UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 000-32319
ALLIANCE DISTRIBUTORS HOLDING INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0851302
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
15-15 132nd Street
College Point, New York 11356
-----------------------------
(Address of Principal Executive Offices)
(718) 747-1500
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 7, 2005 there were 48,953,407 shares of the issuer's Common
Stock, par value $.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format |_| Yes |X| No
PART I - FINANCIAL INFORMATION
INDEX
Pages
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheet as of September 30, 2005 (Unaudited) 3
Statements of Operations for the three and nine
months ended September 30, 2005 and 2004 (Unaudited) 4
Statement of Stockholders' Equity for the nine
months ended September 30, 2005 (Unaudited) 5
Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7-11
Item 2 - Management's Discussion and Analysis or Plan of Operations 12-15
Item 3 - Controls and Procedures 16
PART II - OTHER INFORMATION 16
Item 6 - Exhibits 17
Signatures 18
2
Part I - Financial Information
Item 1 - Financial Statements
ALLIANCE DISTRIBUTORS HOLDING INC.
Balance Sheet (Unaudited)
September 30, 2005
ASSETS
Current assets:
Cash $ 98,093
Accounts receivable, net of allowance for doubtful
accounts of approximately $133,000 3,083,069
Inventory 4,471,963
Due from vendors 358,548
Prepaid expenses and other current assets 190,822
-----------
Total current assets 8,202,495
Property and equipment, net 401,952
Other assets 75,800
-----------
$ 8,680,247
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $ 2,604,388
Accounts payable 3,062,325
Current portion of long term obligations 22,701
Accrued expenses and other current liabilities 153,004
-----------
Total current liabilities 5,842,418
Long term obligations 14,480
Deferred lease obligation 24,169
Commitments and contingencies
Stockholders' equity:
Series A Convertible Non-Redeemable Preferred Stock,
$.001 par value - Authorized, 8,672,020 shares;
issued and outstanding, 403,335 shares 403
Common Stock, $.001 par value - Authorized, 100,000,000
shares; issued and outstanding 46,417,098 shares 46,417
Additional paid-in capital 3,202,084
Accumulated deficit (449,724)
-----------
Total stockholders' equity 2,799,180
-----------
$ 8,680,247
===========
See notes to financial statements.
3
ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Operations (Unaudited)
For the three and nine months ended September 30, 2005 and 2004
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 13,565,841 $ 6,924,181 $ 36,679,480 $ 20,200,199
Cost of goods sold 12,034,847 5,966,406 32,835,637 17,363,624
------------ ------------ ------------ ------------
Gross profit 1,530,994 957,775 3,843,843 2,836,575
Selling, general and administrative expenses 1,187,227 980,454 3,739,033 2,704,112
------------ ------------ ------------ ------------
Income (loss) from operations 343,767 (22,679) 104,810 132,463
Interest expense 119,198 20,444 339,621 81,052
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 224,569 (43,123) (234,811) 51,411
Provision for income taxes 2,346 -- 8,449 11,167
------------ ------------ ------------ ------------
Net income (loss) 222,223 (43,123) (243,260) 40,244
Preferred stock dividends -- 105,977 -- 106,819
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders $ 222,223 $ (149,100) $ (243,260) $ (66,575)
============ ============ ============ ============
Net income (loss) available to common stockholders
per share - Basic $ .00 $ .00 $ (.01) $ .00
============ ============ ============ ============
Net income (loss) available to common stockholders
per share - Diluted $ .00 $ .00 $ (.01) $ .00
============ ============ ============ ============
Weighted-average common shares outstanding-Basic 46,417,098 45,572,098 46,417,098 31,771,112
============ ============ ============ ============
Weighted-average common shares outstanding-Diluted 49,122,008 45,572,098 46,417,098 31,771,112
============ ============ ============ ============
See notes to financial statements.
4
ALLIANCE DISTRIBUTORS HOLDING INC.
Statement of Stockholders' Equity (Unaudited)
For the nine months ended September 30, 2005
Preferred Stock A Common Stock Additional Total
------------------------ ----------------------- Paid In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 2005 564,649 $ 564 43,850,740 $ 43,851 $3,186,240 $ (206,464) $3,024,191
Conversion of Preferred
Stock A into Common Stock (161,314) (161) 2,566,358 2,566 (2,405) -- --
Registration costs -- -- -- -- (16,250) -- (16,250)
Issuance of stock options
to non-employees -- -- -- -- 34,499 -- 34,499
Net loss -- -- -- -- -- (243,260) (243,260)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2005 403,335 $ 403 46,417,098 $ 46,417 $3,202,084 $ (449,724) $2,799,180
========== ========== ========== ========== ========== ========== ==========
See notes to financial statements.
