UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
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. |_|
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 per share price (1) registration fee
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 45,023,559 $0.28 $12,606,596 $1,483.8
value
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 2,071,623 $0.28 $580,054 $68.27
value, issuable upon
exercise of warrants
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 6,416,677 $0.28 $1,796,700 $211.47
value, issuable upon
conversion of Series A
Convertible Non Redeemable
Preferred Stock
- ----------------------------------------------------------------------------------------------------------------------
Total 53,511,859 $0.28 $14,983,320 $1,763.54 (2)
- ----------------------------------------------------------------------------------------------------------------------
(1) 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 bid and asked price for a share of common stock of the registrant, as
quoted through the Pink Sheets on December 20, 2004.
(2) Previously paid.
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.
2
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.
3
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED, FEBRUARY 4, 2005
ALLIANCE DISTRIBUTORS HOLDING INC.
A DELAWARE CORPORATION
53,511,859 SHARES OF COMMON STOCK.
The prospectus relates to the resale by certain selling stockholders of Alliance
Distributors Holding Inc. of up to 53,511,859 shares of our common stock in
connection with the resale of:
- - up to 45,023,559 shares of common stock 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 1,571,623 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 14
of this Prospectus.
On December 21, 2004, the average of the closing bid and asked prices of our
common stock was $0.28 per share. Our common stock is traded on the Pink Sheets
under the symbol "ADTR.PK".
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 7 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 prospectus is FEBRUARY 4, 2005.
4
TABLE OF CONTENTS
PAGE NUMBER
PROSPECTUS SUMMARY INFORMATION 6
RISK FACTORS 7
USE OF PROCEEDS 8
SELLING SECURITY HOLDERS 9
PLAN OF DISTRIBUTION 17
LEGAL PROCEEDINGS 18
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 20
DESCRIPTION OF SECURITIES 23
INTEREST OF NAMED EXPERTS AND COUNSEL 25
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 25
DESCRIPTION OF BUSINESS 25
WHERE YOU CAN FIND MORE INFORMATION 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 28
DESCRIPTION OF PROPERTY 31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 31
CAPITALIZATION 32
EXECUTIVE COMPENSATION 33
FINANCIAL STATEMENTS 35
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 36
INDEMNIFICATION OF DIRECTORS AND OFFICERS 36
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 36
RECENT SALES OF UNREGISTERED SECURITIES 36
EXHIBITS 40
UNDERTAKINGS 42
SIGNATURES 43
5
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 now consist of 21,237,114 shares of common
stock, 403,344 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 December 22, 2004, the Company's outstanding capital stock consists of
46,417,111 shares of common stock, 403,334 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 2,071,623 shares of common stock. The
46,417,111 shares of outstanding common stock consist of 24,679,997 shares of
common stock issued to the former shareholders of AllianceCorner, 21,237,114
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.
6
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 Essential, we
discontinued our business of manufacturing and selling a video controller. Our
current videogame distribution business commenced operations in 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.
We depend on a limited number of suppliers and have no long-term agreement with
any supplier. During the nine-months ended September 30, 2004 two of our
suppliers each accounted for more than 10% of our purchases, and our 80 largest
suppliers in the aggregate accounted for 75% of our purchases. We have no
long-term agreements with any suppliers. 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 proprietary technology. We have no intellectual property
other than a provisional trademark application 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.
7
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.
To date there has been only sporadic trading of our shares of Common Stock on
the Pink Sheets. Since November 22, 2204 through December 17, 2004 only 1,996
shares of common stock have traded on the Pink Sheets. Our shares of common
stock essentially have had no liquidity. The liquidity of our shares is further
reduced because we trade on the Pink Sheets rather than on more recognized
markets.
We are registering for sale substantially all shares of common stock that were
not previously registered. Prior to the effectiveness of our registration
statement for the 53,511,859 shares covered by this prospectus, our publicly
tradable float consisted of only approximately 853,062 shares of common stock.
Although Jay Gelman, Andre Muller and Francis Vegliante have agreed not to
resell an aggregate of 24,679,997 shares of Common Stock until June 29, 2005,
the availability of large numbers of shares for immediate sale into the public
markets will likely depress the price for our shares.
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
8
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 December 22, 2004, 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.
Except for Jay Gelman, Andre Muller and Francis Vegliante, who are each
restricted from reselling an aggregate of 24,679,997 shares registered hereby
until June 29, 2005, 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.
Except as otherwise indicated in footnotes to the table below, the shares
offered hereby were issued in private placements by the Company or are issuable
on exercise or conversion of securities issued in private placements by the
Company.
9
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Jay Gelman (2) 8,226,6713 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Andre Muller(4) 8,226,6715 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Francis Vegliante 8,226,6556 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Humbert B. Powell, III(7) 22,7288 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 388,293 0 0
Trust(10)
1. Assumes all of the shares of common stock offered are sold. Based on
46,417,111 shares of common stock issued and outstanding as of December
22, 2004 and 403,334 shares of Series A Convertible Non Redeemable
Preferred Stock issued and outstanding as of December 22, 2004.
2. See Directors, Executive Officers, Promoters and Control Persons on page
19
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
19
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
19
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.
10
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Sunrise Foundation Trust(11) 346,484 200,132 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Sunrise Securities Corp.(12) 246,145 223,442 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Amnon Mandelbaum 289,945 257,323 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Northumberland Holdings, 2,318,650 828 0 0
LTD.(13)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Smithfield Fiduciary LLC(14) 2,192,533 97,857 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
South Ferry #2 LP(15) 1,832,314 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Vitel Ventures 1,681,402 0 0
Corporation(16)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ----------------
11. Nathan and Lisa Low have shared dispositive and voting power in Sunrise
Foundation Trust.
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.
11
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Martin 569 0 0
Currie (17)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
David 22,728 0 0
Devor(18)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Steven T. 1,137 0 0
Francesco(19)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Stanley 1,137 0 0
Friedman(20)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Marc 455 0 0
Fries(21)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Aaron 978 0 0
Gavios(22)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
John 5,775 0 0
Gentile(23)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Anthony 1,478 0 0
Gentile(24)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Heitner & 617 0 0
Breitstein(25)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Hirsch Wolf & Co LLC(26) 248 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- -----------
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 33.
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 33
24 Director from June 2002 through June 29, 2004.
25 Norman Breitstein and Cary Sternback have shared dispositive and voting
power in Heitner & Breitstein.
26 Hirsch Wolf has sole dispositive and voting power in Hirsch Wolf & Co LLC.
12
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Brian D. 22,728 0 0
Jedwab(27)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
George 5,697 0 0
Mellides(28)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
RDA 2,290 0 0
International(29)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Richard 978 0 0
Rubin(30)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Terrace International 617 0 0
(31)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Jackson Steinem 506,764 0 0
Inc.(32)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
J.A.S. Commercial 80,000 0 0
Corp(33)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Rosenthal & Rosenthal, 500,000 0 0
Inc.(34)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Ajax 229,044 0 0
Partners(35)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ------------
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 Adam S. Gottbetter has sole dispositive and voting power in Jackson
Steinem Inc.
