UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ALLIANCE DISTRIBUTORS HOLDING INC.
(Exact name of registrant as specified in its charter)
DELAWARE 334119 33-0851302
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
15-15 132nd Street, College Point, New York 11356 (718) 747-1500
(Address and telephone number of registrant's principal executive offices)
Jay Gelman, CEO
15-15 132nd Street, College Point, New York 11356 (718) 747-1500
(Name, address and telephone number of agent for service)
Copy of communications to:
Oscar D. Folger, Esq.
521 5th Avenue
New York, New York 10175
Telephone: (212) 697-6464
Approximate date of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
1
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to be offering price aggregate offering Amount of
registered registered (1) per share (2) price (US$) registration fee (3)
--------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 40,116,340 $0.405 $16,247,117.70 $1,912.29
par value
--------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 2,064,096 $0.405 $835,958.88 $98.39
par value, issuable
upon exercise of warrants
--------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 6,416,677 $0.405 $2,598,754.19 $305.87
value, issuable upon
conversion of Series A
Convertible Non Redeemable
Preferred Stock
--------------------------------------------------------------------------------------------------------------------------
Total 48,597,113 $0.405 $19,681,830.77 $2,316.55
--------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 429, this is a combined registration statement that covers
44,508,113 shares being carried forward from Registration Statement 333-121607
and 4,089,000 shares being registered for the first time by this registration
statement.
(2) Estimated pursuant to Rule 457(c) under the Securities Act solely for
purposes of calculating the Registration Fee. The fee is based upon the average
of the high and low prices for a share of common stock of the registrant, as
quoted through the over-the-counter bulletin board on October 5, 2005.
(3) A registration fee of $1,763.54 was previously paid in connection with the
registration of 53,511,859 shares on Registration Statement No. 333-121607 of
which 44,508,113 shares are being carried forward, corresponding to a
registration fee previously paid of $1,466.81. The account of Alliance
Distributors Holding Inc. with the Securities and Exchange Commission has a
credit of $236.46 which should be applied against the Registration Fee. A
registration fee of $613.28 is being submitted in connection with this
registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SHARES AND THE SELLING SHAREHOLDER IS
NOT SOLICITING AN OFFER TO BUY THESE SHARES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
2
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED, OCTOBER 7, 2005
ALLIANCE DISTRIBUTORS HOLDING INC.
A DELAWARE CORPORATION
48,597,113 SHARES OF COMMON STOCK.
The prospectus relates to the resale by certain selling stockholders of Alliance
Distributors Holding Inc. of up to 48,597,113 shares of our common stock in
connection with the resale of:
- up to 40,116,340 shares of common stock of which 36,027,340 shares of common
stock were issued on conversion of securities issued in private placements and
in an acquisition
- up to 6,416,677 shares issuable on conversion of Series A Convertible Non
Redeemable Preferred Stock ("Series A Preferred Shares") issued in private
placements
- up to 1,564,096 shares issuable on the exercise of warrants issued in private
placements
- up to 500,000 shares issuable on the exercise of warrants issued pursuant to a
debt financing agreement
For a description of the plan of distribution of the shares, please see page 11
of this Prospectus.
On October 5, 2005, the average of the closing bid and asked prices of our
common stock was $0.405 per share. Our common stock is traded on the OTC
Bulletin Board under the symbol "ADTR.OB".
OUR BUSINESS IS SUBJECT TO MANY RISKS AND AN INVESTMENT IN OUR COMMON STOCK WILL
ALSO INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD INVEST IN OUR COMMON STOCK ONLY
IF YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CAREFULLY CONSIDER
THE VARIOUS RISK FACTORS DESCRIBED BEGINNING ON PAGE 5 BEFORE INVESTING IN OUR
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this preliminary prospectus is October 7, 2005.
3
TABLE OF CONTENTS
PAGE NUMBER
PROSPECTUS SUMMARY INFORMATION 5
RISK FACTORS 5
USE OF PROCEEDS 6
SELLING SECURITY HOLDERS 6
PLAN OF DISTRIBUTION 11
LEGAL PROCEEDINGS 12
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 13
DESCRIPTION OF SECURITIES 17
INTEREST OF NAMED EXPERTS AND COUNSEL 18
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 18
DESCRIPTION OF BUSINESS 18
WHERE YOU CAN FIND MORE INFORMATION 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 21
DESCRIPTION OF PROPERTY 26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 26
EXECUTIVE COMPENSATION 27
FINANCIAL STATEMENTS 29
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 53
INDEMNIFICATION OF DIRECTORS AND OFFICERS 53
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 53
RECENT SALES OF UNREGISTERED SECURITIES 54
EXHIBITS 57
UNDERTAKINGS 59
SIGNATURES 60
4
You should rely only on the information contained in this prospectus. We have
not, and the selling security holders have not, authorized anyone to provide you
with additional or different information. If anyone provides you with different
information, you should not rely on it. We are not, and the selling security
holders are not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. The information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements including the notes thereto, appearing
elsewhere in this prospectus. Because it is a summary, it does not contain all
of the information you should consider before making an investment decision.
Unless otherwise stated, all share amounts in this prospectus give effect to a 1
for 44 reverse split of the common stock on November 22, 2004.
Alliance Distributors Holding Inc. ("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.
In June 2004, a predecessor of the Company acquired AllianceCorner Distributors
Inc. ("AllianceCorner"), a videogame distributorship, for securities that in
November 2004 were converted into 24,679,997 shares of common stock. 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 of a public shell, 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, the Company had no
continuing operations and its historical results would not be meaningful if
combined with the historical results of AllianceCorner.
In June 2004, the Company in a private placement also issued securities that
after conversions in November 2004 consisted of 21,237,101 shares of common
stock, 403,335 shares of Series A Convertible Non Redeemable Preferred Shares
("Series A Preferred Shares") and warrants to purchase 1,564,096 shares of
common stock. In November 2004 the Company, in connection with a financing
agreement, issued a warrant to purchase 500,000 shares of Common Stock.
As of September 21, 2005, the Company's outstanding capital stock consists of
46,417,098 shares of common stock, 403,335 shares of Series A Convertible Non
Redeemable Preferred Stock convertible into a total of 6,416,677 shares of
common stock, and warrants to buy 2,064,096 shares of common stock. The
46,417,098 shares of outstanding common stock consist of 24,679,997 shares of
common stock issued to the former shareholders of AllianceCorner, 21,237,101
shares of common stock issued upon conversion of the Series A Preferred Shares
and 500,000 shares of common stock outstanding prior to June 2004.
The Company is authorized to issue a total of 100,000,000 shares of common stock
and 10,000,000 shares of preferred stock, of which 1,685,115 has been designated
as the Series A Convertible Non Redeemable Preferred Stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form SB-2 contains forward-looking statements. For this purpose, any
statements contained in this Form SB-2 that are not statements of historical
fact may be deemed to be forward-looking statements. You can identify
forward-looking statements by those that are not historical in nature,
particularly those that use terminology such as "may," "will," "should,"
"expects," "anticipates," "contemplates," "estimates," "believes," "plans,"
"projected," "predicts," "potential," or "continue" or the negative of these
similar terms. In evaluating these forward-looking statements, you should
consider various factors, including those listed below under the heading "Risk
Factors". The Company's actual results may differ significantly from the results
projected in the forward-looking statements. The Company assumes no obligation
to update forward-looking statements.
RISK FACTORS
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in this prospectus in evaluating our company and its
business before purchasing shares of our company's common stock. Our business,
operating results and financial condition could be seriously harmed due to any
of the following risks. The risks described below are not the only ones facing
our company. Additional risks not presently known to us may also impair our
business operations. You could lose all or part of your investment due to any of
these risks.
We discontinued our prior business and have engaged in our current business only
since August 2003. In November 2003, under prior management of the Company, we
discontinued our business of manufacturing and selling a video controller. Our
current videogame distribution business commenced operations on August 11, 2003
and was acquired by us in June 2004. We have not yet demonstrated our ability to
operate during the periodic downturns that we expect in our industry.
Our prior shareholders have suffered significant dilution. In connection with
our acquisition of our current videogame distribution business in June 2004 and
a related financing at the equivalent of $0.22 per share, the ownership of our
prior shareholders was diluted to approximately 1% of the total outstanding
shares.
5
We depend on a limited number of suppliers and have no long-term agreement with
any supplier. During the six-months ended June 30, 2005, one of our suppliers
accounted for approximately 52% of our purchases, and our 5 largest suppliers in
the aggregate accounted for 74% of our purchases. Our results will be materially
and adversely affected if a significant supplier terminates or modifies its
relationship with us.
We have not entered into any distribution arrangement with Microsoft for
distribution of its Xbox(R) product. To date we have no direct business
relationship with Microsoft Corporation ("Microsoft") for the distribution of
its Xbox(R) product. This is an essential product in our industry, and we will
be adversely affected if we cannot within a reasonable time achieve direct
distribution for Microsoft. Pending a direct relationship with Microsoft, we
acquire Xbox(R) products from a distributor, thereby reducing our margins on
this product.
We have no long term agreements with any customer. We deal with our customers on
a purchase order by purchase order basis. We have no assured stability in our
customer base.
We depend on Jay Gelman and Andre Muller as our senior management. The loss of
the services of Mr. Gelman or Mr. Muller would have a material adverse effect on
our business. We have entered into an employment agreement with Mr. Gelman but
not with Mr. Muller. We have obtained only $1,000,000 in key man insurance on
the life of Mr. Gelman.
We operate in a highly competitive industry and our failure to compete
effectively may adversely affect our ability to generate revenue. There are at
least seven distributors in the United States that have revenues and financial
resources and company history substantially greater than our company. We are at
a disadvantage to these companies and need to compete on the basis of the
services we provide to our customers. We may not be able to compete
successfully.
We hold no patents or material proprietary technology. We have no intellectual
property other than a trademark for "Video Game Alliance."
Unanticipated warranty costs could affect the ongoing demand for our products
and our ability to operate profitably. We do not have any facilities for the
repair or service of any products, and generally reimburse our customers in full
for returns. Although the majority of our suppliers 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. We will be adversely affected if our
returns for these suppliers exceed their return allowances.
Our business is subject to sudden changes in the popularity of the products we
distribute and to technological changes. We will be adversely affected by any
material decrease in the attractiveness of video games, or by the availability
of equivalent entertainment through the Internet or other channels. The sudden
decline in popularity of even one particular video console or game can force us
to make a substantial write-down of our inventory of these products.
