stock. However, 23,334 shares were cancelled by agreement with a former consultant in settlement of a dispute involving the number of shares consultant was entitled to retain for services previously rendered. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS ------------- The following discussion should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Form 10-KSB. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause the Company's actual results in future periods to differ materially from forecasted results. OVERVIEW -------- We are a full service promotional marketing and distribution company offering a wide array of business solutions. Ace has grown organically through referrals based on its high quality service and external financings to support our growth. We are also expanding through hiring leading independent salespersons who are well supported by the Ace proprietary business structure. By offering more services and solutions to our customers, new recruits will have the ability to expand their present business by simply making the move to Ace. Upon integrating their client base into our system they too become trusted advisors that provide integrated business solutions instead of a commodity based promotional product salesperson. These achievements position us to accelerate growth through potential acquisition and consolidation of other companies as well as simply recruiting experienced salespeople. In the event a company is acquired by us, of which no assurances can be given in this regard, the new clients would all be introduced to the additional services that are now available in our promotional marketing model. -22- We have effectively carved out a niche for Ace. Marketing and branding companies create an image and direction for clients. Ad agencies develop print, TV, radio and other campaigns aimed at goals of recruiting and introducing new products or services. Traditional promotional product companies offer imprinted merchandise and apparel. Ace finds itself in a position of providing value added services that compliment those of the ad agency, as well as branding and marketing companies while at the same time far exceeding the capabilities of a standard promotional products distributor. We expect our revenues to grow as economic conditions in the United States continue to improve, by adding additional in-house and independent sales representatives to our sales network. While one or more acquisitions of other distributors will also be considered by Management, we can provide no assurances that one or more acquisitions of other distributors will be completed on terms satisfactory to us, if at all. CRITICAL ACCOUNTING POLICIES ---------------------------- Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements require management to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements. REVENUE RECOGNITION. Revenues are recognized when title and risk of loss transfers to the customer and the earnings process is complete. In general, title passes to our customers upon the customer's receipt of the merchandise. Revenue is accounted for in accordance with Emerging Issue Task Force Issue No. 99-19, reporting revenue gross as a principal versus net as an agent. Revenue is recognized on a gross basis since our company has the risks and rewards of ownership, latitude in selection of vendors and pricing, and bears all credit risk. Our company records all shipping and handling fees billed to customers as revenues, and related costs as cost of goods sold, when incurred, in accordance with Emerging Issue Task Force Issue No. 00-10, accounting for shipping and handling fees and costs. ALLOWANCE FOR DOUBTFUL ACCOUNTS. We are required to make judgments based on historical experience and future expectations, as to the realizability of our accounts receivable. We make these assessments based on the following factors: (a) historical experience, (b) customer concentrations, customer credit worthiness, (d) current economic conditions, and (e) changes in customer payment terms. STOCK BASED COMPENSATION. Effective January 1, 2006, the Company began recording compensation expense associated with stock options and other equity-based compensation in accordance with SFAS 123(R), using the modified prospective transition method and therefore has not restated results for prior periods. Under the modified prospective transition method, share-based compensation expense for 2006 includes 1) compensation expense for all share-based awards granted on or after January 1, 2006 as determined based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R) and 2) compensation expense for share-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. -23- RESULTS OF OPERATIONS --------------------- 2007 VERSUS 2006 ---------------- The following table sets forth certain selected condensed statement of operations data for the periods indicated in dollars. In addition, we note that the period-to-period comparison may not be indicative of future performance. ---------------------------------------------- Year Ended December 31 ---------------------------------------------- 2007 2006 ----------------------- ---------------------- Revenue $ 5,660,102 $ 4,506,807 Cost of Revenues 3,844,047 3,183,825 Gross Profit 1,816,055 1,322,982 Operating Expenses 2,721,058 1,806,684 (Loss) from operations (905,003) (483,702) Net (Loss) (879,055) $ (481,026) Net (Loss) per common Share (.11) $ (.07) Weighted average common Shares Outstanding 8,021,521 7,142,594 We generated revenues of $5,660,102 for 2007 as compared to $4,506,807 for 2006. The 25.6% increase in revenues of $1,158,606 in 2007 compared to 2006 is primarily due to our utilizing additional in-house and independent sales representatives to obtain additional customers. Gross profit was $1,816,055 for 2007 as compared to $1,322,982 for 2006. Our gross profit percentage was 32.1% as compared to 29.4% for 2006. Gross profits will vary period-to-period depending upon a number of factors including the mix of items sold, pricing of the items and the volume of product sold. Also, it is our practice to pass freight costs associated with shipping of merchandise to our customers which are included in costs of revenues and net revenue. Reimbursement of freight costs have lower profit margins than sales of our promotional products and has the effect of reducing our overall gross profit margin on sales of products, particularly on smaller orders. The change in gross profit percentage for fiscal 2007 relates to the mix of product sold and size of orders. Operating expenses consisting of selling, general, and administrative expenses were $2,721,058 for 2007 as compared to $1,806,684 for fiscal 2006. Operating costs as a percentage of net revenue was 48.1 % for 2007 compared to 40.1% for 2006. Operating expenses in 2007 increased over 2006 by approximately $914,374 or 50.6 % primarily due to increased salaries of executive officers, stock based compensation and commissions paid. Our net loss was $(879,055) for 2007 as compared to $(481,026) for 2006. Our results of operations for fiscal 2007 were significantly impacted as a result of (x) additional costs incurred (primarily consisting of a new website ($20,000), new computer systems ($30,000), hiring additional personnel ($26,000) and collateral materials ($10,000)) estimated at approximately $100,000 to switch from a branded merchandise company to an integrated business solutions company and (y) stock based compensation of $449,638. Our stock-based payments to employees and consultants can vary period to period based upon the terms of the underlying grants. Fiscal 2007 included stock based (option) compensation to two executive officers in connection with an extension of their employment contracts of approximately $290,000. For comparison purposes, fiscal 2007 and 2006 net loss, excluding stock-based payments of $449,638 and $109,959, was $(429,417) and $(371,067), respectively. -24- No benefit for income taxes is provided for in 2007 and 2006 due to the full valuation allowance on the net deferred tax assets as a result of the uncertainty of the future realization of deferred tax assets. As a result our pre-tax loss and net loss are the same. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company had cash and cash equivalents of $819,021 at December 31, 2007. Cash used by operating activities for the year ended December 31, 2007 was $(511,739). This resulted primarily from a net loss of $(879,055) and an increase of accounts receivable of $241,933 partially offset by stock based compensation of $449,638 and an increase in accounts payable and accrued expenses of $184,351. For 2006, net cash was used in operating activities of $(466,041) substantially due to our net loss of $(481,026), increased by a reduction in customer deposits of $98,000 and partially offset by non-cash stock based compensation of $109,959. For 2006, net cash of $1,420,937 was provided by financing activities due to proceeds from a private placement of our Common Stock and Class C Common Stock Purchase Warrants. Our company commenced operations in 1998 and was initially funded by our three founders, each of whom has made demand loans to our Company that have been repaid. Since 1999, we have relied on equity financing and borrowings from outside investors to supplement our cash flow from operations. We anticipate that our future liquidity requirements will arise from the need to finance our accounts receivable and inventories, hire additional sales persons, capital expenditures and possible acquisitions. The primary sources of funding for such requirements will be cash generated from operations, raising additional capital from the sale of equity or other securities and borrowings under debt facilities which currently do not exist. We believe that we can generate sufficient cash flow from these sources to fund our operations for at least the next fifteen months. 