33 Mitchell Cohen has sole dispositive and voting power in J.A.S. Commercial
Corp.
34 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.
35 David L. Stone has sole dispositive and voting power in Ajax Partners.
13
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Brady Capital Group 110,791 0 0
LLC(36)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Bridges & 458,071 0 0
Pipes(37)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Derek 50,338 44,687 0 0
Caldwell
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
CGT Management 1,145,169 0 0
Ltd(38)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Don 33,601 0 0
Danks
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
DKR Soundshore Oasis 1,145,169 0 0
Holding Fund
Ltd(39)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Robert 206,135 0 0
Feig
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Richard 1,316,605 0 0
Genovese
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
David 32,233 28,591 0 0
Goodfriend
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Iroquois Capital 1,145,169 0 0
LP(40)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
IVC 274,560 0 0
Group(41)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ---------
36 Brian D. Jedwab has sole dispositive and voting power in Brady Capital
Group LLC.
37 David Fuchs has sole dispositive and voting power in Bridges & Pipes.
38 Annette Holloway and M. Grace Riley have shared dispositive and voting
power in CGT Management Ltd.
39 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.
40 Joshua Silverman has sole dispositive and voting power in Iroquois Capital
LP.
41 Mark N. Tompkins has sole dispositive and voting power in IVC Group.
14
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Minotaur Fund 1,071,335 0 0
LLP(42)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Robert W. 497,001 0 0
O'Neill
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Cary D 229,044 0 0
Pinkowski
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
William 229,044 0 0
Ritger
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
RP Capital 229,044 0 0
LLC(43)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
William 229,044 0 0
Saggio
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
SBI USA, 15,066 0 0
LLC(44)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Nadine 251,954 0 0
Smith
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
SPH Investments(45) 1,066 0 0
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
SRG Capital 458,071 0 0
LLC(46)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Shai 458,071 0 0
Stern
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Richard 10,071 8,939 0 0
Stone
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ------------
42 Minotaur Fund LLP is a registered investment company.
43 Nimish Patel has sole dispositive and voting power in RP Capital LLC.
44 Shelly Singhal has sole dispositive and voting power in SBI USA, LLC.
45 Steven Harrington has sole dispositive and voting power in SPH
Investments.
46 SRG Capital LLC is an affiliate of Gerber Asset Management LLC, a
registered broker-dealer. SRG Capital LLC acquired the securities in the
ordinary course of business, and at the time of the purchase of these
securities to be resold under the registration statement, SRG Capital LLC
did not have any agreements, plans or understandings, directly or
indirectly, with any person to distribute the securities. Edwin Mecabe and
Tai May Lee have shared dispositive and voting power in SRG Capital LLC.
15
- ---------------------------- ---------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner
- ---------------------------- ---------------------------------------------------------------------------------------
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
Shares owned Shares issuable Shares Number of shares owned by
prior to this on conversion issuable on selling stockholder or
offering and of Series A exercise of issuable to selling stockholder
registered hereby Preferred Stock warrants owned after
owned prior to prior to this offering and percent of total
this offering offering and outstanding1
and registered registered
hereby hereby
- ---------------------------- ------------------ ----------------- ---------------- ---------------------------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Common Series A
Stock Convertible
Non Redeemable
Preferred Stock
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
M Paul 229,044 0 0
Tompkins
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Phillip 151,885 0 0
Vitug
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Winton Capital Holdings 1,145,169 0 0
Ltd(47)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Marcia 455 0 0
Kucher
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Coniston Investment 4,396 0 0
Corp.(48)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Legend Merchant Group, 3,131 0 0
Inc.(49)
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
Total 45,023,559 6,416,677 2,071,623
- ---------------------------- ------------------ ----------------- ---------------- --------------- -----------------
- --------
47 Mark Belzberg and Andrew Mead have shared dispositive and voting power in
Winton Capital Holdings Ltd.
48 Paul Parisotto has sole dispositive and voting power in Coniston
Investment Corp.
49 Chips Undsworth has sole dispositive and voting power in Legend Merchant
Group, Inc. Legend Merchant Group, Inc. is a registered broker dealer and
received the warrants, as more fully described below in "Unregistered
Sales of Equity Securities," as compensation for investment banking
services in June, 2002. The common shares of stock underlying the warrants
are registered hereunder.
16
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 Pink Sheets Electronic Quotation Service), 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 fulfil 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.
17
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.
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 Reality, Inc. and David Devor, a former officer and a
current employee of the Company, for rent, additional rent, cost and fees
relating to premises formerly occupied by the Company. Plaintiff seeks to
recover $150,416 for the period up to August 31, 2004, plus additional amounts
to be determined by the Court for the period subsequent to August 31, 2004.
Plaintiff also seeks to recover $50,000 in expenses and attorney fees plus
additional amounts to be determined by the Court. We believe that the suit is
without merit and intend to vigorously defend its position.
18
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, 43 Chief Executive Officer on June 29, 2004;
Assistant Secretary and Assistant Secretary on November 11, 2004;
Chairman of Board of Directors and Chairman of the Board of Directors on
October 14, 2004
Andre Muller Chief Operating Officer, 39 President on June 29, 2004; Secretary on
Secretary and Director of the November 11, 2004; and Director on October
Board of Directors 14, 2004
Thomas Vitiello Director 43 Director on October 14, 2004
Humbert B. Powell, Director 63 Director and Chairman of the Board of
III Directors from July 1, 2002 until October
14, 2004 and currently a Director
HUMBERT B. POWELL, III
Humbert B. Powell, III has been a Managing Director at Sanders Morris Harris, a
regional investment-banking firm headquartered in Houston, Texas, with a branch
in New York City, since November 1996. He is also a Director of Lawman Armour
Corp., Bikers Dream Inc., World Water Corp., and a trustee of Salem-Teikyo
University. Mr. Powell served as chief executive officer of the Company from
June 20, 2002 until July 1, 2002.
JAY GELMAN
Jay Gelman in 1988 co-founded L & J Marketing, Inc. d/b/a Alliance Distributors,
a regional video game software and hardware distributor based in College Point,
NY. He served as President, until December of 1997 when Alliance was sold to
Take Two Interactive Software, Inc. From 1998 until 2003, Mr. Gelman was
employed by Track Data Corporation (NASDAQ: TRAC) where he served as a director
and as Executive Vice President. In 2003, Mr. Gelman joined Mr. Muller to found
Alliance Distributors, Inc. (name later changed to AllianceCorner Distributors
Inc.), and served as its President and Chief Executive Officer. Since the
acquisition by the Company of AllianceCorner Distributors Inc. on June 29, 2004,
Mr. Gelman has served as Chief Executive Officer of the Company and is also
currently the Chairman of the Board of Directors.
