UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) T
OF THE SECURITIES EXCHANGE AC OF 1934
For the fiscal year ended December 31, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _______
COMMISSION FILE NUMBER
000-32319
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Alliance Distributors Holding Inc.
(Name of Small Business Issuer in Its Charter)
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Delaware 33-0851302
15-15 132nd Street
College Point, New York 11356
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code:
(718) 747-1500
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, par value $0.001 per share
------------------------------
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State Issuer's revenues for its most recent fiscal year: $35,037,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant was $5,862,830 as of March 16, 2005.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the Issuer's classes of common
stock, as of the latest practicable date: 46,417,098 as of March 16, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
See index to exhibits
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
2
ITEM 1. DESCRIPTION OF BUSINESS
Alliance Distributors Holding Inc. (the "Company" or "Alliance") is a
distributor of video game consoles and video game peripherals, accessories and
software. Our offices are located at 15-15 132nd Street, College Point, New York
11356. Our telephone number is (718) 747-1500.
Business Background
In June 2002, the Company, then named JPAL, Inc. ("JPAL"), a Nevada corporation
which then had no ongoing business or significant assets, acquired Essential
Reality, LLC ("ER, LLC") which had been formed in 1998 as Freedom Multimedia,
LLC in Delaware to develop and market a virtual video game controller. Following
this transaction, JPAL changed its name to Essential Reality, Inc.
("Essential"). In November 2003, we discontinued sales of our virtual video game
controller because of our inability to raise necessary funds.
On June 17, 2004, Essential entered into a Share Exchange Agreement (the
"Exchange Agreement") with Jay Gelman, Andre Muller and Francis Vegliante, the
sole shareholders (the "Shareholders") of AllianceCorner Distributors Inc., a
New York corporation ("AllianceCorner") which had been engaged in the video game
distribution business since August 2003. Pursuant to the Exchange Agreement, the
Company on June 29, 2004 acquired all the outstanding capital stock of
AllianceCorner from the Shareholders and, in exchange for such capital stock,
issued 517,105 Series B Convertible Non Redeemable Preferred Shares ("Series B
Preferred Shares") to Jay Gelman, 517,105 Series B Preferred Shares to Andre
Muller and 517,104 Series B Preferred Shares to Francis Vegliante. On November
22, 2004, the Series B Preferred Shares converted into 8,226,671 shares of
common stock for each of Jay Gelman and Andre Muller and into 8,226,655 shares
of common stock for Francis Vegliante.
In connection with this acquisition, the Company issued the share equivalent of
21,237,114 shares of common stock and 403,334 shares of Series A Convertible Non
Redeemable Preferred Stock in private placements. Each share of Series A
Convertible Non Redeemable Preferred Stock entitles the holder to 15.9090 votes,
and votes as one class with the common stock on as converted basis. Certain
holders granted to Jay Gelman an irrevocable voting proxy to vote their voting
stock. As of March 16, 2005, Jay Gelman's voting proxy covered 5,295,549 shares
of common stock, as well as 168,427 shares of Series A Convertible Non
Redeemable Preferred Stock that have 2,679,520 votes, for a total voting proxy
of 7,975,069 votes.
These transactions diluted the ownership of our shareholders prior to June 2004
to 1.077% of the 46,417,098 shares of common stock outstanding as of March 16,
2005.
We accounted for our acquisition of AllianceCorner as a reverse acquisition as
of June 30, 2004. The pre-acquisition financial statements of AllianceCorner are
treated as historical financial statements of the combined companies.
3
AllianceCorner was formed in May 2003 under the name Alliance Partners, Inc. The
name of Alliance Partners, Inc. was changed to AllianceCorner Distributors Inc.
in September 2003 and was further changed to Alliance Distributors Holding, Inc.
("Alliance New York") in July 2004. Effective November 17, 2004, Alliance New
York was merged into Alliance Distributors Holding Inc., a Delaware corporation
that was wholly owned by Essential.
Effective November 22, 2004, Essential reincorporated in Delaware and changed
its name to Alliance Distributors Holding Inc. ("Alliance" or the "Company"), by
way of a merger of Essential into Alliance, which was then a wholly owned
Delaware subsidiary of Essential.
On March 7, 2005, Mr. Vegliante sold 4,000,000 shares of common stock to
investors in a private transaction at a purchase price of $0.125 per share.
Our Business
What we Sell
We distribute to retail stores video game consoles that are manufactured by Sony
Corporation (the "PlayStation(R)2 Computer Entertainment System"), Nintendo
("GameCubeTM and Game Boy(R) Advance") and Microsoft ("Xbox(R)"). We sell these
consoles at prices ranging from $49.99 to $149. We also distribute accessories
and game software that are made for these consoles by the console manufacturers
and third parties. Accessories include controllers, memory cards, network
adaptors, steering wheels for racing games and extra cable for game controllers.
We sell our accessories and software at prices ranging from $9.99 to $149.99.
The Market
According to The NPD Group, Inc. a leading market information provider, the
video game market in the US had sales of $9.9 billion in 2004.
Suppliers
We are direct distributors for Sony Computer Entertainment America Inc. ("Sony")
and Nintendo of America Inc. ("Nintendo") and purchase product from them
directly. We are also direct distributors for approximately 75 third-party
vendors (including Electronic Arts Inc., Take Two Interactive Software, Inc. and
THQ Inc.) of accessories and software for video games. We have no relationship
with Microsoft for distribution of the Microsoft Xbox(R), and purchase our
Xbox(R) supplies from another distributor.
For the fiscal year ended December 31, 2004, we purchased approximately 30% of
our products for cash in advance, and the balance on 30 day to 45 day terms. In
addition to manufacturer credit and internally generated funds, we have a
financing agreement with a lender under which the lender may in its discretion
lend us up to $5,000,000 based on eligible receivables and inventory. We have
pledged substantially all of our assets as security for this financing.
4
For fiscal year ended December 31, 2004, three of our suppliers in the aggregate
accounted for approximately 50% of our purchases, and our 80 largest suppliers
in the aggregate accounted for 75% of our purchases. We have no long term
agreement with any of our suppliers, and conduct business with them on an
individual purchase order basis. Our business would be materially and adversely
affected should any material supplier terminate its relationship with us or
modify its relationship with us.
Warehouse and Showroom
We store our inventory in our 11,500 square foot warehouse in College Point, New
York. We display our products to customers in a 3,000 square foot showroom that
adjoins our executive offices. Products are either picked up directly by the
customer from our warehouse or delivered through a third party courier. We
deliver products at no additional charge to customers purchasing at least $500
worth of products in the New York metropolitan area and the surrounding
tri-state region.
Our Customers; Sales and Marketing
Our customers consist primarily of approximately 2,500 to 3,000 retail stores
located throughout the United States and Canada. A majority of these stores are
located in the New York metropolitan area and the surrounding tri-state region.
We estimate that these stores are owned by approximately 350 to 500 different
entities. Approximately 50% of our sales are on a cash on delivery basis, and
the balance is invoiced primarily on 7 through 30 day terms. To our knowledge,
no group of stores under common ownership accounted for 10% or more of our sales
for fiscal year ending 2004.
We sell to our customers on a purchase order basis through our sales employees
who are paid on a salary plus commission basis. We have no long-term sales
agreements.
We market ourselves in part as being engaged in a "Video Game Alliance" with our
customers. In this context we advise our customers on how best to sell the
product they buy from us, and we offer them banners, and point of sale and
similar material. In advertisements we list our customers and indicate that the
advertisement is "brought to you by Alliance Distributors." We have not to date
advertised in the trade press. We attend and exhibit at two trade shows
annually.
We have developed a business-to-business website that will offer customers many
of the conveniences of our retail showroom and the ability to order products
directly on line. We believe that the website may allow us to expand our
marketing area. We have incurred approximately $40,000 in developmental expenses
for this website to date.
5
Warranties and Returns
We offer no warranties to our customers and do not have any facilities for the
repair or service of any products. We nevertheless accept returns of product
claimed to be defective and reimburse our customers for the full purchase price
of these products. Although the majority of our suppliers in turn accept these
returns from us, certain suppliers credit us with a fixed allowance for returns
and require that we assume the risk of excess returns.
Competition
Mecca Electronics Industries, Inc., Jack of all Games (a subsidiary of Take Two
Interactive Software, Inc.), About Time Inc, Pioneer Distributors Inc d/b/a JB
Marketing, Florida State Games, SVG Distribution, Inc. and D&H Distributing Co.,
Inc. are the dominant distributors in our industry. These companies have
significantly greater financial resources than our company. We compete with
these companies on the basis of personalized service, advice and marketing
support that we seek to offer to our customers.
Government Regulation
The manufacturers of our products must test them for compliance with Federal
Communications Commission (FCC) standards to avoid radio frequency emissions
that could interfere with other radio frequency transmissions or similar
regulatory standards in other countries. We are not required to test our
products for compliance.
Employees
We currently employ 30 employees, all of whom are employed on a full time basis.
ITEM 2. DESCRIPTION OF PROPERTIES
Our executive offices and an adjoining showroom are located in about 11,000
square feet of space at 15-15 132nd Street, College Point, NY 11356. This space
is leased through KIM Management at a monthly rent of approximately $5,000
excluding property taxes, maintenance and utilities. The lease will terminate on
February 28, 2013. Our 11,000 square foot warehouse, comprised of two adjacent
spaces, is located at 18-37 through 18-39 128th Street, College Point, NY 11356
and is leased through AJ Pegno Reality at a monthly rental of $9,500. The lease
will terminate on June 30, 2008. Our current premises are adequate for our
current operations and we do not anticipate that we will require any additional
premises in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Other than as set forth below, we know of no material, active or pending legal
proceedings against our company, nor are we involved as a plaintiff in any
material proceeding or pending litigation. There are no proceedings in which any
of our directors, officers or affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our
interest.
6
On August 19, 2004 a complaint was filed by Radio Wave LLC, in the Supreme Court
of the State of New York, County of New York, against Essential Reality, LLC,
Essential Reality, Inc. and David Devor, a former officer and a current employee
of the Company, for rent, additional rent, cost and fees relating to premises
formerly occupied by the Company. Plaintiff seeks to recover $150,416 for the
period up to August 31, 2004, plus additional amounts to be determined by the
Court for the period subsequent to August 31, 2004. Plaintiff also seeks to
recover $50,000 in expenses and attorney fees plus additional amounts to be
determined by the Court. We believe that the suit is without merit and intend to
vigorously defend its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Under the Exchange Agreement, Jay Gelman, Andre Muller and Thomas Vitiello
("Shareholders") were designated on June 29, 2004 to constitute a majority of
the directors of the Company. Messrs. Gelman, Muller and Vitiello took office as
directors 10 days after the Company filed a 14f-1 information statement with the
Securities and Exchange Commission and transmitted the information statement to
all holders of record of securities of the Company entitled to vote at a meeting
for election of directors.
On October 25, 2004, the Shareholders, holding 63% of the total outstanding
shares entitled to vote, voted to:
1. amend the Articles of Incorporation of Essential Reality, Inc. to first
increase the number of authorized shares of common stock, par value $0.001
per share (the "common stock"), from 50,000,000 shares to 4,400,000,000
shares, and to increase the number of authorized shares of preferred stock,
par value $0.001 per share from 5,000,000 shares to 10,000,000 shares;
2. further amend the Articles of Incorporation of Essential Reality, Inc. to
reverse split the number of authorized shares of common stock and the
outstanding shares of common stock on the basis of one share for 44 shares;
3. merge Essential Reality, Inc. into its then Delaware wholly owned
subsidiary, Alliance Distributors Holding Inc. and terminate its corporate
existence in the State of Nevada; and
4. adopt the Alliance Distributors Holding Inc. 2004 Stock Plan.