2006 Financing -------------- In 2006, we engaged Brookshire Securities Corporation, a licensed broker-dealer and member of the NASD, to act as Placement Agent to raise financing for our company through the sale of our unregistered securities solely to "accredited investors" as defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended. Pursuant to the offering, we raised gross proceeds of $1,665,250 from the sale of Units. Each Unit consisted of 60,000 shares of our Common Stock and Class C Warrants to purchase 30,000 shares of Common Stock at an offering price of $105,000 per Unit. We had the right to sell fractional Units, but not fractional shares or fractional Class C Warrants. The Class C Warrants are exercisable at $1.75 per share at anytime from the date of issuance through the earlier of June 30, 2009 or the redemption date of the Class C Warrants, whichever is earlier. Each Class C Warrant may be redeemed by us at a redemption price of $.001 per Warrant, on at least 30 days prior written notice (the "Redemption Date'), at anytime after the average closing sales price of our Common Stock as reported in the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or if listed on a national securities exchange, equals or exceeds $3.00 per share for a period of 20 consecutive trading days ending within 10 days prior to the date of the notice of redemption is mailed or otherwise delivered by us to each holder of Class C Warrants. -25- All investors who purchased Units in the Offering have the following additional rights: o REGISTRATION RIGHTS -We currently have an effective Registration Statement registering the resale of the unsold 951,575 shares of our Common Stock and 475,788 shares of our Common Stock underlying a like number of Class C Warrants o ANTI-DILUTION PROTECTION - In the event we seek to raise money on a capital raise transaction during the period commencing on October 30, 2006 and terminating on the earlier of 24 months from that date or 12 months from the initial effective date (i.e. December 21, 2006) of the Registration Statement (the "Covered Period") and we sell shares of our Common Stock or issue options or warrants at a price below $1.75 per share during the Covered Period, the investors in the Offering will have the following anti-dilution protection during the Covered Period: "MOST FAVORED NATION PROVISION - Purchasers of Units sold by the Company during the Covered Period may elect at the time of each capital raise transaction by us to exchange their unsold Units multiplied by $105,000 per Unit in exchange for an equivalent amount of our securities offered in any new capital raise transaction based upon the new terms offered by us. A capital raise transaction shall not include the issuance of securities to officers, directors, employees, advisors or consultants or securities issued in connection with acquisitions, consolidations or mergers." Pursuant to the Offering, we sold 951,575 shares of our Common Stock and Class C Warrants to purchase 475,788 shares of our Common Stock. We also issued to the Placement Agent 139,680 shares of Common Stock and five-year Warrants to purchase 95,160 shares of Common Stock exercisable at $1.00 per share. Exemption from registration is claimed under Rule 506 of Regulation d promulgated under Section 4(2) of the Securities Act. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ----------------------------------------- In July 2006, the FASB issued Financial Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES ("FIN 48"), as an interpretation of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. FIN 48 also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective in the first quarter of Fiscal 2007. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The adoption of this Statement did not have a material effect on the Company's financial position or results of operation. In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 was effective for the Company's fiscal fourth quarter ending December 31, 2006. The adoption of this Statement did not have a material effect on the Company's financial position or results of operation. -26- On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. This Statement references fair value as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction, between market participants in the market in which the reporting entity transacts. The Statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The Statement does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not anticipate that the adoption of this Statement will have a material effect on our financial position or results of operation. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in funded status in the year in which the changes occur through comprehensive income. SFAS 158 had no impact on the Company's financial position or results of operation. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, "Business Combinations" ("SFAS 141R"), which establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent; the amount of net income attributable to the parent and to the noncontrolling interest; changes in a parent's ownership interest; and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is required to be adopted prospectively for the first annual reporting period beginning after December 15, 2008. The Company is currently reviewing the effect that the adoption of this statement will have on its financial statements. ITEM 7. FINANCIAL STATEMENTS ----------------------------- FINANCIAL STATEMENTS -------------------- The report of the Independent Registered Public Accounting Firm, Financial Statements and Schedules are set forth beginning on page F-1 of this Annual Report on Form 10-KSB, following this page. -27- ACE MARKETING & PROMOTIONS, INC. --------------------------------------------- REPORT ON AUDITS OF FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2007 AND 2006 ACE MARKETING & PROMOTIONS, INC. CONTENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 PAGES -------------------------------------------------------------------------------- FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-1 Balance Sheets F-2 Statements of Operations F-3 Statement of Stockholders' Equity F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 - F-15 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Ace Marketing & Promotions, Inc. Valley Stream, New York We have audited the accompanying balance sheets of Ace Marketing & Promotions, Inc. for the years ended December 31, 2007 and 2006, 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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, 2007 and 2006 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Holtz Rubenstein Reminick LLP Melville, New York March 26, 2008 F-1 ACE MARKETING & PROMOTIONS, INC. BALANCE SHEETS ==================================================================================================== DECEMBER 31, 2007 2006 ---------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 819,021 $ 1,353,131 Accounts receivable, net of allowance for doubtful accounts of $10,000 at December 31, 2007 and 2006, respectively 963,919 721,986 Prepaid expenses and other current assets 75,375 47,683 ----------------------------- Total Current Assets 1,858,315 2,122,800 Property and Equipment, net 34,065 16,899 Other Assets 7,745 5,492 ----------------------------- Total Assets $ 1,900,125 $ 2,145,191 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 475,452 $ 359,518 Accrued expenses 206,015 137,598 ----------------------------- Total Current Liabilities 681,467 497,116 ----------------------------- Commitments and Contingencies Stockholders' Equity: Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued -- -- Common stock, $.0001 par value; 25,000,000 shares authorized; 8,124,949 and 8,028,363 shares issued and outstanding at December 31, 2006 and 2005, respectively 813 803 Additional paid-in capital 3,657,920 3,176,791 Accumulated deficit (2,408,574) (1,529,519) ----------------------------- 1,250,159 1,648,075 Less: Treasury Stock, at cost, 23,334 shares (31,501) -- ----------------------------- Total Stockholders' Equity 1,218,658 1,648,075 ----------------------------- Total Liabilities and Stockholders' Equity $ 1,900,125 $ 2,145,191 ============================= ---------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS. F-2 ACE MARKETING & PROMOTIONS, INC. STATEMENTS OF OPERATIONS ============================================================================================ YEARS ENDED DECEMBER 31, 2007 2006 -------------------------------------------------------------------------------------------- Revenue, net $ 5,660,102 $ 4,506,807 Cost of Revenue 3,844,047 3,183,825 ----------------------------- Gross Profit 1,816,055 1,322,982 ----------------------------- Operating Expenses: Selling (including stock based payments of $212,638 and $63,280 for the years ended December 31, 2007 and 2006, respectively) 795,115 444,192 General and administrative (including stock based payments of $237,000 and $46,679 for the years ended December 31, 2007 and 2006, respectively) 1,925,943 1,362,492 ----------------------------- Total Operating Expenses 2,721,058 1,806,684 ----------------------------- Loss from Operations (905,003) (483,702) ----------------------------- Other Income: Interest income 25,948 2,676 ----------------------------- Total Other Income 25,948 2,676 ----------------------------- Net Loss $ (879,055) $ (481,026) ============================= Net Loss Per Common Share: Basic $ (0.11) $ (0.07) ============================= Diluted $ (0.11) $ (0.07) ============================= Weighted Average Common Shares Outstanding: Basic 8,021,521 7,142,594 ============================= Diluted 8,021,521 7,142,594 ============================= -------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS. F-3 ACE MARKETING & PROMOTIONS, INC. Statement of Stockholders' Equity ================================================================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------------------------------------------------------- Total Common Stock Additional Treasury Stock Stockholders' ------------------------ Paid-in ------------------------ Equity Shares Amount Capital (Deficit) Shares Amount ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 1, 2006 $ 598,205 5,888,076 $ 589 $ 1,646,109 $(1,048,493) -- $ -- Securities Issued to Private Placement Investors, net 1,420,937 1,091,255 109 1,420,828 -- -- -- Cashless Exercise of Stock Purchase Warrants -- 1,029,032 103 (103) -- -- -- Cashless Exercise of Stock Options -- 20,000 2 (2) -- -- -- Stock Based Payments 109,959 -- -- 109,959 -- -- -- Net Loss (481,026) -- -- -- (481,026) -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, at December 31, 2006 1,648,075 8,028,363 803 3,176,791 (1,529,519) -- -- Cancellation of Restricted Stock -- -- -- 31,501 -- 23,334 (31,501) Cashless Exercise of Stock Purchase Warrants -- 4,086 1 (1) -- -- -- Stock Based Payments 449,638 92,500 9 449,629 -- -- -- Net Loss (879,055) -- -- -- (879,055) -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, at December 31, 2007 $ 1,218,658 8,124,949 $ 813 $ 3,657,920 $(2,408,574) 23,334 $ (31,501) =========== =========== =========== =========== =========== =========== =========== -------------------------------------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS. F-4 ACE MARKETING & PROMOTIONS, INC. STATEMENTS OF CASH FLOWS ========================================================================================= YEARS ENDED DECEMBER 31, 2007 2006 ----------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net loss $ (879,055) $ (481,026) ------------------------------ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,705 4,201 Stock-based compensation 449,638 109,959 Changes in operating assets and liabilities: Increase in operating assets: Accounts receivable (241,933) (10,930) Prepaid expenses and other assets (29,945) (6,401) (Decrease) increase in operating liabilities: Accounts payable and accrued expenses 184,351 16,156 Customer deposits -- (98,000) ------------------------------ Total adjustments 367,816 14,985 ------------------------------ Net Cash Used in Operating Activities (511,239) (466,041) ------------------------------ Cash Flows from Investing Activities: Acquisition of property and equipment (22,871) -- ------------------------------ Net Cash Used in Investing Activities (22,871) -- ------------------------------ Cash Flows from Financing Activities: Proceeds from private placement, net -- 1,420,937 ------------------------------ Net Cash Provided by Financing Activities -- 1,420,937 ------------------------------ Net (Decrease) Increase in Cash and Cash Equivalents (534,110) 954,896 Cash and Cash Equivalents, beginning of year 1,353,131 398,235 ------------------------------ Cash and Cash Equivalents, end of year $ 819,021 $ 1,353,131 ============================== ----------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS. F-5 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Ace Marketing & Promotions, Inc. (the "Company") is a full service advertising specialties and promotional products company that distributes items typically with logos to large corporations, schools and universities, financial institutions and not-for-profit organizations. Specific categories of promotional products include advertising specialties, business gifts, incentives and awards, and premiums. REVENUE RECOGNITION - Revenue is recognized when title and risk of loss transfers to the customer and the earnings process is complete. In general, title passes to our customers upon the customer's receipt of the merchandise. Revenue is accounted for in accordance with Emerging Issue Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent". Revenue is recognized on a gross basis since the Company has the risks and rewards of ownership, latitude in selection of vendors and pricing, and bears all credit risk. Advance payments made by customers are included in customer deposits. The Company records all shipping and handling fees billed to customers as revenues, and related costs as cost of goods sold, when incurred, in accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". ALLOWANCE FOR DOUBTFUL ACCOUNTS - Management must make estimates of the uncollectability of accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are being amortized using the straight-line method over the estimated useful lives of the related assets or the remaining term of the lease. The costs of additions and improvements, which substantially extend the useful life of a particular asset, are capitalized. Repair and maintenance costs are charged to expense. