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SUBSCRIPTION AGREEMENT
BETWEEN
ESSENTIAL REALITY, INC.
AND
THE PURCHASER LISTED ON
SCHEDULE 1 HERETO
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JUNE __, 2004
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LIST OF SCHEDULES:
Schedule 1 Investor Questionnaire
LIST OF EXHIBITS:
Exhibit A The Certificate of Designation of the Series A Preferred Stock
Exhibit B The Certificate of Designation of the Series B Preferred Stock
Exhibit C Registration Rights Agreement
Exhibit D Post Transaction Capitalization Table
Exhibit E Share Exchange Agreement
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THIS SUBSCRIPTION AGREEMENT (this "Agreement") is made and entered into as
of June __, 2004, between Essential Reality, Inc, a corporation organized and
existing under the laws of the State of Nevada (the "Company"), the purchaser
listed on the Signature Page hereto (each a "Purchaser" and together with the
signatories to all substantially similar Subscription Agreements, the
"Purchasers"), and Xxx Xxxxxx ("Xxxxxx"), who is joining this Agreement solely
with respect to his covenant set forth in Section 2.4(d) below.
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchaser and the Purchaser desires
to acquire from the Company such number of shares of the Company's Series A 6%
Non-Redeemable Convertible Preferred Stock (the "Preferred Stock") as is set
forth on the signature page to this Agreement.
IN CONSIDERATION of the mutual covenants contained in this Agreement, the
Company and each Purchaser agree as follows:
SECTION I
CERTAIN DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, and unless the context
requires a different meaning, the following terms have the meanings indicated:
"ACDI" shall mean Alliance Corner Distributors, Inc.
"Affiliate" shall mean, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlled by" and "under common control
with") shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Agreement" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Business Day" shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government actions
to close.
"Certificates" shall mean the Certificate of Designation of the Rights and
Preferences of Series A Convertible Non-Redeemable Preferred Shares attached as
Exhibit A and the Certificate of Designation of the Rights and Preferences of
Series B Convertible Non-Redeemable Preferred Shares attached as Exhibit B which
shall be filed by the Company with the Secretary of State of Nevada prior to the
Closing Date.
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"Change of Control" shall mean the acquisition, directly or indirectly, by
any Person of ownership of, or the power to direct the exercise of voting power
with respect to, a majority of the issued and outstanding voting securities of
the Company.
"Closing" shall have the meaning set forth in Section 2.2(a).
"Closing Date" shall have the meaning set forth in Section 2.2(a).
"Common Stock" shall mean the shares now or hereafter authorized of the
class of common stock, no par value, of the Company and stock of any other class
into which such shares may hereafter have been reclassified or changed.
"Company" shall have the meaning set forth in the introductory paragraph.
"Control Person" shall have the meaning set forth in Section 4.7 (a)
hereof.
"Default" shall mean any event or condition which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Disclosure Documents" shall mean all the documents and materials provided
to the Purchaser and/or its representatives in connection with the Company and
this offering, including, but not limited to, the Private Placement Memorandum
dated June __, 2004, the Company's last annual report filed with the SEC on Form
10K and each quarterly report filed on Form 10Q since that last annual report.
"Event of Default" shall have the meaning set forth in Section 5.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Indemnified Party" shall have the meaning set forth in Section 4.7(b)
hereof.
"Indemnifying Party" shall have the meaning set forth in Section 4.7(b)
hereof.
"Losses" shall have the meaning set forth in Section 4.7(a) hereof.
"Material" shall mean having a financial consequence in excess of $25,000.
"Material Adverse Effect" shall have the meaning set forth in Section
3.1(a).
"Person" shall mean an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
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"PPM" shall mean the private placement memorandum regarding the offering
of the Preferred Stock by the Company.
"Proceeding" shall mean an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Purchase Price" shall have the meaning set forth in Section 2.1(b).
"Purchaser" shall have the meaning set forth in the introductory
paragraph.
"Reporting Issuer" shall mean a company that is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
"Required Approvals" shall have the meaning set forth in Section 3.1(f).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
" Preferred Stock" shall have the meaning set forth in the recital.
"Share Exchange Agreement" means that certain share exchange agreement
between Alliance Corner Distributors, Inc and the Company dated June [ ] 2004.
"Subsidiaries" shall have the meaning set forth in Section 3.1(a).
"Transaction Documents" shall mean this Agreement, the Registration Rights
Agreement, attached hereto as Exhibit C, the Post Transaction Capitalization
Table attached hereto as Exhibit D, the Share Exchange Agreement attached hereto
as Exhibit E and all other exhibits and schedules hereto and all other
documents, instruments and writings required pursuant to this Agreement.
SECTION II
PURCHASE AND SALE OF CONVERTIBLE PREFERRED SHARES
2.1 Purchase and Sale; Purchase Price.
(a) Subject to the terms and conditions set forth herein, the
Company shall issue and sell and the Purchaser shall purchase the number of
shares of the Preferred Stock as is indicated next to its name on the signature
page hereof.
