As filed with the Securities and Exchange Commission on December 28, 2006
Registration No. 333-126856
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADSOUTH PARTNERS, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 7310 68-0448219
- ---------------------------- ------------------------- -------------------
(State or other jurisdiction (Primary Standard I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
Organization) Code Number)
1141 South Rogers Circle, Suite 11, Boca Raton, FL 33487, (561) 750-0410
(Address and telephone number of Principal Executive Offices)
1141 South Rogers Circle, Suite 11, Boca Raton, FL 33487 (Address
of principal place of business)
Mr. Loren R. Haynes, Chief Executive Officer
Adsouth Partners, Inc.
1141 South Rogers Road, #11
Boca Raton, FL 33487
Telephone: (561) 750-0410
Fax: (561) 750-0420
(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Asher S. Levitsky P.C.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 981-6767
Fax: (212) 930-9725
Approximate date of proposed sale to the public: From time to time after the
effective date of the registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the securities act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said section 8(a),
may determine.
Preliminary Prospectus Subject to Completion dated December , 2006
PROSPECTUS
22,356,263 Shares
ADSOUTH PARTNERS, INC.
Common Stock
OTC Bulletin Board Trading Symbol: ASPR
The selling stockholders may offer and sell from time to time up to an
aggregate of 22,356,263 shares of our common stock that they have acquired or
may acquire from us, including shares that they may acquire upon conversion of
series B convertible preferred stock and exercise of warrants. For information
concerning the selling stockholders and the manner in which they may offer and
sell shares of our common stock, including limitation on the number of shares
that may be issued upon conversion of the series B preferred stock or certain of
the warrants, see "Selling Stockholders" and "Plan of Distribution" in this
prospectus.
We will not receive any proceeds from the sale by the selling
stockholders of their shares of common stock other than the exercise price of
the outstanding warrants if and when the warrants are exercised. We will pay the
cost of the preparation of this prospectus, which is estimated at $30,000.
On December 26, 2006, the last reported sales price for our common
stock on the OTC Bulletin Board was $.04.
Investing in shares of our common stock involves a high degree of risk.
You should purchase our common stock only if you can afford to lose your entire
investment. See "Risk Factors," which begins on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The selling stockholders have not engaged any underwriter in connection
with the sale of their shares of common stock.
The date of this Prospectus is ________________, 20__
You should rely only on the information contained in this prospectus.
We have not authorized any dealer, salesperson or other person to provide you
with information concerning us, except for the information contained in this
prospectus. The information contained in this prospectus is complete and
accurate only as of the date on the front cover page of this prospectus,
regardless when the time of delivery of this prospectus or the sale of any
common stock. This prospectus is not an offer to sell, nor is it a solicitation
of an offer to buy, our common stock in any jurisdiction in which the offer or
sale is not permitted.
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 8
Forward-Looking Statements 16
Use of Proceeds 17
Selling Stockholders 17
Plan of Distribution 22
Market for Common Stock and Stockholder Matters 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Business 32
Management 34
Principal Stockholders 43
Certain Relationships and Related Transactions 44
Description of Capital Stock 45
Experts 48
Legal Matters 48
How to Get More Information 49
Financial Statements F-1
2
PROSPECTUS SUMMARY
This summary does not contain all of the information that is important
to you. You should read the entire prospectus, including the Risk Factors and
our consolidated financial statements and related notes appearing elsewhere in
this prospectus before making an investment decision. At various places in this
Prospectus, we make reference to the "Company" or "Us or "We". When we use those
terms, unless the context is otherwise, we mean Adsouth Partners, Inc. and its
subsidiaries.
Our Business
We have provided advertising agency services specializing in direct
response media campaigns since 2003. Our advertising services include the
placement of advertising in different media, the production of direct marketing
commercials, and the planning and implementation of direct marketing programs
for our clients. All of our historical advertising revenues were generated from
a limited number of customers, none of which are currently customers. We are
currently in litigation with our largest advertising customer in 2006 and 2005.
This former customer has claimed damages of more than $3,000,000 for breach of
contract, fraud, and breach of duty. Since March 31, 2006, our revenue from
advertising service has not been significant.
Previously, we were also engaged in the business of selling certain
products both to retail outlets and through direct marketing and the sale,
installation and servicing of standby and portable generators. On August 1,
2006, we sold the assets of the products segment and on December 11, 2006 we
transferred our ownership in the generator sales segment to an unaffiliated
entity. Accordingly, the financial statements and other financial information
presented as part of this prospectus have been restated to show the products and
generator sales segments as discontinued operations. We commenced activities
related to our products business in 2004 and therefore the 2005 and 2006
financial information included in this prospectus has been restated to present
the products segment as discontinued. We commenced activities relating to our
generator sales business in the latter part of December 2005; however, because
these operations were de minimis during 2005, the financial information included
in this prospectus has not been restated to reflect the generator sales segment
as discontinued for 2005 but has been restated to reflect the generator sales
segment as discontinued for 2006.
About Us
We are a Nevada corporation organized under the name Zenith
Transportation, Inc., in December 1998. Our name was changed to Zenith
Technology, Inc. in February 1999. In January 2004, in a transaction
characterized as a reverse acquisition, we acquired Adsouth, Inc. and our
corporate name was changed to Adsouth Partners, Inc. The transaction by which we
acquired the stock of Adsouth, Inc. is referred to in this prospectus as the
"reverse acquisition." From and after January 4, 2004, our business was the
business conducted by Adsouth, Inc. prior to the reverse acquisition.
We effected the reverse acquisition through a share exchange agreement
dated January 4, 2004 by and among The Tiger Fund, Inc., which was then our
controlling stockholders, us and John P. Acunto, Jr. and Angela E. Acunto, who
were the sole stockholders of Adsouth, Inc. Pursuant to the share exchange
agreement, The Tiger Fund transferred 1,866,667 shares of common stock to Mr.
and Mrs. Acunto in consideration for which they transferred all of the
outstanding stock of Adsouth, Inc. to us. Upon completion of the share exchange
transaction, the control of our company had changed such that Mr. and Mrs.
Acunto collectively owned more than 50% of our outstanding common stock.
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The accounting rules for reverse acquisitions require that beginning
January 4, 2004, our balance sheet includes the assets and liabilities of
Adsouth, Inc. and our equity accounts were recapitalized to reflect the net
equity of Adsouth, Inc.
Our executive offices are located at addressStreet1141 S. Rogers Circle
North, #11, Boca Raton, Florida 33487, telephone (561) 750-0410. Our website
address is www.adsouthinc.com. Neither the information nor other statements
contained in our website nor the information contained in any other Internet
website is a part of this prospectus.
Reverse Split
On March 25, 2005, we effected a one-for-15 reverse split of our common
stock. All share and per share information in this prospectus retroactively
reflect such reverse split.
Issuance of Securities to the Selling Stockholders
The selling stockholders acquired their shares in private placements
during 2005.
In February 2005, we issued to ten of the selling stockholders (i) our
10% convertible notes in the principal amount of $810,100; (ii) 1,620,200 shares
of common stock, and (iii) warrants to purchase 675,083 shares of common stock
at an exercise price of $1.28 per share, for which we received $810,100. At the
closing of our June 2005 private placement, we paid a total of $792,120 to nine
of these investors who held convertible notes in the principal amount of
$660,100. The subscription agreements relating to the issuance of the notes gave
us the right to redeem the notes at a premium and gave the holders of the notes
the right to demand redemption of the notes at a premium if we raise money in a
subsequent private placement. In connection with our payment of the notes, the
investors also cancelled warrants to purchase 550,087 shares of common stock.
The remaining $150,000 principal amount of convertible notes, together with the
warrants and shares of common stock issued in connection with the issuance of
the notes, were exchanged for shares of series B preferred stock and warrants,
based on the amount of principal and interest being exchanged. The three selling
stockholders whose notes were repaid hold 38,700 shares of common stock which
they may sell pursuant to this prospectus.
In May 2005, we issued to two of the selling stockholders (i) our 12%
convertible notes due March 2007 in the principal amount of $650,000, (ii)
270,833 shares of common stock, and (iii) warrants to purchase 812,500 shares of
common stock at an exercise price of $1.275 per share, for which we received
$650,000. These two selling stockholders exchanged the notes, shares of common
stock and warrants issued in the May private placement for shares of series B
preferred stock and warrants, based on the amount of principal and interest
being exchanged. As a result, none of the shares of common stock issued or
issuable upon conversion of the notes and exercise of warrants are included in
this prospectus.
In June 2005, we completed a private placement of our series B
preferred stock with common stock purchase warrants pursuant to a purchase
agreement with three of the selling stockholders. Pursuant to the agreement, one
selling stockholder purchased 925,926 shares of series B preferred stock and
warrants to purchase 9,058,780 shares of the common stock, and the two selling
stockholders who participated in the May 2005 private placement (one of whom
participated in the February 2005 private placement) purchased a total of
300,361 shares of series B preferred stock and warrants to purchase 2,941,219
shares of common stock in exchange for the cancellation of (i) principal and
interest on $150,000 of the promissory note we issued in February 2005 and the
$650,000 promissory notes we
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issued in May 2005, (ii) warrants to purchase a total of 937,500 shares of
common stock issued in the February and May 2005 private placements and (iii)
570,833 shares of common stock which were issued in the February and May 2005
private placements. When they were issued in June 2005, each share of series B
preferred stock was convertible into nine shares of common stock.
The terms of the stock purchase agreement related to the June 2005
private placement required the issuance of additional shares of series B
preferred stock if certain earnings benchmarks were not achieved for the year
ended December 31, 2005. Such earnings benchmarks were not met and on March 23,
2006, the holders of the series B preferred stock agreed to an equivalent
increase in the conversion rate of the remaining outstanding shares of series B
preferred stock in lieu of issuing additional shares of series B preferred
stock. Effective March 21, 2006, each outstanding share of series B preferred
stock was convertible into 12.15 shares of common stock, an increase of 35% from
the original conversion rate of 9 shares of common stock.
The terms of the stock purchase agreement related to the June 2005
private placement requires us to pay liquidated damages for not maintaining an
effective registration statement by issuing additional shares of series B
preferred stock. Our decision to sell our products segment required us to
reclassify that business as a discontinued operation and as a result our
registration statement relating to the shares of our common stock issuable from
the conversion of the series B preferred stock was not effective from April 11,
2006 to December 5, 2006. As of September 30, 2006, we issued an additional
122,589 shares of series B preferred stock in payment of the liquidated damages
and we are required to issue an additional 52,423 shares of series B preferred
stock in payment of liquidated damages for the period from September 30, 2006 to
December 5, 2006. On December 11, 2006, as a result of our decision to dispose
of our generator sales segment, the registration statement was no longer
current. As a result, we are continuing to accrue additional liquidated damages.
At December 11, 2006, there were 1,247,347 shares of series B preferred
stock outstanding, which were convertible into 15,155,263 shares of common
stock. As a result of the adjustment in the conversion price and the liquidated
damages, the total shares of common stock issuable upon conversion of the series
B preferred stock increased from 11,039,013 shares to 16,770,063 shares, as of
December 11, 2006, of which 1,614,800 shares have been sold and 9,424,213 shares
of common stock are being offered for resale pursuant to this prospectus.
On November 1, 2006, we reduced the exercise price of warrants to
purchase 2,500,000 shares, which were issued in the June 2005 private placement
and had an exercise price of $.65, to $.06 per share, reduced the exercise price
of warrants to purchase 2,500,000 shares, which were issued in the June 2005
private placement and had an exercise price of $1.20, to $.06 per share, and the
exercise price of the remaining warrants to purchase 7,000,000 shares, issued in
the June private placement was reduced to $.10. The holders of the warrants have
a ninety day period commencing on the first trading day following the date the
Securities Exchange Commission declares effective a post-effective amendment on
Form SB-2, provided however, that in the event the warrant holders exercise a
specified portion of the warrants during the ninety day period, the reduced
exercise prices will remain in effect until the expiration of the warrants. On
December 7, 2006, a warrant was exercised purchasing 450,000 shares of common
stock for $.06 per share. On December 18, 2006, we reduced the exercise price of
all of the outstanding warrants to purchase an aggregate of 11,550,000 shares
which were issued in the June 2005 private placement to $.03 per share and
shortened their expiration dates from June 17, 2010 to June 2009. As a result,
the total shares subject to these warrants being offered for resale pursuant to
this prospectus are 12,000,000 of which 450,000 are outstanding.
5
In connection with the February, May and June 2005 private placements,
we issued to brokers and their designees warrants to purchase an aggregate of
893,350 shares of common stock. The terms of two of the broker warrants issued
in connection with the February 2005 private placement provided the holders with
certain adjustment benefits whereby as a result of the March 21, 2006 increase
in the conversion rate of the series B preferred stock, and the November 1, 2006
and December 18, 2006 reductions in exercise price of the warrants held by the
series B preferred stockholders, the number of shares subject to the two broker
warrants increased from 135,017 shares to 2,700,338 shares. As a result, the
total shares subject to all of the broker warrants were increased from 893,350
to 3,458,671, of which 893,350 shares are being offered for resale pursuant to
this prospectus.
We are registering the 488,700 outstanding shares of common stock held
by selling stockholders, 9,982,566 shares of common stock which are issuable
upon conversion of the series B preferred stock, and 12,893,350 shares of common
stock issuable upon conversion of the warrants issued to the investors and the
brokers in the three private placements. Selling stockholders have previously
sold 1,494,835 shares of common stock. See "Selling Stockholders."
The Offering
Limitation on Issuance The holders of the series B preferred stock and the
of Common Stock holders of the warrants that were issued in the
June 2005 private placement can not convert their
shares of series B common stock or exercise the
warrants issued in the private placement to the
extent that such exercise would result in the
holders and their affiliates owning more than 4.9%
of our outstanding common stock.
Outstanding Shares of 9,759,065 shares(1),(2)
Common Stock before this
Offering
Common Stock to be 32,115,328 shares(1)
Outstanding After Offering
and the Conversion and
Exercise of the Registered
Securities:
Use of Proceeds: We will not realize any of the proceeds from the
sale of any shares by the selling stockholders. In
the event that any selling stockholders exercise
their warrants, we would receive the exercise
price. If all warrants are exercised, we would
receive approximately $678,000, all of which,
if and when received, would be used for working
capital and other corporate purposes. See "Use of
Proceeds".
Principal Markets: The common stock is traded on the OTC Bulletin
Board.
Trading Symbol: ASPR
(1) Does not include a total of 5,445,150 shares of common stock, of which
(a) 2,870,000 shares are reserved for options, stock grants or other
equity-based incentives granted or available for grant
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under our stock incentive plans; (b) 3,533,335 shares are reserved for
outstanding options which were not issued pursuant to our stock
incentive plans, (c) 61,520 shares are issuable upon exercise of other
outstanding warrants held by persons other than the selling
stockholders, and (d) 8,296,371 shares issuable upon conversion of
series B preferred stock and exercise of warrants held by selling
stockholders that are not included in this prospectus.
(2) Does not include the shares of common stock issuable upon conversion of
the series B preferred stock or exercise of warrants held by the
selling stockholders.
Summary Financial Information
(in thousands, except per share amounts)
The following information as at December 31, 2005 and for the years
ended December 31, 2005 and 2004 has been derived from our audited
financial statements which appear elsewhere in this prospectus. The
following information as at September 30, 2006 and for the nine months
ended September 30, 2006 and 2005 has been derived from our unaudited
financial statements which appear elsewhere in this prospectus.
Consolidated Statement of Operations Information:
Nine Months Ended
September 30, Year Ended December 31,
2006 2005 2005 2004
---- ---- ---- ----
Revenues $4,372 $ 5,755 $7,730 $2,925
Operating (loss) income (1,914) 147 245 (4,288)
Loss from continuing operations (1,928) (98) (14) (4,302)
Gain on disposal of discontinued segment 2,611 - - -
Loss from discontinued operations (6,183) (317) (655) (1,509)
Net loss (5,500) (415) (669) (5,811)
Deemed dividend - series B
preferred stock (1,344) (1,344) -
Net loss attributable to common ($5,500) ($1,759) ($2,013) ($5,811)
Basic and diluted loss per share of
common stock:
Loss from continuing operations ($.21) ($.19) ($.17) ($.78)
Loss from discontinued
operations ($.69) ($.04) ($.09) ($.27)
Gain on disposal of discontinued
segment $.29 - - -
Net loss attributable to common
sharehiolders ($.61) ($.23) ($.26) ($1.05)
Weighted average shares of
common stock outstanding (basic
and diluted) 9,015 7,553 7,666 5,560
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Consolidated Balance Sheet Information:
September 30, December 31,
2006 2005
---- ----
Working capital from continuing operations $ 898 $ 789
Working capital (deficiency), including
discontinued operations (1,877) 2,084
Total assets 5,714 6,023
Total liabilities 6,604 3,472
Accumulated deficit (11,980) (6,480)
Stockholders' equity (deficiency) (890) 2,551
RISK FACTORS
An investment in our securities involves a high degree of risk. In
determining whether to purchase our securities, you should carefully consider
all of the material risks described below, together with the other information
contained in this prospectus before making a decision to purchase our
securities. You should only purchase our securities if you can afford to suffer
the loss of your entire investment.
General Risks Concerning our Business
We have incurred continuing losses from our continuing operations, and we may
not be able to operate profitably.
We incurred losses from continuing operations of $1.9 million during
the nine months ended September 30, 2006 and $14,000 for the year ended December
31, 2005. The loss for the nine month period reflects the significantly reduced
level of business in our advertising segment, with limited advertising revenue
during the second and third quarters of 2006. Our losses are continuing. We
believe that, in the long term, our ability to be profitable is dependent upon
our ability to attract new advertising customers. We cannot assure you that we
can or will be able to operate profitably.
We require significant additional funds both for operations and to develop,
operate and expand our business.
At September 30, 2006, we had a working capital of approximately
$898,000 million from continuing operations. Our ability to obtain any financing
will be dependent upon such factors as our ability to demonstrate to potential
lenders or investors that our advertising business can be sufficiently
profitable to satisfy the requirements of the lender or investor and the
disposition of the pending litigation with a former customer. Lenders or
investors may be reluctant to lend to us or invest in us if they perceive that a
significant portion of the proceeds may be used to settle or pay a judgment with
respect to litigation or to fund the defense of the litigation. Our failure to
obtain the funds necessary to pay our creditors could result in a termination of
our business and could make it necessary for us to seek protection under the
Bankruptcy Code.
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The terms on which we may raise additional capital may result in significant
dilution and may impair our stock price.
Because of our stock price, the terms of our June 2005 private
placement, and our pending litigation, it may be difficult for us to raise the
additional capital we require for our present businesses and for any planned
expansion. We cannot assure you that we will be able to get additional financing
on any terms, and, if we are able to raise funds, it may be necessary for us to
sell our securities at a price which is at a significant discount from the
market price and on other terms which may be disadvantageous to us. In
connection with any such financing, we may be required to provide registration
rights to the investors and pay damages to the investor in the event that the
registration statement is not filed or declared effective by specified dates.
The price and terms of any financing which would be available to us could result
in both the issuance of a significant number of shares and significant downward
pressure on our stock price and could result in a reduction of the conversion
price of the series B preferred stock and exercise price of the warrants held by
the selling stockholders.
We may not realize significant funds from the sale of or products division.
On August 1, 2006, we sold the assets, subject to liabilities, of our
product system to MFC Development Corp., for which we received a note for
$1,525,000, of which $381,500 was paid at closing, and 5,500,000 shares of MFC's
common stock. We received an additional $381,500 in September 2006 and the
remaining balance is payable in monthly installment of $22,000 plus interest.
The principal of the note is subject to adjustment based on a post-closing audit
of the assets and liabilities transferred and assumed. The shares are restricted
securities, and there is not an active market in MFC's common stock and we may
have difficulty selling the MFC stock in private transactions. We cannot assure
you either that MFC will have the resources to make the remaining payments on
the notes or that we will be able to raise any significant funds from the sale
of the MFC stock.
Pending litigation against us by a former advertising client, if adversely
determined, could impair our ability to continue in business.
On May 15, 2006, we were served in an action in the Bankruptcy Court in
the State of placeStateNew Jersey by N.V.E., Inc. claiming breach of contract
and damages approximating $3.4 million plus costs, with claims for treble
damages and punitive damages. NVE was our largest advertising customer in 2005.
Other defendants in the action are John Acunto, Jr., a principal stockholder and
former chief executive officer, John Cammarano, a former director and former
chief executive officer, Anton Lee Wingeier, a former director, former chief
executive officer and former chief financial officer, and one current and two
former employees who are not officers. An adverse judgment in this action may
impair our ability to continue in business because of both the damages to our
reputation that would results from an adverse judgment and a potential
significant financial liability which we may not have the current funds to pay.
If we make any acquisitions, they may disrupt or have a negative impact on our
business.
If we make acquisitions, we could have difficulty integrating the
acquired companies' personnel and operations with our own. Any acquisition may
result in a change of our business. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
affect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:
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* the difficulty of integrating acquired products, services or
operations;
* the potential disruption of the ongoing businesses and
distraction of our management and the management of acquired
companies;
* the difficulty of incorporating acquired rights or products
into our existing business;
* difficulties in disposing of the excess or idle facilities of
an acquired company or business and expenses in maintaining
such facilities;
* difficulties in maintaining uniform standards, controls,
procedures and policies;
* the potential impairment of relationships with employees and
customers as a result of any integration of new management
personnel;
* the potential inability or failure to achieve additional sales
and enhance our customer base through cross-marketing of the
products to new and existing customers;
* the effect of any government regulations which relate to the
business acquired;
* potential unknown liabilities associated with acquired
businesses or product lines, or the need to spend significant
amounts to retool, reposition or modify the marketing and sales
of acquired products or the defense of any litigation, whether
of not successful, resulting from actions of the acquired
company prior to our acquisition.
Our business could be severely impaired if and to the extent that we
are unable to succeed in addressing any of these risks or other problems
encountered in connection with these acquisitions, many of which cannot be
presently identified, these risks and problems could disrupt our ongoing
business, distract our management and employees, increase our expenses and
adversely affect our results of operations.
If we enter into new business activities we may not be able to operate those
businesses profitably.
Our initial business activity was the advertising and direct marketing
business. In 2004, we entered the business of acquiring rights to products which
we believed could enhance our overall business and marketing and selling the
products. In 2005, we decided to enter the business of selling and installing
generators. Neither of these businesses ever operated at a profit and we
disposed of both businesses during the second half of 2006. We may enter into
new businesses which may be significantly different from the advertising
business and may be businesses in which we have no experience. We cannot assure
you that any businesses we may enter will ever be profitable or will ever
generate a positive cash flow.
Because we are dependent on Mr. John Acunto, a consultant and principal
stockholder, the failure to hire qualified key personnel could harm our
business.
Our business is largely dependent upon John P. Acunto, Jr., who,
together with his wife, is our largest stockholder and who is a consultant to
us. Our advertising business is completely dependent on Mr. Acunto and would be
adversely affected if he terminated his relationship with us. Although we have a
consulting agreement with Mr. Acunto, the agreement does not guarantee that he
will continue with us. We do not have any officers who are actively engaged in
our business on a full-time basis. Following the resignation of Anton Lee
Wingeier as chief executive officer and chief financial officer, we elected one
of our directors, Loren R. Haynes as acting chief executive officer and another
director
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, Harlan I. Press, as acting chief financial officer while we search for a chief
executive officer and chief financial officer. The reduced scope of our
operations, together with the pending litigation and our history of entering
into businesses which do not generate profits may make it more difficult to hire
qualified officers. We cannot assure you that we will be successful in engaging
or retaining such personnel and the failure to engage qualified personnel will
have a material adverse effect upon our business. See "Management - Directors
and Executive Officers."
Control by our present principal stockholder might limit independent, public
stockholder influence over us and prevent a third party from acquiring us even
if an acquisition is in the best interest of our stockholders.
As of December 15, 2006, John P. Acunto, Jr., together with his wife,
Angela E. Acunto, owns a total of 3,495,086 shares of common stock, representing
more than 37% of our outstanding shares. In addition, Mr. and Mrs. Acunto hold
presently exercisable stock options to purchase a total of 2,815,982 shares of
common stock. As a result, Mr. and Mrs. Acunto may have the ability to control
the election of directors and approval of any other matters that may be brought
to a vote of stockholders. Mr. Acunto is a guarantor of the obligations of our
former 80%-owned subsidiary, Genco Power Systems, Inc., to New Valu, Inc.,
Genco's principal lender. In connection with the transfer by us our equity in
Genco to New Valu in December 2006, Mr. Acunto agreed that he will cause the
common stock which he and his wife own to be pledged to New Valu as collateral
for his obligations to New Valu.
The issuance of shares through our stock compensation and incentive plans may
dilute the value of existing stockholders.
We anticipate using stock options, stock grants and other equity-based
incentives, to provide motivation and compensation to our officers, employees
and key independent consultants. The award of any such incentives will result in
an immediate and potentially substantial dilution to our existing stockholders
and could result in a decline in the value of our stock price. Furthermore, as a
result of required changes in the method of accounting for the granting of stock
in 2006, we are expensing the value of options granted to our employees, which
results in a greater loss from our operations.
Because of our dependence on a limited number of clients, our failure to
generate business from new customers for our advertising business could impair
our ability to continue in that business.
During 2005, 84% of our revenues were from NVE, which is a plaintiff in
the litigation against us. See "Business - Legal Proceedings." During 2004, 92%
of our revenues were derived from one advertising client that was not a client
in 2005 and during 2004 we reserved $482,000 of receivables from such client.
During the nine months ended September 30, 2006, revenues from two advertising
customers, who are no longer customers - NVE, which represented 71%, and one
other customer which represented 27% of total revenues. All of this revenue was
generated in the first quarter of 2006; we did not generate any advertising
revenue during the second quarter of 2006 and nominal revenue during the third
quarter of 2006. Since our inception we have remained dependent on a limited
number of clients, and we have not had a continuing relationship with the
largest of these clients. Both the absence of a significant client base and our
failure to develop continuing relationships with our advertising clients may
impair our ability to attract new advertising clients. We cannot assure you that
we will be able to operate our advertising business profitably.
11
Because we are responsible for adverting placed on behalf of our advertising
clients, we are exposed to a credit risk associated with sales to our
advertising clients.
Because of the nature of the adverting business, we are exposed to
credit risk associated this business. When we place advertising with a media on
behalf of a client, we have an obligation to make payment to the media,
regardless of whether we are paid by our clients. We may not have the financial
resources to make payments on behalf of our advertising clients, and, to the
extent that our clients do not pay us in a timely manner, it may be difficult
for us to honor our obligations to the media.
Because our advertising clients are generally smaller companies that are highly
subject to fluctuations in the economy, our advertising business will be
especially subject to adverse economic trends.
Since downturns in the economy have generally had a more severe effect
upon smaller companies, especially single-product companies with limited product
acceptance, than larger companies, any changes or anticipated changes in the
economy which cause these companies to reduce their advertising, marketing and
promotion budget or which affect the ability of these companies to borrow money
or raise capital or otherwise implement their business plans would impair our
advertising business by reducing if not eliminating the requirements of these
companies for our services or the ability of these companies to pay for our
services. Our largest advertising clients for 2005 filed for bankruptcy and our
largest advertising client for 2004 substantially reduced the scope of its
operations.
Our failure to develop and sustain long-term relationships with our clients
would impair our ability to continue our advertising business.
Almost all of our agreements for our advertising services are performed
pursuant to short-term or single project engagements. If our clients do not
continue to use our services, and if we are unable always to replace departing
clients or generate new business in a timely or effective manner our advertising
business could suffer a significant loss in revenue. For the second quarter of
2006 we had no advertising revenues and we had nominal advertising revenue for
the third quarter of 2006.
Because we are a small company, with only modest revenue and significant losses
to date from our advertising business, we may not be able to compete
effectively.
Our advertising business generated revenues of $4,372,000 for the nine
months ended September 30, 2006, on which we incurred a loss of $1,928,000. For
the year ended December 31, 2005, our advertising business generated revenues of
$7,730,000, on which we operated on a breakeven basis. For 2004, our advertising
business generated revenues of $2,925,000, on which we sustained a loss of
$4,302,000 (including $3,718,000 of non cash stock based compensation expense
for 2004 compared to $141,000 for 2005). With this level of business, it is
difficult for us to compete in the highly competitive advertising market, which
is dominated by major national and international advertising agencies, major
providers of creative or media services which are not themselves advertising
agencies, and a significantly larger number of regional and local agencies. The
client's perception of the quality of our creative product, our reputation and
our ability to serve clients are, to a large extent, factors in determining our
ability to generate and maintain advertising business. The litigation by NVE
against us is also affecting our ability to generate business from potential
advertising clients. Our size and our lack of significant revenue and our losses
may affect the way that potential clients view us.
12
Risks Concerning our Common Stock and this Offering
Because we are subject to the "penny stock" rules, you may have difficulty in
selling our common stock.
Because our stock is traded on the OTC Bulletin Board and our stock
price is less than $5.00, our stock is subject to the SEC's penny stock rules,
which impose additional sales practice requirements and restrictions on
broker-dealers that sell our stock to persons other than established customers
and institutional accredited investors. These rules may affect the ability of
broker-dealers to sell our common stock and may affect your ability to sell any
common stock you may own. See "Description of Capital Stock - Penny Stock Rules"
for information relating to these rules.
According to the SEC, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include:
* Control of the market for the security by one or a few
broker-dealers that are often related to the promoter or
issuer;
* Manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases;
* "Boiler room" practices involving high pressure sales tactics
and unrealistic price projections by inexperienced sales
persons;
* Excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
* The wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with
consequent investor losses.
As an issuer of "penny stock" the protection provided by the federal securities
laws relating to forward looking statements does not apply to us.
Although the federal securities law provide a safe harbor for
forward-looking statements made by a public company that files reports under the
federal securities laws, this safe harbor is not available to issuers of penny
stocks. As a result, we will not have the benefit of this safe harbor protection
in the event of any based upon an claim that the material provided by us,
including this prospectus, contained a material misstatement of fact or was
misleading in any material respect because of our failure to include any
statements necessary to make the statements not misleading.
Because our stock is thinly traded, fluctuations in our operating results and
announcements and developments concerning our business affect our stock price.
Historically, there has been volatility in the market price for our
common stock. Our quarterly operating results, the number of stockholders
desiring to sell their shares, changes in general economic conditions and the
financial markets, the execution of new contracts and the termination or
expiration of existing contracts, financial difficulties affecting our clients
and other developments affecting us, could cause the market price of our common
stock to fluctuate substantially.
13
Because our stock is thinly traded, we cannot predict when or whether an active
market for our common stock will develop.
In the absence of an active trading market, you may have difficulty
buying and selling or obtaining market quotations for our stock; the market
visibility for our stock may be limited, and the lack of visibility for our
common stock may have a depressive effect on the market price for our common
stock.
Our stock price may be affected by our failure to meet projections and estimates
of earnings developed either by us or by independent securities analysts.
Our operating results may fall below the expectations of securities
analysts and investors as well as our own projections. In the past, we have
issued guidance as to future results, and our actual results did not meet the
results anticipated by our guidance or we have lowered our anticipated results
in the face of adverse developments. The market price for our common stock would
likely be materially adversely affected by our failure to meet any such
anticipated projections as well as any material reduction in any guidance we may
give with respect to our revenue or earnings.
Sales of common stock by the selling stockholders may have a depressive effect
upon the market for our common stock.
