SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT, dated as of the 17th day of June, 2004 (the
"Agreement"), is made by and among Essential Reality, Inc., a Nevada corporation
(the "Company"); and the persons set forth on Schedule I hereto (each,
individually, a "Seller" and collectively, the "Sellers").
W I T N E S S E T H:
WHEREAS, Sellers collectively own all of the issued and outstanding capital
stock of Alliance Corner Distributors, Inc. ("Alliance"), as set forth on
Schedule I to this Agreement (the "Alliance Shares"); and
WHEREAS, the Company desires to acquire from Sellers, and Sellers desire to sell
to the Company, the Alliance Shares in exchange (the "Exchange") for the
issuance by the Company of an aggregate of 1,551,314 shares of the Company's
Series B Non-Redeemable Convertible Preferred Stock, $.001 par value per share
(the "Preferred Stock""), to be issued to Sellers and/or their designees, on the
terms and conditions set forth below, which, upon conversion shall represent
47.72% of the issued and outstanding shares of the capital stock of the Company
on a fully diluted basis;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and agreements set forth herein, the parties hereto
agree as follows:
ARTICLE I
EXCHANGE OF SHARES
1.1 Exchange of Shares. Subject to the terms and conditions of this Agreement,
on the Closing Date (as hereinafter defined):
(a) The Company shall issue and deliver to each Seller and/or its designees the
number of shares of Preferred Stock set forth opposite such Seller's and/or such
designee's names set forth on Schedule I hereto.
(b) The Sellers agree to deliver to the Company the Alliance Shares along with
an appropriately executed stock power endorsed in favor of the Company.
1.2 Time and Place of Closing. The closing of the transactions contemplated
hereby (the "Closing") shall take place at the offices of Willkie Farr &
Gallagher LLP, 787 Seventh Avenue, New York, New York 10017, on a date and time
to be specified by the Sellers which shall be no later than two (2) business
days after satisfaction or waiver of the conditions set forth in Article VI (the
"Closing Date") at 10:00 a.m., or at such other place and date as the Company
and the Sellers may agree.
1.3 Directors and Officers. The directors of the Company as of the Closing Date
shall consist of the persons specified on Exhibit A hereto and shall hold office
in accordance with the articles of incorporation and bylaws of the Company until
their successors are duly elected or appointed and qualified or until their
earlier death, resignation or removal. The officers of the Company as of the
Closing Date shall consist of the persons specified on Exhibit B hereto and
shall hold office in accordance with the articles of incorporation and bylaws of
the Company until their successors are duly elected or appointed and qualified
or until their earlier death, resignation or removal.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants, to the Sellers, as of the date hereof as
follows:
2.1 Organization, Good Standing and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Nevada and has the requisite power to own, lease and operate its
properties and assets and to conduct its business as it is now being conducted.
The Company is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary except for
any jurisdictions (alone or in the aggregate) in which the failure to be so
qualified will not have a Material Adverse Effect. For the 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 portion of its business prior to or after the Closing Date,
(iii) materially adversely affect the ability of the Company to maintain its
listing on the Nasdaq Over-the-Counter Bulletin Board (once such listing has
been obtained) or (iv) prohibit or hinder the Company from executing this
Agreement and/or performing any of its obligations hereunder in any material
respect.
2.2 Authorization; Enforcement. Subject to all applicable regulatory
consents, the Company has the requisite power and authority to enter into and
perform this Agreement and to consummate the Exchange. The execution, delivery
and performance of this Agreement by the Company have been duly and validly
authorized by all necessary corporate action, and no further consent or
authorization is required for the Company to effect the transactions
contemplated hereby. When executed and delivered by the Company, this Agreement
shall constitute a 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, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor's rights and remedies or by
other equitable principles of general application.
2.3 Issuance of Preferred Stock. The Preferred Stock has been duly
authorized by all necessary corporate action and, when issued in accordance with
the terms hereof and upon the Closing Date, shall be validly issued and
outstanding, fully paid and non-assessable.