5
ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Cash Flows
For the nine months ended September 30, 2005 and 2004 (Unaudited)
Nine months ended September 30,
----------------------------
2005 2004
------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ (243,260) $ 40,244
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Deferred rent 6,572 10,021
Depreciation and amortization 84,094 58,081
Bad debt expense 100,000 --
Stock option compensation expense 34,499 --
Amortization of deferred financing costs 51,000 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in assets
Accounts receivable 187,490 (808,020)
Inventory (603,628) (135,450)
Due from vendors (324,300) (262,773)
Prepaid expenses and other current assets (50,881) (22,110)
Increase (decrease) in liabilities
Accounts payable 487,683 (2,360,738)
Due to factor -- 1,435,304
Accrued expenses and other current
liabilities 38,792 (252,417)
------------ ------------
Net cash used in operating activities (231,939) (2,297,858)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (76,672) (65,635)
Increase in other assets (12,500) (3,222)
------------ ------------
Net cash used in investing activities (89,172) (68,857)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from note payable - bank 36,369,314 --
Repayments of note payable - bank (36,131,802) --
Proceeds from sale of securities -- 4,000,000
Payments for registration and issuance costs (16,250) (200,500)
Payments for merger costs -- (35,988)
Payments for pre-acquisition liabilities -- (915,329)
Repayment of long-term obligations (22,663) (171,829)
------------ ------------
Net cash provided by financing activities 198,599 2,676,354
------------ ------------
NET INCREASE (DECREASE) (122,512) 309,639
CASH, beginning of period 220,605 656,853
------------ ------------
CASH, end of period $ 98,093 $ 966,492
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 289,077 $ 81,052
============ ============
Income tax paid $ 7,373 $ 19,222
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Series A 6% Preferred Stock to placement
agent $ -- $ 385,000
============ ============
Liabilities assumed $ -- $ 1,067,898
============ ============
Series A 6% Preferred Stock dividend $ -- $ 106,819
============ ============
Merger costs accrued $ -- $ 60,480
============ ============
See notes to financial statements.
6
ALLIANCE DISTRIBUTORS HOLDING INC.
Notes to Financial Statements (Unaudited)
Note 1 - BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS
Alliance Distributors Holding Inc. (the "Company" or "Alliance") is a
distributor of video game 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, the Company (formerly 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"). AllianceCorner 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 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., by way of a merger of Essential into Alliance
Distributors Holding Inc., which was then a wholly owned Delaware subsidiary of
Essential. The Company operates as a single segment.
On July 21, 2005, the Company and Abrams/Gentile Entertainment Inc. ("Age")
entered into an operating agreement ("Agreement") in which the Company and Age
became members in Alliance Age LLC, a limited liability company formed in
Delaware, to set forth the terms on which the parties will develop and
commercialize products they mutually agree upon from time to time. The Company
agreed to pay Age a $4,000 monthly retainer fee on the first day of each month
commencing August 2005, provided, that no fee is payable for any month beginning
with January 2006 upon a determination that no products are then proceeding
towards completion at a proper pace. The Company owns 65% of Alliance Age LLC.
As of September 30, 2005, Alliance Age LLC was inactive and no monthly retainer
fees have yet been paid.
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. This Form 10-QSB should be read in conjunction with the
Company's financial statements and notes included in the 2004 Annual Report on
Form 10-KSB. In the opinion of management, all material adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation,
have been included in the accompanying unaudited financial statements.
The results of operations for the interim periods are not necessarily indicative
of the results that maybe expected for the full year ending December 31, 2005.
PRIVATE PLACEMENT OFFERING
As part of the Exchange Agreement with AllianceCorner, Essential was required to
raise funds to complete the transaction. Essential sold 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. At
the same time, substantially all outstanding debt of Essential was extinguished
through either issuance by the Company of an aggregate of 452,202 Series A
Preferred Shares or through cash payments which totaled $915,329.
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 15.91 votes,
and votes as one class with the common stock.
