ALLIANCE DISTRIBUTORS HOLDING INC. - 10KSB - 20040629 - NOTES_TO_FINANCIAL_STATEMENT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
Essential Reality, LLC ("ER LLC" or the "Company") was formed as
Freedom Multimedia, LLC in the State of Delaware on July 9, 1998 and
began active operations on June 1, 1999. The Company changed its name
to Essential Reality, LLC ("ER LLC") on December 29, 1999. On June 20,
2002, ER LLC completed a business combination (recapitalization) with
JPAL, Inc. ("JPAL"), a Nevada Corporation (the "Transaction"), whereby,
all of the members of ER LLC contributed their membership interests in
ER LLC to the Company in exchange for 16,874,784 shares of the
Company's common stock. The shareholders of JPAL canceled 7,564,326 of
their shares of JPAL common stock and were left with 1,080,934 shares
of common stock representing 6.02% of the Company. Upon the business
combination, ER LLC was dissolved and all of its assets and liabilities
were transferred into JPAL. Following the Transaction, JPAL changed its
name to Essential Reality, Inc.
The Company was formed to develop, manufacture, and market computer
peripheral devices, with an initial emphasis on a product called
"P5(TM)." However, due to less than expected sales of the P5(TM), the
Company has decided to discontinue its operations and focus on merging
with an operating entity.
GOING CONCERN:
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America that contemplate continuation of the Company as a going
concern. However, the Company has reported a net loss of $5,853,225 for
the year ended December 31, 2003, and has an accumulated deficit of
$19,478,947, and at year end the Company`s current liabilities exceeded
its current assets by $5,484,351. Without realization of additional
capital, it would be unlikely for the Company to continue as a going
concern. This factor raises substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of the
uncertainty.
Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence.
The Company has limited capital resources and has incurred, significant
recurring losses and negative cash flows from operations, and the
Company does not believe its cash on hand along with existing sources
of cash are sufficient to fund its cash needs over the next twelve
months under the current capital structure to continue as a going
concern. In order to address this situation, the Company executed a
binding term sheet which sets forth the preliminary terms and
conditions of a proposed exchange transaction between the Company and
AllianceCorner Distributors Inc., which is contingent on a number of
factors (see Note 19). There can be no assurance that the Company will
be successful in completing the transaction. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern.
REVENUE RECOGNITION:
The Company recognizes under Staff Accounting Bulletin 104, gross
revenue when the earnings process is complete, as evidenced by an
agreement with the customer, transfer of title and the rights and risks
of ownership have passed to the customer, the product is delivered, the
price is fixed and determinable, and collection of the resulting
receivable is reasonably assured. Because the Company allows many of
its distributors price protection and/or right of return, recognition
of revenue in the accompanying financial statements has been deferred
until the distributors sell the merchandise and the cash is collected
by the Company. Inventory at distributors is reported as consigned in
the balance sheet.
F-9
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION, Continued:
In cases where sales are made to certain distributors and title has
transferred, risks of ownership has passed and collection is assured,
sales have been recorded and an account receivable has been recorded.
The Company records an allowance for uncollectible accounts on a
customer-by-customer basis as appropriate.
The Company may bundle product offerings from third-party vendors along
with the P5(TM) product or may sell the P5(TM) independently. The
software is incidental to the product as a whole and according to
Financial Accounting Standards Board No 86, Accounting for the Costs of
Computer Software To Be Sold, Leased or Marketed, all revenue is
allocated to the P5(TM). As such, the Company recorded the gross amount
of the purchase price of the P5(TM) product as revenue and has
reflected the royalty to be paid to the third-party vendor as a
component of cost of sales.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include
all highly liquid debt instruments with original maturities of three
months or less that are not securing any corporate obligations. The
Company had no cash equivalents at December 31, 2003.
The Company maintains its cash in bank deposits accounts that, at
times, may exceed federally insured limits. At December 31, 2003, the
Company did not have any cash in excess of FDIC insured limits. The
Company has not experienced any losses in such accounts.
ACCOUNTS RECEIVABLE:
The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on a
review of the current status of trade accounts receivable. It is
reasonably possible that the Company's estimate of the allowance for
doubtful accounts will change. The Company has not experienced any
losses in accounts receivable and has provided no allowance at December
31, 2003.