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2.4 No Conflicts. Subject to all applicable regulatory consents, the
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby does not and
will not (i) violate any provision of the Company's Certificate of Incorporation
or Bylaws, each as amended to date, (ii) 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, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company is a
party or by which any of the Company's properties or assets are bound, or (iii)
result in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or by which any property or
asset of the Company is bound or affected, except for such conflicts, defaults,
terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect, other
than violations pursuant to clauses (i) or (iii) (with respect to federal and
state securities laws) above. The Company is not required under federal, state,
foreign or local law, rule or regulation to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement or consummate the Exchange in accordance with the terms
hereof (other than any filings, consents and approvals which may be required to
be made by the Company under applicable state and federal securities laws, rules
or regulations, or the rules of the Nasdaq Over-the-Counter Bulletin Board (or
any other exchange on which the Shares may be quoted or listed for trading),
prior to or subsequent to the Closing Date).
2.5 Capitalization. (a) The authorized capital stock of the Company
immediately prior to giving effect to the transactions contemplated hereby
consists of Fifty Million (50,000,000) shares of common stock, par value $.001
per share ("Company Common Stock"), of which 22,000,000 shares are issued and
outstanding as of the date hereof; and Five Million (5,000,000) shares of $.001
par value preferred stock, of which Two Million Four Hundred Thousand Four
Hundred One (2,400,401) are designated as Series A Convertible Non Redeemable
Preferred Stock, $.001 par value per share, of which none are issued or
outstanding, and One Million Nine Hundred Ninety-Five Thousand Five Hundred
Ninety-Nine (1,995,599) shares of Series B Convertible Non Redeemable Preferred
Stock, $.001 par value per share, of which none are issued or outstanding. All
of the outstanding shares of capital stock are, and the Preferred Stock when
issued in accordance with the terms hereof, will be, duly authorized, validly
issued, fully paid and nonassessable, and have not been or, with respect to the
Preferred Stock, will not be issued in violation of any preemptive right of
stockholders.
(b) As of the Closing Date, there are no outstanding subscriptions,
options, contracts, rights or warrants, except as set forth on Item 2.5(b) of
the Disclosure Schedule, including any right of conversion or exchange under any
outstanding security, instrument or other agreement, obligating the Company to
issue additional shares of capital stock or any other equity securities of the
(or any security convertible into or exercisable or exchangeable for capital
stock or any other equity securities of the Company). There are no outstanding
share appreciation rights or similar rights with respect to the Company.
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(c) Assuming the consummation of the Exchange and each of the acts and
events contemplated in Section 6.2 hereof, the pro forma capitalization of the
Company shall be as set forth on the capitalization table attached hereto as
Exhibit C.
2.6 SEC Filings; Financial Statements. (a) The Company has made available to the
Sellers true and complete copies of (i) its Annual Reports on Form 10-KSB for
the fiscal years ended December 31, 2002 and 2003, as filed with the U.S.
Securities and Exchange Commission (the "SEC"), (ii) its proxy statements
relating to all of the meetings of stockholders (whether annual or special) of
the Company since January 1, 2003, as filed with the SEC, and (iii) all other
reports, statements and registration statements and amendments thereto
(including, without limitation, Quarterly Reports on Form 10-QSB and Current
Reports on Form 8-K) filed by the Company with the SEC since January 1, 2003
(collectively, the "SEC Reports"). Since January 1, 2001, the Company has filed
with the SEC all forms, reports, schedules, registration statements and proxy
statements required to be filed by the Company, except as would not have a
Material Adverse Effect. The SEC Reports (i) at the time filed or if amended or
superseded by a later filing, as of the date of the last such amendment or
filing, complied as to form in all material respects with the requirements of
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the "Securities Act"), or the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act") as the case may be, and (ii) did not at the time they were
declared effective or filed, as the case may be, or if amended or superseded by
a later filing, as of the date of the last such amendment or such filing,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The audited consolidated financial statements of the Company for the
fiscal years ended December 31, 2002 and December 31, 2003 (the "Company
Financial Statements") were prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated
therein or in the notes thereto) and fairly present, in all material respects,
the consolidated financial position of the Company as at the respective dates
thereof and the consolidated results of operations and changes in financial
position of the Company for the periods indicated.