ANDRE MULLER
For more than five years prior to 2003 Andre Muller was employed as a General
Manager by Take Two Interactive Software, Inc. In 2003, Mr. Muller joined Mr.
Gelman to found Alliance Distributors, Inc., and served as its Chief Operating
Officer. Since the acquisition by the Company of AllianceCorner Distributors
Inc. on June 29, 2004, Mr. Muller has served as Chief Operating Officer and
President of the Company.
THOMAS VITIELLO
For more than five years, Mr. Vitiello has been the president of VIT Trading,
Inc., a trader in precise metals. He graduated from NYU with a BS in Finance in
1985.
19
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 board of directors have determined that Humbert B. Powell, III 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.
The Company does not have an audit committee established in accordance with
section 3(a)(58)(A) of the Securities Exchange Act of 1934, or a committee
performing similar functions. The Company does not have an audit charter or a
charter governing the nominating process. Management of the Company believes
that it is premature at this early stage of the Company's management and
business development to form an audit committee.
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 December 22, 2004.
Unless otherwise indicated, we believe that all persons named in the table have
sole voting and investment power with respect to all shares of voting stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of options, warrants or convertible securities.
In calculating the percentage ownership by any holder of common stock, the table
considers that the total number of outstanding shares includes shares issuable
on exercise of securities within 60 days from the date hereof that are
beneficially owned by that holder. Accordingly, for calculating the percentage
ownership of shares of common stock outstanding, for Nathan A. Low there are
deemed outstanding 48,860,111 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 47,636,010 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 47,893,333 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), and for all
other holders there are deemed outstanding 46,417,111 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., Smithfield Fiduciary LLC, Nathan A. Low Roth IRA,
Nathan A. Low Family Trust, and Sunrise Foundation Trust there are deemed
outstanding 403,334 shares of Series A Preferred Shares, and for Sunrise Equity
Partners, Nathan A. Low, Level Counter LLC, Amnon Mandelbaum and Marilyn Adler
there are deemed outstanding 326,717 shares of Series A Preferred Shares because
of the deemed conversion of 76,617 shares of Series A Preferred Shares
convertible into 1,218,899 shares of common stock held by Sunrise Equity
Partners (see footnotes 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").
20
- -----------------------------------------------------------------------------------------
Name and address of beneficial Common stock (% of class) Series A Convertible Non
owner Redeemable Preferred
Shares (% of class)
- -----------------------------------------------------------------------------------------
Jay Gelman, 14,031,966(1) (30.23%) 168,427 (41.76%)(2)
15-15 132nd Street, College
Point, NY 11356
- -----------------------------------------------------------------------------------------
Andre Muller 8,226,671 (17.72%) 0
15-15 132nd Street, College
Point, NY 11356
- -----------------------------------------------------------------------------------------
Francis Vegliante 8,226,655 (17.72%) 0
15-15 132nd Street, College
Point, NY
- -----------------------------------------------------------------------------------------
Humbert B. Powell III 22,728 (.05%) 0
527 Madison Avenue, NY, NY 10022
- -----------------------------------------------------------------------------------------
Thomas Vitiello 0 0
15-15 132nd Street, College
Point, NY 11356
- -----------------------------------------------------------------------------------------
Nathan A. Low(3) 2,443,000(4) (4.999%) 320,514
c/o Sunrise Securities Corp. (98.10%)(5)
641 Lexington
Avenue
NY, NY 10022
- -----------------------------------------------------------------------------------------
(1) Consists of 8,226,671 shares of common stock owned by Mr. Gelman, and
5,805,295 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.
21
- -----------------------------------------------------------------------------------------
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 (5.39%)
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.
22
- -----------------------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------------------
Smithfield Fiduciary LLC 2,192,533 (4.72%)(18) 6,151 (1.53%)
c/o Hybridge Capital Management
West 57th Street, 27th Floor
New York, N.Y. 10019
- -----------------------------------------------------------------------------------------
All executive officers and 22,281,365 (48%) 168,427 (41.76%)
directors as a group
- -----------------------------------------------------------------------------------------
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 December 22, 2004 the Company's outstanding capital stock consists of
46,417,111 shares of common stock, 403,334 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 2,071,623 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 53,582,889
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.
(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) 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.
(18) Consists of common shares issued upon conversion of 137,816 Series A
Preferred Shares on November 22, 2004.
23
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.
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.
24
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 AllianceCorner Distributors Inc. as of December 31,
2003 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. ("Company" or "Alliance") is a distributor of
video game consoles and video game peripherals, accessories and software. Our
offices are located at 15-15 132nd Street, College Point, New York 11356. Our
telephone number is (718) 747-1500.
BUSINESS BACKGROUND
In June 2002, the Company, then named JPAL, Inc. ("JPAL"), a Nevada corporation
which then had no ongoing business or significant assets, acquired Essential
Reality, LLC ("ER, LLC") which had been formed in 1998 as Freedom Multimedia,
LLC in Delaware to develop and market a virtual video game controller. Following
this transaction, JPAL changed its name to Essential Reality, Inc.
("Essential"). On 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.
25
In connection with this acquisition, the Company issued the share equivalent of
21,237,114 shares of common stock and 403,334 shares of Series A Convertible Non
Redeemable Preferred Stock in private placements. Each share of Series A
Convertible Non Redeemable Preferred Stock entitles the holder to 15.9090 votes,
and votes as one class with the common stock on as converted basis. Certain
holders granted to Jay Gelman an irrevocable voting proxy to vote 5,805,295
shares of common stock, as well as 168,427 shares of Series A Convertible Non
Redeemable Preferred Stock that have 2,679,520 votes, so that Mr. Gelman's proxy
covers a total of 8,484,815 votes.
These transactions diluted the ownership of our shareholders prior to June 2004
to 1.077% of the 46,417,111 shares of common stock outstanding as of December
22, 2004. 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.
OUR BUSINESS
WHAT WE SELL
We distribute to retail stores video game consoles that are manufactured by Sony
Corporation (the "PlayStation(R)2 Computer Entertainment System"), Nintendo
("GameCubeTM and Game Boy(R) Advance") and Microsoft ("Xbox(R)"). We sell these
consoles at prices ranging from $49.99 to $149. We also distribute accessories
and game software that are made for these consoles by the console manufacturers
and third parties. Accessories include controllers, memory cards, network
adaptors, steering wheels for racing games and extra cable for game controllers.
We sell our accessories and software at prices ranging from $9.99 to $149.99.
THE MARKET
According to The NPD Group, Inc. a leading market information provider, the
video game market in the US had sales of $10 billion in 2003.
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.
From January 1, 2004 through September 30, 2004, we purchased approximately 30%
of our products for cash in advance, and the balance on 30 day to 45 day terms.
In addition to manufacturer credit and internally generated funds, we rely for
funds on a financing agreement 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.