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the account and the gain or loss on disposition is reflected in operating income. COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity. At December 31, 2007 and 2006, 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, 2007 and 2006. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt instruments with a maturity of three months or less, as well as bank money market accounts, to be cash equivalents. F-6 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME PER SHARE - Basic net income per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options. The number of common shares potentially issuable upon the exercise of certain options and warrants that were excluded from the diluted loss per common share calculation was approximately 3,880,000 and 3,519,000 because they are anti-dilutive as a result of a net loss for the years ended December 31, 2007 and 2006. ADVERTISING COSTS - Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2007 and 2006 approximated $20,900 and $500, respectively. SHARE-BASED COMPENSATION - The Company records compensation expense associated with stock options and other equity-based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), SHARE-BASED PAYMENT, using the modified prospective transition method and therefore has not restated results for prior periods. Under the modified prospective transition method, share-based compensation expense includes, (1) compensation expense for all share-based awards granted on or after January 1, 2006 as determined based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R and, (2) compensation expense for share-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. INCOME TAXES - Deferred income taxes are recognized for temporary differences between financial statement and income tax basis of assets and liabilities for which income tax or tax benefits are expected to be realized in future years. A valuation allowance is established to reduce deferred tax assets, if it is more likely, than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. FAIR VALUE OF FINANCIAL INSTRUMENTS - In the opinion of management, the carrying value of all financial instruments, consisting primarily of cash and cash equivalents, accounts receivables and accounts payable, reflected in the accompanying balance sheet, approximates fair value as of December 31, 2007 and 2006, due to their short term nature. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In July 2006, the FASB issued Financial Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES ("FIN 48"), as an interpretation of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. FIN 48 also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective in the first quarter of Fiscal 2007. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The adoption of this Statement did not have a material effect on the Company's financial position or results of operation. F-7 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 was effective for the Company's fiscal fourth quarter ending December 31, 2006. The adoption of this Statement did not have a material effect on the Company's financial position or results of operation. On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. This Statement references fair value as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction, between market participants in the market in which the reporting entity transacts. The Statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The Statement does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not anticipate that the adoption of this Statement will have a material effect on our financial position or results of operation. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in funded status in the year in which the changes occur through comprehensive income. SFAS 158 did not have an impact on the Company's financial position or results of operation. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, "Business Combinations" ("SFAS 141R"), which establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent; the amount of net income attributable to the parent and to the noncontrolling interest; changes in a parent's ownership interest; and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is required to be adopted prospectively for the first annual reporting period beginning after December 15, 2008. The Company is currently reviewing the effect that the adoption of this statement will have on its financial statements. F-8 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- 2. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consist of the following at December 31: USEFUL LIVES 2007 2006 -------------------------------- ------------------ ------------------- ------------------ Furniture and Fixtures 5 years $ 70,715 $ 47,844 Leasehold Improvements 5 years 8,919 8,919 ------------------- ------------------ 79,634 56,763 Less Accumulated Depreciation 45,569 39,864 ------------------- ------------------ $ 34,065 $ 16,899 =================== ================== Depreciation expense for the years ended December 31, 2007 and 2006 was $5,705 and $4,201, respectively. 3. INCOME TAXES The provision for income taxes for the years ended December 31, 2007 and 2006 is summarized as follows: 2007 2006 ------------------------------- ------------------ ------------------- Current: Federal $ - $ - State - - ------------------ ------------------- - - ------------------ ------------------- Deferred: Federal - - State - - ------------------ ------------------- $ - $ - ================== =================== The Company has federal and state net operating loss carryforwards of approximately $1,268,000, which can be used to reduce future taxable income through 2027. The tax effects of temporary differences which give rise to deferred tax assets (liabilities) at December 31, are summarized as follows: DECEMBER 31, 2007 2006 -------------------------------------- ------------------ ------------------- Deferred Tax Assets: Net operating loss carryforwards $ 507,000 $ 342,000 Stock based compensation 420,000 240,000 Allowance for doubtful accounts 4,000 4,000 ------------------ ------------------- Deferred Tax Assets 931,000 586,000 Less Valuation Allowance 931,000 586,000 ------------------ ------------------- Net Deferred Tax Asset $ - $ - ================== =================== F-9 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows: YEARS ENDED DECEMBER 31, 2007 2006 -------------------------------------- --------------- -------------- Federal Statutory Tax Rate 34.00% 34.00% State Taxes, net of federal benefit 6.00% 6.00% Change in Valuation Allowance (40.00%) (40.00%) --------------- -------------- Total Tax Expense 0.00% 0.00% =============== ============== 4. STOCKHOLDERS' EQUITY CAPITALIZATION - On February 9, 2005, the stockholders approved an amendment to the Company's Certificate of Incorporation to (i) increase the authorized shares of Common Stock from 22,000,000 shares to 25,000,000; par value $.0001; and (ii) create 5,000,000 shares of Preferred Stock, $.0001 par value. The Board of Directors has the authority to issue shares of Preferred Stock from time to time and to fix such rights, preferences and privileges of such issuances. PRIVATE PLACEMENT OF SECURITIES - During Fiscal 2004, the Company sold through a private placement, 14.74 units (each consisting of 50,000 common shares and 50,000 Class A Warrants). Each Class A Warrant has an exercise price of $2.00 and was to expire on January 3, 2007. The Company extended the expiration date of the Class A Warrants to April 1, 2008. During Fiscal 2005, the Company completed a private placement through the sale of 10 units (each consisting of 10,000 common shares and 10,000 Class B Warrants) at a purchase price of $10,000 per unit for net proceeds of $95,000, net of transaction cost of approximately $5,000. Each Class B Warrant has an exercise price of $2.00 and expires on January 2, 2008. Subsequent to December 31, 2007, the Company extended the expiration date of the Class B Warrants to April 1, 2008. During Fiscal 2006, the Company completed a private placement (the "Offering") through the sale of 15.859 units (each consisting of 60,000 common shares and 30,000 Class C Warrants) at a purchase price of $105,000 per unit for net proceeds of $1,420,937, net of transaction costs of approximately $244,000. Each Class C Warrant has an exercise price of $1.75 per share and expires on June 30, 2009. Pursuant to the Offering, the Placement Agent was issued 139,680 shares of the Company's common stock and a warrant to purchase 95,160 shares of common stock at an exercise price of $1.00 per share. The placement agent warrants expire on June 29, 2011. During the year ended December 31, 2007, the Placement Agent exercised 8,671 warrants using the cashless exercise provision, and received 4,086 shares of the Company's common stock. In addition, pursuant to the Offering, the Company issued options to purchase 50,000 shares of the Company's common stock at an exercise price of $.10 per share to a law firm in connection with legal services for the Offering. The options were valued at $95,000 and have been recorded as a cost of the Offering. 