(c) The Company has furnished to the Sellers true and correct copies of
any amendments or modifications that it has entered into or made (but which have
not yet been filed with the SEC) to agreements, documents or other instruments
that previously had been filed by the Company with the SEC pursuant to the
Securities Act and the rules and regulations promulgated thereunder or the
Exchange Act and the rules and regulations promulgated thereunder.
2.7 Further Financial Matters. The Company does not have any liabilities or
obligations, whether secured or unsecured, accrued, determined, absolute or
contingent, asserted or unasserted or otherwise, except as disclosed in the
Private Placement Memorandum of the Company substantially in the form of the
draft dated June 16, 2004, attached as Exhibit D hereto. Upon the execution of
certain debt conversion agreements and settlement and release agreements
pursuant to Sections 6.2(a) and (b) hereof, the Company shall have no
outstanding indebtedness except for $30,000 of outstanding trade payables.
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2.8 Taxes. (a) The Company has timely filed all Tax Returns (as defined in
Section 2.8(b)) required to be filed by it (except for its Tax Return for the
year 2003, for which it has filed an extension), all such Tax Returns are
complete and accurate in all material respects, and the Company, collected or
withheld, or caused to be paid, collected or withheld, all material Taxes (as
defined in Section 2.8(b)) required to be paid, collected or withheld, other
than such Taxes for which adequate reserves in the Company Financial Statements
have been established or which are being contested in good faith (provided such
contests are disclosed in Item 2.8 of the Disclosure Schedule). There are no
claims or assessments pending against the Company for any alleged deficiency in
any Tax, and the Company has not been notified in writing of any proposed Tax
claims or assessments against the Company (other than, in each case, claims or
assessments for which adequate reserves in the Company Financial Statements have
been established or which are being contested in good faith (provided such
contests are disclosed in Item 2.8 of the Disclosure Schedule)). The Company has
no waivers or extensions of any applicable statute of limitations to assess any
Taxes. Other than as disclosed in this Section 2.8(a), there are no outstanding
requests by the Company for any extension of time within which to file any Tax
Return or within which to pay any Taxes shown to be due on any Tax Return.
Except as provided on Schedule 4.19, no written claim has been made during the
prior three (3) years by any governmental entity in a jurisdiction where the
Company does not currently file Tax Returns to the effect that the Company is or
may be subject to taxation by that jurisdiction. The Company has delivered to
the Sellers copies of each of its Tax Returns for the years 2001 and 2002, and a
copy of the extension filed by the Company for its Tax Return for the year 2003.
Neither the Company nor any person on behalf of the Company has granted to any
person any power of attorney that is currently in force with respect to any Tax
matter relating to the Company.
(b) For purposes of this Agreement: (i) "Taxes" shall mean all income,
gross receipts, windfall profits, capital, large corporations, value added,
goods and services, severance, property, production, sales, use, license,
excise, franchise, employment, employer health, employer insurance, withholding
or other taxes of any kind whatsoever together with any interest, additions,
penalties or installments with respect thereto and any interest in respect of
such additions, penalties or installments and (ii) "Tax Returns" shall mean all
declarations, reports and returns (including, without limitation, all necessary
elections and disclosures) required to be filed with any governmental entity
with respect to Taxes.
2.9 Absence of Certain Changes or Events. Except (i) as expressly permitted by
this Agreement, and (ii) for the default by the Company on all of its
outstanding debt to noteholders of the Company, all of which debt shall be
extinguished by the Company pursuant to Section 6.2(a) hereof prior to the
Closing, since December 31, 2003, there has not been: (x) any event that has had
a Material Adverse Effect, or (y) any material change by the Company in its
significant accounting principles or practices except as required by GAAP or as
the Company's independent public accountants have advised the Company is
required by GAAP.
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2.10 Real Property. The Company owns no real property 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.