26
During the nine-months ended September 30, 2004 two of our suppliers each
accounted for more than 10% of our purchases, and our 80 largest suppliers in
the aggregate accounted for 75% of our purchases. We have no long term agreement
with any of our suppliers, and conduct business with them on an individual
purchase order basis. Our business would be materially and adversely affected
should any material supplier terminate its relationship with us or modify its
relationship with us to our detriment.
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
during either 2003 or for the nine month period ending 2004.
We sell to our customers on a purchase order basis through our sales employees
who are paid on a salary plus commission basis. We have no long-term sales
agreements.
We market ourselves in part as being engaged in a "Video Game Alliance" with our
customers. In this context we advise our customers on how best to sell the
product they buy from us, and we offer them banners, and point of sale and
similar material. We also publish newspaper dealer-listing advertisements that
are paid for cooperatively by various manufacturers. In these 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 are developing 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
27
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 28 employees, all of whom 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.
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 7 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.
28
RESULTS OF OPERATIONS
Overview of Third Quarter and Nine Months Ended September 30, 2004 Compared to
the Period from August 11, 2003, the date of Commencement of Operations, to
September 30, 2003.
Sales. For the three and nine months ended September 30, 2004 the Company
recognized product-related revenues in the amount of $6,924,181 and $20,200,199,
respectively as compared to $352,710 for the period from August 11, 2003, the
date of commencement of operations, to September 30, 2003.
Cost of Sales. For the three and nine months ended September 30, 2004, cost of
sales totaled $5,966,406 and $17,363,624, respectively, as compared to $334,184
for the period from August 11, 2003, the date of commencement of operations, to
September 30, 2003. For the three and nine months ended September 30, 2004,
gross profit was 13.8% and 14.0% of net sales, respectively.
Selling, general and administrative expenses. For the three and nine months
ended September 30, 2004 selling, general and administrative expenses totaled
$980,454 and $2,704,112, respectively, compared to $74,977 for the period from
August 11, 2003, the date of commencement of operations, to September 30, 2003.
The Company's major components for the three and nine months ended September 30,
2004, are as follows: selling, consisting primarily of salaries and commissions,
of $75,771 and $293,349, respectively; shipping and warehouse, consisting
primarily of salaries and freight-out, of $180,350 and $599,846, respectively;
and general and administrative, consisting primarily of salaries , insurance,
consulting fees, professional fees and rent, of $516,698 and $1,204,871,
respectively.
Interest expense for the three and nine months ended September 30, 2004 totaled
$20,444 and $81,052, respectively, compared to $64 for the period from August
11, 2003, the date of commencement of operations, to September 30, 2003.
Interest expense relates to the factor arrangement described below under
Liquidity and Capital Resources.
LIQUIDITY AND CAPITAL RESOURCES
On June 29, 2004 the Company received $2,884,171 in net proceeds from the sale
of 1,124,767 shares of Series A 6% Convertible Non-Redeemable Preferred Shares
of Essential ("Series A 6% Preferred Shares) in a private placement (the
"Offering"). At the same time, substantially all outstanding debt of the Company
was extinguished through either conversion into an aggregate of 452,202 shares
of Series A 6% Preferred Shares or through cash payments.
For the nine months ended September 30, 2004 net cash used in operating
activities was $2,297,858. Net cash used in operations for the nine months ended
September 30, 2004 consisted of net income of $40,244 and included the following
changes in operating assets and liabilities: an increase in accounts receivable
of $808,020, a decrease in accounts payable of $2,360,738 and an increase in
amount due to factor of $1,435,304, due to advances taken during the period.
Net cash used in investing activities for the nine months ended September 30,
2004 was $984,186, of which $65,635 was used for the purchase of equipment and
$915,329 was used for the payment of Essential's pre-acquisition liabilities.
Net cash for financing activities, raised by the Offering, for the nine months
ended September 30, 2004 was $3,591,683 which consisted primarily of gross
proceeds of $4,000,000 from the Offering, less payments of issuance costs of
$200,500, as well as $171,829 of repayment of long term obligations.
In December 2003, AllianceCorner entered into a factoring arrangement with 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%
(6.25% as of September 30, 2004) for advances made prior to the collection of
the factored accounts receivable. As of September 30, 2004, factor advances of
approximately $1,004,000 were offset against amounts due to the factor.
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. As of September 30, 2004, the Company was in compliance
with this covenant.
29
On November 11, 2004, Alliance Distributors Holding, Inc., Essential's New York
subsidiary, entered into a Financing Agreement which replaced the factoring
agreement with the 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 (7.25 percent as of December 22, 2004). The Company's CEO and the
Company's President signed limited guaranties in respect of borrowings under the
Agreement.
On November 11, 2004 the Company issued to Rosenthal a warrant (the "Warrant")
to purchase 500,000 shares of common stock at $0.10 per share and 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 Company expects to record deferred
financing costs of approximately $110,000 in the fourth quarter, representing
the fair value of the warrants, which will be amortized over the life of the
financing agreement.
The Company owes a note payable in the amount of $93,789 to Corner Distributors,
Inc. ("Corner"), which is due and payable on June 30, 2005, in connection with
the purchase of inventory by and between the Company and Corner, dated as of
March 4, 2004.
The Company believes that it has sufficient liquidity for the next twelve months
based upon its existing cash and availability under the financing agreement.
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 and Due to Factor - Accounts Receivable and due to factor as
shown on the Balance Sheet are net of allowances and anticipated discounts. An
allowance for doubtful accounts is determined through analysis of the aging of
accounts receivable at the date of the financial statements, assessments of
collectibility based on historic trends and an evaluation of the impact of
economic conditions. The allowance for doubtful accounts is not significant
since the Company sells a substantial portion of its trade receivables to a
commercial factor, without recourse, 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.
Principally, the Company's historical estimates of these costs have not differed
materially from actual results.
30
Inventories - Inventory is stated at the lower of cost or market, cost being
determined on the average cost basis. Writedowns for slow moving and aged
merchandise are provided based on historical experience and current product
demand. The Company evaluates the adequacy of the writedowns quarterly. While
writedowns have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same level of
writedowns as in the past.
DESCRIPTION OF PROPERTY
Our executive offices and an adjoining showroom are located in about 11,000
square feet of space at 15-15 132nd Street, College Point, NY 11356. This space
is leased through KIM Management at a monthly rent of approximately $5,150
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 combined monthly rental of $9,500.
The lease will terminate on June 30, 2008. Rents due under our leases are
subject to an approximate 3% annual increase. 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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Pink Sheets Electronic Quotation Service since
July 2003 and traded on the OTC Bulletin Board from April 19, 2001 until July
2003. Our current trading symbol is ADTR.PK. The following table sets out the
high and low closing bid prices of our common stock during the periods indicated
as quoted on the OTC Bulletin Board and the Pink Sheets Electronic Quotation
Service. Prices are not 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.