INVENTORIES:
Inventories are valued at the lower of cost or market, with cost being
determined on the first-in first-out basis. The inventory represents
high-technology parts that may be subject to rapid technology
obsolescence or limited sales cycle and which are sold in a highly
competitive industry. If the actual product demand or selling prices
are less than cost, the Company establishes an allowance account based
on net realizable value. During the years ended December 31, 2003 and
2002, the Company wrote down its inventory to market. The inventory
valuation adjustment totaled $78,395 and $1,883,207 at December 31,
2003 and 2002, respectively.
F-10
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INVENTORIES, Continued:
Inventory sold with the right of price protection and/or right of
return is reported as inventory on consignment. There was no consigned
inventory at December 31, 2003.
PRODUCT WARRANTY:
Due to effective product testing and the short time between the product
shipment and the detection and correction of production failures, the
warranty accrual and the related expense were not significant for the
year ended December 31, 2003.
EQUIPMENT AND IMPROVEMENTS:
Equipment and improvements are valued at cost. Depreciation and
amortization are provided using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over the shorter of
the lease term or the length of the lease, which is five years.
The estimated service lives of equipment and improvements are as
follows:
Office equipment 5 years
Testing equipment 3 years
Furniture and fixtures 5 years
Computers 3 years
Leasehold improvements 5 years
WEBSITE DEVELOPMENT COSTS:
In March 2000 the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on Issue No.
00-2 for Web Site Development Costs. Website development costs for the
years ended December 31, 2003 and 2002 were $-0- and $22,320,
respectively.
CAPITALIZED DEVELOPMENT COSTS:
Product development costs include costs incurred by the Company to
research and develop the P5(TM) product. Product development costs are
expensed until such time as the Company determines that a product is
technologically feasible. Product development costs are capitalized
from such date until such time as product development is substantially
complete. Product development costs capitalized will be amortized on
the straight-line basis over the estimated useful life of the product,
which is estimated to be three years. The Company attained
technological feasibility in 2002. No amounts were capitalized after
obtaining technological feasibility.
F-11
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
LONG-LIVED ASSETS:
In October 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." Although retaining many of the fundamental
recognition and measurement provisions of SFAS 121, the new rules
significantly change the criteria that would have to be met to classify
an asset as held-for-sale. The statement also supersedes certain
provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future
operating losses from discontinued operations to be displayed in
discontinued operations in the period or periods in which the losses
are incurred rather than as of the measurement date, as presently
required. We concluded that the effect of adopting this statement had a
material impact on our financial position, results of operations, or
cash flows. In November 2003, when the Company decided to discontinue
its operations, all of the intangible assets and fixed assets that were
previously capitalized have been written off as part of the loss from
discontinued operations.
ADVERTISING:
The Company expenses advertising costs when incurred. Advertising
expense totaled $80,730 and $289,400 for the years ended December 31,
2003 and 2002, respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed in the year incurred. These
costs totaled $527,000, net of loan receivable of $400,000 (see Note 3)
and $1,579,100 for the years ended December 31, 2003 and 2002,
respectively. The costs incurred during the year ended December 31,
2003 related to follow-up of the product and final testing of products
manufactured. These costs are included in discontinued operations on
the statement of operations.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets, including tax loss and
credit carryforwards, and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in
the deferred tax assets and deferred tax liabilities. The components of
the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Realization of
the deferred tax asset is dependent on generating sufficient taxable
income in future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's cash and cash equivalents,
accounts receivable, inventories, accounts payable, and accrued
expenses (non of which are held for trading) approximates their
estimated fair values due to the short-term maturities of those
financial instruments. Also, the carrying amounts for secured and
unsecured convertible debentures approximate fair value, because the
terms offered to the Company are at current market rates.
F-12
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COMPREHENSIVE INCOME:
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 2003 and
2002, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
STOCK BASED COMPENSATION
The Company has elected to follow Financial Accounting Standards Board
Statement No. 123 (Accounting for Stock-Based Compensation) and
accordingly the Company determined compensation costs based on the fair
value at the grant date for its stock options.