2.11 Compliance with Law. The Company is not conducting its respective business
or affairs in violation of any applicable federal, state or local law,
ordinance, rule, regulation, court or administrative order, decree or process,
or any requirement of insurance carriers. The Company has not received any
notice of violation or claimed violation of any such law, ordinance, rule,
regulation, order, decree, process or requirement.
2.12 Permits and Licenses. The Company has 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 absence of which would not materially
adversely affect its business.
2.13 Litigation. Except as set forth in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2003, there is no claim, dispute, action,
suit, proceeding or investigation pending or, to the knowledge of the Company,
threatened, against or affecting the business of the Company. The Company nor
any of its properties is subject to any order, judgment, injunction or decree.
2.14 Patents; Trademarks and Intellectual Property Rights. The Company owns or
possesses 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.
2.15 Brokers. All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried out by the Company directly with the
Sellers without the intervention of any person on behalf of the Company in such
a manner as to give rise to any valid claim by any person, other than Sunrise
Securities Corp., against any Seller for a finder's fee, brokerage commission or
similar payment.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The Sellers represent and warrant, jointly but not severally, to the Company
that:
3.1 Due Organization and Qualification; Subsidiaries; Due Authorization.
(a) Alliance is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of formation, with full corporate
power and authority to own, lease and operate its business and properties and to
carry on its business in the places and in the manner as presently conducted or
proposed to be conducted. Alliance is in good standing as a foreign corporation
in each jurisdiction in which it require(s) such qualification.
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(b) Each Seller has all requisite power and authority to execute and deliver
this Agreement, and to consummate the transactions contemplated hereby and
thereby. Each Seller has taken all action necessary for the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby.
3.2 No Conflicts or Defaults. The execution and delivery of this Agreement by
the Sellers and the consummation of the transactions contemplated hereby do not
and shall not (a) contravene the governing documents of Alliance, or (b) with or
without the giving of notice or the passage of time, violate, conflict with, or
result in a breach of, or a default or loss of rights under, any material
covenant.
3.3 Capitalization. The authorized capital stock of Alliance consists of Three
Hundred (300) shares of common stock, no par value per share, of which Three
Hundred (300) shares of common stock are issued and outstanding. Set forth in
Item 3.3 of the Disclosure Schedule is a list of all stockholders of Alliance,
setting forth their names, addresses and number of shares owned. All of the
outstanding shares of the Alliance Common Stock are, and the Alliance Shares
when transferred in accordance with the terms hereof, will be, duly authorized,
validly issued, fully paid and nonassessable, and have not been or, with respect
to the Alliance Shares, will not be transferred in violation of any rights of
third parties.
3.4 Financial Statements. The Sellers have provided to the Company copies of the
consolidated balance sheets of Alliance at December 31, 2003 and March 31, 2004
and the related statements of operations, stockholders' equity and cash flows
for the period then ended, including the notes thereto, as audited by Mahoney
Cohen & Company, CPA, P.C., certified public accountants, (all such statements
being the "Alliance Financial Statements").
3.5 Further Financial Matters. Alliance does not have any material liabilities
or obligations, whether secured or unsecured, accrued, determined, absolute or
contingent, asserted or unasserted or otherwise, which are required to be
reflected or reserved in a balance sheet or the notes thereto under generally
accepted accounting principles, but which are not reflected in the Alliance
Financial Statements.
3.6 Taxes. All payments for withholding taxes, unemployment insurance and other
amounts required to be paid for periods prior to the date hereof to any
governmental authority in respect of employment obligations of Alliance, have
been paid or shall be paid prior to the Closing and have been duly provided for
on the books and records of Alliance and in the Alliance Financial Statements.
3.7 Indebtedness; Contracts; No Defaults. To Alliance's knowledge, neither
Alliance nor any other person or entity is in breach in any material respect of,
or in default in any material respect under, any material contract, agreement,
arrangement, commitment or plan to which Alliance is a party, and no event or
action has occurred, is pending or is threatened, which, after the giving of
notice, passage of time or otherwise, would constitute or result in such a
material breach or material default by Alliance or, to the knowledge of
Alliance, any other person or entity. Alliance has not received any notice of
default under any contract, agreement, arrangement, commitment or plan to which
it is a party, which default has not been cured to the satisfaction of, or duly
waived by, the party claiming such default on or before the date hereof.