7
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 Preferred Shares 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 as a result of such
conversion the holder would beneficially own in excess of 4.999% or 9.999% of
the issued and outstanding shares ("4.999% Restriction"). Series A Preferred
Shares not converted into the Company's common stock due to the operation of the
4.999% Restriction are not entitled to the 6% dividend referred to above.
As of September 30, 2005, there were 46,417,098 shares of common stock issued
and outstanding consisting of 24,679,997 shares of common stock issued upon
conversion of all of the Series B Preferred Shares, 21,127,101 shares of common
stock issued upon conversion of 1,327,980 shares of the Series A Preferred
Shares, 110,000 shares of common stock issued in payment of liabilities and
500,000 shares of common stock issued and outstanding prior to June 2004.
As of September 30, 2005 there were issued and outstanding 403,335 shares of
Series A Preferred Shares convertible into 6,417,060 shares of common stock
subject to the 4.999% Restriction. Subsequent to September 30, 2005, 159,416
shares of Series A Preferred Stock were converted into 2,536,309 shares of
Common Stock.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allowance for Doubtful Accounts
The Company establishes credit terms for new clients based upon management's
review of their credit information and projects terms, performs ongoing credit
evaluations of its customers, adjusting credit terms when management believes
appropriate based upon payment history and an assessment of their current credit
worthiness. The Company records an allowance for doubtful accounts for estimated
losses resulting from the inability of its clients to make required payments.
The Company determines this allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, previous
loss history, estimate of the client's current ability to pay its obligation to
the Company, and the condition of the general economy and the industry as a
whole. While credit losses have generally been within expectations and the
provisions established, the Company cannot guarantee that credit loss rates in
the future will be consistent with those experienced in the past. In addition,
the Company has credit exposure if the financial condition of one of its major
clients were to deteriorate. In the event that the financial condition of its
clients were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be necessary. It is reasonably possible that
the Company's estimate of the allowance for doubtful accounts will change. The
Company increased its allowance for doubtful accounts by $100,000 during the
first quarter of 2005 and maintains a balance of approximately $133,000 as of
September 30, 2005.
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. 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. While write-downs have been within expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same level of write-downs as in the past. 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.
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 periods prior to
June 29, 2004. Effective June 29, 2004, the Company is taxed as a C corporation.
Accordingly, AllianceCorner was subject to New York State S corporation taxes
and New York City corporate income taxes for the period prior to June 29, 2004
and as a C corporation for the period subsequent to June 30, 2004. The provision
for income tax expense for all periods presented comprises state and local
taxes.
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.
8
At December 31, 2004, the Company had approximately $5,000,000 of federal and
state net operating loss carryforwards that expire through 2024. The Company has
established a full 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 of an entity to utilize net
operating loss carryforwards if there has been a significant change in ownership
in the entity. The Company has not yet completed its Section 382 analysis,
however their preliminary indication is that it is likely that it has undergone
an ownership change within the meaning of the Act by reason of the Exchange
Agreement and related transactions, and that its ability to utilize the net
operating loss carryforwards may be significantly limited.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) 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 shares outstanding during
the period. The weighted average number of common and common equivalent shares
outstanding reflects the conversion of Series B Preferred Shares for Common
Stock as of January 1, 2004 and of Series A Preferred Shares for Common Stock as
of June 29, 2004, computed on a post Reverse Split basis (see Note 1).
Common equivalents for the three months ended September 30, 2005 include 261,905
of warrants issued to the Company's lender and 2,443,005 shares of Common Stock
that are eligible for issuance upon conversion of 153,552 Series A Preferred
Shares under the 4.999% Restriction. Common equivalents for the three months
ended September 30, 2004 and for the nine months ended September 30, 2005 and
2004 exclude 403,335 Series A Preferred Shares since their effect would be
anti-dilutive. Common equivalents for the nine months ended September 30, 2005
exclude the 500,000 of warrants that were issued to the Company's lender on
November 11, 2004 since their effect would be anti - dilutive.
Stock Based Compensation
In January 2005, the Company established a stock option plan. 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". Under this method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. As of September 30,
2005 there were 7,400,000 options issued. The options are ten-year non-qualified
options to purchase the Company's common stock, 7,250,000 of the options have an
exercise price of $0.325 per share and 150,000 of the options have an exercise
price of $.32 per share. All of the issued options vest and become exercisable
in 12 equal quarterly installments. 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, 100,000 options were granted to Barbara A. Ras, the
CFO 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 Humbert 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.