The number of shares of common stock being offered for sale constitutes
a significant percentage of our outstanding common stock and an even higher
percentage of the public float. If the selling stockholders sell a significant
number of shares of common stock, the market price of our common stock may
decline. Furthermore, the sale or potential sale of the shares offered by the
selling stockholders as well as any additional shares which we may be required
to issue to the selling stockholders pursuant to their subscription agreements
could have a significant depressive effect on our stock price which could make
it difficult for us to raise funds from other sources.
If we issue shares of common stock at a price less than the conversion price of
the series B preferred stock we may be required to issue a significant number of
additional shares of common stock.
We are required to issue additional shares of common stock and reduce
the conversion price of the notes and the exercise price of the warrants if,
while the notes and warrants are outstanding, we offer or issue common stock at
a lower price so that the effective price paid by the selling stockholders and
the conversion price of the notes and the exercise price of the warrants will be
equal to the lower price.
Because selling stockholders have a right of first refusal for future offering
of our stock, we may have difficulty in raising additional funds if required for
our business.
The selling stockholders who purchased their securities in the June
2005 private placement, have the right to participate in any future funding on
terms whereby each they can purchase the securities offered at 80% of the
offering price. These provisions may prevent us from raising additional funds.
We are required to pay liquidated damages since our board does not consist of a
majority of independent directors.
The purchase agreement relating to the June 2005 private placement
requires us to appoint, 45 days from the closing date, such number of
independent directors that would result in a majority of our directors being
independent directors, that the audit committee would be composed solely of
independent directors and the compensation committee would have a majority of
independent directors.
14
Our failure to meet these requirements would results in our payment of
liquidated damages that are payable by the issuance of additional shares of
series B preferred stock. We are not in compliance with the requirement, since a
majority of our directors are not independent.
Because we did not keep a registration statement effective, we are required to
issue additional shares of series B preferred stock as liquidated damages.
The registration rights agreement which we executed in connection with
the securities purchase agreement relating to the June 2005 sale of series B
preferred stock requires us to issue additional shares of preferred stock if we
fail to keep a registration statement covering the underlying shares of common
stock current and effective. In April 2006, the registration covering these
shares ceased to be current and effective because of our decision to treat the
products division as a discontinued operation. As a result, as of September 30,
2006, we issued an aggregate of 122,589 shares of series B preferred stock and
damages and we are required to issue an additional 52,423 shares of series B
preferred stock in payment of liquidated damages for the period from September
30, 2006 to December 5, 2006. On December 11, 2006, as a result of our decision
to dispose of our generator sales segment, the registration statement was no
longer current. As a result, we are continuing to accrue additional liquidated
damages up to a maximum of 613,280 shares of series B preferred stock.
The registration and potential sale by the selling stockholders of a significant
number of shares could encourage short sales by third parties.
The significant downward pressure on our stock price caused by the sale
or potential sale of a significant number of shares could cause our stock price
to decline, thus allowing short sellers of our stock an opportunity to take
advantage of any decrease in the value of our stock. The presence of short
sellers in our common stock may further depress the price of our common stock.
Because we are not subject to compliance with rules requiring the adoption of
certain corporate governance measures, our stockholders have limited protections
against interested director transactions, conflicts of interest and similar
matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and
enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq
Stock Market as a result of Sarbanes-Oxley, require the implementation of
various measures relating to corporate governance. These measures are designed
to enhance the integrity of corporate management and the securities markets and
apply to securities which are listed on those exchanges or the Nasdaq Stock
Market. Because we are not presently required to comply with many of the
corporate governance provisions and because we chose to avoid incurring the
substantial additional costs associated with such compliance any sooner than
necessary, we have not yet adopted all of these measures. A majority of our
directors are not independent, and we do not have independent audit or
compensation committees. We also are not in compliance with requirements
relating to the distribution of annual and interim reports, the holding of
stockholders meetings and solicitation of proxies for such meeting and
requirements for stockholder approval for certain corporate actions. Until we
comply with such corporate governance measures, regardless of whether such
compliance is required, the absence of such standards of corporate governance
may leave our stockholders without protections against interested director
transactions, conflicts of interest and similar matters and investors may be
reluctant to provide us with funds necessary to expand our operations.
15
Failure to achieve and maintain internal controls in accordance with Section 404
of the Sarbanes-Oxley Act could have a material adverse effect on our business
and operating results and stockholders could lose confidence in our financial
reporting.
Effective internal controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, our operating results could be harmed. We
will be required to document and test our internal control procedures in order
to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which
requires increased control over financial reporting requirements, including
annual management assessments of the effectiveness of such internal controls and
a report by our independent certified public accounting firm addressing these
assessments. We must be in compliance with these requirements for 2008. In
preparing to meet such deadline, we may identify deficiencies that we may not be
able to remediate in time to meet the deadline. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to conclude that
we have effective internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an
effective internal control environment could also cause investors to lose
confidence in our reported financial information, which could have a material
adverse effect on our stock price. Our failure to have full-time officers,
including a full-time chief financial officer may impair our ability to maintain
effective internal controls.
Our stock price may be affected by shares of common stock becoming available for
public sale.
We estimate that the public float for our common stock presently
consists of approximately 7.1 million shares of common stock, which excludes the
shares being sold by the selling stockholders. Under the volume limitations of
Rule 144, a stockholder, together with members of his or her family, may not
sell more than 1% of our outstanding common stock in any three-month period.
The issuance and sale of the registered common stock could result in a change of
control.
If issued, the 22,356,263 shares of common stock offered for resale by
the selling stockholders would constitute 70% of our then outstanding common
stock. The percentage would increase to the extent that additional shares of
common stock become issuable upon conversion of the series B preferred stock
pursuant to the anti-dilution provision. Any sale of all or a significant
percentage of those shares to a person or group could result in a change of
control. Any change of control could result in the exercise by our executive
officers of the termination provisions contained in their employment agreements.
FORWARD-LOOKING STATEMENTS
Statements in this prospectus may be "forward-looking statements."
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and are likely to, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those described above and those risks discussed from
time to time in this prospectus, including the risks described under "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this prospectus and in other documents which we file
with the Securities and Exchange Commission. In addition, such statements could
be affected by risks and uncertainties related to product demand, our
16
ability to develop our advertising business, our ability to enter into new
businesses and operate such businesses at a profit, market and customer
acceptance, our ability to raise any financing which we may require for our
operations, competition, government regulations and requirements, pricing and
development difficulties, our ability to make acquisitions and successfully
integrate those acquisitions with our business, as well as general industry and
market conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock by
the selling stockholders. If the selling stockholders exercise any warrants, we
will receive the amount of the exercise price. The maximum total exercise price
is approximately $678,000, which we would receive only if all of the warrants
were exercised at their present exercise price. Any proceeds which we receive
from the exercise of the warrants held by the selling stockholders would be used
for working capital and general corporate purposes. We cannot assure you that
any warrants will be exercised.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders,
the number of shares of common stock owned beneficially by the selling
stockholders as of December 11, 2006, the number of shares of our common stock
that may be offered by the selling stockholders pursuant to this prospectus, the
number of shares owned by the selling stockholders after completion of the
offering. No selling stockholder will own more than 1% of our outstanding common
stock upon completion of the offering. The table and the other information
contained under the captions "Selling Stockholders" and "Plan of Distribution"
has been prepared based upon information furnished to us by or on behalf of the
selling stockholders.
Shares Beneficially Shares Offered Shares Owned
Name Owned for Sale After Offering
- ---- ----- -------- --------------
Barron Partners, LP(1) 20,465,440 16,202,564 4,262,876
Vestal Venture Capital(2) 6,247,506 4,870,606 1,376,900
Richard Molinsky 642,317 551,043 81,567
ACS Holdings, LLC(3) 310,119 310,119 -0-
Steven Pollan 213,398 213,398 -0-
Max Communications, Inc.(4) 200,000 200,000 -0-
Vision Opportunity Master Fund, Ltd.(5) 133,333 133,333 -0-
Atlas Equity Group, LLC(3) 20,200 20,200 -0-
Dawson James Securities, Inc.(6) 50,000 50,000 -0-
Shimon Fishman 5,000 5,000 -0-
(1) Andrew B. Worden, president of the general partner of Barron Partners, has
sole voting and dispositive power over the shares beneficially owned by Barron
Partners.
(2) Allan R. Lyons has sole voting and dispositive power over the shares
beneficially owned by Vestal Venture Capital.
(3) Michael D. Farkas has sole voting and dispositive power over the shares
beneficially owned by ACS Holdings and Atlas Equity Group.
17
(4) Richard Molinsky has sole voting and dispositive power over the shares
beneficially owned by Max Communications.
(5) Adam Benowitz and Randy Cohen have shared voting and dispositive power over
the shares beneficially owned by Vision Opportunity Master Fund.
(6) Dawson James Securities is a broker dealer. Robert D. Keyser and Albert J.
Poliak have shared voting and dispositive power over the shares beneficially
owned by Dawson James Securities.
The shares of common stock being offered by Barron Partners, Vestal
Venture Capital and Richard Molinsky represent the shares of common stock
issuable upon conversion of the series B preferred stock and warrants that were
issued in the June 2005 private placement. See "Selling Stockholders - Private
Placements - June 2005 Private Placement" for information relating to the shares
of common stock issuable to them. The shares owned and offered for sale by Mr.
Molinsky include 200,000 shares of common stock issued upon exercise of warrants
held by Max Communications, Inc., which is wholly owed by Mr. Molinsky.
The shares owned and offered for sale by Max Communications are
beneficially owned by Mr. Molinsky, who is the sole stockholder of Max
Communications, and are also included under shares owned and being offered for
sale by Mr. Molinsky.
The purchase agreement, the certificate of designation relating to the
series B preferred stock and the warrants all provide that the preferred stock
cannot be converted and the warrants cannot be exercised to the extent that the
number of shares of common stock held by the selling stockholder and his
affiliates after such conversion or exercise would exceed 4.9% of the
outstanding common stock. Beneficial ownership is determined in the manner
provided in Section 13(d) of the Securities Exchange Act of 1934 and Regulation
13d-3 of the SEC thereunder. This provision, which cannot be modified without
the approval of the holders of a majority of the outstanding common stock,
limits the ability of the holders of the warrants and series B preferred stock
to convert their shares. Based on our outstanding common stock on December 11,
2006, of 9,759,065 shares, Barron Partners, Vestal Venture Capital and Mr.
Molinsky would not be able to convert series B preferred stock or exercise
warrants for more than 478,194 shares of common stock. As the number of shares
of common stock increases, whether upon conversion of series B preferred stock,
exercise or warrants or for any other reason, the number of shares which could
be issued under this limitation will increase. In the event that any holder of
the series B preferred stock or the warrants issued in the June 2005 private
placement transfers its or his shares of series B preferred stock or warrants,
the transferee, if it is not an affiliate of the transferor, would be subject to
a separate 4.9% limitation. In the table of selling stockholders, all shares
which are issuable upon conversion of series B preferred stock and upon exercise
of warrants are included, even though some of such shares may not be issuable as
a result of the 4.9% limitation and thus may not be deemed beneficially owned by
the selling stockholders under Regulation 13d-3. The number of shares shown in
the selling stockholders table under the heading "Shares Owned After Offering"
does not give effect to the 4.9% limitation.
All of the warrants held by Vision Opportunity Master Fund and warrants
to purchase 159,900 shares held by ACS Holdings and 140,100 shares held by
Steven Pollan are also subject to the same 4.9% limitation. This limitation does
not affect the other warrants held by ACS Holdings and Mr. Pollan.
The shares being offered by Vision Opportunity Master Fund represent
shares of common stock issuable upon exercise of warrants. Since the number of
shares beneficially owned by Vision Opportunity Master Fund and its affiliates
is less that 4.9% of our outstanding common stock, the 4.9% limitation does not
affect Vision Opportunity Master Fund's ability to exercise its warrant.
18
The shares being offered by Steve Pollan include 13,500 shares of
common stock owned by him and 199,898 shares of common stock issuable upon
exercise of warrants owned by him.
The shares being offered by ACS Holdings includes 310,119 shares of
common stock issuable upon exercise of warrants owned by ACS Holdings. ACS
Holdings is the parent of Atlas Capital Services, and Messrs. Shimon Fishman,
and Steven Pollan are officers of either Atlas Capital Services or one of its
affiliates. As a result, it is possible the ability of ACS Holdings to exercise
its warrant to purchase 159,900 shares may be affected by the 4.9% limitation.
This limitation does not affect the exercisability of the other warrants held by
ACS Holdings.
The shares being offered by Dawson James represent shares issuable upon
exercise of a warrant held by it.
None of the selling stockholders has, or within the past three years
has had, any position, office or material relationship with us or any of our
predecessors or affiliates except as follows:
See "Selling Stockholders - Private Placements" for information
relating the purchase of securities from us and the payment of debt and
cancellation of warrants held by selling stockholders.
Atlas served as placement agent for the February, May and June 2005
private placements. When we engaged Atlas, we issued to Atlas a warrant to
purchase 33,334 shares of common stock for nominal consideration. This option
was exercised at or about the time of the February 2005 private placement. For
services rendered by Atlas in connection with the three private placements we
paid Atlas cash compensation totaling $242,010. We also issued to Atlas'
designees, ACH Holdings and Mr. Steven Pollan, warrants to purchase 135,017
shares of common stock at $.60 per share, 75,000 shares of common stock at $.48
per share and 300,000 shares of common stock at $.30 per share. The terms of the
warrant to purchase 135,017 shares provided the holder with certain adjustment
benefits whereby as a result of the March 21, 2006 increase in the conversion
rate of the series B preferred stock, and the November 1, 2006 and December 18,
2006 reductions in exercise price of the warrants held by the series B preferred
stockholders, the number of shares subject to the February 2005 warrant
increased from 135,017 shares to 2,700,338 shares and the exercise price was
decreased from $.60 per share to $.03 per share.
In connection with the May 2005 private placement, we paid Dawson James
Securities a cash fee of $24,000 and issued to Dawson James Securities a
warrants to purchase a total of 50,000 shares at $.48 per share.
In connection with the June 2005 private placement, Liberty Company
Financial, LLC was the advisor to Barron Partners, and at the closing, we paid
Liberty $125,000 and issued to Liberty warrants to purchase 333,333 shares of
common stock at $.30 per share. Liberty transferred warrants to purchase 200,000
shares to Max Communications, which is wholly owned by Richard Molinsky and
transferred warrants to purchase 133,333 shares to Vision Opportunity Master
Fund..
Private Placements
February 2005 Private Placement
Pursuant to subscription agreements dated February 17 and 22, 2005, we
sold, to ten investors in a private placement, for $810,100, (i) our 10%
convertible notes due December 2006 in the aggregate principal amount of
$810,100, (ii) 1,620,200 shares of common stock, and (iii) warrants to purchase
675,087 shares of common stock at an exercise price of $1.275 per share. We also
paid the investors'
19
legal expenses. We had the right to prepay the convertible notes issued in the
February 2005 private placement at a premium and the holders had the right to
demand that the notes be redeemed at a premium in the event of a subsequent
private placement. Contemporaneously with the June 2005 private placement, we
paid notes in the principal amount of $660,100 to those investors. The following
table set forth with respect to the investors who purchased notes in the
February 2005 private placement the principal amount of the note which was
cancelled, the number of shares subject to warrants that were cancelled, the
amount we paid the investor and the number of shares of common stock retained by
them.
Principal Shares Shares
Name Amount Warrants Payment Retained Offered
- ---- ------ -------- ------- -------- -------
Omega Capital Small Cap Fund $250,000 208,334 $300,000 500,000 -
Platinum Partners Value Arbitrage, LP 250,000 208,334 300,000 500,000 -
BL Cubed LLC 75,000 62,500 90,000 150,000 -
Atlas Equity Group, LLC 27,600 23,000 33,120 55,200 20,200
196 Beach 113 Corp. 17,500 14,584 21,000 35,000 -
Shimon Fishman 12,500 10,417 15,000 25,000 5,000
Steve Pollan 12,500 10,417 15,000 25,000 13,500
Robert Schechter 12,500 10,417 15,000 25,000 -
Nicholas Hirsch 2,500 2,084 3,000 5,000 -
- ------------------------------------- --------------- --------------- --------------- --------------- ---------------
Total $660,100 550,087 $792,120 1,320,000 38,700
- ------------------------------------- --------------- --------------- --------------- --------------- ---------------
May 2005 Private Placement
Pursuant to subscription agreements dated May 16 and May 20, 2005, we
sold to two investors, Vestal Venture Capital and Richard Molinsky, in a private
placement, for $650,000, (i) our 12% convertible notes due March 2007 in the
principal amount of $650,000, (ii) 270,834 shares of common stock, and (iii)
warrants to purchase 812,500 shares of common stock at an exercise price of
$1.275 per share. We also reimbursed the investors for legal expenses of
$10,000. The notes, warrants and shares of common stock issued in the May 2005
private placement were exchanged for shares of series B preferred stock and
warrants in the June 2005 private placement.
June 2005 Private Placement
In June 2005, we issued to Barron Partners 925,926 shares of series B
preferred stock and warrants to purchase 9,058,780 shares of the common stock
for $2,500,000. We also issued to Vestal Venture Capital 281,942 shares of
series B preferred stock and warrants to purchase 2,758,378 shares of common
stock in exchange for convertible notes in the aggregate principal amount of
$750,000, which were issued in the February and May 2005 private placements, and
the warrants and shares of common stock that were issued to Vestal Venture
Capital in those private placements, and to Richard Molinsky 18,689 shares of
series B preferred stock and warrants to purchase 182,842 shares of common stock
in exchange for the convertible note in the amount of $50,000 which was issued
in the May 2005 private placement and the warrants and shares of common stock
that were issued to Mr. Molinsky in that private placement.
20
The following schedule sets forth the number of shares of common stock
issuable upon conversion of the series B preferred stock and each of the
outstanding warrants issued to the investors in the private placement. Warrants
to purchase 450,000 shares of common stock have been exercised. Although the
warrants initially had exercise prices that ranged from $.65 to $1.80, the
exercise price of all of the outstanding warrants has been reduced to $.03 per
share.
Series B
Name Preferred Stock Warrants
- ---- --------------- --------
Barron Partners LP 12,596,210 8,608,780
Vestal Venture Capital 3,914,378 2,758,378
Richard Molinsky 259,475 182,842
---------- ----------
Total 16,770,063 11,550,000
---------- ----------
Pursuant to the preferred stock purchase agreement relating to the
issuance of the series B preferred stock and warrants in the June 2005 private
placement:
* The investors have the right to participate in any future funding
on terms whereby they can purchase the securities offered at 80%
of the offering price.
* We agreed that, within 45 days from the closing date, June 17,
2005, we will have appointed such number of independent directors
that would result in a majority of our directors being independent
directors, that our audit committee would be composed solely of
independent directors and our compensation committee would have a
majority of independent directors. Our failure to meet these
requirements would results in the payment of liquidated damages
that are to be paid by the issuance of additional shares of series
B preferred stock.
* We and the investors entered into a registration rights agreement
pursuant to which we agreed to file, within 30 days after the
closing, the registration statement of which this prospectus is a
part.
* Mr. John Cammarano, Jr., until December 18, 2006 a director and
until May 1, 2006, the chief executive officer, and Mr. Anton Lee
Wingeier, until December 10, 2006, the chief executive and chief
financial officer, each agreed that (i) he would not publicly sell
any shares of our common stock during the two-year period
commencing on the date of the purchase agreement, (ii)
notwithstanding any contrary provisions of any employment
agreement or other understanding, he will not receive any bonus
except for a bonus based on growth in earnings per share as
determined by a compensation committee of the board of directors
the majority of members of which are independent directors and
(iii) in the event of a termination of his employment, other than
a termination by us that is not for cause or as a result of his
death or disability, his severance will not exceed one year's
compensation. Mr. Cammarano and Mr. Wingeier are no longer
employed by us.
* Our board of directors approved and agreed to submit to our
stockholders for their approval, an amendment to our articles of
incorporation to (i) eliminate the series A convertible preferred
stock, (ii) increase the number of authorized shares of preferred
stock to 10,000,000 shares and give the board of directors the
right to determine the rights, preferences, privileges and
limitations of the shares of preferred stock and (iii) increase
the number of authorized shares of common stock to 60,000,000
shares. This amendment was approved by our stockholders in 2005.
21
* We agreed that, upon the effectiveness of the increase in the
authorized preferred stock, we would increase the number of
authorized shares of series B preferred stock from 1,500,000
shares to 3,000,000 shares, and the investors agreed to consent to
such increase. The number of authorized shares of preferred stock
was not increased, but the conversion ratio of the series B
preferred stock was increased from 9 to 12.15 as a result of our
failure to meet the required level of EBITDA per share.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions or by gift. These sales
may be made at fixed or negotiated prices. The principal market for the common
stock is the OTC Bulletin Board, although the common stock may also be traded in
the Pink Sheets, LLC. The selling stockholders may use any one or more of the
following methods when selling or otherwise transferring shares:
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
* block trades in which a broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
* sales to a broker-dealer as principal and the resale by the
broker-dealer of the shares for its account;
* an exchange distribution in accordance with the rules of the
applicable exchange;
* privately negotiated transactions, including gifts;
* covering short sales made after the date of this prospectus.
* pursuant to an arrangement or agreement with a broker-dealer to
sell a specified number of such shares at a stipulated price per
share;
* a combination of any such methods of sale; and
* any other method of sale permitted pursuant to applicable: law.
The selling stockholders may also sell shares pursuant to Rule 144 or
Rule 144A under the Securities Act, if available, rather than pursuant to this
prospectus.
See "Selling Stockholders" for information concerning the restriction
on the right of the holders of the series B preferred stock and certain of the
warrants to convert the shares of series B preferred stock and to exercise
warrants if such conversion or exercise would result in the holder and his or
its affiliates beneficially owning more than 4.9% of our common stock.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
22
A selling stockholder may from time to time pledge or grant a security
interest in some or all of the shares or common stock or warrant owned by them
and, if the selling stockholder defaults in the performance of the secured
obligations, the pledgees or secured parties may offer and sell the shares of
common stock from time to time under this prospectus, or under an amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the
Securities Act of 1933 amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus.
In connection with the sale of our common stock or interests therein,
the selling stockholders may enter into hedging transactions with broker-dealers
or other financial institutions which may in turn engage in short sales of our
common stock in the course of hedging the positions they assume. The selling
stockholders may, after the date of this prospectus, also sell shares of our
common stock short and deliver these securities to close out their short
positions, or loan or pledge their common stock to broker-dealers that in turn
may sell these securities. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
In the event of a transfer by a selling stockholder of the series B
preferred stock, warrants or the common stock issuable upon conversion or
transfer the series B preferred stock or warrants other than a transfer pursuant
to this prospectus or Rule 144 of the SEC, we may be required to amend or
supplement this prospectus in order to name the transferee as a selling
stockholder.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed us that they do not have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
Because the selling stockholders may be deemed to be "underwriters"
within the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. Federal securities laws, including
Regulation M, may restrict the timing of purchases and sales of our common stock
by the selling stockholders and any other persons who are involved in the
distribution of the shares of common stock pursuant to this prospectus. Atlas
Capital Services, Dawson James Securities and Liberty Company Financial are
broker-dealers. ACS Holdings, as the parent of Atlas Capital Services, and
Steven Pollan, as an officer of Atlas Capital Services, may be deemed affiliates
of Atlas Capital Services. Although none of the selling stockholders have an
agreement or understanding with any broker-dealer with respect to the sale of
their shares, Atlas Capital Services may also act as broker for other selling
stockholders. Selling stockholders who are broker-dealers or affiliates of
broker-dealers will be deemed underwriters in connection with their sales.
We are required to pay all fees and expenses incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
23
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been trading since April 29, 2002 on the
over-the-counter market and quoted on the OTC Bulletin Board. It is also quoted
on the Pink Sheets, LLC. For the period from April 29, 2002 through January 13,
2004 our trading symbol was ZNTH and, from January 14, 2004 until March 24, 2005
we traded under the symbol ADPR. Effective March 28, 2005, the effective date of
our one-for-15 reverse split, our trading symbol was changed to ASPR.
The table below sets forth, for the periods indicated, the high and low
bid prices of our common stock for the periods indicated, as quoted by the OTC
Bulletin Board Research Service. Such quotations reflect inter-dealer prices,
without retail markup, markdown or commission, and may not represent actual
transactions.
Quarter Ended High Bid Low Bid
- -------------------------------------------------- ------------- -------------
March 31, 2004 $4.65 $1.35
June 30, 2004 $3.23 $1.13
September 30, 2004 $3.45 $0.77
December 31, 2004 $2.03 $1.14
March 31, 2005 $1.65 $0.53
June 30, 2005 $0.92 $0.51
September 30, 2005 $0.65 $0.17
December 31, 2005 $0.40 $0.22
March 31, 2006 $0.63 $0.32
June 30, 2006 $0.65 $0.23
September 30, 2006 $0.35 $0.06
December 31, 2006 (through December 26, 2006) $0.16 $0.03
On December 26, 2006, the closing bid price of our common stock was
$.04.
As of December 15, 2006, we had approximately 1,000 record holders of
our common stock.
We have not paid dividends on our common stock, and the terms of
certificate of designation relating to the creation of the series B preferred
stock prohibit us from paying dividends. We plan to retain future earnings, if
any, for use in our business. We do not anticipate paying dividends on our
common stock in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
On March 30, 2006, we made a decision to enter into negotiations for
the sale of our product segment. On August 1, 2006, we and our subsidiaries sold
to MFC substantially all of the assets of our business relating to the direct,
wholesale and retail marketing and sales of consumer products, which is the line
of business which we refer to as our products segment which is presented as a
discontinued operation in our consolidated financial statements as of September
30, 2006 and for the nine months ended September 30, 2006 and 2005. Through
December 31, 2005, the product segment was shown as a separate business segment.
On December 11, 2006, we transferred to New Valu, Inc., Genco's primary
24
lender, all of our ownership in Genco which is the line of business which we
refer to as our generator sales segment. The generator sales segment, which was
formed in December 2005, was presented as a separate segment in our financial
statement as of September 30, 2006 and December 31, 2005 and for the nine months
ended September 30, 2006 and for the year ended December 31, 2005. We commenced
activities relating to our generator business in December 2005; however, because
these operations were not significant during 2005, the statement of financial
position and statement of operations for 2005 have not been restated to reflect
the discontinuation of these operations. Our continuing operations are
advertising services. The consolidated financial statements at December 31, 2005
and for the years ended December 31, 2005 and 2004, which are included in this
prospectus, have been restated to reflect the products segment as a discontinued
operation. The consolidated financial statements at September 30, 2006 and for
the nine months ended September 30, 2006 have been restated to reflect the
generator sales segment as a discontinued operation.
As an advertising services company, we offer the placement of
advertising in different media, the production of direct marketing commercials,
and the planning and implementation of direct marketing programs for our
clients. Both our revenue and our gross margins reflect services in addition to
those of a typical advertising agency since the gross margin on advertising
revenue is typically a percentage of the amount paid for the advertisement. In
May 2006, NVE, a former advertising customer which was our largest customer in
both the nine months ended September 30, 2006 and the year ended December 31,
2005, commenced an action against us seeking approximately $3.4 million in
damages plus costs, with claims for treble damages and punitive damages. The
complaint arises from a letter agreement dated May 12, 2005, pursuant to which
we performed services for an advertising campaign. The complaint, as amended,
alleges breach of contract, fraud and breach of duty. Although we believe that
we complied with our obligations under the contract, and we have not established
a reserve with respect to this litigation, there is no assurance that a court
would not come to a contrary conclusion or that the litigation will not be
settled for an amount which would severely impact our financial condition. This
litigation has negatively impacted our ability to obtain necessary financing and
to attract potential new advertising clients and to maintain and develop our
existing advertising clients. We did not record revenue from advertising clients
during the second quarter of 2006 and our advertising revenue for the third
quarter of 2006 was not material. During the nine months ended September 30,
2006, NVE accounted for revenue of $3.1 million, or approximately 71% of
revenue, from continuing operations. During the year ended December 31, 2005,
NVE accounted for revenue of $6.5 million, or approximately 84% of revenues from
continuing operations. During the nine months ended September 30, 2005,
marketing, consulting and media placement services revenues were generated from
fourteen customers of which 89% was from NVE.
In our discontinued products segment, we sold, both through our direct
marketing operations and our sales to retail stores, a range of different
products, some of which are not related to the others and have different
distribution channels. During 2004, we recognized revenue from only one product
line, our Dermafresh product line, which we acquired in February 2004 and
introduced to the market in June 2004. From December 31, 2004 through June 2006,
we either acquired or obtained marketing rights to a number of additional
products. On August 1, 2006, we sold the assets, having a book value of
approximately $2.1 million, of our products segment to MFC Development Corp., in
exchange for (i) the assumption of certain accounts payable, accrued expenses
and other liabilities related to the products business approximating $1,535,000,
(ii) an unsecured promissory note in the amount of $1,525,000, and (iii)
5,500,000 shares of MFC's common stock valued at $1,650,000 on August 1, 2006,
of which 750,000 shares are held in escrow as security for obligations relating
to our representations and warranties. The principal of the note is subject to
adjustment based on a post-closing audit of the assets and liabilities
transferred and assumed. The shares are restricted securities. In September
2006, we sold
25
2,875,000 shares of MFC common stock and pledged 1,250,000 shares of MFC common
stock as security for our guaranty of debt obligations of our majority-owned
subsidiary, Genco. We intend to seek to have our shares of MFC common stock
registered and upon registration to sell the shares and use the proceeds for
general corporate purposes. Although we have certain registration rights with
respect to the shares, we cannot assure you either (i) that MFC will have the
resources to make the remaining payments on the notes or (ii) that we will be
able to raise any significant funds from the remaining MFC stock.
Our discontinued generator sales segment included the sale,
installation and servicing of standby and portable generators to both
residential and commercial customers. Since December 2005, we had been
developing the infrastructure necessary to operate the generator sales segment,
including the acquisition of computers, vehicles and equipment and warehouse
space. During the nine months ended September 30, 2006 we launched the generator
sales operations in placeSouth Florida. On December 11, 2006, we sold to New
Valu, Inc., Genco's principal lender, our equity in Genco pursuant to an
agreement dated December 10, 2006. At the time we entered into this agreement,
Genco, owed $1,866,666 to New Valu and $156,250 to another lender. We had
guaranteed these loans, and pledged our equity in Genco and 625,000 shares of
MFC stock that were owned by us as security for payment of these loans. Further,
Genco did not have sufficient funds to continue its operations and it had
significant potential liabilities with respect to customer deposits for
generators. Pursuant to the agreement with New Valu and HSK, Inc., Genco's other
lender, on December 11, 2006: (i) our obligations under its guarantee to New
Valu were terminated; (ii) we transferred to New Valu our 80% interest in Genco;
(iii) we sold 625,000 shares of MFC common stock to HSK for $156,250 and used
the proceeds to pay HSK the $156,250 due to HSK; and, (iv) any obligations from
Genco to us were terminated.
In June 2005, we sold 1,226,557 shares of our series B preferred stock
to a group of accredited investors. In connection with the sale of the shares,
we agreed to register the shares of common stock issuable upon conversion of the
series B preferred stock and warrants that were issued in connection with the
preferred stock sale. When we decided to sell our products division with the
resulting reclassification of that business as a discontinued operation, the
registration statement relating to those shares was no longer current and the
stockholders were no longer able to sell the shares of common stock covered by
the registration statement. As a result, we are required to pay liquidated
damages to the holders of the series B preferred stock by issuing additional
shares of series B preferred stock. As of December 11, 2006, the fair value of
the liquidated damages, as determined using the Black-Scholes option valuation
formula, approximated $334,000, for which we issued 122,589 shares of series B
preferred stock and are required to issue an additional 52,422 shares of series
B preferred stock. Each shares of series B preferred stock is convertible into
12.15 shares of common stock.