31
- --------------------------------------------------------------------------------
QUARTER ENDED BID PRICE PER SHARE
- --------------------------------------------------------------------------------
2002 HIGH LOW
- --------------------------------------------------------------------------------
March 31, 2002 $4.30 $4.05
- --------------------------------------------------------------------------------
June 30, 2002 $4.05 $2.25
- --------------------------------------------------------------------------------
September 30, 2002 $3.22 $1.41
- --------------------------------------------------------------------------------
December 31, 2002 $1.95 $0.80
- --------------------------------------------------------------------------------
2003
- --------------------------------------------------------------------------------
March 31, 2003 $0.65 $0.55
- --------------------------------------------------------------------------------
June 30, 2003 $0.25 $0.25
- --------------------------------------------------------------------------------
September 30, 2003 $0.17 $0.07
- --------------------------------------------------------------------------------
December 31, 2003 $0.11 $0.11
- --------------------------------------------------------------------------------
2004
- --------------------------------------------------------------------------------
March 31, 2004 $0.25 $0.11
- --------------------------------------------------------------------------------
June 30, 2004 $0.35 $0.08
- --------------------------------------------------------------------------------
September 30, 2004 $0.35 $0.06
CAPITALIZATION
On November 22, 2004, 1,731,315 shares of Series A 6% Convertible Non Redeemable
Preferred Stock converted into 21,126,981 shares of common stock and 403,334
shares of Series A Convertible Non Redeemable Preferred Stock, and 1,551,314
Series B Convertible Non Redeemable Preferred Stock converted into 24,679,997
shares of common stock. Included in these conversions are $32,200 liabilities
payable in common stock, which are recorded on the balance sheet at September
30, 2004. These conversions are reflected in the following table, which sets
forth (1) our actual capitalization as of September 30, 2004 and (2) pro forma
capitalization as of September 30, 2004 after giving effect to these
conversions. The table does not reflect the potential effects of exercise of
warrants or the accretion of Preferred Stock Dividends from October 1, 2004
through November 22, 2004, and should be read in conjunction with our financial
statements included elsewhere in this prospectus.
32
Actual Pro-Forma
---------- ----------
Long-term obligations $ 51,438 $ 51,438
STOCKHOLDERS' EQUITY:
Series A 6% Convertible Non-Redeemable Preferred Stock, $.001 par value
Authorized - 2,004,401 shares at September 30, 2004 and no pro-forma shares
Issued and outstanding - 1,685,115 at September 30, 2004 and no pro-forma 1,685 --
Shares
Series A Convertible Non-Redeemable Preferred Stock, $.001 par value
Authorized - no shares at September 30, 2004 and 10,000,000 pro-forma
shares Issued and outstanding - no shares at September 30, 2004 and 387,139
pro-forma shares -- 387
Series B Convertible Non-Redeemable Preferred Stock, $.001 par value
Authorized - 1,995,599 shares at September 30, 2004 and no pro-forma shares
Issued and outstanding - 1,551,314 at September 30, 2004 and no
pro-forma shares 1,551 --
Common stock, $.001 par value
Authorized - 1,136,364 shares at September 30, 2004 and 100,000,000
pro-forma shares
Issued and outstanding - 500,000 at September 30, 2004 and 46,159,466 500 46,159
pro-forma shares
Additional paid-in capital 3,174,232 3,163,622
Retained earnings 133,241 133,241
---------- ----------
Total stockholders' equity 3,311,209 3,343,409
---------- ----------
Total capitalization $3,362,647 $3,394,847
========== ==========
Pacific Stock Transfer Company, 500 E. Warm Springs Road, Ste 240, (Telephone:
(702)-361-3033; Facsimile: (702) 433-1979) is the registrar and transfer agent
for our shares of common stock.
On December 22, 2004, the shareholders' list of our shares of common stock
showed 152 registered shareholders and 46,417,111 shares of common stock and
403,334 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.
As of February 4, 2005, the Company granted a total of 7,400,000 options under
the Plan and no prior. The options are outstandingten-year non-qualified options
to purchase the Company's common stock at an exercise price of $0.3250 per share
and vest and become exercisable in 12 equal quarterly installments beginning on
April 1, 2005. Of the total options granted, 1,100,000 options were granted to
Jay Gelman, the CEO and Chairman of the Board of Directors of the Company,
1,100,000 options were granted to Andre Muller, the President, COO and a
director of the Company, and 150,000 options were granted to each of Thomas
Vitiello 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
33
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 Annual Compensation Salary
December 31
- ------------------------------- ---------------------------- ----------------------------
Jay Gelman, Chief Executive 2004 $ 182,211
Officer
- ------------------------------- ---------------------------- ----------------------------
Andre Muller, President and 2004 $ 182,211
Chief Operating Officer
- ------------------------------- ---------------------------- ----------------------------
Steven T. Francesco, Chief 2003 $0
Executive Officer
- ------------------------------- ---------------------------- ----------------------------
2002 $127,000
- ------------------------------- ---------------------------- ----------------------------
2001 $0
- ------------------------------- ---------------------------- ----------------------------
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.
34
INDEX
PAGE
ALLIANCE DISTRIBUTORS HOLDING INC. (FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
Report of Independent Registered Public Accounting Firm F - 1
Balance Sheet as of December 31, 2003 F - 2
Statement of Income for the Period from May 9, 2003
(Inception) to December 31, 2003 F - 3
Statement of Stockholders' Equity for the Period from
May 9, 2003 (Inception) to December 31, 2003 F - 4
Statement of Cash Flows 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 - 16
ALLIANCE DISTRIBUTORS HOLDING INC. (FORMERLY ESSENTIAL REALITY, INC.)
Balance Sheet as of September 30, 2004 (Unaudited) F - 17
Statements of Operations for the three and nine months
ended September 30, 2004 and 2003 (Unaudited) F - 18
Statement of Stockholders' Equity for the nine months ended
September 30, 2004 (Unaudited) F - 19
Statement of Cash Flows for the nine months ended
September 30, 2004 and 2003 (Unaudited) F - 20 to F - 21
Notes to Financial Statements (Unaudited) F - 22 to F - 27
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders
Alliance Distributors Holding Inc.
(Formerly AllianceCorner Distributors Inc.)
We have audited the accompanying balance sheet of Alliance Distributors Holding
Inc. (Formerly 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 Alliance Distributors Holding
Inc. (Formerly 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
F-1
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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.
F-2
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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 - historical 199,816
Pro forma adjustment (unaudited):
Change in lieu of income taxes 70,970
-----------
Pro forma net income (unaudited) $ 128,846
===========
Basic and diluted net income per common share - historical $ .01
===========
Pro forma basic and diluted net income per common share $ .01
===========
Basic and diluted weighted-average common shares
outstanding 24,679,997
===========
See accompanying notes.
F-3
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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.
F-4
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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 203,419
Due from vendors (14,400)
Prepaid expenses and other current assets (42,074)
Accounts payable 1,500,465
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.
F-5
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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
Inventory financed by accounts payable $ 3,099,626
===========
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.
F-6
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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 of inventory was financed in accordance with the terms of the
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
=========
In November 2004, the Company changed its name (see Note 9). 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.