Our Authorized Preferred Stock Exposes Holders of our Common Stock to Certain
Risks. Our Certificate of Incorporation authorizes the issuance of up to
10,000,000 shares of preferred stock, par value $.001 per share. The authorized
but unissued preferred stock constitutes what is commonly referred to as "blank
check" preferred stock. This type of preferred stock may be issued by the Board
of Directors from time to time on any number of occasions, without stockholder
approval, as one or more separate series of shares comprised of any number of
the authorized but unissued shares of preferred stock, designated by resolution
of the Board of Directors, stating the name and number of shares of each series
and setting forth separately for such series the relative rights, privileges and
preferences thereof, including, if any, the: (i) rate of dividends payable
thereon; (ii) price, terms and conditions of redemption; (iii) voluntary and
involuntary liquidation preferences; (iv) provisions of a sinking fund for
redemption or repurchase; (v) terms of conversion to common stock, including
conversion price, and (vi) voting rights. This preferred stock gives our Board
of Directors the ability to hinder or discourage any attempt to gain control of
us by a merger, tender offer at a control premium price, proxy contest or
otherwise.
Trading of our stock may be restricted by the SEC's penny stock regulations
which may limit a stockholder's ability to buy and sell our stock. The
Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors". These requirements may have the effect of reducing the
level of trading activity in the secondary market for the stock that is subject
to these penny stock rules. Consequently, these penny stock rules may affect the
ability of broker-dealers to trade our securities. We believe that the penny
stock rules discourage investor interest in and limit the marketability of our
common stock.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of our
common stock being offered for sale by the selling stockholders. We will,
however, receive proceeds upon exercise of the warrants and these proceeds will
be used for general working capital purposes. We will incur all costs associated
with this registration statement and prospectus.
SELLING SECURITY HOLDERS
The table sets forth certain information regarding the beneficial ownership of
shares of common stock by the selling stockholders as of September 21, 2005, and
the number of shares of common stock covered by this prospectus. Substantially
all of the shares offered hereby are being registered pursuant to registration
agreements with the Company.
6
The selling stockholders may from time to time offer and sell the shares of
common stock to be registered. No estimate can be given as to the amount or
percentage of these shares of common stock that will be held by the selling
stockholders upon termination of the offering.
------------------------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner Amount and Nature of Beneficial Ownership
Shares owned prior Shares issuable on Shares Number of shares owned
to this offering and conversion of issuable on by selling stockholder
registered hereby Series A Preferred exercise of or issuable to selling
Stock owned prior warrants owned stockholder after
to this offering prior to this offering and percent
and registered offering and of total outstanding(1)
hereby registered hereby
------------------------------------------------------------------------------------------------------------------------------------
Common Series A
Stock Convertible
Non
Redeemable
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
Jay Gelman(2) 8,226,671(3) 0 0
------------------------------------------------------------------------------------------------------------------------------------
Andre Muller(4) 8,226,671(5) 0 0
------------------------------------------------------------------------------------------------------------------------------------
Francis Vegliante 4,226,655(6) 0 0
------------------------------------------------------------------------------------------------------------------------------------
Humbert B. Powell, III(7) 22,728(8) 0 0
------------------------------------------------------------------------------------------------------------------------------------
Nathan A. Low 756,302 800,527 0 0
------------------------------------------------------------------------------------------------------------------------------------
Nathan A. Low Roth IRA 2,290,384 0 0
------------------------------------------------------------------------------------------------------------------------------------
Sunrise Equity Partners(9) 2,290,384 0 0
------------------------------------------------------------------------------------------------------------------------------------
Nathan A. Low Family Trust(10) 388,293 0 0
------------------------------------------------------------------------------------------------------------------------------------
Sunrise Foundation Trust(11) 346,484 200,132 0 0
------------------------------------------------------------------------------------------------------------------------------------
----------
(1) Assumes all of the shares of common stock offered are sold. Based on
46,417,098 shares of common stock issued and outstanding as of September 21,
2005 and 403,335 shares of Series A Convertible Non Redeemable Preferred Stock
issued and outstanding as of September 21, 2005.
(2) See Directors, Executive Officers, Promoters and Control Persons on page 12.
(3) Consists of shares issued on conversion of securities issued in an
acquisition by the Company.
(4) See Directors, Executive Officers, Promoters and Control Persons on page 12
(5) Consists of shares issued on conversion of securities issued in an
acquisition by the Company.
(6) Consists of shares issued on conversion of securities issued in an
acquisition by the Company.
(7) See Directors, Executive Officers, Promoters and Control Persons on page 12
(8) Consists of shares issued by the Company to Mr. Powell in consideration for
directorship services.
(9) Level Counter LLC has sole dispositive and voting power in Sunrise Equity
Partners. Nathan Low, Amnon Mandelbaum and Marilyn Adler have shared dispositive
and voting power in Level Counter LLC.
(10) Lisa Low has sole dispositive and voting power in the Nathan A. Low Family
Trust.
(11) Nathan and Lisa Low have shared dispositive and voting power in Sunrise
Foundation Trust.
7
------------------------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner Amount and Nature of Beneficial Ownership
------------------------------------------------------------------------------------------------------------------------------------
Shares owned prior Shares issuable on Shares Number of shares owned
to this offering and conversion of issuable on by selling stockholder
registered hereby Series A Preferred exercise of or issuable to selling
Stock owned prior warrants owned stockholder after
to this offering prior to this offering and percent
and registered offering and of total outstanding(1)
hereby registered hereby
------------------------------------------------------------------------------------------------------------------------------------
Common Series A
Stock Convertible
Non
Redeemable
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
Sunrise Securities Corp.(12) 246,145 223,442 0 0
------------------------------------------------------------------------------------------------------------------------------------
Amnon Mandelbaum 289,945 257,323 0 0
------------------------------------------------------------------------------------------------------------------------------------
Northumberland Holdings, LTD.(13) 2,318,650 828 0 0
------------------------------------------------------------------------------------------------------------------------------------
Smithfield Fiduciary LLC(14) 1,558,033 97,857 0 0
------------------------------------------------------------------------------------------------------------------------------------
South Ferry #2 LP(15) 1,832,314 0 0
------------------------------------------------------------------------------------------------------------------------------------
Vitel Ventures Corporation(16) 90,296 0 0
------------------------------------------------------------------------------------------------------------------------------------
Martin Currie(17) 569 0 0
------------------------------------------------------------------------------------------------------------------------------------
David Devor(18) 22,728 0 0
------------------------------------------------------------------------------------------------------------------------------------
Steven T. Francesco(19) 1,137 0 0
------------------------------------------------------------------------------------------------------------------------------------
Stanley Friedman(20) 1,137 0 0
------------------------------------------------------------------------------------------------------------------------------------
Marc Fries(21) 455 0 0
------------------------------------------------------------------------------------------------------------------------------------
Aaron Gavios(22) 978 0 0
------------------------------------------------------------------------------------------------------------------------------------
John Gentile(23) 5,775 0 0
------------------------------------------------------------------------------------------------------------------------------------
Anthony Gentile(24) 1,478 0 0
------------------------------------------------------------------------------------------------------------------------------------
Heitner & Breitstein(25) 617 0 0
------------------------------------------------------------------------------------------------------------------------------------
----------
(12) Nathan Low has sole dispositive and voting power in Sunrise Securities
Corp. Sunrise Securities Corp. is a registered broker dealer. Sunrise Securities
Corp. received 108,146 shares of Series A 6% Convertible Non Redeemable
Preferred Shares as compensation for investment banking services ("compensation
shares"). The common shares of stock underlying the compensation shares are
registered hereunder, as more fully described below in "Unregistered Sales of
Equity Securities". Sunrise Securities Corp. distributed the compensation shares
to the following affiliates, each of whom advised that he/she received such
compensation shares in the ordinary course of business for his/her own account,
and, at the time of receipt of the compensation shares, had no agreements or
understandings with any person, directly or indirectly, to further distribute
the securities: Derek Caldwell, Nathan Low, Sunrise Foundation Trust, Amnon
Mandelbaum, David Goodfriend, Richard Stone and Marcia Kucher.
(13) Michele Parker has sole dispositive and voting power in Northumberland
Holdings, LTD.
(14) Smithfield Fiduciary LLC is an affiliate of Highbridge Capital Corporation,
a registered broker-dealer. The securities were acquired in the ordinary course
of business and, at the time of the purchase of such securities to be resold
under the registration statement, Smithfield Fiduciary LLC did not have any
agreements, plans or understandings, directly or indirectly, with any person to
distribute the securities. Highbridge Capital Management, LLC is the trading
manager of Smithfield Fiduciary LLC and consequently has sole dispositive and
voting power over securities held by Smithfield Fiduciary LLC. Glenn Dubin and
Henry Swieca have shared dispositive and voting power in Highbridge Capital
Management, LLC. Each of Highbridge Capital Management, LLC, Glenn Dubin and
Henry Swieca disclaims beneficial ownership of the securities held by Smithfield
Fiduciary LLC.
(15) Darren Ross has sole dispositive and voting power in South Ferry #2 LP.
(16) Mark N. Tompkins has sole dispositive and voting power in Vitel Ventures
Corporation.
(17) Vice President, Business Development from June 2001 through April 7, 2003.
(18) Vice President, Marketing from November 2001 through June 29, 2004.
(19) See Executive Compensation on page 27.
(20) Vice President, Manufacturing from February 2000 until January 9, 2003.
(21) Director from June 2002 until June 29, 2004.
(22) Vice President, Sales and Distribution from November 2001 through January
10, 2003.
(23) Director from June 2002 through June 29, 2004. See Executive Compensation
on page 27.
(24) Director from June 2002 through June 29, 2004.
(25) Norman Breitstein and Cary Sternback have shared dispositive and voting
power in Heitner & Breitstein.
8
------------------------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner Amount and Nature of Beneficial Ownership
------------------------------------------------------------------------------------------------------------------------------------
Shares owned prior Shares issuable on Shares Number of shares owned
to this offering and conversion of issuable on by selling stockholder
registered hereby Series A Preferred exercise of or issuable to selling
Stock owned prior warrants owned stockholder after
to this offering prior to this offering and percent
and registered offering and of total outstanding(1)
hereby registered hereby
------------------------------------------------------------------------------------------------------------------------------------
Common Series A
Stock Convertible
Non
Redeemable
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
Hirsch Wolf & Co LLC(26) 248 0 0
------------------------------------------------------------------------------------------------------------------------------------
Brian D. Jedwab(27) 22,728 0 0
------------------------------------------------------------------------------------------------------------------------------------
George Mellides(28) 5,682 0 0
------------------------------------------------------------------------------------------------------------------------------------
RDA International(29) 2,290 0 0
------------------------------------------------------------------------------------------------------------------------------------
Richard Rubin(30) 978 0 0
------------------------------------------------------------------------------------------------------------------------------------
Terrace International(31) 617 0 0
------------------------------------------------------------------------------------------------------------------------------------
J.A.S. Commercial Corp(32) 80,000 0 0
------------------------------------------------------------------------------------------------------------------------------------
Rosenthal & Rosenthal, Inc.(33) 500,000 0 0
------------------------------------------------------------------------------------------------------------------------------------
Ajax Partners(34) 229,044 0 0
------------------------------------------------------------------------------------------------------------------------------------
Brady Capital Group LLC(35) 110,791 0 0
------------------------------------------------------------------------------------------------------------------------------------
Derek Caldwell 50,338 44,687 0 0
------------------------------------------------------------------------------------------------------------------------------------
CGT Management Ltd(36) 1,145,169 0 0
------------------------------------------------------------------------------------------------------------------------------------
Don Danks 33,601 0 0
------------------------------------------------------------------------------------------------------------------------------------
DKR Soundshore Oasis Holding Fund Ltd(37) 984,169 0 0
------------------------------------------------------------------------------------------------------------------------------------
Robert Feig 206,135 0 0
------------------------------------------------------------------------------------------------------------------------------------
----------
(26) Hirsch Wolf has sole dispositive and voting power in Hirsch Wolf & Co LLC.