A schedule of activity with respect to the Company's stock option plans
is as follows:
Weighted
Number Average of
of Shares Exercise Price
---------- --------------
Outstanding at December 31, 2002 1,357,000 $ 1.08
Granted Directors and Employees 50,000 .35
Exercised -- --
Cancelled (297,334) .88
Forfeited (128,666) .85
---------- ----------
Outstanding a December 31, 2003 981,000 $ 1.13
========== ==========
Options exercisable at December 31, 2003 683,764 $ 1.09
========== ==========
The following tables summarize information about stock options
outstanding and exercisable at December 31, 2003:
Weighted Outstanding
Average Options Options Exercisable
Range of Number of Remaining Weighted Number of Weighted
Exercise Outstanding Contractual Life Average Shares Average
Prices Options in Year Exercise Price Exercisable Exercise Price
---------------------------------------------------------------------------------------------------------------
$0.65 to $1.00 825,600 7.78 $ 0.71 579,957 $ 0.70
$1.01 to $4.00 155,400 8.48 3.36 103,807 3.32
--------- --------- -------------- --------
981,000 7.89 $ 1.13 683,764 $ 1.09
========= ========= ============== ========= ============
BASIC AND DILUTED LOSS PER SHARE:
In accordance with SFAS No. 128, "Earnings Per Share," the basic loss
per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed similarly to
basic loss per common share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. At December 31, 2003 and 2002,
the Company did not include the effects of common stock components
because their effect would have been anti-dilutive. As of December 31,
2003 and 2002, the Company had approximately 21,357,746 and 3,406,369,
respectively of anti-dilutive securities.
F-13
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SEGMENT REPORTING:
Based on the Company's integration and management strategies, the
Company operated in a single business segment. For the years ended
December 31, 2003 and 2002, all revenues have been derived from
domestic operations.
NEW ACCOUNTING PRONOUNCEMENTS:
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB
104 supersedes SAB 101, "Revenue Recognition in Financial Statements."
SAB 104's primary purpose is to rescind accounting guidance contained
in SAB 101 related to multiple element revenue arrangements, superseded
as a result of the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." Additionally, SAB 104
rescinds the SEC's Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers ("the FAQ") issued with SAB 101
that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21,
the revenue recognition principles of SAB 101 remain largely unchanged
by the issuance of SAB 104, which was effective upon issuance. The
adoption of SAB 104 did not impact the consolidated financial
statements.
(2) BUSINESS COMBINATION:
On June 20, 2002, Essential Reality, LLC, a Delaware Limited Liability
Company, completed a business combination with JPAL, Inc., a Nevada
corporation and an SEC registrant pursuant to an Amended Contribution
Agreement between ER LLC and JPAL, whereby all of the members of ER LLC
contributed their membership interests in ER LLC to the Company in
exchange for an aggregate of 16,874,784 shares of the Company's common
stock. Concurrent with the Transaction, the shareholders of JPAL
canceled 7,564,326 of their shares of JPAL common stock and were left
with 1,080,934 shares of common stock representing 6.02% of the
Company. Following the Transaction, JPAL changed its name to Essential
Reality, Inc. and ER LLC, a wholly owned subsidiary of the Company, was
merged into the Company. Subsequently, ER LLC was liquidated and the
assets became assets of Essential Reality, Inc.
The Transaction was accounted for as a recapitalization of ER LLC. The
management of ER LLC remained as the management of the Company. Since
the Transaction was accounted for as a recapitalization and not a
business combination, no goodwill has been recorded in connection with
the Transaction and the costs incurred in connection with the
Transaction have been accounted for as a reduction of additional
paid-in capital. As a result of the recapitalization: (i) the
historical financial statements of the Company for periods prior to the
date of the Transaction are no longer the historical financial
statements of JPAL, and, therefore, JPAL's historical financial
statements are no longer presented; (ii) the historical financial
statements of the Company for periods prior to the date of the
Transaction are those of ER LLC; (iii) all references to the financial
statements of the "Company" apply to the historical financial
statements of ER LLC prior to the Transaction and to the financial
statements of the Company subsequent to the Transaction; and (iv) any
reference to the Company applies solely to ER LLC and Essential
Reality, Inc.
(3) DISCONTINUED OPERATIONS
On November 6, 2003, the Board of Directors passed a unanimous
resolution to discontinue the operations of the P5(TM) Unit because of
the lack of capital and the inability to obtain additional financing.
