SUPPLEMENT NO. 1 TO
SUBSCRIPTION AGREEMENT/CONFIDENTIAL PRIVATE PLACEMENT
OFFERING MEMORANDUM
ESSENTIAL REALITY, INC.
(A NEVADA CORPORATION)
This Supplement No. 1 (the "Supplement") to the Subscription Agreement
(the "Agreement") and Confidential Private Placement Offering Memorandum dated
June 17, 2004 (the "Memorandum") is being furnished to you on a confidential
basis in connection with the offering by Essential Reality, Inc., a Nevada
corporation (the "Company"), of shares of its Series A 6% Non-Redeemable
Convertible Preferred Stock (the "Offering"). The information contained in this
Supplement supplements and, in certain respects, modifies or supersedes certain
statements contained in the Memorandum. Investors are urged to review the
Memorandum and this Supplement carefully. Capitalized terms not defined herein
have the meanings given to them in the Agreement or Memorandum, as applicable.
CHANGES TO THE AGREEMENT AND MEMORANDUM
The following changes to the Agreement shall also be deemed to be amendments to
any related disclosures made relating to them in the Memorandum.
DEFINITIONS
The definition of the term "Certificates" in Section 1.1 is amended to read in
its entirety as follows:
"Certificates" shall mean the AMENDED 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.
CLOSING DATE
The portion of the first sentence of subsection (a) of Section 2.3 of the
Agreement (Closing Conditions) reading:
"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:"
is hereby deleted and replaced with the following:
"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 (BUT IN NO EVENT SHALL SUCH DATE BE LATER THAN JULY 15, 2004)
by the mutual consent of the Company and Sunrise, in their sole
discretion, 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:"
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POST-CLOSING REVERSE STOCK SPLIT
Subsection (a) of Section 2.4 of the Agreement (Post-Closing Covenants) is
hereby deleted in its entirety and replaced with the following:
"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 (A) an increase in the Company's number of
authorized shares of Common Stock from 50,000,000 to 4,400,000,000; and
(B) A REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK OF ONE SHARE FOR
FORTY-FOUR SHARES OUTSTANDING IMMEDIATELY FOLLOWING THE INCREASE IN THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 50,000,000 TO
4,400,000,000 AND THE CONVERSION OF THE PREFERRED STOCK AND THE COMPANY'S
SERIES B NON-REDEEMABLE CONVERTIBLE PREFERRED STOCK."
NON-REGISTERED OFFERING
Subsection (j) of Section 3.1 of the Agreement (Non-Registered Offering) is
deleted in its entirety and replaced with the following:
"Neither the Company noR 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
OR THE UNDERLYING COMMON STOCK to the registration requirements of Section
5 of the Securities Act."
AMENDMENT TO THE SERIES A CERTIFICATE OF DESIGNATION
The Certificate of Designation of the Rights and Preferences of the Series A 6%
Non-Redeemable Convertible Preferred Stock shall be amended and restated to
provide for the following:
The number of shares of Common Stock that may be acquired by a holder of Series
A Preferred Stock upon any conversion of Series A Preferred shall be limited to
the extent necessary to insure that, following such conversion, the total number
of shares of Common Stock then beneficially owned by such holder and its
affiliates and any other persons whose beneficial ownership of Common Stock
would be aggregated with such holder's for purposes of Section 13(d) of the
Exchange Act, does not exceed 4.999% of the total number of issued and
outstanding shares of Common Stock (including for such purpose the shares of
Common Stock issuable upon such conversion). This restriction may not be waived.
In addition, the number of shares of Common Stock that may be acquired by a
holder of Series A Preferred Stock upon any conversion of Series A Preferred
shall be limited to the extent necessary to insure that, following such
conversion, the total number of shares of Common Stock then beneficially owned
by such holder and its affiliates and any other persons whose beneficial
ownership of Common Stock would be aggregated with such Holder's for purposes of
Section 13(d) of the Exchange Act, does not exceed 9.999% of the total number of
issued and outstanding shares of Common Stock (including for such purpose the
shares of Common Stock issuable upon such conversion). This restriction may also
not be waived.
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Any shares of Series A Preferred Stock not converted into Common Stock due to
the operation of these restrictions will no longer be entitled to any rights to
the dividend and liquidation preference.
In addition, except as otherwise required by law, the holders of the Series A
Preferred Stock shall be entitled to vote on matters on which holders of Common
Stock are entitled to vote only if and to the extent that such holder's shares
are convertible into Common Stock in accordance with the conversion restrictions
set forth above.
These provisions may impact the ability of certain holders of shares of Series A
Preferred Stock to convert their shares into Common Stock as quickly as desired
and may cause such holders to lose their voting rights to the extent that a
certain number of their shares of Series A Preferred remain outstanding due to
the operation of the conversion restrictions.
The Amended and Restated Certificate of Designations is attached hereto as
Exhibit A.
CHANGES TO THE MEMORANDUM
RISK FACTORS AND THE SHARE EXCHANGE
On page 11 of the Memorandum (Risk Factors) and page 13 of the Memorandum (the
Share Exchange) there is a discussion of voting proxies given to Jay Gelman
representing approximately 13% of the outstanding common stock of the Company.
In addition to those proxies, The Nathan A Low Roth I.R.A. has granted a voting
proxy to the Company for all securities of the Company that it owns. Unlike the
other voting proxies, the voting proxies of each of the Nathan A. Low Family
Trust dated April 12, 1996 (a member of the Northumberland Investors) and the
Nathan A Low Roth I.R.A. shall continue for a period of 2 years from the
Closing, unless the underlying securities are transferred.