(27) Director from June 2002 through June 29, 2004.
(28) Acting Chief Financial Officer from March 2003 through June 29, 2004.
(29) Gail Dessimoz and Michael Racz have shared dispositive and voting power in
RDA International.
(30) Vice President, Product Development from April 2001 through February 24,
2003.
(31) John Ellsworth has sole dispositive and voting power in Terrace
International.
(32) Mitchell Cohen has sole dispositive and voting power in J.A.S. Commercial
Corp.
(33) Rosenthal & Rosenthal, Inc. is an affiliate of Rosenthal International
Limited, a registered broker-dealer. The securities were acquired in the
ordinary course of business and, at the time of the purchase of such securities
to be resold under the registration statement, Rosenthal & Rosenthal, Inc. did
not have any agreements, plans or understandings, directly or indirectly, with
any person to distribute the securities. Stephen J. Rosenthal, Eric J. Rosenthal
and Robert Prizer have shared dispositive and voting power in Rosenthal &
Rosenthal, Inc.
(34) David L. Stone has sole dispositive and voting power in Ajax Partners.
(35) Brian D. Jedwab has sole dispositive and voting power in Brady Capital
Group LLC.
(36) Annette Holloway and M. Grace Riley have shared dispositive and voting
power in CGT Management Ltd.
(37) DKR SoundShore Oasis Holding Fund Ltd. (the "Fund") is a master fund in a
master-feeder structure. The Fund's investment manager is DKR Oasis Management
Company LP (the "Investment Manager"). Pursuant to an investment management
agreement among the Fund, the feeder funds and the Investment Manager, the
Investment Manager has the authority to do any and all acts on behalf of the
Fund, including voting any shares held by the Fund. Mr. Seth Fischer is the
managing partner of Oasis Management Holdings LLC, one of the general partners
of the Investment Manager. Mr. Fischer has ultimate responsibility for trading
with respect to the Fund. Mr. Fischer disclaims beneficial ownership of the
shares.
9
------------------------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner Amount and Nature of Beneficial Ownership
------------------------------------------------------------------------------------------------------------------------------------
Shares owned prior Shares issuable on Shares Number of shares owned
to this offering and conversion of issuable on by selling stockholder
registered hereby Series A Preferred exercise of or issuable to selling
Stock owned prior warrants owned stockholder after
to this offering prior to this offering and percent
and registered offering and of total outstanding(1)
hereby registered hereby
------------------------------------------------------------------------------------------------------------------------------------
Common Series A
Stock Convertible
Non
Redeemable
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
Richard Genovese 1,316,605 0 0
------------------------------------------------------------------------------------------------------------------------------------
David Goodfriend 32,233 28,591 0 0
------------------------------------------------------------------------------------------------------------------------------------
Iroquois Capital LP(38) 1,145,169 0 0
------------------------------------------------------------------------------------------------------------------------------------
Theseus Fund, LP(39) 1,071,335 0 0
------------------------------------------------------------------------------------------------------------------------------------
Robert W. O'Neel, III 497,001 0 0
------------------------------------------------------------------------------------------------------------------------------------
William Saggio 229,044 0 0
------------------------------------------------------------------------------------------------------------------------------------
SBI USA, LLC(40) 15,066 0 0
------------------------------------------------------------------------------------------------------------------------------------
Nadine Smith 251,954 0 0
------------------------------------------------------------------------------------------------------------------------------------
SPH Investments(41) 1,066 0 0
------------------------------------------------------------------------------------------------------------------------------------
Shai Stern 383,071 0 0
------------------------------------------------------------------------------------------------------------------------------------
Richard Stone 10,071 8,939 0 0
------------------------------------------------------------------------------------------------------------------------------------
M Paul Tompkins 229,044 0 0
------------------------------------------------------------------------------------------------------------------------------------
Phillip Vitug 151,885 0 0
------------------------------------------------------------------------------------------------------------------------------------
Winton Capital Holdings Ltd(42) 995,169 0 0
------------------------------------------------------------------------------------------------------------------------------------
Marcia Kucher 455 0 0
------------------------------------------------------------------------------------------------------------------------------------
Barbara A. Ras(43) 89,000(44) 0 0
-----------------------------------------------------------------------------------------------------------------------------------
BL Squared Foundation(45) 1,333,332 0 0
------------------------------------------------------------------------------------------------------------------------------------
The Ezra Charitable Trust(46) 1,333,332 0 0
------------------------------------------------------------------------------------------------------------------------------------
Eli Levitin 1,333,336 0 0
------------------------------------------------------------------------------------------------------------------------------------
Total 40,116,340 6,416,677 2,064,096
------------------------------------------------------------------------------------------------------------------------------------
----------
(38) Joshua Silverman has sole dispositive and voting power in Iroquois Capital
LP.
(39) Theseus Fund, LP, formerly known as Minotaur Fund LLP, is a registered
investment company.
(40) Shelly Singhal has sole dispositive and voting power in SBI USA, LLC.
(41) Steven Harrington has sole dispositive and voting power in SPH Investments.
(42) Mark Belzberg and Andrew Mead have shared dispositive and voting power in
Winton Capital Holdings Ltd.
(43) See Directors, Executive Officers, Promoters and Control Persons on page
12.
(44) Ms. Ras has direct beneficial ownership of 66,000 shares of common stock
and indirect beneficial ownership of 23,000 shares of common stock owned by her
husband.
(45) Mel E. Lifshitz, Sandy A. Liebhard and Stanley D. Bernstein each have sole
dispositive and voting power in BL Squared Foundation.
(46) Ezra Birnabum, Caroline Birnbaum and Moshe Birnbaum each have sole voting
and dispositive power over the securities held by The Ezra Charitable Trust. The
Ezra Charitable Trust is an affiliate of Pond Equities, a registered broker
dealer. The Ezra Charitable Trust acquired the securities in the ordinary course
of business and, at the time of the purchase of such securities, had no
agreements, plans or understandings, directly or indirectly, with any person to
distribute such securities.
10
We may require the selling security holders to suspend the sales of the
securities offered by this prospectus upon the occurrence of any event that
makes any statement in this prospectus or the related registration statement
untrue in any material respect or that requires the changing of statements in
these documents in order to make statements in those documents not misleading.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell all or a portion of the
shares of common stock on any market upon which the common stock may be listed
or quoted (currently the OTC Bulletin Board), in privately negotiated
transactions or otherwise. Such sales may be at fixed prices prevailing at the
time of sale, at prices related to the market prices or at negotiated prices.
The shares of common stock being offered for resale by this prospectus may be
sold by the selling stockholders by one or more of the following methods,
without limitation:
(a) block trades in which the broker or dealer so engaged will attempt to sell
the shares of common stock as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
(b) purchases by broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the applicable
exchange;
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the federal
securities laws);
(g) at the market to or through market makers or into an existing market for the
shares;
(h) through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); and
(i) a combination of any of the aforementioned methods of sale.
In the event of the transfer by any of the selling stockholders of its shares of
common stock, Series A Convertible Non Redeemable Preferred Stock and Warrants
to any pledgee, donee or other transferee, we will amend this prospectus and the
registration statement of which this prospectus forms a part by the filing of a
post-effective amendment in order to have the pledgee, donee or other transferee
in place of the selling stockholder who has transferred his, her or its shares.
In effecting sales, brokers and dealers engaged by the selling stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from a selling stockholder or, if any of the
broker-dealers act as an agent for the purchaser of such shares, from a
purchaser in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with a
selling stockholder to sell a specified number of the shares of common stock at
a stipulated price per share. Such an agreement may also require the
broker-dealer to purchase as principal any unsold shares of common stock at the
price required to fulfill the broker-dealer commitment to the selling
stockholder if such broker-dealer is unable to sell the shares on behalf of the
selling stockholder. Broker-dealers who acquire shares of common stock as
principal may thereafter resell the shares of common stock from time to time in
transactions which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above. Such sales
by a broker-dealer could be at prices and on terms then prevailing at the time
of sale, at prices related to the then-current market price or in negotiated
transactions. In connection with such resales, the broker-dealer may pay to or
receive from the purchasers of the shares commissions as described above.
The selling stockholders and any broker-dealers or agents that participate with
the selling stockholders in the sale of the shares of common stock may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
these sales. In that event, any commissions received by the broker-dealers or
agents and any profit on the resale of the shares of common stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
From time to time, any of the selling stockholders may pledge shares of common
stock pursuant to the margin provisions of customer agreements with brokers.
Upon a default by a selling stockholder, their broker may offer and sell the
pledged shares of common stock from time to time. Upon a sale of the shares of
common stock, the selling stockholders intend to comply with the prospectus
delivery requirements under the Securities Act by delivering a prospectus to
each purchaser in the transaction. We intend to file any amendments or other
necessary documents in compliance with the Securities Act which may be required
in the event any of the selling stockholders defaults under any customer
agreement with brokers.
To the extent required under the Securities Act, a post effective amendment to
this registration statement will be filed disclosing the name of any
broker-dealers, the number of shares of common stock involved, the price at
which the common stock is to be sold, the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable, that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and other facts material to
the transaction.
11
We and the selling stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as a selling stockholder is a distribution
participant and we, under certain circumstances, may be a distribution
participant, under Regulation M. All of the foregoing may affect the
marketability of the common stock.
All expenses of the registration statement including, but not limited to, legal,
accounting, printing and mailing fees are and will be borne by us. Any
commissions, discounts or other fees payable to brokers or dealers in connection
with any sale of the shares of common stock will be borne by the selling
stockholders, the purchasers participating in such transaction, or both.
Any shares of common stock covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act, as amended, may be sold under
Rule 144 rather than pursuant to this prospectus.
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.