The consolidated financial statements and related notes reflect the
financial position, results of operations and cash flows of the
Company for these discontinued includes allocations of certain
expenses for the P5(TM) Unit.
F-14
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(3) DISCONTINUED OPERATIONS, Continued:
A summary of the income (loss) from discontinued operations for the
year ended December 31, 2003 is as follows:
Revenue $ 234,600
Cost of revenue 230,867
----------
Gross profit 3,733
Operating expenses
Impairment of fixed assets and
Intangible assets 419,235
Sales and marketing 524,512
Product development 527,015
Severance compensation 204,511
Depreciation and amortization 233,332
Inventory valuation adjustment 78,395
----------
Total operating expenses 1,987,000
----------
Loss from discontinued operations ($1,983,267)
==========
(4) NOTES RECEIVABLE:
Notes receivable as of December 31, 2003 consisted of the following:
Due from former employee $ 50,000
Less : reserve for collectibility 50,000
---------
$ -
=======
In July 2001, the Company signed an agreement with a third party for
the development of the P5(TM). In connection with the agreement, the
Company agreed to provide loan advances up to $2,000,000, later
increased to $2,700,000, to cover approved development costs. The loan
is non-interest bearing and is reduced by qualified development
expenses incurred by the developer, and is further reduced by tax
credits from a division of the Canadian Government for research, earned
by the developer and passed through to the Company. The Company
received a General Security Agreement that created a security interest
in the developer's equipment, inventory, accounts receivable,
intangibles, etc. The loan is payable within two years after each
advance unless on demand after the two years at the discretion of ER.
For the year ended December 31, 2002, the loan balance has been reduced
by $1,403,325 of qualified development expenses and $535,092 of
research and development credits from the Canadian Government. At
December 31, 2002, the remaining receivable was $400,000 and was
recorded net of an allowance for reduced tax credits of $52,121.
On September 16, 2003 the Company executed a Settlement Agreement and
Mutual Release where the parties agreed to waive all rights and claims
against each other for its past and present services under the
Agreement including severance obligations assumed by the developer; and
the Company applied against the outstanding Tax Credit Receivable equal
to the amount to the developer.
F-15
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(4) NOTES RECEIVABLE, CONTINUED:
As of September 16, 2003 the loan balance has been reduced $1,960,012
of Qualified expenses and $418,773 of research and development credits
from The Canadian Government. After taking into account the credits,
the remaining receivable totalled $477,309. Included in accounts
payable on the agreement date was $366,642 of amounts owed for services
rendered. As part of the agreement the receivable was offset against
thepayable and a contract termination expense in the amount of $110,669
was recorded and included in product development expense in
discontinued operations at December 31, 2003.
In July, 2002 the Company loaned the former President and COO $50,000
due in one year with interest accruing at 6%. This loan was an advance
for a potential bonus the employee may have received in connection with
an employment agreement assuming he met all the terms of the agreement.
The Company terminated the employee due to cause and accordingly has
reflected the advance as still outstanding. However, the Company is
unsure of its collectability and has reserved the loan in full at
December 31, 2003.
(5) INVENTORIES:
Inventories as of December 31, 2003 consisted of finished goods
totalling $117,594.
Subsequent to December 31, 2003, the Company experienced difficulty in
selling its P5(TM) glove at its suggested retail pricing and was not
able to sell the majority of its inventory at cost to manufacture.
Accordingly, it has taken a permanent write down to reflect the selling
price in 2004 to market against the remaining finished goods inventory.
Included in cost of sales is an impairment adjustment of $78,395 of
finished goods for December 31, 2003 and for December 31, 2002 included
in operating expenses is impairment of inventory realization of
$1,883,207.
(6) OTHER CURRENT ASSET
Included in other current assets are amounts totaling $205,135
representing funds deposited in an escrow account for the exchange with
Alliance (see Note 19 Subsequent Events)
(7) EQUIPMENT AND IMPROVEMENTS:
A summary as of December 31, 2003 is as follows:
Furniture and fixtures $ 3,257
Leasehold improvements 7,569
Computers 17,947
Office equipment 10,433
Tooling, molds, dies, and equipment 392,267
--------
431,473
Less: accumulated depreciation and amortization 178,028
Less: Impairment charge (See Note 3) 253,445
--------
$ --
========
Depreciation and amortization expense amounted to $138,468 and $29,194
for the years ended December 31, 2003 and 2002, respectively. When the
Company changed its business strategy at the end of 2003, the Company
recorded the unamortized balance of $253,445 as an impairment loss
because the asset was not fully recoverable.