The products business and the generator sales business are two
businesses which we commenced during 2004 and 2005, respectively. Neither
business operated profitably and both were disposed of. We may seek to enter
into new businesses, and we cannot give any assurance that we will be able to
operate any new businesses profitably. As of the date of this prospectus, we
have no plans to enter into any new businesses.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the placecountry-regionUnited States requires
our management to make assumptions, estimates and judgments that affect the
amounts reported in the financial statements, including the notes thereto, and
related disclosures of commitments and contingencies, if any. We consider our
critical accounting policies to be those that are complex and those that require
significant judgments and estimates in the preparation of our financial
statements, including the following: recognition of revenues, accounting for
stock-based
26
compensation, and accounting for income taxes. We rely on historical experience
and on other assumptions we believe to be reasonable under the circumstances in
making our judgment and estimates. Actual results could differ materially from
those estimates. There have been no significant changes in the assumptions,
estimates and judgments in the preparation of these financial statements from
the assumptions, estimates and judgments used in the preparation of our 2005
audited consolidated financial statements.
Revenue Recognition
We derive advertising services revenue from; (i) the placement of
advertising in television, internet and print media outlets; (ii) the production
of advertising content including television commercials, print advertising and
other graphics design literature; and (iii) advertising and marketing consulting
services. Our advertising services revenue is derived from billings that are
earned when the media is placed, from fees earned as advertising services are
performed and from production services rendered. In addition, incentive amounts
may be earned based on qualitative and/or quantitative criteria. In the case of
media placements, revenue is recognized as the media placements appear. We are
the primary obligor and carry all of the credit risk for the media placements
and accordingly, record the full amount of such billings from the media
placements as revenue in accordance with Emerging Issues Task Force Issue No.
99-19. In the case of consulting and production arrangements, the revenue is
recognized as the services are performed. Our creative consulting revenue is
generally earned on a fee basis, and in certain cases incentive amounts may also
be earned. As with fee arrangements in advertising, such revenue is recognized
as the work is performed. Incentive amounts for advertising and marketing
services are recognized upon satisfaction of the qualitative and/or quantitative
criteria, as set out in the relevant client contract. Deferred revenues are
recognized as a liability when billings are received in advance of the date when
revenues are earned.
Stock-Based Compensation
Commencing January 1, 2006, we are recognizing expense of options or
similar instruments issued to employees using the fair-value-based method of
accounting for stock-based payments in compliance with SFAS 123(R) "Share-Based
Payment" using the modified-prospective-transition method. For the nine months
ended September 30, 2006, we recognized $179,000 of stock compensation expense.
As of September 30, 2006, there remains approximately $42,000 of nonvested
stock-based compensation arrangements granted to employees.
Income Taxes
We provide for federal and state income taxes currently payable, as
well as for those deferred because of temporary differences between reporting
income and expenses for financial statement purposes versus tax purposes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. The effect of a
change in tax rates is recognized as income or expense in the period of the
change. A valuation allowance is established, when necessary, to reduce deferred
income taxes to the amount that is more likely than not to be realized. As of
December 31, 2005, we had net operating loss carry-forwards approximating
$3,486,000. Pursuant to Section 382 of the Internal Revenue Code, utilization of
these losses may be limited in the event of a change in control, as defined in
the Treasury regulations. Approximately $130,000 of net operating losses
incurred prior to January 4, 2004 is limited to $26,000 per year due to
27
the change of control that resulted from the January 2004 reverse acquisition.
Approximately $2.3 million of net operating losses incurred from January 1, 2004
through June 17, 2005 are limited to $651,000 per year due to the June 17, 2005
private placement of the series B preferred stock. There was no tax benefit or
expense for any of the 2006 and 2005 interim reporting periods.
New Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") 155, Accounting for
Certain Hybrid Financial Instruments an amendment of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 155, provides the framework for fair value remeasurement of any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation as well as establishes a requirement to evaluate interests
in securitized financial assets to identify interests. SFAS 155 further amends
FASB 140 to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. The guidance SFAS
155 also clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133 and concentrations of credit risk in the
form of subordination are not embedded derivatives. This Statement is effective
for all financial instruments acquired or issued after the beginning of an
entity's first fiscal year that begins after September 15, 2006. SFAS 155 is not
expected to have a material impact on our consolidated results of operations and
financial condition.
In March 2006, SFAS issued SFAS 156, Accounting for Servicing of
Financial Assets--an amendment of SFAS 140. SFAS 156 requires the recognition of
a servicing asset or servicing liability under certain circumstances when an
obligation to service a financial asset by entering into a servicing contract.
SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value utilizing the amortization
method or fair market value method. SFAS 156 is effective at the beginning of
the first fiscal year that begins after September 15, 2006. SFAS 156 is not
expected to have a material impact on our consolidated results of operations and
financial condition.
In July 2006, the FASB released FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109"
(FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in
income tax law. This Interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns.
This Interpretation shall be effective for fiscal years beginning after December
15, 2006. Earlier adoption is permitted as of the beginning of an enterprise's
fiscal year, provided the enterprise has not yet issued financial statements,
including financial statements for any interim period for that fiscal year. The
cumulative effects, if any, of applying this Interpretation will be recorded as
an adjustment to retained earnings as of the beginning of the period of
adoption. We have commenced the process of evaluating the expected effect of FIN
48 on our consolidated results of operations and financial condition and are
currently not yet in a position to determine such effects.
In September 2006, the FASB issued Statement of Financial Accounting
Standard 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. SFAS No. 157 is
effective for financial statements issued
28
for fiscal years beginning after November 15, 2007. We are in the process of
evaluating the impact of the adoption of SFAS No. 157 will have on our results
of operations and financial condition.
In September 2006, the staff of the SEC issued Staff Accounting
Bulletin No. 108 ("SAB 108") which 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. SAB 108 becomes effective
in fiscal 2007. Adoption of SAB 108 is not expected to have a material impact on
our consolidated results of operations and financial condition.
Nine Months Ended September 30, 2006 Compared with the Nine Months Ended
September 30, 2005
Advertising revenues for the first nine months of 2006 were $4,372,000
compared to $5,755,000 for the same period in 2005. Substantially all of the
advertising revenue in the 2006 and 2005 periods was from two customers who are
no longer customers and one of which, NVE, is in litigation against us. Media
placement costs, as a percentage of advertising revenue, for the first nine
months of 2006 were 87% compared to 72% for first nine months of 2005. In 2005
we had negotiated higher rates on the media which we placed compared to 2006,
resulting in a lower margin. Historically, we have been dependent upon a limited
number of customers with whom we have short term relationships. The pending NVE
litigation has impaired our advertising business. Our generator customers have
provided us with a broader base of customers.
Selling, administrative and other expenses for the first nine months of
2006 were $2,496,000, compared to $1,477,000 for the same period in 2005.
Operating expenses directly related to the advertising services for the first
nine months of 2006 were $596,000, including $319,000 of personnel costs,
$128,000 of advertising costs and $86,000 of facilities expense. Corporate
overhead costs for the first nine months of 2006 were $1,900,000 including
professional fees of $490,000 and personnel costs of $859,000 (human resources,
finance and operations). Selling, administrative and other expenses for the
first nine months of 2005 were primarily personnel and commission costs related
to the advertising business.
Non operating income and expense for the first nine months of 2006
includes a $225,000 gain from the sale of 2,875,000 shares of MFC Development
common stock. During the first nine months of 2006 the liquidated damages of
$263,000 represents the fair value of additional shares of series B preferred
stock that we were required to issue to our series B preferred stockholders for
our failure to maintain an effective registration statement on the shares of
common stock underlying the series B convertible preferred stock. Non operating
expense for the first nine months of 2005 includes a loss on early
extinguishment of debt. On June 17, 2005, we completed a private placement of
our Series B Preferred Stock of which a portion of the proceeds were used to pay
off convertible notes that were issued in February and May 2005 and as a result
a loss on early debt extinguishment of $179,000 related to our advertising
business was incurred. Although the agreement pursuant to which we issued the
series B preferred stock and warrants provides for liquidated damages for the
failure to have an independent board of directors and independent audit and
compensation committees, we did not include any accrual for the potential
issuance of shares of series B preferred stock under these provisions.
The loss from continuing operations was $1,928,000 for the first nine
months of 2006 compared to $98,000 for the same period in 2005. For the first
nine months of 2006, the aggregate loss from our discontinued products and
generator sales segments was $6,183,000 compared to $317,000 for the same period
in 2005. For the first nine months of 2006 we recognized a gain on the disposal
of our products segment of $2,611,000. Overall, we incurred a consolidated net
loss attributable to common
29
stockholders of $5,500,000, or $.61 per share (basic and diluted), for the first
nine months of 2006. In connection with the private placement completed on June
17, 2005, the fair value of the securities issued (including the preferred stock
and warrants to purchase common stock) when compared to the net proceeds
resulted in a beneficial conversion feature that approximated $1,344,000. For
purposes of calculating the net loss attributable to common stockholders, such
beneficial conversion feature is considered a deemed dividend and is deducted
from the net loss for purposes of calculating basic and fully diluted loss per
share. As a result of the deemed dividend, the net loss attributable to common
stockholders for the first nine months 2005 was $1,759,000, and the basic and
fully diluted loss per share for such period was $.23.
2005 Compared with 2004
Advertising services revenues in 2005 increased $4,805,000, or 164%,
compared to 2004. During 2005, marketing, consulting and media placement
services revenues were generated from nineteen customers, of which 84% was from
one customer, NVE, which was not a customer in 2004. We are presently in
litigation with NVE. See "Business - Legal Proceedings." Substantially all of
the advertising revenues for 2004 was from a different customer which has not
been a customer subsequent to 2004. As a result of that customer's financial
condition, we wrote off $482,000 of the receivable from that customer. The media
placement and production costs increased $4,481,000, or 433%, from 2004.
Advertising revenues in 2005 compared to 2004 were more heavily concentrated in
media placement as compared to commercial production which resulted in a lower
overall return from 65% to 29%.
Selling, administrative and other expenses for 2005 were $1,955,000,
compared to $6,178,000 for 2004. Operating expenses during 2004 include
$3,718,000 of non-cash stock-based compensation expense compared to $141,000 for
2005. Operating expenses for 2005 includes $100,000 for the settlement of an
arbitration proceeding with the Screen Actors Guild. Recurring operating
expenses decreased by $746,000 primarily from a reduction of executive payroll
related to the advertising segment.
Interest expense for 2005 was $69,000 of which $63,000 relates to the
convertible notes that were issued in February and May of 2005, including
$53,000 of amortized discount on the convertible note issuance. We did not have
interest expense for 2004.
On June 17, 2005, we completed a private placement of our series B
preferred stock of which a portion of the proceeds were used to pay our
convertible notes that were issued in February and May 2005. As a result of such
early extinguishment, for 2005, we recorded a loss on early debt extinguishment
of $179,000.
Our continuing operations for 2005 incurred a net loss of $14,000
compared to a net loss of $4,302,000 for 2004. For 2005, the loss from our
discontinued products segment was $655,000 compared to $1,509,000 for 2004. In
connection with the private placement completed on June 17, 2005, the fair value
of the securities issued (including the preferred stock and warrants to purchase
common stock) when compared to the net proceeds resulted in a beneficial
conversion feature that approximated $1,344,000. For purposes of calculating the
net loss attributable to common stockholders, such beneficial conversion feature
is considered a deemed dividend and is deducted from the net loss for purposes
of calculating basic and fully diluted loss per share. Including the deemed
dividend, the net loss attributable to common stockholders for 2005 and 2004 was
$2,013,000 and $5,811,000, respectively, and the basic and fully diluted loss
for such periods was $.26 and $1.05, respectively.
30
Financial Condition
As of September 30, 2006, we had an accumulated deficit of $11,980,000
and had working capital from continuing operations of $898,000, compared to
working capital from continuing operations of $789,000 at December 31, 2005. In
addition, we are a defendant in a litigation by NVE seeking damages in excess of
$3,000,000, plus costs, with claims for treble damages and punitive damages.
Although we believe we have meritorious defenses against such lawsuit and, as of
September 30, 2006, we have not established any reserve with respect to this
litigation, an unfavorable outcome of such action would have a materially
adverse impact on our business and our ability to continue operating. These
factors raise substantial doubt about our ability to continue as a going
concern.
The following table details changes in components of working capital
from continuing operations:
September 30, December 31,
2006 2005 Change
--------------------------------------------------------------- ------------------ --------------------- ------------------
Cash $66,000 $1,428,000 ($1,362,000)
Certificate of deposit (restricted) - 103,000 (103,000)
Accounts receivable - net 40,000 24,000 16,000
Marketable securities 1,687,000 - 1,687,000
Marketable securities held in escrow 675,000 - 675,000
Interest receivable 9,000 - 9,000
Current portion of deferred charge, related party 67,000 67,000 -
Prepaid expense and other current assets 11,000 298,000 (287,000)
Current portion of note receivable 275,000 - 275,000
Accounts payable (1,105,000) (27,000) (1,078,000)
Customer deposits (761,000) (1,029,000) 268,000
Accrued expenses (36,000) (59,000) 23,000
Current debt (30,000) (16,000) (14,000)
--------------------------------------------------------------- ------------------ --------------------- ------------------
Working capital of continuing operations $898,000 $789,000 $109,000
--------------------------------------------------------------- ------------------ --------------------- ------------------
The marketable securities are restricted under the rule 144 of the
Securities and Exchange Commission and cannot presently be publicly traded
unless they are included in a registration statement or are sold in a
transaction exempt from registration pursuant to the Securities Act of 1933, as
amended.
During the nine months ended September 30, 2006, $2,451,000 of cash was
used by the discontinued products and generator sales segments and $1,089,000
was generated by continuing operations, resulting in a net decrease of
$1,362,000. The increase in marketable securities relates to the shares of MFC
common stock received as partial consideration from the sale of our product
segment. The increase in accounts payable relates to amounts owed to networks
for media that was placed during March 2006 and is being paid over negotiated
terms.
On August 1, 2006, we sold to MFC substantially all of the assets of
our product segment. We transferred to MFC those assets relating to the products
segment in exchange for (i) the assumption of certain accounts payables, accrued
expenses and other liabilities related to the product business approximating
$1,535,000, (ii) an unsecured promissory note in the amount of $1,525,000, and
(iii) 5,500,000 shares of MFC's common stock valued at $1,650,000 on August 1,
2006, of which 750,000 shares are held in escrow as security for obligations
relating to our representations and warranties in the purchase agreement. The
principal amount of the note is subject to adjustment based upon a post-closing
accounting. On August 2, 2006, MFC made a payment of $381,250, representing 25%
of the
31
principal amount of the note, and on September 18, 2006, MFC made a second
payment of $381,250 and has made monthly principal and interest payments for the
months of October and November 2006.
On December 10, 2006, we entered into an agreement with New Valu, Inc.
and HSK Funding, Inc. At the time we entered into this agreement, Genco, owed
$1,866,666 to New Valu and $156,250 to HSK. We had guaranteed these loans, and
pledged our 80% interest in Genco and 625,000 shares of MFC common stock that
were owned by us as security for payment of these loans. Further, Genco did not
have sufficient funds to continue its operations and it had significant
potential liabilities with respect to customer deposits for generators. Pursuant
to the agreement with New Valu and HSK, on December 11, 2006: (i) our
obligations under its guarantee to New Valu were terminated; (ii) we transferred
to New Valu our 80% interest in Genco; (iii) we sold 625,000 shares of MFC
common stock to HSK for $156,250 and used the proceeds to pay HSK the $156,250
due to HSK; and, (iv) any obligations from Genco to us were terminated.
We need additional funds in order to market and expand our advertising
services; however, we have no formal or informal understanding with any funding
source. In the event of a judgment against us or a settlement requiring payments
by us in the NVE litigation, we will require additional funds. We have raised
funds from one of our lenders from the sale of some of our shares of our MFC
stock, but such funds were used to pay the lender and were not available for
operations. Further, the remaining payments on the MFC note are payable in
installments and are significantly less than our working capital needs. In the
event that our creditors obtain judgments against us or in the event of an
unfavorable resolution of the NVE litigation, either as a result of a judgment
or settlement, it may make it necessary for us to seek protection under the
Bankruptcy Code.
BUSINESS
Since the end of the first quarter of 2006, our advertising services
have not been a significant part of our business. We had no revenues from
advertising in the second quarter of 2006 and insignificant revenues from
advertising during the third quarter.
The advertising services we offer include:
* the placement of advertising in television, internet and print
media outlets;
* the production of advertising content, including television
commercials, print advertising and other graphics design
literature; and
* advertising and marketing consulting services relating to the
customer's marketing campaign.
In performing our advertising agency services, we both use our
production services and, in certain cases, we outsource commercial production
services to third party production companies.
Sales and Marketing
We have not actively marketed our advertising services since the first
quarter of 2006. Historically, we have obtained new advertising customers
through referrals from the independent marketing representatives that we had
utilized while we owned the product segment. The litigation with NVE has
significantly limited our ability to attract new advertising customers.
32
Major Customers
We did not generate any significant revenue from our advertising
segment during the second and third quarters of 2006. None of our customers from
which we generated revenues in 2005 and the first quarter of 2006 are currently
customers.
Our advertising clients have been typically small companies for whom a
range of services include, in addition to the placement of advertising,
consulting services which can include assistance in not only developing an
advertising program, but helping the client to design or develop the particular
product or service, determine the appropriate market and design and implement an
overall marketing program and strategy.
Intellectual Property
We do not have any intellectual property related to our advertising
services business.
Competition
The marketing communications business is highly competitive, with
agencies of all sizes and disciplines competing primarily on the basis of
reputation and quality of service to attract and retain clients and personnel.
Companies such as WPP Group, Omnicom Group, Interpublic Group, Digitas,
ChoicePoint Precision Marketing and Havas generally serve large corporations
with consolidated or business unit sales from direct marketing in excess of $100
million. Additionally, based on agency direct marketing revenues published in
the trade journal Advertising Age's 2004 Agency Survey, our research indicates
that there are approximately 36 agencies with direct marketing revenues ranging
from $10 million to $244 million and more than 70 agencies with direct marketing
revenues ranging from at least $1 million to $10 million. We intend to seek a
market niche by providing a full level of service quality that users of direct
marketing services may not receive from our larger competitors. Most of our
advertising clients are smaller companies that would not typically be sought by
the major advertising and marketing companies.
Pending Litigation
On May 15, 2006, we were served in an action in the Bankruptcy Court in
the State of New Jersey by NVE. Other defendants in the action are John Acunto,
Jr., a principal stockholder and former chief executive officer, John Cammarano,
a former director and former chief executive officer, Anton Lee Wingeier, a
former director and former chief financial officer and one current and two
former employees who are not officers. The complaint arises from a letter
agreement dated May 12, 2005, pursuant to which we performed services for NVE
relating to NVE's advertising campaign. The complaint alleged that we breached
the contract in fraudulently invoicing NVE for advertising services. The
complaint also alleged that our conduct constituted criminal activity and
includes a claim under the Racketeer Influenced and Corrupt Organizations Act
(generally known as RICO) and its state law equivalent, and sought damages
approximating $3.4 million plus costs, with claims for treble damages and
punitive damages. On July 17, 2004, the court dismissed with prejudice, the RICO
and conversion claims against us and the individual defendants. The fraud claims
were dismissed against all defendants, with the plaintiff having the right to
replead those claims within 30 days. The claims based on breach of contract and
the claims seeking an accounting were not dismissed against us. On August 4,
2006, the plaintiff filed an amended complaint repleading the fraud claim,
adding a claim for breach of duty and amending the other claims that were not
previously dismissed. Although we believe that we complied
33
with our obligations under the contract, there is no assurance that a court
would not come to a contrary conclusion.
Two former officers of Genco have notified us that they believe they
are owed $122,000 pursuant to their employment agreements which were terminated
upon their resignations in September 2006. We are in the process of evaluating
the claims made by such former officers and have not accrued any amounts related
to such claim.
Employees
As of December 15, 2006, we had 2 full-time employees one advertising
executive and our chief executive officer. We also have retained Mr. Acunto as a
consultant. None of our employees are represented by a labor union, and we
consider our employee relations to be good.
Property
We lease 20,394 square feet of office and warehouse space in a
warehouse complex located in Boca Raton, Florida under a lease, which expires in
October 2015 and which has a current annual rent is $310,000. We lease 6,658
square feet of executive office space in Boca Raton, Florida, of
which approximately two-thirds is sub-leased to non-affiliates and one-third is
unused and is available for sub-lease. This lease, which expires in March 2010
has a current annual rent of $149,000. We lease 846 square feet of office space
in Bentonville, Arkansas, for space which we no longer use, under a lease which
expires in November 2008 for which we pay annual rent of $15,000. This space was
used by our products segment. Our present annual rental, exclusive of subleased
office space, approximates $550,000. Most of our unused space was leased for our
products segment and was not assumed by the purchaser of that division. All of
our leases include standard escalation provisions. We believe that our current
space exceeds our immediate and near term requirements and we are currently
exploring our options to terminate certain of our leases with the landlords.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our directors
and executive officers.
Name Age Position
- ---- --- --------
Loren R. Haynes 45 Interim chief executive officer and director
Harlan I. Press 42 Chairman of the board, interim chief financial
officer and director
Loren R. Haynes has been our interim chief executive officer since
December 10, 2006 and a director since December 2005. Mr. Haynes has been the
placeSouth Florida regional manager for Genco since May 29, 2006. From 2005
until May 2006, Mr. Haynes was vice president of sales and marketing for United
Auto Group, an automobile brokerage firm. From 1997 to 2005 he was customer
service engineer/installation coordinator for Sentry Technology Corp., a
manufacturer of traveling robotic CCTV systems for industrial use. Mr. Haynes is
the brother-in-law of John P. Acunto, Jr., a greater than 37% stockholder. Mr.
Haynes was the designee of Mr. Acunto, as provided in his consulting agreement.
34
Harlan I. Press has been a director since August 2005 and was our chief
operating officer from July 2006 to September 2006 and has been our interim
chief financial officer since December 18, 2006. From April 2000 until April
2006, he was the vice-president and treasurer of Concord Camera Corp., a
designer, developer, manufacturer and distributor of image capture devices and
related products since April 2000. Mr. Press joined Concord Camera Corp. in
April 1994 and served in various capacities including corporate controller and
chief accounting officer. Mr. Press is a member of the American Institute of
Certified Public Accountants, the New York State Society of Certified Public
Accountants and the Financial Executives Institute. As an officer of Concord
Camera, Mr. Press is a defendant in several class actions against Concord, its
directors and officers, relating primarily to Concord's financial statements. In
addition, the Commission has advised Concord that it is investigating
matters underlying the claims in one of the class action suits. Concord and Mr.
Press believe that the actions are without merit and are actively defending the
actions.
Key Consultant
Mr. John P. Acunto, Jr., age 33, has been a consultant to us since June
2005. He was also the chief executive officer of Genco since September 2006.
Pursuant to his consulting agreement, Mr. Acunto agreed to serve on a
substantially full-time basis as a consultant with principal emphasis in
marketing our advertising business. Mr. Acunto served as our chief executive
officer, chairman of the board and director from January 4, 2004 until June
2005. In July 2003, Mr. Acunto founded and developed Adsouth, Inc., a direct
response marketing and advertising services firm which we acquired pursuant to
the reverse acquisition. For more than five years prior to founding Adsouth,
Inc., Mr. Acunto was an independent marketing consultant, advising clients on a
wide variety of subjects including, without limitation, direct marketing, media
buying, media placement and related activities, doing business as The Business
Planning Company.
Director's Compensation
Pursuant to the 2005 long-term incentive plan, each newly-elected
independent director receives at the time of his or her election, a five-year
option to purchase 50,000 shares of common stock at the market price on the date
of his or her election. In addition, the plan provides for the annual grant to
each independent director of an option to purchase 10,000 shares of common stock
on April 1st of each year, commencing April 1, 2006. In
lieu of the annual grant of 10,000 to each director, in December 2005, each
director received an option to purchase 25,000 shares of common stock at an
exercise price of $.32 per share, subject to stockholder approval of an
amendment to the plan. Commencing August 2005, we are paying our independent
directors an annual directors' fee of $5,000, a meeting fee of $1,000 per
meeting attended in person and $500 per meeting attended by telephone. Each
committee member receives a payment of $250 for each meeting attended in person
and $125 for each meeting attended by telephone. We pay the chairman of the
audit committee an annual fee of $2,500. We do not presently have any
independent directors.
Board of Directors and Committee Meetings
Our business, property and affairs are managed by or under the
direction of the board of directors. Members of the board are kept informed of
our business through discussion with the chief executive and financial officers
and other officers, by reviewing materials provided to them and by participating
at meetings of the board and its committees. As of
September 30, 2006, none of our directors are
independent.
35
From August 10, 2005 to December 10, 2006, our board of directors has
had two committees - the audit committee and the compensation committee. During
2006, the audit committee was comprised of Messrs. Haynes, Cammarano and Press
and the compensation committee was comprised of Messrs. Cammarano, Haynes,
Wingeier and Press. Since we only have three directors, we do not have any
committees as of the date of this prospectus.
During 2005, there were 15 meetings of the board of directors, all of
which were attended by all persons serving as a director at that time.
Our audit committee was involved in discussions with our independent
auditors with respect to the scope and results of our year-end audit, our
quarterly results of operations, our internal accounting controls and the
professional services furnished by the independent auditors. The audit committee
also approved the selection of the independent registered accounting firm. Mr.
Press was the audit committee financial expert.
Our board of directors has adopted a written charter for the audit
committee which the audit committee reviews and reassesses for adequacy on an
annual basis. The charter can be found on our website at www.adsouthinc.com.
The compensation committee served as the stock option committee for our
stock option plan, and it reviews and approves any employment agreements with
management and changes in compensation for our executive officers.
Our board has adopted a code of business conduct and ethics that
applies to all of our employees, officers, directors and consultants. A copy of
the code of business conduct and ethics can be found on our website at
www.adsouthinc.com.
Section 16(a) Compliance
Section 16(a) of the Securities Exchange Act of 1934, requires our
directors, executive officers and persons who own more than 10% of our common
stock to file with the SEC initial reports of ownership and reports of changes
in ownership of common stock and other of our equity securities. To our
knowledge, all of our directors and officers were in compliance with their
reporting requirements in a timely manner during 2005.
36
Compensation
Summary Compensation Table
The following table presents compensation information related to our
chief executive officer and other executive officers who received or accrued
compensation from us in excess of $100,000 (on an annualized basis) for 2005 and
2004.
Long-term Compensation
Awards
------
Securities
Underlying
Other Annual Restricted Options / SARs
Name and Principal Position Year Salary Bonus Compensation Stock Awards (#)
- --------------------------- ---- ------ ----- ------------ ------ ---
John P. Acunto, Jr. 2005 $530,000 $46,000 $14,000 162,648
Chief Executive Officer 2004 $250,000 $695,000 $10,000 666,667 333,333
John Cammarano, Jr., Chief 2005 $237,000 $192,000 $13,000 1,000,000
Executive Officer and President 2004 $128,000 $132,000 $16,000 69,507 66,667
Anton Lee Wingeier 2005 $163,000 $146,000 $12,000 249,314
Chief Financial Officer 2004 $ 92,000 $ 24,000 $10,000 46,667 --
Other annual compensation consists of fringe benefits including car
allowance and medical benefits.
For 2005, Mr. Acunto's bonus represents incentive compensation pursuant
to his employment agreement which terminated upon his resignation in June 2005.
Mr. Acunto's compensation for 2005 includes compensation of $450,000 for
services as a consultant subsequent to June 2005. For 2004, Mr. Acunto's bonus
includes a $250,000 signing bonus pursuant to his employment agreement and
$445,000 of discretionary commissions that were earned on advertising revenues
prior to the execution of his employment agreement. The revenues on which the
commission was paid to Mr. Acunto include revenue with respect to which a
reserve was established in 2004.
For 2005, Mr. Cammarano's bonus includes a $50,000 signing bonus
related to a renegotiation of his employment terms and $142,000 of incentive
compensation pursuant to his employment agreements. For 2004, Mr. Cammarano's
bonus includes a $50,000 signing bonus and $82,000 of commissions which were
paid in accordance with his March 2005 employment agreement which was terminated
June 2005.
For 2005, Mr. Wingeier's bonus includes a $50,000 signing bonus related
to a renegotiation of his employment terms and $96,000 of incentive compensation
pursuant to his employment agreements. For 2004, Mr. Wingeier's bonus represents
a signing bonus pursuant to his July 2004 employment agreement which was
terminated in June 2005.
Employment and Consulting Agreements
On February 18, 2005, we entered into an employment agreement, dated as
of July 1, 2004, with our chief financial officer, Anton Lee Wingeier. Mr.
Wingeier's July 2004 employment agreement was superseded by a new employment
agreement we entered into with him in October 2005. Mr. Wingeier's July 2004
employment agreement provided for Mr. Wingeier to serve as our chief financial
officer until December 31, 2005 and continuing thereafter on a month-to-month
basis unless terminated by either party. Mr. Wingeier received a salary at the
annual rate of $125,000 through September 30, 2004 and $150,000 thereafter. He
also received an initial bonus of $24,000 in 2004, and was to receive a
quarterly
37
and annual bonus. The quarterly bonus was 5% of our adjusted gross profit, which
is defined as gross profit less compensation (other than his quarterly bonus and
annual bonus). If our income before income taxes and payment of his annual bonus
is at least $2,000,000, we were to pay Mr. Wingeier an annual bonus equal to 5%
of the adjusted income. For each quarter in which a quarterly bonus was payable,
Mr. Wingeier was to receive a five-year non-qualified option to purchase the
number of shares of common stock determined by dividing the amount of the
quarterly bonus by the exercise price per share, which was the closing price of
our common stock on the last day of the quarter. Mr. Wingeier also received
insurance benefits and a monthly automobile allowance of $900. In the event of a
termination of Mr. Wingeier's employment as a result of his death or disability,
we will pay him or his beneficiary his salary for the lesser of one year or the
balance of the term.
In connection with the June 2005 private placement, we and Mr. Wingeier
agreed that (i) he would not publicly sell any shares of our common stock during
the two-year period commencing on the date of the purchase agreement, (ii)
notwithstanding any contrary provisions of his employment agreement or other
understanding, he will not receive any bonus except for a bonus based on growth
in earnings per share as determined by a compensation committee of the board of
directors the majority of members of which are independent directors, (iii) in
the event of a termination of his employment, other than a termination by us
that is not for cause or as a result of his death or disability, his severance
will not exceed one year's compensation, (iv) that he would no longer receive a
car allowance, (v) that his base salary would be $175,000 and (vi) that his
employment term was extended to June 17, 2008.
On October 7, 2005, we entered into an employment agreement with Mr.
Wingeier which superseded his previous employment agreement. The employment
agreement initially expires on December 31, 2008 and continues on a
month-to-month basis thereafter unless terminated on not less than 90 days
notice by either us or Mr. Wingeier. Pursuant to his employment agreement Mr.