These actions became effective November 22, 2004, the 21st day following the
date the Company sent a Schedule 14C information statement relating to these
actions to security holders entitled to vote.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Pink Sheets Electronic Quotation Service since
July 2003 and traded on the OTC Bulletin Board from April 19, 2001 until July
2003. Our current trading symbol is ADTR.PK. The following table sets out the
high and low closing bid prices of our common stock during the periods indicated
as quoted on the OTC Bulletin Board and the Pink Sheets Electronic Quotation
Service. Prices are adjusted to reflect a one-for 44 reverse split effective on
November 22, 2004 . The following quotations obtained from Yahoo Finance reflect
the highs and low bids for our common stock based on inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
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Quarter Ended Bid Price Per Share
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2004 High Low
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March 31, 2004 $11.00 $4.84
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June 30, 2004 $15.40 $3.52
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September 30, 2004 $15.40 $4.40
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December 31, 2004 $4.40 $0.20
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2003 High Low
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March 31, 2003 $28.60 $24.20
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June 30, 2003 $11.00 $11.00
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September 30, 2003 $7.48 $3.08
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December 31, 2003 $22.44 $2.20
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As of March 16, 2005, there were 136 stockholders of record of the Company's
Common Stock. This number does not include shares held in street name. The
Company has not paid cash dividends on its Common Stock and does not plan to pay
cash dividends in the foreseeable future.
8
EQUITY COMPENSATION PLAN INFORMATION
Our current Alliance Distributors Holding Inc. 2004 Stock Plan (the "Plan") was
adopted by our directors on October 25, 2004 and was approved by our
shareholders on October 25, 2004. No options were issued and outstanding under
the Plan during fiscal year 2004.
As of March 16, 2005, the Company has granted a total of 7,550,000 options under
the Plan and 2,450,000 securities remain available for future issuance. The
options granted are ten-year non-qualified options to purchase the Company's
common stock and vest and become exercisable in 12 equal quarterly installments
beginning on April 1, 2005.
Of the total options granted, 1,100,000 options were granted to Jay Gelman, the
CEO and Chairman of the Board of Directors of the Company, 1,100,000 options
were granted to Andre Muller, the President, COO and a director of the Company,
and 150,000 options were granted to each of Thomas Vitiello, Humbert B. Powell,
III, and Steven Nathan each a non-employee director of the Company. These
options have an exercise price of $0.3250 per share, except for Mr. Nathan's
options, which have an exercise price of $0.320 per share.
The options were granted in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
See "Business-Background," for description of a transaction whereby
AllianceCorner Distributors Inc. ("AllianceCorner") became a New York
wholly-owned subsidiary of Essential. The name of AllianceCorner was changed to
Alliance Distributors Holding, Inc. ("New York Alliance") in July 2004.
Effective November 17, 2004, New York Alliance was merged into Alliance
Distributors Holding Inc., a Delaware corporation that was wholly owned by
Essential. Effective November 22, 2004, Essential reincorporated in Delaware and
changed its name to Alliance Distributors Holding Inc. ("Alliance" or the
"Company"), by way of a merger of Essential into Alliance, which was then a
wholly owned Delaware subsidiary of Essential. The business of AllianceCorner
became our only business. Since the former stockholders of AllianceCorner
acquired a majority of our voting interests, the transaction was treated as a
reverse acquisition, with AllianceCorner treated as the acquirer for accounting
purposes. Accordingly, the pre-acquisition financial statements of
AllianceCorner are our historical financial statements. At the time of the
acquisition, Essential had no continuing operations and its historical results
would not be meaningful if combined with the historical results of
AllianceCorner.
9
Our distribution revenues are derived from the sale of interactive video games
and gaming products for all key manufacturers and third-party software titles,
accessories and hardware. Operating margins in our distribution business are
dependent on the mix of software and hardware sales, with software generating
higher margins than hardware.
10
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain of the Company's accounting policies require the application of
significant judgment by management in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject to
an inherent degree of uncertainty. These judgments are based on historical
experience, observation of trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
Critical accounting policies include:
Revenue Recognition - The Company recognizes sales upon shipment of products to
customers as title and risk of loss pass upon shipment and collectibility is
reasonably assured. Provisions for estimated uncollectible discounts and rebates
to customers, estimated returns and allowances and other adjustments are
provided for in the same period the related sales are recorded. While such
amounts have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same rates as
in the past.
Accounts Receivable - Accounts Receivable as shown on the Balance Sheet are net
of allowances and anticipated discounts. An allowance for doubtful accounts is
determined through analysis of the aging of accounts receivable at the date of
the financial statements, assessments of collectibility based on historic trends
and an evaluation of the impact of economic conditions. The allowance for
doubtful accounts is not significant. Principally, the Company's historical
estimates of these costs have not differed materially from actual results. The
Company controls credit risk through credit approvals, credit limits and
monitoring procedures. The Company performs credit evaluations of its customers
but generally does not require collateral to support accounts receivable.
Inventories - Inventory is stated at the lower of cost or market, cost being
determined on the average cost basis. Write-downs for slow moving and aged
merchandise are provided based on historical experience and current product
demand. The Company evaluates the adequacy of the write-downs quarterly. The
Company cannot guarantee that it will continue to experience the same level of
write-downs as in the past.
11
YEAR ENDED DECEMBER 31, 2004 AND FOR THE PERIOD FROM August 11, 2003
(Commencement of Operations) TO DECEMBER 31, 2003
The following table shows each specified item as a dollar amount and as a
percentage of net sales in each fiscal period, and should be read in conjunction
with the financial statements included elsewhere in this Annual Report on Form
10-K:
Year Ended For the Period
December 31, August 11, 2003 to
2004 December 31,2003
(Thousands) (Thousands)
------------------- ----------------
Net sales $ 35,037 100.0% $ 10,513 100.0%
Cost of goods sold 31,116 88.8% 9,219 87.7%
-------- -------- --------- --------
Gross profit 3,921 11.2% 1,294 12.3%
Operating Expenses:
Selling, general and
administrative expenses 3,919 11.2% 1,077 10.2%
-------- -------- --------- --------
Income from operations 2 .0% 217 2.1%
Interest expense 230 .7% 9 .1%
-------- -------- --------- --------
Income(loss) before income taxes (228) (.7%) 208 2.00%
Income taxes 14 .0% 79 .8%
-------- -------- --------- --------
Net income (loss) $ (242) (.7)% $ 129 1.2%
======== ======== ========= ========
RESULTS OF OPERATIONS
Net Sales. Net sales for the year ended December 31, 2004 were $35,036,991. From
January 1, 2004 to August 10, 2004 net sales were $15,605,584. From August 11,
2004 to December 31, 2004 net sales were $19,431,407, as compared to net sales
of $10,513,231 for the period from August 11, 2003, the date of commencement of
operations, to December 31, 2003. The increase in sales for the period beginning
August 11, 2004 and ending December 31, 2004 primarily resulted from the sales
of new game software (Grand Theft Auto: San Andreas) and PlayStation 2 console
hardware.
Cost of Goods Sold. For the year ended December 31, 2004, cost of goods sold
totaled $31,116,020. From January 1, 2004 to August 10, 2004 cost of goods sold
were $13,339,880, or 14.5% of gross profit. From August 11, 2004 to December 31,
2004 cost of goods sold were $17,776,140, or 8.5% of gross profit, as compared
to $9,219,064 or 12.3% of gross profit for the period from August 11, 2003, the
date of commencement of operations, to December 31, 2003.
The increase in cost of sales for the period beginning August 11, 2004 and
ending December 31, 2004 was primarily due to the lack of Playstation 2 hardware
in the marketplace. The lack of hardware resulted in a decrease in demand for
game software, which in turn resulted in a decrease in profit margin from game
software.
During the fourth quarter of fiscal 2004 the Company conducted its annual
physical inventory. The physical inventory resulted in a difference with the
perpetual inventory system of approximately $269,000, which was recorded as an
expense within cost of goods sold in the accompanying financial statements and
resulted in a corresponding 0.8% decrease on our gross profit for the year ended
December 31, 2004.
12
Selling, General and Administrative Expenses. For the year ended December 31,
2004 selling, general and administrative expenses totaled $3,919,071, compared
to $1,077,342 for the period from August 11, 2003, the date of commencement of
operations, to December 31, 2003. The major components of selling, general and
administrative expenses for the year ended December 31, 2004 were: (i) selling
expenses, consisting primarily of salaries and commissions and salary related
expenses, of $429,112; (ii) shipping and warehouse expenses, consisting
primarily of salaries and salary related expenses and freight-out, of $637,773
and $244,610 respectively; and (iii) general and administrative expenses,
consisting primarily of salaries and salary - related expenses of $1,335,142,
and insurance, consulting fees, professional fees and rent of $698,127. Included
in professional fees are one time expenses of $163,000.
Interest expense for the year ended December 31, 2004 totaled $229,844, compared
to $9,009 for the period from August 11, 2003, the date of commencement of
operations, to December 31, 2003. Interest expense relates to the note
payable-bank and factor arrangements described below under Liquidity and Capital
Resources.
LIQUIDITY AND CAPITAL RESOURCES
On June 29, 2004 the Company received $2,884,171 in net proceeds from the sale
of 1,124,767 shares of Series A 6% Convertible Non-Redeemable Preferred Shares
of Essential ("Series A 6% Preferred Shares) in a private placement (the
"Offering"). At the same time, substantially all outstanding debt of the Company
was extinguished through either conversion into an aggregate of 452,202 shares
of Series A 6% Preferred Shares or through cash payments.
For the year ended December 31, 2004 net cash used in operating activities was
$5,181,707. Net cash used in operations for the year ended December 31, 2004
consisted of a net loss of $241,749 and included the following changes in
operating assets and liabilities: an increase in accounts receivable of
$3,216,014, an increase in inventory of $972,128 a decrease in accounts payable
of $1,889,677 and a decrease in amount due to factor of $1,283,854.
Net cash used in investing activities for the year ended December 31, 2004 was
$987,330, of which $68,952 was used for the purchase of equipment and $915,329
was used for the payment of Essential's pre-acquisition liabilities.
Net cash provided by financing activities for the year ended December 31, 2004
was $5,732,789 which consisted primarily of gross proceeds of $4,000,000 from
the Offering, less payments of issuance costs of $200,500, payments of merger
expenses of $111,963, repayment of long term obligations of $271,624, payment of
deferred financing costs of $50,000 and net proceeds on our note payable to bank
of $2,366,876.
13
In December 2003, AllianceCorner entered into a factoring arrangement with
Rosenthal & Rosenthal, Inc. ("Rosenthal"), a commercial factor. As set forth in
the next paragraph, this factoring arrangement was replaced with a Financing
Agreement on November 11, 2004. Under the factoring arrangement as in effect
through November 11, 2004, the Company sold a substantial portion of its trade
receivables up to maximum credit limits established by the factor for each
individual account. Receivables sold in excess of these limitations were subject
to recourse in the event of non-payment by the customer. The Company paid
interest at the prime lending rate plus 1.5% for advances made prior to the
collection of the factored accounts receivable. Substantially all of the
Company's assets were pledged as collateral under the factoring agreement. The
Company was required to maintain a specified level of net worth, as defined.
