ALLIANCECORNER DISTRIBUTORS INC.
Financial Statements
December 31, 2003
ALLIANCECORNER DISTRIBUTORS INC.
Index
Page
----
Report of Independent Registered Public Accounting Firm 1
Balance Sheet as of December 31, 2003 2
Statement of Income for the Period from May 9, 2003
(Inception) to December 31, 2003 3
Statement of Stockholders' Equity for the Period from
May 9, 2003 (Inception) to December 31, 2003 4
Statement of Cash Flows for the Period from May 9, 2003
(Inception) to December 31, 2003 5-6
Notes to Financial Statements 7-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders
AllianceCorner Distributors Inc.
We have audited the accompanying balance sheet of AllianceCorner
Distributors Inc. as of December 31, 2003, and the related statements of income,
stockholders' equity and cash flows for 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 audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides 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 AllianceCorner Distributors
Inc. as of December 31, 2003, and the results of its operations and its cash
flows for 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
February 27, 2004, except for
Note 9 for which the dates
are June 29, 2004 and
July 26, 2004
ALLIANCECORNER DISTRIBUTORS INC.
Balance Sheet
December 31, 2003
ASSETS (Note 4)
Current assets:
Cash $ 656,853
Accounts receivable, net of allowance for doubtful
accounts of $10,000 180,684
Due from factor (Note 4) 1,283,854
Inventory 2,896,207
Due from vendors 14,400
Prepaid expenses and other current assets 42,074
----------
Total current assets 5,074,072
Property and equipment, net (Notes 5, 6 and 7) 423,372
Other assets 18,334
----------
$5,515,778
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Notes 1 and 3) $4,356,341
Capitalized lease obligations - current portion (Note 7) 15,160
Notes payable - current portion (Note 6) 13,170
Accrued expenses and other current liabilities 187,900
----------
Total current liabilities 4,572,571
Other liabilities:
Capitalized lease obligations, net of current portion (Note 7) 20,447
Notes payable, net of current portion (Note 6) 38,943
Other long-term debt (Note 1) 243,750
Deferred rent obligation (Note 8) 4,236
----------
Total other liabilities 307,376
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value:
Authorized, issued and outstanding - 300 shares 300
Additional paid-in capital (Note 1) 435,715
Retained earnings 199,816
----------
Total stockholders' equity 635,831
----------
$5,515,778
==========
See accompanying notes.
-2-
ALLIANCECORNER DISTRIBUTORS INC.
Statement of Income
For the Period from May 9, 2003 (Inception) to December 31, 2003
Net sales $10,513,231
Cost of goods sold (Note 3) 9,219,064
-----------
Gross profit 1,294,167
Selling, general and administrative expenses 1,077,342
-----------
Income from operations 216,825
Interest expense 9,009
-----------
Income before provision for income taxes 207,816
Provision for income taxes 8,000
-----------
Net income $ 199,816
===========
Basic and diluted net income per common share $ 666.05
===========
Basic and diluted weighted-average common shares
outstanding 300
===========
See accompanying notes.
-3-
ALLIANCECORNER DISTRIBUTORS INC.
Statement of Stockholders' Equity
For the Period from May 9, 2003 (Inception) to December 31, 2003
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
-------- -------- -------- --------
Balance, May 9, 2003 (inception) $ -- $ -- $ -- $ --
Issuance of common stock 300 -- -- 300
Additional paid-in capital
contribution -- 435,715 -- 435,715
Net income -- -- 199,816 199,816
-------- -------- -------- --------
Balance, December 31, 2003 $ 300 $435,715 $199,816 $635,831
======== ======== ======== ========
See accompanying notes.
-4-
ALLIANCECORNER DISTRIBUTORS INC.