(b) The purchase price for each share of Preferred Stock shall be
$3.56 (the "Per Share Consideration"). The Per Share Consideration multiplied by
the number of shares of Preferred Stock to be purchased by the Purchaser is
referred to as the "Purchase Price. The Company shall not accept any
subscription for a Purchase Price less than $25,000, unless such requirement is
waived by the Company in its sole discretion, as set forth in the PPM.
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2.2 Execution and Delivery of Documents; The Closing.
(a) The Closing of the purchase and sale of the Preferred Stock (the
"Closing") shall take place simultaneously with the execution and delivery of
this Agreement (the "Closing Date"). On the Closing Date,
(i) the Company shall execute and deliver to the Purchaser the
certificates representing the Preferred Stock; and
(ii) the Purchaser shall deliver to the Company the cash
consideration for the Preferred Stock. Such consideration shall be in the form
of wire transfer of immediately available funds. The wiring instructions of the
Company are:
X. X. Xxxxxx Chase
00 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx
A/C# 000-000-000
ABA# 021 000 021
American Stock Transfer & Trust Company as Escrow Agent for
Essential Reality, Inc.
All funds wired to this account shall be held in escrow pending the completion
of the Closing. If the Closing does not occur by June 30, 2004 or such later
date as the offering may be extended to, then such funds shall be promptly
returned to the Purchasers without interest.
2.3 Conditions to Closing
(a) The Closing is predicated upon the following conditions being
satisfied at or prior to June 30, 2004 or such later date as the offering may be
extended to and if any of these conditions are not met or waived by such date,
then the Purchase Price shall be returned to the Purchasers without interest:
(i) the Company obtaining debt conversion agreements from all
its outstanding note holders such that all outstanding debt of the Company
(which debt is currently in default) is extinguished either through the payment
of such debt (with such payments being consistent with the Use of Proceeds
section of the PPM) or the conversion of such debt into Preferred Shares based
on a per share price of the Preferred Stock of $3.56 and the Company's debt,
after giving effect to such conversion and payments to be made at the Closing,
shall be in the form of trade payables in an amount not to exceed $30,000;
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(ii) all required definitive instruments and agreements shall
be executed by all parties thereto prior to or at the Closing, including, but
not limited to, the Share Exchange Agreement, in the form attached hereto as
Exhibit E;
(iii) all necessary board and third party consents have been
obtained;
(iv) the Company and ACDI complete all necessary technical and
legal due diligence;
(v) ACDI receives a voting proxy from (i) Minotaur Fund
L.L.P., Xxxxxxx Xxxxx, Xxxxx Capital Group, LLC, Xxxxxx X. X'Xxxx, III, Xxxx
Xxxxxxx, Xxx Xxxxx and SBI USA, LLC (collectively the "Xxxxxxx Investors") (ii)
Northumberland Holdings Ltd., Xxxxxxx Xxxxxxxx and Xxxxxx X. Low Family Trust,
dated April 12, 1996, and/or its Affiliates, assigns and successors
(collectively, the "Northumberland Investors") for all shares of the Company's
stock held by the Northumberland Investors and the Xxxxxxx Investors at or prior
to the Closing;
(vi) the Company is, as of the Closing Date, fully current in
its required SEC regulatory filings;
(vii) the Company shall have filed the Certificates with the
Nevada Secretary of State providing for the Preferred Stock;
(viii) the Company simultaneously closes on the sale of no
less than $4,000,000 of Preferred Stock in the offering for cash consideration
or other immediately available funds; and
(ix) Sunrise Securities Corp. shall have received one or more
legal opinions in form and substance acceptable to it from legal counsel to the
Company and/or ACDI as to the sufficiency of Disclosure Documents for purposes
of Section 10(b)(5) of the Securities Exchange Act of 1934 and the regulations
thereunder as they relate to each of ACDI and the Company.
2.4 Post-Closing Covenants. Following the Closing, the Company and Xxxxxx
for the purposes of Section 2.4(d) hereof, shall take all actions necessary or
appropriate:
(a) to amend its Certificate of Incorporation to increase the number
of authorized shares of Common Stock to enable the conversion of all outstanding
shares of Preferred Stock into Common Stock. In connection therewith, the
Company covenants to the Purchaser that it will take all reasonable efforts to
file as soon as possible an information statement on Schedule 14(c) pursuant to
Regulation 14(c) of the Exchange Act and shall file such schedule with the SEC
no later than 60 days following the Closing Date. This information statement
shall be undertaken to obtain stockholder approval of an increase in the
Company's number of authorized shares of Common Stock from 50,000,000 to
4,400,000,000;
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(b) to register the Common Stock underlying the Preferred Stock for
sale pursuant to the terms and conditions of the Registration Rights Agreement,
attached hereto as Exhibit C;
(c) to take any and all reasonable actions to cause the Company's
Common Stock to be re-admitted for trading on the OTC Bulletin Board as soon as
reasonably possibly following the Closing, but in all events no later than the
Effectiveness Deadline as such term is defined in the Registration Rights
Agreement attached hereto as Exhibit C; and
(d) to cause the Company and Xxxxxx to enter into an employment
agreement (the "Employment Agreement") within thirty (30) days following the
Closing which will provide that Xxxxxx will serve as the Company's Chairman and
Chief Executive Officer. The Employment Agreement shall be for a term of at
least two years at a base salary of $300,000 for the first year and $350,000 for
the second year (the amount of base salary beyond the first two years, if
applicable, shall be agreed to by the Company and Xxxxxx). All other terms and
conditions, including those related to (i) forms of compensation other than base
salary, (ii) an agreement not to compete and (iii) confidentiality of
proprietary information, shall be of a customary nature as determined by the
Board of Directors of the Company in mutual agreement with Xxxxxx.