On November 11, 2004, the Company, entered into a Financing Agreement which
replaced the factoring agreement with Rosenthal. Under the Agreement, Rosenthal
may in its discretion lend up to $5 million to the Company based on eligible
inventory and receivables. All borrowings are due on demand, are secured by
substantially all of the assets of the Company and are subject to the Company's
compliance with certain financial covenants. The Agreement terminates November
30, 2007 unless terminated sooner by Rosenthal on 30 days' notice. Interest on
outstanding borrowings is payable at a variable rate per annum, equal to the
prime rate (but not less than 4.75 percent) plus 2.00 percent (7.25 percent as
December 31, 2004). The Company's CEO and the Company's President signed limited
guaranties in respect of borrowings under the Agreement The Company was required
to maintain a specified level of certain agreed upon financial formulas, as
defined. As of December 31, 2004, the Company was in compliance with its
covenants.
The Company believes that it has sufficient liquidity for the next twelve months
based upon its existing cash and availability under the financing agreement.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4". SFAS No. 151 retains the general principle of ARB 43,
Chapter 4, "Inventory Pricing (AC Section I78)", that inventories are presumed
to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventories based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company does not anticipate that the
adoption SFAS No. 151 will have a significant impact on the Company's overall
results of operations or financial position.
14
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 20, Accounting for Nonmonetary
Transactions". The amendments made by SFAS 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmoneary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. This statement shall be applied prospectively and is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date of issuance. The Company does not
anticipate that the adoption of SFAS 153 will have a significant impact on the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". This
statement revises FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123(R) focuses primarily on the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires companies to recognize in the statement
of operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This Statement, for small business issuers is effective as
of the first reporting period that begins after December 15, 2005. Accordingly,
the Company will adopt SFAS 123(R) in its first quarter of fiscal 2006. The
Company is currently evaluating the provisions of SFAS 123(R) and has not yet
determined the impact that this Statement will have on its future results of
operations or financial position. Since the Company had no options outstanding,
there would be no impact of the new standard, if it had been in effect, on the
net earnings and related per share amounts of our fiscal years ended December
31, 2004 and 2003.
FLUCTUATIONS IN OPERATING RESULTS AND SEASONALITY
We have experienced fluctuations in quarterly operating results as a result of
the timing of the introduction of new titles; variations in sales of titles
developed for particular platforms; market acceptance of our titles; sequels or
enhancements of existing titles; projected and actual changes in platforms; the
timing and success of title introductions by our competitors; product returns;
changes in pricing policies by us and our competitors; order cancellations; and
delays in product shipment. Sales of our titles are also seasonal, with peak
shipments typically occurring in the fourth calendar quarter as a result of
increased demand for titles during the holiday season. Annual comparisons of
operating results are not necessarily indicative of future operating results.
15
ITEM 7. FINANCIAL STATEMENTS
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Index
Page
Report of Independent Registered Public Accounting Firm F - 1
Balance Sheet as of December 31, 2004 F - 2
Statements of Operations for the year ended December 31, 2004
and for the Period from May 9, 2003 (Inception) to
December 31, 2003 F - 3
Statements of Stockholders' Equity for the year ended December
31, 2004 and for the Period from May 9, 2003 (Inception)
to December 31, 2003 F - 4
Statements of Cash Flows for the year ended December 31, 2004
and for the Period from May 9, 2003(Inception) to
December 31, 2003 F - 5 to F - 6
Notes to Financial Statements F - 7 to F - 19
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders
Alliance Distributors Holding Inc.
(Formerly Essential Reality, Inc.)
We have audited the accompanying balance sheet of Alliance Distributors Holding
Inc. (formerly Essential Reality, Inc.) as of December 31, 2004, and the related
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 2004 and the period from May 9, 2003 (inception) to December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alliance Distributors Holding
Inc. (formerly Essential Reality, Inc.) as of December 31, 2004, and the results
of its operations and its cash flows for the year ended December 31, 2004 and
the period from May 9, 2003 (inception) to December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 9, 2005
F-1
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Balance Sheet
December 31, 2004
ASSETS
Current assets:
Cash $ 220,605
Accounts receivable, net of allowance for doubtful
accounts of approximately $37,000 3,370,559
Inventory 3,868,335
Due from vendors 34,248
Prepaid expenses and other current assets 177,441
----------
Total current assets 7,671,188
Property and equipment, net 409,374
Other assets 76,800
----------
$8,157,362
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $2,366,876
Accounts payable 2,574,642
Current portion of long term obligations 28,056
Accrued expenses and other current liabilities 114,212
----------
Total current liabilities 5,083,786
Long term obligations 31,788
Deferred lease obligation 17,597
Commitments and contingencies
Stockholders' equity:
Series A Convertible Non-Redeemable Preferred Stock,
$.001 par value - Authorized, 8,833,334 shares;
issued and outstanding,564,649 shares 564
Common stock, $.001 par value - Authorized, 100,000,000 shares;
Issued and outstanding 43,850,740, shares 43,851
Additional paid-in capital 3,186,240
Accumulated deficit (206,464)
----------
Total stockholders' equity 3,024,191
----------
$8,157,362
==========
See notes to financials statements.
F-2
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Statements of Operations
For the Year Ended December 31, 2004 and
For the Period from May 9, 2003 (Inception) to December 31, 2003
2004 2003
------------ ------------
Net sales $ 35,036,991 $ 10,513,231
Cost of goods sold 31,116,020 9,219,064
------------ ------------
Gross profit 3,920,971 1,294,167
Selling, general and administrative expenses 3,919,071 1,077,342
------------ ------------
Income from operations 1,900 216,825
Interest expense 229,844 9,009
------------ ------------
Income (loss) before provision for income taxes (227,944) 207,816
Provision for income taxes 13,805 8,000
------------ ------------
Net income (loss) (241,749) 199,816
Preferred stock dividends 164,531 --
------------ ------------
Net loss available to common shareholders $ (406,280) $ 199,816
============ ============
Net income (loss) per share - Basic and diluted $ (.01) $ .01
============ ============
Basic and diluted weighted-average common shares
outstanding 35,873,457 24,679,997
============ ============
See notes to financial statements.
F-3
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC)
Statements of Stockholders' Equity
For the Year Ended December 31, 2004
and For the Period from May 9, 2003 (Inception) to
December 31, 2003
Preferred Stock A Preferred Stock B Common Stock
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Balance, May 9, 2003 (Inception) -- $ -- -- $ -- -- $ --
Issuance of common stock 300 300
Additional capital contribution -- -- -- -- -- --
Net income -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2004 -- -- -- -- 300 300
Exchange of Alliance
shares for Essential shares -- -- 1,551,314 1,551 (300) (300)
Essential shareholders' shares
prior to reverse acquisition -- -- -- -- 422,457 422
Issuance of shares in exchange
for Essential debt and Essential's
debt and liabilities assumed 452,202 452 -- -- 77,543 78
Proceeds from PPO, net of
cash issuance costs 1,124,767 1,125 -- -- -- --
Shares issued to placement
agent of PPO, net of merger
expenses of $385,000 108,146 108 -- -- -- --
Preferred stock dividend 46,200 46 -- -- -- --
Conversion of Preferred Stock B
into common stock -- -- (1,551,314) (1,551) 24,679,997 24,680
Conversion of Preferred Stock A
into common stock (1,166,666) (1,167) -- -- 18,560,743 18,561
Shares issued to settle common
stock liability -- -- -- -- 110,000 110
Warrants issued to lender -- -- -- -- -- --
Merger expenses and registration
fees -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 564,649 $ 564 -- $ -- 43,850,740 $ 43,851
=========== =========== =========== =========== =========== ===========
Retained
Additional Earnings Total
Paid In (Accumulated Stockholders'
Capital Deficit) Equity
----------- ----------- -----------
Balance, May 9, 2003 (Inception) $ -- $ -- $ --
Issuance of common stock -- -- 300
Additional capital contribution 435,715 435,715
Net income 199,816 199,816
----------- ----------- -----------
Balance, January 1, 2004 435,715 199,816 635,831
Exchange of Alliance
shares for Essential shares (1,251) -- --
Essential shareholders' shares
prior to reverse acquisition (422) -- --
Issuance of shares in exchange
for Essential debt and Essential's
debt and liabilities assumed (1,068,428) -- (1,067,898)
Proceeds from PPO, net of
cash issuance costs 3,798,375 -- 3,799,500
Shares issued to placement
agent for PPO, net of merger
expenses of $385,000 (108) -- --
Preferred stock dividend 164,485 (164,531) --
Conversion of Preferred Stock B
into common stock (23,129) -- --
Conversion of Preferred Stock A
into common stock (17,394) -- --
Shares issued to settle common
stock liability 32,090 -- 32.200
Warrants issued to lender 60,000 -- 60,000
Merger expenses and registration
fees (193,693) -- (193,693)
Net loss -- (241,749) (241,749)
----------- ----------- -----------
Balance, December 31, 2004 $ 3,186,240 $ (206,464) $ 3,024,191
=========== =========== ===========
See notes to financial statements
F-4
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Statements of Cash Flows
For the Year Ended December 31, 2004 and
For the Period from May 9, 2003 (Inception) to December 31, 2003
2004 2003
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (241,749) $ 199,816
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Deferred rent 13,359 4,236
Depreciation and amortization 82,950 26,928
Bad Debt expense 27,050 10,000
Interest amortization of deferred financing costs 10,833 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in assets
Accounts receivable (3,216,014) (190,864)
Due from factor 1,283,854 (1,283,854)
Inventory (972,128) 203,419
Due from vendors (19,848) (14,400)
Prepaid expenses and other current assets (64,185) (42,074)
Increase (decrease) in liabilities
Accounts payable (1,889,677) 1,500,465
Accrued expenses and other current
liabilities (195,241) 187,900
------------ ------------
Net cash provided by (used in)
operating activities (5,181,707) 601,752
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (68,952) (130,044)
Increase in other assets (3,049) (18,334)
Payments for pre-acquisition liabilities (915,329) --
------------ ------------
Net cash used in investing activities (987,330) (148,378)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of securities 4,000,000 --
Proceeds from note payable - bank 10,018,726 --
Repayments of note payable - bank (7,651,850) --
Payments for issuance costs (200,500) --
Payments for merger costs (111,963) --
Repayment of long-term obligations (271,624) (11,827)
Capital contribution -- 200,000
Proceeds from notes payable -- 15,306
Payment of deferred financing costs (50,000)
------------ ------------
Net cash provided by financing activities 5,732,789 203,479
------------ ------------
NET INCREASE (DECREASE) IN CASH (436,248) 656,853
CASH, beginning of period 656,853 --
------------ ------------
CASH, end of year $ 220,605 $ 656,853
============ ============
See notes to financial statements
F-5
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Statements of Cash Flows (Continued)
For the Year Ended December 31, 2004 and
For the Period from May 9, 2003 (Inception) to December 31, 2003
2004 2003
------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 148,413 $ 4,009
============ ===========
Income tax paid - S Corporation related taxes $ 19,222 $ --
============ ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Inventory financed by accounts payable $ -- $ 3,099,626
============ ===========
Fair market value of property and equipment contributed $ -- $ 276,138
Capitalized lease obligations assumed $ -- (27,277)
Notes payable assumed $ -- (12,896)
------------ -----------
Net capital contributed $ -- $ 236,015
============ ===========
Equipment acquired under capital lease obligations $ -- $ 17,444
============ ===========
Equipment financed by note payable $ -- $ 26,674
============ ===========
Issuance of Series A 6% Preferred Stock $ 385,000 $ --
to placement agent ============ ===========
Pre-acquisition liabilities assumed $ 1,067,898 $ --
============ ===========
Series A 6% Preferred Stock dividend paid in-kind $ 164,531 $ --
============ ===========
Merger and registration costs accrued and in accounts
payable $ 81,730 $ --
============ ===========
Issuance of common stock to settle liability $ 32,200 $ --
============ ===========
Issuance of warrants to lender $ 60,000 $ --
============ ===========
See notes to financial statements
F-6
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 1 - BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS
Alliance Distributors Holding Inc. (the " Company" or "Alliance"), formerly
Essential Reality, Inc., is a wholesale distributor of video games, consoles,
peripherals, accessories and software to customers throughout the United States
for most key manufacturers and third party publishers in the video game
industry.