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.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors and executive officers, their ages, positions held and duration
each person has held that position, are as follows:
NAME POSITION HELD WITH THE COMPANY AGE DATE FIRST ELECTED OR APPOINTED
-----------------------------------------------------------------------------------------------------------------------------------
Jay Gelman Chief Executive Officer, Assistant Secretary 44 Chief Executive Officer on June 29, 2004;
and Chairman of Board of Directors Assistant Secretary on November 11, 2004;
and Chairman of the Board of Directors on
October 14, 2004
-----------------------------------------------------------------------------------------------------------------------------------
Andre Muller Chief Operating Officer, Secretary 40 Chief Operating Officer and President on
Director of the Board of Directors June 29, 2004; Secretary on November 11, 2004;
and Director on October 14, 2004
-----------------------------------------------------------------------------------------------------------------------------------
Barbara A. Ras Chief Financial Officer 43 Chief Financial Officer on April 7, 2005
-----------------------------------------------------------------------------------------------------------------------------------
Humbert B. Powell, III Director 64 Director and Chairman of the Board of Directors
from July 1, 2002 until October 14, 2004 and
currently a Director
-----------------------------------------------------------------------------------------------------------------------------------
Thomas Vitiello Director 44 Director on October 14, 2004
-----------------------------------------------------------------------------------------------------------------------------------
Steven H. Nathan Director 55 Director on March 14, 2005
-----------------------------------------------------------------------------------------------------------------------------------
JAY GELMAN
Jay Gelman in 1989 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 co-founded Alliance
Partners (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.
12
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 co-founded
Alliance Partners (name later changed to AllianceCorner 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.
BARBARA A. RAS
Barbara A. Ras has not engaged in business activities since September 2002. From
October 1994 to August 2002 she was employed at Take Two Interactive Software,
Inc. (NASDQ: TTWO), in several positions, including controller and chief
accounting officer, and also as chief financial officer of Take Two's
distribution arm. Previously, she was a tax accountant and an internal auditor.
Ms. Ras is a certified public accountant.
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 a trustee of Salem-Teikyo
University. Mr. Powell served as chief executive officer of the Company from
June 20, 2002 until July 1, 2002.
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.
STEVEN H. NATHAN
Steven H. Nathan has since 1997 served as President of Progressive Planning,
Inc. a tax and financial consulting firm in Jericho, New York. 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, New York. 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
March 2005 in accordance with Section 3(a)(58)(A) of the Exchange Act. Serving
on the Committee are Steven H. Nathan and Thomas Vitiello. The Board of
Directors has determined that it has an audit committee financial expert serving
on the audit committee, Steven H. Nathan.
The board of directors have determined that Steven H. 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the common stock and Series A
Preferred Shares as of September 21, 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.
13
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 4 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 10 and 14 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 12 below), for Jay
Gelman, Andre Muller and Francis Vegliante there are deemed outstanding
46,692,098 shares of common stock (because of the deemed conversion of 275,000
employee stock options convertible into 275,000 shares of common stock), for
Humbert B. Powell III, Thomas Vitiello and Steven H. Nathan there are deemed
outstanding 46,454,598 shares of common stock (because of the deemed conversion
of 37,500 employee stock options convertible into 37,500 shares of common
stock), for Barbara A. Ras there are deemed outstanding 46,433,765 shares of
common stock (because of the deemed conversion of 16,667 employee stock options
convertible into 16,667 shares of common stock) and for all other holders there
are deemed outstanding 46,417,098 shares of common stock.
For calculating the percentage ownership of the Series A Convertible Non
Redeemable Preferred Stock ("Series A Preferred Shares"), for Jay Gelman,
Northumberland Holdings, Ltd., Nathan A. Low Roth IRA, Nathan A. Low Family
Trust, and Sunrise Foundation Trust there are deemed outstanding 403,335 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 326,718 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
8, 10, 12, and 14 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").
14
-----------------------------------------------------------------------------------------
Name and address of beneficial Common stock (% of class) Series A Convertible Non
owner Redeemable Preferred
Shares (% of class)
-----------------------------------------------------------------------------------------
Jay Gelman, 13,797,220(1) (29.55%) 168,427 (41.76%)(2)
15-15 132nd Street,
College Point, NY 11356
-----------------------------------------------------------------------------------------
Andre Muller 8,501,671 (18.21%) 0
15-15 132nd Street,
College Point, NY 11356
-----------------------------------------------------------------------------------------
Francis Vegliante 4,501,655 (9.64%) 0
15-15 132nd Street,
College Point, NY 11356
-----------------------------------------------------------------------------------------
Barbara A. Ras 105,667 (0.23%) 0
15-15 132nd Street,
College Point, NY 11356
-----------------------------------------------------------------------------------------
Humbert B. Powell, III 60,228 (0.13%) 0
527 Madison Avenue,
NY, NY 10022
-----------------------------------------------------------------------------------------
Thomas Vitiello 37,500 (0.08%) 0
15-15 132nd Street,
College Point, NY 11356
-----------------------------------------------------------------------------------------
Steven H. Nathan 37,500 (0.08%) 0
15-15 132nd Street,
College Point, NY 11356
-----------------------------------------------------------------------------------------
Nathan A. Low(3) 2,443,000(4) (4.999%) 320,514 (98.10%) (5)
c/o Sunrise Securities Corp.
641 Lexington Avenue
NY, NY 10022
-----------------------------------------------------------------------------------------
(1) Consists of 8,226,671 shares of common stock owned by Mr. Gelman, and
5,295,549 shares for which Mr. Gelman has a Voting Proxy referred to in
Description of Business below.
(2) Consists of Series A Preferred Shares subject to the Voting Proxy.
(3) 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.
(4) 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").
(5) 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.
15
-----------------------------------------------------------------------------------------
Name and address of beneficial Common stock (% of class) Series A Convertible Non
owner Redeemable Preferred
Shares (% of class)
-----------------------------------------------------------------------------------------
Nathan A. Low Roth IRA 0(6) 143,967 (35.69%)(7)
c/o Sunrise Securities Corp.
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 (5.40%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
NY, NY 10022
-----------------------------------------------------------------------------------------
Sunrise Equity Partners 1,218,899 (2.56%)(8) 67,350 (20.61%)(9)
641 Lexington Avenue 25th Floor
New York, NY 10022
-----------------------------------------------------------------------------------------
Level Counter LLC 1,218,899 (2.56%)(10) 67,350 (20.61%)(11)
641 Lexington Avenue 25th Floor
New York, NY 10022
-----------------------------------------------------------------------------------------
Amnon Mandelbaum 1,766,167 (3.69%)(12) 67,350 (20.61%)(13)
641 Lexington Avenue 25th Floor
New York, NY 10022
-----------------------------------------------------------------------------------------
Marilyn Adler 1,218,899 (2.56%)(14) 67,350 (20.61%)(15)
641 Lexington Avenue 25th Floor
New York, NY 10022
-----------------------------------------------------------------------------------------
(6) See Notes 4 and 5.
(7) See Notes 4 and 5.
(8) 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 4 and 5.
(9) See Notes 4 and 5.
(10) 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.
(11) See Notes 4, 5 and 10.
(12) 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 10.
(13) See Notes 10, 11 and 12.
(14) 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.
(15) See Notes 10, 11 and 14.
16
-----------------------------------------------------------------------------------------
Name and address of beneficial Common stock (% of class) Series A Convertible Non
owner Redeemable Preferred
Shares (% of class)
-----------------------------------------------------------------------------------------
Northumberland Holdings, Ltd. 2,320,832 (4.999%)(16) 53 (.01%)(17)
-----------------------------------------------------------------------------------------
Theseus Fund, L.P. 4,400,000 (9.48%) 0
f/k/a Minotaur Fund LLP
-----------------------------------------------------------------------------------------
All executive officers and 22,539,786 (47.86%) 168,427 (41.76%)
directors as a group
-----------------------------------------------------------------------------------------
(16) 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.
(17) 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.
DESCRIPTION OF SECURITIES
We are authorized to issue 100,000,000 shares of common stock, par value $0.001
per share, and up to 10,000,000 shares of preferred stock, par value $0.001 per
share, on such terms as the Board may determine.
As of September 21, 2005 the Company's outstanding capital stock consists of
46,417,098 shares of common stock, 403,335 shares of Series A Convertible Non
Redeemable Preferred Stock convertible into a total of 6,416,677 shares of
common stock, and warrants to buy 2,064,096 shares of common stock. The Company
is authorized to issue a total of 100,000,000 shares of common stock and
10,000,000 shares of preferred stock, of which 1,685,115 has been designated as
the Series A Convertible Non Redeemable Preferred Stock, so that 53,582,902
shares of common stock and 8,314,885 shares of preferred stock remain available
for issuance.
COMMON STOCK
Upon liquidation, dissolution or winding up of the corporation, the holders of
common stock are entitled to share ratably in all net assets available for
distribution to stockholders after payment to creditors. The common stock is not
convertible or redeemable and has no preemptive, subscription or conversion
rights.
Each outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders. There are no cumulative voting rights.
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available at such times and in such amounts as
our Board of Directors may from time to time determine. Holders of common stock
will share equally on a per share basis in any dividend declared by the Board of
Directors. We have not paid any dividends on our common stock and do not
anticipate paying any cash dividends on such stock in the foreseeable future.
In the event of a merger or consolidation, all holders of common stock will be
entitled to receive the same per share consideration.
SERIES A PREFERRED SHARES
Each share of Series A Preferred Shares is convertible into 15.9090 shares of
common stock, votes with the common stock as one class on as converted basis,
and otherwise ranks equally with the common stock on a pari passu as converted
basis. 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.
17
POTENTIAL ISSUANCE OF ADDITIONAL SERIES OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of up to
10,000,000 shares of the Company's $0.001 par value preferred stock (the
"Preferred Stock"). As of the date of this prospectus, other than the Series A
Preferred Shares, no shares of Preferred Stock were outstanding. The Preferred
Stock constitutes what is commonly referred to as "blank check" preferred stock.
"Blank check" preferred stock allows the Board of Directors, from time to time,
to divide the Preferred Stock into series, to designate each series, to issue
shares of any series, and to fix and determine separately for each series any
one or more of the following relative rights and preferences: (i) the rate of
dividends; (ii) the price at and the terms and conditions on which shares may be
redeemed; (iii) the amount payable upon shares in the event of involuntary
liquidation; (iv) the amount payable upon shares in the event of voluntary
liquidation; (v) sinking fund provisions for the redemption or purchase of
shares; (vi) the terms and conditions pursuant to which shares may be converted
if the shares of any series are issued with the privilege of conversion; and
(vii) voting rights. Dividends on shares of Preferred Stock, when and as
declared by the Board of Directors out of any funds legally available therefore,
may be cumulative and may have a preference over Common Stock as to the payment
of such dividends. Depending upon the voting rights granted to any series of
Preferred Stock, issuance thereof could result in a reduction in the power of
the holders of Common Stock. In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, the holders of each
series of the then outstanding Preferred Stock may be entitled to receive, prior
to the distribution of any assets or funds to the holders of the Common Stock, a
liquidation preference established by the Board of Directors, together with all
accumulated and unpaid dividends.