Wingeier receives annual compensation of $175,000, a signing bonus of $50,000
and quarterly and annual bonuses. The quarterly bonuses are equal to the sum of
(i) a gross margin bonus calculated as 5% of the amount by which the product
segments gross profit is greater than 47% of the product segments revenues; (ii)
an operating expense bonus calculated as the amount by which selling, general
and administrative expense (less consulting fees, legal fees, non-cash stock
expense and investor relations fees) as a percentage of consolidated revenue has
decreased from the immediately preceding quarter, multiplied by consolidated
revenues, the product of which is multiplied by one-half of the percentage
decrease; and (iii) a net income bonus calculated as 7.5% of the quarter's
income before debt extinguishment, interest expense on subordinated debentures
and non-cash stock compensation expense. The annual bonuses are calculated as
7.5% of the amount by which annual income before debt extinguishment, interest
expense on subordinated debentures and non-cash stock compensation expense has
increased from the immediately preceding year. Mr. Wingeier is entitled to
receive options to purchase not less than such shares of common stock as having
a value equal to the sum of the quarterly and annual bonuses and in December
2005 he received an option to purchase 200,000 shares of common stock for $0.32
per share.
On May 23, 2006, our board of directors approved and executed an
amendment to the October 7, 2005 employment agreement with Mr. Wingeier.
Pursuant to the amendment, Mr. Wingeier's employment term was extended to
December 31, 2011, his annual salary was increased to $225,000 per year, and he
receive a monthly auto allowance of $1,200. In the event Mr. Wingeier is
eligible for severance, pursuant to the terms of his agreement, such amount will
be the greater of $225,000 or one year's salary. In addition, in exchange for
forgoing the bonus provisions of his employment agreement, as set forth prior to
this amendment, with the exception to any bonus he may be entitled to resulting
from the sale of the products segment, if any, he will be compensated $200,000.
Thereafter, any bonus he receives will be at the discretion of the Board of
Directors.
38
On July 14, 2006 we entered into an amended employment agreement with
Mr. Wingeier pursuant to which he will serve as chief executive and chief
financial officer through December 31, 2011 for which he will receive a base
salary of $225,000 per annum and a monthly automobile allowance of $1,200. The
agreement also replaces bonuses due to Mr. Wingeier under his existing
agreements, including any bonuses from the sale of our product segment, with a
$200,000 bonus, of which $50,000 has been paid, $50,000 is due on July 31, 2006
and the remaining $100,000 will be paid in ten bi-weekly installments of $10,000
beginning August 1, 2006. Mr. Wingeier is eligible to receive an annual bonus at
the discretion of the compensation committee. In the event we terminate Mr.
Wingeier's employment, other than as a result of his disability or a termination
for cause, Mr. Wingeier is entitled to severance pay equal to one month's
salary, including his automobile allowance, for every month worked, up to twelve
months.
On December 10, 2006, Mr. Wingeier resigned from all positions he then
held with the Company and any of its subsidiaries.
On February 18, 2005, we entered into an employment agreement, dated as
of July 1, 2004, with John P. Acunto, Jr. to serve as our chief executive
officer. Mr. Acunto's employment agreement was terminated, except for his
obligations under the non-disclosure, non-competition and related provisions,
with the execution of his consulting agreement in June 2005. Mr. Acunto's
employment agreement provided for Mr. Acunto to serve as our chief executive
officer until December 31, 2009. Mr. Acunto received a salary of $375,000. He
also received an initial bonus of $250,000 in 2004. Mr. Acunto received his
quarterly bonus for the first quarter of 2005, and a proportionate share of his
quarterly bonus for the period April 1 through June 16, 2005. The quarterly
bonus was 5% of our adjusted gross profit, which is defined as gross profit less
compensation (other than his quarterly bonus and annual bonus). For each quarter
in which a quarterly bonus is payable, Mr. Acunto was to receive a five-year
non-qualified option to purchase the number of shares of common stock determined
by dividing the amount of the quarterly bonus by the exercise price per share,
which shall be the closing price of our common stock on the last day of the
quarter. Pursuant to this provision, Mr. Acunto received an option to purchase
49,314 shares of common stock at an exercise price of $.74 per share. Mr. Acunto
also received options to purchase 113,334 shares of common stock at an exercise
price of $.705 per share. Mr. Acunto also received insurance benefits and a
monthly automobile allowance of $1,800.
On June 17, 2005, in connection with the June 2005 private placement,
we entered into a consulting agreement with Mr. Acunto, pursuant to which Mr.
Acunto agreed to serve on a substantially full-time basis as a consultant with
principal emphasis in marketing our advertising business for a term of three
years and continuing thereafter on a year-to-year basis unless terminated by
either party on 90 days prior written notice. As compensation for his services,
we paid Mr. Acunto an initial payment of $200,000, and we are to pay him a
non-refundable monthly draw of $17,000 against commissions earned. We agreed to
pay Mr. Acunto a commission equal to 5% of the gross profit on covered accounts,
as defined in the agreement. We also granted Mr. Acunto a non-qualified stock
option to purchase 2,000,000 shares of common stock at an exercise price of $.65
per share, which is exercisable immediately as to 500,000 shares and thereafter
in quarterly installments based on our gross profit for the quarter. On August
16, 2005, the consulting agreement with Mr. Acunto was amended whereby the
$34,000 paid to him for the months of July 2005 and August 2005 were deemed
earned fees and not a draw on commissions and effective September 1, 2005, his
commission was increased from 5% to 10% of the gross profit on covered accounts.
In December 2005, we granted Mr. Acunto an option to purchase 200,000 shares of
common stock at an exercise price of $.32 per share. Mr. Acunto's consulting
agreement provides that during the term of the consulting agreement and as long
as Mr. Acunto and member of his family as to which he as the right to vote or
dispose of their shares represent
39
at least 40% of our outstanding stock, Mr. Acunto has the right to designate one
nominee for director if the board consists of three or four directors and two
nominees for director, if the board consists of five or more directors. All of
such nominees shall be (i) independent directors, as defined by Nasdaq, and (ii)
not directly or indirectly related to Mr. Acunto or his wife. Mr. Loren R.
Haynes is Mr. Acunto's nominee to the board.
On May 9, 2006, we entered into an agreement with Mr. Acunto which
modifies and extends his existing consulting agreement. Pursuant to the
agreement, Mr. Acunto's consulting arrangement was extended until June 30, 2012
and continues on a year-to-year basis thereafter. However, Mr. Acunto's
consulting agreement may be cancelled only by him if he guarantees or
underwrites loans or financial facilities to, for or on our behalf, in an amount
not less than $250,000, and such guarantees or underwritten loans remain
outstanding. Mr. Acunto will receive a monthly minimum nonrefundable draw of
$20,000 against commissions and shall be allowed to participate in our health
insurance plans or be reimbursed for out-of-pocket expenses for maintaining his
own health insurance plan. Mr. Acunto's commissions will be equal to 10% of our
gross profit on covered accounts, such gross profit, except as it relates to
Genco sales, which will be calculated in accordance with generally accepted
accounting principles. Mr. Acunto will earn a commission on Genco's sales
calculated as the sales price, less the cost of the unit and less the cost of
the unit multiplied by 30% to arrive at the gross profit multiplied by 10% to
arrive at the earned commission. Other than commissions earned from Genco sales,
covered accounts shall mean new accounts generated by Mr. Acunto's efforts.
On March 18, 2004, we entered into an employment agreement with John
Cammarano, Jr. to serve as our president. Mr. Cammarano's March 2004 employment
agreement was superseded by a new employment agreement we entered into with him
in October 2005. Mr. Cammarano's March 2004 employment agreement provided for
him to serve as our president until March 18, 2007 and automatically renewed for
additional three-year periods unless either we or Mr. Cammarano gave 90 days
notice before March 18, 2007 of our or his intention to not renew. Mr. Cammarano
received a salary at the annual rate of $175,000 through the term of the March
2004 employment agreement. He also received a signing bonus of $50,000 and
25,000 shares of common stock and an additional 33,334 shares of common stock
for overseeing the establishment of a web-based advertising business and an
option to purchase 66,667 shares of common stock at an exercise price of $1.35
per share. Mr. Cammarano was entitled to a bonus of 5% of our product sales and
stock based incentives equal to 5% of the revenues that are generated as a
result of his direct efforts. For the year ended December 31, 2004, Mr.
Cammarano voluntarily limited his bonus compensation to 5% of product sales,
less returns and advertising allowances. Mr. Cammarano also received a monthly
auto allowance of $1,800.
On June 17, 2005, Mr. Cammarano was elected as our chief executive
officer and agreed that (i) he would not publicly sell any shares of our common
stock during the two-year period commencing on the date of the purchase
agreement relating to the June 2005 private placement, (ii) notwithstanding any
contrary provisions of his employment agreement or other understanding, he will
not receive any bonus except for a bonus based on growth in earnings per share
as determined by a compensation committee of the board of directors the majority
of members of which are independent directors, (iii) in the event of a
termination of his employment, other than a termination by us that is not for
cause or as a result of his death or disability, his severance will not exceed
one year's compensation, (iv) that he would no longer receive a car allowance
and (v) that his base salary would be $250,000. We also granted Mr. Cammarano a
non-qualified stock option to purchase 800,000 shares of common stock at an
exercise price of $.65 per share as to 425,000 shares and thereafter in
quarterly installments based on our gross profit for the quarter.
40
On October 7, 2005, we entered into an employment agreement with Mr.
Cammarano which superseded his previous employment agreement. The employment
agreement initially expires on December 31, 2008 and continues on a
month-to-month basis thereafter unless terminated on not less than 90 days
notice by either us or Mr. Cammarano. Pursuant to his employment agreement Mr.
Cammarano receives annual compensation of $250,000, a signing bonus of $50,000
and quarterly and annual bonuses. The quarterly bonuses are equal to the sum of
(i) a gross margin bonus calculated as 5% of the amount by which the product
segment's gross profit is greater than 47% of the product segments revenues;
(ii) an operating expense bonus calculated as the amount by which selling,
general and administrative expense (less consulting fees, legal fees, non-cash
stock expense and investor relations fees) as a percentage of consolidated
revenue has decreased from the immediately preceding quarter, multiplied by
consolidated revenues, the product of which is multiplied by one-half of the
percentage decrease; and (iii) a net income bonus calculated as 7.5% of the
quarter's income before debt extinguishment, interest expense on subordinated
debentures and non-cash stock compensation expense. The annual bonuses are
calculated as 7.5% of the amount by which annual income before debt
extinguishment, interest expense on subordinated debentures and non-cash stock
compensation expense has increased from the immediately preceding year. Mr.
Cammarano is entitled to receive options to purchase not less than such shares
of common stock as having a value equal to the sum of the quarterly and annual
bonuses and in December 2005 he received an option to purchase 200,000 shares of
common stock for $0.32 per share.
Effective May 1, 2006, Mr. Cammarano resigned from his position as
chief executive officer. Pursuant to the terms of a separation agreement with
Mr. Cammarano, we will pay Mr. Cammarano a severance of $270,833 payable in
seven monthly installments beginning May 16, 2006, all of which will be expensed
in the second quarter of 2006. Mr. Cammarano is eligible to receive a quarterly
bonus as defined in his employment agreement of up to $275,000 for the quarter
in which the contemplated sale of the products segment occurs provided that such
sale is consummated no later than September 30, 2006. In addition, we will
reimburse Mr. Cammarano's COBRA insurance premiums for up to one year and agrees
to transfer title to a company-owned vehicle to Mr. Cammarano.
Stock Incentive Plans
We have three equity incentive plans - our stock incentive plan,
pursuant to which we may grant stock options, stock grants or other incentives
to purchase up to 1,000,000 shares to non-management employees, consultants,
directors and advisors, our management incentive program, pursuant to which we
may issue stock grants for up to 1,666,667 shares to management and our 2005
long-term incentive plan pursuant to which as of December 31, 2005, we may issue
stock options, stock grants or other incentives to purchase up to 1,870,000
shares to employees, consultants, directors and advisors. In March 2006, our
board of directors adopted, subject to stockholder approval, an amendment to the
2005 long-term incentive plan increasing the number of shares available under
the plan to 3,120,000 and providing that, for 2006, each independent director
received an option to purchase 25,000 shares of common stock at an exercise
price of $.32 per share, being the market price on the date the board approved
the amendment to the plan..
During 2005, we issued options to purchase an aggregate of 4,998,814
shares of common stock of which 298,519 were issued pursuant to the stock
incentive plan, 26,667 were issued pursuant to the management incentive plan,
1,873,628 were issued pursuant to the 2005 long-term incentive plan and
2,800,000 were issued outside of plans. The grant of options made outside of the
plans was approved by the shareholders at the 2005 shareholder meeting.
41
As of December 31, 2005 there were an aggregate of 2,240 shares of
common stock available for grant pursuant to these plans, plus any additional
shares which may be available as a result of the expiration or termination of
any outstanding options or other rights.
The following table sets forth information relating to options which
were granted during 2005 to our executive officers who are included in the
preceding summary compensation table as of December 31,
2005. No stock appreciation rights were granted.
Percent of total
grants and
Number of options
securities granted to Exercise or
underlying options employees in base price
Name granted (#) fiscal year ($/share) Expiration Date
- ---- ----------- ----------- --------- ---------------
John P. Acunto, Jr. 113,334 2% $.71 3/20/2006
49,314 1% $.74 3/31/2010
2,000,000 40% $.65 6/19/2010
200,000 4% $.32 12/30/2010
John Cammarano, Jr. 800,000 16% $.65 6/19/2010
200,000 4% $.32 12/30/2010
Anton Lee Wingeier 49,314 1% $.74 3/31/2010
200,000 4% $.32 12/30/2010
Aggregated Option Exercises in Last Year and Year-end Option Values
The following table presents information regarding the unexercised
options and stock appreciation rights to purchase shares of our common stock
held by our executive officers who are included in the preceding summary
compensation table as of December 31, 2005. No stock
appreciation rights were granted.
Value of Unexercised
Number of Securities Underlying In-the-Money Options at Year End
Unexercised Options at Year End (#) ($)
------------------------------------ ----------------------------------
Shares
Acquired On Value
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
John P.
Acunto, Jr.(1) 56,667 $0 1,739,315 900,000 $0 -
John Cammarano, Jr. - - 832,292 234,375 $0 $0
Anton Lee Wingeier - - 249,314 - $0 -
(1) Excludes options to purchase 333,334 shares issued in 2004 to Mr. Acunto's
wife, Angela E. Acunto, as to which he disclaims beneficial interest.
42
PRINCIPAL STOCKHOLDERS
The following table and discussion provides information as to the
shares of common stock beneficially owned on December 18, 2006 by: (i) each
director; (ii) each officer named in the summary compensation table; (iii) each
person owning of record or known by us, based on information provided to us by
the persons named below, to own beneficially at least 5% of our common stock;
and, (iv) all directors and executive officers as a group.
Shares of Common
Stock Beneficially Percentage of Outstanding
Name Owned Common Stock
- ---------------------------------------------------- ----------------------- --------------------------------------
John P. Acunto, Jr. 5,411,068 46.35%
1141 S. Rogers Circle, #11
Boca Raton, FL 33487
Angela E. Acunto 5,411,068 46.35%
1141 S. Rogers Circle, #11
Boca Raton, FL 33487
The Tiger Fund 805,606 8.25%
2600 Michelson Derive; 17th Floor
Irvine, CA 92612
John Cammarano, Jr. 1,042,426 6.41%
Harlan I. Press 75,000 0.76%
Loren B. Haynes 75,000 0.76%
All directors and executive officers as a 150,000 1.52%
group (2 individuals)
Except as otherwise indicated each person has the sole power to vote
and dispose of all shares of common stock listed opposite his name. Each person
is deemed to own beneficially shares of common stock which are issuable upon
exercise or warrants or options or upon conversion of convertible securities if
they are exercisable or convertible within 60 days of the date as of which the
information is provided.
Mr. John P. Acunto, Jr. and Ms. Angela E. Acunto are husband and wife.
The shares owned beneficially by each of them includes (i) 1,895,086 shares of
common stock and 1,582,648 shares of common stock issuable upon options held by
Mr. Acunto and (ii) 1,600,000 shares of common stock and 333,334 shares of
common stock issuable upon exercise of options held by Mrs. Acunto. Each of Mr.
and Mrs. Acunto disclaims beneficial interest in the shares owned by the other.
Mrs. Acunto has pledged 333,334 shares of Common Stock to each of Argyll
Equities and Platinum Securities to secure her three-year notes each in the
principal amount of $200,000.
The shares beneficially owned by Mr. Cammarano include 565,625 shares
issuable upon the exercise of stock options held by him.
The shares beneficially owned by each of Mr. Press and Mr. Haynes
include shares of common stock issuable upon the exercise of stock options held
by them.
Although Barron Partners, Vestal Venture Capital and Richard Molinksy
own shares of series B preferred stock and warrants which, if fully exercised,
would result in their ownership of more than 5%
43
of our outstanding common stock, because of the limitation on right of
conversion and exercise, which precludes either of them or their affiliate from
acquiring more than 4.9% of our outstanding common stock, neither of such
persons is the beneficial owner of 5% or more of our common stock under the
rules of the SEC.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 4, 2004, we, The Tiger Fund, Adsouth, Inc., John P. Acunto,
Jr. and Angela E. Acunto entered into a share exchange agreement, pursuant to
which, contemporaneously with the execution of the agreement, The Tiger Fund
transferred 1,866,667 shares of Common Stock it owned to Mr. John P. Acunto, Jr.
and Ms. Angela E. Acunto, who were the sole stockholders of Adsouth, Inc., and
Mr. and Ms. Acunto transferred their stock in Adsouth, Inc. to us. Upon
completion of the share exchange transaction, the control of our company had
changed such that Mr. and Mrs. Acunto collectively owned more than 50% of our
outstanding common stock.
On May 9, 2003, our board of directors authorized The Tiger Fund's
purchase of 1,298,452 shares of common stock for which The Tiger Fund issued its
$19,477 promissory note. The note accrues interest annually at a rate equal to
the 90 day treasury rate published in the Wall Street Journal on January 1st of
each year, an effective rate of 1% at December 31, 2005, with all principal and
interest due in forty-eight (48) months.
In connection with the reverse acquisition, The Tiger Fund committed to
provide us with $1 million in equity funding during 2004. Originally, The Tiger
Fund was to receive a warrant to purchase 133,333 shares of common stock at $15
per share for its $1 million investment. On March 31, 2004, we and The Tiger
Fund entered into an amended agreement pursuant to which The Tiger Fund
purchased 333,333 shares of common stock for $1 million consisting of $350,000
cash and a promissory note in the amount of $650,000. Subsequently, The Tiger
Fund returned 157,894 shares of common stock and the $650,000 promissory note
was cancelled.
Mr. Acunto, who beneficially owns more than 10% of our common stock,
earned approximately $252,000 and $307,000 for services performed pursuant to
his consulting agreement with us for the full year 2005 and the first six months
of 2006, respectively. In addition during the full year 2005 and the first six
months of 2006 Mr. Acunto received $50,000 and $108,000, respectively, as
consideration for personal guarantees he provided on loans made to us.
Mr. Acunto was a guarantor of Genco's obligations to New Valu.
Contemporaneously with our agreement with New Valu and HSK, Mr. Acunto entered
into a separate agreement with New Valu pursuant to which he acknowledged that
his previous guarantee of Genco's obligations to New Valu remains in full force
and effect. The agreement also provides that:
* Mr. Acunto will cause the commons stock which he and his wife
own in the Company to be pledged to New Valu as collateral for
the loan;
* Mr. Acunto's employment agreement with Genco is terminated; and
* Mr. Acunto and Genco will negotiate in good faith with respect
to a new employment agreement.
Mr. Horowitz, a former member of our board of directors, is the
president and 50% owner of Profit Motivators, Inc., an independent marketing
representative. Profit Motivators represented us as an
44
independent marketing representative to certain of our customers. In this
capacity, Profit Motivators earned commissions approximating $75,000 for 2005.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 60,000,000 shares of common stock, par value
$.0001 per share, and 10,000,000 shares of preferred stock, par value $.0001 per
share. Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and are entitled to
share in such dividends as the board of directors, in its discretion, may
declare from funds legally available. In the event of liquidation, each
outstanding share entitles its holder to participate ratably in the assets
remaining after payment of liabilities. There are presently 9,759,065 shares of
common stock outstanding.
Our directors are elected by a plurality vote. Because holders of
common stock do not have cumulative voting rights, holders or a single holder of
more than 50% of the outstanding shares of common stock present and voting at an
annual stockholders meeting at which a quorum is present can elect all of our
directors. Our stockholders have no preemptive or other rights to subscribe for
or purchase additional shares of any class of stock or of any other securities.
All outstanding shares of common stock are, and those issuable upon conversion
of the note and exercise of the warrants will be, upon such conversion or
exercise, validly issued, fully paid, and non-assessable.
Series B Convertible Preferred Stock
In connection with the June 2005 private placement, our board of
directors created the series B preferred stock. Each share of series B preferred
stock was initially convertible into 9 shares of common stock. On March 23,
2006, as a result of our failure to meet financial targets set forth in the
purchase agreement pursuant to which the series B preferred stock was issued,
the conversion rate of the series B preferred stock was increased to 12.15. No
dividends are payable with respect to the series B preferred stock and we are
prohibited from paying dividends on the common stock or redeeming common stock
while the series B preferred stock is outstanding.
If, during the two year period beginning June 17, 2005, we issues
shares of common stock or options, warrants or other convertible securities at a
price or with a conversion or exercise price less than the conversion price
(initially $.30), with certain specified exceptions, the number of shares
issuable upon conversion of one share of series B preferred stock is adjusted,
using a weighted average formula, to reflect such issuance.
Upon any voluntary or involuntary liquidation, dissolution or
winding-up, the holders of the series B preferred stock are entitled to a
preference of $2.70 per share before any distributions or payments may be made
with respect to the common stock or any other class or series of capital stock
which is junior to the series B preferred stock upon voluntary or involuntary
liquidation, dissolution or winding-up.
Without the approval of the holders of 75% of the series B preferred
stock, we will not (a) alter or change the powers, preferences or rights given
to the series B preferred stock, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a liquidation senior to
or otherwise pari passu with the series B preferred stock, or any class or
series of preferred stock possessing greater voting rights or the right to
convert at a more favorable price than the series B preferred stock, (c) amend
our articles of incorporation or other charter documents in breach of any of the
provisions hereof, (d) increase the authorized number of shares of series B
preferred stock, or (e) enter into any agreement with respect to the foregoing.
45
The holders of the Series B Preferred Stock may not convert the Series
B Preferred Stock to the extent that such conversion would result in the holders
owning more than 4.9% of the outstanding common stock. This limitation may not
be amended without the consent of the holders of a majority of the outstanding
common stock.
In the event we do not deliver a stock certificate upon conversion of
the Series B Preferred Stock in a timely manner, as set forth in the Certificate
of Designation, we must pay the converting holder liquidated damages.
Transfer Agent
The transfer agent for our common stock is Mountain Share Transfer,
Inc., 1625 Abilene Drive, Broomfield, CO 80020-1147.
Penny-Stock Rules
The SEC has adopted regulations which generally define a "penny stock"
to be any equity security that has a market price (as defined) of less than
$5.00 per share, subject to certain exceptions, and is not listed on the a
registered stock exchange or the Nasdaq Stock Market (although the $5.00 per
share requirement may apply to Nasdaq listed securities) or has net tangible
assets in excess of $2,000,000, if the issuer has been in continuous operation
for at least three years, or $5,000,000, if the issuer has been in continuous
operation for less than three years; or has average revenue of at least
$6,000,000 for the last three years.
As a result, our common stock is subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the SEC relating to the penny stock market. The broker-dealer must also disclose
the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell our
securities and may affect your ability to sell our securities in the secondary
market and the price at which you can sell our common stock.
According to the SEC, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include:
* Control of the market for the security by one or a few
broker-dealers that are often related to the promoter or
issuer;
* Manipulation of prices through prearranged matching of
purchases and sales and false and misleading press
releases;
* "Boiler room" practices involving high pressure sales tactics
and unrealistic price projections by inexperienced sales
persons;
46
* Excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
The wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the inevitable collapse of those prices with consequent investor losses.
Purchasers of penny stocks may have certain legal remedies available to
them in the event the obligations of the broker-dealer from whom the penny stock
was purchased violates or fails to comply with the above obligations or in the
event that other state or federal securities laws are violated in connection
with the purchase and sale of such securities. Such rights include the right to
rescind the purchase of such securities and recover the purchase price paid for
them.
Because our stock is a "penny stock" we do not have the safe harbor
protection under federal securities laws with respect to forward-looking
statement.
Shares Available for Future Sale
We estimate that the public float for our common stock presently
consists of approximately 7,070,125 shares of common stock. In August 2004 we
issued 16,667 shares of common stock in connection with a consulting agreement.
These shares became eligible for sale pursuant to Rule 144 commencing in August
2006. Under the volume limitations of Rule 144, a stockholder, together with
members of his or her family, may not sell more than 1% of our outstanding
common stock in any three-month period. The 1,866,667 shares that were acquired
by John and Angela Acunto in January 2004 from The Tiger Fund and 805,606 of the
shares acquired by The Tiger Fund from us in May 2003 are not eligible for sale
pursuant to Rule 144 since the shares were initially acquired by The Tiger Fund
at time that we were a blank-check shell company. It is the position of the SEC
that shares acquired by a company which is not engaged in a business may not be
sold pursuant to Rule 144 and may only be sold pursuant to a registration
statement.
The Nevada General Corporation Law
We are incorporated in Nevada and are subject to the provisions of the
Nevada General Corporation Law. Under certain circumstances, the following
selected provisions may delay or make more difficult acquisitions or changes of
control. Our articles of incorporation and by-laws do not exclude us from such
provisions. These provisions also may have the effect of preventing changes in
our management. It is possible that these provisions could make it more
difficult to accomplish transactions that stockholders may otherwise deem to be
in their best interests.
Restrictions on Control Share Acquisitions
Sections 78.378 to 78.3793 of the Nevada General Corporation Law relate
to acquisitions of control of an issuing corporation, which is defined as a
Nevada corporation that has 200 or more stockholders, at least 100 of whom have
addresses in Nevada appearing on our stock ledger. These provisions will not
apply unless we meet the definition of an issuing corporation.
Under these provisions, acquiring person who acquires a controlling
interest in an issuing corporation and those acting in association with an
acquiring person obtain only such voting rights in the control shares as are
conferred upon them by a resolution of the stockholders of the corporation,
approved by a majority of the voting power at a special or annual meeting of the
stockholders, with the votes of interested stockholders not counted. The meeting
of stockholders is held upon the request and at the expense of the acquiring
person.
47
In the event that the control shares are accorded full voting rights
and the acquiring person acquires control shares with a majority or more of all
the voting power, any stockholder, other than the acquiring person, who does not
vote in favor of authorizing voting rights for the control shares is entitled to
demand payment for the fair value of his or her shares, and the corporation must
comply with the demand. A controlling interest means the ownership of
outstanding voting shares sufficient to enable the acquiring person,
individually or in association with others, directly or indirectly, to exercise
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority and/or (iii) a majority or more of the voting power of the
issuing corporation in the election of directors. Voting rights must be
conferred by a majority of the disinterested stockholders as each threshold is
reached and/or exceeded.
These provisions do not apply if the articles of incorporation or
bylaws in effect on the 10th day following the acquisition of a controlling
interest by an acquiring person provide that said provisions do not apply.
Restrictions on Certain Business Combinations
Sections 78.411 to 78.444 of the Nevada General Corporation Law
restrict the ability of a resident domestic corporation to engage in any
combination with an interested stockholder for three years after the interested
stockholder's acquisition of the shares that cause such stockholder to become an
interested stockholder, unless the combination or the purchase of shares by the
interested stockholder that cause such stockholder to become an interested
stockholder is approved by our board of directors before that date. If the
combination was not previously approved, the interested stockholder may effect a
combination after the three-year period only if such stockholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria.
For purposes of the above provisions, a resident domestic corporation
is a Nevada public corporation that has 200 or more stockholders and an
interested stockholder is any person, other than the company and its
subsidiaries, who is (i) the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the outstanding voting shares of the company or (ii)
an affiliate or associate of the company and, at any time within three years
immediately before the date in question, was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the company.
These restrictions do not apply to corporations that elect in a charter
amendment approved by a majority of the disinterested shares to be excluded from
these provisions. Such an amendment would not become effective for 18 months
after its passage and would apply only to stock acquisitions occurring after its
effective date. Our articles of incorporation and bylaws do not exclude us from
the restrictions imposed by such provisions.
EXPERTS
The consolidated financial statements for the years ended December 31,
2005 and 2004, included in this prospectus to the extent and for the periods
indicated in its report, have been audited by Marcum & Kliegman LLP, independent
registered public accountants, and are included herein in reliance upon the
authority of such firm as an expert in accounting and auditing in giving such
report.
LEGAL MATTERS
The validity of the shares of common stock offered through this
prospectus has been passed on by Katsky Korins LLP, formerly known as Esanu
Katsky Korins & Siger, LLP.
48
HOW TO GET MORE INFORMATION
We file annual, quarter and periodic reports, proxy statements and
other information with the Securities and Exchange Commission using the
Commission's EDGAR system. You may inspect these documents and copy information
from them at the Commission's public reference room at 100 F Street, NE,
Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http//www.sec.gov.
We have filed a registration statement with the Commission relating to
the offering of the shares. The registration statement contains information
which is not included in this prospectus. You may inspect or copy the
registration statement at the Commission's public reference facilities or its
website.
You should rely only on the information contained in this prospectus.
We have not authorized any person to provide you with any information that is
different.
49
ADSOUTH PARTNERS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 (as Restated) F-3
Consolidated Balance Sheet as of December 31, 2005 (as Restated) F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005
and 2004 (as Restated) F-5 - F-6
Consolidated Statement of Changes in (Capital Deficiency) Stockholders'
Equity for the Years Ended December 31, 2005 F-7
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficiency)
Equity for the Years Ended December 31, 2004 F-8
Notes to Consolidated Financial Statements for the Year Ended
December 31, 2005 and 2004 (as Restated) F-9 - F-34
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Adsouth Partners, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Adsouth Partners,
Inc. and Subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, changes in (capital deficiency)
stockholders' equity, and cash flows for the years ended December 31, 2005 and
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Adsouth
Partners, Inc. and Subsidiaries as of December 31, 2005, and the consolidated
results of their operations and their cash flows for the years ended December
31, 2005 and 2004 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 14(d) the accompanying consolidated financial statements
have been restated to reflect the accounting of the discontinued operations
therein.
/s/ Marcum & Kliegman LLP
New York, New York
February 25, 2006, except for Note 14(b) which is as of March 15, 2006, Note
14(c) which is as of March 28, 2006 and Note 14(d) which is as of September
29, 2006.