On June 17, 2004, Essential Reality, Inc, ("Essential") entered into a Share
Exchange Agreement (the "Exchange Agreement") with Jay Gelman, Andre Muller and
Francis Vegliante, who were the sole shareholders (the "Shareholders") of
AllianceCorner Distributors Inc., a privately held, wholesale distributor
incorporated in New York ("AllianceCorner"). Alliance had no prior affiliation
with Essential and commenced operations in August 2003. Pursuant to the Exchange
Agreement, Essential on June 29, 2004 acquired all the outstanding capital stock
of AllianceCorner from the Shareholders in exchange for 1,551,314 Series B
Convertible Non Redeemable Preferred Shares ("Series B Preferred Shares"). As a
result of the acquisition, the business of Alliance is Essential's only
business. The transaction was accounted for as a reverse acquisition as of June
30, 2004 and the pre-acquisition financial statements of AllianceCorner are
treated as historical financial statements of the combined companies. As the
transaction was accounted for as a reverse acquisition into a public shell, no
goodwill has been recorded and the costs incurred have been accounted for as a
reduction of additional paid-in capital. As a result of the reverse acquisition:
(i) the historical financial statements of Essential for periods prior to the
date of the transaction are not presented and (ii) because AllianceCorner is the
accounting acquirer, Essential's historical stockholders' equity is not carried
forward to the merged company as of June 30, 2004. The net monetary liabilities
of Essential assumed in the transaction were approximately $153,000 after
payments of approximately $915,000.
The name of AllianceCorner Distributors, Inc. was changed to Alliance
Distributors Holding Inc. (d/b/a Alliance Distributors) after the acquisition
and Essential does business under that name. The Company operates as a single
segment.
AllianceCorner Distributors Inc., whose operations commenced in August 2003, was
incorporated as Alliance Partners, Inc. in May 2003 under the laws of the State
of New York and financed with $200,000 of equity. In September 2003, the Company
admitted a new stockholder, changed its name to AllianceCorner Distributors Inc.
and purchased substantially all of the inventory of Corner Distributors, Inc.
("Corner"), a company previously managed by the new stockholder and owned by a
relative of the stockholder, for $3,099,626.
NATURE OF BUSINESS
Essential Reality, LLC ("ER, LLC") was formed as Freedom Multimedia, LLC in the
state of Delaware on July 9, 1998 and began active operations on June 1, 1999.
The Company changed its name to ER, LLC on December 29, 1999. On June 20, 2002,
ER, LLC completed a business combination (recapitalization) with JPAL, Inc.
("JPAL"), a Nevada Corporation (the "Transaction") whereby, all of the members
of ER, LLC contributed their membership interests in ER, LLC to JPAL in exchange
for shares of the JPAL's common stock. Following the Transaction, JPAL changed
its name to Essential Reality, Inc.
On November 6, 2003 the Board of Directors of the Company resolved to
discontinue the sales of the P5(TM) Unit, a virtual controller, because of the
lack of capital and the ability to raise additional funds and resolved to pursue
the Exchange Agreement with AllianceCorner.
F-7
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 1 - BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS (Continued)
PRIVATE PLACEMENT OFFERING
As part of the Exchange Agreement with AllianceCorner, Essential was required to
raise funds to complete the transaction. Essential offered 1,124,767 shares of
Series A 6% Convertible Non Redeemable Preferred Shares (the "Series A Preferred
Shares"), through a private placement offering ("PPO"). The PPO resulted in
gross proceeds of $4,000,000 and net proceeds to the Company of $3,799,500 less
$915,329 for payments of Essential's liabilities. At the same time,
substantially all outstanding debt of Essential was extinguished through either
conversion into an aggregate of 452,202 Series A Preferred Shares or through
cash payments.
Sunrise Securities Corp. ("Sunrise") acted as the placement agent in connection
with the PPO and received (a) an $8,500 nonrefundable retainer fee; and (b) a
commission consisting of 108,146 shares of Series A Preferred Shares and 5 year
warrants due June 29, 2009 to purchase 1,564,096 shares of common stock at an
exercise price of $.22. (See Stockholders' Equity section below).
STOCKHOLDERS' EQUITY
Each share of common stock entitles the holder thereof to one vote on each
matter that may come before a meeting of the shareholders. Any Series A
Preferred Share or Series B Preferred Share entitles the holder to 15.9090
votes, and votes as one class with the common stock.
In the Exchange Agreement, the Shareholders agreed to vote their Series B
Preferred Shares in favor of an amendment to the Company's Articles of
Incorporation that would increase the number of authorized shares of common
stock from 50,000,000 to 4,400,000,000 (the "Amendment"), and in favor of a
simultaneous reverse split of the common stock on the basis of one share for
forty-four shares to 100,000,000 authorized shares (the "Reverse Split"). These
actions became effective on November 22, 2004 and all share and per share data
included in these financial statements have been retroactively adjusted for the
split.
The Series A Preferred Shares were entitled to a dividend in kind, upon
conversion, accruing at the rate of 6% per annum from June 29, 2004 until the
effectiveness of the Amendment, November 22, 2004. The Company issued 46,200
additional shares of Series A that converted into 735,000 shares of common stock
and recorded a preferred dividend in the amount of $164,531.
The adoption of the Amendment and the Reverse Split resulted in the automatic
conversion of each Series A Preferred Share and each Series B Preferred Share
into 15.91 shares of common stock. However, Series A Preferred Shares owned by a
holder were not to be converted into common stock if and so long as a result of
conversion the holder would beneficially own in excess of 4.999% or 9.999% of
the issued and outstanding shares, respectively. Any Series A Preferred Shares
not converted into the Company's common stock due to the operation of this
restriction (the "4.999% Restriction") will no longer be entitled to the 6%
dividend referred to above.
As of December 31, 2004, the Series A Preferred Shares were converted into
18,560,743 shares of common stock and the Series B Preferred Shares were
converted into 24,679,997 shares of common stock so that there was a total of
43,850,740 issued and outstanding shares of common stock. The warrant issued to
Sunrise Securities Corp. is exercisable into 1,564,096 shares of common stock.
F-8
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 1 - BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS (Continued)
STOCKHOLDERS' EQUITY (Continued)
The shares of the Company's common stock issued as a result of the conversion on
November 22, 2004, the common stock underlying the Series A Preferred Shares and
the warrants were entitled to registration rights and the Company filed Form
SB-2 on December 23, 2004.
After giving effect to the transactions contemplated by the Exchange Agreement,
the Reverse Split and the PPO and to the conversion of all Series A Preferred
Shares and Series B Preferred Shares, but not giving effect to warrants issued
to the Placement Agent in connection with the PPO and to the 4.999% Restriction,
the former shareholders of Alliance collectively own 24,679,997 shares of common
stock, or approximately 48% of the outstanding common stock of the Company,
investors in the PPO own approximately 18,685,005 shares of common stock , or
approximately 36% of the outstanding common stock of the Company, investors
converting outstanding debt of Essential in the PPO own 6,135,007 shares of
common stock, or approximately 12% of the outstanding common stock of the
Company, the Placement Agent owns 1,720,505 shares of common stock, or
approximately 3% of the outstanding common stock of the Company and shareholders
who owned Essential shares prior to the PPO own approximately 500,000 shares of
common stock, or approximately 1% of the outstanding common stock of the
Company. Investors in the PPO paid the equivalent of $.22 per share.
Certain holders of Series A Preferred Shares (the "Proxy Grantors") have granted
to Jay Gelman an irrevocable proxy (the "Voting Proxy") to vote 544,591 Series A
Preferred Shares which includes the 6% stock dividend issued on November 22,
2004 owned by them and any shares of common stock into which such Series A
Preferred Shares are converted. After conversion, the Series A Preferred Shares
owned by the Proxy Grantors will be entitled in the aggregate to 8,663,949
votes. Subsequent to December 31, 2004, due to sales of stock by some of the
Proxy Grantors, this was reduced to 7,974,326 votes.
The three former Shareholders of Alliance each owned Series B Preferred Shares
representing 15.8% of the Company's total voting power (the total number of
votes that can be cast by the outstanding common stock, Series A Preferred
Shares and Series B Preferred Shares). Mr. Gelman, as of December 31, 2004,
based on his Series B Preferred Shares and his voting rights pursuant to the
Voting Proxy, had 31.9% of the Company's total voting power. On February 16,
2005 this was 30.66%. The Shareholders in the aggregate as of December 31, 2004
had approximately 63% of the Company's total voting power and control the
Company. On March 11, 2005, one of the shareholders sold 4 million shares
reducing the voting power to 54.23%.
In connection with the Exchange Agreement, the former shareholders of Alliance
have agreed not to dispose of any of their Series B Preferred Shares (or any of
their shares of the Company's common stock received by them upon conversion of
the Series B Preferred Shares) for a period of one year from the closing of the
Exchange Agreement unless approval is obtained through methods defined in the
Exchange Agreement.
Subsequent to December 31, 2004, there were 161,314 shares of Series A Preferred
Shares converted into 2,566,358 shares of common stock; as a result, as of
February 23, 2005, the shares issued and outstanding were 403,335 of Series A
Preferred Shares and 46,417,098 of common stock.
F-9
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note- 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates reflected in these financial statements relate primarily
to bad debt reserves on accounts receivable.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to estimated
uncollectible accounts. The Company's estimate is based on a regular review of
individual account balances over 90 days, historical collection experience and
consideration of other factors such as a customer's financial status and other
business risk. It is reasonably possible that the Company's estimate of the
allowance for doubtful accounts will change. The Company established allowances
of $37,000 at December 31, 2004.
Inventory
Inventory consists entirely of finished goods held for sale and is reported at
the lower of cost or market, on the average cost basis. At times, the Company
makes advance payments to vendors to procure and ensure delivery of certain high
demand products. Such deposits are reflected as due from vendors in the balance
sheet.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance and repairs are
charged to expense as incurred. Assets held under capital leases are recorded at
the lower of the net present value of the minimum lease payments or the fair
value of the leased assets at the inception of the lease. Leasehold improvements
are amortized over the lesser of the lease terms or the assets' useful lives.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations for the respective period.