Of the total options granted, 250,000 options were granted to a non-employee who
provided past services to the Company and 500,000 options were granted to
non-employees for future services to be provided over the next three years. The
options are ten-year non-qualified options, have an exercise price of $.325 per
share, and vest and become exercisable in twelve quarterly installments
beginning on April 1, 2005. The fair value of the options-pricing model was
calculated with the following weighted-average assumptions used for the grant:
risk-free interest rate 4.25%; expected life 6.5 years; expected volatility 55%.
During the three and nine months ended September 30, 2005, the Company recorded
stock-based compensation expense of approximately $3,833 and $34,499,
respectively, for these options. The fair value generated by the Black-Scholes
model may not be indicative of the future benefit, if any, that may be received
by the option holder.
Had compensation costs for the Company's stock option grants to employees been
determined based on the fair value at the grant dates for awards under these
plans in accordance with SFAS No. 123, the Company's net income (loss) and basic
and diluted net income (loss) per share would have been reduced to the pro forma
amounts as follows:
9
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2005 2005
---------------- ----------------
(Unaudited) (Unaudited)
Net income (loss), as reported $ 222,223 $ (243,260)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of tax effects (52,916) (160,957)
---------------- ----------------
Proforma net income (loss) $ 169,307 $ (404,217)
================ ================
Net income (loss) per share:
Basic and diluted - as reported $ 0.00 $ (0.01)
================ ================
Basic and diluted - proforma $ 0.00 $ (0.01)
================ ================
There were no options outstanding at September 30, 2004.
The fair value of the options-pricing model was calculated with the following
weighted-average assumptions used for grants during the nine months ended
September 30, 2005: risk-free interest rate 4.25-4.5%; expected life 6.5 years;
expected volatility 55-126%. The fair value generated by the Black-Scholes model
may not be indicative of the future benefit, if any, that may be received by the
option holder.
Recent Accounting Pronouncements
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 beginning of the Company's next fiscal year. 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. The impact of this new standard, if it had been in effect,
on the net income (loss) and related per share amounts for the three and nine
months ended September 30, 2005 is disclosed in Stock Based Compensation, above.
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS No. 154 becomes
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
Note 3 - FINANCING AGREEMENTS
The Company has entered into a financing agreement with Rosenthal & Rosenthal,
Inc. ("Rosenthal") dated November 11, 2004 and amended on November 1, 2005 (the
"Agreement"). Under the Agreement, Rosenthal may in its discretion lend to the
Company up to $10,000,000, which is the maximum credit under the facility, 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 Company's CEO and the
Company's President have signed limited guaranties in respect of borrowings
under the Agreement.
The amendment dated November 1, 2005 among other things increased the maximum
credit under the facility from $5,000,000 to $10,000,000 and reduced the
interest rate on borrowings by 0.5%.
The Agreement terminates November 30, 2007 unless terminated by Rosenthal on 30
days' notice. Interest accrues on outstanding borrowings at the prime rate (but
not less than 4.75%) plus 1.5%. At September 30, 2005, the interest rate on
borrowings outstanding was 8.75%. In addition, the Company will pay the lender
on each anniversary date an annual fee of 1% of the maximum credit which is
amortized over one year, and a monthly administrative fee of $1,000. The
financing expense for the annual fee recorded for the three and nine months
ended September 30, 2005 amounted to $12,500 and $37,500, respectively. At
September 30, 2005, the principal amount outstanding under the facility was
$2,604,388.
10
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 2004, 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 three and nine
months ended September 30, 2005 amounted to $4,500 and $13,500, respectively.
Under the terms of the Agreement, the Company is required to maintain a
specified level of net worth, working capital and debt ratios as defined. In May
2005, Rosenthal informed the Company that it did not comply with a financial
covenant under the Agreement for the fourth quarter of 2004. Rosenthal has
provided a waiver for this failure to comply. In addition, for the first and
second quarter of 2005, the Company did not comply with certain financial
covenants for which Rosenthal has also provided waivers. On October 31, 2005,
the Company and Rosenthal agreed to amend the covenants, effective September 30,
2005. Based upon this amendment, the Company was in compliance with all of its
covenants at September 30, 2005.