Statement of Cash Flows
For the Period from May 9, 2003 (Inception) to December 31, 2003
Cash flows from operating activities:
Net income $ 199,816
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 26,928
Bad debt expense 10,000
Deferred rent obligation 4,236
Change in assets and liabilities:
Accounts receivable (190,684)
Due from factor (1,283,854)
Inventory (2,896,207)
Due from vendors (14,400)
Prepaid expenses and other current assets (42,074)
Accounts payable 4,600,091
Accrued expenses and other current liabilities 187,900
-----------
Net cash provided by operating activities 601,752
-----------
Cash flows from investing activities:
Acquisition of property and equipment (130,044)
Other assets (18,334)
-----------
Cash used in investing activities (148,378)
-----------
Cash flows from financing activities:
Proceeds from additional paid-in capital 200,000
Proceeds from notes payable 15,306
Repayment of capital lease obligations (9,064)
Repayment of notes payable (2,763)
-----------
Net cash provided by financing activities 203,479
-----------
Net increase in cash 656,853
Cash, beginning of period --
-----------
Cash, end of period $ 656,853
===========
See accompanying notes.
-5-
ALLIANCECORNER DISTRIBUTORS INC.
Statement of Cash Flows (Concluded)
For the Period from May 9, 2003 (Inception) to December 31, 2003
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 4,009
=========
Supplemental Schedule of Non-Cash Investing and Financing Activities
Fair market value of property and equipment contributed $ 276,138
Capital lease obligations assumed (27,227)
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
=========
See accompanying notes.
-6-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 1 - The Company
AllianceCorner Distributors Inc. ("Alliance" or the "Company") is a
wholesale distributor of video games and accessories, whose operations commenced
in August 2003, with a customer base substantially throughout the United States.
The Company 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.
The acquisition was financed in accordance with the purchase agreement. In
December 2003, the Company and Corner agreed to extend the maturity of $243,750
of the purchase price. At December 31, 2003, approximately $1,303,000 is due to
Corner, of which approximately $1,059,000 is included in accounts payable and
$243,750 is long-term debt which is due and payable on June 30, 2005.
In addition, the following net assets, previously owned by Corner, were
contributed to the Company and recorded at their fair market value agreed to by
the stockholders:
Fair market value of property and equipment contributed $ 276,138
Capital lease obligations assumed (27,227)
Notes payable assumed (12,896)
---------
Net capital contributed $ 236,015
=========
The Company operates as a single segment.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates reflected in these financial statements relate
primarily to bad debt reserves on accounts receivable.
-7-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
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
Contributed property and equipment is recorded at fair market value.
Purchased 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 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
-8-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets, including property and equipment, be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. The Company assesses its
assets for impairment based on the estimated future undiscounted cash flows
expected to result from the use of the asset and records impairment losses when
this amount is less than the carrying amount. Impairment losses are recorded for
the excess of the assets' carrying amount over their fair value, which is
generally determined based on the estimated future discounted cash flows over
the remaining useful life of the asset using a discount rate determined by
management at the date of the impairment review. Management believes at this
time that the carrying value and useful life of long-lived assets continue to be
appropriate.
Revenue Recognition
Sales are recorded when products are shipped to customers. Provisions for
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
The Company, 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 December 31, 2003.
The Company is subject to New York State S corporation taxes and New York
City corporate income taxes. The provision for income taxes comprises state and
local taxes.
Shipping and Handling Costs
The Company includes shipping and handling costs in selling, general and
administrative expense. For the period from May 9, 2003 (inception) to December
31, 2003, the Company incurred approximately $144,000 of such costs.
-9-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Advertising Expenses
Advertising expenses are charged to operations in the period in which they
are incurred. Advertising expenses for the period from May 9, 2003 (inception)
to December 31, 2003 were approximately $5,000.
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, 2003 due to their short-term maturities. Advances from
the factor and long-term debt 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, 2003, the Company has no items that
represent other comprehensive income and, therefore, has income in the financial
statements.
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 and common equivalent shares outstanding during the period. The
Company has no common equivalent shares outstanding.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). FIN 46 requires that a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements apply to the
first fiscal year or interim period ending after March 31, 2004. The Company
believes the adoption of FIN 46 will not affect its financial position or
results of operations.
-10-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No.133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company does not expect adoption of SFAS No.