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3.8 Compliance with Law. Alliance is not conducting its business or affairs in
material violation of any applicable federal, state or local law, ordinance,
rule, regulation, court or administrative order, decree or process, or any
requirement of insurance carriers. Alliance has not received any notice of
violation or claimed violation of any such law, ordinance, rule, regulation,
order, decree, process or requirement.
3.9 No Adverse Changes. Since execution of this Agreement, there has not been
any material adverse change in the business, prospects, the financial or other
condition, or the assets or liabilities of Alliance as reflected in the Alliance
Financial Statements.
3.10 Litigation. There is no claim, dispute, action, suit, proceeding or
investigation pending or, to the knowledge of Alliance, threatened, against or
affecting the business of Alliance, or challenging the validity or propriety of
the transactions contemplated by this Agreement.
3.11 Patents; Trademarks and Intellectual Property Rights. Alliance owns or
possesses 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.
3.12 Brokers. All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried out by Alliance directly with the Sellers
without the intervention of any person on behalf of the Sellers in such a manner
as to give rise to any valid claim by any person against the Sellers for a
finder's fee, brokerage commission or similar payment, except for a fee of
$28,500 in stock of the Company which will be paid by Alliance to J.A.S.
Commercial Corp. after the Closing Date.
3.13 Purchase for Investment.
(a) Each Seller is acquiring the Preferred Stock for investment for the
Seller's own account and not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and each Seller has no present
intention of selling, granting any participation in, or otherwise distributing
the same. Each Seller further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Preferred Stock.
(b) Each Seller understands that the Preferred Stock is not registered
under the Act on the ground that the sale and the issuance of securities
hereunder is exempt from registration under the Act pursuant to Section 4(2)
thereof, and that the Company's reliance on such exemption is predicated on each
Seller's representations set forth herein.
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(c) Each Seller is an "accredited investor" as that term is defined in
Rule 501 (a) of Regulation D under the Act.
3.14 Investment Experience. Each Seller acknowledges that it can bear the
economic risk of its investment, and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment in the Preferred Stock.
3.15 Information. Each Seller has carefully reviewed such information as each
Seller deemed necessary to evaluate an investment in the Preferred Stock.
3.16 Restricted Securities. Each Seller understands that the Preferred Stock may
not be sold, transferred, or otherwise disposed of without registration under
the Act or an exemption there from, and that in the absence of an effective
registration statement covering the Preferred Stock or any available exemption
from registration under the Act, the Preferred Stock must be held indefinitely.
Each Seller is aware that the Preferred Stock may not be sold pursuant to Rule
144 promulgated under the Act unless all of the conditions of that Rule are met.
Among the conditions for use of Rule 144 may be the availability of current
information to the public about the Company.
ARTICLE IV
INDEMNIFICATION
4.1 Indemnity of the Company. The Company agrees to indemnify and hold harmless
the Sellers from and against, and to reimburse the Sellers with respect to, all
liabilities, losses, costs and expenses, including, without limitation,
reasonable attorneys' fees and disbursements, asserted against or incurred by
the Sellers by reason of, arising out of, or in connection with any material
breach of any representation, warranty or agreement contained in this Agreement
made by the Company or in any document or certificate delivered by the Company
pursuant to the provisions of this Agreement or in connection with the
transactions contemplated thereby; provided that any representation or warranty
that is itself qualified as to materiality shall not be deemed so qualified for
purposes of this Section 4.1.