The Company believes that it will have sufficient liquidity for the next twelve
months and the foreseeable future. However, the Company would be materially and
adversely affected if Rosenthal demands payment of these borrowings under the
Agreement and the Company is unable to refinance these borrowings.
Note 4 - 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 Essential
Reality, LLC, Essential and David Devor, a former officer and a current employee
of the Company, for rent and costs 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 5 - LETTER OF INTENT
In September 2005, the Company signed a non-binding letter of intent to purchase
Foto Electric Supply Co., Inc. (Fesco) for $75 million, payable $50 million in
cash, $12.5 million in notes and $12.5 million in equity securities to be valued
in relation to financing for the transaction.
Fesco is a privately held company based in New York City whose primary business
is the distribution of consumer electronics. Fesco's revenues in its most recent
fiscal year were approximately $130 million (unaudited). The Company and Fesco
are negotiating the terms of a definitive acquisition agreement. No assurances
can be given when, if ever, the proposed acquisition will close or the terms
thereof.
In connection with the possible acquisition of Fesco, the Company signed an
Engagement Agreement dated as of October 11, 2005 (the "Engagement Agreement")
with an investment banking firm ("Firm"). The Engagement Agreement provides,
among other things, that the Firm will serve as the Company's financial adviser
and exclusive placement agent for a proposed private placement of approximately
$60 million of Alliance equity securities (the "Proposed Offering"). If the
Proposed Offering is successful, the net proceeds will be used primarily to fund
the cash portion of the Fesco purchase price and related expenses. No assurances
can be given when, if ever, the Proposed Offering will close or the terms. None
of the securities to be sold in the Proposed Offering will be registered under
the Securities Act of 1933, as amended (the "1933 Act") and shall not be offered
or sold in the United States absent registration or an applicable exemption from
the registration requirements of the 1933 Act.
In connection with its agreement with the Firm, the Company agreed to issue to
them 50,000 shares of Alliance Common Stock with an estimated value of $19,500,
to pay designated success fees and warrants to them if the offering is
successfully completed, and to reimburse them for designated expenses. For
accounting purposes, these costs will be offset against any proceeds raised from
the private placement.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD - LOOKING STATEMENTS
The following discussion of our financial condition and results of operations
should be read together with the financial statements and related notes included
elsewhere in this report. Some of the statements in this section that are not
historical facts are forward-looking statements. You are cautioned that the
forward-looking statements contained in this section are estimates and
predictions, and that our actual results could differ materially from those
anticipated in the forward-looking statements due to risks, uncertainties or
actual events differing from the assumptions underlying these statements. The
risks, uncertainties, and assumptions include, but are not limited to, those
disclosed in our annual report on Form 10-KSB for our fiscal year ended December
31, 2004.
OVERVIEW
See "Note 1", 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.
Our 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.
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. The Company establishes credit terms
for new clients based upon management's review of their credit information and
projects terms, performs ongoing credit evaluations of its customers, adjusting
credit terms when management believes appropriate based upon payment history and
an assessment of their current credit worthiness. The allowance for doubtful
accounts is determined through analysis of the aging of accounts receivable at
the date of the financial statements for estimated losses resulting from the
inability of its clients to make required payments. The Company determines this
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, previous loss history, estimate of the
client's current ability to pay its obligation to the Company, and the condition
of the general economy and the industry as a whole. While credit losses have
generally been within expectations and the provisions established, the Company
cannot guarantee that credit loss rates in the future will be consistent with
those experienced in the past. In addition, the Company has credit exposure if
the financial condition of one of its major clients were to deteriorate. In the
event that the financial condition of its clients were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be
necessary. It is reasonably possible that the Company's estimate of the
allowance for doubtful accounts will change. The Company increased its allowance
for doubtful accounts by $100,000 during the first quarter of 2005 and maintains
a balance of approximately $133,000 as of September 30, 2005.
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. While
write-downs have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same level of
write-downs as in the past.
Recent Accounting Pronouncements
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 beginning of the Company's next fiscal year. 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. The impact of this new standard, if it had been in effect,
on the net income (loss) and related per share amounts for the three and nine
months ended September 30, 2005 is disclosed in Note 2 of the financial
statements.