5. SHARE-BASED COMPENSATION WARRANTS - On June 10, 2005, the Company entered into a consulting agreement with a financial advisory firm. In connection with this agreement, the Company granted a warrant for the purchase of 1,100,000 shares of the Company's common stock. The warrant had an exercise price of $.10 per share and expired on June 10, 2010. On February 27, 2006, F-10 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- the holder exercised the warrants utilizing the cashless exercise provision and received 1,029,032 shares of common stock in exchange for the exercise of the 1,100,000 warrants based on the closing price of $1.55 of the Company's stock on that date. On September 26, 2005, the Company entered into a consulting agreement with a financial advisory firm. In connection with this agreement, the Company granted a warrant for the purchase of 100,000 shares of the Company's common stock. The warrant has an exercise price of $2.50 per share and expires on August 14, 2010. PURCHASE OF LISTS AND SEARCH ENGINE - On April 10, 2006, the Company granted 40,000 non-statutory stock options to an entity controlled by two of the officers of the Company, for the purchase of an email list of promotional products professionals and an industry specific search engine. The officers of the Company have waived their right to receive any benefit from the option grant, and the options were granted in the name of the minority shareholders of the related entity. The options have an exercise price of $2.50 per share and expire on April 10, 2011. The email list and search engine were expensed and have been valued at approximately $18,000, which is included in general and administrative expenses for the year ended December 31, 2006. SHARE BASED COMPENSATION PLAN - During Fiscal 2005, the Company established, and the stockholders approved, an Employee Benefit and Consulting Services Compensation Plan (the "Plan") for the granting of up to 4,000,000 non-statutory and incentive stock options and stock awards to directors, officers, consultants and key employees of the Company. All stock options under the Plan are granted at or above the fair market value of the common stock at the grant date. Employee and non-employee stock options generally vest over periods ranging from 1 to 3 years and generally expire either 5 or 10 years from the grant date. Effective January 1, 2006, the Company's Plan is accounted for, in accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS 123 (R) requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements. In addition, the Company adheres to the guidance set forth within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies. In adopting SFAS 123(R), the Company applied the modified prospective approach to transition. Under the modified prospective approach, the provisions of SFAS 123(R) are to be applied to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered, that are outstanding, as of the required effective date, shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro-forma disclosures under SFAS 123. The Company's results for the years ended December 31, 2007 and 2006 include employee share-based compensation expense totaling approximately $317,000 and $49,000. Such amounts have been included in the Statement of Operations within selling, general and administrative expenses. No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements, due to a history of operating losses. F-11 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The Company took into consideration guidance under SFAS 123(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected volatility is based upon historical volatility of the Company's stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data. The estimated fair value of each option award granted was determined on the date of grant using the following weighted-average assumptions for option grants during the years ended December 31, 2007 and 2006: 2007 2006 --------------------------------------------------------------------------- --------------------- -------------------- Dividend Yield 0.00% 0.00% Volatility 58.23% 25.00% Risk-Free Interest Rate 4.15% 5.02% Expected Life 10.00 YEARS 5.00 years A summary of option activity under the Plan as of December 31, 2007, and changes during the year then ended is as follows: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Options Shares Price Term (years) Value ----------------------------------------- ------------------ ------------------ ------------------- ------------------ Outstanding, beginning of year 1,921,222 $ 1.17 6.13 Granted 300,000 1.20 10.00 ------------------ Outstanding, end of year 2,221,222 $ 1.18 5.74 $ - ================== ================== =================== ================== Exercisable, end of year 1,652,247 $ 1.13 6.31 $ - ================== ================== =================== ================== For the years ended December 31, 2007 and 2006, share-based compensation expense related to stock options was approximately $360,000 and $92,000, respectively. The weighted-average grant-date fair value of options granted during the years ended December 31, 2007 and 2006 was $.86 and $.57, respectively. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2007 is $0, and was calculated as the difference between the exercise price of the underlying options and the market price of the Company's common stock for the shares that had exercise prices, that were lower than the $0.66 closing price of the Company's common stock on December 31, 2007. The total intrinsic value of options exercised in the years ended December 31, 2007 and 2006 was approximately $0 and $42,500, respectively, determined as of the date of exercise. The Company received no cash proceeds from options exercised in the years ended December 31, 2007 and 2006. Options exercised during the year ended December 31, 2007 and 2006 were completed through cashless exercise provisions of the Plan. A summary of the status of the Company's non-vested shares as of December 31, 2007 and the changes during the year ended December 31, 2007, is as follows: F-12 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- Weighted Average Grant-Date Non-vested Shares Shares Fair Value ------------------------------------ --------------- ------------------ Non-vested at January 1, 2007 873,767 $ .32 Granted 300,000 .86 Vested (575,833) .57 --------------- ------------------ Non-vested at December 31, 2007 597,934 $ .36 =============== ================== As of December 31, 2007 and 2006, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $108,000 and $216,000, respectively. Unamortized compensation cost as of December 31, 2007 is expected to be recognized over a remaining weighted-average vesting period of 1.14 years. For the year ended December 31, 2006, the weighted average fair value of options exercised was $.13. There were no options exercised during the year ended December 31, 2007. COMMON SHARES RESERVED Class A Warrants 737,000 Class B Warrants 100,000 Class C Warrants 475,788 Placement Agent Warrants 86,489 2005 Stock Option Plan 3,962,222 6. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The Company leases office space under non-cancelable operating leases, which expire in November 2009. The Company is obligated for the payment of real estate taxes under these leases. The Company is also currently leasing additional office space on a month-to-month basis. Minimum future rentals under non-cancelable lease commitments are as follows: YEARS ENDING DECEMBER 31, ----------------------------------------------------------------------- 2008 $ 28,000 2009 27,000 Rent and real estate tax expense was approximately $85,000 and $72,000 for the years December 31, 2007 and 2006, respectively. EMPLOYMENT CONTRACTS - On March 1, 2005, the Company entered into employment contracts with two of its officers. The employment agreements provide for minimum annual salaries plus bonuses equal to 5% of pre-tax earnings (as defined) and other perquisites commonly found in such agreements. In addition, pursuant to the employment contracts, the Company granted the officers options to purchase up to an aggregate of 400,000 shares of common stock. On August 22, 2007, the Company approved a three year extension of the employment contracts with two of its officers expiring on February 28, 2011. The employment agreements provide for minimum annual salaries with scheduled increases per annum to occur on every anniversary date of the contract and extension commencing on March, 1, 2008. A signing bonus of options to purchase 150,000 shares granted to each executive were fully vested at the date of the grant and exercisable at $1.20 per share through August 22, 2017. Ten-year options to purchase 50,000 F-13 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- shares of Common Stock are to be granted at fair market value on each anniversary date of the contract and extension commencing March 1, 2008. Termination pay of one-year base salary based upon the scheduled annual salary of each executive officer for the next contract year, plus the amount of bonuses paid (or entitle to be paid) to the executive for the current fiscal year of the preceding fiscal year, whichever is higher. Minimum aggregate future commitments under the employment contracts is as follows: YEARS ENDING DECEMBER 31, ---------------------------------------------------------------------- 2008 424,000 2009 472,000 2010 520,000 2011 88,000 7. CONCENTRATIONS 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. During the years ended December 31, 2007 and 2006, a customer accounted for approximately 20% and 21% of net revenues, respectively. TRANSACTIONS WITH MAJOR SUPPLIER - During the year ended December 31, 2007, a supplier accounted for approximately 12% of net purchases. 8. RELATED PARTY TRANSACTIONS The Company purchased merchandise with a cost of approximately $4,934 and $8,700 for the years ended December 31, 2007 and 2006, respectively, from an entity that is owned by an individual related to one of the officers of the Company. 9. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS Cash paid during the years for: YEARS ENDED DECEMBER 31, 2007 2006 -------------------------------- ------------------- ------------------ Interest $ - $ - =================== ================== Income Taxes $ - $ - =================== ================== 10. JOINT MARKETING AND SALES AGREEMENT In February 2007, the Company entered into a joint marketing and sales agreement with Atrium Enterprises Ltd. ("Atrium"). Atrium provides solutions to corporate customers through the design and application of performance improvement programs. The agreement provides for the Company to receive the exclusive rights to market and sell Atrium's products and services to its customers and provides Atrium the exclusive right to sell and market the Company's promotional services to its customers. The Company will receive a 50% commission on gross profit (as defined) from all sales of Atrium's F-14 ACE MARKETING & PROMOTIONS, INC. NOTES TO FINANCIAL STATEMENTS ================================================================================ YEARS ENDED DECEMBER 31, 2007 AND 2006 -------------------------------------------------------------------------------- products and services generated by the Company. Atrium will receive a 50% commission on gross profit (as defined) from all sales of the Company's promotional services generated by Atrium. In addition, Atrium was granted an option to purchase 70,000 shares of the Company's common stock at an exercise price of $2.50 per share. The options vest in three equal installments commencing on February 15, 2008, and expire four years after the date of grant. Included in stock based payments, for the year ended December 31, 2007, is approximately $14,000 related to this grant. 