Depreciation and amortization is provided over the estimated lives of the
related assets using the straight-line method. The estimated useful lives for
significant property and equipment categories are as follows:
Vehicles 4 years
Warehouse equipment 3 to 7 years
Office furniture and equipment 3 to 7 years
Leasehold improvements 5 to 10 years
F-10
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 requires that long-lived assets, including property and equipment, be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. The Company assesses its
assets for impairment based on the estimated future undiscounted cash flows
expected to result from the use of the asset and records impairment losses when
this amount is less than the carrying amount. Impairment losses are recorded for
the excess of the assets' carrying amount over their fair value, which is
generally determined based on the estimated future discounted cash flows over
the remaining useful life of the asset using a discount rate determined by
management at the date of the impairment review. Management believes at this
time that the carrying value and useful life of long-lived assets continue to be
appropriate.
Deferred Rent
The Company accounts for scheduled rent increases contained in its leases on a
straight-line basis over the non-cancellable lease term.
Revenue Recognition
The Company recognizes sales upon shipment of products to customers as title and
risk of loss pass upon shipment and collectibility is reasonably assured.
Provisions for estimated discounts and rebates to customers, estimated returns
and allowances and other adjustments are provided for in the same period the
related sales are recorded.
Income Taxes
AllianceCorner, with the consent of its stockholders, elected to have its income
taxed under the provisions of Subchapter S of the Internal Revenue Code and the
corresponding provisions of New York State Tax laws. Under the aforementioned
provisions, corporate income or loss and any tax credits earned are included in
the stockholders' individual federal and state income tax returns. Accordingly,
no provision has been made for federal income taxes for the period from May 9,
2003 (inception) to June 29, 2004. AllianceCorner was subject to New York State
S corporation taxes and New York City corporate income taxes. The provision for
income taxes for this period comprises state and local taxes.
Effective June 29, 2004, the Company is taxed as a C corporation.
The Company follows SFAS No. 109 "Accounting for Income Taxes" and accounts for
income taxes using the liability method which requires the recognition of
deferred tax assets or liabilities for the temporary differences between the
financial reporting and tax bases of the Company's assets and liabilities and
for tax carryforwards at enacted statutory rates in effect for the years in
which the differences are expected to reverse. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. In addition, valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
F-11
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Shipping and Handling
The Company includes shipping and handling revenues in net sales. For the year
ended December 31, 2004 and for the period from May 9, 2003 (inception) to
December 31, 2003, shipping and handling revenues were approximately $166,000
and $48,000, respectively. The Company includes shipping and handling costs in
selling, general and administrative expense. For the year ended December 31,
2004 and for the period from May 9, 2003 (inception) to December 31, 2003, the
Company incurred approximately $245,000 and $144,000,of such costs,
respectively.
Advertising Expenses
Advertising expenses are charged to operations in the period in which they are
incurred. Advertising expenses for the year ended December 31, 2004 and for the
period from May 9, 2003 (inception) to December 31, 2003 were approximately
$35,000 and $5,000, respectively.
Fair Value of Financial Instruments
The carrying amounts of significant financial instruments, which includes
accounts receivable, accounts payable and accrued expenses, approximated fair
value as of December 31, 2004 and 2003 due to their short-term maturities.
Advances from the factor and borrowings under the financing agreement
approximate fair value due to their variable interest rate.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of December 31, 2004 and 2003, the Company has no items
that represent other comprehensive income.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted net income
per share is computed by dividing the net income by the weighted average number
of common shares and common equivalent outstanding during the period. The
weighted average number of common and common equivalent shares outstanding
reflects the conversion of preferred stock for common stock as of June 29, 2004
(see Note 1) and the 1 for 44 stock split, which occurred in November 2004.
Common equivalents at December 31, 2004 exclude the 500,000 of warrants issued
to the Company's lender, since their effect would be anti-dilutive. There were
no common equivalents at December 31, 2003.
Stock Based Compensation
In March 2005, the Company established a stock option plan (See Note 11). The
Company accounts for stock based employee compensation arrangements under the
intrinsic value method pursuant to APB Opinion No. 25, "Accounting for Stock
Issued to Employees". There were no options issued as of December 31, 2004.
Accordingly, no compensation expense was recorded in the financial statements
with respect to option grants.
F-12
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4". SFAS No. 151 retains the general principle of ARB 43,
Chapter 4, "Inventory Pricing (AC Section I78)", that inventories are presumed
to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventories based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company does not anticipate the adoption
SFAS No. 151 will have a significant impact on the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 20, Accounting for Nonmonetary
Transactions". The amendments made by SFAS 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmoneary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. This statement, shall be applied prospectively and is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date of issuance. The Company does not
anticipate that the adoption of SFAS 153 will have a significant impact on the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". This
statement revises FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123(R) focuses primarily on the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires companies to recognize in the statement
of operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This Statement, for small business issuers is effective as
of the first reporting period that begins after December 15, 2005. Accordingly,
the Company will adopt SFAS 123(R) in its first quarter of fiscal 2006. The
Company is currently evaluating the provisions of SFAS 123(R) and has not yet
determined the impact that this Statement will have on its future results of
operations or financial position. Since the Company had no options outstanding,
there would be no impact of this new standard, if it had been in effect, on the
net earnings and related per share data amounts of our fiscal years ended 2004
and 2003.
Note 3 - CONCENTRATIONS OF CREDIT RISK AND MAJOR SUPPLIERS
Cash
The Company maintains cash balances at two banks. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to $100,000.
F-13
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 3 - CONCENTRATIONS OF CREDIT RISK AND MAJOR SUPPLIERS (Continued)
Accounts Receivable
Concentrations of credit risk with respect to accounts receivable are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade credit risk. The Company controls credit
risk through credit approvals, credit limits and monitoring procedures. The
Company performs credit evaluations of its customers but generally does not
require collateral to support accounts receivable. The Company's bad debt
experience has been within management's expectations.
Major Suppliers
Other than the purchase of inventory acquired from Corner (see Note 1), for the
period from May 9, 2003 (inception) to December 31, 2003, two suppliers
accounted for approximately 22% of purchases. For the year ended December 31,
2004 three suppliers accounted for approximately 50% of purchases. Management
believes that other suppliers could provide the materials on comparable terms.
At December 31, 2004, the amount due to these suppliers was approximately $
1,339,000 and is included in accounts payable on the accompanying balance sheet.
If a significant supplier terminates or modifies its relationship with the
Company future results could be materially and adversely affected.
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2004 consists of:
Leasehold improvements $239,742
Office furniture and equipment 105,187
Warehouse equipment 54,863
Vehicles 52,226
Equipment under capital leases 67,234
--------
519,252
Less: Accumulated depreciation and
amortization 109,878
--------
$409,374
========
Depreciation and amortization expense amounted to $82,950 and $26,928 for the
year ended December 31, 2004 and for the period May 3, 2003 (Inception) to
December 31, 2003, respectively.
F-14
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 5 - FINANCING AGREEMENTS
In December 2003, the Company entered into a factoring arrangement with a
commercial factor, Rosenthal & Rosenthal, Inc. ("Rosenthal"). Up to November
2004, the Company sold a substantial portion of its trade receivables up to
maximum credit limits established by the factor for each individual account.
Receivables sold in excess of these limitations were subject to recourse in the
event of non-payment by the customer. Under the terms of the agreement, the
Company paid interest at the prime lending rate plus 1.5% for advances made
prior to the collection of the factored accounts receivable. Substantially all
of the Company's assets were pledged as collateral under the factoring
agreement.
On November 11, 2004, Alliance entered into a Financing Agreement which replaced
the factoring agreement with Rosenthal. Under the Agreement, Rosenthal may in
its discretion lend up to $5,000,000 to Alliance based on eligible inventory and
receivables. All borrowings are due on demand, are secured by substantially all
of the assets of Alliance and are subject to the Company's compliance with
certain financial covenants. The Company's CEO and the Company's President
signed limited guaranties in respect of borrowings under the Agreement.
The Agreement terminates November 30, 2007 unless terminated by Rosenthal on 30
days' notice. Interest on outstanding borrowings is payable at a variable rate
per annum, equal to the prime rate (but not less than 4.75 %) plus 2.00 % (7.25
% as of December 31, 2004). In addition, the Company will pay the lender on each
anniversary date an annual fee of 1% of the Maximum Credit of $5,000,000 in the
amount of $50,000 which is amortized over one year, and a monthly administrative
fee of $1,000. The financing expense for the annual fee recorded for the year
ended December 31, 2004 amount to $6,250. At December 31, 2004, the loan
outstanding amounted to $2,366,876.
In connection with the Agreement, the Company issued to Rosenthal a warrant (the
"Warrant") to purchase 500,000 shares of common stock at $0.10 per share. The
Warrant expires on November 30, 2010. On notice by the Company the Warrants will
expire earlier if the closing price of the common stock during a period
designated in the Warrants is not less than $0.40 per share. The Warrants may be
exercised for cash or on a cashless basis (i.e., by deducting from the number of
shares otherwise issuable on exercise a number of shares that have a then market
value equal to the exercise price). The Company recorded a deferred financing
cost of approximately $60,000 in the fourth quarter, representing the fair value
of the warrants, which will be amortized over the life of the financing
agreement of three years. The financing expense recorded for the year December
31, 2004 amounted to approximately $5,000.
Under the terms of the agreements, the Company is required to maintain a
specified level of net worth, working capital and debt ratios as defined. At
December 31, 2004 the Company is in compliance with these covenants.
F-15
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 6 - LONG TERM OBLIGATIONS
At December 31, 2004, long-term obligations consist of:
Notes payable in monthly installments of approximately
$1,200 through September 2008, including interest at
varying rates up to 5.5%, secured by related equipment
with a carrying value of approximately $49,000 $38,203
Capital lease obligations payable in various monthly
installments of approximately $1,400 through June
2006, including interest at 5.5%, secured by related
equipment with a carrying value of approximately
$26,000 22,843
-------
61,046
Less: Amount representing interest 1,202
-------
59,844
Less: Current portion 28,056
-------
$31,788
=======
At December 31, 2004, future payments of long-term obligations are as follows:
Year Ending
December 31,
------------
2005 $ 30,350
2006 18,551
2007 8,130
2008 4,015
--------
$ 61,046
========
Note 7 - INCOME TAXES
The components of the provision for income taxes are as follows:
2004 2003
------- -------
Current tax expense:
Federal $ -- $ --
State and local 13,805 8,000
------- -------
Total $13,805 $ 8,000
======= =======
The Company was taxed as an S Corporation for federal and state purposes for
2003 and for the period January 1, 2004 through June 29, 2004. As such, the
Company's tax provision for this period include New York City taxes, which are
determined as if the Company was a C Corporation. New York City does not
recognize S Corporations. For the period the Company was a C Corporation during
2004, the Company incurred a federal, state and local net operating loss, which
was fully reserved by valuation allowance.
F-16
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 7 - INCOME TAXES (Continued)
The Company accounts for income taxes using the liability method which requires
the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities and for tax carryforwards at enacted statutory rates in
effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The Company has not recorded income tax expense or benefit as a
result of its available net operating loss carryforwards, which are fully
reserved by a valuation allowance because management does not believe that is it
more likely than not that the deferred tax assets will be utilized.
Significant components of the Company's net deferred income taxes are as follows
at December 31, 2004:
Long-term deferred tax assets:
Net operating loss carryforwards $2,100,000
Other 24,000
----------
Total deferred tax assets 2,124,000
Less: Valuation allowance 2,124,000
----------
Net deferred tax assets $ --
==========
At December 31, 2004, the Company had federal and state net operating loss
carryforwards of approximately $5,000,000. The federal net operating loss
carryforwards expire through the year 2024 and the state net operating loss
carryforwards expire through 2016. The Company has established a valuation
allowance of $2,124,000 at December 31, 2004 due to the uncertainty surrounding
the realization of such assets. The Tax Reform Act of 1986 contains provisions
that limit the ability to utilize net operating loss carryforwards in the case
of certain events including significant changes in ownership interests. The
Company has not evaluated whether it has undergone an ownership change pursuant
to this act. Based upon the terms of the Exchange agreement, an ownership change
may have occurred. If such ownership changes are found to exist, the net
operating loss carryforwards as reported could be significantly limited.