F-2
- ---------------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Consolidated Statements of Operations (as Restated)
Year Ended December 31, 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Revenues $7,730,000 $2,925,000
--------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Media placement and production costs 5,516,000 1,035,000
Selling, administrative and other expense 1,969,000 6,178,000
--------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 7,485,000 7,213,000
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 245,000 (4,288,000)
Interest income 2,000 -
Interest expense (69,000) -
Loss on sale of marketable securities (13,000) (10,000)
Other expense - (4,000)
Loss on early debt extinguishment (179,000) -
--------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (14,000) (4,302,000)
Loss from operations of discontinued products sector (655,000) (1,509,000)
--------------------------------------------------------------------------------------------------------------------------
Net loss (669,000) (5,811,000)
Deemed dividend-series B preferred stock (1,344,000) -
--------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders ($2,013,000) ($5,811,000)
--------------------------------------------------------------------------------------------------------------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic and diluted loss per common share;
Loss from continuing operations attributable to common stockholders ($0.17) ($0.78)
Loss from operation of discontinued products sector ($0.09) (0.27)
Net loss attributable to common stockholders ($0.26) ($1.05)
Weighted average number of common shares:
Basic and diluted 7,666,172 5,559,674
--------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
-----------------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Consolidated Balance Sheet (as Restated)
December 31, 2005
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $1,428,000
Certificate of deposit 103,000
Accounts receivable - net 24,000
Current portion of deferred charge, related party 67,000
Prepaid expenses and other current assets 298,000
Assets of discontinued products sector 3,576,000
--------------------------------------------------------------------------------------------------------------------------
Total current assets 5,496,000
Property and equipment - net 375,000
Deferred charge, related party - net of current portion 100,000
Deposit 52,000
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,023,000
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $27,000
Customer deposits 1,029,000
Accrued expenses 59,000
Current portion of notes payable 11,000
Current portion of capital lease obligations 5,000
Liabilities of discontinued products sector 2,287,000
--------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,418,000
Notes payable - net of current portion 37,000
Capital lease obligations - net of current portion 17,000
--------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,472,000
--------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 10,000,000 shares authorized, 1,500,000
designated as series B convertible preferred stock, 1,166,557 issued and
outstanding as of December 31, 2005 -
Common stock, $.0001 par value; 60,000,000 shares authorized, 8,197,599
issued and outstanding as of December 31, 2005 1,000
Additional paid-in capital 9,521,000
Notes receivable - stockholder (20,000)
Deferred compensation (471,000)
Accumulated deficit (6,480,000)
--------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,551,000
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,023,000
--------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
-----------------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (as Restated)
Year Ended December 31, 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES
Loss from continuing operations ($14,000) ($4,302,000)
Adjustments to reconcile net loss to net cash - operating activities:
Stock based compensation 141,000 3,718,000
Depreciation 26,000 8,000
Amortization of debt discount on convertible notes 53,000 -
Bad debt expense 15,000 484,000
Loss on sale of marketable securities 13,000 10,000
Loss on early debt extinguishment 179,000 -
Other operating adjustments - 6,000
Changes in assets and liabilities:
Accounts receivable (40,000) (668,000)
Prepaid expense and other current assets (297,000) (1,000)
Deferred charge, related party (167,000) -
Accounts payable (76,000) 86,000
Customer deposits 978,000 51,000
Accrued expenses (172,000) 240,000
-------------------------------------------------------------------------------------------------------------------------
Net cash - operating activities 639,000 (368,000)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures (329,000) (47,000)
Purchase certificate of deposit, restricted (3,000) (100,000)
Proceeds from sale of marketable securities 160,000 -
Deposits (42,000) (8,000)
-------------------------------------------------------------------------------------------------------------------------
Net cash - investing activities (214,000) (155,000)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FINANCING ACTIVITIES
Deferred financing costs (80,000) -
Capital lease payments (3,000) -
Proceeds from notes payable 50,000 -
Repayments of notes payable (3,000) -
Proceeds from exercise of stock options and warrants 33,000 130,000
Repayments on bank line-of-credit - (145,000)
Proceeds form issuance of common stock - 560,000
Proceeds from issuance of convertible notes 487,000 -
Repayments of convertible notes (257,000) -
Cash proceeds from issuance of preferred stock 1,603,000 -
Offering costs (123,000) -
-------------------------------------------------------------------------------------------------------------------------
Net cash - financing activities 1,707,000 545,000
-------------------------------------------------------------------------------------------------------------------------
Change in cash - continuing operations 2,132,000 22,000
Cash flows of discontinued products sector:
Operating cash flows (2,225,000) (512,000)
Investing cash flows (182,000) (139,000)
Financing cash flows 1,665,000 651,000
-------------------------------------------------------------------------------------------------------------------------
Net change in cash 1,390,000 22,000
Cash - beginning of period 38,000 16,000
-------------------------------------------------------------------------------------------------------------------------
Cash - end of period $1,428,000 $38,000
-------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $15,000 -
-------------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes - -
-------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
continued
F-5
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (as Restated)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the Year Ended December 31, 2005
In January 2005 the Company issued 63,333 shares of common stock valued
at $83,000 to acquire the assets of the Miko Brand.
On February 17, 2005, the Company issued warrants as part of a fee paid
in connection with the issuance of convertible notes. The value of the warrants
approximated $145,000 and was capitalized as a deferred financing cost.
On May 16, 2005, the Company issued warrants as part of a fee paid in
connection with the issuance of convertible notes. The value of the warrants
approximated $61,000 and was capitalized as a deferred financing cost.
On June 17, 2005, the Company issued 300,633 shares of series B
convertible preferred stock in exchange for $800,000 of convertible notes and
$12,000 of interest accrued thereon.
During 2005, the Company issued options to consultants which, using the
Black-Scholes option valuation formula, had an aggregate value of $736,000,
which was recorded as an increase to deferred compensation expense. Such
deferred compensation expense is being amortized pursuant to the terms of the
underlying consulting agreement to which the related options were issued.
In 2005, the Company entered into capital lease obligations having an
aggregate net present value of $34,000 resulting in a non cash increase in
property and equipment of $7,000 to the advertising sector and $27,000 to the
products sector.
During the Year Ended December 31, 2004
On March 31, 2004, the Company sold 333,333 shares of common stock to a
related party for $1,002,000 of which $650,000 was paid with the issuance of a
promissory note. On June 23, 2004, 157,894 of such shares were returned in
cancellation of $635,000 of the related promissory note.
In 2004, the Company entered into a capital lease oblation having an
aggregate net present value of $22,000 resulting in a non cash increase in
property and equipment of $18,000 to the advertising sector and $4,000 to the
products sector.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
- ------------------------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Consolidated Statement of Changes in (Capital Deficiency) Stockholders' Equity
For the Year Ended December 31, 2005
Shares of
Series B
Preferred Shares of
Stock, Common Stock, Preferred Common
Issued and Issued and Stock, Par Stock, Par Additional Deferred
Outstanding Outstanding Value Value Paid-in Capital Compensation
- -------------------------------- -------------- --------------- ---------------- ------------- ---------------- --------------
Balance at December 31, 2004 - 6,002,214 - - $5,274,000 -
Net loss - - - - - -
Stock returned from settlements - (3,333) - - - -
Stock issued to acquire the
Miko Brand Assets - 63,333 - - 83,000 -
Securities issued in conjunction
with the issuance of the
convertible notes - 1,891,033 - $1,000 1,077,000 -
Securities returned upon the
early extinguishment of the
convertible notes - (570,833) - - (936,000) -
Issuance of series B
convertible preferred stock 1,226,557 - - - 3,312,000 -
Offering costs - - - - (370,000) -
Series B convertible preferred
stock conversion (60,000) 540,000 - - - -
Grant of stock options to
consultants - - - - 736,000 ($736,000)
Grant of warrants for
placement fees - - - - 205,000 -
Exercise of stock options and
warrants - 275,185 - - 140,000 -
Amortization of deferred stock
based compensation - - - - - 265,000
- -------------------------------- ------------- -------------- ------------- -------------- --------------- --------------
Balance at
December 31, 2005 1,166,557 8,197,599 - $1,000 $9,521,000 ($471,000)
- -------------------------------- ------------- -------------- ------------- -------------- --------------- -------------
continued
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Consolidated Statement of Changes in (Capital Deficiency) Stockholders' Equity
For the Year Ended December 31, 2005
Note
Receivable Accumulated
Stockholder Deficit Total
- -------------------------------- --------------- -------------- -----------
Balance at December 31, 2004 ($20,000) ($5,811,000) ($557,000)
Net loss - (669,000) (669,000)
Stock returned from settlements - - -
Stock issued to acquire the
Miko Brand Assets - - 83,000
Securities issued in conjunction
with the issuance of the
convertible notes - - 1,078,000
Securities returned upon the
early extinguishment of the
convertible notes - - (936,000)
Issuance of series B
convertible preferred stock - - 3,312,000
Offering costs - - (370,000)
Series B convertible preferred
stock conversion - - -
Grant of stock options to
consultants - - -
Grant of warrants for
placement fees - - 205,000
Exercise of stock options and
warrants - - 140,000
Amortization of deferred stock
based compensation - - 265,000
- -------------------------------- ------------- -------------- -----------
Balance at
December 31, 2005 ($20,000) ($6,480,000) $2,551,000
- -------------------------------- ------------- -------------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
- ------------------------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficiency)
For the Year Ended December 31, 2004
Shares of
Common stock Additional Note
Issued and Common Stock, Paid-in Deferred Receivable Accumulated
Outstanding Par Value Capital Compensation Stockholder Deficit Total
- ------------------- ------------- --------------- ------------ --------------- -------------- --------------- ----------
Balance at
December 31, 2003 - - $22,000 - - ($12,000) $10,000
Equity section of
Zenith Technology,
Inc. (Note 1) 3,478,032 - 934,000 ($783,000) ($20,000) (131,000) -
Transfer to
additional paid-in
capital upon
reorganization - - (131,000) - - 131,000 -
Capitalization of
accumulated deficit
at the time of the
S-Corp Revocation - - (12,000) - - 12,000 -
Stock issued
pursuant to stock
grants (Note 13) 2,003,396 - 3,625,000 (130,000) - - 3,495,000
Grant of stock
options (Note 13) - - 78,000 (78,000) - - -
Exercise of stock
options (Note 13) 150,000 - 130,000 - - - 130,000
Amortization of
deferred compen-
sation (Note 13) - - - $991,000 - - 991,000
Stock issued for
note receivable-
related party
(Note 13) 333,333 - 1,002,000 - (650,000) - 352,000
Cancellation of
note receivable-
related party
upon return of
previously
issued stock (157,894) - (650,000) - 650,000 - -
Stock issued in
lieu of cash for
interest expense 15,347 - 25,000 - - - 25,000
Sale of common stock 180,000 - 251,000 - - - 251,000
Net loss - - - - - (5,811,000) (5,811,000)
- ------------------- ------------- --------------- ------------ --------------- -------------- --------------- ----------
Balance at December
31, 2004 6,002,214 - $5,274,000 - ($20,000) ($5,811,000) ($557,000)
- ------------------- ------------- --------------- ------------ --------------- -------------- --------------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
Adsouth Partners, Inc. (the "Company"), (formerly Zenith Technology,
Inc.) is a publicly held Nevada corporation organized on December 2, 1998.
Changes in Control
On January 4, 2004, the Company, The Tiger Fund, Adsouth, Inc., John P.
Acunto, Jr. and Angela E. Acunto entered into a share exchange transaction,
pursuant to which the Tiger Fund transferred 1,866,667 shares of the Company's
common stock, par value $.0001 per share, it owned to Mr. Acunto and Ms. Acunto,
who were the two shareholders of Adsouth, Inc., in exchange for their 100%
equity ownership in Adsouth, Inc. (the "Adsouth Acquisition"). Upon the
completion of the Adsouth Acquisition, control of the Company had changed
whereby Mr. Acunto, and Ms. Acunto owned more than 50% of the total issued and
outstanding common stock.
Because the Adsouth Acquisition resulted in the former owners of
Adsouth, Inc. gaining control of the Company, the transaction is accounted for
as a reverse acquisition. Effective on the acquisition date, the Company's
balance sheet includes the assets and liabilities of Adsouth, Inc. and its
equity accounts have been recapitalized to reflect the equity of Adsouth, Inc.
In addition, effective on the acquisition date, and for all reporting periods
thereafter, the Company's operating activities, including any prior comparative
periods, will include only those of Adsouth, Inc.
Restatement
The Company is presenting its products sector as discontinued
operations. Accordingly, the consolidated financial statements and other
financial information as of December 31, 2005 and for the years ended December
31, 2005 and 2004, have been restated to show the products sector as a
discontinued operation (see Note 14(d)).
On March 30, 2006, the Company made a decision to enter into
negotiations for the sale of its product sector. On August 1, 2006, the Company
and its subsidiaries sold to MFC Development Corp. ("MFC") substantially all of
the assets of its business relating to the direct, wholesale and retail
marketing and sales of consumer products, which is the line of business which
the Company refers to as its products sector which is presented as a
discontinued operation in our financial statement as of December 31, 2005 and
for the years ended December 31, 2005 and 2004. The sale was made pursuant to an
asset purchase agreement dated June 22, 2006 with MFC. Our continuing operations
are in two business segments - generator sales and advertising services. Through
December 31, 2005, the product sector was shown as a separate segment.
Reverse Split
All share and per share information in these financial statements
reflects a one-for-15 reverse split which became effective on March 25, 2005.
F-9
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Nature of Operations
Since July 8, 2003 the Company has been engaged in providing
advertising agency services specializing in direct response media campaigns. The
Company's advertising agency services include (i) the placement of advertising
in television, internet and print media outlets; (ii) the production of
advertising content including television commercials, print advertising and
other graphics design literature; and (iii) advertising and marketing consulting
services.
In December 2005, the Company organized Genco Power Solutions, Inc.
("Genco") for the purpose of marketing, selling, installing and servicing
integrated power generator systems to residential homeowners and commercial
business throughout Florida. The Company owns 66% of Genco and four individuals
own the remaining 34% of Genco. The Company did not recognize any revenues from
the operations of Genco during 2005.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries through which it has direct controlling
interests. The Company has 100% ownership in Adsouth, Inc., a Florida
corporation organized on October 31, 2003 and Dermafresh, Inc. (a discontinued
operation), a Florida corporation organized on February 2, 2004 and Miko
Distributors, Inc., a Florida corporation organized on January 10, 2005. The
Company has a66% ownership interest in Genco Power Solutions, Inc., a Florida
corporation organized on December 14, 2005. For Genco, the Company eliminates
the minority interest portion of any related profits and losses. The allocable
losses of Genco's minority interests are in excess of the Company's investment
in Genco by $4,000 at December 31, 2005. All significant intercompany balances
and transactions have been eliminated.
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of December
31, 2005, the Company has no cash equivalents.
Accounts Receivables
All of the Companies accounts receivable are reported at their net
collectible amounts. The Company records a reserve against any accounts
receivable for which the Company deems, in its judgment, that collection may be
in doubt. The reserve for uncollectible accounts at December 31, 2005 was
$15,000. Bad debt expense for 2005 and 2004 was $15,000 and $484,000,
respectively.
F-10
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Inventory
Inventory is comprised of finished goods available for sale and is
valued at the lower of cost or market, cost being determined both on a moving
average and a first-in/first-out basis.
Property and Equipment
Property and equipment and leasehold improvements are carried at cost
less allowances for accumulated depreciation and amortization. The cost of
equipment held under capital leases is equal to the lower of the net present
value of the minimum lease payments or the fair market value of the leased
property at the inception of the lease. Depreciation is computed generally by
the straight-line method over the estimated useful lives of the assets, which
are generally five to seven years. Amortization of leasehold improvements and
equipment held under capital leases is included with depreciation expense and is
calculated on the straight-line method over the term of the underlying leases
which range from three to ten years. . Expenditures for maintenance and repairs,
which do not generally extend the useful life of the related assets, are charged
to operations as incurred. Gains or losses on disposal of property and equipment
are reflected in the statement of operations in the period of disposal.
Long-lived Assets
Long-lived assets consist primarily of property and equipment. Long-lived
assets are reviewed for impairment whenever events or circumstances indicate
their carrying value may not be recoverable. When such events or circumstances
arise, an estimate of the future undiscounted cash flows produced by the asset,
or the appropriate grouping of assets, is compared to the asset's carrying value
to determine if impairment exists pursuant to the requirements of SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". If the asset
is determined to be impaired, the impairment loss is measured based on the
excess of its carrying value over its fair value. Assets to be disposed of are
reported at the lower of its carrying value or net realizable value.
Revenue Recognition
During the years ended December 31, 2005 and 2004, the Company derived
advertising services revenue from; (i) the placement of advertising in
television, internet and print media outlets; (ii) the production of advertising
content including television commercials, print advertising and other graphics
design literature; and (iii) advertising and marketing consulting services. The
Company's advertising services revenue is derived from billings that are earned
when the media is placed, from fees earned as advertising services are performed
and from production services rendered. In addition, incentive amounts may be
earned based on qualitative and/or quantitative criteria. In the case of media
placements, revenue is recognized as the media placements appear. During the
years ended December 31, 2005 and 2004, the Company was the primary obligor and
carried all of the credit risk for the media placements and accordingly,
recorded the full amount of such billings from the media placements as revenue
in accordance with Emerging Issues Task Force Issue No. 99-19. In the case of
consulting and production arrangements, the revenue is recognized as the
services are performed. The Company's creative consulting revenue is generally
earned on a fee basis, and in certain cases incentive amounts
F-11
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
may also be earned. As with fee arrangements in advertising, such revenue is
recognized as the work is performed. Incentive amounts for advertising and
marketing services are recognized upon satisfaction of the qualitative and/or
quantitative criteria, as set out in the relevant client contract. Deferred
revenues are recognized as a liability when billings are received in advance of
the date when revenues are earned and were $1,029,000 as of December 31, 2005.
Advertising Costs
Advertising costs, which for the years ended December 31, 2005 and 2004
were $1,000 and $31,000, respectively, are expensed as incurred and are included
within selling expenses in the statement of operations.
Income Taxes
The Company provides for federal and state income taxes currently
payable, as well as for those deferred because of temporary differences between
reporting income and expenses for financial statement purposes versus tax
purposes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. The effect of a
change in tax rates is recognized as income or expense in the period of the
change. A valuation allowance is established, when necessary, to reduce deferred
income taxes to the amount that is more likely than not to be realized.
As of December 31, 2005, the Company has net operating loss
carry-forwards approximating $3,486,000. Pursuant to section 382 of the Internal
Revenue Code, utilization of these losses may be limited upon a change in
control.
Basic and Diluted Income (Loss) Per Share
Basic and diluted per share results for 2005 and 2004 were computed
based on the net loss allocated to the common stock for the respective periods.
The weighted average number of shares of common stock outstanding during the
periods was used in the calculation of basic earnings (loss) per share. In
accordance with FAS 128, "Earnings Per Share," the weighted average number of
shares of common stock used in the calculation of diluted per share amounts is
adjusted for the dilutive effects of potential common shares including, (i) the
assumed exercise of stock options based on the treasury stock method; and (ii)
the assumed conversion of convertible preferred stock only if an entity records
earnings from continuing operations, as such adjustments would otherwise be
anti-dilutive to earnings per share from continuing operations. As a result of
the Company recording losses during 2005 and 2004, the average number of common
shares used in the calculation of basic and diluted loss per share is identical
and have not been adjusted for the effects of potential common shares from
unconverted shares of convertible preferred stock and unexercised stock options
and warrants. As of December 31, 2005 there were outstanding options to purchase
5,490,297 shares of common stock, warrants to purchase 12,954,868 shares of
common stock and series B preferred stock convertible into 10,499,013 shares of
common stock. Such potential common shares may dilute earnings per share in the
future.
F-12
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Accounting principles generally accepted in the United States of
America require disclosing the fair value of financial instruments to the extent
practicable for financial instruments, which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. In assessing the fair value of these financial
instruments, the Company used a variety of methods and assumptions, which were
based on estimates of market conditions and risks existing at that time. For
certain instruments, including cash, accounts and notes receivable and other
current liabilities, it was estimated that the carrying amount approximated fair
value for the majority of these instruments because of their short maturity. The
fair value of the capital leases and notes payable obligations, as recorded,
approximate their fair values as represented by the net present value of the
future payments on the underlying obligations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk include cash and accounts receivable.
As of December 31, 2005, all of the Company's cash is placed with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. As of December
31, 2005, the Company had $1,327,000 of cash balances in excess of federally
insured limits.
The following table sets forth the percentage of revenue derived by the
Company from those customers which accounted for at least 10% of consolidated
revenues during the applicable periods:
Customer 2005 2004
- ----------------- -------------- --------------
Customer A 84% *
Customer B * 92%
* Not a customer during this period and no longer a customer.
The Company does not require collateral to support accounts receivable
or financial instruments subject to credit risk.
Stock Options and Similar Equity Instruments
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure," for stock options and similar equity
instruments (collectively "Options") issued to employees. SFAS No. 123 allows
for the choice of recording stock options issued to employees using Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees" while disclosing the effects, on a pro forma basis, of using SFAS No.
123 in the footnotes to the financial statements. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration
F-13
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. In December 2004, the FASB issued SFAS No.123 (revised
2004), "Share-Based Payment." SFAS 123(R) will provide investors and other users
of financial statements with more complete financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and
employee stock purchase plans. SFAS 123(R) replaces SFAS 123 and supercedes APB
Opinion No. 25. Public entities that are small business issuers will be required
to apply Statement 123(R) as of the first annual reporting period that begins
after December 15, 2005. Through 2005, the Company recognized the expense of
options or similar instruments issued to employees using the intrinsic value
based method. Beginning with the first quarter of 2006, the Company is required
to recognize expense of options or similar instruments issued to employees using
the fair-value-based method of accounting for stock-based payments.
For purposes of pro forma disclosures the amount of stock-based
compensation as calculated using the fair value method of accounting for stock
options issued to employees is amortized over the options' vesting period. The
Company's pro forma information for the years ended December 31, 2005 and 2004
is as follows:
2005 2004
- -------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders ($2,013,000) ($5,811,000)
Add: Stock-based employee compensation as determined under the intrinsic value based
method and included in the statement of operations 8,000 3,063,000
Deduct: Stock- based employee compensation as determined under fair value based method (210,000) (3,184,000)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma net loss attributable to common stockholders ($2,215,000) ($5,932,000)
- -------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders - Basic and diluted:
As reported ($0.26) ($1.05)
Pro forma ($0.02) ($1.07)
The following table summarizes the Company's stock warrants and options
for the years ended December 31, 2005 and 2004.
Year Ended December 31,
-----------------------
2005 2004
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding-beginning of period 1,061,520 $1.73 - -
Granted 19,379,750 $1.06 3,246,583 $0.62
Exercised (241,852) $0.63 (2,151,730) $0.06
Forfeited/Expired (1,754,253) $1.32 (33,333 $1.35
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding-end of period 18,445,165 $1.02 1,061,520 $1.73
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable-end of period 16,517,040 $1.14 1,061,520 $1.73
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during the period $0.39 $1.50
- ---------------------------------------------------------------------------------------------------------------------------
F-14
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
The assumptions used during the years ended December 31, 2005 and 2004
were as follows:
Year Ended December 31,
-----------------------
2005 2004
- ---------------------------- --------------------- -------------------------
Risk free interest rate 3.56% 2.12%
Expected Dividend Yield 0% 0%
Expected Lives 1-5 years 1-5 years
Expected Volatility 33%-177% 68%-120%
The following table presents warrants and options outstanding as of
December 31, 2005 and their exercise prices and contractual remaining lives, the
18,445,165 warrants and options outstanding have exercise prices ranging between
$0.28 and $30.00 and a weighted-average remaining contractual life of 4.28
years.
Shares Underlying Remaining
Outstanding Options Contractual
and Warrants Exercise Price Life in Years
- ----------------------- ----------------- --------------------
9,077 $30.00 2.84
52,444 $3.00 0.20
3,499,999 $1.80 4.46
3,499,999 $1.50 4.46
733,335 $1.35 3.16
26,667 $1.31 2.03
2,500,000 $1.20 4.46
700,000 $0.80 3.27
98,628 $0.74 4.25
56,667 $0.71 0.22
5,300,000 $0.65 4.46
135,017 $0.60 4.13
125,000 $0.48 0.74
175,000 $0.38 1.00
750,000 $0.32 5.00
100,000 $0.31 4.61
633,333 $0.30 4.46
50,000 $0.28 5.00
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-15
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Reclassifications
Certain 2004 items have been reclassified to conform to the December
31, 2005 presentation.
2. Accounts Receivable
The Company's accounts receivables as of December 31, 2005 are
summarized as follows:
Accounts receivable $39,000
Allowance for doubtful accounts (15,000)
- -------------------------------------------------------------------------------
Accounts receivable, net $24,000
- -------------------------------------------------------------------------------
The following table summarizes the activity in the Company's allowance
for doubtful accounts for the years ended December 31, 2005 and 2004:
2005 2004
- ------------------------------------------------- ------------ ---------------
Balance at beginning of period ($484,000) -
Write-offs 484,000 $31,000
Provision for bad expense (15,000) (515,000)
- ------------------------------------------------- ------------ ---------------
Balance at end of period ($15,000) ($484,000)
- ------------------------------------------------- ------------ ---------------
For the year ended December 31, 2004, 92% of the Company's consolidated
revenues were derived from one customer, who is no longer a customer and who
owed the Company $655,000 as of December 31, 2004. During the year ended
December 31, 2004, the Company reserved $482,000 of the receivable due from such
customer. During the year ended December 31, 2005, the Company accepted
marketable securities which were valued at $173,000 in payment towards the
outstanding receivable and wrote-off the balance of $482,000.
3. Deferred Charge, Related Party
On June 16, 2005, Mr. Acunto, who beneficially owns more than 10% of
our common stock, received an initial payment of $200,000 on June 17, 2005
pursuant to his consulting agreement of which $33,000 was charged to operations
in 2005 and $167,000 is a deferred charged asset which will be amortized over
the term of the consulting agreement. $67,000 of the deferred charge will be
amortized over the next twelve months and is classified as a current asset and
the balance of $100,000 is classified as a long-term asset.
F-16
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
4. Property and Equipment
The Company's property and equipment as of December 31, 2005 are
summarized as follows:
- --------------------------------------------------------------------------------
Vehicles $49,000
Leasehold improvements 66,000
Computer equipment 59,000
Computer software 31,000
Equipment 33,000
Furniture 79,000
Production equipment 67,000
- --------------------------------------------------------------------------------
384,000
Accumulated depreciation and amortization (29,000)
- --------------------------------------------------------------------------------
355,000
- --------------------------------------------------------------------------------
Equipment held under capitalized lease obligations 24,000
Accumulated amortization (4,000)
- --------------------------------------------------------------------------------
20,000
- --------------------------------------------------------------------------------
Property and equipment, net $375,000
- --------------------------------------------------------------------------------
Depreciation and amortization expense for the years ended December 31,
2005 and 2004 was $26,000 and $8,000, respectively.
5. Capital Lease Obligations
As of December 31, 2005, the future minimum lease payments under
capital leases are as follows:
2006 $7,000
2007 6,000
2008 6,000
2009 6,000
2010 2,000
- --------------------------------------------------------------------------------
27,000
Less amount representing imputed interest (5,000)
- --------------------------------------------------------------------------------
Present value of net minimum capital lease payments 22,000
Current portion of capital lease obligations 5,000
- --------------------------------------------------------------------------------
Non current portion of capital lease obligations $17,000
- --------------------------------------------------------------------------------
F-17
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
6. Long-term Notes Payable
As of December 31, 2005, the amounts outstanding on long-term notes
payable are as follows:
Vehicle loan dated April 25, 2005 (a) $16,000
Vehicle loan dated August 19, 2005 (b) 14,000
Vehicle loan dated September 2, 2005 (c) 23,000
Furniture and fixtures loan dated November 8, 2005 (d) 60,000
Machinery and equipment loan dated November 8, 2005 (e) 63,000
- --------------------------------------------------------------------------------
Total Notes payable 176,000
Portion of notes payable related to discontinued operations (128,000)
- --------------------------------------------------------------------------------
Portion of notes payable related to continuing operations 48,000
Less current portion of notes payable (11,000)
- --------------------------------------------------------------------------------
Long-term portion of notes payable $37,000
- --------------------------------------------------------------------------------
The aggregate maturities of long-term notes payable are as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
2006 $38,000
2007 41,000
2008 38,000
2009 32,000
2010 27,000
- --------------------------------------------------------------------------------
Total maturities of long-term notes payable $176,000
- --------------------------------------------------------------------------------
Interest expense on the long-term notes payable for the year ended
December 31, 2005 was $3,803 of which $1,000 related to continuing operations.
(a) On April 25, 2005, the Company obtained a $20,000 vehicle loan. The
loan bears interest at 9.5% per annum and requires monthly principal and
interest payments over the three year term of the loan. The loan is
collateralized with a security interest in the underlying vehicle. During the
year ended December 31, 2005 interest expense on the loan was $1,191.
(b) On August 19, 2005, the Company obtained a $16,000 vehicle loan.
The loan bears interest at 8.0% per annum and requires monthly principal and
interest payments over the three year term of the loan. The loan is
collateralized with a security interest in the underlying vehicle. During the
year ended December 31, 2005 interest expense on the loan was $441.
(c) On September 2, 2005, the Company obtained a $25,000 vehicle loan.
The loan bears interest at 8.0% per annum and requires monthly principal and
interest payments over the four year term of the loan. The loan is
collateralized with a security interest in the underlying vehicle. During the
year ended December 31, 2005 interest expense on the loan was $603.
(d) On November 8, 2005, the Company obtained a $60,000 furniture and
fixtures loan. The loan bears interest at 8.75% per annum and requires monthly
principal and interest payments over the five year term of the loan. The loan is
collateralized with a security interest in the underlying furniture and
fixtures. During the year ended December 31, 2005 interest expense on the loan
was $765.
F-18
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
(e) On November 8, 2005, the Company obtained a $64,000 machinery and
equipment loan. The loan bears interest at 8.75% per annum and requires monthly
principal and interest payments over the five year term of the loan. The loan is
collateralized with a security interest in the underlying furniture and
fixtures. During the year ended December 31, 2005 interest expense on the loan
was $803.
7. Income Taxes
For the years ended December 31, 2005 and 2004, the Company has no
current Federal or state taxes payable. Deferred taxes are based upon
differences between the financial statement and tax basis of assets and
liabilities and available tax carry-forwards are summarized in the following
table.
As of December 31, 2005
- --------------------------------------------------------------------------------
Net operating loss carry-forward $1,220,000
Allowance for doubtful accounts receivable 7,000
Stock compensation expense 1,005,000
Sales returns and promotion allowance 75,000
Depreciation (27,000)
- --------------------------------------------------------------------------------
Net deferred tax asset 2,280,000
Valuation allowance ($2,280,000)
- --------------------------------------------------------------------------------
-
- --------------------------------------------------------------------------------
For the year ended December 31, 2005 the valuation allowance for net
deferred tax assets increased by $217,000. The net increase was the result of
changes in net temporary differences. Based upon the current tax loss, the
Company has established the valuation allowance against the entire net deferred
tax asset.
As of December 31, 2005, the Company has net operating loss
carry-forwards approximating $3,486,000. Pursuant to section 382 of the Internal
Revenue Code, utilization of these losses may be limited upon a change in
control. Approximately $130,000 of net operating losses incurred prior to
January 4, 2004 is limited to $26,000 per year due to the change of control that
resulted from the January 1, 2004 reverse acquisition. Approximately $2.3
million of net operating losses incurred from January 1, 2004 through June 17,
2005 are limited to $651,000 per year due to the June 17, 2005 private placement
of the series B preferred stock.
The Company's net operating loss carry-forwards at December 31, 2005
expire as set forth in the following table.
Year carry-forward expires Amount
- --------------------------------------------------------------------------------
2023 $130,000
2024 2,006,000
2025 1,350,000
- --------------------------------------------------------------------------------
$3,486,000
- --------------------------------------------------------------------------------
F-19
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
The following table reconciles the statutory federal income tax rate to
the effective rate.
Year Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Statutory federal income tax rate (35.0%) (35.0%)
Net operating loss for which no benefit was received 32.3% 34.7%
Permanent difference 2.7% .3%
- --------------------------------------------------------------------------------
Effective income tax rate 0.0% 0.0%
- --------------------------------------------------------------------------------
8. Commitments and Contingencies
(a) Operating Lease Obligations
The Company leases 20,394 square feet of office and warehouse space in
a warehouse complex located at 1141 S. Rogers Circle, Boca Raton, Florida under
a lease, which initially expires in October 2015. The Company also leases 6,658
square feet of executive office space in an office building located 1515 N.