11. SUBSEQUENT EVENT In February 2008, the Company entered into an agreement with Blue Bite, LLC ("Blue Bite"), a distributor of wireless networking solutions, to become an authorized provider and reseller in the United States of mobile advertising solutions. In connection with the agreement, the Company loaned Blue Bite $50,000, pursuant to a Note which is due March 1, 2009, and is convertible, at the Company's option, into a 10% ownership interest of Blue Bite. Upon conversion, the Company would also have to deliver to Blue Bite, $75,000 in restricted Common Stock of the Company as additional consideration. F-15 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ----------------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------- Not Applicable. Item 8.A.( T) Controls and Procedures. -------------------------------------- EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. ------------------------------------------------- As of the end of the period covered by this annual report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon the foregoing evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective, for the reasons discussed below, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission("SEC"). MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of our principal executive officer and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. -28- Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2007, based on criteria established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Due to the inherent issue of segregation of duties in a small company, we have relied heavily on entity or management review controls to lessen the issue of segregation of duties. Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2007. Our principal executive officer and principal financial officer have concluded that we have material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following material weaknesses as of December 31, 2007. INDEPENDENT BOARD OF DIRECTORS OR AUDIT COMMITTEE We do not have an independent board of directors or audit committee to oversee our internal control over financial reporting. REVENUE RECOGNITION AND COST OF REVENUE Revenue is recognized upon shipment of merchandise to customers and when title and risk of loss transfers to the customer. The verification of drop shipments to customers is not a centralized function, and we lack a process of timely identifying shipping dates and accurately matching revenue and related expenses. As such there is a potential of a misstatement as a result of a period cutoff error. We have purchased new accounting software that will integrate and automate the shipping information with our accounting records and which we believe will remediate this deficiency. This software is expected to be implemented by the end of our second quarter in Fiscal 2008. INFORMATION TECHNOLOGY Management has identified certain control procedures that were not sufficiently documented relating to a) entity level management of our information technology functions; b) logical access to financial applications and company wide networks; and c) the managing of operations for application and technology platforms. We have engaged a consultant to assist us in remediating these deficiencies. -29- FINANCIAL REPORTING Management identified the following significant deficiencies that when aggregated give rise to a material weakness in the area of financial reporting. These deficiencies include a) lack of review or evidence of review in the financial reporting process; b) the inability to account for complex equity transactions; c) various manual processes and dual databases creating need for extensive number of journal entries; and d) inability to apply complex accounting principles. Management is presently assessing these deficiencies. This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report on internal control in this annual report. CHANGES IN INTERNAL CONTROLS ---------------------------- There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 8.B. Other Information. ----------------------------- Not Applicable. -30- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE -------------------------------------------------------------------------------- WITH SECTION 16(a) OF THE EXCHANGE ACT. --------------------------------------- The names, ages and principal occupations of the Company's present officers and directors are listed below. FIRST BECAME DIRECTOR --------------------- NAME (1) AGE AND/OR OFFICER POSITION -------- --- -------------- -------- 1998 Chief Executive Officer/ Secretary/ Dean Julia 40 Treasurer/Director/Co-Founder Michael Trepeta 36 1998 President/Director/Co-Founder Scott Novack 40 1998 Director/Co-Founder Sean McDonnell 47 2005 Chief Financial Officer ______ (1) Directors are elected at the annual meeting of stockholders and hold office until the following annual meeting. The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time. MANAGEMENT TEAM Our officers, directors and founders each have experience in the development of early stage companies including business strategies, products and services and financing. DEAN L. JULIA Mr. Julia holds a Bachelor of Business Administration from Hofstra University received in 1990. Since that time, Mr. Julia has been associated with various broker/dealers as a stockbroker where he was involved in the funding of numerous development stage and growth companies. From 1991 to 1996, Mr. Julia served as a Vice President for Reich & Co. From 1993 to 1994, he was Vice President for D. Blech & Co. From 1994 to 1995, he served as a Vice President for GKN Securities; and from 1995 to 1996 he served as Vice President for Rickel & Associates. From September 1996 through February 1998, Mr. Julia served as President and Chief Executive Officer of DLJ Consulting, a financial intermediary consultant for public and private companies. In 1998, Mr. Julia co-founded us and became an officer, director and principal stockholder of our company and a full time employee. MICHAEL D. TREPETA Mr. Trepeta received a Bachelor of Science Degree in Applied Economics and Business Management with a minor in Communications from Cornell University in 1993. Since that time, Mr. Trepeta has been associated with various broker/dealers as a stockbroker where he was involved in the funding of numerous development stage and growth companies. Mr. Trepeta was a Vice President of Investments at Joseph Roberts & Co. in 1994 and a Vice President of Investments at Rickel & Associates from 1995-1996. From September of 1996 through February 1998, he has served as President of MDT Consulting Group, Inc., a corporation contracted by publicly traded companies to serve as a financial intermediary to investment bankers and to assist in developing products, services, and business strategies. In 1998, Mr. Trepeta co-founded us and he became an officer, director and principal owner of our company and a full time employee. SCOTT J. NOVACK Mr. Novack holds a Bachelor of Business Administration from Hofstra University received in 1990. From 1993-1994, Mr. Novack was a Vice President at D. Blech & Co., a New York investment bank specializing in raising venture capital money for early stage companies. From 1994-1995, Mr. Novack was a Vice President at GKN Securities, a New York based investment bank. From 1995-1996, Mr. Novack was a Vice President at Rickel Associates, a New York based investment bank. Mr. Novack was the President of SJN Consulting Group, Inc., a privately held company, from 1996 to 2003. SJN was a corporation contracted by publicly traded companies to serve as a financial intermediary to investment bankers and to assist in developing products, services, and business strategies. Since 2003, Mr. Novack is a private investor who invests for his own account. In 1998, Mr. Novack co-founded us and became a director of our company. -31- SEAN MCDONNELL Sean J. McDonnell, Certified Public Accountant, has been self employed and in private accounting practice since January 1990 handling many different types of business entities and associations. Mr. McDonnell has spent much of his time helping his customers grow their companies and acquire financing for the purchase of buildings and equipment. Prior to starting his own practice, he was employed from 1985 - 1990 as a senior staff member in the accounting firm of Breiner & Bodian CPA's. After graduating from Dowling College in 1984, he was employed by Kenneth Silver C.P.A. from 1984 - 1985. He is currently serving on the boards of the Police Athletic League, North East Youth Sports Association and Sound Beach Soccer Club, Inc. Mr. McDonnell has served as our Chief Financial Officer since January 3, 2005 and currently as an employee, he devotes such time to our affairs as is necessary for the performance of his duties. LACK OF COMMITTEES ------------------ Our Company has no audit, compensation or nominating committees of our board of directors or committees performing similar functions. We are currently seeking to nominate and appoint to the board two independent directors and to form an audit committee consisting of the two independent directors. It is our goal that at least, one of the two independent directors would be deemed a "Financial Expert" within the meaning of Sarbanes-Oxley Act of 2002, as amended. Under the National Association of Securities Dealers Automated Quotations definition, an "independent director means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board's discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $60,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of Ace has served on that company's compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of Ace's outside auditor. The term "Financial Expert" is defined as a person who has the following attributes: an understanding of generally accepted accounting principles and financial statements; has the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the company's financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of audit committee functions. We can provide no assurances that our board's efforts to select two persons to serve as independent directors on the Board of Directors (at least one of which is a "Financial Expert") and on the proposed audit committee will be successful. In the event an audit committee is established, its first responsibility would be to adopt a written charter. Such charter would be expected to include, among other things: o being directly responsible for the appointment, compensation and oversight of our independent auditor, which shall report directly to the audit committee, including resolution of disagreements between management and the auditors regarding financial reporting for the purpose of preparing or issuing an audit report or related work; o annually reviewing and reassessing the adequacy of the committee's formal charter; o reviewing the annual audited financial statements with our management and the independent auditors and the adequacy of our internal accounting controls; o reviewing analyses prepared by our management and independent auditors concerning significant financial reporting issues and judgments made in connection with the preparation of our financial statements; -32- o reviewing the independence of the independent auditors; o reviewing our auditing and accounting principles and practices with the independent auditors and reviewing major changes to our auditing and accounting principles and practices as suggested by the independent auditor or its management; o reviewing all related party transactions on an ongoing basis for potential conflict of interest situations; and o all responsibilities given to the audit committee by virtue of the Sarbanes-Oxley Act of 2002, which was signed into law by President George W. Bush on July 30, 2002. CODE OF ETHICS Effective March 3, 2003, the Securities & Exchange Commission requires registrants like the Company to either adopt a code of ethics that applies to the Company's Chief Executive Officer and Chief Financial Officer or explain why the Company has not adopted such a code of ethics. For purposes of item 406 of Regulation S-K, the term "code of ethics" means written standards that are reasonably designed to deter wrongdoing and to promote: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities & Exchange Commission and in other public communications made by the Company; o Compliance with applicable governmental law, rules and regulations; o The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and o Accountability for adherence to the code. In March 2006, the Company adopted a Code of Ethics and Code of Conduct which have been filed as Exhibit 14.1 to our Form 10-KSB. Changes to the Code of Ethics and Code of Conduct will be filed under a Form 8-K or quarterly or annual report under the Exchange Act. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, directors and greater than ten percent stockholders are required by the Commission's regulations to furnish us with copies of all Section 16(a) forms they file. During fiscal 2006, none of our officers, directors or 10% or greater stockholders failed to file or filed any forms late to the best of our knowledge, except for certain Form 4 filings of Glenwood Capital and Peter Chung. ITEM 10. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS. ----------------------------------------------------------- SUMMARY COMPENSATION TABLE The following table sets forth the overall compensation earned over the fiscal year ended December 31, 2007 and 2006 by (1) each person who served as the principal executive officer of the Company during fiscal year 2007; (2) the Company's most highly compensated (up to a maximum of two) executive officers as of December 31, 2007 with compensation during fiscal year 2007 of $100,000 or more; and (3) those two individuals, if any, who would have otherwise been in included in section (2) above but for the fact that they were not serving as an executive of the Company as of December 31, 2007. SALARY COMPENSATION -------------------------- NON-EQUITY NONQUALIFIED NAME AND OPTIONS INCENTIVE PLAN DEFERRED ALL OTHER PRINCIPAL FISCAL BONUS STOCK AWARDS COMPENSATION COMPENSATION COMPENSATION POSITION YEAR SALARY ($) ($) AWARDS ($)(1) ($) EARNINGS ($) ($) (2)(3) TOTAL ($) --------------------- ------ --------- -------- ------- --------------------------------------------------------------- Dean L. Julia 2007 $188,000 -- -- $145,667 -- -- $ 15,112 $ 348,779 Chief Executive 2006 $164,000 -- -- $ 16,667 -- -- $ 15,600 $ 196,267 Officer Michael D. Trepeta 2007 $188,000 -- -- $145,667 -- -- $ 15,112 $ 348,779 President 2006 $164,000 -- -- $ 16,667 -- -- $ 15,387 $ 196,054 ____________________ -33- (1) Reflects dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires the company to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vest). As a general rule, for time-in-service-based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description FAS 123 R and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the financial statements included with this Form 10-KSB. (2) Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any "gross-ups" or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the named executive officer; and (vii) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column. (3) Includes compensation for service as a director described under Director Compensation, below. For a description of the material terms of each named executive officers' employment agreement, including the terms of the terms of any common share purchase option grants, see that section of this Form 10-KSB captioned "Employment Agreements." No outstanding common share purchase option or other equity-based award granted to or held by any named executive officer in 2007 were repriced or otherwise materially modified, including extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined, nor was there any waiver or modification of any specified performance target, goal or condition to payout. -34- For a description of the material terms of any contract, agreement, plan or other arrangement that provides for any payment to a named executive officer in connection with his or her resignation, retirement or other termination, or a change in control of the company see "Employment Agreements". EXECUTIVE OFFICER OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table provides certain information concerning any common share purchase options, stock awards or equity incentive plan awards held by each of our named executive officers that were outstanding as of December 31, 2007. OPTION AWARDS STOCK AWARDS -------------------------------------------------------------------------------- --------------------------------------------------- EQUITY INCENTIVE PLAN AWARDS: NUMBER EQUITY EQUITY OF INCENTIVE PLAN INCENTIVE PLAN UNEARNED AWARDS: AWARDS: MARKET SHARES, MARKET OR NUMBER OF NUMBER OF NUMBER OF NUMBER OF VALUE OF UNITS OR PAYOUT VALUE SECURITIES SECURITIES SECURITIES SHARES OR SHARES OR OTHER UNEARNED UNDERLYING UNDERLYING UNDERLYING UNITS OF UNITS OF RIGHTS SHARES, UNITS OR UNEXERCISE UNEXERCISED UNEXERCISED OPTION OPTION STOCK THAT STOCK THAT THAT HAVE OTHER RIGHTS OPTIONS(#) OPTIONS(#) UNEARNED EXERCISE EXPIRATION HAVE NOT HAVE NOT NOT THAT HAVE NOT NAME EXERCISABLE UNEXERCISABLE OPTIONS (#) PRICE ($) DATE VESTED (#) VESTED VESTED VESTED ------------- ------------------------- ------------------- --------- ---------- ------------ ----------- --------- ---------------- Dean L. Julia 250,000 -- -- $ 1.00 01/03/15 -- -- -- -- (1) 100,000 100,000 $ 1.20 12/28/15 150,000 -- -- $ 1.20 08/22/17 Michael D. 250,000 -- -- $ 1.00 01/03/15 -- -- -- -- Trepeta 100,000 100,000 $ 1.20 12/28/15 (1) 150,000 -- -- $ 1.20 08/22/17 -- -- -- -- ______________ (1) Common Stock purchase options to acquire 250,000 shares of common stock at $1.00 per share were granted on January 3, 2005. These options were fully exercisable (vested) upon grant. Options granted on December 28, 2005 vest and are exercisable immediately as to one-half of the options and the balance shall vest and become exercisable on December 28, 2008. Common Stock purchase options to acquire 150,000 shares of Common Stock were granted on August 23, 2007, exercisable at $1.20 per share and fully vested at the date of grant. All options contain cashless exercise provisions. -35- EMPLOYMENT AGREEMENTS Each of the following executive officers is a party to an employment agreement with the Company. NAME POSITION ANNUAL SALARY(1) BONUS (2) Dean L. Julia Chief Financial Officer $ 212,000 Annual bonuses of at least 5% of pre-tax earnings Michael Trepeta President $ 212,000 Annual bonuses of at least 5% of pre-tax earnings __________ (1) Annual salary is for 2008. Compensation of each executive officer named in the table above has his monthly base salary increased by $2,000 each subsequent March 1st during the term of the agreement and any extensions thereof. The current monthly base salary of $16,000 increased to $18,000 on March 1, 2008. (2) Annual bonuses are paid by us by the last business day of March for the preceding calendar (fiscal) year, except in the event of termination prior to the end of any fiscal year (other than termination for cause), a pro rata portion of the annual bonus shall be paid within 30 days of termination. A summary of each Executive's employment agreement, as amended, is as follows: Each employment agreement, as amended, expires on February 29, 2011. The Agreement shall be automatically renewed for a period of two years thereafter unless the Executive gives 60 days prior written notice of his intention not to renew this Agreement prior to the end of the initial Term. Each employment agreement may not be terminated without cause. However, it may be terminated at any time by the Executive upon written three-month notice. In such event, the Company shall be relieved of all of its obligations under the Agreement, except for payment of the Executive's Base Salary and Annual Bonus earned and unpaid through the effective date of termination, those obligations with respect to indemnification and director and officer insurance and severance pay as described below. We may terminate the Executive's employment for cause ("Cause") as defined in the Agreement. In the event this Agreement is terminated for cause, the Executive's Base Salary and any unearned Annual Bonus, severance pay and all benefits shall terminate immediately upon such discharge, and we shall have no further obligations to the Executive except for payment and reimbursement for any monies due which right to payment or reimbursement accrued prior to such termination. We may terminate this Agreement upon the disability as defined in the Agreement or death of the Executive by giving written notice to the Executive. In the case of disability, such termination will become effective immediately upon the giving of such notice unless otherwise specified by us. Upon any such termination, we shall be relieved of all our obligations under the Executive's employment, except for payment of the Executive's Base Salary and Annual Bonus earned and unpaid through the effective date of termination and severance pay. We have agreed to defend and indemnify each Executive in his capacity as an officer against all claims, judgments, damages, liabilities, costs and expenses (including reasonable attorney's fees) arising out of, based upon, or related to his performance of services to us, to the maximum extent permitted under law. We will also use our reasonable best efforts to include each Executive as an insured under all applicable directors' and officers' liability insurance policies maintained by us. -36- Each Executive is also entitled to the following additional benefits: o $2,000 per month pay raise on each March 1 during the term of the Agreement and any extension thereof; o The annual grant on March 1 of each year of ten-year stock options to purchase 50,000 shares at an exercise price equal to the then fair market value of our common stock as determined by the Board. On December 28, 2005, Messrs. Trepeta and Julia each agreed to amend their employment contracts to eliminate the automatic annual grant of options in consideration of the grant of ten year options to purchase 200,000 shares exercisable at $1.20 per share, with one-half immediately vested and the other half to vest on December 28, 2008 irrespective of employment or termination thereof; Pursuant to a three-year extension of their employment agreements, the automatic grant of 50,000 options at fair market value on each anniversary date of the contract recommenced on March 1, 2008. A signing bonus was paid to each executive consisting of options to purchase 150,000 shares, fully vested at the date of grant and exercisable at $1.20 per share at any time through August 22, 1017; o Election to the Board of Directors and during the term of employment, the Board's nomination for re-election to the Board; o Paid disability insurance and term life insurance for the benefit of each Executive's family in an amount fixed by the Board at a cost not to exceed $10,000 per annum; o Use of company automobile with all related costs