Note 8 - RETIREMENT PLAN
The Company sponsors a 401(k) contributory plan (the "Plan") for the benefits of
employees who are at least 21 years of age. The Company's management determines,
at its discretion, any annual contributions. The Company elected not to
contribute to the Plan for the year ended December 31, 2004 and for the period
from May 9, 2003 (inception) to December 31, 2003.
Note 9 - WARRANTS
All of the warrants granted in conjunction with secured convertible debentures
and notes payable were cancelled as of June 29, 2004.
The Company has outstanding 3 year warrants, which expire on June 20, 2005, with
an exercise price of $57.20 to purchase 7,528 shares of common stock issued to
the financial consultants associated with the JPAL deal on June 20, 2002.
Pursuant to the PPO, the Company issued Sunrise 5 year warrants which expire on
June 29, 2009 to purchase 1,564,096 shares of common stock with an exercise
price of $0.22 per share. (See Note 1)
F-17
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 9 - WARRANTS (Continued)
On November 11, 2004, in connection with the new Financing Agreement, the
Company issued warrants to purchase 500,000 shares of common stock at $0.10 per
share. (See Note 5)
Note 10 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases showroom, office and warehouse space under operating leases
expiring from 2008 through 2013. The future minimum lease payments, excluding
escalation charges, are as follows:
Year Ending
December 31,
------------
2005 $178,000
2006 183,000
2007 188,000
2008 131,000
2009 71,000
Thereafter 240,000
--------
$991,000
========
In accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," non-cancellable operating leases with scheduled rent
increases require that rent expense be recognized on a straight-line basis over
the lease term. Rent expense for the year ended December 31, 2004 and for the
period from May 9, 2003 (inception) to December 31, 2003 includes approximately
$14,000 and $4,000, respectively, which relates to the amortized portion of the
scheduled rent increases. At December 31, 2004 an obligation of approximately
$18,000 representing future deferred rent payments is reflected in the
accompanying balance sheet.
Total rent expense charged to operations for the year ended December 31, 2004
and for the period from May 9, 2003 (inception) to December 31, 2003 was
approximately $191,000 and $46,000, respectively.
Employment Agreement
On July 26, 2004, the Chief Executive Officer of Alliance signed an employment
agreement for two years with annual compensation of $300,000 per year for the
first year and $350,000 for the second year, and at the discretion of the Board
of Directors, bonuses equal to his salary. In addition, he will receive a
monthly car allowance in the amount of $750 per month.
F-18
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
Notes to Financial Statements
Note 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreement (Continued)
The Employment Agreement also provides for the Board of Directors to award
discretionary bonuses to Mr. Gelman in an amount equal to his salary. In the
event of a termination of Mr. Gelman's employment by the Company other than for
Cause, as defined under the Employment Agreement, or by Mr. Gelman for Good
Reason, as defined under the Employment Agreement, Mr. Gelman will be entitled
to a lump sum payment equal to three times his base salary for the period from
the date of termination through June 30, 2006. The Employment Agreement contains
a 12-month non-compete provision effective following termination, except for
termination by the Company other than for Cause, or Good Reason by Mr. Gelman.
The Employment Agreement also contains customary confidentiality provisions.
Litigation
On August 19, 2004 a complaint was filed by Radio Wave LLC ("Plaintiff"), in the
Supreme Court of the State of New York, County of New York, against ER, LLC,
Essential and David Devor, a former officer and a current employee of the
Company, for rent, additional rent, cost and fees relating to premises formerly
occupied by the Company. Plaintiff seeks to recover $150,416 for the period up
to August 31, 2004, plus additional amounts to be determined by the Court for
the period subsequent to August 31, 2004. Plaintiff also seeks to recover
$50,000 in expenses and attorney fees plus additional amounts to be determined
by the Court. The Company believes that the suit is without merit and intends to
vigorously defend its position.
Note 11 - SUBSEQUENT EVENT
As of March 14, 2005, the Board of Directors of the Company granted a total of
7,550,000 non-statutory options under the Company's Alliance Distributors
Holding Inc. 2004 Stock Plan. The options are ten-year non-qualified options to
purchase the Company's common stock, 7,400,000 of the options have an exercise
price of $0.3250 per share and 150,000 of the options have an exercise price of
$.32 per share, vest and become exercisable in 12 equal quarterly installments
beginning on April 1, 2005. Of the total options granted, 1,100,000 options were
granted to Jay Gelman, the CEO and Chairman of the Board of Directors of the
Company, 1,100,000 options were granted to Andre Muller, the President, COO and
a director of the Company, and 150,000 options were granted to each of Thomas
Vitiello, Steven H. Nathan and Humber B. Powell, III, each a non-employee
director of the Company. The options were granted in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended.
The board also agreed as compensation for the directors to serve as members of
the Board, each member receives annual compensation of $6,000 to attend four
regular meetings a year. No fee will be payable for any other meeting.
Note 12-FOURTH QUARTER ADJUSTMENT
During the fourth quarter of fiscal 2004 the Company conducted its annual
physical inventory. The physical inventory resulted in a difference with the
perpetual inventory system of approximately $269,000, which was recorded as an
expense within cost of sales in the accompanying financial statements.
The Company determined that approximately $198,000 of the difference was due to
an error in the perpetual inventory system which did not properly update certain
sales transactions. The balance was related to shrinkage.
F-19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Previously disclosed on the Company's reports on Form 8-K filed with the
Securities and Exchange Commission on March 20, 2003 and July 14, 2004.
ITEM 8A CONTROLS AND PROCEDURES
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer/Principal
Financial Officer, of the effectiveness of the design and the operation of our
"disclosure controls and procedures" (as such term is defined in Rules 13a-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2004 ("Evaluation
Date"). Based on such evaluation, our Chief Executive Officer/Principal
Financial Officer have concluded that, as of the Evaluation Date, the disclosure
controls and procedures are reasonably designed and effective to ensure that (i)
information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
(ii) such information is accumulated and communicated to our management,
including our Chief Executive Officer/Principal Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Additionally, the Company is implementing periodic observation of inventory
through the use of computerized equipment and will conduct periodic
reconciliation to the perpetual inventory file. These changes will have the
effect of ensuring that account reconciliation operational controls are
operating as designed and will reduce the probability of human error. The
Company introduced these controls after learning of the errors described in Note
12 of the Financial Statements.
Other than the changes noted above, there have been no changes in the Company's
internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the
Exchange Act that occurred during the Company's fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers, their ages, positions held and duration
each person has held that position, are as follows:
17
Name Position Held with the Company Age Date First Elected or Appointed
---- --------------------------------- --- -------------------------------
Jay Gelman Chief Executive Officer, 43 Chief Executive Officer on June 29, 2004;
Assistant Secretary and Assistant Secretary on November 11, 2004;
Chairman of Board of Directors and Chairman of the Board of Directors on
October 14, 2004
Andre Muller Chief Operating Officer, President 39 Chief Operating Officer and President on
Secretary and Director of the June 29, 2004; Secretary on November 11, 2004;
Board of Directors and Director on October 14, 2004
Thomas Vitiello Director 43 Director on October 14, 2004
Humbert B. Director 63 Director and Chairman of the Board of
Powell, III Directors from July 1, 2002 until October
14, 2004 and currently a Director
Steven H. Director 55 Director on March 14, 2005
Nathan
JAY GELMAN
Jay Gelman in 1988 co-founded L & J Marketing, Inc. d/b/a Alliance Distributors,
a regional video game software and hardware distributor based in College Point,
NY. He served as President, until December of 1997 when Alliance was sold to
Take Two Interactive Software, Inc. From 1998 until 2003, Mr. Gelman was
employed by Track Data Corporation (NASDAQ: TRAC) where he served as a director
and as Executive Vice President. In 2003, Mr. Gelman joined Mr. Muller to found
Alliance Distributors, Inc. (name later changed to AllianceCorner Distributors
Inc.), and served as its President and Chief Executive Officer. Since the
acquisition by the Company of AllianceCorner Distributors Inc. on June 29, 2004,
Mr. Gelman has served as Chief Executive Officer of the Company and is also
currently the Chairman of the Board of Directors.
ANDRE MULLER
For more than five years prior to 2003 Andre Muller was employed as a General
Manager by Take Two Interactive Software, Inc. In 2003, Mr. Muller joined Mr.
Gelman to found Alliance Distributors, Inc., and served as its Chief Operating
Officer. Since the acquisition by the Company of AllianceCorner Distributors
Inc. on June 29, 2004, Mr. Muller has served as Chief Operating Officer and
President of the Company.
19
THOMAS VITIELLO
For more than five years, Mr. Vitiello has been the president of VIT Trading,
Inc., a trader in precious metals. He graduated from NYU with a BS in Finance in
1985.
HUMBERT B. POWELL, III
Humbert B. Powell, III has been a Managing Director at Sanders Morris Harris, a
regional investment-banking firm headquartered in Houston, Texas, with a branch
in New York City, since November 1996. He is also a Director of Lawman Armour
Corp., Bikers Dream Inc., World Water Corp., and a trustee of Salem-Teikyo
University. Mr. Powell served as chief executive officer of the Company from
June 20, 2002 until July 1, 2002.
STEVEN H. NATHAN
Mr. Nathan has since 1997 served as President of Progressive Planning, Inc. a
tax and financial consulting firm in Jericho, NY. From 1993 through 1997 he was
Vice President and Chief Financial Officer of L & J Marketing, Inc. d/b/a
Alliance Distributors, a regional video game software and hardware distributor
based in College Point, NY. He held similar positions from 1984 to 1993 with
Wren/AP Distributors.
TERM OF OFFICE
The Company's Directors are appointed for a one-year term to hold office until
the next annual meeting of shareholders. Our officers serve at the pleasure of
the Board of Directors.
See "Certain Relationships and Related Transactions" for information on a
transaction between the Company and Jay Gelman.
There are no family relationships among directors or executive officers.
The Company has a separately designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. Serving on the
Committee are Steven Nathan and Thomas Vitiello. The Board of Directors has
determined that it has an audit committee financial expert serving on the audit
committee, Steven Nathan.
The board of directors have determined that Steven Nathan is an independent
director based on Rule 4200 of the National Association of Securities Dealers'
listing standards and is qualified as an "Audit Committee Financial Expert" as
defined in Item 7(d)(3)(iv) of Schedule 14A.
20
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that during the period from January 1, 2004 through
December 31, 2004 all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were complied
with.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its Chief Executive
Officer/ Principal Financial Officer.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information as to the total remuneration
paid by the Company to its Chief Executive Officer. No other officer received
salary and bonus payments, other than the named individual, in excess of
$100,000 for each of the last three completed fiscal years.