4.2 Indemnity of the Sellers. The Sellers agree to defend, indemnify and hold
harmless the Company from and against, and to reimburse the Company with respect
to, all liabilities, losses, costs and expenses, including, without limitation,
reasonable attorneys' fees and disbursements, asserted against or incurred by
the Sellers by reason of, arising out of, or in connection with any material
breach of any representation, warranty or agreement contained in this Agreement
and made by the Sellers or in any document or certificate delivered by the
Sellers pursuant to the provisions of this Agreement or in connection with the
transactions contemplated thereby; provided that any representation or warranty
that is itself qualified as to materiality shall not be deemed so qualified for
purposes of this Section 4.2.
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4.3 Indemnification Procedure. A party (an "Indemnified Party") seeking
indemnification shall give prompt notice to the other party (the "Indemnifying
Party") of any claim for indemnification arising under this Article 4. The
Indemnifying Party shall have the right to assume and to control the defense of
any such claim with counsel reasonably acceptable to such Indemnified Party, at
the Indemnifying Party's own cost and expense, including the cost and expense of
reasonable attorneys' fees and disbursements in connection with such defense, in
which event the Indemnifying Party shall not be obligated to pay the fees and
disbursements of separate counsel for such in such action. In the event,
however, that such Indemnified Party's legal counsel shall determine that
defenses may be available to such Indemnified Party that are different from or
in addition to those available to the Indemnifying Party, in that there could
reasonably be expected to be a conflict of interest if such Indemnifying Party
and the Indemnified Party have common counsel in any such proceeding, or if the
Indemnified Party has not assumed the defense of the action or proceedings, then
such Indemnifying Party may employ separate counsel to represent or defend such
Indemnified Party, and the Indemnifying Party shall pay the reasonable fees and
disbursements of counsel for such Indemnified Party. No settlement of any such
claim or payment in connection with any such settlement shall be made without
the prior consent of the Indemnifying Party which consent shall not be
unreasonably withheld.
ARTICLE V
DELIVERIES
5.1 Items to be delivered to the Sellers prior to or at Closing by the
Company.
(a) Articles of Incorporation and amendments thereto, bylaws and amendments
thereto, and a certificate of good standing from the Secretary of State of the
State of Nevada;
(b) all applicable schedules hereto;
(c) all minutes and resolutions of the Board of Directors and shareholder
meetings in possession of the Company;
(d) shareholder list;
(e) all financial statements and tax returns in possession of the Company;
(f) resolution from the Company's current directors appointing three (3)
designees of Alliance to the Company's Board of Directors;
(g) letters of resignation from the Company's current directors to be effective
upon Closing and after the appointments described in this section;
(h) certificates representing the Preferred Stock issued in the denominations
set forth opposite the respective names of the Sellers on Schedule I;
(i) copies of board, and if applicable, shareholder resolutions approving this
transaction and authorizing the issuances of the shares hereto; and
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(j) any other document reasonably requested by the Sellers that they deem
necessary for the consummation of this transaction.
5.2 Items to be delivered to the Company prior to or at Closing by
Alliance
(a) all applicable schedules hereto;
(b) certificates representing all of the Alliance Shares; and
(c) any other document reasonably requested by the Company that it
deems necessary for the consummation of this transaction.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions Precedent to Closing. The obligations of the parties under this
Agreement shall be and are subject to fulfillment, prior to or at the Closing,
of each of the following conditions:
(a) That each of the representations and warranties of the parties
contained herein shall be true and correct at the time of the Closing Date as if
such representations and warranties were made at such time; and
(b) That the parties shall have performed or complied with all agreements,
terms and conditions required by this Agreement to be performed or complied with
by them prior to or at the time of the Closing.