Notwithstanding any other provision of this Agreement, these post-closing
covenants (the "Post-Closing Covenants') shall specifically survive the Closing
of this Agreement.
SECTION III
REPRESENTATIONS AND WARRANTIES
3.1 Representations, Warranties and Agreements of the Company. The Company
hereby makes the following representations and warranties to the Purchasers, all
of which shall survive the Closing:
(a) Organization and Qualification. The Company is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
State of Nevada with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
The Company has one subsidiary: E. R. Canada, Ltd. The Company is duly qualified
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary, except where the failure to be so
qualified or in good standing, as the case may be, would not, individually or in
the aggregate, have a Material Adverse Effect. For purposes of this Agreement,
"Material Adverse Effect" means any condition, circumstance or situation that
would reasonably be expected to (i) be materially adverse to the business,
assets, liabilities, results of operations or financial condition of the
Company, (ii) materially adversely affect the ability of the Company to conduct
any material portions of its business prior to or after the Closing, (iii)
materially adversely affect the ability of the Company to obtain a listing on
the NASDAQ Over-the-Counter Bulletin Board or (iv) prohibit or hinder the
Company from executing this Agreement and performing any of its obligations
hereunder in any material respect.
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(b) Authorization, Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated hereby and by each other Transaction Document and to otherwise to
carry out its obligations hereunder and thereunder. The execution and delivery
of this Agreement and each of the other Transaction Documents by the Company and
the consummation by it of the transactions contemplated hereby and thereby has
been duly authorized by all necessary action on the part of the Company. This
Agreement and each of the other Transaction Documents has been or will be duly
executed by the Company (if applicable) and when delivered in accordance with
the terms hereof or thereof will constitute the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. The parties acknowledge that
the Company has duly authorized and filed the Certificates with the Nevada's
Secretary of State containing the terms set forth in Exhibits A and B and
attached hereto.
(c) Capitalization. The authorized, issued and outstanding capital
stock of the Company is set forth in the PPM. No shares of Preferred Stock have
been issued as of the date hereof. No shares of Common Stock or any other class
of the Company's securities are entitled to preemptive or similar rights, nor is
any holder of the Common Stock entitled to preemptive or similar rights arising
out of any agreement or understanding with the Company by virtue of this
Agreement. Assuming consummation of the transactions contemplated by the
Transaction Documents, the capitalization of the Company shall be as set forth
on Exhibit D hereto.
(d) Issuance of Securities. The Preferred Stock has been duly and
validly authorized for issuance, offer and sale pursuant to this Agreement and,
when issued and delivered as provided hereunder against payment in accordance
with the terms hereof, shall be valid and binding obligations of the Company
enforceable in accordance with their respective terms. The Company covenants
that it will as soon as practicable authorize and issue Common Stock solely for
the purpose of providing for the sufficient number of shares of Common Stock to
enable the conversion of all shares of the Preferred Stock into Common Stock,
free from any preemptive rights or any other actual contingent purchase rights
of persons other than the holders of the Preferred Stock. When issued in
accordance with the terms hereof, these shares of common stock will be duly
authorized, validly issued, fully paid and non-assessable. The Company has no
equity or equity equivalent security outstanding that is substantially similar
to the Preferred Stock, including any security having a conversion feature
substantially similar to the Preferred Stock.
(e) No Conflicts. The execution, delivery and performance of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
do not and will not (i) conflict with or violate any provision of its
Certificate of Incorporation or bylaws (each as amended through the date hereof)
or (ii) be subject to obtaining any consents except those referred to in Section
3.1(f), conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment, injunction,
decree or other restriction of any court or governmental authority to which the
Company is subject (including, but not limited to, those of other countries and
the federal and state securities laws and regulations), or by which any property
or asset of the Company is bound or affected, except in the case of clause (ii),
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect. The business of the Company is not being conducted in violation
of any law, ordinance or regulation of any governmental authority.
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(f) Consents and Approvals. Except as specifically described in the
PPM, the Company is not required to obtain any consent, waiver, authorization or
order of, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of this Agreement and
each of the other Transaction Documents, except for the filing of the
Certificates which filing shall be effected prior to the Closing Date (together
with the consents, waivers, authorizations, orders, notices and filings referred
to above, the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in the
Disclosure Documents, there is no action, suit, notice of violation, proceeding
or investigation pending or, to the best knowledge of the Company, threatened
against or affecting the Company, its subsidiary or any of its respective
properties before or by any court, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) which (i)
relates to or challenges the legality, validity or enforceability of any of the
Transaction Documents or the Shares, (ii) could, individually or in the
aggregate, have a Material Adverse Effect or (iii) could, individually or in the
aggregate, materially impair the ability of the Company to perform fully on a
timely basis its obligations under the Transaction Documents.