Depending upon the consideration paid for Preferred Stock, the liquidation
preference of Preferred Stock and other matters, the issuance of Preferred Stock
could result in a reduction in the assets available for distribution to the
holders of the Common Stock in the event of liquidation of the Company. Holders
of Preferred Stock will not have preemptive rights to acquire any additional
securities issued by the Company. Once a series has been designated and shares
of the series are outstanding, the rights of holders of that series may not be
modified adversely except by a vote of at least a majority of the outstanding
shares constituting such series.
The issuance by the board of directors of new series Preferred Stock could, in
certain instances, render more difficult or discourage a merger, tender offer,
or proxy contest and thus potentially have an "anti-takeover" effect, especially
if preferred shares were issued in response to a potential takeover. In
addition, issuances of authorized preferred shares can be implemented, and have
been implemented by some companies in recent years, with voting or conversion
privileges intended to make acquisition of the corporation more difficult or
more costly. Such an issuance could deter the types of transactions which may be
proposed or could discourage or limit the stockholders' participation in certain
types of transactions that might be proposed (such as a tender offer), whether
or not such transactions were favored by the majority of the stockholders, and
could enhance the ability of officers and directors to retain their positions.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified
any part of this prospectus or having given an opinion upon the validity of the
securities being registered or upon other legal matters in connection with the
registration or offering of the common stock was employed on a contingency basis
or had, or is to receive, in connection with the offering, a substantial
interest, directly or indirectly, in the registrant or any of its parents or
subsidiaries. Nor was any such person connected with the registrant or any of
its parents, subsidiaries as a promoter, managing or principal underwriter,
voting trustee, director, officer or employee.
The financial statements of Alliance Distributors Holding Inc. (formally
Essential Reality Inc.) as of December 31, 2004 and for the year ended December
31, 2004 and for the period from May 9, 2003 (Inception) to December 31, 2003,
filed with this prospectus and registration statement, have been audited by
Mahoney Cohen & Company, CPA, P.C., an independent registered public accounting
firm, as set forth in their report accompanying the financial statements, and
have been included herein in reliance upon such report, and upon the authority
of said firm as experts in accounting and auditing.
Certain legal matters in connection with this offering and Registration
Statement are being passed upon by Oscar D. Folger, New York, New York. Each of
Oscar Folger and Jeffrey Folger, an associate of the firm, owns 250,000 stock
options granted under the Company's Alliance Distributors Holding Inc. 2004
Stock Plan. Mr. Folger's wife beneficially owns 1,984 shares of common stock
through LCG Capital Group, LLC, which owns 109,091 shares of common stock.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our Certificate of Incorporation and bylaws provide that directors and officers
shall be indemnified by us to the fullest extent authorized by the Delaware
General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
might be permitted to directors, officers or persons controlling our company
under the provisions described above, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
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.
18
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
21,237,101 shares of common stock and 403,335 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 September 21, 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 September
21, 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.
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 $70 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 $5 to $125.
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 and for the six months ended June
30, 2005, 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.
19
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. For the six months ended
June 30, 2005, one of our suppliers accounted for approximately 52% of our
purchases, and our 5 largest suppliers in the aggregate accounted for 74% 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 and for the six months ended June 30, 2005.
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.
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 except for six employees are employed on a
full time basis.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. Our
Securities and Exchange Commission filings are available to the public over the
Internet at the SEC's website at http://www.sec.gov.
20
You may also read and copy any materials we file with the Securities and
Exchange Commission at the SEC's public reference room at 450 Fifth Street N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, under the Securities Act with respect to the securities
offered under this prospectus. This prospectus, which forms a part of that
registration statement, does not contain all information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of the Company, the references
are not necessarily complete and you should refer to the exhibits attached to
the registration statement for copies of the actual contract or document. You
may review a copy of the registration statement at the SEC's public reference
room. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our filings and the registration
statement can also be reviewed by accessing the SEC's website at
http://www.sec.gov.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with our audited
financial statements and the related notes that appear elsewhere in this
registration statement. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in the forward looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this registration statement,
particularly in the section entitled "Risk Factors" beginning on page 5 of this
prospectus.
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 of a public shell, 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, the Company had no continuing operations and its
historical results would not be meaningful if combined with the historical
results of AllianceCorner.
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 six months ended June 30, 2005 and
2004, respectively, and should be read in conjunction with the financial
statements included in the Quarterly Report on Form 10-QSB:
Three Months Ended June 30, 2005 compared to Three Months Ended June 30, 2004
Three months Three months
Ended Ended
June 30, 2005 June 30, 2004
(Thousands) (Thousands)
------------------------------ ------------------------------
Net sales $ 12,225 100.0% $ 5,976 100.0%
Cost of goods sold 11,154 91.2% 5,196 87.0%
------------- ------------- ------------- -------------
Gross profit 1,071 8.8% 780 13.0%
Selling, general and
administrative expenses 1,275 10.4% 803 13.4%
------------- ------------- ------------- -------------
Loss from operations (204) (1.6)% (23) (.4)%
Interest expense 127 1.1% 33 .6%
------------- ------------- ------------- -------------
Loss before income taxes (331) (2.7)% (56) (1.0)%
Income taxes 5 .0% (1) .0%
------------- ------------- ------------- -------------
Net loss $ (336) (2.7)% $ (55) (1.0)%
============= ============= ============= =============
21
Net sales increased by $6,248,426, or 104.6%, from $5,976,377 for the three
months ended June 30, 2004 to $12,224,803 for the three months ended June 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 $5,957,695, or 114.6%, from $5,196,597 for the
three months ended June 30, 2004 to $11,154,292 for the three months ended June
30, 2005. The increase was consistent with revenue growth. Gross profit as a
percentage of net sales decreased to 8.8% for the three months ended June 30,
2005 from 13.0% for the three months ended June 30, 2004. This decrease was
primarily due to the Company's strategy to grow the customer base and increase
revenues during the second quarter, which historically has been the weakest
period, 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
$265,270 and $225,702 for the quarter ended June 30, 2005 and 2004,
respectively.
Selling, general and administrative expenses increased by $471,306, or 58.7%,
from $803,096 for the three months ended June 30, 2004 to $1,274,402 for the
three months ended June 30, 2005. The increase was primarily due to the
Company's increase in salaries and related payroll taxes of $175,052,
professional fees associated with the Company's expanded operations of $110,936,
advertising and marketing expenses of $62,288 and insurance premiums of $44,999.
Selling, general and administrative expenses as a percentage of net sales
decreased to 10.4% for the three months ended June 30, 2005 from 13.4% for the
three months ended June 30, 2004. For the three months ended June 30, 2005,
selling, general and administrative expenses were comprised of the following:
$206,018 in selling expenses, $265,270 in distribution costs and $803,114 in
general and administrative expenses. For the three months ended June 30, 2004,
selling, general and administrative expenses were comprised of the following:
$125,597 in selling expenses, $225,702 in distribution costs and $451,797 in
general and administrative expenses.
Interest expense increased by $93,356, or 279.0%, from $33,453 for the three
months ended June 30, 2004 to $126,809 for the three months ended June 30, 2005.
The increase was primarily due to increased borrowings as well as higher
interest rates on bank borrowings during the second quarter of 2005. The
increased borrowing levels were the result of increased sales volume that
required higher inventory levels and increased accounts receivable.
Six Months Ended June 30, 2005 compared to Six Months Ended June 30, 2004
Six months Six months
Ended Ended
June 30, 2005 June 30, 2004
(Thousands) (Thousands)
------------------------ -----------------------
Net sales $ 23,114 100.0% $ 13,276 100.0%
Cost of goods sold 20,801 90.0% 11,397 85.8%
---------- ---------- ---------- ----------
Gross profit 2,313 10.0% 1,879 14.2%
Selling, general and
administrative expenses 2,552 11.0% 1,724 13.0%
---------- ---------- ---------- ----------
Income (loss) from operations (239) (1.0)% 155 1.2%
Interest expense 220 1.0% 61 .5%
---------- ---------- ---------- ----------
Income (loss) before income taxes (459) (2.0)% 94 .7%
Income taxes 6 .0% 11 .1%
---------- ---------- ---------- ----------
Net income (loss) $ (465) (2.0)% $ 83 .6%
========== ========== ========== ==========
22
Net sales increased by $9,837,620, or 74.1%, from $13,276,018 for the six months
ended June 30, 2004 to $23,113,638 for the six months ended June 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 $9,403,572, or 82.5%, from $11,397,218 for the
six months ended June 30, 2004 to $20,800,790 for the six months ended June 30,
2005. The increase was consistent with revenue growth. Gross profit as a
percentage of net sales decreased to 10.0% for the six months ended June 30,
2005 from 14.2% for the six months ended June 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
$518,580 and $504,903 for the six months ended June 30, 2005 and 2004,
respectively.
Selling, general and administrative expenses increased by $828,146, or 48.0%,
from $1,723,658 for the six months ended June 30, 2004 to $2,551,804 for the six
months ended June 30, 2005. The increase was primarily due to the Company's
increase in salaries and related payroll taxes of $245,604, professional fees
associated with the Company's expanded operations of $173,699, allowance for
doubtful accounts of $100,000, advertising and marketing expenses of $85,178,
insurance premiums of $95,772 and stock option compensation expense of $30,666
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 11.0% for the six months ended June 30,
2005 from 13.0% for the six months ended June 30, 2004. For the six months ended
June 30, 2005, selling, general and administrative expenses were comprised of
the following: $370,777 in selling expenses, $518,580 in distribution costs and
$1,662,447 in general and administrative expenses. For the six months ended June
30, 2004, selling, general and administrative expenses were comprised of the
following: $257,887 in selling expenses, $504,903 in distribution costs and
$960,868 in general and administrative expenses.
Interest expense increased by $159,814, or 263.7%, from $60,608 for the six
months ended June 30, 2004 to $220,422 for the six months ended June 30, 2005.
The increase was primarily due to increased borrowings as well as higher
interest rates on bank borrowings during the first and second quarter of 2005.
The increased borrowing levels were the result of increased sales volume that
required higher inventory levels and increased accounts receivable.
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:
For the Period
Year Ended August 11, 2003 to
December 31, 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%
========== ========== ========== ==========
23
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.
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
For the six months ended June 30, 2005 net cash used in operating activities was
$1,899,515. Net cash used in operations for the six months ended June 30, 2005
consisted of a net loss of $465,481 and included the following changes in
operating assets and liabilities: an increase in accounts receivable of
$710,925, and an increase in inventory of $1,317,230. These increases were the
result of increased sales volume.
Net cash used in investing activities for the six months ended June 30, 2005 was
$68,162, which was primarily used for the purchase of equipment.
Net cash provided by financing activities for the six months ended June 30, 2005
was $1,763,112 which primarily consisted of net proceeds on our note payable to
bank of $1,795,202.