6.2 Conditions to Obligations of the Sellers. The obligations of the Sellers
shall be further subject to fulfillment prior to or at the Closing, of each of
the following conditions:
(a) the Company shall have entered into debt conversion agreements with
all of its outstanding noteholders such that all outstanding debt of the Company
held by such noteholders shall have been extinguished through (i) the conversion
of such debt into shares of Preferred Stock or (ii) cash payments by the
Company;
(b) the Company shall have obtained settlement and release agreements for
all of its trade payables, except for $30,000 of trade payables which shall
remain outstanding as of the Closing Date;
(c) all required definitive instruments and agreements in a form
reasonably satisfactory to the Sellers shall have been executed;
(d) all necessary board and third party consents shall have been obtained;
(e) the Sellers shall have completed all necessary technical and legal due
diligence;
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(f) the Sellers shall have received a Voting Proxy from (i) Minotaur Fund,
L.L.P., Phillip Vitug, Brady Capital Group, LLC, Robert W. O'Neel, III, John
Gentile, Don Danks and SBI USA, LLC (together, the "Corfman Investors"), and
(ii) Northumberland Holdings Ltd., Richard Genovese and Nathan Low and/or his
Affiliates, assigns and successors (together, the "Northumberland Investors")
for all shares of Company stock held by the Corfman Investors and the
Northumberland Investors after consummation of the transactions contemplated by
the Transaction Documents;
(g) the Company shall be fully current as of the Closing Date in its
required SEC regulatory filings, including its Form 10-KSB for the year ended
December 31, 2003 and its From 10-QSB for the quarter ended March 31, 2004, each
of which shall have been filed in a form reasonably satisfactory to the Sellers;
(h) on the Closing Date the Company shall not have any liabilities,
contingent or otherwise, including but not limited to, any notes payable or
accounts payable, except as otherwise disclosed;
(i) the Company shall have filed the Certificates with the Nevada
Secretary of State providing for the Preferred Stock; and
(j) The Company shall have completed a private placement of the Company's
securities resulting in net proceeds to the Company of at least $2,800,669 as
evidenced by a disbursement receipt from the American Stock Transfer & Trust
Company.
ARTICLE VII
COVENANTS
7.1 Post-Closing Covenants. Following the Closing, the Sellers shall take all
actions necessary or appropriate to effect the amendment of the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock, par value $.001 per share, of the Company, thereby enabling the
conversion of all outstanding shares of Preferred Stock into Common Stock of the
Company (the "Amendment"); including, without limitation, obtaining approval of
the Amendment by the Board of Directors of the Company and the shareholders of
the Company within 20 days following the Closing (it being understood that no
corporate action effectuating the Amendment shall be taken until at least 20
calendar days after an information statement on Schedule 14C has been mailed to
the Company shareholders pursuant to Regulation 14c-2(b) of the Exchange Act).
During the period from the Closing to the date on which the shareholders of the
Company approve the Amendment, no Seller shall transfer any securities of the
Company (or rights therein) to any person.
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ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any time before or, at
Closing, by:
(a) The mutual agreement of the parties hereto; or
(b) Either the Company or Sellers holding a majority of the outstanding
ownership interests in Alliance, if:
(i) Any provision of this Agreement applicable to a party hereto shall be
materially untrue, be incapable of being accomplished or fail to be
accomplished;
(ii) Any legal proceeding shall have been instituted or shall be
imminently threatening to delay, restrain or prevent the consummation of this
Agreement;
(iii) The Exchange shall not have been consummated by June 30, 2004.
(c) Upon termination of this Agreement for any reason, in accordance with
the terms and conditions set forth in this paragraph, each party shall bear all
costs and expenses as such party has incurred.
ARTICLE IX
MISCELLANEOUS
9.1 Survival of Representations, Warranties and Agreements. All representations
and warranties and statements made by a party to this agreement or in any
document or certificate delivered pursuant hereto shall survive the Closing Date
for a period of two years from the Closing Date.
9.2 Notice. All communications, notices, requests, consents or demands given or
required under this Agreement shall be in writing and shall be deemed to have
been duly given when delivered to, or received by prepaid registered such party
by notice in the manner provided herein:
If to the Company:
Gottbetter & Partners L.L.P.
488 Madison Avenue, 12th Floor
New York, NY 10022
(212) 400-6900 (212) 400-6901 (fax) c/o Louis Cammarosano
If to the Sellers:
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At the address of each Seller set forth on Schedule 1 hereto.
With a copy to:
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
Attention: Christopher E. Manno, Esq.