F-7
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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
F-8
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY 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
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
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.
The pro forma adjustment included in the statement of income gives effect to a
charge in lieu of income taxes that would have been included in the provision
for income taxes had the Company, which elected S corporation status, been taxed
as a C corporation.
F-9
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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 outstanding during the period. The weighted average number of
common and common equivalent shares outstanding only reflects the exchange of
common stock for Preferred Stock (see Note 9) and the 1 for 44 stock split,
which occurred in November 2004, as no stock options or warrants have been
issued.
F-10
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-11
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - CONCENTRATIONS OF CREDIT RISK AND MAJOR SUPPLIERS (CONTINUED)
ACCOUNTS RECEIVABLE
Concentrations of credit risk with respect to accounts receivable are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade credit risk. The Company controls credit
risk through credit approvals, credit limits and monitoring procedures. The
Company performs credit evaluations of its customers but generally does not
require collateral to support accounts receivable. Credit losses have 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. 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.
F-12
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
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
========
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
=======
F-13
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
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
=======
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
=======
F-14
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
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
==========
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.
F-15
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ALLIANCECORNER DISTRIBUTORS INC.)
NOTES TO FINANCIAL STATEMENTS
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 300 shares of common stock for 1,551,314 shares of Essential's Series
B Convertible, Non-Redeemable Preferred Stock. The transaction was accounted for
as a reverse acquisition as of June 30, 2004 and the pre-acquisition financial
statements of Alliance 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 will be recorded and the costs
incurred will be accounted for as a reduction of additional paid-in capital. The
net monetary liabilities of Essential assumed in the transaction were
approximately $153,000.
As part of the Exchange Agreement, 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 Essential of $3,799,500 less $915,329 for
payments of the Essential's liabilities leaving a balance of $2,884,171. At the
same time, substantially all outstanding debt of the Essential was extinguished
through either conversion into an aggregate of 452,202 Series A Preferred Shares
or through cash payments.
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 1 for 44 reverse split, will own 24,679,997 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.
F-16
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2004
ASSETS
Current Assets
Cash $ 966,492
Accounts receivable, net of allowance for doubtful accounts 988,704
Inventories 3,031,657
Due from vendors 277,173
Prepaid expenses and other current assets 91,616
----------
Total current assets 5,355,642
Equipment and improvements, net of accumulated depreciation 430,926
and amortization
Other assets 21,556
----------
Total assets $5,808,124
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $2,043,101
Due to factor 151,450
Current portion of long term obligations 122,460
Accrued expenses and other current liabilities 96,266
Liabilities payable in common stock 32,200
----------
Total current liabilities 2,445,477
Long term obligations 51,438
----------
Total liabilities 2,496,915
Commitments and contingencies
Stockholders' equity:
Series A 6% Convertible Non-Redeemable Preferred Stock 1,685
$.001 par value; 2,004,401 shares authorized, 1,685,115
issued and outstanding (aggregate liquidation preference
$5,996,811)
Series B Convertible Non-Redeemable Preferred Stock 1,551
$.001 par value; 1,995,599 shares authorized, 1,551,314
issued and outstanding (aggregate liquidation preference
$5,552,678)
Common stock, $0.001 par value; 1,136,364 shares authorized; 500
500,000 issued and outstanding
Additional paid-in capital 3,174,232
Retained Earnings 133,241
----------
Total stockholders' equity 3,311,209
----------
Total liabilities and stockholders' equity $5,808,124
==========
See notes to financial statements
F-17
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003(1) 2004 2003(1)
--------------- --------------- --------------- ---------------
Sales $ 6,924,181 $ 352,710 $ 20,200,199 $ 352,710
Cost of sales 5,966,406 334,184 17,363,624 334,184
--------------- --------------- --------------- ---------------
Gross profit 957,775 18,526 2,836,575 18,526
Selling, general and administrative expenses 980,454 74,977 2,704,112 74,977
--------------- --------------- --------------- ---------------
Income (loss) from operations (22,679) (56,451) 132,463 (56,451)
Interest expense 20,444 64 81,052 64
--------------- --------------- --------------- ---------------
Income (loss) before provision for income taxes (43,123) (56,515) 51,411 (56,515)
Provision for income taxes -- -- 11,167 --
--------------- --------------- --------------- ---------------
Net income (loss) (43,123) (56,515) 40,244 (56,515)
--------------- --------------- --------------- ---------------
Preferred stock dividends 105,977 -- 106,819 --
--------------- --------------- --------------- ---------------
Net loss available to common shareholders $ (149,100) $ (56,515) $ (66,575) $ (56,515)
=============== =============== =============== ===============
Net loss per share - Basic $ -- $ -- $ -- $ --
=============== =============== =============== ===============
Net loss per share - Diluted $ -- $ -- $ -- $ --
=============== =============== =============== ===============
Dividends per share $ -- $ -- $ -- $ --
=============== =============== =============== ===============
NUMBER OF WEIGHTED AVERAGE SHARES - BASIC 51,988,643 24,679,997 33,948,989 24,679,997
NUMBER OF WEIGHTED AVERAGE SHARES - DILUTED 51,988,643 24,679,997 33,948,989 24,679,997
(1) The three and nine months ended September 30, 2003 includes the results from
August 11, 2003, the date of commencement of operations.
See notes to financial statements
F-18
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Preferred Stock A Preferred Stock B Common Stock
--------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
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 452,202 452 -- -- 77,543 78
Essential's debt and
liabilities assumed -- -- -- -- -- --
Proceeds from PPO, net of
cash issuance costs 1,124,767 1,125 -- -- -- --
Shares issued to placement
agent of PPO 108,146 108 -- -- -- --
Merger Expenses -- -- -- -- -- --
Net income -- -- -- -- -- --
Preferred stock dividend -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30,2004 1,685,115 $ 1,685 1,551,314 $ 1,551 500,000 $ 500
=========== =========== =========== =========== =========== ===========
Additional Total
Paid In Retained Stockholders'
Capital Earnings Equity
----------- ----------- -----------
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 (530) -- --
Essential's debt and
liabilities assumed (1,067,898) -- (1,067,898)
Proceeds from PPO, net of
cash issuance costs 3,798,375 -- 3,799,500
Shares issued to placement
agent for PPO (108) -- --
Merger expenses (96,468) -- (96,468)
Net income -- 40,244 40,244
Preferred stock dividend 106,819 (106,819) --
----------- ----------- -----------
Balance,September 30, 2004 $ 3,174,232 $ 133,241 $ 3,311,209
=========== =========== ===========
See notes to financial statements
F-19
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
STATEMENT OF CASH FLOWS (UNAUDITED)
Nine months ended September 30,
2004 2003 (1)
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ 40,244 $ (56,515)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Deferred Rent 10,021 --
Depreciation and amortization 58,081 1,255
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (808,020) (143,677)
Inventories (135,450) (286,975)
Due from vendors (262,773) (54,821)
Prepaid expenses and other current assets (22,110) (18,883)
Accounts payable (2,360,738) 362,199
Due from/to factor, net 1,435,304 --
Accrued expenses and other current
liabilities (252,417) 551
----------- -----------
Net cash used in operating activities (2,297,858) (196,866)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of equipment (65,635) (22,202)
Increase in other Assets (3,222) (10,367)
Payments for pre-acquisition liabilities (915,329) --
----------- -----------
Net cash used in investing activities (984,186) (32,569)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of securities 4,000,000 --
Payments for issuance costs (200,500) --
Payments for merger costs (35,988) --
Repayment of long-term obligations (171,829) (37,624)
Capital contribution -- 200,000
Proceeds from line-of-credit -- 232,000
----------- -----------
Net cash provided by financing activities 3,591,683 394,376
----------- -----------
NET INCREASE IN CASH 309,639 164,941
CASH, beginning of period 656,853 --
----------- -----------
CASH, end of period $ 966,492 $ 164,941
=========== ===========
(1) The nine months ended September 30, 2003 include the results from August 11,
2003, the date of commencement of operations.