(h) No Default or Violation. Except as disclosed in the Disclosure
Documents, to the knowledge of the Company and its subsidiary, there is no (i)
default under or in violation of any indenture, loan or credit agreement or any
other agreement or instrument to which it is a party or by which it or any of
its properties is bound, except such conflicts or defaults as do not have a
Material Adverse Effect, (ii) violation of any order of any court, arbitrator or
governmental body relative to the Company, its business or assets, except for
such violations as do not have a Material Adverse Effect, or (iii) violation by
the Company of any statute, rule or regulation of any governmental authority
which could (individually or in the aggregate) (x) adversely affect the
legality, validity or enforceability of this Agreement, (y) have a Material
Adverse Effect or (z) adversely impair the Company's ability or obligation to
perform fully on a timely basis its obligations under this Agreement or any
other Transaction Document.
(i) Disclosure and Transaction Documents. To the knowledge of the
Company, the Disclosure Documents and the Transaction Documents are accurate in
all material respects and do not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
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(j) Non-Registered Offering. Neither the Company not any Person
acting on its behalf has taken or will take any action (including, without
limitation, any offering of any securities of the Company under circumstances
which would require the integration of the sale of securities contemplated by
this Agreement with any other offering of securities by the Company under the
Securities Act) which might subject the offering, issuance or sale of the
Preferred Stock to the registration requirements of Section 5 of the Securities
Act.
(k) Brokerage. Except for the fees payable to Sunrise Securities
Corporation, a registered broker-dealer, there are no valid claims for brokerage
commissions, finder's fees or similar compensation in connection with the
transactions contemplated by this Agreement based upon any arrangement or
agreement made by or on behalf of the Company, and the Company has not taken any
action that would cause the Investor to be liable for any such fees or
commissions.
(l) Real Property. The Company and its subsidiary owns no real
estate and is not subject to any lease or sublease relating to real property.
The Company is the legal and beneficial owner, in fee simple, of all of its
owned real property, in each case free and clear of any liens.
(m) Permits and Licenses. The Company and its subsidiary have all
certificates of occupancy, rights, permits, certificates, licenses, franchises,
approvals and other authorizations as are reasonably necessary to conduct its
business and to own, lease, use, operate and occupy its assets, at the places
and in the manner now conducted and operated, except those the absensce of which
would not have a Material Adverse Effect.
(n) Patents, Trademarks and Intellectual Property Rights. The
Company and its subsidiary own or possess sufficient legal rights to all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, internet web site(s) proprietary rights and processes
necessary for its business as now conducted without any conflict with or
infringement of the rights of others.
3.2 Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company as follows:
(a) No Public Sale or Distribution. The Purchaser is acquiring the
Preferred Stock in the ordinary course of business for its own account and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act and the Purchaser does not have a present arrangement to effect any
distribution of the Preferred Stock to or through any person or entity;
provided, however, that by making the representations herein, the Purchaser does
not agree to hold any of the Preferred Stock for any minimum or other specific
term and reserves the right to dispose of the Preferred Stock at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act.
(b) Accredited Investor Status. TO ESTABLISH THAT THE PURCHASER IS
AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a) PROMULGATED UNDER THE
SECURITIES ACT, THE INVESTOR MUST XXXX AT LEAST ONE BOX BELOW, THEREBY MAKING
THE REPRESENTATION SET FORTH BESIDE THE MARKED BOX AND COMPLETE THE INVESTOR
QUESTIONNAIRE ATTACHED HERETO AS SCHEDULE 1.
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|_| The Purchaser is a natural person whose individual net worth,
or joint net worth with that person's spouse, at the time of
the Investor's purchase exceeds $1,000,000.
|_| The Purchaser is a natural person who had an individual income
in excess of $200,000 in each of the two most recent years or
joint income with that person's spouse in excess of $300,000
in each of those years and has a reasonable expectation of
reaching the same income level in the current year.
|_| The Purchaser is a bank as defined in Section 3(a)(2) of the
Securities Act or a savings and loan association or any other
institution as defined in Section 3(a)(5)(A) of the Securities
Act.
|_| The Purchaser is a broker dealer registered pursuant to
Section 15 of the United States Securities Exchange Act of
1934, as amended.
|_| The Purchaser is an insurance company as defined in Section
(2)(13) of the Securities Act.
|_| The Purchaser is an investment company registered under the
Investment Company Act or a business development company as
defined in Section 2(a)(48) of that Act.
|_| The Purchaser is a Small Business Investment Company licensed
by the U.S. Small Business Administration under Section 301(c)
or (d) of the U.S. Small Business Investment Act of 1958, as
amended.
|_| The Purchaser is a plan established and maintained by a State
within the United States, one or more political subdivisions
of such a State, or any agency or instrumentality of such a
State or its political subdivisions, for the benefit of its
employees, with total assets in excess of $5,000,000.
|_| The Purchaser is an employee benefit plan within the meaning
of the United States Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), (i) the investment decision for
which is made by a plan fiduciary, as defined in Section 3(21)
of ERISA, which is either a bank, savings and loan
association, insurance company, or registered investment
advisor or (ii) which has total assets in excess of $5,000,000
or (iii) which is a self-directed plan with investment
decisions made solely by persons that are Accredited
Investors.
|_| The Purchaser is a private business development company as
defined in Section 202(a)(22) of the United States Investment
Advisers Act of 1940.