12
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS No. 154 becomes
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
RESULTS OF OPERATIONS
The following tables show each specified item as a dollar amount and as a
percentage of net sales for the three and nine months ended September 30, 2005
and 2004, respectively, and should be read in conjunction with the financial
statements included elsewhere in this Quarterly Report on Form 10-QSB:
Three Months Ended September 30, 2005 compared to Three Months Ended September
30, 2004
Three months Three months
Ended Ended
September 30, September 30,
2005 2004
(Thousands) (Thousands)
------------------------------- --------------------------------
Net sales $ 13,566 100.0% $ 6,924 100.0%
Cost of goods sold 12,035 88.7% 5,966 86.2%
-------------- -------------- -------------- --------------
Gross profit 1,531 11.3% 958 13.8%
Selling, general and
administrative expenses 1,187 8.8% 981 14.1%
-------------- -------------- -------------- --------------
Income (loss) from operations 344 2.5% (23) (.3)%
Interest expense 119 0.9% 20 .3%
-------------- -------------- -------------- --------------
Income (loss) before income taxes 225 1.6% (43) (.6)%
Income taxes 3 .0% -- .0%
-------------- -------------- -------------- --------------
Net income (loss) $ 222 1.6% $ (43) (.6)%
============== ============== ============== ==============
Net sales increased by $6,641,660, or 95.9%, from $6,924,181 for the three
months ended September 30, 2004 to $13,565,841 for the three months ended
September 30, 2005. The growth in net sales was primarily due to the increase in
sales with our existing customers, as well as an increase in our customer base.
Cost of goods sold increased by $6,068,441, or 101.7%, from $5,966,406 for the
three months ended September 30, 2004 to $12,034,847 for the three months ended
September 30, 2005. The increase was consistent with revenue growth. Gross
profit as a percentage of net sales decreased to 11.3% for the three months
ended September 30, 2005 from 13.8% for the three months ended September 30,
2004. This decrease was primarily due to the Company's strategy to grow the
customer base and increase revenues by introducing incentive pricing programs to
new and key customers. Cost of goods sold excludes the distribution costs of
purchasing, receiving, inspection, warehousing and handling costs; we include
these costs in our selling, general and administrative expenses. Our gross
margins may not be comparable to those of other entities since some entities
include these distribution costs in the cost of goods sold. These distribution
costs were $288,098 and $229,504 for the quarter ended September 30, 2005 and
2004, respectively.
Selling, general and administrative expenses increased by $206,773, or 21.1%,
from $980,454 for the three months ended September 30, 2004 to $1,187,227 for
the three months ended September 30, 2005. The increase was primarily due to the
Company's increase in salaries and related payroll taxes of $84,961, advertising
and marketing expenses of $46,683, professional fees of $19,295 and website
maintenance fees of $15,208. Selling, general and administrative expenses as a
percentage of net sales decreased to 8.8% for the three months ended September
30, 2005 from 14.1% for the three months ended September 30, 2004. For the three
months ended September 30, 2005, selling, general and administrative expenses
were comprised of the following: $171,859 in selling expenses, $288,098 in
distribution costs and $727,270 in general and administrative expenses. For the
three months ended September 30, 2004, selling, general and administrative
expenses were comprised of the following: $97,335 in selling expenses, $229,504
in distribution costs and $653,615 in general and administrative expenses.
13
Interest expense increased by $98,754, or 483.0%, from $20,444 for the three
months ended September 30, 2004 to $119,198 for the three months ended September
30, 2005. The increase was primarily due to increased borrowings as well as
higher interest rates on bank borrowings during the third quarter of 2005. The
increased borrowing levels were the result of increased sales volume that
required higher inventory levels and increased accounts receivable.
Nine Months Ended September 30, 2005 compared to Nine Months Ended September 30,
2004
Nine months Nine months
Ended Ended
September 30, September 30,
2005 2004
(Thousands) (Thousands)
---------------------------- ---------------------------
Net sales $ 36,680 100.0% $ 20,200 100.0%
Cost of goods sold 32,836 89.5% 17,364 86.0%
------------ ------------ ------------ ------------
Gross profit 3,844 10.5% 2,836 14.0%
Selling, general and
administrative expenses 3,739 10.2% 2,704 13.4%
------------ ------------ ------------ ------------
Income from operations 105 .3% 132 .6%
Interest expense 340 .9% 81 .4%
------------ ------------ ------------ ------------
Income (loss) before income taxes (235) (.6)% 51 .2%
Income taxes 8 .0% 11 .0%
------------ ------------ ------------ ------------
Net income (loss) $ (243) (.6)% $ 40 .2%
============ ============ ============ ============
Net sales increased by $16,479,281, or 81.6%, from $20,200,199 for the nine
months ended September 30, 2004 to $36,679,480 for the nine months ended
September 30, 2005. The growth in net sales was primarily due to the increase in
sales with our existing customers, as well as an increase in our customer base.