F-16
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(8) INTANGIBLE ASSETS:
Intangible assets as of December 31, 2003 are as follows:
Domain name $ 18,000
Leasehold Improvements 7,569
Product development 260,000
Website 22,320
--------
307,889
Less: accumulated depreciation and amortization 142,100
Less: Impairment charge (See Note 3) 165,789
--------
Intangible, net $ --
========
Amortization expense for intangible assets amounted to $94,864 and
$39,667 for the years ended December 31, 2003 and 2002, respectively.
When the Company changed its business strategy at the end of 2003, the
Company recorded the unamortized balance of $165,789 as an impairment
loss because the asset was not fully recoverable.
(9) SECURED CONVERTIBLE DEBENTURE:
In November 2002, the Company opened a Subscription Agreement to raise
$1,000,000 under an 8% Secured Convertible Debenture (the "Debenture")
for a period of 6-months from the date funds are received. As of
December 31, 2003, the Company had raised $1,000,000 ($500,000 raised
in each year ended December 31, 2003 and 2002). The debenture for
$1,000,000 contains a beneficial conversion feature for six months at a
conversion price of $1.00. The debenture also contains detachable
warrants to acquire 310,500 shares of common stock at an exercise price
of $1.00 per share expiring in five years. The Debenture is
collateralized by the Company's right, title, and interest in and to
all present and future rights to payment of goods and services.
During the year ended December 31,2003 the Company issued an additional
700,000 warrants to one debt holder under the same terms as the
original warrants. The estimated value of the warrants totaled $115,198
and was determined using the Black-Scholes pricing model with the
following assumptions: (i) no expected dividends; (ii) a risk-free
interest rate of 4.04%; (iii) expected volatility of 83%; and (iv) an
expected life of two years. The amount was expensed immediately as the
underlying debt has matured.
In connection with the Debenture in accordance with EITF 00-27, the
Company first determined the value of the notes and the fair value of
the detachable warrants issued in connection with this convertible
debenture. The estimated value of the 310,500 warrants (exclusive of
the additional 700,000 warrants discussed above) of $196,187 was
determined using the Black-Scholes pricing model with the following
assumptions: (i) no expected dividends; (ii) a risk-free interest rate
of 4.04%; (iii) expected volatility of 83%; and (iv) an expected life
of two years. The face amount of the notes payable of $1,000,000, which
had a conversion feature for six months, was proportionately allocated
to the note payable and the warrants in the amount of $840,087 and
$159,913 ($50,465 for 2003), respectively. The amount allocated to the
warrants of $159,913 was recorded as a discount on the note payable.
The value of the note payable was then allocated between the note and
the beneficial conversion feature, which amounted to $448,331 and
$391,756 ($116,756 for 2003), respectively. The combined total discount
is $551,670, is being accreted into notes payable as additional
interest expense over the remaining life of the note of six months. As
of December 31, 2003, the entire $551,670 has been amortized to
expense. None of the note balance under this agreement has been
converted into common stock as of December 31, 2003.
As of December 31, 2003, the Company has defaulted on the debt. The
debt is no longer convertible as the conversion feature expired on the
maturity date of the notes.
F-17
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(10) UNSECURED CONVERTIBLE DEBENTURE:
As of December 31,2003, the Company has $1,717,070 of notes payable
that were assumed during the Transaction (as described in Note 1,
Nature of Business). These notes bear interest at 8 1/2% per annum. As
of December 31, 2003, the Company has accrued $186,735 of interest and
it is included in accounts payable and accrued expenses at December 31
2003. The Company has defaulted on these loans.
In May 2003, the Company issued an 8% Unsecured Convertible debenture
for $67,500. The debenture which matures in six months contains a
conversion feature at a conversion price of $0.40. The debenture also
contains detachable warrants to acquire 42,188 shares of common stock
at an exercise price of $0.25 per share expiring in five years. In
accordance with EITF 00-27, the Company first determined the value of
the notes and the fair value of the detachable warrants issued in
connection with this convertible debenture. The estimated value of the
42,188 warrants of $3,746 was determined using the Black-Scholes
pricing model with the following assumptions: (i) no expected
dividends; (ii) a risk-free interest rate of 4.04%; (iii) expected
volatility of 83%; and (iv) an expected life of two years. The proceeds
were proportionately allocated to the note payable and the warrants in
the amount of $63,951 and $3,549, respectively. The amount allocated to
the warrants of $3,549 was recorded as a discount on the note payable.
Due to the market price being less than the conversion price no
beneficial conversion exists. The discount is being accreted into notes
payable as additional interest expense over the remaining life of the
note. As of December 31, 2003, all of the $3,549 discount has been
amortized to expense. None of the note balance under this agreement has
been converted into common stock as of December 31, 2003. The debt and
convertibility featured expired without repayment or conversion.
In June 2003, the Company issued an 8% Unsecured Convertible Debenture
for $40,000. The debenture, which matures in six months, contains a
conversion feature at a conversion price of $0.40. The debenture
contains detachable warrants to acquire 33,000 shares of common stock
at an exercise price of $0.25 per share expiring in five years. In
accordance with EITF 00-27, the Company first determined the value of
the notes and the fair value of the detachable warrants issued in
connection with this convertible debenture. The estimated value of the
33,000 warrants of $5,631 was determined using the Black-Scholes
pricing model with the following assumptions: (i) no expected
dividends; (ii) a risk-free interest rate of 4.04%; (iii) expected
volatility of 83%; and (iv) an expected life of two years. The proceeds
were proportionately allocated to the note payable and the warrants in
the amount of $35,064 and $4,936, respectively. The amount allocated to
the warrants of $4,936 was recorded as a discount on the note payable.
Due to the market price being less than the conversion price no
beneficial conversion exists. The discount is being accreted into notes
payable as additional interest expense over the remaining life of the
note. As of December 31, 2003, all of the $4,936 discount has been
amortized to expense. None of the note balance under this agreement has
been converted into common stock as of December 31, 2003.
From July 2003 to December 31,2003 the Company issued an 8% Unsecured
Convertible Debenture for $106,000. The debenture, which matures in six
months, contains a conversion feature at a conversion price of $0.40.
The debenture contains detachable warrants to acquire 136,228 shares of
common stock at an exercise price of $1.25 per share expiring in five
years. In accordance with EITF 00-27, the Company first determined the
value of the notes and the fair value of the detachable warrants issued
in connection with this convertible debenture. The estimated value of
the 136,228 warrants of $2,615 was determined using the Black-Scholes
pricing model with the following assumptions: (i) no expected
dividends; (ii) a risk-free interest rate of 4.04%; (iii) expected
volatility of 83%; and (iv) an expected life of five years. The face
amount of the notes payable of $106,000 which has a conversion feature
of six months, was proportionately allocated to the note payable and
the warrants in the amount of $103,422 and $2,574, respectively. The
amount allocated to the warrants of $2,574 was recorded as a discount
on the note payable. Due to the market price being less than the
conversion price no beneficial conversion exits. The discount is being
accreted into notes payable as additional interest expense over the
remaining life of the note. Of the $2,574 discount, as of December 31,
2003, $1,738 has been amortized to expense. None of the note balance
under this agreement has been converted into common stock as of
December 31, 2003.
F-18
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(10) UNSECURED CONVERTIBLE DEBENTURE, CONTINUED:
From October 2003 to December 31,2003 the Company issued an 6%
Unsecured Convertible Debenture for $310,715. The debenture, which
matures in three months, contains a beneficial conversion feature at a
conversion price of $0.02. In accordance with EITF 00-27, the Company
determined the estimated value of the conversion feature to be
$310,715. This estimate was determined using the Black-Scholes pricing
model with the following assumptions: (i) no expected dividends; (ii) a
risk-free interest rate of 4.04%; (iii) expected volatility of 83%; and
(iv) an expected life of 1 year. The discount is being accreted into
notes payable as additional interest expense over the remaining life of
the note. Of the $310,715 discount, as of December 31, 2003, $155,357
has been amortized to expense. None of the note balance under this
agreement has been converted into common stock as of December 31, 2003.