Federal Highway, Boca Raton, Florida under a lease, as amended, which initially
expires in March of 2010. The Company leases 846 square feet of office space in
Bentonville, Arkansas under a lease which initially expires in November 2008.
As of December 31, 2005 the Company's future minimum lease payments
under operating leases are as follows:
2006 $475,000
2007 492,000
2008 500,000
2009 513,000
2010 533,3000
Thereafter 2,071,000
- --------------------------------------------------------------------------------
Total $4,584,000
- --------------------------------------------------------------------------------
Rent expense under operating leases for the years ended December 31,
2005 and 2004 was $240,000 and $76,000, respectively.
(b) Consulting Agreement
On June 17, 2005, in connection with the private placement of the
series B preferred stock, Mr. Acunto resigned as the Company's chief executive
officer and the Company entered into a consulting agreement with Mr. Acunto,
pursuant to which Mr. Acunto agreed to serve on a substantially full-time basis
as a consultant with principal emphasis in marketing the Company's advertising
business for a term of three years and continuing thereafter on a year-to-year
basis unless terminated by either party on 90 days prior written notice. As
compensation for his services, the Company paid Mr. Acunto an initial payment of
$200,000, and is to pay him a non-refundable monthly draw of $17,000 against
commissions earned. The Company agreed to pay Mr. Acunto a commission equal to
5% of the gross profit on covered accounts, as defined in the agreement. The
Company also granted Mr. Acunto a non-qualified stock option to purchase
2,000,000 shares of common stock at an exercise price of $.65 per share, which
is exercisable immediately as to 500,000 shares and thereafter in quarterly
installments based on the
F-20
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Company's gross profit for the quarter. On August 16, 2005, the consulting
agreement with Mr. Acunto was amended whereby the $34,000 paid to him for the
months of July 2005 and August 2005 were deemed earned fees and not a draw on
commissions and effective September 1, 2005, his commission was increased from
5% to 10% of the gross profit on covered accounts.
(c) Employment Agreements
On June 17, 2005, contemporaneously with Mr. Acunto's resignation, Mr. John
Cammarano, Jr, who was the Company's president, was elected as chief executive
officer and was granted non-qualified stock options to purchase 800,000 shares
of common stock at $.65 per share. The intrinsic value of the option issued to
Mr. Cammarano approximates $8,000 which will be expensed as the option vests.
Mr. Cammarano's annual compensation was increased to $250,000, effective June
17, 2005. On October 7, 2005, the Company entered into an employment agreement
with Mr. Cammarano and Mr. Anton Lee Wingeier (the Company's chief financial
officer) which superseded their previous employment agreements. The employment
agreements initially expired on December 31, 2008 and continued on a
month-to-month basis thereafter unless terminated on not less than 90 days
notice by either the Company or executive. Pursuant to October 7, 2005
employment agreements Mr. Cammarano and Mr. Wingeier were to receive annual
compensation of $250,000 and $175,000 respectively, signing bonuses of $50,000
each and quarterly and annual bonuses. The quarterly bonuses were equal to the
sum of (i) a gross margin bonus calculated as 5% of the amount by which the
product sectors gross profit is greater than 47% of the product sectors
revenues; (ii) an operating expense bonus calculated as the amount by which
selling, general and administrative expense (less consulting fees, legal fees,
non-cash stock expense and investor relations fees) as a percentage of
consolidated revenue has decreased from the immediately preceding quarter,
multiplied by consolidated revenues, the product of which is multiplied by
one-half of the percentage decrease; and (iii) a net income bonus calculated as
7.5% of the quarter's income before debt extinguishment, interest expense on
subordinated debentures and non-cash stock compensation expense. The annual
bonuses were calculated as 7.5% of the amount by which annual income before debt
extinguishment, interest expense on subordinated debentures and non-cash stock
compensation expense increased from the immediately preceding year. Pursuant to
the quarterly and annual bonus provisions of the employment agreements dated
October 7, 2005, the Company recorded aggregate accrued bonus compensation of
approximately $100,000. Both Mr. Cammarano and Mr. Wingeier will receive options
to purchase not less than such shares of common stock as having a value equal to
the sum of the quarterly and annual bonuses and in December 2005 they each
received an option to purchase 200,000 shares of common stock for $0.32 per
share, the fair value on the date of grant.
As of June 27, 2005, the Company entered into a three-year employment
agreement with a key marketing employee at an annual salary of $145,000. In
connection with her employment, the Company granted her an option to purchase
500,000 shares of common stock pursuant to the 2005 Plan at an exercise price of
$.65.
F-21
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
(d) Legal Proceedings
On or about January 17, 2005, Paul Spinner instituted a lawsuit in U.S.
District Court, Southern District of Florida, against Mr. Acunto and the
Company's subsidiary, Adsouth, Inc. Upon an initial investigation, the Company
considers the allegations to relate to a private business transaction between
Paul Spinner and Mr. Acunto. Accordingly, on March 2, 2006, Mr. Acunto executed
an Indemnification and Hold Harmless Agreement in favor of Adsouth, Inc., which
addresses the cost of defense of the legal proceedings and an indemnification of
Adsouth, Inc. in the event of any adverse finding against Adsouth, Inc. The case
is in its initial discovery stage and the Company is unable to determine the
potential impact of the litigation on the Company or its operations.
In the normal course of business the Company may be involved in legal
proceedings in the ordinary course of business. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance.
9. Capital Stock
Common and Preferred Stock
As of December 31, 2005 there are 60,000,000 shares of common stock
authorized of which 8,197,599 shares were issued and outstanding. As of December
31, 2005 there are 10,000,000 shares of preferred stock, $.0001 par value per
share, authorized of which 1,500,000 are designated as series B convertible
preferred stock. As of December 31, 2005 there are 1,166,557 shares of series B
preferred stock issued and outstanding.
In April 2004, the Company's stockholders, by a consent of the holders
of a majority of the outstanding shares of common stock, approved an amendment
to the Company's certificate of incorporation, which (i) increased the number of
authorized shares of common stock to 500,000,000 shares, and (ii) authorized
5,000,000 shares of preferred stock, par value $.0001 per share, of which
3,500,000 shares were designated as series A convertible preferred stock.
On March 14, 2005, the board of directors approved a one-for-fifteen share
reverse split of the Company's common stock and a proportionate reduction of the
authorized shares outstanding. On March 25, 2005, the effective date of the
reverse split, the numbers of authorized shares of common stock was reduced to
33,333,333. All share information and per share amounts presented in these
consolidated financial statements are presented as if the aforementioned reverse
split was effective for all periods presented.
On June 16, 2005, the Company's board of directors approved, and on
October 20, 2005 the Company's stockholders adopted, an amendment to Company's
Articles of Incorporation to (i) eliminate the series A convertible preferred
stock, (ii) increase the number of authorized shares of preferred stock to
10,000,000 shares, and (iii) increase the number of authorized shares of common
stock to 60,000,000 shares.
F-22
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
On June 16, 2005, the Company created the series B preferred stock. The
certificate of designation provides that:
(i) each issued and outstanding share of series B preferred stock was
convertible into 9 shares of common stock through March 22, 2006 and, as a
result of an amendment dated March 23, 2006, into 12.15 shares of common stock
thereafter;
(ii) if, within two years after the closing, the Company issues common
stock or options, warrants or other convertible securities at a price or with a
conversion or exercise price less than the conversion price (initially $.30),
with certain specified exceptions, the number of shares issuable upon conversion
of one share of series B preferred stock is adjusted, using a weighted average
formula, to reflect such issuance;
(iii) no dividends are payable with respect to the series B preferred
stock;
(iv) while the series B preferred stock is outstanding, the Company may
not pay dividends on or redeem shares of common stock;
(v) upon any voluntary or involuntary liquidation, dissolution or
winding-up, the holders of the series B preferred stock are entitled to a
preference of $2.70 per share before any distributions or payments may be made
with respect to the common stock or any other class or series of capital stock
which is junior to the series B preferred stock upon voluntary or involuntary
liquidation, dissolution or winding-up;
(vi) the holders of the series B preferred stock have no voting rights;
(vii) without the approval of the holders of 75% of the series B
preferred stock, the Company will not (a) alter or change the powers,
preferences or rights given to the series B preferred stock or alter or amend
the Certificate of Designation relating to the series B preferred stock, (b)
authorize or create any class of stock ranking as to dividends or distribution
of assets upon a liquidation senior to or otherwise pari passu with the series B
preferred stock, or any class or series of preferred stock possessing greater
voting rights or the right to convert at a more favorable price than the series
B preferred stock, (c) amend its certificate or articles of incorporation or
other charter documents in breach of any of the provisions hereof, (d) increase
the authorized number of shares of series B preferred stock, or (e) enter into
any agreement with respect to the foregoing.; and,
(viii) in the event the Company does not deliver a stock certificate
upon conversion of the series B preferred stock in a timely manner, as set forth
in the Certificate of Designation, the Company must pay the converting holder
liquidated damages. The holders of the series B preferred stock may not convert
the series B preferred stock to the extent that such conversion would result in
the holders owning more than 4.9% of the outstanding common stock. This
limitation may not be amended without the consent of the holders of a majority
of the outstanding common stock.
All remaining shares of preferred stock not so specifically designated
may be designated in the future by action of the Board of Directors of the
Corporation and otherwise in accordance with the applicable provisions of the
Nevada Revised Statutes of the State of Nevada.
F-23
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Common Stock Private Placement Offerings
On June 4, 2004, the Company sold 133,333 shares of its common stock
for $1.50 per share to an accredited investor pursuant to a private placement
offering receiving proceeds of $200,000. Pursuant to the offering, the investor
has the right to demand registration of the 133,333 shares one year from the
date of purchase. Such shares were registered effective August 3, 2005.
On July 20, 2004, the Company sold 46,667 shares of its common stock
for $1.13 per share to an accredited investor pursuant to a private placement
offering receiving proceeds of approximately $52,500. Pursuant to the offering,
the investor has the right to demand registration of the 46,667 shares one year
from the date of purchase. Such shares were registered effective August 3, 2005.
Convertible Debentures Private Placement Offering
On February 17 and 22, 2005, the Company completed a private placement
of its securities with ten accredited investors (the "February Private
Placement") pursuant to which, the Company sold, for $810,100, (i) its 10%
convertible notes due December 2006 in the aggregate principal amount of
$810,100, (ii) 1,620,200 shares of common stock, and (iii) warrants to purchase
675,083 shares of common stock at an exercise price of $1.28 per share. The
notes were convertible into common stock at the fixed conversion price of $.60
per share at any time. The debt discount related to the convertible notes was
$810,000 and was to be amortized over the term of the 10% convertible notes.
Atlas Capital Services, LLC served as placement agent for the financing. As
compensation for its services as placement agent, the Company paid Atlas a fee
of 10% of the gross proceeds raised in the private placement, warrants to
purchase 135,017 shares of common stock at an exercise price of $.60 per share.
The Company also paid the subscribers' legal expenses. In connection with the
Company's engagement of Atlas, it issued to Atlas an option to purchase 33,333
shares of common stock for nominal consideration. This option was exercised at
or about the closing of the private placement.
On May 16, 2005 and May 20, 2005, the Company completed a private
placement of its securities with two accredited investors (the "May Private
Placement") pursuant to which the Company sold, for $650,000, (i) its 12%
secured convertible notes due March 15, 2007 in the aggregate principal amount
of $650,000, (ii) 270,833 shares of common stock, and (iii) warrants to purchase
812,500 shares of common stock at an exercise price of $1.275 per share. The
notes were convertible into common stock at the fixed conversion price of $.60
per share at any time. The debt discount related to the convertible notes was
$267,000 and was to be amortized over the term of the 10% convertible notes. In
connection with the placement, the Company paid fees equal to 10% of the gross
proceeds raised in the private placement and warrants to purchase 125,000 shares
of common stock at an exercise price of $.48 per share. The Company also
reimbursed the investors for legal fees and expenses of $10,000.
The closing costs related to the issuance of the convertible notes were
$445,000 including legal fees, broker fees and the value of broker warrants
issued pursuant to the convertible note offerings. The deferred offering costs
were being amortized on a straight-line basis over the period in which the
convertible notes were outstanding. On June 17, 2005, the Company paid a total
of $792,120 to the holders of $660,100 of the convertible notes. The
subscription agreements relating to the issuance of the notes gave the Company
the right to redeem the notes at a premium and gave the holders of the notes the
F-24
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
right to demand redemption of the notes at a premium. In connection with the
payment, the note holders also cancelled warrants to purchase 550,087 shares of
common stock. On June 17, 2005, note holders exchanged a total of $800,000 of
principal and $12,000 of accrued interest for shares of the series B preferred
stock. In connection with the exchange, the note holders also cancelled warrants
to purchase 937,500 shares of common stock and returned 570,833 shares of common
stock. As a result of the payment and exchange of this debt the Company incurred
a loss of $537,000 for 2005 from the early extinguishment of the convertible
notes which includes the unamortized balance of the deferred offering costs.
Series B Preferred Stock Private Placement
On June 17, 2005, the Company completed a private placement with three
accredited investors (the "June Private Placement") pursuant to which the
Company issued an aggregate of 1,226,557 shares of series B preferred stock and
warrants to purchase 12,000,000 shares of common stock in exchange for
$2,500,000 cash, the cancellation of (i) $812,000 of principal and interest on
the Company's convertible debentures; (ii) warrants to purchase a total of
937,500 shares of common stock, and (iii) 570,833 shares of common stock, which
were issued pursuant to the February and May 2005 private placements.
The June Private Placement required the issuance of additional shares
of series B preferred stock if the Company's fully-diluted earnings per share of
common stock, computed as provided in the purchase agreement which excludes
certain non-recurring expenses, is $.167 or less for the year ending December
31, 2005. On March 23, 2006, the holders of the series B preferred stock agreed
to an equivalent increase in the conversion rate of the remaining outstanding
shares of series B preferred stock as opposed to the issuance of additional
shares of series B preferred stock. Based on the calculation of the Company's
fully diluted earnings for the year ended December 31, 2005, as calculated
pursuant to the purchase agreement, as of March 21, 2006, each outstanding share
of series B preferred stock is convertible into 12.15 shares of common stock, an
increase of 35% from the original conversion rate.
The Company and the investors entered into a registration rights
agreement pursuant to which the Company filed a registration statement covering
the common stock issuable upon conversion of the series B preferred stock and
exercise of the warrants. The registration statement became effective on August
3, 2005.
The warrants issued to the investors have a term of five years,
commencing June 17, 2005, and have exercise prices of $.65 as to 2,500,000
shares, $1.20 as to 2,500,000 shares, $1.50 as to 3,500,000 shares and $1.80 as
to 3,500,000. If, while the warrants are outstanding, the Company issues common
stock or options, warrants or other convertible securities at a price or with a
conversion or exercise price less than the exercise price, with certain
specified exceptions, the exercise price of the warrants will be reduced using a
weighted average formula, to reflect such issuance. The reduction in the
exercise price pursuant to this provision will not result in an increase in the
number of shares of common stock issuable upon such exercise.
Atlas Capital Services, LLC served as placement agent for the
financing. As compensation for its services as placement agent, the Company paid
Atlas a fee of $125,000 and issued to Atlas and its designees warrants to
purchase 300,000 shares of common stock at $.30 per share. Liberty Company
Financial, LLC served as financial advisor to Barron, and the Company paid
Liberty Company Financial
F-25
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
a fee of $125,000 and issued to Liberty warrants to purchase 333,333 shares of
common stock at $.30 per share. The Company also reimbursed Barron Partners for
its legal fees and other expenses in the amount of $50,000.
The Company determined that the series B preferred stock was issued
with an effective beneficial conversion feature of approximately $1,344,000
based upon the relative fair values of the underlying securities issued. As
such, this beneficial conversion feature is recorded as a deemed preferred stock
dividend.
As of December 31, 2005, 60,000 shares of series B preferred stock were
converted into 540,000 shares of common stock.
Note Receivable Stockholder
On May 9, 2003, the Company's board of directors authorized The Tiger
Fund's purchase of an additional 1,298,452 shares of common stock upon their
issuance of an approximately $20,000 promissory note to the Company, subsequent
to which, the Tiger Fund owned the maximum number of shares permitted by the
Tiger Fund Stock Purchase Agreement. The note accrues interest annually at a
rate equal to the 90 day treasury rate published in the Wall Street Journal on
January 1st of each year, an effective rate of 1% at December 31, 2005, with all
principal and interest due in forty-eight (48) months.
Pursuant to the Adsouth Acquisition, the Tiger Fund, Inc. committed to
provide the Company with a total of $1 million in equity funding during 2004.
Originally, the Tiger fund was to receive a warrant to purchase 133,333 shares
of common stock at $15 per share for its $1 million investment. On March 31,
2004, the Company and the Tiger Fund entered into an amended agreement pursuant
to which the Tiger Fund, Inc. purchased 333,333 shares of common stock for
approximately $1 million consisting of $350,000 cash and a promissory note in
the amount of $650,000. Subsequently, The Tiger Fund returned 157,894 shares of
common stock and the $650,000 promissory note was cancelled.
Stock Repurchase Plan
On July 23, 2004 the Company's board of directors authorized the
purchase of up to $500,000 of its common stock from time to time in open market
transactions. The repurchase program did not have a specified duration. No
shares were repurchased by the Company under the stock repurchase plan and in
2005 the Company's board of directors terminated the plan. The Company's
agreement relating to the sale of the series B preferred stock prohibits the
Company from purchasing stock.
F-26
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
10. Stock Based Compensation
The Company's stock based compensation is summarized on the following
table:
Year Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Deferred stock based compensation (a) $264,000 $991,000
Non deferred stock based compensation (b) - 3,497,000
- --------------------------------------------------------------------------------
Total stock based compensation expense 264,000 4,488,000
Portion allocable to discontinued operations (123,000) (770,000)
- --------------------------------------------------------------------------------
Portion allocable to continuing operations $141,000 $3,718,000
- --------------------------------------------------------------------------------
(a) Deferred Stock Based Compensation
The Company's deferred stock compensation is summarized in the
following table:
Year Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Balance at beginning of period - $783,000
Value of stock grant, option and warrants issued $736,000 208,000
Amortization of deferred stock compensation (265,000) ($991,000)
- --------------------------------------------------------------------------------
Balance at end of period $471,000 -
- --------------------------------------------------------------------------------
In December 2003, pursuant to a management agreement, the Company
authorized the issuance of 347,800 shares of common stock to Strategy Partners,
Inc., a related party, as payment for the first twelve months of their
management consulting services. During 2004, the Company granted to consultants
an aggregate of 58,334 shares of common stock and options to purchase to an
aggregate of 363,333 shares of common stock at prices ranging from $.0015 to
$1.38 per share for services performed during 2004. Using the Black-Scholes
option valuation formula, these stock and option grants were valued at an
aggregate of $991,000, all which was expensed in the year ended December 31,
2004.
During the year ended December 31, 2005, the Company granted to
consultants options to purchase an aggregate of 2,786,852 shares of common stock
at prices ranging from $0.32 to $1.31 per share, including an option issued to
Mr. Acunto, pursuant to his consulting agreement to purchase 2,000,000 shares at
$.65 per share and an option issued to Mr. Acunto by the compensation committee
to purchase 200,000 shares at $.32 per share. Using the Black-Scholes option
valuation formula, these option grants were valued at an aggregate of $736,000
which is being amortized to expense using the straight-line method based on the
term of service pursuant to which the options were issued.
(b) Non Deferred Stock Based Compensation
During the year ended December 31, 2004, the Company granted to
employees and consultants 1,945,063 shares of common stock valued at $3,497,000,
all of which was expensed on the date of grant in 2004.
During the year ended December 31, 2004, the Company issued to certain
former and existing stockholders of the Company, in order to settle claims for
such warrants that were purported to exist
F-27
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
prior to the Adsouth Acquisition, warrants to purchase an aggregate of 9,076
shares of common stock at a price of $30.00 per share and warrants to purchase
52,444 shares of common stock at a price of $3.30. Using the Black-Scholes
option valuation formula, these warrants resulted in no compensation expense.
Stock Options
During the year ended December 31, 2004, the Company issued to
executive officers, options to purchase 766,667 shares of common stock at a
price of $1.35 per share, the fair value of such shares on February 27, 2004,
resulting in no stock-based compensation expense.
On May 4, 2004, the Company issued to a consultant an option to
purchase 53,333 shares of common stock at a price of $2.45 per share. The fair
value of each share on May 4, 2004 was $1.95 per share resulting in no
stock-based compensation.
During the year ended December 31, 2005, the Company issued to
employees and directors options to purchase an aggregate of 2,211,962 shares of
common stock at prices ranging from $.28 to $.80 per share, of which an option
to purchase 56,667 shares of common stock for $0.71 per share was exercised. The
exercise prices of all such options issued equaled the fair value of the
underlying common stock on the date of grant, resulting in no stock based
compensation expense.
Warrants
On February 17, 2005, in connection with the February Private
Placement, the Company issued warrants to purchase 675,083 shares of common
stock at an exercise price of $1.28 per share, all of which were cancelled on
June 17, 2005 as a result of the June Private Placement, and issued broker
warrants to purchase 135,017 shares of common stock at an exercise price of $.60
per share.
On May 16, 2005, in connection with the May Private Placement, the
Company issued warrants to purchase 812,500 shares of common stock at an
exercise price of $1.275 per share, all of which were cancelled as a result of
the June Private Placement, and issued broker warrants to purchase 125,000
shares of common stock at an exercise price of $.48 per share.
On June 17, 2005, in connection with the June Private Placement, the
Company issued warrants to purchase 12,000,000 shares of common stock having
exercise prices of $.65 as to 2,500,000 shares, $1.20 as to 2,500,000 shares,
$1.50 as to 3,500,000 shares and $1.80 as to 3,500,000. In connection with the
June Private Placement, the Company issued broker warrants to purchase 633,333
shares of common stock at $.30 per share.
F-28
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
11. Segment Information
As a result of the Company's decision to sell its Product Sector (see
Note 14(d)), the Company's operating activity consists of two operating
segments, advertising services and generator sales. Segment selection is based
upon the organizational structure that the Company's management uses to evaluate
performance and make decisions on resource allocation, as well as availability
and materiality of separate financial results consistent with that structure.
The advertising services segment consists of the placement of advertising, the
production of advertising and creative advertising consulting. The generator
sales segment includes all activities related to the sale, installation and
servicing of stand-by generators. Corporate and general expenses of the Company
are allocated to the Company's segments based on an estimate of the proportion
that such allocable amounts benefit the segments. The following tables provide
information about the Company's operating segments.
For the Years Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Revenues:
Advertising services $7,730,000 $2,925,000
Generator sales - -
- --------------------------------------------------------------------------------
Total revenues $7,730,000 $2,925,000
- --------------------------------------------------------------------------------
Interest Expense:
Advertising services $69,000 -
Generator sales - -
- --------------------------------------------------------------------------------
Total interest expense $69,000 -
- --------------------------------------------------------------------------------
Depreciation Expense:
Advertising services $26,000 $8,000
Generator sales - -
- --------------------------------------------------------------------------------
Total depreciation expense $26,000 $8,000
- --------------------------------------------------------------------------------
Loss from continuing operations:
Advertising services - ($4,302,000)
Generator sales ($14,000) -
- --------------------------------------------------------------------------------
Total loss from continuing operations ($14,000) ($4,302,000)
- --------------------------------------------------------------------------------
As of December 31, 2005
- --------------------------------------------------------------------------------
Assets:
Advertising services $6,017,000
Generator sales 6,000
- --------------------------------------------------------------------------------
Total assets - continuing operations $6,023,000
- --------------------------------------------------------------------------------
For the Year Ended December 31, 2005
- --------------------------------------------------------------------------------
Capital Expenditures:
Advertising services $323,000
Generator sales -6,000
- --------------------------------------------------------------------------------
Total capital expenditures $329,000
- --------------------------------------------------------------------------------
F-29
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
12. Related Party Transactions
On January 4, 2004, the Company, The Tiger Fund, Adsouth, Inc., Mr.
Acunto and Ms. Acunto entered into a share exchange transaction, pursuant to
which the Tiger Fund transferred 1,866,667 shares of the Company's common stock
it owned to Mr. Acunto and Ms. Acunto, who were the two shareholders of Adsouth,
Inc., in exchange for their 100% equity ownership in Adsouth, Inc. (the "Adsouth
Acquisition"). Upon the completion of the Adsouth Acquisition, control of the
Company had changed whereby Mr. Acunto and Ms. Acunto owned more than 50% of the
total issued and outstanding common stock.
On May 9, 2003, the Company's board of directors authorized The Tiger
Fund's purchase of 1,298,452 shares of common stock upon their issuance of a
$19,477 promissory note to the Company. The note accrues interest annually at a
rate equal to the 90 day treasury rate published in the Wall Street Journal on
January 1st of each year, an effective rate of 1% at December 31, 2005, with all
principal and interest due in forty-eight (48) months.
Pursuant to the Adsouth Acquisition, The Tiger Fund, Inc. committed to
provide the Company with a total of $1 million in equity funding during 2004.
Originally, The Tiger fund was to receive a warrant to purchase 133,333 shares
of common stock at $15 per share for its $1 million investment. On March 31,
2004, the Company and The Tiger Fund entered into an amended agreement pursuant
to which the Tiger Fund, Inc. purchased 333,333 shares of common stock for $1
million consisting of $350,000 cash and a promissory note in the amount of
$650,000. Subsequently, The Tiger Fund returned 175,439 shares of common stock
and the $650,000 promissory note was cancelled.
Mr. Acunto, who beneficially owns more than 10% of our common stock,
earned approximately $252,000 for services performed pursuant to his consulting
agreement with the Company for the year ended December 31, 2005. In addition,
Mr. Acunto provided personal guarantees for loans made to the discontinued
product sector, for which Mr. Acunto received an aggregate of $50,000 for the
year ended December 31, 2005.
Mr. Horowitz, a member of our board of directors, is the president and
50% owner of Profit Motivators, Inc., an independent marketing representative.
Profit Motivators represents the Company as an independent marketing
representative to certain of our customers. In this capacity, Profit Motivators
has earned commissions approximating $75,000 for the year ended December 31,
2005.
13. New Authoritative Pronouncements
In September 2005, the FASB ratified the following consensus reached in
EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will result
in a taxable amount when the recorded amount of the liability is recovered or
settled. c) Recognition of deferred taxes for the temporary difference should be
reported as an
F-30
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
adjustment to additional paid-in capital. This consensus is effective in the
first interim or annual reporting period commencing after December 15, 2005,
with early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27,"Application of Issue
No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are still
presented in the financial statements). The adoption of this pronouncement is
not expected to have a material impact on the Company's financial statements.
In September 2005, the EITF reached a consensus on, Issue No. 05-7,
"Accounting for Modifications to Conversion Options Embedded In Debt Securities
and Related Issues," beginning in the first interim or annual reporting period
beginning after December 15, 2005. Early application of this guidance is
permitted in periods for which financial statements have not yet been issued.
The disclosures required by Statement 154 should be made excluding those
disclosures that require the effects of retroactive application. EITF No. 05-7
is not expected to have material effect on the Company's consolidated financial
position.
In June 2005, the EITF reached consensus on Issue No. 05-6,
"Determining the Amortization Period for Leasehold Improvements ("EITF 05-6").
EITF 05-6 provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance in EITF 05-6 will be applied prospectively and is
effective for periods beginning after June 30, 2005. EITF 05-6 is not expected
to have a material effect on the Company's consolidated financial position or
results of operations.
In May 2005, SFAS No. 154, "Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3"
was issued which, among other things, changes the accounting and reporting
requirements for a change in accounting principle and provides guidance on error
corrections. SFAS No. 154 requires retrospective application to prior period
financial statements of a voluntary change in accounting principle unless
impracticable to determine the period-specific effects or cumulative effect of
the change, and restatement with respect to the reporting of error corrections.
SFAS No. 154 applies to all voluntary changes in accounting principles, and to
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS No. 154 also
requires that a change in method of depreciation or amortization for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. At this time, adoption of SFAS No. 154 is not expected
to significantly impact the Company's financial statements or future results of
operations.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued its final standard on accounting for share-based payments ("SBP"), FASB
Statement No. 123R (revised 2004), Share-Based Payment. The statement requires
companies to expense the value of employee stock options and similar awards.
Under FAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards' grant date, based on the estimated number of awards that are
expected to vest. Compensation cost for awards that vest would not be reversed
if the awards expire without being exercised. The effective date for public
companies that file as small business issuers is the annual period beginning
after
F-31
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
December 15, 2005, and applied to all outstanding and unvested SBP awards at a
company's adoption. The Company believes that the implementation of FAS 123R
will result in additional stock-based compensation expense in future periods.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges Of Non-monetary Assets - An Amendment of APB No. 29
("SFAS 153"). SFAS 153 amends APB No. 29 to eliminate the exception of
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expect to change significantly as a result
of the exchange. SFAS 153 and APB No. 29 do not apply to the acquisition of
non-monetary assets or services on issuance of the capital stock of an entity.
Currently, the Company has not had any exchanges of non-monetary assets within
the meaning of SFAS 153 and adoption of SFAS 153 has had no effect on the
Company's financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS
151). The provisions of this statement become effective for the Company in
fiscal 2007. SFAS 151 amends the existing guidance on the recognition of
inventory costs to clarify the accounting for abnormal amounts of idle expense,
freight, handling costs, and wasted material (spoilage). Existing rules indicate
that under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. SFAS 151 requires that those items be
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal". In addition, SFAS 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The adoption of SFAS 151 is not expected
to have a material impact on the Company's valuation of inventories or operating
results.
In October 2004, the FASB ratified the consensus reached in EITF Issue
No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share." The EITF reached a consensus that contingently convertible
instruments, such as contingently convertible debt, contingently convertible
preferred stock, and other such securities should be included in diluted
earnings per share (if dilutive) regardless of whether the market price trigger
has been met. The consensus became effective for reporting periods ending after
December 15, 2004. The adoption of this pronouncement did not have a material
effect on the Company's financial statements.
14. Subsequent Events
(a) On February 1, 2006 the Company entered into an agreement with an
individual to serve as the Company's vice president of finance/controller and as
Genco's, Inc. chief financial officer. On February 1, 2006, the Company granted
such individual an option to purchase 50,000 shares of common stock for $.36 per
share, the market value of the common stock on the date of grant.
F-32
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
(b) On February 10, 2006, Genco entered into a loan agreement with a
non-affiliated lender which provides for a $1,000,000 loan commitment. The terms
of the loan agreement provides for an initial draw of $500,000, which loan was
made on February 10, 2006, and a second draw of $500,000 which was made on March
15, 2006. The loan bears interest at 18% per annum, requires an interest only
payment for the first month and twelve payments thereafter consisting of
$41,666.67 of principal plus accrued interest. The loan is guaranteed by Mr.
John Acunto, Jr., the Company's principal stockholder, for which he provided
received consideration of fifty thousand dollars from Genco. In addition the
lender holds a security interest in all of Genco's assets. Pursuant to the loan
agreement, the lender received 7% of Genco's common stock and has a right of
first refusal to provide customer financing for the sale of Genco's generator
systems. Also, after 18 months, the lender has the right to cause the Company to
purchase the lender's shares of Genco common stock at a negotiated price of no
less than 3.5 times Genco's trailing twelve month's income before interest,
depreciation, amortization and income taxes. At this time the Company is unable
to place a fair value on the equity of Genco and no debt discount or contingent
repurchase liability has been recorded or disclosed.