Cost of goods sold increased by $15,472,013, or 89.1%, from $17,363,624 for the
nine months ended September 30, 2004 to $32,835,637 for the nine months ended
September 30, 2005. The increase was consistent with revenue growth. Gross
profit as a percentage of net sales decreased to 10.5% for the nine months ended
September 30, 2005 from 14.0% for the nine months ended September 30, 2004. This
decrease was primarily due to the Company's strategy to grow the customer base
and increase revenues by introducing incentive pricing programs to new and key
customers. Cost of goods sold excludes the distribution costs of purchasing,
receiving, inspection, warehousing and handling costs; we include these costs in
our selling, general and administrative expenses. Our gross margins may not be
comparable to those of other entities since some entities include these
distribution costs in the cost of goods sold. These distribution costs were
$803,792 and $733,357 for the nine months ended September 30, 2005 and 2004,
respectively.
Selling, general and administrative expenses increased by $1,034,921, or 38.3%,
from $2,704,112 for the nine months ended September 30, 2004 to $3,739,033 for
the nine months ended September 30, 2005. The increase was primarily due to the
Company's increase in salaries and related payroll taxes of $302,479,
professional fees associated with the Company's expanded operations of $200,056,
advertising and marketing expenses of $155,598, allowance for doubtful accounts
of $100,000, insurance premiums of $96,444 and stock option compensation expense
of $34,499 as a result of 750,000 options that were granted to non-employees who
provide services to the Company. Selling, general and administrative expenses as
a percentage of net sales decreased to 10.2% for the nine months ended September
30, 2005 from 13.4% for the nine months ended September 30, 2004. For the nine
months ended September 30, 2005, selling, general and administrative expenses
were comprised of the following: $542,635 in selling expenses, $803,792 in
distribution costs and $2,392,606 in general and administrative expenses. For
the nine months ended September 30, 2004, selling, general and administrative
expenses were comprised of the following: $355,222 in selling expenses, $733,357
in distribution costs and $1,615,533 in general and administrative expenses.
14
Interest expense increased by $258,569, or 319.0%, from $81,052 for the nine
months ended September 30, 2004 to $339,621 for the nine months ended September
30, 2005. The increase was primarily due to increased borrowings as well as
higher interest rates on bank borrowings during the nine months ended September
30, 2005. The increased borrowing levels were the result of increased sales
volume that required higher inventory levels and increased accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2005 net cash used in operating
activities was $231,939. Net cash used in operations for the nine months ended
September 30, 2005 consisted of a net loss of $243,260 and included the
following changes in operating assets and liabilities: a decrease in accounts
receivable of $187,490 offset by an increase in inventory of $603,628, an
increase in due from vendors of $324,300 and an increase in accounts payable of
$487,683. The increases were the result of increased sales volume that required
higher inventory levels.
Net cash used in investing activities for the nine months ended September 30,
2005 was $89,172, which was primarily used for the purchase of equipment.
Net cash provided by financing activities for the nine months ended September
30, 2005 was $198,599 which primarily consisted of net proceeds on our note
payable to bank of $237,512.
For the nine months ended September 30, 2004 net cash used in operating
activities was $2,297,858. Net cash used in operations for the nine months ended
September 30, 2004 consisted of net income of $40,244 and included the following
changes in operating assets and liabilities: an increase in accounts receivable
of $808,020, a decrease in accounts payable of $2,360,738, and an increase in
amount due to factor of $1,435,304, due to advances taken during the period.
Net cash used in investing activities for the nine months ended September 30,
2004 was $68,857, which was primarily used for the purchase of equipment.
Net cash provided by financing activities for the nine months ended September
30, 2004 was $2,676,354, which consisted of gross proceeds of $4,000,000 from
the PPO and payments of issuance costs and Essential pre-acquisition liabilities
of $200,500 and $915,329, respectively.