paid for by us; o Health insurance; o Right to participate in any pensions of our company; o Termination pay of one-year base salary based upon the scheduled annual salary of each executive officer for the next contract year, plus the amount of bonuses paid or entitled to be paid to the executive for the current fiscal year or the preceding fiscal year, whichever is higher; o Health insurance; and o Right to participate in any pensions of our company. CORPORATE GOVERNANCE BOARD OF DIRECTORS BOARD MEMBERS WHO ARE DEEMED INDEPENDENT Our board of directors has determined that none of our directors are "independent" as that term is defined by the National Association of Securities Dealers Automated Quotations ("NASDAQ"). See "Lack of Committees" for the NASDAQ definition of "Independent Director." -37- DIRECTOR COMPENSATION STOCK OPTIONS Stock options and equity compensation awards to our non-employee / non-executive director are at the discretion of the Board. To date, no options or equity awards have been made to our non-employee / non-executive director. CASH COMPENSATION Our non-employee / non-executive director is eligible to receive a fee of $500 to be paid for attending each Board meeting; however, no fees were paid in 2007. TRAVEL EXPENSES All directors shall be reimbursed for their reasonable out of pocket expenses associated with attending the meeting. DIRECTOR COMPENSATION The following table shows the overall compensation earned for the 2007 fiscal year with respect to each non-employee and non-executive director as of December 31, 2007. DIRECTOR COMPENSATION ------------------------------------------------------------------------------------------- FEES EARNED NON-EQUITY NONQUALIFIED NAME AND OR PAID OPTION INCENTIVE PLAN DEFERRED PRINCIPAL IN CASH STOCK AWARDS ($) COMPENSATION COMPENSATION ALL OTHER POSITION ($) AWARDS ($) (1) ($)(2) EARNINGS ($) COMPENSATION ($) TOTAL ($) ----------------------- ------------ ---------- ---------- ------------- ------------- ---------------- --------- Scott Novack, Director -- -- -- -- -- -- -- ______________ (1) Reflects dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires the company to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vest). As a general rule, for time-in-service-based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description FAS 123 R and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the financial statements included with this Form 10-KSB. (2) Excludes awards or earnings reported in preceding columns. (3) Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any "gross-ups" or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the director; (vii) any consulting fees earned, or paid or payable; (viii) any annual costs of payments and promises of payments pursuant to a director legacy program and similar charitable awards program; and (ix) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column. 2005 EMPLOYEE BENEFIT AND CONSULTING SERVICES COMPENSATION PLAN --------------------------------------------------------------- On January 3, 2005, our company established an Employee Benefit and Consulting Services Compensation Plan (the "2005 Plan") covering 2,000,000 shares, which 2005 Plan was ratified by our stockholders on February 9, 2005. On August 12, 2005, the company's stockholders approved a 2,000,000 share increase in the 2005 Plan to 4,000,000 shares. -38- ADMINISTRATION -------------- Our board of directors administers the 2005 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The board may, in its sole discretion, accelerate the vesting of awards. TYPES OF AWARDS --------------- The 2005 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2005 Plan contains provisions for granting non-statutory stock options and incentive stock options and common stock awards. STOCK OPTIONS. A "stock option" is a contractual right to purchase a number of shares of common stock at a price determined on the date the option is granted. An incentive stock option is an option granted under the Internal Revenue Code of 1986 to our employees with certain tax advantages to the grantee over non-statutory stock options. The option price per share of common stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price in the case of incentive stock options shall not be less than 100% of the fair market value of the common stock on the date of grant and may be granted below fair market value in the case of non-statutory stock options. Incentive stock options granted to owners of 10% or more of our common stock must be granted at an exercise price of at least 110% of the fair market value of our common stock and may not have a term greater than five years. Also, the value of incentive options vesting to any employee cannot exceed $100,000 in any calendar year. The option price of our options must be paid in cash, money order, check or common stock of the company. The non-statutory stock options may also contain at the time of grant, at the discretion of the board, certain other cashless exercise provisions. These cashless exercise provisions are included in the currently outstanding non-statutory stock options granted by the board. -39- Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the optionee ceases to be an employee of our company for any reason other than death, any incentive stock option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the optionee's death, any incentive stock option exercisable at the date of death may be exercised by the legal heirs of the optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the optionee, any incentive stock options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the board of directors at the date of grant of each respective option. COMMON STOCK AWARD. Common stock awards are shares of common stock that will be issued to a recipient at the end of a restriction period, if any, specified by the board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse and we will issue a stock certificate representing such shares of common stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the board, the restricted stock award will be terminated. AWARDS ------ As of December 31, 2007, the Company has granted non-statutory stock options to purchase 2,221,222 shares of the Company's Common Stock which are currently outstanding at exercise prices ranging from $1.00 per share to $ 2.50 per share, exclusive of options which have been cancelled since the date of grant. The board has granted options with varying terms. It is not possible to predict the individuals who will receive future awards under the Plan or the number of shares of Common Stock covered by any future award because such awards are wholly within the discretion of the Board. The table below contains information as of December 31, 2007 on the known benefits provided to certain persons and group of persons under the Plan. ----------------------------------------------------- ---------------- ---------------- ------------------------ NUMBER OF RANGE OF VALUE OF UNEXERCISED SHARES SUBJECT EXERCISE PRICE OPTIONS AT TO OPTIONS ($) PER SHARE DECEMBER 31, 2007 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ Dean L. Julia, Chief Executive Officer 600,000 $1.00 - $1.20 $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ Michael D. Trepeta, President 600,000 $1.00 - $1.20 $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ Sean McDonnell, Chief Financial officer 50,000 $1.00 $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ Three Executive Officers As a group 1,250,000 $1.00 - $1.20 $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ Non-Executive Officer, Employees and Consultants 971,222 $1.00-$ 2.50 $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ __________ (1) Value is normally calculated by multiplying (a) the difference between the market value per share at period end (i.e. $.66 based upon a last sale on December 31, 2007) and the option exercise price by (b) the number of shares of Common Stock underlying the option. -40- ELIGIBILITY ----------- Our officers, employees, directors and consultants of Ace and our subsidiaries are eligible to be granted stock options, and common stock awards. TERMINATION OR AMENDMENT OF THE 2005 PLAN ----------------------------------------- The board may at any time amend, discontinue, or terminate all or any part of the 2005 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND --------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS. ---------------------------- As of March 24, 2008, the Company had outstanding 8,101,615 shares of Common Stock. The only persons of record who presently hold or are known to own (or believed by the Company to own) beneficially more than 5% of the outstanding shares of such class of stock is listed below. The following table also sets forth certain information as to holdings of the Company's Common Stock of all officers and directors individually, and all officers and directors as a group. ------------------------------------------------------------- ------------------------------- ------------------------ NUMBER OF COMMON APPROXIMATE NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENTAGE ---------------------------------------------------------------------------------------------------------------------- OFFICERS AND DIRECTORS: ------------------------------------------------------------- ------------------------------- ------------------------ Scott Novack 457 Rockaway Avenue Valley Stream, NY 11583 1,052,402 13.0 ------------------------------------------------------------- ------------------------------- ------------------------ Michael D. Trepeta 457 Rockaway Avenue Valley Stream, NY 11583(2) 1,566,402 18.1 ------------------------------------------------------------- ------------------------------- ------------------------ Dean L. Julia 457 Rockaway Avenue Valley Stream, NY 11583 (2) 1,536,901 17.8 ------------------------------------------------------------- ------------------------------- ------------------------ Sean McDonnell 457 Rockaway Avenue Valley Stream, NY 11583 (3) 50,000 .6 ------------------------------------------------------------- ------------------------------- ------------------------ All Directors and Officers as a Group (four persons) (4) 4,205,705 45.5 ------------------------------------------------------------- ------------------------------- ------------------------ Glenwood Capital Corporation 2070 South Hibiscus Drive North Miami Beach, FL 33181 (5) 979,122 11.9 ------------------------------------------------------------- ------------------------------- ------------------------ Domenico Iannucci One Windsor Drive Muttontown, NY 11753 (6) 789,660 9.7 ------------------------------------------------------------- ------------------------------- ------------------------ -41- _______________ (1) Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is generally determined by voting powers and/or investment powers with respect to securities. Unless otherwise noted, all of such shares of common stock listed above are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them. Such person or entity's percentage of ownership is determined by assuming that any options or convertible securities held by such person or entity, which are exercisable within sixty (60) days from the date hereof, have been exercised or converted as the case may be, but not for the purposes of determining the number of outstanding shares held by any other named beneficial owner. (2) Includes options to purchase 550,000 shares. Excludes options to purchase 100,000 shares which will vest in December 2008. (3) Includes options to purchase 50,000 shares. (4) Includes options to purchase 1,150,000 shares. (5) Includes 600,000 shares and 50,000 Class B Warrants owned by Glenwood Capital, 218,000 shares and 30,000 warrants owned by Peter S. Chung and 47,212 shares and 7,910 warrants owned by Brookshire and 26,000 warrants owned by Tim Ruggiero, a principal of Brookshire. The foregoing information was based on information supplied to Ace by the security holders. (6) Includes 339,660 shares of Common Stock, Class A Warrants to purchase 300,000 shares and Class B Warrants to purchase 50,000 shares and includes options to purchase 100,000 shares. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. ------------------------------------------------------------------- The following summary information is as of December 31, 2007 and relates to our 2005 Plan described elsewhere herein pursuant to which we have granted options to purchase our common stock: ------------------------------- ------------------------------ ---------------------- -------------------------------- (a) (b) (c) ------------------------------- ------------------------------ ---------------------- -------------------------------- Number of securities remaining available for Number of shares of common Weighted average future issuance under stock to be issued upon exercise price of equity compensation plans exercise outstanding (excluding shares Plan category of outstanding options options reflected in column (a) ------------------------------- ------------------------------ ---------------------- -------------------------------- Equity compensation Plans (1) 2,221,222 1.18 1,778,778 ------------------------------- ------------------------------ ---------------------- -------------------------------- (1) Options exercisable at December 31, 2007 include 2,221,222 shares with a weighted average exercise price of $1.00 to $2.50 per share and aggregate intrinsic value of $0.00. -42- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. --------------------------------------------------------- RELATED PARTY TRANSACTIONS -------------------------- Michael Trepeta's wife has a company which is a candle supplier. From time-to-time, we have in the past and may in the future purchase candle supplies from her company. During 2004, 2005, 2006 and 2007, we purchased a total of $20,471, $10,313, $8,657 and $4,934, respectively, from her company. The transactions above were approved by the Board of Directors based upon obtaining at least three competitive quotes and Mr. Trepeta's wife being the best price. Accordingly, the transactions described above were believed by Management to be on terms that are at least as favorable to us as the terms we could have obtained from an unaffiliated third party. In the future, we expect to have one or more members of our Board be independent directors of our company. It is anticipated that future transactions between us and our executive officers and directors and other affiliated parties will be approved by the then disinterested members of the Board and, if not a majority of the Board, then by our independent director(s) through a committee appointed by the Board. OTHER TRANSACTIONS ------------------ In 2006, we engaged Brookshire Securities Corporation, a licensed broker-dealer and member of the NASD, to act as Placement Agent to raise financing for our company through the sale of our unregistered securities solely to "accredited investors" as defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended. Pursuant to the offering, we raised gross proceeds of $1,665,250 from the sale of Units. Each Unit consisted of 60,000 shares of our Common Stock and Class C Warrants to purchase 30,000 shares of Common Stock at an offering price of $105,000 per Unit. Pursuant to the Offering, we sold 951,575 shares of our Common Stock and Class C Warrants to purchase 475,788 shares of our Common Stock. We also issued to the Placement Agent 139,680 shares of Common Stock and five-year Warrants to purchase 95,160 shares of Common Stock exercisable at $1.00 per share. We have agreed to file a Registration Statement with the Securities and Exchange Commission within 60 days of October 30, 2006 (automatically extended to 120 days if we have executed an agreement to acquire the stock or assets of another promotional product distributor), to provide for the resale by purchasers of Units of the shares of Common Stock and the Warrant Shares issuable upon exercise of the Class C Warrants under the Securities Act. We have agreed to use our best efforts to have the Registration Statement declared effective as soon as possible after filing and we have agreed to obtain an effective Registration Statement within 210 days of October 30, 2006, subject to a 30-day extension if the Registration Statement receives a "full review" from the Commission. These intervals would be extended by 30 days if fiscal year end audited financial statements would be required, and which were not issued prior to the closing. If the Registration Statement is not effective within the aforementioned time parameters, we will pay liquidated damages in cash or, at our discretion, in Common stock (based upon the fair market value of our Common Stock) equal to 1% of the amount invested to each investor for each subsequent 30-day period that we fail to have an effective Registration Statement, up to a maximum of 9%. In the event the SEC establishes policy preventing the use of or prohibiting the effectiveness of a registration statement, and the Registration Statement is still pending with liquidated damages accruing, we shall be responsible for said damages up to the date of the policy change. We have agreed to use our best efforts to maintain the effectiveness of the registration statement until the earlier of five years from October 30, 2006, the final closing date of the Offering or until the Shares and Warrant Shares may be sold pursuant to provisions of Rule 144(k) without volume limitations. Any registration costs (other than costs of counsel to subscribers or commissions related to the sales of the Shares and Warrant Shares) will be paid by us. -43- In the event we seek to raise money on a capital raise transaction during the period commencing on October 30, 2006 and terminating on the earlier of 24 months from that date or 12 months from the initial effective date of the Registration Statement (the "Covered Period") and we sell shares of our Common Stock or issue options or warrants at a price below $1.75 per share during the Covered Period, the investors in the Offering will have the following anti-dilution protection during the Covered Period: "MOST FAVORED NATION PROVISION - Purchasers of Units sold by Ace Marketing during the Covered Period may elect at the time of each capital raise transaction by us to exchange their unsold Units multiplied by $105,000 per Unit in exchange for an equivalent amount of our securities offered in any new capital raise transaction based upon the new terms offered by us. A capital raise transaction shall not include the issuance of securities to officers, directors, employees, advisors or consultants or securities issued in connection with acquisitions, consolidations or mergers." Item 13. EXHIBITS ----------------- Exhibit DESCRIPTION ------- ----------- NO. --- 3.1 Articles of Incorporation filed March 26, 1998 (1) 3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1) 3.3 Amendment to Articles of Incorporation approved by stockholders on February 9, 2005(1) 3.4 Amended By-Laws (1) 10.1 Employment Agreement - Michael Trepeta (2) 10.2 Employment Agreement - Dean Julia (2) 10.3 Amendments to Employment Agreement - Michael Trepeta (5)(7) 10.4 Amendments to Employment Agreement - Dean L. Julia (5)(7) 10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (6) 10.6 Agreement with Aon Consulting (6) 11.1 Statement Statement re: Computation of per share earnings. See Statement of Operations and Notes to Financial Statements 14.1 Code of Ethics/Code of Conduct (5) 21.1 Subsidiaries of the Issuer - None in 2007 23.1 Consent of by Holtz Rubenstein Reminick LLP (3) 31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (3) 31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (3) 32.1 Chief Executive Officer Section 1350 Certification (3) 32.2 Chief Financial Officer Section 1350 Certification (3) 99.1 2005 Employee Benefit and Consulting Services Compensation Plan(2) 99.2 Form of Class A Warrant (2) 99.3 Form of Class B Warrant (2) 99.4 Amendment to 2005 Plan (4) 99.5 Form of Class C Warrant (8) 99.6 Release of Earnings - 2007 (3) -44- ___________ (1) Incorporated by reference to Registrant's Registration Statement on Form 10-SB as filed with the Commission on February 10, 2005. (2) Incorporated by reference to Registrant's Registration Statement on Form 10-SB/A as filed with the Commission March 18, 2005. (3) Filed herewith. (4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with the Commission on August 18, 2005. (5) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal year ended December 31, 2005. (6) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal year ended December 31, 2006. (7) Incorporated by reference to the Registrant's Form 8-K dated September 21, 2007. (8) Incorporated by reference to the Registrant's Form 10-QSB for its quarter ended September 30, 2006. -45- Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ------------------------------------------------- AUDIT FEES For the fiscal year ended December 31, 2007 and 2006, the aggregate fees billed for professional services rendered by Holtz Rubenstein Reminick LLP ("independent auditors") for the audit of the Company's annual financial statements and the reviews of its financial statements included in the Company's quarterly reports and filings under the Securities Act of 1933 totaled approximately $54,000 and $49,000, respectively. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES For the fiscal years ended December 31, 2007 and 2006, there were $-0- in fees billed for professional services by the Company's independent auditors rendered in connection with, directly or indirectly, operating or supervising the operation of its information system or managing its local area network. ALL OTHER FEES For the fiscal years ended December 31, 2007 and 2006, there were no fees paid or billed for preparation of corporate tax returns, tax research and other professional services rendered by the Company's independent auditors. -46- SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACE MARKETING & PROMOTIONS, INC. By: /S/ Dean L. Julia --------------------------------- Dean L. Julia, Chairman of the Board and Chief Executive Officer Dated: Valley Stream, New York March 28, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURES TITLE DATE ---------- ----- ---- /S/ DEAN L. JULIA Chairman of the Board March 28, 2008 --------------------------- Chief Executive Officer Dean L. Julia /S/ SEAN MCDONNELL Principal Financial and -------------------------- Accounting Officer March 28, 2008 Sean McDonnell /S/ MICHAEL D. TREPETA --------------------------- President, Director March 28, 2008 Michael D. Trepeta /S/ SCOTT NOVACK --------------------------- Director March 28, 2008 Scott Novack Dean L. Julia, Michael D. Trepeta and Scott Novack represent all the current members of the Board of Directors. -47-