(c) On March 1, 2006 22,222.22 shares of series B preferred stock were
converted into 200,000 shares of common stock. On March 28, 2006, 35,000 shares
of series B preferred stock were converted into 425,250 shares of common stock.
The June Private Placement required the issuance of additional shares of series
B preferred stock if the Company's fully-diluted earnings per share of common
stock, computed as provided in the purchase agreement which excludes certain
non-recurring expenses, is $.167 or less for the year ending December 31, 2005.
On March 23, 2006, the holders of the series B preferred stock agreed to an
equivalent increase in the conversion rate of the remaining outstanding shares
of series B preferred stock as opposed to the issuance of additional shares of
series B preferred stock. Based on the calculation of the Company's fully
diluted earnings for the year ended December 31, 2005, as calculated pursuant to
the purchase agreement, as of March 23, 2006, each outstanding share of series B
preferred stock is convertible into 12.15 shares of common stock, an increase of
35% from the original conversion rate.
(d) On March 30, 2006, the Company made a decision to enter into
negotiations for the sale of its products sector. On August 1, 2006, the Company
and its subsidiaries sold to MFC substantially all of the assets of its business
relating to the direct, wholesale and retail marketing and sales of consumer
products, which is the line of business which the Company refers to as its
products business. The sale was made pursuant to an asset purchase agreement
dated June 22, 2006 with MFC. The Company transferred to MFC those assets
relating to the products business in exchange for (i) the assumption of certain
account payables, accrued expenses and other liabilities related to the products
business, (ii) an unsecured promissory note in the amount of $1,525,000, and
(iii) 5,500,000 shares of MFC's common stock, of which 750,000 shares are held
in escrow as security for its obligations relating to its representations and
warranties. The principal amount of the note is subject to adjustment based upon
a post-closing accounting.
On August 2, 2006, MFC made a payment of $381,250, representing 25% of
the principal amount of the note. A second payment in the amount of $381,250 was
paid on September 19, 2006. The note is payable on demand at any time commencing
April 21, 2007; provided, that if MFC shall have paid 50% of the principal
amount of the note by January 20, 2007, the note is payable in installments
through January 2009 and the Company does not have the right to demand payment
unless there is a default under the note. If MFC shall not have paid 50% of the
principal amount of the note,
F-33
Adsouth Partners, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (as Restated)
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
together with accrued interest, by January 20, 2007, the Company has the right
to convert the note into MFC's common stock at a conversion price of $.80 per
share. If MFC shall have paid 50% of the principal amount of the note by January
20, 2007, the Company has no right to convert the note and MFC has the right to
force conversion at a 15% premium.
MFC also has an option to purchase any or all of the shares of MFC
common stock which the Company owns at the time the option is exercised at an
exercise price per share of $1.00 through July 19, 2007 and $1.15 for from July
20, 2007 through July 19, 2008, at which time the option terminates. The option
does not prohibit the Company from selling shares of MFC common stock, and any
shares sold are no longer subject to the option. MFC agreed to certain
registration rights with respect to the shares of MFC common stock issued at the
closing and issuable upon conversion of the note. The Company has agreed to
pledge 2,250,000 shares of MFC common stock as security for the Company's
guaranty of the obligations of its majority-owned subsidiary, Genco Power
Solutions, Inc., to HSK Funding, Inc. and New Valu, Inc. in the principal amount
of $1,000,000.
The following tables provide information regarding the discontinued
products sector:
For the Years Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Revenues $5,584,000 $1,119,000
Loss from operations of discontinued product ($655,000) ($1,509,000)
As of December 31, 2005
- --------------------------------------------------------------------------------
Assets:
Cash $1.000
Accounts receivable 943,000
Due from factor 154,000
Inventory 1,959,000
Prepaid expense and other assets 158,000
Property and equipment, net 203,000
Investment in product line rights 148,000
Deposits 10,000
- --------------------------------------------------------------------------------
Assets of discontinued products sector $3,576,000
- --------------------------------------------------------------------------------
Liabilities:
Accounts payable $783,000
Accrued expenses 247,000
Bank line-of-credit 100,000
Demand note payable 1,000,000
Current portion of long-term debt 27,000
Current portion of capital lease obligations 6,000
Notes payable, less current portion 101,000
Capital lease obligations, less current portion 23,000
- --------------------------------------------------------------------------------
Liabilities of discontinued products sector $2,287,000
- --------------------------------------------------------------------------------
F-34
ADSOUTH PARTNERS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2006 and 2005
Page
----
Unaudited Condensed Consolidated Statements of Operations
for the Nine Months Ended September 30, 2006 (as restated)
and 2005 F-36
Unaudited Condensed Consolidated Balance Sheet
as of September 30, 2006 (as restated) F-37
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2006 (as restated)
and 2005 F-38 - F-39
Unaudited Condensed Consolidated Statement of Changes in
Stockholders' Equity (Capital Deficiency) for the Nine
Months Ended September 30, 2006 F-40
Notes To Unaudited Condensed Consolidated Financial
Statements for the Nine Months Ended September 30, 2006
(as restated) and 2005 F-41 - F-51
F-35
- -------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
2006
For the Nine Months Ended September 30, (as restated) 2005
- -------------------------------------------------------------------------- ------------------ ---------------------
Revenues $4,372,000 $5,755,000
- -------------------------------------------------------------------------- ------------------ ---------------------
Costs and expenses
Media placement and production costs 3,790,000 4,131,000
Selling, administrative and other expense 2,496,000 1,477,000
- -------------------------------------------------------------------------- ------------------ ---------------------
Total costs and expenses 6,286,000 5,608,000
- -------------------------------------------------------------------------- ------------------ ---------------------
(Loss) income from operations (1,914,000) 147,000
Interest income 32,000 1,000
Interest expense (8,000) (67,000)
Gain on sale of marketable securities 225,000 -
Loss on early debt extinguishment - (179,000)
Non cash stock based expense from liquidated damages related to series B (263,000) -
- -------------------------------------------------------------------------- ------------------ ---------------------
Loss from continuing operations (1,928,000) (98,000)
Loss from operations of discontinued products and generator sales
segments (see Notes 4, 5 and 9(e)) (6,183,000) (317,000)
Gain on disposal of discontinued products segment (see Notes 4 and 5) 2,611,000 -
- -------------------------------------------------------------------------- ------------------ ---------------------
Net loss (5,500,000) (415,000)
Deemed dividend-Series B Preferred Stock - (1,344,000)
- -------------------------------------------------------------------------- ------------------ ---------------------
Net loss attributable to common stockholders ($5,500,000) ($1,759,000)
- -------------------------------------------------------------------------- ------------------ ---------------------
AMOUNTS PER SHARE OF COMMON STOCK
Basic and diluted loss per share of common stock:
Loss from continuing operations attributable to common stockholders ($.21) ($.19)
Loss from operations of discontinued products and generator sales
segment attributable to common stockholders (.69) (.04)
Gain on disposal of discontinued products segment .29 -
- -------------------------------------------------------------------------- ------------------ ---------------------
Net loss attributable to common stockholders ($.61) ($.23)
- -------------------------------------------------------------------------- ------------------ ---------------------
Weighted average number of common shares:
Basic and diluted 9,014,898 7,553,349
- -------------------------------------------------------------------------- ------------------ ---------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-36
- ---------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheet (as restated)
As of September 30, 2006
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $66,000
Accounts receivable - net 40,000
Marketable securities 1,687,000
Marketable securities held in escrow 675,000
Interest receivable 9,000
Current portion of deferred charge, related party 67,000
Prepaid expenses and other current assets 11,000
Current portion of note receivable 275,000
Assets of discontinued products and generator sales segment (see Notes 4, 5 and 9(e)) 1,825,000
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 4,655,000
Property and equipment - net 511,000
Note receivable - net of current portion 488,000
Deferred charge, related party - net of current portion 50,000
Deposit 10,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,714,000
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $1,105,000
Customer deposits 761,000
Accrued expenses 36,000
Current portion of notes payable 23,000
Current portion of capital lease obligations 7,000
Liabilities of discontinued products and generator sales segment (see Notes 4,5 and 9(e)) 4,600,000
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,532,000
Notes payable - net of current portion 51,000
Capital lease obligations - net of current portion 21,000
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 6,604,000
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 6 and 7)
CAPITAL DEFICIENCY
Preferred stock, $.0001 par value; 10,000,000 shares authorized, 1,500,000 designated as
series B convertible preferred stock, 1,194,924 issued and outstanding -
Common stock, $.0001 par value; 60,000,000 shares authorized, 9,309,065 issued and
outstanding 1,000
Additional paid-in capital 9,535,000
Notes receivable - stockholder (21,000)
Accumulated deficit (11,980,000)
Accumulated other comprehensive income 1,575,000
- ---------------------------------------------------------------------------------------------------------------------
Total capital deficiency (890,000)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $5,714,000
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-37
- ----------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
2006
For the Nine Months Ended September 30, (as restated) 2005
- -------------------------------------------------------------------------------- ---------------- ------------------
CASH FLOWS - OPERATING ACTIVITIES
Loss from continuing operations ($1,928,000) ($98,000)
Adjustments to reconcile net loss to net cash - operating activities:
Stock based compensation 179,000 92,000
Depreciation 80,000 15,000
Amortization of debt discount on convertible notes - 53,000
Non cash stock based expense from liquidated damages related to
series B preferred shareholders (see Note 6) 263,000 -
Bad debt expense 5,000 4,000
Gain on sale of marketable securities (225,000) -
Loss on early debt extinguishment - 179,000
Other operating adjustments 3,000 -
Changes in assets and liabilities
Accounts receivable (20,000) (95,000)
Interest receivable (9,000) -
Prepaid expense and other current assets 288,000 (569,000)
Deferred charge, related party 50,000 (183,000)
Accounts payable 1,077,000 24,000
Customer deposits (268,000) 604,000
Accrued expenses (24,000) (127,000)
- -------------------------------------------------------------------------------- ---------------- ------------------
Net cash - operating activities (529,000) (101,000)
- -------------------------------------------------------------------------------- ---------------- ------------------
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures (239,000) (85,000)
Redeem certificate of deposit 100,000 -
Proceeds from sale of marketable securities 1,088,000 -
Proceeds from payments of notes receivable 763,000 -
Deposits 41,000 (115,000)
Proceeds from recission and termination of the Miko Brands acquisition 10,000 -
Advances to discontinued generator sales segment (156,000) -
Other investing activities - (2,000)
- -------------------------------------------------------------------------------- ---------------- ------------------
Net cash - investing activities 1,607,000 (202,000)
- -------------------------------------------------------------------------------- ---------------- ------------------
CASH FLOWS FINANCING ACTIVITIES
Capital lease payments (5,000) (3,000)
Repayments of notes payable (16,000) (1,000)
Proceeds from exercise of stock options 32,000 33,000
Proceeds from issuance of convertible notes - 487,000
Repayment of convertible notes - (256,000)
Cash proceeds from issuance of preferred stock - 1,603,000
Deferred financing costs - (80,000)
Proceeds from notes payable - 17,000
Offering costs - (123,000)
- -------------------------------------------------------------------------------- ---------------- ------------------
Net cash - financing activities 11,000 1,677,000
- -------------------------------------------------------------------------------- ---------------- ------------------
continued
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-38
- ----------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
2006
For the Nine Months Ended September 30, (as restated) 2005
- -------------------------------------------------------------------------------- ---------------- ------------------
Change in cash - continuing operations 1,089,000 1,374,000
Cash flows of discontinued products and generator sales segments (see
Notes 4, 5 and 9(e)):
Operating cash flows (3,280,000) (1,003,000)
Investing cash flows (875,000) (63,000)
Financing cash flows 1,704,000 500,000
- -------------------------------------------------------------------------------- ---------------- ------------------
Net change in cash (1,362,000) 808,000
Cash - beginning of period 1,428,000 37,000
- -------------------------------------------------------------------------------- ---------------- ------------------
Cash - end of period $66,000 $845,000
- -------------------------------------------------------------------------------- ---------------- ------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $8,000 $10,000
- -------------------------------------------------------------------------------- ---------------- ------------------
Cash paid for income taxes - -
- -------------------------------------------------------------------------------- ---------------- ------------------
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES
For the nine months ended September 30, 2006
On August 1, 2006, the Company sold substantially all of the assets of
its product segment in exchange for $1,650,000 of marketable securities, which
are subject to restrictions under the Securities Act of 1933, as amended, valued
at fair market value, a $1,525,000 note receivable and the assumption of
$1,535,000 of liabilities, resulting in a gain on disposal of $2,611,000. The
net book values of the disposed assets includes $1,631,000 of accounts
receivables, $1,048,000 of inventory, $131,000 of fixed assets and $50,000 of
investment in product line rights. The book values of the assumed liabilities
includes $760,000 of accounts payable, $760,000 of demand notes (including
accrued interest) and $15,000 of capital lease obligations. The gain on disposal
includes $761,000 for unrecognized gross profits on goods out on consignment as
of the date of the sale.
For the nine months ended September 30, 2005
In January 2005 the Company issued 63,333 shares of common stock valued
at $83,000 to acquire the assets of the Miko Brand.
On February 17, 2005, the Company issued warrants as part of a fee paid
in connection with the issuance of convertible notes. The value of the warrants
approximated $145,000 and was capitalized as a deferred financing cost.
On May 16, 2005, the Company issued warrants as part of a fee paid in
connection with the issuance of convertible notes. The value of the warrants
approximated $61,000 and was capitalized as a deferred financing cost.
On June 17, 2005, the Company issued 300,633 shares of Series B
Convertible Preferred stock in exchange for $800,000 of convertible notes and
$12,000 of accrued interest thereon.
During 2005, the Company issued options to consultants which, using the
Black-Scholes option valuation formula, had an aggregate value of $708,000,
which was recorded as an increase to deferred compensation expense. Such
deferred compensation expense is amortized pursuant to the terms of the
underlying consulting agreement to which the related options were issued.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-39
- ------------------------------------------------------------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity (Capital Deficiency)
For the Nine Months Ended September 30, 2006
Shares of Shares of
Series B Common
Preferred Stock, Preferred Common Additional Note
Stock, Issued Issued and Stock, Par Stock, Par Paid-in Receivable
and Outstanding Outstanding Value Value Capital Stockholder
- ----------------------------- ---------------- -------------- -------------- ------------ -------------- --------------
Balance at January 1, 2006 1,166,557 8,197,599 - $1,000 $9,050,000 ($20,000)
Comprehensive Loss:
Net loss - - - - - -
Unrealized gain from
available-for-sale
securities - - - - - -
Series B convertible
preferred stock conversion (94,222) 1,074,800 - - - -
Grant of stock options - - - - 11,000 -
Exercise of stock options - 100,000 - - 32,000 -
Interest on note receivable
from stockholder - - - - 1,000 (1,000)
Amortization of deferred
stock based compensation - - - - 167,000 -
Recission and termination
of the acquisition of the
Miko Brand - (63,334) - - 1,000 -
Issuance of series B
preferred for liquidation
damages 122,589 - - - 264,000 -
- ----------------------------- ---------------- -------------- -------------- ------------ -------------- --------------
Balance at September 30, 2006 1,194,924 9,309,065 - $1,000 $9,535,000 ($21,000)
- ----------------------------- ---------------- -------------- -------------- ------------ -------------- --------------
continued
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
Adsouth Partners, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Changes in Stockholders'
Equity (Capital Deficiency)
For the Nine Months Ended September 30, 2006
Accumulated
Other
Accumulated Comprehensive
Deficit Income Total
- ----------------------------- -------------- ------------- --------------
Balance at January 1, 2006 ($6,480,000) - $2,551,000
Comprehensive Loss:
Net loss (5,500,000) - (5,500,000)
Unrealized gain from
available-for-sale
securities - 1,575,000 1,575,000
Series B convertible
preferred stock conversion - - -
Grant of stock options - - 11,000
Exercise of stock options - - 32,000
Interest on note receivable
from stockholder - - -
Amortization of deferred
stock based compensation - - 167,000
Recission and termination
of the acquisition of the
Miko Brand - - 10,000
Issuance of series B
preferred for liquidation
damages - - 264,000
- ----------------------------- -------------- ------------- --------------
Balance at September 30, 2006 ($11,980,000) 1,575,000 ($890,000)
- ----------------------------- -------------- ------------- --------------
F-40
Adsouth Partners, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
For the Nine Months Ended 6September 30, 2006 (as restated) and 2005
- --------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Adsouth Partners, Inc. and its wholly owned subsidiaries Adsouth, Inc.,
Dermafresh, Inc. and Miko Distributors, Inc., and its majority-owned subsidiary
Genco Power Solutions, Inc. ("Genco") (collectively the "Company") have been
prepared in accordance with Regulation S-B promulgated by the Securities and
Exchange Commission and do not include all of the information and footnotes
required by generally accepted accounting principles in the United States of
America for complete financial statements. In the opinion of management, these
interim financial statements include all adjustments, which include only normal
recurring adjustments, necessary in order to make the financial statements not
misleading. The results of operations for such interim periods are not
necessarily indicative of results of operations for a full year. The unaudited
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
consolidated financial statements for the year ended December 31, 2005, as
disclosed elsewhere in this document. However, as stated in Note 4, 5 and 9(e)
of these financial statements, the Company is presenting its products and
generator sales segments as discontinued operations. Accordingly, the financial
statements and other financial information for the nine months ended September
30, 2006 and 2005, have been reclassified to show the products and generator
sales segments as discontinued operations.
2. Going Concern and Certain Significant Accounting Policies
Going Concern and Management's Plan
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the placecountry-regionUnited States of America, which contemplate
continuation of the Company as a going concern. The Company incurred a loss of
$1,928,000 from continuing operations and a net loss of $5,500,000 for the nine
months ended September 30, 2006. As of September 30, 2006, the Company had an
accumulated deficit of $11,980,000 and had working capital deficiency of
$1,877,000. During the nine months ended September 30, 2006, revenues from two
advertising customers, who are no longer customers, represented 71% and 27%,
respectively, of total revenues. In addition, the Company is a defendant in a
recently-commenced litigation by one of these advertising customers seeking
damages approximating $3,400,000, plus costs with claims for treble damages and
punitive damages. Although the Company believes it has meritorious defenses
against such lawsuit, an unfavorable outcome of such action would have a
materially adverse impact on its business and its ability to continue operating.
The aforementioned factors raise substantial doubt about the Company's ability
to continue as a going concern.
As discussed in Note 4, the Company decided to seek a buyer for its
product segment, for which the Company incurred a loss from operations for the
nine months ended September 30, 2006 of $2,667,000. On August 1, 2006, the
Company sold to MFC Development Corp. ("MFC") substantially all of the assets of
the products segment. The Company transferred to MFC those assets relating to
the products segment in exchange for (i) the assumption of certain accounts
payable, accrued expenses and other liabilities related to the products business
approximating $1,535,000, (ii) an unsecured promissory note in the amount of
$1,525,000, and (iii) 5,500,000 shares of MFC's common stock valued at
$1,650,000 on August 1, 2006, of which 750,000 shares are held in escrow as
security for its obligations
F-41
relating to its representations and warranties. The principal amount of the note
is subject to adjustment based upon a post-closing accounting.
As discussed in Note 9(e), on December 11, 2006, the Company disposed
of its generator sales segment, for which the Company incurred a loss from
operations for the nine months ended September 30, 2006 of $3,516,000. On
December 11, 2006, the Company entered into an agreement with New Valu, Inc.
("New Valu") and HSK Funding, Inc. ("HSK"). At the time the parties entered into
this agreement, the Company's 80%-owned subsidiary, Genco Power Systems, Inc.
("Genco"), owed $1,866,666 to New Valu and $156,250 to HSK. The Company had
guaranteed these loans, and pledged its 80% interest in Genco and 625,000 shares
of MFC that were owned by the Company as security for payment of these loans.
Further, Genco did not have sufficient funds to continue its operations and it
had significant potential liabilities with respect to customer deposits for
generators. Pursuant to the agreement with New Valu and HSK, on December 11,
2006: (i) the Company's obligations under its guarantee to New Valu were
terminated; (ii) the Company transferred to New Valu its 80% interest in Genco;
(iii) the Company sold 625,000 shares of MFC common stock to HSK for $156,250
and used the proceeds to pay HSK the $156,250 due to HSK; and, (iv) any
obligations from Genco to the Company were terminated, including any obligations
Genco has pursuant to an oral lease of office space in Boca Raton, Florida
During the nine months ended September 30, 2006, the Company generated
$1,089,000 of cash from continuing operations and used $2,451,000 for its
discontinued products and generator sales segments. The Company's remaining
operations are advertising, and it plans to focus its efforts on reducing costs
and on obtaining new advertising customers to generate cash flows. If the
Company is unable to obtain new advertising customers in a timely manner, it
will need additional funding to continue its operations.
Certain Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Adsouth Partners, Inc. financial statements included in the Company's
consolidated financial statements for the year ended December 31, 2005. Certain
2005 items have been reclassified to conform to the 2006 presentation.
(a) Basic and Diluted Loss Per Share
Basic and diluted per share results for the three and nine months ended
September 30, 2006 and 2005 were computed based on the loss allocated to the
common stock for the respective periods. The weighted average number of shares
of common stock outstanding during the periods was used in the calculation of
basic loss per share. In accordance with FAS 128, "Earnings Per Share," the
weighted average number of shares of common stock used in the calculation of
diluted per share amounts is adjusted for the dilutive effects of potential
common shares including, (i) the assumed exercise of stock options based on the
treasury stock method; and (ii) the assumed conversion of convertible preferred
stock only if an entity records earnings from continuing operations, as such
adjustments would otherwise be anti-dilutive to earnings per share from
continuing operations.
F-42
During the nine months ended September 30, 2006 and 2005, the Company
recorded a loss from continuing operations and as a result, the average number
of common shares used in the calculation of basic and diluted loss per share is
identical and have not been adjusted for the effects of potential common shares
from unconverted shares of convertible preferred stock and unexercised stock
options and warrants. As of September 30, 2006 there were outstanding options to
purchase 5,081,963 shares of common stock, warrants to purchase 13,188,079
shares of common stock and series B preferred stock convertible into 14,518,324
shares of common stock. Such potential common shares may dilute earnings per
share in the future.
(b) Stock Based Compensation
In 2006 the Company began to recognize expense of options or similar
instruments issued to employees using the fair-value-based method of accounting
for stock-based payments in compliance with SFAS 123(R) "Share-Based Payment"
using the modified-prospective-transition method. For the nine months ended
September 30, 2006, the Company recognized $179,000 of stock compensation
expense. On 2006February 1, 2006, the Company entered into an agreement with an
individual to serve as the Company's vice president of finance/controller and
granted to such individual a vested option to purchase 50,000 shares of common
stock for $.36 per share, the market value of the common stock on the date of
grant. Using the Black-Scholes option valuation formula, the value of such stock
option grant was $11,000. As of September 30, 2006, there remains approximately
$42,000 of deferred compensation costs related to the foregoing nonvested shares
which will be expensed over a weighted average period of 1.7 years.
The following table summarizes the Company's stock warrants and options
for the nine months ended September 30, 2006.
Weighted
Average
Exercise
Price Per
Shares Share
---------------------------------------- ---------- ------------- ----------- ------------
Outstanding-beginning of period 18,445,165 $1.02
Granted 283,211 $0.56
Exercised (100,000) $0.32
Forfeited/Expired (358,334) $0.78
---------------------------------------- ---------- - ---------- ------------ -- ---------
Outstanding-end of period 18,270,042 $1.09
---------------------------------------- ---------- - ---------- ------------ -- ---------
Options exercisable-end of period 16,309,617 $1.14
---------------------------------------- ---------- - ---------- ------------ -- ---------
Weighted-average fair value per share
of option granted during the nine
months ended September 30, 2006 $0.04
F-43
The assumptions used during the nine months ended September 30, 2006
were as follows:
-----------------------------------------------------------------------
Risk free interest rate 3.73%
Expected Dividend Yield 0%
Expected Lives 1-5 years
Expected Volatility 69%
A summary of the status of the Company's nonvested shares as of
September 30, 2006 and changes during the nine months ended September 30, 2006
is presented as follows:
Weighted
Average
Grant-Date
Shares Fair Value
------------------------------------ -------------- ------------- ----------- ------------
Nonvested-beginning of period 744,792 $0.18
Granted 50,000 $0.22
Vested (503,125) $0.19
Forfeited/Expired - -
------------------------------------ -------------- - ---------- ------------ -- ---------
Nonvested-end of period 291,667 $0.14
------------------------------------ -------------- - ---------- ------------ -- ---------
The following table presents warrants and options outstanding as of
September 30, 2006 and their exercise prices and contractual remaining lives,
the 18,270,042 warrants and options outstanding have exercise prices ranging
between $0.28 and $30.00 and a weighted-average remaining contractual life of
3.64 years.
Shares Underlying Remaining
Outstanding Options Contractual
and Warrants Exercise Price Life in Years Intrinsic Value
------------------------ ------------------- --------------------- ---------------------
9,077 $30.00 2.09 -
52,444 $3.00 2.46 -
3,499,999 $1.80 3.71 -
3,499,999 $1.50 3.71 -
733,335 $1.35 2.41 -
2,500,000 $1.20 3.71 -
500,000 $.80 3.73 -
98,628 $.74 3.50 -
5,300,000 $.65 3.71 -
368,228 $.60 3.38 -
125,000 $.48 3.62 -
175,000 $.38 .25 -
50,000 $.36 4.34 -
625,000 $.32 4.25 -
50,000 $.31 3.86 -
633,332 $.30 3.71 -
50,000 $.28 4.25 -
------------------------ ------------------- --------------------- ---------------------
18,270,042 -
------------------------ ------------------- --------------------- ---------------------
Prior to 2006, the Company elected to use the intrinsic value method of
accounting for stock options issued under its stock option plan and accordingly
did not record an expense for such
F-44
stock options. For purposes of pro forma disclosures under the fair-value
method, the estimated fair-value of the options was amortized to expense over
the options' vesting period.
The Company's pro forma information for the nine months ended
September 30, 2005, is as follows:
- ---------------------------------------------------------------- --------------
Net income (loss) attributable to common stockholders ($1,759,000)
Add: Stock-based employee compensation as determined
under the intrinsic value based method and included
in the statement of operations -
Deduct: Stock- based employee compensation as determined
under fair value based method (111,000)
- ---------------------------------------------------------------- --------------
Pro forma net income (loss) attributable to common stockholders ($1,870,000)
- ---------------------------------------------------------------- --------------
Amounts per share of common stock:
Basic and diluted net income (loss) attributable to common stockholders:
As reported ($.23)
Pro forma ($.25 )
(c) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk include cash and accounts receivable.
As of September 30, 2006, all of the Company's cash is placed with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. As of September
30, 2006 the Company's discontinued generator sales segment has cash balances in
excess of federally insured limits of approximately $107,000. During the nine
months ended September 30, 2006, revenues from two advertising customers, who
are no longer customers, represented 71% and 27%, respectively, of total
revenues. During the nine months ended September 30, 2005, revenues from one
advertising customer, who is no longer a customer, represented 89% of total
revenues. At September 30, 2006, 95% of the Company's accounts receivable was
due from one customer. The Company does not require collateral to support
accounts receivable or financial instruments subject to credit risk.
(d) New Authoritative Guidance
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") 155, Accounting for
Certain Hybrid Financial Instruments an amendment of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 155, provides the framework for fair value remeasurement of any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation as well as establishes a requirement to evaluate interests
in securitized financial assets to identify interests. SFAS 155 further amends
FASB 140 to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. The guidance SFAS
155 also clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133 and concentrations of credit risk in the
form of subordination are not embedded derivatives. This Statement is effective
for all financial instruments acquired or issued after the beginning of an
entity's first fiscal year that begins after September 15,
F-45
2006. SFAS 155 is not expected to have a material impact on the Company's
consolidated financial statements.
In March 2006, the FASB issued SFAS 156, Accounting for Servicing of
Financial Assets--an amendment of SFAS 140. SFAS 156 requires the recognition of
a servicing asset or servicing liability under certain circumstances when an
obligation to service a financial asset by entering into a servicing contract.
SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value utilizing the amortization
method or fair market value method. SFAS 156 is effective at the beginning of
the first fiscal year that begins after September 15, 2006. SFAS 156 is not
expected to have a material impact on the Company's consolidated financial
statements.
In July 2006, the FASB released FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109"
(FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in
income tax law. This Interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns.
This Interpretation shall be effective for fiscal years beginning after December
15, 2006. Earlier adoption is permitted as of the beginning of an enterprise's
fiscal year, provided the enterprise has not yet issued financial statements,
including financial statements for any interim period for that fiscal year. The
cumulative effects, if any, of applying this Interpretation will be recorded as
an adjustment to retained earnings as of the beginning of the period of
adoption. The Company has commenced the process of evaluating the expected
effect of FIN 48 on its Financial Statements and is currently not yet in a
position to determine such effects.
In September 2006, the FASB issued Statement of Financial Accounting
Standard 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of SFAS No. 157 will have on our results
of operations and financial condition.
In September 2006, the staff of the SEC issued Staff Accounting
Bulletin No. 108 ("SAB 108") which 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. SAB 108 becomes effective
in fiscal 2007. Adoption of SAB 108 is not expected to have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.
(e) Revenue Recognition
The Company's advertising services revenue is derived from billings
that are earned when the media is placed, from fees earned as advertising
services are performed and from production services rendered. In addition,
incentive amounts may be earned based on qualitative and/or quantitative
criteria. In the case of media placements, revenue is recognized as the media
placements appear. During 2006 and 2005, the Company was the primary obligor and
carried all of the credit risk for the media placements and accordingly,
recorded the full amount of such billings from the media placements as revenue
in accordance with Emerging Issues Task Force Issue No. 99-19. In the case of
consulting and
F-46
production arrangements, the revenue is recognized as the services are
performed. The Company's creative consulting revenue is generally earned on a
fee basis, and in certain cases incentive amounts may also be earned. As with
fee arrangements in advertising, such revenue is recognized as the work is
performed. Incentive amounts for advertising and marketing services are
recognized upon satisfaction of the qualitative and/or quantitative criteria, as
set out in the relevant client contract.
3. Related Party Transactions
John P. Acunto, Jr., who beneficially owns more than 10% of our common
stock, received approximately $398,000 for services performed pursuant to his
consulting agreement with the Company for the nine months ended September 30,
2006. In addition, Mr. Acunto provided personal guarantees for loans made to
Genco, for which Mr. Acunto received an aggregate of $132,500 for the nine
months ended September 30, 2006.
4. Disposal of Products Segment
On March 30, 2006, the Company made a decision to enter into
negotiations for the sale of its products segment. On August 1, 2006, the
Company sold to MFC substantially all of the assets of its business relating to
the direct, wholesale and retail marketing and sales of consumer products, which
is the line of business which the Company refers to as its products business,
resulting in a gain on disposal of $2,611,000. The sale was made pursuant to an
asset purchase agreement dated June 22, 2006 with MFC. The Company transferred
to MFC those assets relating to the products business, having a net book value
of approximately $2,099,000, in exchange for (i) the assumption of certain
account payables, accrued expenses and other liabilities related to the products
business approximating $1,535,000, (ii) an unsecured promissory note in the
amount of $1,525,000, and (iii) 5,500,000 shares of MFC's common stock valued at
$1,650,000 on August 1, 2006, of which 750,000 shares are held in escrow as
security for its obligations relating to its representations and warranties. The
principal amount of the note is subject to adjustment based upon a post-closing
accounting.