Facsimile: (212) 728-9288
9.3 Entire Agreement. This Agreement, the Disclosure Schedules and any
instruments and agreements to be executed pursuant to this Agreement, set forth
the entire understanding of the parties hereto with respect to the subject
matter of this Agreement, merges and supersedes all prior and contemporaneous
understandings with respect to its subject matter and may not be waived or
modified, in whole or in part, except by a writing signed by each of the parties
hereto.
9.4 Successors and Assigns. This Agreement shall be binding upon, enforceable
against and inure to the benefit of, the parties hereto and their respective
heirs, administrators, executors, personal representatives, successors and
assigns, and nothing herein is intended to confer any right, remedy or benefit
upon any other person.
9.5 Governing Law. This Agreement shall in all respects be governed by and
construed in accordance with the laws of the State of New York as applicable to
agreements made and fully to be performed in such state, without giving effect
to conflicts of law principles.
9.6 Counterparts. 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) with the same force and effect as if such facsimile signature page
were an original thereof.
9.7 Severability. If any provision of this Agreement is held to be invalid or
unenforceable by a court of competent jurisdiction, this Agreement shall be
interpreted and enforceable as if such provision were severed or limited, but
only to the extent necessary to render such provision and this Agreement
enforceable.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of
the date first above written.
ESSENTIAL REALITY, INC., a Nevada corporation
By:
Name: Humbert B. Powell, III
Title: Chairman of the Board
SELLERS:
By: ________________________________________________
Name: Jay Gelman
By: ________________________________________________
Name: Andre Muller
By: ________________________________________________
Name: Francis Vegliante
15
THE COMPANY DISCLOSURE SCHEDULES
Item 2.5(b) - Capitalization
Item 2.8 - Taxes
16
ALLIANCE DISCLOSURE SCHEDULES Item 3.3 - Capitalization.
17
EXHIBIT A
DIRECTORS
Jay Gelman Chairman
Andre Muller Director
Thomas Vitiello Director
Humbert B. Powell, III Director
18
EXHIBIT B
OFFICERS
Jay Gelman Chief Executive Officer
Andre Muller President and Chief Operating Officer
George Mellides Chief Financial Officer
19
EXHIBIT C
CAPITALIZATION TABLE
(See attached)
20
EXHIBIT D
PRIVATE PLACEMENT MEMORANDUM
(See attached)
21
DISCLOSURE SCHEDULE
22
ITEM 2.5(B)
CAPITALIZATION
OPTIONS DATE EXPIRATION EXERCISE
ADVISORY BOARD OPTIONS GRANTED GRANTED DATE PRICE
Glen Wong 25,000 June 20, 2002 June 20, 2012 $ 1.60
Eli Levitan 25,000 June 20, 2002 June 20, 2012 $ 0.75
Joshua I. Smith 25,000 June 21, 2002 June 21, 2012 $ 0.75
David H. Starr 25,000 June 20, 2002 June 20, 2012 $ 0.75
Marvin Igelman 25,000 June 20, 2002 June 20, 2012 $ 0.75
Paul Eibler 35,000 June 20, 2002 June 20, 2012 $ 0.75
John Constantino 75,000 June 20, 2002 June 20, 2012 $ 0.75
-----------
235,000
===========
FINANCIAL CONSULTANT WARRANTS
Coniston Investment Corp. 193,440 June 20, 2002 June 20, 2005 $ 1.30
Legend Merchant Group, Inc. 137,771 June 20, 2002 June 20, 2005 $ 1.30
-----------
331,211
===========
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ITEM 2.8
TAXES
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ITEM 3.3
CAPITALIZATION
- ----------------------------------------------------------------------------
NAME/ADDRESS NUMBER OF SHARES OWNED
- ----------------------------------------------------------------------------
Jay Gelman 100
27 Copper Beech Lane
Lawrence, NY 11559
- ----------------------------------------------------------------------------
Andre Muller 100
16 Hunting Hollow Ct.
Dix Hills, NY 11746
- ----------------------------------------------------------------------------
Francis Vegliante 100
25 Loomis Drive
Baldwin Place, NY 10505
- ----------------------------------------------------------------------------
25