149 to have an impact on the financial statements as the Company does not engage
in derivative or hedging activity.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). The adoption of SFAS No. 150 will
not have an impact on the Company's reported financial position or results of
operations.
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. Credit
losses have been within management's expectations.
-11-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 3 - Concentrations of Credit Risk and Major Suppliers (Continued)
Major Suppliers
For the period from May 9, 2003 (inception) to December 31, 2003, two
suppliers accounted for approximately 22% of purchases. The Company believes
that it does not have an economic dependence upon these vendors as alternative
means of sourcing are available. At December 31, 2003, the amount due to these
suppliers was approximately $856,000 and is included in accounts payable on the
accompanying balance sheet.
Note 4 - Due from Factor
In December 2003, the Company entered into a factoring arrangement with a
commercial factor. The Company sells 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 are subject
to recourse in the event of non-payment by the customer. Under the terms of the
agreement, the Company pays interest at the prime lending rate plus 1.5% (5.5%
at December 31, 2003) for advances made prior to the collection of the factored
accounts receivable. At December 31, 2003, factor advances of approximately
$1,100,000 were offset against amounts due from the factor.
Substantially all of the Company's assets have been pledged as collateral
under the factoring agreement.
Under the terms of the agreement, the Company is required to maintain a
specified level of net worth, as defined. At December 31, 2003, the Company is
in compliance with this covenant.
Note 5 - Property and Equipment
Property and equipment consists of:
Leasehold improvements $226,754
Office furniture and equipment 51,913
Warehouse equipment 73,663
Vehicles 51,630
Equipment under capital leases 46,340
--------
450,300
Less: Accumulated depreciation and
amortization 26,928
--------
$423,372
========
-12-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 6 - Notes Payable
The Company financed the acquisition of certain equipment with notes
payable. The notes are secured by related equipment and require total monthly
payments of $1,201 including principal and interest. The interest rates of notes
range from 0% to 5.5%.
At December 31, 2003, maturities of notes payable for each of the next
five years are as follows:
Year Ending
December 31,
------------
2004 $ 13,170
2005 13,611
2006 12,467
2007 8,125
2008 4,740
----------
$ 52,113
==========
Note 7 - Capitalized Lease Obligations
Capitalized lease obligations consist of:
Capitalized lease obligations payable in various
monthly installments totalling $1,395,
including principal and interest through June
2006, bearing interest at 5.5%. The leases are
secured by equipment with a net book value of
approximately $40,000 at December 31, 2003 $ 35,607
Less: Current portion 15,160
----------
$ 20,447
==========
-13-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 7 - Capitalized Lease Obligations (Continued)
Minimum future lease payments under the capital leases as of December 31,
2003 are as follows:
Year Ending
December 31,
------------
2004 $ 16,691
2005 15,168
2006 6,086
----------
Total minimum lease payments 37,945
Less: Amount representing interest 2,338
----------
Present value of net minimum lease payment $ 35,607
==========
Note 8 - Commitments and Contingencies
Leases
The Company leases showroom, office and warehouse space and various
equipment under operating leases expiring from 2005 through 2013. The future
minimum lease payments, excluding escalation charges, are as follows:
Year Ending
December 31,
2004 $ 179,000
2005 185,000
2006 186,000
2007 188,000
2008 131,000
Thereafter 311,000
--------------
$ 1,180,000
==============
-14-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 8 - Commitments and Contingencies (Continued)
Leases (Continued)
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 period from May 9, 2003 (inception) to
December 31, 2003 includes approximately $4,000 which relates to the amortized
portion of the scheduled rent increases. At December 31, 2003, an obligation of
approximately $4,000 representing future deferred rent payments is reflected in
the accompanying balance sheet.
Total rent expense charged to operations for the period from May 9, 2003
(inception) to December 31, 2003 was approximately $46,000.
Contingent Bonus
Pursuant to an agreement among the stockholders, one of the stockholders
is entitled to a bonus contingent upon the Company's earnings. In any calendar
year through December 31, 2008, if the Company achieves a certain level of
earnings, the stockholder will receive a bonus as defined in the agreement. For
the period from May 9, 2003 (inception) to December 31, 2003, no bonus has been
earned.