(11) EQUITY
In November 2002, the Company issued 50,000 shares in exchange for
deferral of payment of legal services valued at $70,000 based on the
market price of the Company's stock when the services had been
completed. An amount of $70,000 of expense was charged to equity-based
compensation. The law firm resigned in the first quarter of 2003 before
completing the deferred legal services and the Company paid $25,000 to
settle the outstanding amount owned. The Company may pursue the return
of the shares because the law firm did not complete the agreed-upon
services.
On June 20, 2002, ER LLC completed a private placement (the "Offering")
whereby it issued 7,274,784 membership units for gross proceeds of
$7,577,900. Included in the gross proceeds was $500,000 of bridge loans
that were converted to 480,000 membership units of the Company.
$250,000 of the bridge loans converted was owed to JPAL and $250,000
was due to a third-party lender. JPAL exchanged the membership interest
in ER LLC for the reduction of $250,000 in notes payable it owed to
third-party lenders.
In connection with the Offering, the Company issued to its financial
advisors warrants to purchase an aggregate of 331,211 shares of common
stock (the "Additional Warrants"). Such warrants shall have an exercise
price of $1.30 per membership unit and shall be exercisable for a
period of up to five years. As a result of the Transaction, warrants to
purchase membership units in ER LLC have become warrants to purchase
common shares of the Company. The value of the warrants issued above
was priced using the Black-Scholes pricing model. (Refer to footnote
12.)
On March 12, 2003, the Company sold to a private investor 100,000
shares for $1.00 per share totaling $100,000.
On March 10, 2003, the Company entered into an Investment
Banking/Advisory Agreement with First Securities USA, Inc. through its
SBI USA division ("SBI") engaging SBI as the exclusive financial
advisor, for six months in connection with the management of a "PIPE"
(private investment in public equity) of equity securities, which may
or may not include common stock and warrants to purchase common stock
of the Company, on a best efforts basis up to $5,000,000 with a minimum
of $3,000,000. The private placement will be structured as a
transaction exempt from section 5 of the Securities Act of 1933 and
shall comply with section 4(2) of the Securities Act and Regulation D
and to permit the initial closing upon the receipt and acceptance by
the Company of $3,000,000 for irrevocable subscriptions for the
securities up to $5,000,000. The Company paid the Investment Banker a
retainer of 25,000 shares of common stock of the Company with a total
fair market value, based on the close price of the stock, of $25,250.
In addition, the Company will pay a commission in cash equal to 10% of
the aggregate gross proceeds of the securities sold, as well as
warrants for the purchase of a number of securities equal to 10% of the
number of securities sold in the private placement. The warrants will
be exercisable for five years at a price equal to 110% of the offering
price per security. The agreement was terminated by mutual consent on
December 17, 2003. Included in accounts payable is $3,822 for expenses
at December 31, 2003.
F-19
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(11) EQUITY, CONTINUED:
On March 14, 2003 the Company retained a consultant for institutional
financial public relations for at least two years. As compensation, the
Company will issue a five year warrant to purchase up to 250,000 shares
of the Company's common stock at a strike price of $1.00 per share; in
addition the Company will pay a $10,000 retainer per month for 24
months in the form of the Company's common stock for 240,000 shares in
advance and to be registered by the Company at its expense at the
earliest time. No services have been performed to date and no warrants
or shares have been issued.
The Company will reimburse the consultant for reasonable out-of-pocket
expenses not to exceed $250, without the consent of the Company. The
Company will prepay $5,000 and will replenish this monthly to maintain
the $5,000 level. No payments have been made to date. The balance owed
is in included in accounts payable as of December 31, 2003.
On April 1, 2003, the Company issued 240,000 shares of common stock to
a consultant for services to be rendered over a two year period. The
fair market value of the stock of $144,000 was determined based on the
closing price of the stock on the date of issuance. The contract amount
will be amortized over the contract period. The amount has been offset
against equity due to the stock being issued before the services have
been rendered. No services have been rendered to date and no shares
have been issued.