The Company has entered into a financing agreement with Rosenthal & Rosenthal,
Inc. ("Rosenthal") dated November 11, 2004 and amended on November 1, 2005 (the
"Agreement"). Under the Agreement, Rosenthal may in its discretion lend to the
Company up to $10,000,000, which is the maximum credit under the facility, 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 Company's CEO and the
Company's President have signed limited guaranties in respect of borrowings
under the Agreement.
The amendment dated November 1, 2005 among other things increased the maximum
credit under the facility from $5,000,000 to $10,000,000 and reduced the
interest rate on borrowings by 0.5%.
The Agreement terminates November 30, 2007 unless terminated by Rosenthal on 30
days' notice. Interest accrues on outstanding borrowings at the prime rate (but
not less than 4.75%) plus 1.5%. At September 30, 2005, the interest rate on
borrowings outstanding was 8.75%. In addition, the Company will pay the lender
on each anniversary date an annual fee of 1% of the maximum credit which is
amortized over one year, and a monthly administrative fee of $1,000. The
financing expense for the annual fee recorded for the three and nine months
ended September 30, 2005 amounted to $12,500 and $37,500, respectively. At
September 30, 2005, the principal amount outstanding under the facility was
$2,604,388.
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 2004, 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 three and nine
months ended September 30, 2005 amounted to $4,500 and $13,500, respectively.
Under the terms of the Agreement, the Company is required to maintain a
specified level of net worth, working capital and debt ratios as defined. In May
2005, Rosenthal informed the Company that it did not comply with a financial
covenant under the Agreement for the fourth quarter of 2004. Rosenthal has
provided a waiver for this failure to comply. In addition, for the first and
second quarter of 2005, the Company did not comply with certain financial
covenants for which Rosenthal has also provided waivers. On October 31, 2005,
the Company and Rosenthal agreed to amend the covenants, effective September 30,
2005. Based upon this amendment, the Company was in compliance with all of its
covenants at September 30, 2005.
The Company believes that it will have sufficient liquidity for the next twelve
months and the foreseeable future. However, the Company would be materially and
adversely affected if Rosenthal demands payment of these borrowings under the
Agreement and the Company is unable to refinance these borrowings.
15
ITEM 3. CONTROLS AND PROCEDURES
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and
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 September
30, 2005 ("Evaluation Date"). Based on such evaluation, our Chief Executive
Officer and 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 and
Principal Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Additionally in 2005, 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 in the Annual Report on Form 10-KSB.
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 fiscal quarter that has
materially affected, or is reasonable likely to materially affect, the Company's
internal control over financial reporting.
PART 2. OTHER INFORMATION
Item numbers 2, 3 and 4 are not applicable and have been omitted.
ITEM 1. Legal Proceedings
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 Essential
Reality, LLC, Essential and David Devor, a former officer and a current employee
of the Company, for rent and costs 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.
ITEM 5. Other Information
The Company has entered into a financing agreement with Rosenthal & Rosenthal,
Inc. ("Rosenthal") dated November 11, 2004 and amended on November 1, 2005 (the
"Agreement"). Under the Agreement, Rosenthal may in its discretion lend to the
Company up to $10,000,000, which is the maximum credit under the facility, 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 Company's CEO and the
Company's President have 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 accrues on outstanding borrowings at the prime rate (but
not less than 4.75%) plus 1.5%.
The amendment dated November 1, 2005 among other things increased the maximum
credit under the facility from $5,000,000 to $10,000,000 and reduced the
interest rate on borrowings by 0.5%.
16
ITEM 6. EXHIBITS.
Exhibits.
EXHIBIT INDEX
NUMBER DESCRIPTION
--------- --------------------
10.1 Form of Financing Agreement between the Company and Rosenthal &
Rosenthal. Incorporated herein by reference from Exhibit 10.1 to the
Company's Form 8-K filed on November 15, 2004.
10.2 Amendment dated November 1, 2005 to the Financing Agreement between
the Company and Rosenthal & Rosenthal, filed herein.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 7, 2005
Alliance Distributors Holding Inc.
By: /s/ Jay Gelman
-------------------------------------------
Jay Gelman
CEO and Chairman of the Board
By: /s/ Barbara A. Ras
-------------------------------------------
Barbara A. Ras
Chief Financial Officer (Principal Financial and
Accounting Officer)
18