Sale by Estate
If any stockholder should die, the estate of such deceased stockholder has
the ability to sell the stockholder's interests to the Company. The Company is
required to purchase the stockholder's interest at a price, as defined. The
Company believes that it maintains sufficient insurance coverage for this
contingency.
Note 9 - Subsequent Event
On June 29, 2004, Alliance and Essential Reality, Inc. ("Essential"), an
SEC registrant, completed a reverse acquisition pursuant to a Share Exchange
Agreement (the "Exchange Agreement") whereby the stockholders of Alliance
exchanged all of their capital stock for 1,551,314 shares of Essential's Series
B Convertible, Non-Redeemable Preferred Stock and Alliance became a wholly-owned
subsidiary of Essential. The net monetary liabilities of Essential assumed in
the transaction were approximately $153,000.
-15-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 9 - Subsequent Event (Continued)
The stockholders of Alliance, after giving effect to all the transactions
in the Exchange Agreement, which include the conversion of all Series A and
Series B Preferred Stock and a reverse split, will own 24,679,995 shares of
common stock of Essential, or 48%. Additionally, holders of Essential's Series A
6% Convertible, Non-Redeemable Preferred Stock, who collectively own the right
to vote approximately 16% of common stock, have granted an irrevocable proxy to
vote their shares in all matters to the Chief Executive Officer of Alliance,
thereby giving the stockholders of Alliance, in the aggregate, the power to vote
approximately 64% of the common stock and control Essential.
Following the transaction, the Company changed its name to Alliance
Distributors Holding, Inc.
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 and stock
options in amounts and terms to be determined by the Board of Directions upon
the adoption of the Essential 2004 Stock Option Plan.
-16-
ALLIANCECORNER DISTRIBUTORS INC.
Financial Statements
March 31, 2004
ALLIANCECORNER DISTRIBUTORS INC.
Index
Page
Balance Sheet as of March 31, 2004 (Unaudited) 1
Statement of Income for the Three Months Ended
March 31, 2004 (Unaudited) 2
Statement of Cash Flows for the Three Months Ended
March 31, 2004 (Unaudited) 3
Notes to Financial Statements 4-5
ALLIANCECORNER DISTRIBUTORS INC.
Balance Sheet
March 31, 2004
(Unaudited)
ASSETS
Current assets:
Cash $ 183,368
Accounts receivable, net 366,840
Due from factor 291,153
Inventory 1,809,470
Due from vendors 721,022
Prepaid expenses and other current assets 39,649
----------
Total current assets 3,411,502
Property and equipment, net 410,414
Other assets 17,636
----------
$3,839,552
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,594,315
Current portion of long term obligations 28,647
Accrued expenses and other current liabilities 138,693
----------
Total current liabilities 2,761,655
Long term obligations 302,931
Commitments and contingencies
Stockholders' equity:
Common stock, no par value:
Authorized, issued and outstanding - 300 shares 300
Additional paid-in capital 435,715
Retained earnings 338,951
----------
Total stockholders' equity 774,966
----------
$3,839,552
==========
See accompanying notes.
-1-
ALLIANCECORNER DISTRIBUTORS INC.
Statement of Income
For the Three Months Ended March 31, 2004
(Unaudited)
Net sales $7,299,641
Cost of goods sold 6,200,621
----------
Gross profit 1,099,020
Selling, general and administrative expenses 920,562
----------
Income from operations 178,458
Interest expense 27,155
----------
Income before provision for income taxes 151,303
Provision for income taxes 12,167
----------
Net income $ 139,136
==========
Basic and diluted net income per common share $ 463.79
==========
Basic and diluted weighted-average common shares outstanding 300
==========
See accompanying notes.
-2-
ALLIANCECORNER DISTRIBUTORS INC.