See notes to financial statements
F-20
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
STATEMENT OF CASH FLOWS (CONTINUED) (UNAUDITED)
Nine months ended September 30,
2004 2003(1)
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 81,052 $ 63
=========== ===========
Income tax paid - S Corporation related taxes $ 19,222 $ --
=========== ===========
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 =========== ===========
Liabilities assumed $ 1,067,898 $ --
=========== ===========
Series A 6% Preferred Stock dividend accrued $ 106,819 $ --
=========== ===========
Merger costs accrued $ 60,480 $ --
=========== ===========
(1) The nine months ended September 30, 2003 include the results from August 11,
2003, the date of commencement of operations.
See notes to financial statements
F-21
ALLIANCE DISTRIBUTORS HOLDING INC.
(FORMERLY ESSENTIAL REALITY, INC.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 (UNAUDITED)
1. BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS
On June 17, 2004, Essential Reality, Inc., referred to herein as the
registrant,"Essential" or the "Company," 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 New York corporation ("Alliance"). Alliance had no prior
affiliation with the Company and commenced operations in August 2003. Pursuant
to the Exchange Agreement, the Company on June 29, 2004 acquired all the
outstanding capital stock of Alliance 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
the Company's only business. The transaction was accounted for as a reverse
acquisition as of June 30, 2004 and the pre-acquisition financial statements of
Alliance 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 the Company for
periods prior to the date of the transaction are not presented and (ii) because
Alliance is the accounting acquirer, the Company's historical stockholders'
equity is not carried forward to the merged company as of June 30, 2004. The net
monetary liabilities of the Company assumed in the transaction were
approximately $153,000 after payments of approximately $915,000 (See Note 4).
The name of AllianceCorner Distributors, Inc. was changed to Alliance
Distributors Holding, Inc. after the acquisition and the Company does business
under that name.
The accompanying unaudited condensed 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. 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 condensed 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.
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 Alliance, a privately held wholesale distributor of
interactive video games and gaming products.
F-22
PRIVATE PLACEMENT OFFERING
As part of the Exchange Agreement with Alliance, the Company was required to
raise funds to complete the transaction. The Company 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 the Company's liabilities leaving a balance of
$2,884,171, which was transferred to the Company by the escrow agent as of July
1, 2004. At the same time, substantially all outstanding debt of the Company was
extinguished through either conversion into an aggregate of 452,202 Series A
Preferred Shares or through cash payments. (See Note 4)
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 per share on a post reverse split basis. (see
Stockholders' Equity section).
STOCKHOLDER'S 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. Each Series A
Preferred Share and each Series B Preferred Share entitles the holder to 15.9090
votes, and votes as one class with the common stock.
Certain holders of Series A Preferred Shares (the "Proxy Grantors") have granted
to Jay Gelman an irrevocable proxy (the "Voting Proxy") to vote 533,334 Series A
Preferred Shares 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 8,484,815 votes.
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"). The
Company filed a Schedule 14C relating, in part, to the adoption of the Amendment
and the Reverse Split with the Securities and Exchange Agreement on October 26,
2004 in accordance with the requirements of Regulation 14C under the Act. (See
Item 4) These actions will not become effective before November 22, 2004, the
21st day following the date the Company sent an information statement relating
to these actions to security holders entitled to vote. All share and per share
data included in these financial statements have been adjusted for the split.
The Series A Preferred Shares are entitled on conversion to a dividend in kind,
i.e., in Series A Preferred Shares, accruing at the rate of 6% per annum from
June 29, 2004 until the effectiveness of the Amendment.
The Series A Preferred Shares are convertible into 26,808,648, shares of post
reverse split common stock. The Series B Preferred Shares are convertible into
24,679,997 shares of post reverse split common stock. The warrant issued to
Sunrise Securities Corp. is exercisable into 1,564,096 shares of common stock.
The adoption of the Amendment and the Reverse Split will result in the automatic
conversion of each Series A Preferred Share and each Series B Preferred Share
into 15.91 shares of post-split common stock. However, 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, 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.
The shares of the Company's common stock underlying the Series A Preferred
Shares and Series B Preferred Shares are entitled to registration rights.
F-23
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 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 the
approximately 22,000,000 pre-split shares outstanding prior to PPO own
approximately 500,000 post-split shares of common stock, or approximately 1% of
the outstanding common stock of the Company. Investors in the PPO paid the
equivalent of $.005 per share of common stock on an as converted pre-split basis
($.22 on a post-split basis).
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.
The three former Shareholders of Alliance each own 517,105 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, based on his Series B
Preferred Shares and his voting rights pursuant to the Voting Proxy, has 31.9%
of the Company's total voting power. The Shareholders in the aggregate have
approximately 63% of the Company's total voting power and control the Company.
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.
EQUIPMENT AND IMPROVEMENTS
Contributed equipment is recorded at fair market value. Purchased equipment and
improvements are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance and repairs are
charged to expense as incurred. Leasehold improvements are amortized over the
lesser of the lease terms or the assets' useful lives. When 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 equipment and improvements 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
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.
F-24
INCOME TAXES
At December 31, 2003 Essential had pre-acquisition unused net operating loss
carryforwards of approximately $7,500,000 for purposes that maybe applied
against future taxable income and that, if unused, expire 2023. The Company will
evaluate its net operating loss carryforward availability and determine whether
a tax provision is required at year-end. As a result of the Exchange Agreement,
the Company believes it has undergone a change in control. Utilization of the
net operating loss carryforwards will be subject to a substantial annual
limitation due to the ownership change and limitations provided by the Internal
Revenue Code of 1986. The annual limitations may result in the expiration of net
operating loss carryforwards before utilization.