For the six months ended June 30, 2004 net cash used in operating activities was
$3,350,671. Net cash used in operations for the six months ended June 30, 2004
consisted of net income of $83,367 and included the following changes in
operating assets and liabilities: an increase in funds on deposit with PPO
escrow agent of $2,884,171, decrease in inventory of $1,400,991, decrease in
accounts payable of $2,685,844 and increase in due to factor of $1,326,793, due
to advances taken during the period.
Net cash used in investing activities for six months ended June 30, 2004 was
$13,291, which was primarily used for the purchase of equipment.
Net cash provided by financing activities for the six months ended June 30, 2004
was $2,864,251, 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.
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.
24
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.
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 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.
On November 11, 2004, the Company, entered into a Financing Agreement
("Agreement") with Rosenthal & Rosenthal Inc. ("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 (8.25 percent as June 30, 2005). The Company's CEO and the Company's
President signed limited guaranties in respect of borrowings under the
Agreement.
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.
The Company and Rosenthal are currently renegotiating the terms and covenants of
the Agreement and the Company anticipates that such renegotiation will be
successful. Subject to the execution of this revised agreement, the Company
believes that it will have sufficient liquidity for the next twelve months and
the foreseeable future. However, the Company would have to scale down its
operations if it is unsuccessful in renegotiating the borrowing base and
financial covenants. Furthermore, 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.
NON-BINDING LETTER OF INTENT
On September 6, 2005, the Company announced that it signed a non-binding letter
of intent to acquire Foto Electric Supply Co., Inc., (Fesco). 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.
The letter of intent contemplates a purchase price for Fesco of $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. Although
the Company anticipates that Sanders, Morris & Harris will assist the Company as
investment bankers, the Company does not have any current arrangement or
commitment for any financing for the transaction.
CRITICAL ACCOUNTING POLICIES
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 at June 30, 2005.
25
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.
DESCRIPTION OF PROPERTY
Our executive offices and an adjoining showroom are located in about 5,500
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.
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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the OTC Bulletin Board since April 28, 2005. It
traded on the Pink Sheets Electronic Quotation Service from July 2003 to April
27, 2005 and on the OTC Bulletin Board from April 19, 2001 until July 2003. Our
current trading symbol is ADTR.OB. 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, and reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
--------------------------------------------------------------------------------
QUARTER ENDED BID PRICE PER SHARE
--------------------------------------------------------------------------------
2003 HIGH LOW
--------------------------------------------------------------------------------
March 31, 2003 $28.60 $24.20
--------------------------------------------------------------------------------
June 30, 2003 $11.00 $11.00
--------------------------------------------------------------------------------
September 30, 2003 $7.48 $3.08
--------------------------------------------------------------------------------
December 31, 2003 $22.44 $2.20
--------------------------------------------------------------------------------
2004 HIGH LOW
--------------------------------------------------------------------------------
March 31, 2004 $11.00 $4.84
--------------------------------------------------------------------------------
June 30, 2004 $15.40 $3.52
--------------------------------------------------------------------------------
September 30, 2004 $15.40 $4.40
--------------------------------------------------------------------------------
December 31, 2004 $4.40 $0.20
--------------------------------------------------------------------------------
2005 HIGH LOW
--------------------------------------------------------------------------------
March 31, 2005 $0.65 $0.11
--------------------------------------------------------------------------------
June 30, 2005 $0.20 $0.12
26
On September 21, 2005, the shareholders' list of our shares of common stock
showed 128 registered shareholders and 46,417,098 shares of common stock and
403,335 shares of Series A Convertible Non Redeemable Preferred Stock
outstanding, which upon conversion will convert into 6,416,677 shares of common
stock.
We have not declared any cash dividends for the last two fiscal years and in any
subsequent interim period and do not anticipate that we will do so in the
foreseeable future. Although there are no restrictions that limit the ability to
pay dividends on our shares of common stock, our intention is to retain future
earnings for use in our operations and the expansion of our business.
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. During fiscal year ended 2004, no options have
been granted under the Plan and no prior options were outstanding.
As of June 30, 2005, the Company granted a total of 7,650,000 options under the
Plan. The options are outstanding ten-year non-qualified options to purchase the
Company's common stock, 7,500,000 of the options have an exercise price of
$0.325 per share and 150,000 of the options have an exercise price of $0.32 per
share, 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, 1,100,000 options were
granted to Andre Muller, the President, COO and a director of the Company,
100,000 options were granted to Barbara A. Ras, CFO 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.
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 Position Fiscal Year Ended December 31 Annual Compensation Salary
--------------------------------------------------------------------------------------------------------------------------------
Jay Gelman, Chief Executive Officer 2004 $ 182,211 *
--------------------------------------------------------------------------------------------------------------------------------
Andre Muller, President and
Chief Operating Officer 2004 $ 182,211 *
--------------------------------------------------------------------------------------------------------------------------------
Steven T. Francesco, Chief Executive Officer 2004 $0
2003 $0
2002 $127,000
--------------------------------------------------------------------------------------------------------------------------------
* For the period from June 29, 2004 through December 31, 2004
27
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.
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.
28
INDEX
PAGE
ALLIANCE DISTRIBUTORS HOLDING INC. (FORMERLY ESSENTIAL REALITY, INC.)
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 - 15
ALLIANCE DISTRIBUTORS HOLDING INC.
Balance Sheet as of June 30, 2005 (Unaudited) F - 16
Statements of Operations for the three and six months
ended June 30, 2005 and 2004 (Unaudited) F - 17
Statement of Stockholders' Equity for the six months
ended June 30, 2005 (Unaudited) F - 18
Statements of Cash Flows for the six months
ended June 30, 2005 and 2004 (Unaudited) F - 19
Notes to Financial Statements (Unaudited) F - 20 to F - 24
29
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
30
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
31
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
32
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
33
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
34
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
35
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.
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.
F - 7
36
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.
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.
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.
F - 8
37
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
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 - 9
38
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.
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 nonmonetary 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.
F - 10
39
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.
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 - 11
40
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.
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
========
F - 12
41
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.
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.
F - 13
42
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)
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.
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.
F - 14
43
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 - 15
44
ALLIANCE DISTRIBUTORS HOLDING INC.
Balance Sheet (Unaudited)
June 30, 2005
ASSETS
Current assets:
Cash $ 16,040
Accounts receivable, net of allowance for doubtful
accounts of approximately $133,000 3,981,484
Inventory 5,185,565
Due from vendors 74,706
Prepaid expenses and other current assets 136,150
-----------
Total current assets 9,393,945
Property and equipment, net 411,957
Other assets 80,300
-----------
$ 9,886,202
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $ 4,162,078
Accounts payable 2,956,221
Current portion of long term obligations 26,391
Accrued expenses and other current liabilities 128,220
-----------
Total current liabilities 7,272,910
Long term obligations 17,613
Deferred lease obligation 22,553
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 3,198,251
Accumulated deficit (671,945)
-----------
Total stockholders' equity 2,573,126
-----------
$ 9,886,202
===========
See notes to financial statements.
F - 16
45
ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Operations (Unaudited)
For the three and six months ended June 30, 2005 and 2004
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 12,224,803 $ 5,976,377 $ 23,113,638 $ 13,276,018
Cost of goods sold 11,154,292 5,196,597 20,800,790 11,397,218
------------ ------------ ------------ ------------
Gross profit 1,070,511 779,780 2,312,848 1,878,800
Selling, general and administrative expenses 1,274,402 803,096 2,551,804 1,723,658
------------ ------------ ------------ ------------
Income (loss) from operations (203,891) (23,316) (238,956) 155,142
Interest expense 126,809 33,453 220,422 60,608
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (330,700) (56,769) (459,378) 94,534
Provision for (benefit from) income taxes 5,103 (1,000) 6,103 11,167
------------ ------------ ------------ ------------
Net income (loss) (335,803) (55,769) (465,481) 83,367
Preferred stock dividends -- 842 -- 842
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ (335,803) $ (56,611) $ (465,481) $ 82,525
============ ============ ============ ============
Net income (loss) available to common shareholders
per share - basic & diluted $ (.01) $ .00 $ (.01) $ .00
============ ============ ============ ============
Weighted-average common shares outstanding -
basic and diluted 46,417,098 24,909,581 46,417,098 24,794,789
============ ============ ============ ============
See notes to financial statements.
F - 17
46
ALLIANCE DISTRIBUTORS HOLDING INC.
Statement of Stockholders' Equity (Unaudited)
For the six months ended June 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 -- -- -- -- 30,666 -- 30,666
Net loss -- -- -- -- -- (465,481) (465,481)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2005 403,335 $ 403 46,417,098 $ 46,417 $ 3,198,251 $ (671,945) $ 2,573,126
=========== =========== =========== =========== =========== =========== ===========
See notes to financial statements.
F - 18
47
ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Cash Flows
For the six months ended June 30, 2005 and 2004 (Unaudited)
Six months ended June 30,
---------------------------
2005 2004
------------ -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ (465,481) $ 83,367
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Deferred rent 4,956 10,917
Depreciation and amortization 53,079 37,522
Bad debt expense 100,000 --
Stock option compensation expense 30,666 --
Amortization of deferred financing costs 34,000 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in assets
Accounts receivable (710,925) (207,116)
Inventory (1,317,230) 1,400,991
Due from vendors (40,458) (272,262)
Prepaid expenses and other current assets 16,291 (22,118)
Funds on deposit with PPO escrow agent -- (2,884,171)
Increase (decrease) in liabilities
Accounts payable 381,579 (2,685,844)
Due to factor -- 1,326,793
Accrued expenses and other current
liabilities 14,008 (138,750)
------------ -----------
Net cash used in operating activities (1,899,515) (3,350,671)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (55,662) (13,989)
(Increase) decrease in other assets (12,500) 698
------------ -----------
Net cash used in investing activities (68,162) (13,291)
------------ -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from note payable - bank 23,635,275 --
Repayments of note payable - bank (21,840,073) --
Proceeds from sale of securities -- 4,000,000
Payments for registration and issuance costs (16,250) (200,500)
Payments for pre-acquisition liabilities -- (915,329)
Repayment of long-term obligations (15,840) (19,920)
------------ -----------
Net cash provided by financing activities 1,763,112 2,864,251
------------ -----------
NET DECREASE IN CASH (204,565) (499,711)
CASH, beginning of period 220,605 656,853
------------ -----------
CASH, end of period $ 16,040 $ 157,142
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 182,406 $ 60,608
============ ===========
Income tax paid $ 2,013 $ 17,635
============ ===========
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 $ -- $ 842
============ ===========
See notes to financial statements.
F - 19
48
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, which
was then a wholly owned Delaware subsidiary of Essential. The Company operates
as a single segment.
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 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 15.909 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 Preferred Shares that converted into 735,000
shares of common stock and recorded a preferred dividend in the amount of
$164,531.