Statement of Cash Flows
For the Three Months Ended March 31, 2004
(Unaudited)
Cash flows from operating activities:
Net income $ 139,136
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 16,961
Deferred rent obligation 3,341
Change in assets and liabilities:
Accounts receivable (186,156)
Due from factor 992,701
Inventory 1,086,737
Due from vendors (706,622)
Prepaid expenses and other current assets 2,425
Other assets 698
Accounts payable (1,762,026)
Accrued expenses and other current liabilities (49,207)
-----------
Net cash used in operating activities (462,012)
-----------
Cash flows used in investing activities:
Acquisition of property and equipment (4,004)
-----------
Cash flows from financing activities:
Repayment of capital lease obligations (3,278)
Repayment of notes payable (4,191)
-----------
Cash used in financing activities (7,469)
-----------
Net decrease in cash (473,485)
Cash, beginning of year 656,853
-----------
Cash, end of period $ 183,368
===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 27,155
Income taxes $ 10,075
See accompanying notes.
-3-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 1 - The Company
AllianceCorner Distributors Inc. ("Alliance" or the "Company") is a
wholesale distributor of video games and accessories, whose operations commenced
in August 2003, with a customer base substantially throughout the United States.
The Company operates in a single segment.
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the Unites States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. 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. The accompanying financial statements and notes
should be read in conjunction with the audited financial statements and notes of
the Company for the fiscal year ended December 31, 2003. 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, 2004.
Note 2 - Summary of Significant Accounting Policies
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,
Alliance 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.
-4-
ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Property and Equipment
Contributed property and equipment is recorded at fair market value.
Purchased 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 from the accounts and any resulting gain
or loss is included in the results of operations for the respective period.
Depreciation is provided over the estimated lives of the related assets using
the straight-line method. The estimated useful lives for 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
Income Taxes
The Company, 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 months ended March 31, 2004.
The Company is subject to New York State S corporation taxes and New York
City corporate income taxes. The provision for income taxes comprises state and
local taxes.
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.
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ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Net Income Per Common Share
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the net income by the weighted
average number of common and common equivalent shares outstanding during the
period. The Company has no common equivalent shares outstanding.
Note 3 - Due from Factor
In December 2003, the Company entered into a factoring arrangement with a
commercial factor. The Company sells 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 are subject
to recourse in the event of non-payment by the customer. Under the terms of the
agreement, the Company pays interest at the prime lending rate plus 1.5% (5.5%
at March 31, 2004) for advances made prior to the collection of the factored
accounts receivable. At March 31, 2004, factor advances of approximately
$1,230,000 were offset against amounts due from the factor.
Substantially all of the Company's assets have been pledged as collateral
under the factoring agreement.
Under the terms of the agreement, the Company is required to maintain a
specified level of net worth, as defined. At March 31, 2004, the Company is in
compliance with this covenant.
Note 4 - Subsequent Events
On June 29, 2004, Alliance and Essential Reality, Inc. ("Essential"), a
SEC registrant, completed a reverse acquisition pursuant to a Share Exchange
Agreement (the "Exchange Agreement') whereby the stockholders of Alliance
exchanged all of their capital stock for 1,551,314 shares of Essential's Series
B Convertible, Non-Redeemable Preferred Stock and Alliance became a wholly-owned
subsidiary of Essential. The net monetary liabilities of Essential assumed in
the transaction were approximately $153,000.
The stockholders of Alliance, after giving effect to all the transactions
in the Exchange Agreement, which include the conversion of all Series A and
Series B Preferred Stock and a reverse split, will own 24,679,995 shares of
common stock of Essential, or 48%. Additionally, holders of Essential's Series A
6% Convertible, Non-Redeemable Preferred Stock, who collectively own the right
to vote approximately 16% of common stock, have granted an irrevocable proxy to
vote their shares in all matters to the Chief Executive Officer of Alliance,
thereby giving the stockholders of
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ALLIANCECORNER DISTRIBUTORS INC.
Notes to Financial Statements
Note 4 - Subsequent Events (Continued)
Alliance, in the aggregate, the power to vote approximately 64% of the common
stock and control Essential.
Following the transaction, the Company changed its name to Alliance
Distributors Holding, Inc.
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 and stock
options in amounts and terms to be determined by the Board of Directions upon
the adoption of the Essential 2004 Stock Option Plan.
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