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|_| The Purchaser is an organization that is described in Section
501(c)(3) of the United States Internal Revenue Code of 1986,
as amended, a corporation, a Massachusetts or similar business
trust, or a partnership that, in any case, was not formed for
the specific purpose of acquiring the Interest and has total
assets in excess of $5,000,000.
|_| The Purchaser is an executive officer (as defined in Rule
501(f) promulgated under the Securities Act) or general
partner of the Partnership or of the General Partner.
|_| The Purchaser is a trust with total assets of $5,000,000, not
formed for the specific purpose of acquiring the Interest,
whose purchase of the Interest is directed by a sophisticated
person as described in Rule 506(b)(2)(ii) promulgated under
the Securities Act.
|_| The Purchaser is an entity in which all of the equity owners
are Accredited Investors.
(c) Authority. The Purchaser has the requisite power and authority
to enter into and to consummate the transactions contemplated hereby and by the
other Transaction Documents and otherwise to carry out its obligations hereunder
and thereunder. The acquisition of the Preferred Stock to be purchased by the
Purchaser hereunder has been duly authorized by all necessary action on the part
of the Purchaser. This Agreement has been duly executed and delivered by the
Purchaser and constitutes the valid and legally binding obligation of the
Purchaser, enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to, or affecting generally
the enforcement of, creditors rights and remedies or by other general principles
of equity.
(d) Investment Intent. The Purchaser is acquiring the Preferred
Stock to be purchased by it hereunder, and will acquire the Preferred Stock for
its own account for investment purposes only and not with a view to or for
distributing or reselling such Preferred Stock, or any part thereof or interest
therein, without prejudice, however, to such Purchaser's right, subject to the
provisions of this Agreement, at all times to sell or otherwise dispose of all
or any part of such Preferred Stock in compliance with applicable federal and
state securities laws.
(e) Experience of Purchaser. The Purchaser, either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of an investment in the Preferred Stock to be acquired by it hereunder,
and has so evaluated the merits and risks of such investment.
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(f) Ability of Purchaser to Bear Risk of Investment. The Purchaser
is able to bear the economic risk of an investment in the Preferred Stock to be
acquired by it hereunder and, at the present time, is able to afford a complete
loss of such investment.
(g) Access to Information. The Purchaser acknowledges that it has
been afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the Preferred Stock offered hereunder and
the merits and risks of investing in such securities; (ii) access to information
about the Company and the Company's financial condition, results of operations,
business, properties, management and prospects sufficient to enable it to
evaluate its investment in the Preferred Stock; and (iii) the opportunity to
obtain such additional information which the Company possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment and to verify the accuracy
and completeness of the information that it has received about the Company.
(h) Reliance. The Purchaser understands and acknowledges that (i)
the Preferred stock is being offered and sold to it hereunder is being offered
and sold without registration under the Securities Act in a private placement
that is exempt from the registration provisions of the Securities Act under
Section 4(2) of the Securities Act and (ii) the availability of such exemption
depends in part on, and that the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and such Purchaser hereby
consents to such reliance.
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
SECTION IV
OTHER AGREEMENTS OF THE PARTIES
4.1 Manner of Offering. The Preferred Stock is being issued pursuant to
Rule 506 of Regulation D of the Securities Act.
4.2 Notice of Certain Events. The Company shall, on a continuing basis,
advise the Purchaser promptly after obtaining knowledge of, and, if requested by
the Purchaser, confirm such advice in writing, of any event that makes any
statement of a material fact made by the Company in Section 3.1 or in the
Disclosure Documents untrue or that requires the making of any additions to or
changes in Section 3.1 or in the Disclosure Documents in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading,
4.3 Modification to Disclosure Documents. If any event shall occur as a
result of which, in the reasonable judgment of the Company or the Purchaser, it
becomes necessary or advisable to amend or supplement any of the Disclosure
Documents in order to make the statements therein, in the light of the
circumstances at the time such Disclosure Documents were delivered to the
Purchaser, not misleading, or if it becomes necessary to amend or supplement any
of the Disclosure Documents to comply with applicable law, the Company shall
promptly prepare an appropriate amendment or supplement to each such document in
form and substance reasonably satisfactory to both the Purchaser and Company so
that (i) as so amended or supplemented, each such document will not include an
untrue statement of material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances existing
at the time it is delivered to the Purchaser, not misleading and (ii) the
Disclosure Documents will comply with applicable law.
13
4.4 Blue Sky Laws. The Company shall cooperate with the Purchaser in
connection with the exemption from registration of the Preferred Stock under the
securities or Blue Sky laws of such jurisdictions as the Purchasers may request;
provided, however, that the Company shall not be required in connection
therewith to qualify as a foreign corporation where it is not now so qualified.
The Company agrees that it will execute all necessary documents and pay all
necessary state filing or notice fees to enable the Company to sell the
Preferred Stock to the Purchasers.