On August 2, 2006, MFC made a payment of $381,250, representing 25% of
the principal amount of the note, and on September 18, 2006, MFC made a second
payment of $381,250.Commencing September 18, 2006, MFC had paid 50% of the
principal amount and the balance is due in monthly installments approximating
$23,000 plus interest. and the Company does not have the right to demand payment
unless there is a default under the note. If MFC shall had not paid 50% of the
principal amount of the note, together with accrued interest, by January 20,
2007, the Company had the right to convert the note into MFC's common stock at a
conversion price of $.80 per share. As of September 18, 2006, MFC has paid 50%
of the principal amount of the note and the Company no longer has the right to
convert the note into MFC's common stock and MFC has the right to force
conversion at a 15% premium.
MFC also has an option to purchase any or all of the shares of MFC
common stock which the Company owns at the time the option is exercised at an
exercise price per share of $1.00 through 2007July 19, 2007 and $1.15 for from
July 20, 2007 through July 19, 2008, at which time the option terminates. The
option does not prohibit the Company from selling shares of MFC common stock,
and any shares sold are no longer subject to the option. MFC agreed to certain
registration rights with respect to the shares of MFC common stock issued at the
closing and issuable upon conversion of the note. The
F-47
Company has sold 2,875,000 shares of MFC common stock and has pledged 1,250,000
shares as security for the Company's guaranty of the obligations of its
majority-owned subsidiary, Genco. The Company intends to seek to have the shares
of MFC common stock registered and upon registration to sell the shares and use
the proceeds for general corporate purposes.
5. Discontinued Operations
As discussed in Note 4, in August 2006 the Company disposed of its
products segment and as discussed in Note 9(e), on December 11, 2006 the Company
disposed of its generator sales segment. Both the products and generator sales
segments are presented as discontinued segments in the financial statements for
the nine months ended September 30, 2006 and 2005. The following tables provide
information regarding the discontinued products and generator sales segments:
For the Nine Months Ended September 30, 2006 2005
- ------------------------------------------------------------------------------------------- -------------- ----------------
Revenues, Net of Returns:
Products $1,115,000 $3,921,000
Generators 2,186,000 -
- ------------------------------------------------------------------------------------------- -------------- ----------------
Revenues of discontinued products and generator sales segments $3,301,000 $3,921,000
- ------------------------------------------------------------------------------------------- -------------- ----------------
Loss from Operations:
Products ($2,667,000) ($317,000)
Generators (3,516,000) -
- ------------------------------------------------------------------------------------------- -------------- ----------------
Loss from operations of discontinued products and generator sales segments (6,183,000) ($317,000)
- ------------------------------------------------------------------------------------------- -------------- ----------------
Gain on Disposal of Discontinued Segment:
Products $2,611,000 -
Generators - -
- ------------------------------------------------------------------------------------------- -------------- ----------------
Gain on disposal of discontinued products and generator sales segments $2,611,000 -
- ------------------------------------------------------------------------------------------- -------------- ----------------
Generator
As of September 30, 2006 Products Sales Total
--------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents - $156,000 $156,000
Accounts receivable-net - 20,000 20,000
Inventory - 312,000 312,000
Prepaid expenses and other current assets - 437,000 437,000
Property and equipment, net $84,000 646,000 730,000
Goodwill - 120,000 120,000
Deferred loan costs - 18,000 18,000
Deposits - 32,000 32,000
--------------------------------------------------------------------------------------------------------------------------
Assets of discontinued products and generator sales segments $84,000 $1,741,000 $1,825,000
--------------------------------------------------------------------------------------------------------------------------
Liabilities:
Accounts payable $101,000 $479,000 $580,000
Customer deposits - 1,842,000 1,842,000
Accrued expenses 1,000 179,000 180,000
Current portion of notes payable 17,000 1,925,000 1,942,000
Notes payable, less current portion 56,000 - 56,000
--------------------------------------------------------------------------------------------------------------------------
Liabilities of discontinued products and generator sales segment $175,000 $4,425,000 $4,600,000
--------------------------------------------------------------------------------------------------------------------------
F-48
6. Series B Preferred Stock - Liquidated Damages
In June 2005, the Company sold 1,226,557 shares of its series B
preferred stock to a group of investors. In connection with the sale of the
shares, the Company agreed that it would register the shares of common stock
issuable upon conversion of the series B preferred stock and warrants that were
issued in connection with the preferred stock sale. As a result of the Company's
decision to sell its products division with the resulting reclassification of
that business as a discontinued operation, the registration statement relating
to those shares was no longer current and the stockholders were no longer able
to sell the shares of common stock issuable upon conversion of the series B
preferred stock. As a result, the Company is required to pay liquidated damages
by issuing additional shares of series B preferred stock. As of September 30,
2006, the fair value of the liquidated damages, as determined using the
Black-Scholes option valuation formula, was approximately $263,000, for which
the Company issued an aggregate of 122,589 shares of series B preferred stock
during the nine months ended September 30, 2006. The Company's obligation will
continue until it has amended the registration statement. As of the date of this
quarterly report, the Company has filed a post-effective amendment to the
registration statement. Until the post-effective amendment is declared
effective, the liquidated damages will continue to accrue. Each share of series
B preferred stock is convertible into 12.15 shares of common stock.
7. Contingencies
On May 15, 2006, the Company was served in an action in the Bankruptcy
Court in the State of New Jersey by N.V.E., Inc. ("NVE"). Other defendants in
the action are John Acunto, Jr., a principal stockholder and former chief
executive officer, John Cammarano, a former chief executive officer, Anton Lee
Wingeier, the Company's chief financial officer and three other employees of the
Company. The complaint arises from a letter agreement dated May 12, 2005,
pursuant to which the Company performed services for NVE relating to NVE's
advertising campaign. The complaint alleges that the Company breached the
contract in fraudulently invoicing NVE for advertising services. The complaint
also alleges that the Company's conduct constituted criminal activity and
includes a claim under the Racketeer Influenced and Corrupt Organizations Act
(generally known as RICO) and its state law equivalent, and seeks damages
approximating $3,400,000 plus costs, with claims for treble damages and punitive
damages. On July 17, 2004, the court dismissed with prejudice, the RICO and
conversion claims against the Company and the individual defendants. The fraud
claims were dismissed against all defendants, with the plaintiff having the
right to replead those claims within 30 days. The claims based on breach of
contract and the claims seeking an accounting were not dismissed against the
Company. On August 4, 2006, the plaintiff filed an amended complaint repleading
the fraud claim, adding a claim for breach of duty and amending the other claims
that were not previously dismissed. Although we believe that we complied with
our obligations under the contract, there is no assurance that a court would not
come to a contrary conclusion.
Two former officers of Genco have notified the Company that they
believe they are owed $122,000 pursuant to their employment agreements which
were terminated upon their resignations in September 2006. The Company is in the
process of evaluating the claims made by such former officers and have not
accrued any amounts related to such claim.
F-49
8. Comprehensive Income (Loss)
The following table summarizes comprehensive income (loss) for the
respective periods:
For the Nine Months Ended September 30, 2006 2005
- --------------------------------------------------------------------------------
Net loss ($5,500,000) ($415,000)
Other comprehensive income:
Unrealized gain related to marketable
securities arising during the period,
net of $0 tax 1,575,000 -
- --------------------------------------------------------------------------------
Comprehensive loss ($3,925,000) ($415,000)
- --------------------------------------------------------------------------------
9. Subsequent Events
(a) On October 13, 2006, the Company executed a $617,000 promissory note in
payment of an outstanding accounts payable balance with an existing vendor. The
note bears interest at 10.25% per annum and requires 24 monthly principal and
interest payments approximating $27,000 each until the loan is paid on November
13, 2008.
(b) On October 15, 2006, Genco executed a promissory note for $156,250 payable
to HSK Funding. Genco paid $3,000 as a loan commitment fee to the lenders and
$1,500 was paid for legal fees related to the loan. The loan bears interest at
15% per annum. Commencing November 17, 2006, and on the 17th day of each month
thereafter, Genco is required to make monthly payments of $25,000 plus accrued
interest until April 17, 2007, when the entire unpaid balance plus accrued
interest is due and payable. The loan is guaranteed by the Company and the
guarantee is secured by a pledge of the Company's stock of Genco. In addition,
the Company agreed to pledge 625,000 shares of the stock of MFC as security for
the loan. The proceeds of the loan were used for Genco's working capital.
(c) On November 1, 2006, the Company reduced the exercise price of warrants to
purchase 2,500,000 shares, which were issued in the June 2005 private placement
and had an exercise price of $.65, to $.06 per share, reduced the exercise price
of warrants to purchase 2,500,000 shares, which were issued in the June 2005
private placement and had an exercise price of $1.20, to $.06 per share, and the
exercise price of the remaining warrants to purchase 7,000,000 shares, issued in
the June private placement was reduced to $.10. The holders of the warrants have
a ninety day period commencing on the first trading day following the date the
Securities Exchange Commission declares effective a post-effective amendment on
Form SB-2, provided however, that in the event the warrant holders exercise a
specified portion of the warrants during the ninety day period, the reduced
exercise prices will remain in effect until the expiration of the warrants. As a
result of this reduction in exercise price, the exercise price of shares subject
to warrants issued to a placement agent was reduced to $.06, and the number of
shares subject to those warrants was increased from 368,228 to 1,350,169.
On December 18, 2006, the Company reduced the exercise price of all of
the remaining outstanding and unexercised series A, B, C and D warrants to
purchase an aggregate of 11,550,000 shares to $.03 per share and shortened their
expiration dates from June 17, 2010 to June 2009. As a result of this reduction
in exercise price, the exercise price of shares subject to warrants issued to a
placement agent was reduced from $.06 per share to $.03 per share, and the
number of shares subject to those warrants was increased from 1,350,169 to
2,700,338.
F-50
(d) On December 7, 2006, a holder of series A warrants exercised such warrant to
the extent of 450,000 shares at $.06 per share upon which the Company received
aggregate proceeds of $27,000.
(e) On December 11, 2006, the Company entered into an agreement with New Valu
and HSK. At the time the parties entered into this agreement, the Company's
80%-owned subsidiary, Genco, owed $1,866,666 to New Valu and $156,250 to HSK.
The Company had guaranteed these loans, and pledged its 80% interest in Genco
and 625,000 shares of MFC that were owned by the Company as security for payment
of these loans. Further, Genco did not have sufficient funds to continue its
operations and it had significant potential liabilities with respect to customer
deposits for generators. Pursuant to the agreement with New Valu and HSK, on
December 11, 2006: (i) the Company's obligations under its guarantee to New Valu
were terminated; (ii) the Company transferred to New Valu its 80% interest in
Genco; (iii) the Company sold 625,000 shares of MFC common stock to HSK for
$156,250 and used the proceeds to pay HSK the $156,250 due to HSK; and, (iv) any
obligations from Genco to the Company were terminated, including any obligations
Genco has pursuant to an oral lease of office space in Boca Raton, Florida. As a
result of this transaction the Company ceased to have any ownership interest in
Genco, which is the line of business which the Company refers to as its
generator sales segment which is presented as a discontinued operation in our
financial statement as of September 30, 2006 and for the nine months then ended.
John Acunto, who, together with his wife, is the Company's largest
common stockholder, was also a guarantor of Genco's obligations to New Valu.
Contemporaneously with the Company's agreement with New Valu and HSK, Mr. Acunto
entered into a separate agreement with New Valu pursuant to which he
acknowledged that his previous guarantee of Genco's obligations remains in full
force and effect. The agreement also provides that: (i) Mr. Acunto will cause
the commons stock which he and his wife own in the Company to be pledged to New
Valu as collateral for the loan; (ii) Mr. Acunto's employment agreement with
Genco is terminated; and, (iii) Mr. Acunto and Genco will negotiate in good
faith with respect to a new employment agreement.
F-51
Part II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
The Company's articles of incorporation provide that the liability of
the directors of the corporation for monetary damages shall be eliminated to the
fullest extent permissible under placeStateNevada law.
Section 78.138 of the Nevada Revised Statutes provides that, with
certain specified exceptions, or unless the articles of incorporation or an
amendment thereto, in each case filed on or after October 1, 2003, provide for
greater individual liability, a director or officer is not individually liable
to the corporation or its stockholders or creditors for any damages as a result
of any act or failure to act in his capacity as a director or officer unless it
is proven that his act or failure to act constituted a breach of his fiduciary
duties as a director or officer; and his breach of those duties involved
intentional misconduct, fraud or a knowing violation of law.
Sections 78.7502, 78.751 and 78.752 of the Nevada Revised Statutes
provides broad indemnification for officers and directors, as follows:
Subsection 1 of NRS 78.7502 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise (an
"Indemnified Party"), against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by the
Indemnified Party in connection with such action, suit or proceeding if the
Indemnified Party acted in good faith and in a manner the Indemnified Party
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe the Indemnified Party's conduct was unlawful.
Subsection 2 of NRS 78.7502 of the Nevada Law empowers a corporation to
indemnify any Indemnified Party who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that such person acted in the capacity of an Indemnified Party against
expenses, including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by the Indemnified Party in connection with the defense or
settlement of such action or suit if the Indemnified Party acted under standards
similar to those set forth above, except that no indemnification may be made in
respect of any claim, issue or matter as to which the Indemnified Party shall
have been adjudged to be liable to the corporation or for amounts paid in
settlement to the corporation unless and only to the extent that the court in
which such action or suit was brought determines upon application that in view
of all the circumstances the Indemnified Party is fairly and reasonably entitled
to indemnity for such expenses as the court deems proper.
NRS 78.7502 further provides that to the extent an Indemnified Party
has been successful on the merits or otherwise in the defense of any action,
suit or proceeding referred to in subsection (1) or (2) described above or in
the defense of any claim, issue or matter therein, the corporation shall
indemnify the Indemnified Party against expenses (including attorneys' fees)
actually and reasonably incurred by the Indemnified Party in connection
therewith.
II-1
Subsection 1 of NRS 78.751 provides that any discretionary
indemnification under NRS 78.7502, unless ordered by a court or advanced
pursuant to Subsection 2 of NRS 78.751, may be made by a corporation only as
authorized in the specific case upon a determination that indemnification of the
Indemnified Person is proper in the circumstances. Such determination must be
made (a) by the stockholders, (b) by the board of directors of the corporation
by majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding, (c) if a majority vote of a quorum of such
disinterested directors so orders, by independent legal counsel in a written
opinion, or (d) by independent legal counsel in a written opinion if a quorum of
such disinterested directors cannot be obtained. Subsection 2 of NRS 78.751
provides that a corporation's articles of incorporation or bylaws or an
agreement made by the corporation may require the corporation to pay as incurred
and in advance of the final disposition of a criminal or civil action, suit or
proceeding, the expenses of officers and directors in defending such action,
suit or proceeding upon receipt by the corporation of an undertaking by or on
behalf of the officer or director to repay the amount if it is ultimately
determined by a court that he is not entitled to be indemnified by the
corporation. Said Subsection 2 further provides that the provisions of that
Subsection 2 do not affect any rights to advancement of expenses to which
corporate personnel other than officers and directors may be entitled under
contract or otherwise by law. Subsection 3 of NRS 78.751 provides that
indemnification and advancement of expenses authorized in or ordered by a court
pursuant to NRS 78.751 does not exclude any other rights to which the
Indemnified Party may be entitled under the articles of incorporation or any
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
for either an action in his official capacity or in another capacity while
holding his office. However, indemnification, unless ordered by a court pursuant
to NRS 78.7502 or for the advancement of expenses under Subsection 2 of NRS
78.751, may not be made to or on behalf of any director or officer of the
corporation if a final adjudication establishes that his or her acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and was material to the cause of action. Additionally, the scope of such
indemnification and advancement of expenses shall continue as to an Indemnified
Party who has ceased to hold one of the positions specified above, and shall
inure to the benefit of his or her heirs, executors and administrators. NRS
78.752 empowers a corporation to purchase and maintain insurance or make other
financial arrangements on behalf of an Indemnified Party for any liability
asserted against such person and liabilities and expenses incurred by such
person in his or her capacity as an Indemnified Party or arising out of such
person's status as an Indemnified Party whether or not the corporation has the
authority to indemnify such person against such liability and expenses.
Article VI of the Company's by-laws provide for indemnification of
officers and directors as follows:
Subject to the limitations of law, if any, the Company shall have the
power to indemnify any director, officer, employee and agent of the Company who
was or is a party or is threatened to be made a party to any proceeding (other
than an action by or in the right of to procure a judgment in its favor against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceedings, provided that the Board
shall find that the director, officer, employee or agent acted in good faith and
in a manner which such person reasonably believed in their best interests of the
Company and, in the case of criminal proceedings, had no reasonable cause to
believe the conduct was unlawful. The termination of any proceeding by judgment
order, settlement, conviction or upon a plea of nolo contendere shall not, of
itself create a resumption that such person did not act in good faith and in a
manner which the person reasonably believed to be in the best interest of the
Company or that such person had reasonable cause to believe such person's
conduct was unlawful.
Subject to the limitations of law, if any, the Company shall have the
power to indemnify any director, officer, employee and agent of the Company who
was or is threatened to be made a party to any threatened, pending or completed
legal action by or in the right of the Company to procure a judgment in
II-2
its favor, against expenses actually and reasonable incurred by such person in
connection with the defense or settlement, if the Board of Directors determine
that such person acted in good faith, in a manner such person believed to be in
the best interest of the Company and with such care, including reasonable
inquiry, as an ordinarily prudent person would use under similar circumstances.
Expenses incurred in defending any proceeding may be advanced by the
Company prior to the final disposition of such proceeding upon receipt of an
undertaking by or on its behalf of any officer, director, employee or agent to
repay such amount unless it shall be determined ultimately that the officer or
director is entitled to be indemnified as authorized by this article.
The Company shall have power to purchase and maintain insurance on
behalf of any officer, director, employee or agent of the Company against any
liability asserted against or incurred by the officer, director, employee or
agent in such capacity or arising our of such person's status as such whether or
not the Company would have the power to indemnify the officer, or director,
employee or agent against such liability under the provisions of Article VI of
the by-laws.
Each Selling Stockholder and the Company have agreed to mutual
indemnification provisions with respect to certain liabilities incurred in
connection with this offering as the result of claims made under the Securities
Act of 1933, the Securities Exchange Act of 1934 or state law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, offices or controlling persons of the
Company, pursuant to the foregoing provisions, or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered hereunder, the Company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses of the registration, all of which will be paid by the
Company, are as follows:
Item Amount
SEC filing fee 2,831.31
Printing and filing 10,000.00
Legal expenses, including blue sky 25,000.00
Accounting expenses 15,000.00
Miscellaneous 2,168.69
Total 55,000.00
Item 26. Recent Sales of Unregistered Securities
On May 9, 2003, our board of directors authorized The Tiger Fund's
purchase of 1,298,452 shares of common stock for which The Tiger Fund issued its
$19,477 promissory note. The note accrues interest annually at a rate equal to
the 90 day treasury rate, an effective rate of 1% at December 31, 2004,
II-3
with all principal and interest due in May 2007. In connection with the reverse
acquisition, The Tiger Fund committed to provide us with $1,000,000 in equity
funding during 2004. Originally, The Tiger Fund was to receive a warrant to
purchase 133,333 shares of common stock at $15 per share for its $1 million
investment. On March 31, 2004, we and The Tiger Fund entered into an amended
agreement pursuant to which The Tiger Fund purchased 333,333 shares of common
stock for $1 million consisting of $350,000 cash and a promissory note in the
amount of $650,000. Subsequently, The Tiger Fund returned 157,894 shares of
common stock and the $650,000 promissory note was cancelled.
On June 4, 2004, we sold 133,333 shares of our common stock for $1.50
per share to an accredited investor for $1.50 per share, for a total of
$200,000.
On July 20, 2004, we sold 46,667 shares of our common stock for $1.13
per share to an accredited investor for $1.13 per share, for a total of $52,500.
On February 17 and 22, 2005, we completed a private placement of its
securities pursuant to subscription agreements with ten accredited investors.
Pursuant to the subscription agreements, we sold to the investors, for $810,100,
(i) our 10% convertible notes due December 2006 in the aggregate principal
amount of $810,100, (ii) 1,620,200 shares of common stock, and (iii) warrants to
purchase 675,083 shares of common stock at an exercise price of $1.28 per share.
Atlas Capital Services, LLC served as placement agent for the financing. As
compensation for its services as placement agent, we paid Atlas a fee of 10% of
the gross proceeds raised in the private placement and warrants to purchase
135,004 shares of common stock at an exercise price of $.60 per share. We also
paid the investors' legal expenses. This transaction is described in greater
detail under the caption "Selling Stockholders" in the prospectus.
In February 2005, contemporaneously with the closing of the private
placement described in the preceding paragraph, we issued 33,334 shares of
common stock for nominal consideration to Atlas Capital Services, LLC, the
private placement agent for the private placement described in the preceding
paragraph.
In April 2005, we adopted the 2005 stock option plan, covering
1,000,000 shares of common stock. We granted options to purchase 200,000 shares
of common stock at an exercise price of $.778, being the market price on the
date of grant, to a consultant. In June 2005, we granted options to purchase
49,314 shares of common stock at an exercise price of $.74 to Mr. John P.
Acunto, Jr. and Mr. Anton Lee Wingeier pursuant to their employment agreements.
In May 2005, we completed a private placement of our securities
pursuant to a subscription agreement with two accredited investor. Pursuant to
the subscription agreement, we sold to the investor, for $600,000, (i) our 12%
convertible note due March 15, 2007 in the principal amount of $600,000, (ii)
250,000 shares of common stock, and (iii) warrants to purchase 750,000 shares of
common stock at an exercise price of $1.275 per share. In connection with the
placement, we paid fees of $36,000 to Atlas and $24,000 to Dawson James
Securities, Inc. and issued warrants to purchase 75,000 shares and 50,000 shares
of common stock at an exercise price of $.48 per share to Atlas and its
designees and to Dawson James, respectively. The Company also reimbursed the
investor for legal fees and expenses of $10,000.
On June 17, 2005, we completed a private placement of our series B
preferred stock with common stock purchase warrants with three accredited
investors. Pursuant to the agreement, one investor purchased 925,926 shares of
series B preferred stock and warrants to purchase 9,058,780 shares of the common
stock for $2,500,000, and the two selling stockholders who participated in the
May 2005 private placement (one of whom participated in the February 2005
private placement) purchased a total of 300,361 shares of series B preferred
stock and warrants to purchase 2,941,219 shares of common stock
II-4
in exchange for the cancellation of (i) principal and interest on $150,000 of
the promissory note we issued in February 2005 and the $650,000 promissory notes
we issued in May 2005, (ii) warrants to purchase a total of 937,500 shares of
common stock issued in the February and May 2005 private placements and (iii)
570,833 shares of common stock which were issued to in the February and May 2005
private placements.
Atlas served as placement agent for the June 2005 private placement. As
compensation for its services as placement agent, we paid Atlas a fee of
$125,000 and issued to Atlas's designees warrants to purchase 300,000 shares of
common stock at $.30 per share. Liberty Company Financial, LLC served as
financial advisor to Barron, and we paid Liberty Company Financial a fee of
$125,000 and issued to placeCityLiberty warrants to purchase 333,333 shares of
common stock at $.30 per share. The Company also reimbursed Barron Partners, one
of the investors, for its legal fees and other expenses in the amount of
$50,000.
See "Selling Stockholders" in the prospectus for more information
concerning the securities issued in the February, May and June private
placements.
The securities above were offered and sold in reliance upon exemptions
from the registration requirements of Section 5 of the Securities Act of 1933,
as amended, pursuant to Sections 4(2) and 4(6) of the Securities Act and Rule
506 of SEC. The securities were sold exclusively to accredited investors as
defined by Rule 501(a) under the Securities Act. The stock issuances prior to
the reverse acquisition were made by Zenith Technologies, Inc.
During 2004 and 2005, we issued shares of common stock and options to
purchase common stock to our officers and other key employees. These shares and
the shares issued upon exercise of the warrants have been or will be registered
pursuant to the Securities Act on a Form S-8.
Item 27. Exhibits
Exhibit Number Exhibit Description
Exhibit Number Exhibit Description
- --------------- --------------------------------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation(1)
3.2 By-laws(1)
4.1 Form of subscription agreement for February 17 and 19, 2005 private placement(2)
4.2 Form of warrant (Atlas) for February 17 and 19, 2005 private placement(2)
4.3 Form of Preferred Stock Purchase Agreement dated June 16, 2005(3)
4.4 Certificate of Designation for the Series B Convertible Preferred Stock(3)
4.5 Form of Warrant issued in the June 2005 private placement(3)
4.6 Registration rights agreement relating to the June 2005 private placement(3)
5 Opinion of Esanu Katsky Korins & Siger, LLP(4)
10.1 Employment agreement dated as of July 1, 2004 between the Company and John P. Acunto, Jr.(2)
10.2 Employment agreement dated as of July 1, 2004 between the Company and Anton Lee Wingeier(2)
10.3 Employment agreement dated March 18, 2004, between the Company and John Cammarano(3)
10.4 Consulting agreement dated June 17, 2005, between the Company and John P. Acunto, Jr.(3)
10.5 The Company's Amended and Restated Stock Incentive Plan(5)
10.6 The Company's Amended and Restated Management Incentive Program(5)
10.7 The Company's 2005 Long-term Incentive Plan(6)
10.8 Employment agreement dated as of October 7, 2005 between the Company and Anton Lee Wingeier(11)
II-5
Exhibit Number Exhibit Description
- --------------- --------------------------------------------------------------------------------------------------------------------
10.9 Employment agreement dated as of October 7, 2005 between the Company and John Cammarano(11)
10.10 Loan agreement, dated February 10, 2006, between Genco Power Solutions, Inc. and New Valu, Inc.(11)
10.11 Employment agreement dated April 20, 2006, between the Company and Dale Branham(7)
10.12 Employment agreement dated April 20, 2006, between the Company and Keith Straub(7)
10.13 Amended consulting agreement dated May 9, 2006, between the Company and John P. Acunto, Jr.(7)
10.14 Employment agreement dated May 10, 2006, between the Company and Charles Matza.(8)
10.15 Separation agreement dated May 1, 2006, between the Company and John Cammarano.(9)
10.16 Amended employment agreement dated as of May 23, 2006 between the Company and Anton Lee Wingeier(10)
10.17 Loan agreement dated May 9, 2006 between Genco Power Solutions, Inc. and New Valu, Inc.(10)
10.18 Separation agreement dated May 31, 2006, between the Company and Charles Matza.(12)
10.19 Amended consulting agreement dated May 26, 2006, between the Company and John P. Acunto, Jr.(12)
10.20 Terms of Employment of Harlan Press with Adsouth Partners, Inc., dated July 14, 2006.(13)
10.21 Amended and Restated Terms of Employment of Anton Lee Wingeier with Adsouth Partners, Inc., dated July 14, 2006(13)
10.22 Amended and Restated Terms of Employment of Dale C. Branham with Genco Power Solutions, Inc., dated July 14, 2006(13)
10.23 Amended and Restated Terms of Employment of Keith A. Straub with Genco Power Solutions, Inc., dated July 14, 2006(13)
10.24 Loan Agreement dated July 14, 2006 between Genco Power Solutions, Inc. and HSK Funding, Inc. and New Valu, Inc.(13)
10.25 Non-Exclusive Buy/Sell Agreement dated January 10, 2006 between Generac Power Systems, Inc. and Genco Power
Solutions, Inc.(17)
10.26 Note dated August 1, 2006 from MFC Development Corp. and Adsouth Marketing, LLC, to Adsouth Partners, Inc.(14)
10.27 Asset purchase agreement between MFC development Corp. and Adsouth Partners, Inc.(15)
10.28 Letters dated November 1, 2006 regarding the Common Stock Purchase Warrants A, B, C and D exercise price reductions
(4)
10.29 Letters dated December 18, 2006 regarding the Common Stock Purchase Warrants A, B, C and D exercise price reductions
(17)
10.30 Agreement dated December 10, 2006 among New Valu, Inc, HSK Funding, Inc. and Adsouth Partners, Inc.(18)
10.31 Agreement dated December 10, 2006 between New Valu, Inc. and John Acunto.(18)
21 Subsidiaries of the Registrant(1)
23.1 Consent of Esanu Katsky Korins & Siger, LLP (Included in Exhibit 5)
23.2 Consent of Marcum & Kliegman, LLP (17)
(1) Filed as an exhibit to the Company's annual report on Form 10-KSB for the year ended December 31. 2005 and incorporated
herein by reference.
(2) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on February 22, 2005
and incorporated herein by reference.
(3) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on June 20, 2005 and
incorporated herein by reference.
(4) Previously filed.
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(5) Filed as an exhibit to the Company's information statement dated April 24, 2004, which was filed with the Commission on
April 27, 2004 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's definitive proxy statement which was filed with the Commission on September 20, 2005
and incorporated herein by reference.
(7) Filed as an exhibit to the Company's March 31, 2006 quarterly report on Form 10QSB which was filed with the Commission on
May 22, 2006 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on May 17, 2006 and
incorporated herein by reference.
(9) Filed as an exhibit to the Company's current report on Form 8-K/A which was filed with the Commission on May 18, 2006 and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on May 25, 2006 and
incorporated herein by reference.
(11) Filed as an exhibit to the Company's September 30, 2005 quarterly report on Form 10QSB which was filed with the Commission
on November 14, 2005 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on June 7, 2006 and
incorporated herein by reference.
(13) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on July 18, 2006 and
incorporated herein by reference.
(14) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on August 7, 2006 and
incorporated herein by reference.
(15) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on June 28, 2006 and
incorporated herein by reference.
(16) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on February 14, 2006
and incorporated herein by reference.
(17) Filed herewith
(18) Filed as an exhibit to the Company's current report on Form 8-K which was filed with the Commission on December 15, 2006
and incorporated herein by reference.
Item 28. Undertakings
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to the Registration Statement
to: (i) include any prospectus required by Section 10(a)(3) of
the Securities Act; (ii) reflect in the prospectus any facts
or events arising after the effective date of the Registration
Statement which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement; and notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reelected
in the form of a prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation
of Registration" table in the effective registration
statement; and (iii) include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement, provided however,
that provisions (i) and (ii) of this undertaking are
inapplicable if the information to be filed thereunder is
contained in periodic reports filed by the Company pursuant to
the Exchange Act that are incorporated by reference into the
Registration Statement.
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(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remains
unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by the Company is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boca Raton, State of Florida on this 27th day of
December, 2006.
ADSOUTH PARTNERS, INC.
By: /s/ Loren R. Haynes
Loren R. Haynes
Interim Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated. Each
person whose signature appears below hereby authorizes Loren R. Haynes as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission.
Signature Title Date
- --------- ----- ----
/s/ Loren R. Haynes Interim Chief Executive and Financial December 27, 2006
Loren R. Haynes Officer and Director (Principal
Executive Officer)
/s/ Harlan I. Press Interim Chief Financial Officer and December 27, 2006
Harlan I. Press and Director (Principal Financial
and Accounting Officer)
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT
We consent to the inclusion in this Registration Statement of Adsouth
Partners, Inc. and Subsidiaries on Post-Effective Amendment No. 3 to Form SB-2
[File No. 333-126856] of our report dated February 25, 2006, except for Note
14(b) which is as of March 15, 2006, Note 14(c), which is as of March 28, 2006,
and Note 14(d), which is as of September 29, 2006, with respect to our audits of
the financial statements of Adsouth Partners, Inc. and Subsidiaries as of
December 31, 2005 and for the years ended December 31, 2005 and 2004, which
report appears in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to our firm under the heading "Experts" in the
Prospectus.
Marcum & Kliegman LLP
Certified Public Accountants
New York, New York
December 26, 2006
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