Alliance was a Subchapter S Corporation and accordingly, no provision has been
made for federal income taxes for the periods prior to June 29, 2004. Effective
June 29, 2004, Alliance is subject to federal income taxes. A deferred tax
asset, which would consist primarily of an NOL for Alliance at September 30,
2004, has not been recorded because the likelihood of realization is uncertain.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing the net income
(loss) by the weighted average number of common and common equivalent shares
outstanding during the period. Common shares outstanding assume the conversion
of Series A and B Preferred Shares into 15.9090 post-split shares of Common
Stock. Common equivalents which would include the conversion of Sunrise's
warrants have not been included as their effect would be anti-dilutive for the
three and nine months ending September 30, 2004. No stock options have been
issued.
3. DUE TO FACTOR
In December 2003, Alliance entered into a factoring arrangement with a
commercial factor. Alliance 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,
Alliance pays interest at the prime lending rate plus 1.5% (6.25% at September
30, 2004) for advances made prior to the collection of the factored accounts
receivable. At September 30, 2004 advances of approximately $1,004,000 were
offset against amounts due to the factor.
Substantially all of Alliance's assets have been pledged as collateral under the
factoring agreement.
Under the terms of the agreement, Alliance is required to maintain a specified
level of net worth, as defined. At September 30, 2004, Alliance is in compliance
with this covenant.
Subsequently, on November 11, 2004, the factoring agreement was replaced with a
new Financing Agreement. (See Note 8)
F-25
4. SETTLEMENT OF ESSENTIAL'S PRE-ACQUISITION LIABILITIES
OUTSTANDING LIABILITIES TO VENDORS, RELATED PARTIES, EMPLOYEES AND OTHER
The outstanding Company liabilities to vendors, related parties, employees and
others, were resolved as follows as a result of the Exchange Agreement:
OUTSTANDING AT
JUNE 28, 2004 PRIOR CONVERTED TO RELEASE OF UNPAID
TO EXCHANGE AGREEMENT PAID STOCK BALANCE
--------------------- ---------- ---------- -----------------
Accounts payable $1,567,987* $ 468,583 $ 54,250 $1,045,154
Related parties 503,699 19,035 -- 484,664
Employees 201,011 43,382 73,850 83,779
Other 126,870 120,000 -- 6,870
---------- ---------- ---------- ----------
Total $2,399,567 $ 651,000 $ 128,100 $1,620,467
========== ========== ========== ==========
* Net of $47,498 remaining in Accounts payable at June 30, 2004.
SECURED CONVERTIBLE DEBENTURE:
As of June 30, 2004, pursuant to the Exchange Agreement and the PPO, the
debenture holders agreed to convert the outstanding principal in the amount of
$1,000,000 into 80,285 Series A 6% Convertible Non Redeemable Preferred Stock
and provided a release for the accrued interest in the amount of $119,593.
NOTES PAYABLE:
As of June 30, 2004, pursuant to the Exchange Agreement and the PPO, note
holders with outstanding principal in the amount of $2,366,285 agreed to receive
$264,330 in cash, converted $1,562,551 of principal into 355,063 Series A 6%
Convertible Non Redeemable Preferred Stock and provided a release for $539,404
in principal and accrued interest in the amount of $333,396.
5. LIABILITIES TO BE PAID IN COMMON STOCK
As of September 30, 2004 pursuant to the Exchange Agreement the Company will
issue 110,000, post-split, common stock for services rendered in the amount of
$32,200.
6. WARRANTS
Pursuant to the PPO, the Company issued Sunrise 5 year warrants due June 29,
2009 to purchase 1,564,096 shares of common stock with an exercise price of
$0.22 per share on a post-reverse split basis.
In addition, the Company has outstanding 3 year warrants due June 20, 2005 with
an exercise price of $57.20 to purchase 7,528 post-reverse split common stock
issued to the financial consultants associated with the JPAL deal on June 20,
2002.
Subsequently, on November 11, 2004, in connection with the new Financing
Agreement, the Company issued warrants to purchase 500,000 shares of
post-reverse split common stock at $0.10 per share. (See Note 8)
F-26
7. 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.
8. SUBSEQUENT EVENT
On November 11, 2004, Alliance entered into a Financing Agreement which replaces
the factoring agreement with Rosenthal & Rosenthal Inc. ("Rosenthal"). Under the
Agreement, Rosenthal may in its discretion lend up to $5 million 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 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 percent) plus 2.00 percent (7.25
percent as of December 22, 2004). The Company's CEO and the Company's President
signed limited guaranties in respect of borrowings under the Agreement. 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. All
share and dollar amounts give effect to the proposed 1 for 44 reverses split of
common stock that is referred to in the Company filing on Form 14C on October
26, 2004. The Company expects to record deferred financing costs of
approximately $110,000 in the fourth quarter, representing the fair value of the
warrants, which will be amortized over the life of the financing agreement.
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).
F-27
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 $1,763.54
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 $0
securities laws
Miscellaneous $1,000
Total $34,763.54
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.
36
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.
37
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.
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.
38
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.
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.
39
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.
EXHIBITS
The following Exhibits are filed with this Prospectus:
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit
Number Description
NUMBER DESCRIPTION
2.1 Exchange Agreement between Essential Reality, Inc. and Messrs. Jay
Gelman, Andre Muller and Francis Vegliante dated as of June 17,
2004. Incorporated herein by reference from Exhibit 2.1 to the
Company's Form 8-K filed on July 14, 2004 (the "Form 8-K").
2.2 Form of Agreement and Plan of Merger dated as of October 25, 2004 by
and between Essential Reality, Inc. and Alliance Distributors
Holding Inc. Incorporated herein by reference from Exhibit 2 to the
Company's Form 8-K filed on November 23, 2004.
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.
40
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 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.
4.3 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.
4.4 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.
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.
41
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., previously filed.
10.13 Lease Agreement dated as of December 1, 2003 between Angelo Pegno
et. al. and AllianceCorner Distributors Inc., previously filed.
10.14 Lease Agreement dated as of July 1, 2003 between Angelo Pegno Et.
al. and Alliance Partners, Inc., previously filed.
23.1 Consent of Mahoney Cohen & Company, CPA, P.C., previously filed.
23.2 Consent of Oscar D. Folger Law Offices (included in Exhibit 5.1).
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 Essential Reality
Inc. Wireless pursuant to the foregoing provisions, or otherwise, Essential
Reality Inc. Wireless 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 Essential
Reality Inc. Wireless of expenses incurred or paid by a director, officer or
controlling person of Essential Reality Inc. Wireless 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, Essential
Reality Inc. Wireless 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.
42
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 February 4, 2005.
ALLIANCE DISTRIBUTORS HOLDING INC.
By: /s/ Jay Gelman
--------------
Jay Gelman, Chairman and CEO
43
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
February 4, 2005
/s/ Andre Muller
- ----------------
Andre Muller, President, COO and Director
February 4, 2005
/s/ Humbert B. Powell, III
- --------------------------
Humbert B. Powell, III, Director
February 4, 2005
/s/ Thomas Vitiello
- -------------------
Thomas Vitiello, Director
February 4, 2005
44