4.5 Integration. The Company shall not and shall use its best efforts to
ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2 of the
Securities Act) that would be integrated with the offer or sale of the Preferred
Stock in a manner that would require the registration under the Securities Act
of the sale of the Preferred Stock to the Purchaser.
4.6 Solicitation Materials. The Company shall not (i) distribute any
offering materials in connection with the offering and sale of the Preferred
Stock other than the Disclosure Documents and any amendments and supplements
thereto prepared in compliance herewith or (ii) solicit any offer to buy or sell
the Preferred Stock by means of any form of general solicitation or advertising.
4.7 Indemnification.
(a) Indemnification
(i) The Company shall indemnify and hold harmless the
Purchaser and its officers, directors, agents, employees and Affiliates, each
Person who controls or the Purchaser (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) (each such Person, a "Control
Person") and the officers, directors, agents, employees and Affiliates of each
such Control Person, to the fullest extent permitted by applicable law, from and
against any and all losses, claims, damages, liabilities, costs (including,
without limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of, or relating to, a breach
or breaches of any representation, warranty, covenant or agreement by the
Company under this Agreement or any other Transaction Document.
(ii) The Purchaser shall indemnify and hold harmless the
Company, its officers, directors, agents and employees, each Control Person and
the officers, directors, agents and employees of each Control Person, to the
fullest extent permitted by application law, from and against any and all
Losses, as incurred, arising out of, or relating to, a breach or breaches of any
representation, warranty, covenant or agreement by the Purchaser under this
Agreement or the other Transaction Documents.
14
(b) Conduct of Indemnification Proceedings. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed to pay such fees and
expenses; or (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense of the
claim against the Indemnified Party but will retain the right to control the
overall Proceedings out of which the claim arose and such counsel employed by
the Indemnified Party shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party to which the
Indemnified Party is entitled hereunder (including reasonable fees and expenses
to the extent incurred in connection with investigating or preparing to defend
such Proceeding in a manner not inconsistent with this Section) shall be paid to
the Indemnified Party, as incurred, within ten (10) Business Days of written
notice thereof to the Indemnifying Party.
No right of indemnification under this Section shall be available as
to a particular Indemnified Party if there is a non-appealable final judicial
determination that such Losses arise solely out of the negligence or bad faith
of such Indemnified Party in performing the obligations of such Indemnified
Party under this Agreement or a breach by such Indemnified Party of its
obligations under this Agreement.
15
(c) Contribution. If a claim for indemnification under this Section
is unavailable to an Indemnified Party or is insufficient to hold such
Indemnified Party harmless for any Losses in respect of which this Section would
apply by its terms (other than by reason of exceptions provided in this
Section), then each Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses in such proportion as is appropriate to reflect the
relative benefits received by the Indemnifying Party on the one hand and the
Indemnified Party on the other and the relative fault of the Indemnifying Party
and Indemnified Party in connection with the actions or omissions that resulted
in such Losses as well as any other relevant equitable considerations. The
relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether there was a judicial
determination that such Losses arise in part out of the negligence or bad faith
of the Indemnified Party in performing the obligations of such Indemnified Party
under this Agreement or the Indemnified Party's breach of its obligations under
this Agreement. The amount paid or payable by a party as a result of any Losses
shall be deemed to include any attorneys' or other fees or expenses incurred by
such party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided for
in this Section was available to such party.
(d) Non-Exclusivity. The indemnity and contribution agreements
contained in this Section are in addition to any obligation or liability that
the Indemnifying Parties may have to the Indemnified Parties.
4.8 No Violation of Applicable Law. Notwithstanding any provision of this
Agreement to the contrary, if the conversion or the issuance of common stock
would be prohibited by the relevant provisions of Nevada law, such redemption
shall be effected as soon as it is permitted under such law.
SECTION V
LEGAL FEES
5.1 In the event any party hereto commences legal action to enforce its
rights under this Agreement or any other Transaction Document, the
non-prevailing party shall pay all reasonable costs and expenses (including but
not limited to reasonable attorney's fees, accountant's fees, appraiser's fees
and investigative fees) incurred in enforcing such rights.
SECTION VI
MISCELLANEOUS
6.1 Fees and Expenses. Except as set forth in this Agreement, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all stamp and other taxes and duties levied in connection
with the issuance of the Preferred Stock pursuant hereto. The Purchaser shall be
responsible for any taxes payable by the Purchaser that may arise as a result of
the investment hereunder or the transactions contemplated by this Agreement or
any other Transaction Document. The Company shall pay all costs, expenses, fees
and all taxes incident to and in connection with: (A) the issuance and delivery
of the Preferred Stock, (B) the exemption from registration of the Preferred
Stock for offer and sale to the Purchaser under the securities or Blue Sky laws
of the applicable jurisdictions, and (C) the preparation of certificates for the
securities (including, without limitation, printing and engraving thereof), and
(D) all fees and expenses of counsel and accountants of the Company.
16
6.2 Entire Agreement. This Agreement, together with all of the Exhibits
and Schedules annexed hereto, and any other Transaction Document contains the
entire understanding of the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, oral or written, with
respect to such matters. This Agreement shall be deemed to have been drafted and
negotiated by both parties hereto and no presumptions as to interpretation,
construction or enforceability shall be made by or against either party in such
regard.