--------------------------------------------------------------------------------
Name and Principal Fiscal Year Ended Annual Compensation
Position December 31 Salary
--------------------------------------------------------------------------------
Jay Gelman, Chief 2004 $ 182,211 (*)
Executive Officer
--------------------------------------------------------------------------------
Andre Muller,
President and Chief 2004 $ 182,211 (*)
Operating Officer
--------------------------------------------------------------------------------
Steven T. Francesco,
Chief Executive 2003 $0
Officer
--------------------------------------------------------------------------------
2002 $127,000
--------------------------------------------------------------------------------
(*) For the period from June 29, 2004 through December 31, 2004
Following the resignation of Mr. Francesco as Chief Executive Officer after
February 5, 2003, the company had no Chief Executive Officer or President for
the remainder of the fiscal year 2003 and no other officers or employees that
were compensated in excess of $100,000 during the fiscal years ended December
31, 2001, 2002 and 2003. During the fiscal year ended December 31, 2002, the
Company had three chief executive officers. Frank Drechsler served as chief
executive officer until our business combination with ER LLC on June 20, 2002.
Mr. Drechsler did not earn or receive any compensation for services he rendered.
Following the business combination, Humbert B. Powell, III acted as chief
executive officer until July 1, 2002. Mr. Powell did not earn or receive any
compensation for services he rendered in such capacity. Steven T. Francesco
served as chief executive officer from July 1, 2002 until February 5, 2003. From
February 5, 2003 until December 31, 2003, John Gentile served as principal
executive officer. Mr. Gentile did not earn or receive any compensation for
services he rendered. Mr. Gelman has served as Chief Executive Officer of the
Company since the acquisition by the Company of AllianceCorner Distributors Inc.
on June 29, 2004 and is also currently the Chairman of the Board of Directors.
Mr. Muller has served as Chief Operating Officer and President of the Company
since the acquisition by the Company of AllianceCorner Distributors Inc. on June
29, 2004 and is currently a director of the Board of Directors.
21
DIRECTOR COMPENSATION
On January 14, 2005, the board of directors resolved that each director will be
entitled to a $1,500 fee for each of four regularly scheduled meetings during
each year.
Prior to August 30, 2004, board members were compensated for their services as
director. Each member received annual compensation of $10,000 ($12,000 if acting
as chairman of a committee) plus options to purchase 10,000 shares of the
Company's common stock at an exercise price equal to the closing price of our
common stock on the date of the grant. The options vested over a one-year period
in equal quarterly amounts, so long as the director completed service for such
quarter. Non-employee directors were reimbursed for reasonable expenses in
connection with serving as a director and member of a committee. There were
100,000 options issued prior to June 29, 2004, all of which were cancelled
pursuant to terms of the Exchange Agreement.
Employment Agreement
Reference is made to Certain Relationships and Related Transactions describing
the Company's employment agreement with Jay Gelman, the Company's Chief
Executive Officer and Chairman.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the ownership of the common stock and Series A
Preferred Shares as of March 16, 2005.
Unless otherwise indicated, we believe that all persons named in the table have
sole voting and investment power with respect to all shares of voting stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of options, warrants or convertible securities.
In calculating the percentage ownership by any holder of common stock, the table
considers that the total number of outstanding shares includes shares issuable
on exercise of securities within 60 days from the date hereof that are
beneficially owned by that holder. Accordingly, for calculating the percentage
ownership of shares of common stock outstanding, for Nathan A. Low there are
deemed outstanding 48,860,098 shares of common stock (see footnote 8 to the
beneficial ownership table directly below), for Sunrise Equity Partners, Level
Counter LLC and Marilyn Adler there are deemed outstanding 47,635,997 shares of
common stock (because of the deemed conversion of 76,617 shares of Series A
Preferred Shares convertible into 1,218,899 shares of common stock held by
Sunrise Equity Partners; see footnotes 14 and 18 below), for Amnon Mandelbaum
there are deemed outstanding 47,893,320 shares of common stock (because of the
deemed conversion of 257,323 warrants owned by Mr. Mandelbaum and 1,218,899
shares beneficially owned by Mr. Mandelbaum, see footnote 16 below), for Jay
Gelman, Andre Muller and Francis Vegliante there are deemed outstanding
46,508,765 shares of common stock, for Steven Nathan, Humbert Powell and Thomas
Vitiello there are deemed outstanding 46,429,598 shares of common stock and for
all other holders there are deemed outstanding 46,417,098.
22
For calculating the percentage ownership of the Series A Convertible Non
Redeemable Preferred Shares ("Series A Preferred Shares"), for Jay Gelman,
Northumberland Holdings, Ltd., Smithfield Fiduciary LLC, Nathan A. Low Roth IRA,
Nathan A. Low Family Trust, and Sunrise Foundation Trust there are deemed
outstanding 403,334 shares of Series A Preferred Shares, and for Sunrise Equity
Partners, Nathan A. Low, Level Counter LLC, Amnon Mandelbaum and Marilyn Adler
there are deemed outstanding 326,717 shares of Series A Preferred Shares because
of the deemed conversion of 76,617 shares of Series A Preferred Shares
convertible into 1,218,899 shares of common stock held by Sunrise Equity
Partners (see footnotes 12, 14, 16, and 18 below). Each Series A Preferred Share
is convertible into 15.9090 shares of common stock except to the extent that as
a result of conversion the holder would beneficially own in excess of 4.999% or
9.999% of the issued and outstanding shares ("4.999% Restriction").
-----------------------------------------------------------------------------------
Name and address of beneficial owner Common stock Series A
(% of class) Convertible
Non
Redeemable
Preferred
Shares (%
of class)
-----------------------------------------------------------------------------------
Jay Gelman, 13,613,887(1) 168,427
15-15 132nd Street, College Point, NY 11356 (29.27%) (41.76%)(2)
-----------------------------------------------------------------------------------
Andre Muller 8,318,338(3) 0
15-15 132nd Street, College Point, NY 11356 (17.89%)
-----------------------------------------------------------------------------------
Humbert B. Powell III 35,228(4) 0
527 Madison Avenue, NY, NY 10022 (.076%)
-----------------------------------------------------------------------------------
----------
(1) Consists of 8,226,671 shares of common stock owned by Mr. Gelman, 91,667
shares of common stock issuable upon exercise of options and 5,295,549
shares for which Mr. Gelman has a Voting Proxy referred to above in
Description of Business.
(2) Consists of Series A Convertible Non Redeemable Preferred Shares subject
to the Voting Proxy.
(3) Consists of 8,226,671 shares of common stock and 91,667 shares of common
stock issuable upon exercise of options.
23
-----------------------------------------------------------------------------------
Name and address of beneficial owner Common stock Series A
(% of class) Convertible
Non
Redeemable
Preferred
Shares (%
of class)
-----------------------------------------------------------------------------------
Thomas Vitiello 12,500(5) 0
15-15 132nd Street, College Point, NY 11356 (.027%)
-----------------------------------------------------------------------------------
Steven H. Nathan 12,500 0
Progressive Planning, Inc. (.027%)(6)
500 North Broadway
Jericho, NY 11753
-----------------------------------------------------------------------------------
Nathan A. Low (7) 2,443,000 (8) 320,514
c/o Sunrise Securities Corp. (4.999%) (98.10%)(9)
641 Lexington Avenue
NY, NY 10022
-----------------------------------------------------------------------------------
----------
(4) Consists of 22,728 shares of common stock and 12,500 shares of common
stock issuable upon exercise of options.
(5) Consists of 12,500 shares of common stock issuable upon exercise of
options.
(6) Consists of 12,500 shares of common stock issuable upon exercise of
options.
(7) Mr. Low's wife has sole voting and investment power in the shares owned by
Nathan A. Low Family Trust. Mr. Low has shared voting and investment power
in Level Counter LLC, which has sole investment and voting power in the
shares owned by Sunrise Equity Partners. Mr. Low has shared voting and
investment power in the shares owned by Sunrise Foundation Trust. Mr. Low
disclaims beneficial ownership of the shares owned by Nathan A. Low Family
Trust, Sunrise Equity Partners and Sunrise Foundation Trust.
(8) These 2,443,000 shares consist of 800,527 shares issuable on exercise of
warrants owned by Nathan A. Low, 200,132 shares issuable on exercise of
warrants owned by Sunrise Foundation Trust, 223,442 shares issuable on
exercise of warrants owned by Sunrise Securities Corp and 1,218,899 shares
of common stock issuable on conversion of 76,617 shares of the Series A
Convertible Non Redeemable Preferred Stock ("Series A Preferred Shares")
owned by Sunrise Equity Partners. Excludes 2,290,384 shares of common
stock for Nathan A Low Roth IRA, 756,302 shares of common stock for Nathan
Low, 388,293 shares of common stock for Nathan A. Low Family Trust,
346,484 shares of common stock for Sunrise Foundation Trust, 246,145
shares of common stock for Sunrise Securities Corp. and 1,071,485 shares
of common stock for Sunrise Equity Partners, which are not currently
issuable on conversion of Series A Preferred Shares. Series A Preferred
Shares owned by a holder will not be converted into common stock if and so
long as a result of conversion the holder would beneficially own in excess
of 4.999% or 9.999% of the issued and outstanding shares ("4.999%
Restriction").
(9) Consists of 47,539 Series A Preferred Shares owned by Nathan A. Low,
24,407 Series A Preferred Shares owned by Nathan A. Low Family Trust,
143,967 Series A Preferred Shares owned by Nathan A. Low Roth IRA, 21,779
Series A Preferred Shares owned by Sunrise Foundation Trust, 15,472 Series
A Preferred Shares owned by Sunrise Securities Corp. and 67,350 Series A
Preferred Shares owned by Sunrise Equity Partners that are not convertible
into common stock by reason of the 4.999% Restriction.
24
------------------------------------------------------------------------------------
Name and address of beneficial owner Common stock Series A
(% of class) Convertible
Non
Redeemable
Preferred
Shares (%
of class)
------------------------------------------------------------------------------------
Nathan A. Low Roth IRA 0 (10) 143,967
c/o Sunrise Securities Corp. (35.69%)(11)
641 Lexington Avenue
NY, NY 10022
------------------------------------------------------------------------------------
Nathan A. Low Family Trust 0 24,407 (6.05%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
NY, NY 10022
------------------------------------------------------------------------------------
Sunrise Foundation Trust 0 21,779 (5.39%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
NY, NY 10022
------------------------------------------------------------------------------------
Sunrise Equity Partners 1,218,899 67,350
641 Lexington Avenue 25th Floor (2.56%)(12) (20.61%) (13)
New York, NY 10022
------------------------------------------------------------------------------------
Level Counter LLC 1,218,899 67,350
641 Lexington Avenue 25th Floor (2.56%)(14) (20.61%) (15)
New York, NY 10022
------------------------------------------------------------------------------------
Amnon Mandelbaum 1,766,167 67,350
641 Lexington Avenue 25th Floor (3.69%)(16) (20.61%)(17)
New York, NY 10022
------------------------------------------------------------------------------------
----------
(10) See Notes 8 and 9.
(11) See Notes 8 and 9.
(12) Excludes 1,071,485 shares of common stock, which, are not issuable on
conversion of 67,350 Series A Preferred Shares because of the 4.999%
Restriction. See Notes 8 and 9.
(13) See Notes 8 and 9.
(14) Level Counter LLC has sole investment and voting power in the shares owned
by Sunrise Equity Partners. Level Counter LLC disclaims beneficial
ownership of these shares.
(15) See Notes 8, 9 and 14.