LIQUIDITY
The following new risk factor is hereby added to page 9 at the bottom of the
previously existing section on risk factors:
LIQUIDITY RESTRICTIONS
Holders of certain Preferred Shares shall not receive the benefit of the
automatic conversion of all of the Preferred Shares into Common Stock. A holder
of the Preferred Shares may not receive shares of common stock upon conversion
of its shares of Preferred Shares to the extent such conversion would result in
the holder beneficially owning in excess of 4.999% or 9.999% of the issued and
outstanding shares of the common stock of the Company on an as-converted basis.
Such conversion restrictions may not be waived. Any of the Preferred Shares not
converted into common stock due to the operation of these restrictions will no
longer be entitled to the 6% dividend. Accordingly, affected holders of
Preferred Shares may have to hold the Preferred Shares for a longer period of
time than those holders of Preferred Shares that automatically convert into
Common Stock.
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DESCRIPTION OF SECURITIES
On page 20 of the Memorandum, the second, third and fourth sentences of the
fifth paragraph are deleted and replaced with the following:
Except as set forth below, the Preferred Shares and the Series B Preferred
Shares shall convert automatically into shares of Common Stock upon the
effectiveness of a certificate of amendment to the Company's Articles duly filed
with the Secretary of State of Nevada authorizing a sufficient number of shares
of common stock of the Company to enable the conversion of all Preferred Shares
and Series B Preferred Shares to convert into common stock of the Company. The
Preferred Shares pay a 6% payable in kind dividend until such time as the
Company has enough common stock to convert all the Preferred Shares being
offered into common stock of the Company. The Series B Preferred Shares do not
pay a dividend. A holder of the Preferred Shares may not receive shares of
common stock upon conversion of its shares of Preferred Shares to the extent
such conversion would result in the holder beneficially owning in excess of
4.999% or 9.999% of the issued and outstanding shares of the common stock of the
Company on an as-converted basis. Such conversion restrictions may not be
waived. Any of the Preferred Shares not converted into common stock due to the
operation of these restrictions will no longer be entitled to the 6% dividend.
TERMS OF OFFERING AND PLAN OF DISTRIBUTION
On page 21 of the Memorandum, the reference to the Offering being subject to
extension, is amended so that the Offering is subject to extension by the
Company and Sunrise, in their sole discretion, but such extension shall not
extend beyond July 15, 2004.
CAPITALIZATION/APPENDIX II
A footnote has been added to the capitalization table of the Company to reflect
that the table does not include Warrants to purchase Common Stock of the Company
issuable to the Placement Agent for services rendered in connection with the
offering. A revised capitalization table is annexed hereto.
INVESTOR QUESTIONNAIRE
A separate Investor Questionnaire is attached hereto for corporate entity
subscribers in the Offering. If you are investing on behalf of a corporate
entity, or have sent in your subscription documents on behalf of a corporate
entity, kindly complete and return the attached questionnaire and return it with
an executed copy of this Supplement.
Please sign below to confirm your receipt of this Supplement (and, if applicable
to confirm your subscription for Preferred Shares on the basis of this
Supplement).
THIS SUPPLEMENT MUST BE EXECUTED AND RETURNED BEFORE THE CLOSING. FAILURE TO
RETURN AN EXECUTED SUPPLEMENT SHALL RESULT IN THE REJECTION OF THE AGREEMENT OF
PURCHASER, IN WHICH CASE ALL FUNDS DEPOSITED BY PURCHASER SHALL BE RETURNED
WITHOUT INTEREST. FOR THE AVOIDANCE OF DOUBT, THE UNDERSIGNED ACKNOWLEDGES AND
AGREES THAT ANY FUNDS PREVIOUSLY DEPOSITED BY PURCHASER AS CONSIDERATION FOR THE
PURCHASE OF SERIES A 6% NON-REDEEMABLE CONVERTIBLE PREFERRED STOCK OF THE
COMPANY SHALL BE DEEMED DEPOSITED ON THE BASIS OF THE FINAL EXECUTION VERSIONS
OF THE TRANSACTION DOCUMENTS AND DISCLOSURE DOCUMENTS. IN ADDITION, ALL TERMS
AND CONDITIONS OF THE MEMORANDUM AND AGREEMENT EXCEPT AS AMENDED HEREBY SHALL
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REMAIN IN FULL FORCE AND EFFECT, INCLUDING THE DISCRETION OF THE COMPANY AND THE
PLACEMENT AGENT TO ACCEPT OR REJECT ANY SUBSCRIPTION FOR PREFERRED STOCK.
PURCHASER REAFFIRMS HIS, HER OR ITS AGREEMENT TO BE PARTY TO AND TO BE BOUND BY
THE TERMS OF THE TRANSACTION DOCUMENTS (IN FORM AND SUBSTANCE OF THE FINAL
EXECUTION VERSIONS THEREOF) AND CONFIRMS THAT SUNRISE, THE COMPANY AND ANY OTHER
PERSON PARTY TO THE TRANSACTION DOCUMENTS SHALL RELY ON SUCH PREVIOUSLY
DELIVERED SIGNATURE PAGES AS IF THE UNDERSIGNED HAD EXECUTED AND DELIVERED
SIGNATURE PAGES ON THE BASIS OF THE FINAL EXECUTION VERSIONS.
ESSENTIAL REALITY, INC.
ACKNOWLEDGED AND CONFIRMED:
By:________________________________
Name:
Title:
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