6.3 Notices. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be deemed to have been duly given
upon facsimile transmission (with written transmission confirmation report) at
the number designated below (if delivered on a Business Day during normal
business hours where such notice is to be received), or the first Business Day
following such delivery (if delivered other than on a Business Day during normal
business hours where such notice is to be received) whichever shall first occur.
The addresses for such communications shall be:
If to the Company: Essential Reality, Inc.
c/o Gottbetter & Partners LLP
000 Xxxxxxx Xxxxxx 00 Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Tel: (000) 000-0000
Fax: (000) 000-0000
Attn: Xxxxx Xxxxxxxxxxx
If to the Purchaser See Signature Page attached hereto
or such other address as may be designated hereafter by notice given pursuant to
the terms of this Section 6.3.
6.4 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
both the Company and the Purchaser, or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
17
6.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
6.6 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and permitted
assigns. The assignment by a party of this Agreement or any rights hereunder
shall not affect the obligations of such party under this Agreement.
6.7 No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
6.8 Governing Law; Venue; Service of Process. The parties hereto
acknowledge that the transactions contemplated by this Agreement and the
exhibits hereto bear a reasonable relation to the State of New York. The parties
hereto agree that the internal laws of the State of New York shall govern this
Agreement and the exhibits hereto, including, but not limited to, all issues
related to usury. Any action to enforce the terms of this Agreement or any of
its exhibits, or any other Transaction Document shall be brought exclusively in
the state and/or federal courts situate in the County and State of New York.
Service of process in any action by the Purchaser to enforce the terms of this
Agreement may be made by serving a copy of the summons and complaint, in
addition to any other relevant documents, by commercial overnight courier to the
Company at its principal address set forth in this Agreement.
6.9 Survival. The Post-Closing Covenants contained in Section 2.4 shall
specifically survive the Closing of this Agreement. Additionally, should the
Closing occur, the representations and warranties of the Company and the
Purchaser contained in Section III and the agreements and covenants of the
parties contained in Section IV and this Section VI shall survive the Closing
for a period of two (2) years following the Closing.
6.10 Counterpart Signatures. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
6.11 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefore, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.
18
6.12 Limitation of Remedies. With respect to claims by the Company or any
person acting by or through the Company, or by the Purchaser or any person
acting through the Purchaser, for remedies at law or at equity relating to or
arising out of a breach of this Agreement, liability, if any, shall, in no
event, include loss of profits or incidental, indirect, exemplary, punitive,
special or consequential damages of any kind.
[SIGNATURE PAGE FOLLOWS]
19
Signature Page to
Subscription Agreement for
Preferred Stock of
ESSENTIAL REALITY, INC.
Executed at __________, _________ this _____day of ________, 2004.
*
___________________________
[If Entity Print Name Above]
By:_______________________________
Name:
Title (if applicable):
Number of Shares
Subscribed For:
Total Purchase Price:
Taxpayer I.D. Number or
Social Security Number: ______________________
Address: __________________________________________
Telephone: ________________________________________
Facsimile: ________________________________________
20
Accepted and agreed to as of this ___ day of __________, 2004
ESSENTIAL REALITY, INC.
By: ___________________
Title: ___________________
___________________________________________________________________
XXX XXXXXX, solely for purposes of Section 2.4(d) of this Agreement.
* If the Investor is a corporation, trust, partnership, or other entity,
please attach a copy of the resolutions, trust instrument, partnership agreement
or similar document (or in lieu thereof, an opinion of counsel) showing the
corporation, trust, partnership or other entity has authority to purchase the
Shares and showing that the signatory above may act on its behalf in making this
investment.
21
Schedule 1
Investor Questionnaire
CONFIDENTIAL INVESTOR QUESTIONNAIRE FOR U.S. INDIVIDUALS
1.1 Purpose of this Questionnaire
A certain number of shares of preferred stock (the "Preferred Stock") of
securities of Essential Reality, Inc. (the "Company") are being offered, without
registration under the Securities Act of 1933, as amended (the "Act"), or the
securities laws of any state, in reliance on the limited offering exemptions
contained in Section 4(2) and/or in Rule 506 of Regulation D of the General
Rules and Regulations under the Act and in reliance on similar exemptions under
applicable state laws, solely to "accredited investors," as such term is defined
in Rule 501 of Regulation D. The Company must determine that each individual is
an "accredited investor" as defined in such Rule 501 before selling (or, in some
states, offering) Preferred Stock to any such individual. This Questionnaire
does not constitute an offer to sell or a solicitation of an offer to buy
Preferred Stock or any other security.
THE COMPANY WILL NOT OFFER OR SELL PREFERRED STOCK TO ANY INVESTOR WHO HAS NOT
DULY COMPLETED A CONFIDENTIAL INVESTOR QUESTIONNAIRE.
1.2 Instructions
One (1) copy of this Questionnaire should be completed, signed, dated and
delivered to Gottbetter & Partners, LLP, 000 Xxxxxxx Xxxxxx, 00xx Xxxxx, Xxx
Xxxx, Xxx Xxxx 00000. Please contact Xxxxx Xxxxxxxxxxx at Xxxxxxxxxx & Partners,
LLP, (000) 000-0000 if you have any questions with respect to the Questionnaire.