(16) Consists of 289,945 shares and 257,323 warrants owned by Mr. Mandelbaum,
and 1,218,899 shares owned by Level Counter LLC. Mr. Mandelbaum has shared
voting and investment power in Level Counter LLC, which has sole
investment and voting power in the shares owned by Sunrise Equity
Partners. Mr. Mandelbaum disclaims beneficial ownership of the shares
owned by Sunrise Equity Partners. See Note 14.
(17) See Notes 14, 15 and 16.
25
-----------------------------------------------------------------------------------
Name and address of beneficial owner Common stock Series A
(% of class) Convertible
Non
Redeemable
Preferred
Shares (%
of class)
-----------------------------------------------------------------------------------
Marilyn Adler 1,218,899 67,350
641 Lexington Avenue 25th Floor (2.56%) (18) (20.61%)(19)
New York, NY 10022
-----------------------------------------------------------------------------------
Northumberland Holdings, Ltd. 2,320,832 53 (.01%)(21)
(4.999%) (20)
-----------------------------------------------------------------------------------
Smithfield Fiduciary LLC 2,189,033 6,151
c/o Hybridge Capital Management (4.72%) (22) (1.53%)
West 57th Street, 27th Floor
New York, N.Y. 10019
-----------------------------------------------------------------------------------
Francis Vegliante 4,318,322 (23) 0
15-15 132nd Street, College Point, NY (9.28%)
-----------------------------------------------------------------------------------
Thesues Fund, 3,500,000 0
L.P. 131 Olive Hill Lane (7.54%)
Woodside, CA 94062
-----------------------------------------------------------------------------------
All executive officers and directors as a 21,992,453 168,427
group (47.16%) (24) (41.76%)
-----------------------------------------------------------------------------------
----------
(18) Consists of shares owned by Level Counter LLC. Ms. Adler has shared voting
and investment power in Level Counter LLC, which has sole investment and
voting power in the shares owned by Sunrise Equity Partners. Ms. Adler
disclaims beneficial ownership of the shares owned by Sunrise Equity
Partners.
(19) See Notes 14, 15 and 18.
(20) Consists of 2,182 shares of common stock owned since June 19, 2002 and
2,318,650 shares issued upon conversion of 145,743 Series A Preferred
Shares on November 22, 2004.
(21) Balance amount remaining after conversion of 145,743 Series A Preferred
Shares from a total 145,796 Series A Preferred Shares issued to
Northumberland Holdings, Ltd.
(22) Consists of common shares issued upon conversion of 137,816 Series A
Preferred Shares on November 22, 2004.
(23) Consists of 4,226,655 shares of common stock and 91,667 shares of common
stock issuable upon exercise of options.
(24) Percentage calculated by dividing 21,992,453 by 46,637,932, consisting of
46,417,098 shares of common stock actually outstanding and 220,834 shares
of common stock issuable upon exercise of options held by the directors.
26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as disclosed below, there have been no transactions, or proposed
transactions, which have materially affected or will materially affect us in
which any director, executive officer or beneficial holder of more than 5% of
the outstanding common stock, or any of their respective relatives, spouses,
associates or affiliates, has had or will have any direct or material indirect
interest.
Employment Agreement. The Company has a two year employment agreement (the
"Employment Agreement") effective as of July 1, 2004 with Jay Gelman, who is the
Company's Chief Executive Officer and Chairman of its Board of Directors. The
Employment Agreement provides for annual compensation of $300,000 for the first
year and $350,000 for the second year. The Employment Agreement also provides
for the Board of Directors to award discretionary bonuses to Mr. Gelman in an
amount equal to his salary. In the event of a termination of Mr. Gelman's
employment by the Company other than for Cause, as defined under the Employment
Agreement, or by Mr. Gelman for Good Reason, as defined under the Employment
Agreement, Mr. Gelman will be entitled to a lump sum payment equal to three
times his base salary for the period from the date of termination through June
30, 2006. The Employment Agreement contains a 12-month non-compete provision
effective following termination, except for termination by the Company other
than for Cause, or Good Reason by Mr. Gelman. The Employment Agreement also
contains customary confidentiality provisions.
Reference is made to the Liquidity and Capital Resources section above for a
discussion relating to limited guaranties signed by the Company's CEO and the
Company's President with respect to borrowings by the Company under the
Financing Agreement.
ITEM 13. EXHIBITS
(a)
1. Financial Statements. See Item 7 Index to Financial Statements.
2. Financial Statement Schedules. Not applicable
NUMBER DESCRIPTION
2.1 Exchange Agreement between Essential Reality, Inc. and Messrs. Jay
Gelman, Andre Muller and Francis Vegliante dated as of June 17,
2004. Incorporated herein by reference from Exhibit 2.1 to the
Company's Form 8-K filed on July 14, 2004 (the "Form 8-K").
2.2 Form of Agreement and Plan of Merger dated as of October 25, 2004 by
and between Essential Reality, Inc. and Alliance Distributors
Holding Inc. Incorporated herein by reference from Exhibit 2 to the
Company's Form 8-K filed on November 23, 2004.
27
3.1 Certificate of Incorporation of Alliance Distributors Holding Inc.
Incorporated herein by reference from Exhibit 3.1 to the Company's
Form 8-K filed on November 23, 2004.
3.2 By-Laws of Alliance Distributors Holding Inc. Incorporated herein by
reference from Exhibit 3.2 to the Company's Form 8-K filed on
November 23, 2004.
4.1 Alliance Distributors Holding Inc. 2004 Stock Plan. Incorporated
herein by reference from Exhibit 3.3 to the Company's Form 8-K filed
on November 23, 2004.
4.2 Form of Stock Option Agreement, filed herewith.
4.3 Form of Warrant issued to Rosenthal & Rosenthal. Incorporated herein
by reference from Exhibit 4.1 to the Company's Form 8-K filed on
November 15, 2004.
4.4 Form of Warrants issued to Legend Merchant Group, Inc. and Coniston
Investment Corp. Incorporated herein by reference from Exhibit 4.1
to the Company's Form SB-2 filed on July 19, 2002.
4.5 Form of Warrant issued to Sunrise Securities Corp. Incorporated
herein by reference from Exhibit 99.4 to the Company's Form 8-K
filed on July 14, 2004.
9.1 Irrevocable Proxy given in favor of Jay Gelman. Incorporated herein
by reference from Exhibit 9.1 to the Form 8-K.
10.1 Retainer Agreement dated as of June 29, 2004 between Essential
Reality, Inc. and IVC Group. Incorporated herein by reference from
Exhibit 10.1 to the Company's Form 10-QSB for the period ended June
30, 2004, filed on August 17, 2004.
10.2 Employment Agreement, dated as of July 26, 2004 between Essential
Reality Inc. and Jay Gelman, President and CEO of Essential Reality
Inc. Incorporated herein by reference from Exhibit 10.2 to the
Company's Form 10-QSB filed on August 17, 2004.
10.3 Subscription Agreement among the Investor's listed on Schedule I
thereto, Essential Reality, Inc. and Jay Gelman. Incorporated herein
by reference from Exhibit 99.1 to the Form 8-K.
10.4 Subscription Agreement Supplement No. 1 between the Investors listed
on Schedule I thereto and Essential Reality, Inc. Incorporated
herein by reference from Exhibit 99.2 to the Form 8-K.
10.5 Registration Rights Agreement between Essential Reality and the
Investors listed on Schedule I to the Subscription Agreement.
Incorporated herein by reference from Exhibit 99.3 to the Form 8-K.
28
10.6 Stock Purchase Warrant between Essential Reality, Inc. and Sunrise
Securities Corp. Incorporated herein by reference from Exhibit 99.4
to the Form 8-K.
10.7 Investment Banking Agreement between Essential Reality, Inc. and
Sunrise Securities Corp. Incorporated herein by reference from
Exhibit 99.5 to the Form 8-K.
10.8 Form of Financing Agreement issued to Rosenthal & Rosenthal.
Incorporated herein by reference from Exhibit 10.1 to the Company's
Form 8-K filed on November 15, 2004.
10.9 Form of Security Agreement issued to Rosenthal & Rosenthal.
Incorporated herein by reference from Exhibit 10.2 to the Company's
Form 8-K filed on November 15, 2004.
10.10 Form of Guaranty issued to Rosenthal & Rosenthal. Incorporated
herein by reference from Exhibit 10.3 to the Company's Form 8-K
filed on November 15, 2004.
10.11 Form of Registration Rights Agreement issued to Rosenthal &
Rosenthal. Incorporated herein by reference from Exhibit 10.4 to the
Company's Form 8-K filed on November 15, 2004.
10.12 Lease Agreement dated as of July 28, 2003 between Big Brother World,
Inc. and Corner Distributors, Inc., as amended, previously filed.
10.13 Lease Agreement dated as of December 1, 2003 between Angelo Pegno
et. al. and AllianceCorner Distributors Inc., previously filed.
10.14 Lease Agreement dated as of July 1, 2003 between Angelo Pegno Et.
al. and Alliance Partners, Inc., previously filed.
14 Code of Ethics. Incorporated herein by reference from Exhibit 14 to
the Company's Form 8-K filed on March 16, 2005.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, filed herewith.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(b) Reports on Form 8-K
29
8-K Report Items
November 16, 2004 1.01, 2.02, 3.02, 9.01
November 23, 2004 5.03, 8.01, 9.01
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees.
The audit fees for 2004 and 2003 were $92,388 and $30,341, respectively. All
services provided by independent accountants were approved by the board of
directors.
Audit-Related Fees.
The audit related fees for 2004 were related to the 8K and SB2 filings in the
amount of $68,806.
Audit Committee Pre-Approval Policies and Procedures.
The Audit Committee is directly and solely responsible for oversight, engagement
and termination of any independent auditor employed by the Company for the
purpose of preparing or issuing an audit report or related work.
The Committee:
Meets with the independent auditor prior to the audit and discusses the planning
and staffing of the audit;
Approves in advance the engagement of the independent auditor for all audit
services and non-audit services and approves the fees and other terms of any
such engagement;
Obtains periodically from the independent auditor a formal written statement of
the matters required to be discussed by Statement of Auditing Standards No. 61,
as amended, and, in particular, describing all relationships between the auditor
and the Company; and
Discusses with the auditor any disclosed relationships or services that may
impact auditor objectivity and independence.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this Report on Form 10-KSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
March 30, 2005
Alliance Distributors Holding Inc.
By: /s/ Jay Gelman
-------------------------------------------
Jay Gelman
CEO and Chairman of the Board
30
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jay Gelman, and each of them severally, his true
and lawful attorney-in-fact with power of substitution and resubstitution to
sign in his, place and stead, in any and all capacities, to do any and all
things and execute any and all instruments that such attorney may deem necessary
or advisable under the Securities Exchange Act of 1934 and any rules,
regulations and requirements of the U.S. Securities and Exchange Commission in
connection with the Annual Report on Form 10-KSB and any and all amendments
hereto, as fully for all intents and purposes as he might or could do in person,
and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Jay Gelman Date: March 30, 2005
------------------------------------------
Jay Gelman, Chief Executive Officer and
Chairman of the Board
/s/ Andre Muller Date: March 30, 2005
------------------------------------------
Andre Muller, President, Secretary, Chief
Operating Officer and Director
/s/ Humbert B. Powell, III Date : March 30, 2005
------------------------------------------
Humbert B. Powell, III, Director
/s/ Steven H. Nathan Date : March 30, 2005
------------------------------------------
Steven H. Nathan, Director
/s/ Thomas Vitiello Date : March 30, 2005
------------------------------------------
Thomas Vitiello, Director
31