F - 20
49
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 15.909 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.
From inception through June 30, 2005, the Series A Preferred Shares were
converted into 21,127,101 shares of common stock and the Series B Preferred
Shares were converted into 24,679,997 shares of common stock, comprising most of
the 46,417,098 issued and outstanding shares of common stock.
As of June 30, 2005 there were issued and outstanding 403,335 shares of Series A
Preferred Shares convertible into 6,416,693 shares of common stock subject to
the 4.999% Restriction.
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 at June
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 three and six months
ended June 30, 2004. AllianceCorner was subject to New York State S corporation
taxes and New York City corporate income taxes. The provision for income tax
expense (benefit) for the three and six months ended June 30, 2004 comprises
state and local taxes.
Effective June 29, 2004, the Company is taxed as a C corporation. The provision
for income tax expense for the three and six months ended June 30, 2005
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.
At December 31, 2004, the Company had federal and state net operating loss
carryforwards of approximately $5,000,000, expiring 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 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.
F - 21
50
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 and six months ended June 30, 2005 exclude the
500,000 of warrants issued to the Company's lender since their effect would be
anti-dilutive. For the three and six months ended June 30, 2005 and 2004 the
403,335 Series A Preferred Shares not eligible for conversion due to the 4.999%
Restriction are excluded.
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 June 30, 2005
there were 7,650,000 options issued. The options are ten-year non-qualified
options to purchase the Company's common stock, 7,500,000 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, 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 six months ended June 30, 2005, the Company recorded
stock-based compensation expense of approximately $3,833 and $30,666,
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 loss and basic and
diluted net loss per share would have been reduced to the pro forma amounts as
follows:
For the Three Months For the Six Months
Ended June 30, 2005 Ended June 30, 2005
-------------------- -------------------
(Unaudited) (Unaudited)
Net loss, as reported $ (335,803) $ (465,481)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of tax effects (54,833) (108,041)
-------------------- -------------------
Proforma net loss $ (390,636) $ (573,522)
==================== ===================
Net loss per share:
Basic and diluted - as reported $ (0.01) $ (0.01)
==================== ===================
Basic and diluted - proforma $ (0.01) $ (0.01)
==================== ===================
F - 22
51
There were no options outstanding at June 30, 2004.
The fair value of the options-pricing model was calculated with the following
weighted-average assumptions used for grants during the six months ended June
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 loss and related per share amounts for the three and six months ended
June 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
On November 11, 2004, the Company entered into a Financing Agreement
("Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal"), which replaced an
earlier factor 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 % (8.25
% as of June 30, 2005). 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 three
and six months ended June 30, 2005 amounted to $12,500 and $25,000,
respectively. At June 30, 2005, the loan outstanding amounted to $4,162,078.
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 six
months ended June 30, 2005 amounted to $4,500 and $9,000, 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.
The Company and Rosenthal are currently renegotiating the terms and covenants of
the Agreement and the Company anticipates that such renegotiation will be
successful. Subject to the execution of this revised agreement, the Company
believes that it will have sufficient liquidity for the next twelve months and
the foreseeable future. However, the Company would have to scale down its
operations if it is unsuccessful in renegotiating the borrowing base and
financial covenants. Furthermore, 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.
F - 23
52
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 - SUBSEQUENT EVENT
On July 21, 2005, the Company and Abrams/Gentile Entertainment Inc. ("Age")
entered into an operating agreement ("Agreement") of 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. Alliance Age LLC will be included in future periods as a
majority subsidiary of the Company and included in subsequent financial
statements.
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.
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation and bylaws provide that directors and officers
shall be indemnified by us to the fullest extent authorized by the Delaware
General Corporation Law.
To the extent that indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of our
company, we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the selling stockholder. All of the
amounts shown are estimates, except for the SEC Registration Fees.
SEC registration fees $ 613.28
Printing and engraving expenses $ 1,000
Accounting fees and expenses $ 10,000
Legal fees and expenses $ 20,000
Transfer agent and registrar fees $ 1,000
Fees and expenses for qualification under state
securities laws $ 0
Miscellaneous $ 1,000
Total $33,613.28
F - 24
53
RECENT SALES OF UNREGISTERED SECURITIES
On June 20, 2002, JPAL consummated a business combination with Essential
Reality, LLC, a Delaware limited liability company ("ER LLC"). Pursuant to the
terms of the transaction, all of the members of ER LLC contributed their
membership interests in ER LLC to JPAL in exchange for an aggregate of the share
equivalent of 383,518 shares of common stock of the Company. In connection with
the issuance of these shares of common stock, the Company relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
JPAL issued $1,500,000 bridge loans during the year ended 2001 and $1,825,000
bridge loans during the first two quarters ended June 30, 2002 ("bridge loans").
JPAL issued two year warrants to all bridge note holders, all of which expired
on June 20, 2004, without any such warrants having been exercised by any of the
note holders. Essential Reality LLC assumed $2,517,070 of the bridge loans (the
"notes payable") pursuant to an Assignment and Transfer Agreement between
Essential Reality LLC and the holders of the bridge loans upon the consummation
of the merger transaction between Essential Reality LLC and JPAL, the
predecessors of Essential Reality, Inc.
Of the total $2,517,070 notes payable, $550,000 were paid off in cash during the
second quarter of 2002, and $250,000 were converted into the share equivalent of
4,941 shares of common stock during the third quarter of 2002.
Of the $1,717,070 notes payable balance, (i) $980,734 was owed to the following
14 noteholders: 1025 Associates Inc., Bel-Cal Holdings, Ltd., Capital Growth
Trust, FAC Enterprises, Inc., Fenmore Consultants, Ltd., Jim Smith, Michael
Garnick, Motty Gurary, Miriam Braun, Rivka Pearlstein, SPH Investments, Inc.,
SPH Investments, Inc. Profit Sharing, Winton Capital Holdings, Ltd., Wolver Ltd.
("980,734 note holders"), (ii) $694,751 was owed to Northumberland Holdings,
Ltd. and (iii) the balance $41,585 was owed to Mark Tompkins.
On June 29, 2004, $264,330 of the $980,734 owed to the $980,734 note holders was
paid in cash, $539,404 plus all accrued interest was forgiven, and $177,000 was
converted into 49,719 shares of Series A 6% Convertible Non Redeemable Preferred
Stock of Essential by 1025 Associates Inc., FAC Enterprises, Inc., Fenmore
Consultants, Ltd., SPH Investments, Inc. and Wolver Ltd. on June 29, 2004,
pursuant to the Exchange Agreement described below. The 49,719 shares of Series
A 6% Convertible Non Redeemable Preferred Stock were further converted into
809,980 shares of common stock of the Company on November 22, 2004.
The Company converted the entire $694,751 principal amount owed to
Northumberland Holdings, Ltd. on June 29, 2004, pursuant to the Exchange
Agreement, into 174,744 shares of Series A 6% Convertible Non Redeemable
Preferred Stock of Essential. The 174,744 shares of Series A 6% Convertible Non
Redeemable Preferred Stock of Essential was further converted into 2,866,812
shares of common stock of the Company and 53 shares of Series A Convertible Non
Redeemable Preferred Stock of the Company on November 22, 2004.
The Company converted the entire $41,585 principal amount owed to Mark Tompkins
on June 29, 2004, pursuant to the Exchange Agreement, into 10,459 shares of
Series A 6% Convertible Non Redeemable Preferred Stock of Essential. The 10,459
shares of Series A 6% Convertible Non Redeemable Preferred Stock was further
converted into 170,388 shares of common stock of the Company on November 22,
2004.
On June 20, 2002, the Company, then JPAL, issued warrants to Coniston Investment
Corp. to purchase the share equivalent of 4,396 shares of common stock of the
Company at a purchase price of $57.20 per share. The warrants will expire June
20, 2005 if not exercised by that date.
On June 20, 2002, the Company, then JPAL, issued warrants to Legend Merchant
Group, Inc. to purchase the share equivalent of 3,131 shares of common stock of
the Company at a purchase price of $57.20 per share. The warrants will expire
June 20, 2005 if not exercised by that date.
During the year ended 2002, the Company, then Essential, issued a $500,000
secured convertible debenture to Minotaur Fund LLP, and during the year ended
2003 issued a $200,000 secured convertible debenture to Minotaur Fund LLP, for a
total of $700,000 secured convertible notes. The Company converted the entire
$700,000 principal amount owed to Minotaur Fund LLP on June 29, 2004, pursuant
to the Exchange Agreement, into 62,552 shares of Series A 6% Convertible Non
Redeemable Preferred Stock of Essential. The 62,552 shares of Series A 6%
Convertible Non Redeemable Preferred Stock was further converted into 1,071,335
shares of common stock of the Company on November 22, 2004. All warrants were
cancelled and outstanding accrued interest was forgiven.
On November 6, 2002, the Company issued the share equivalent of 1,137 shares of
common stock to David Feldman for legal services rendered on behalf of the
Company.
During the year ended 2003, the Company, then Essential, issued a $100,000
secured convertible debenture to Phillip Vitug. The Company converted the
$100,000 principal amount owed to Phillip Vitug on June 29, 2004, pursuant to
the Exchange Agreement, into 8,868 shares of Series A 6% Convertible Non
Redeemable Preferred Stock of Essential. The 8,868 shares of Series A 6%
Convertible Non Redeemable Preferred Stock was further converted into 151,885
shares of common stock of the Company on November 22, 2004. All warrants were
cancelled and outstanding accrued interest was forgiven.
During the year ended 2003, the Company, then Essential, issued to Brady Group,
LLC a $15,000 secured convertible debenture and a $62,500 unsecured convertible
note. The Company converted the entire $77,500 principal amount owed to Brady
Group, LLC on June 29, 2004, pursuant to the Exchange Agreement, into 6,469
shares of Series A 6% Convertible Non Redeemable Preferred Stock of Essential.
The 6,469 shares of Series A 6% Convertible Non Redeemable Preferred Stock was
further converted into 110,791 shares of common stock of the Company on November
22, 2004. All warrants were cancelled and outstanding accrued interest was
forgiven.
54
During the year ended 2003, the Company, then Essential, issued to Robert W.
O'Neel, III a $185,000 secured convertible debenture and a $150,000 unsecured
convertible note. The Company converted the entire $335,000 principal amount
owed to Robert W. O'Neel, III on June 29, 2004, pursuant to the Exchange
Agreement, into 29,018 shares of Series A 6% Convertible Non Redeemable
Preferred Stock of Essential. The 29,018 shares of Series A 6% Convertible Non
Redeemable Preferred Stock was further converted into 497,001 shares of common
stock of the Company on November 22, 2004. All warrants were cancelled and
outstanding accrued interest was forgiven.