22
PLEASE ANSWER ALL QUESTIONS. If the appropriate answer is "None" or "Not
Applicable," so state. Please print or type your answers to all questions.
Attach additional sheets if necessary to complete your answers to any item.
Your answers will be kept strictly confidential at all times; however, the
Company may present this Questionnaire to such parties as it deems appropriate
in order to assure itself that the offer and sale of the Preferred Stock will
not result in a violation of the registration provisions of the Act or a
violation of the securities laws of any state.
1. Name and Address. Please provide the following personal information:
Name:_________________________________________________ Age: _______________
Residence Address
(including Zip Code):
--------------------------------------------------------
Business Address
(including Zip Code):
---------------------------------------------------------
Telephone Res.:____________________________ Bus.:____________________________
Preferred Mailing Address: __________ Residence ___________ Business ___________
2. Accredited Investor Status. Please answer Question 2 by marking the
appropriate box below.
(i) Did your individual annual income during each of the last two years exceed
$200,000 and do you expect your annual income during the current year to
exceed $200,000, or did your joint annual income (together with your
spouse) during each of the last two years exceed $300,000 and do you
expect your joint annual income during the current year to exceed
$300,000?1
|_| |_|
Yes No
(ii) If the answer to the preceding questions was no, does your individual or
joint (together with your spouse) net worth exceed $1,000,000?
|_| |_|
Yes No
23
For this purpose, a person's income is the amount of his individual
adjusted gross income (as reported on a federal income tax return), increased by
the following amounts: (a) any deductions for a portion of long term capital
gains (Section 1202 of the Internal Revenue Code, as amended (the "Code")); (b)
any deduction for depletion (Section 611 et seq. of the Code; (c) any exclusion
for interest on tax exempt municipal obligations (Section 103 of the Code); and
(d) any losses of a partnership allocated to the individual (Schedule E of Form
1040).
(iii) If your answer to Questions 2 (i) and 2 (ii) was no, are you an
executive officer or director the Company?
|_| |_|
Yes No
3. Bank References (please include name and address of Bank and name of an
officer):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
4. Attorney (Name, Firm and Address):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
5. Accountant (Name, Firm and Address):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
6. NASD Affiliation (Please include the firm name and address of each NASD
member firm, if any, with which you are affiliated or associated, and the nature
of your affiliation or association or, if none, please so indicate):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
24
7. Investor Suitability Information
Occupation or Profession:
----------------------------------------------------
Nature of Business:
-----------------------------------------------------------
Name of Employer:
-------------------------------------------------------------
Address:
----------------------------------------------------------------------
(Street)
(City) (State) (Zip Code)
------------------------------------------------------------------------------
Office Telephone Current Position or Title:
Number:
----------------------------------------------------------------------
(Area Code) (Number)
Period Employed:
-------------------------------------------------------------
If not employed or self-employed, give name and telephone number of person to
contact to verify income, and your relationship to such person:
------------------------------------------------------------------------------
(Name) (Area Code) (Number)
---------------------------------------
(Relationship)
Other employment during the past five years (employer, position or title,
principal responsibilities and years of service):
8. Do you anticipate that your current level of income will change in the
foreseeable future and, if so, when and to what level do you expect it to
change?
------------------------------------------------------------------------------
9. Are you obligated as an endorser, guarantor, surety, indemnitor or otherwise
for any significant contingent liabilities: Yes _____ No _____ If yes, please
indicate type and amount: _______________________________________
10. Are there any suits outstanding or litigation or claims pending against you
which could adversely and materially affect your financial condition? Yes _____
No _____ If yes, provide details:
25
11. By signing this Questionnaire I hereby confirm the following statements:
(a) I am aware that the proposed offering of Preferred Stock will
involve "restricted securities," as said term is defined in Rule 144
of the Rules and Regulations promulgated under the Act, and that
they, or any interest therein may not be sold or otherwise
transferred without having first been registered under the all
applicable federal and state securities laws, or unless an exemption
from such registration provisions is available with respect to any
such resale or transfer under all applicable federal and state
securities laws.
(b) I acknowledge that any delivery to me of the accompanying
subscription documents and any materials included therein (the
"Offering Materials") relating to the Preferred Stock prior to the
determination by the Company of my suitability as an investor shall
not constitute an offer of the Preferred Stock until such
determination of suitability shall be made, and I agree that I shall
promptly return the Offering Materials to the Company upon request.
(c) My answers to the foregoing questions are true and complete to the
best of my information and belief, and I will promptly notify the
Company of any changes in the information I have provided.
------------------------------
(Printed Name)
------------------------------
(Signature)
Date and Place Executed:
Date:
-----------------------------------------------
Place:
----------------------------------------------
26
Exhibit A
The Certificate of Designation of the Series A Preferred Stock
Exhibit B
The Certificate of Designation of the Series B Preferred Stock
Exhibit C
Exhibit D
Post Transaction Capitalization Table
Exhibit E
Share Exchange Agreement
--------