During the year ended 2003, the Company, then Essential, issued a $3,000
unsecured convertible note to John Gentile. The Company converted the $3,000
principal amount owed to John Gentile on June 29, 2004, pursuant to the Exchange
Agreement, into 251 shares of Series A 6% Convertible Non Redeemable Preferred
Stock of Essential. The 251 shares of Series A 6% Convertible Non Redeemable
Preferred Stock was further converted into 4,297 shares of common stock of the
Company on November 22, 2004. All warrants were cancelled and outstanding
accrued interest was forgiven.
During the year ended 2003, the Company, then Essential, issued a $23,000
unsecured convertible note to Don Danks. The Company converted the $23,000
principal amount owed to Don Danks on June 29, 2004, pursuant to the Exchange
Agreement, into 1,962 shares of Series A 6% Convertible Non Redeemable Preferred
Stock of Essential. The 1,962 shares of Series A 6% Convertible Non Redeemable
Preferred Stock was further converted into 33,601 shares of common stock of the
Company on November 22, 2004. All warrants were cancelled and outstanding
accrued interest was forgiven.
During the year ended 2003, the Company, then Essential, issued a $10,715
unsecured convertible note to Shelly Singhal. The Company converted the $10,715
principal amount owed to Shelly Singhal on June 29, 2004, pursuant to the
Exchange Agreement, into 880 shares of Series A 6% Convertible Non Redeemable
Preferred Stock of Essential. The 880 shares of Series A 6% Convertible Non
Redeemable Preferred Stock was further converted into 15,066 shares of common
stock of the Company on November 22, 2004. All warrants were cancelled and
outstanding accrued interest was forgiven.
During the year ended 2003, the Company, then Essential, issued a $300,000
unsecured convertible note to Richard Genovese. The Company converted the
$300,000 principal amount owed to Richard Genovese on June 29, 2004, pursuant to
the Exchange Agreement, into 66,761 shares of Series A 6% Convertible Non
Redeemable Preferred Stock of Essential. The 66,761 shares of Series A 6%
Convertible Non Redeemable Preferred Stock was further converted into 1,316,605
shares of common stock of the Company on November 22, 2004. All warrants were
cancelled and outstanding accrued interest was forgiven.
During the year ended 2003, the Company, then Essential, issued a $100,000
unsecured convertible note to Nathan Low Family Trust. The Company converted the
$100,000 principal amount owed to Nathan Low Family Trust on June 29, 2004,
pursuant to the Exchange Agreement, into 23,665 shares of Series A 6%
Convertible Non Redeemable Preferred Stock of Essential. The 23,665 shares of
Series A 6% Convertible Non Redeemable Preferred Stock was further converted
into 24,407 shares of Series A Convertible Non Redeemable Preferred Stock of the
Company on November 22, 2004. All outstanding accrued interest was forgiven.
On December 5, 2003, in consideration for arranging a factoring agreement
between the Company and Rosenthal & Rosenthal, the Company agreed to issue the
share equivalent of 80,000 shares of common stock to J.A.S. Commercial Corp.
These shares were issued on November 22, 2004.
On February 10, 2004, the Company agreed to issue the share equivalent of 30,000
shares of common stock to Jackson Steinem, Inc. in consideration for non-legal
services provided by Jackson Steinem, Inc. in connection with the Company's
reorganization transaction completed June 29, 2004. These shares were issued on
November 22, 2004.
On June 22, 2004 the Company issued the share equivalent of 22,728 shares of
common stock to Humbert B. Powell, III for past directorship services.
On June 22, 2004 the Company issued the share equivalent of common stock to the
following individuals for past directorship services: 22,728 shares to Brian
Jedwab, 455 shares to Marc Fries, 1,478 shares of Anthony Gentile and 1,478
shares to John Gentile.
On June 22, 2004, the Company issued the share equivalent of 22,728 shares of
common stock to Dave Devor for past services rendered as Marketing Director of
the Company.
On June 22, 2004, the Company issued the share equivalent of 5,697 shares of
common stock to George Mellides for past services rendered as Acting Chief
Financial Officer of the Company.
On June 29, 2004, pursuant to the Exchange Agreement, the Company issued the
share equivalent of 4,795 shares of common stock to former employees in
settlement of severance agreements and issued the share equivalent of 3,771
shares of common stock of the Company to two trade creditors in settlement of
accounts payable.
On June 29, 2004, pursuant to the Exchange Agreement, the Company issued to IVC
Group 16,854 shares of Series A 6% Convertible Non Redeemable Preferred Stock of
Essential for consulting services. The 16,854 shares of Series A 6% Convertible
Non Redeemable Preferred Stock was further converted into 274,560 shares of
common stock of the Company on November 22, 2004.
55
On June 29, 2004, the Company entered into a Share Exchange Agreement (the
"Exchange Agreement") dated June 17, 2004, between the Company, then Essential,
and Jay Gelman, Andre Muller and Francis Vegliante, the sole shareholders (the
"Shareholders") of AllianceCorner Distributors Inc., a New York corporation
("AllianceCorner"). Pursuant to the Exchange Agreement, the Company 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 for
each of Jay Gelman and Andre Muller was converted into 8,226,671 shares of
common stock and 8,226,655 shares of common stock for Francis Vegliante.
On June 29, 2004, as part of the Exchange Agreement, the Company issued
1,124,767 shares of Series A 6% Convertible Non Redeemable Preferred Shares,
through a private placement offering ("PPO"). The 1,124,767 shares of Series A
6% Convertible Non Redeemable Preferred Shares was further converted into
18,243,814 shares of common stock on November 22, 2004. The Series A 6%
Convertible Non Redeemable Preferred Shares issued for cash were sold to the
following investors: AJAX Partners, Nathan A. Low IRA, Bridges & Pipes, Cary D.
Pinkowski, CGT Management Ltd., DKR Sound Shore Oasis Holding Fund, Ltd.,
Iroquois Capital LP, Jackson Steinem Inc., M. Paul Tompkins, Nadine Smith,
Richard Genovese, Robert Feig, RP Capital LLC, Shai Stern, Smithfield Fiduciary,
LLC, South Ferry #2 L.P., SRG Capital, LLC, Sunrise Equity Partners, Vitel
Ventures Corp., William Saggio and Winton Capital Holdings Ltd.
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 6% Convertible Non
Redeemable Preferred Stock, and 5 year warrants due June 29, 2009 to purchase
1,564,096 shares of common stock at an exercise price of $.22 per share. The
Series A 6% Convertible Non Redeemable Preferred Shares was further converted
into 382,687 shares of common stock of the Company and 84,790 shares of Series A
Convertible Non Redeemable Preferred Stock of the Company on November 22, 2004.
On November 11, 2004 the Company issued to Rosenthal & Rosenthal a warrant (the
"Warrant") to purchase 500,000 shares of common stock at $0.10 per share. The
warrant was issued in a private placement under the exemption set forth in
Section 4(2) of the Securities Act of 1933 (the "Act"). The Company agreed to
register the shares issuable on exercise of the Warrant.
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).
All issuances were made as private placements pursuant to the provisions of
Section 4(2) of the Securities Act of 1933, as amended.
56
EXHIBITS
The following Exhibits are filed with this Prospectus:
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit
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"). Form of
Agreement and Plan of Merger dated as of October 25, 2004 by and
between Essential Reality, Inc. and
2.2 Alliance Distributor Holding Inc. Incorporated herein by reference
from Exhibit 2 to the Company's Form 8-K filed on November 23, 2004.
3.1 Certificated 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. Incorporated herein by reference
from Exhibit 4.2 to the Company's Form 10K-SB filed on March 30,
2005.
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.
5.1 Opinion of Oscar D. Folger Law Offices (filed herewith)
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.
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.
57
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 KIM Management,
LLC, and Big Brother World, Inc. Incorporated herein by reference
from Exhibit 10.12 to the Company's Form SB-2 filed on December 23,
2004.
10.13 Lease Agreement dated as of December 1, 2003 between Angelo Pegno
et. al. and AllianceCorner Distributors Inc. Incorporated herein by
reference from Exhibit 10.13 to the Company's Form SB-2 filed on
December 23, 2004.
10.14 Lease Agreement dated as of July 1, 2003 between Angelo Pegno Et.
al. and Alliance Partners, Inc. Incorporated herein by reference
from Exhibit 10.14 to the Company's Form SB-2 filed on December 23,
2004.
10.15 Assignment and Assumption of Lease Agreement dated as of March 30,
2004 between Corner Distributors, Inc. and AllianceCorner
Distributors, Inc., filed herewith.
23.1 Consent of Mahoney Cohen & Company, CPA, P.C., Independent
Registered Public Accounting Firm, filed herewith.
23.2 Consent of Oscar D. Folger Law Offices (included in Exhibit 5.1).
99.1 Operating Agreement of Alliance Age LLC between Alliance
Distributors Holding Inc. and Abrams/Gentile Entertainment Inc.
dated July 21, 2005. Incorporated herein by reference from Exhibit
99.1 to the Company's Form 10Q-SB filed on August 15, 2005.
58
UNDERTAKINGS
The undersigned company hereby undertakes that it will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include:
(a) any prospectus required by Section 10(a)(3) of the Securities Act;
(b) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(c) include any additional or changed material information with respect to the
plan of distribution not previously disclosed in the registration statement;
(2) For the purpose of determining any liability under the Securities Act, each
of the post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) Remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Alliance
Distributors Holding Inc. pursuant to the foregoing provisions, or otherwise,
Alliance Distributors Holding Inc. has been advised that in the opinion of the
Commission that type of indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against said liabilities (other than the payment by Alliance
Distributors Holding Inc. of expenses incurred or paid by a director, officer or
controlling person of Alliance Distributors Holding Inc. in the successful
defense of any action, suit or proceeding) is asserted by the director, officer
or controlling person in connection with the securities being registered,
Alliance Distributors Holding Inc. will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of the issue.
59
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of New York, State of
New York, on October 7, 2005.
ALLIANCE DISTRIBUTORS HOLDING INC.
By: /s/ Jay Gelman
--------------
Jay Gelman, Chairman and CEO
60
Pursuant to the requirements of the Securities Act, this registration statement
has been signed by the following persons in the capacities and on the dates
stated.
SIGNATURES
/s/ Jay Gelman
--------------------------------------------
Jay Gelman, Chairman and CEO
October 7, 2005
/s/ Andre Muller
--------------------------------------------
Andre Muller, President, COO and Director
October 7, 2005
/s/ Barbara A. Ras
--------------------------------------------
Barbara A. Ras, Chief Financial Officer
October 7, 2005
/s/ Humbert B. Powell, III
--------------------------------------------
Humbert B. Powell, III, Director
October 7, 2005
/s/ Thomas Vitiello
--------------------------------------------
Thomas Vitiello, Director
October 7, 2005
/s/ Steven H.Nathan
--------------------------------------------
Steven H. Nathan, Director
October 7, 2005
61