(12) INCOME TAXES:
Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which is uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax asset
as of December 31, 2003, has been established to reflect these
uncertainties. As of December 31, 2002, the deferred tax asset before
valuation allowances is approximately $2,032,700 for federal purposes.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to ownership change and continuity of
business change limitations provided by the Internal Revenue Code of
1986. The annual limitations may result in the expiration of net
operating loss carryforwards before utilization.
Income tax provision amounted to $-0- for the years ended December 31,
2003 and 2002. A reconciliation of the provision (benefit) for income
taxes with amounts determined by applying the statutory U.S. federal
income tax rate to income before income taxes as of December 31, 2003
and 2002 is as follows:
2003 2002
----------- -----------
Computed tax at federal statutory rate of 34% $(1,990,000) $(2,908,200)
Reduction for loss from ER LLC -- 875,500
Change in valuation allowance 1,990,000 2,032,700
----------- -----------
$ -- $ --
=========== ===========
F-20
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(12) INCOME TAXES, Continued:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities as of December 31, 2003 are as follows:
Deferred tax asset -
Net operating losses carry forwards $ 1,687,000
Deferred tax liability -
Deferred compensation 517,000
-----------
Net deferred assets before valuation alloance (1,170,000)
-----------
Valuation allowance 1,170,000
-----------
Net deferred tax assets $ --
===========
At December 31, 2003, the Company has available unused net operating
losses carry forwards of approximately $7,600,000 for purposes that may
be applied against future taxable income and that, if unused, expire
through 2023.
(13) RETIREMENT PLAN:
The Company sponsors a 401(k) contributory plan (the "Plan") for the
benefits of employees who are at least 21 years of age. The Company's
management determines, at its discretion, any annual contributions. The
Company elected not to contribute to the Plan for the years ended
December 31, 2003 and 2002.
(14) WARRANTS:
A schedule of warrant activity as December 31, 2003 is as follows:
Weighed
Number Average
of Shares Exercise Price
--------- ---------------
Outstanding at December 31, 2002 1,286,211 $ 1.68
Granted 1,621,916 1.68
Exercised -- --
Cancelled -- --
--------- ---------
Outstanding and exercisable at
December 31, 2003 2,908,127 $ 1.68
========= =========
All of the warrants granted in conjunction with secured convertible
debentures and notes payable are disclosed in Notes 8 and 9.
In connection with the termination of the CEO in February 2003, the
Company issued five year warrants to purchase 250,000 shares of common
stock. The fair value of the warrants of $117,410 was determined using
the Black-Scholes pricing model with the following assumptions: (i) no
expected dividends; (ii) a risk free interest rate of 4%; (iii)
expected volatility of 80%; and (iv) expected life of five years.
F-21
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(14) WARRANTS, CONTINUED:
In connection with the consulting contract for public relation services
entered into in March 2003, the Company issued five year warrants to
purchase 250,000 shares of common stock. The fair value of the warrants
of $88,785 was determined using the Black-Scholes pricing model with
the following assumptions: (i) no expected dividends; (ii) a risk free
interest rate of 4%; (iii) expected volatility of 80%; and (iv)
expected life of five years.
(15) COMMITMENTS AND CONTINGENCIES:
In April 2003, the Company entered into an operating lease for office
and warehouse space in Mineola, New York. The operating lease is
effective for 5 years with an option to renew for 3 years. The minimum
monthly base rental is $4,500 with annual increases of two hundred per
month plus 20% of the increase in real estate taxes over the base year.
The lease was terminated on January 31, 2004
The Company defaulted under its previous location in New York, NY and
terminated the lease by forfeiting the security deposit in the amount
of $58,050 which satisfied the outstanding debt as of June 30, 2003.
Rent expense for the years ended December 31, 2003 and 2002 totaled
$98,646 and $114,338, respectively.
The Company is allocated certain equipment lease costs under leases
assumed by a company related to a certain member of LCG. The Company is
not obligated under the leases but is allocated a portion the minimum
payments under the leases. Computer lease expense for the years ended
December 31, 2003 and 2002 amounted to $18,137 and $47,667,
respectively.
Employment Agreement
The Company has an employment agreement with the vice president of
marketing and sales. The agreement provides for an annual base salary
of $150,000 per year and four months of severance compensation.
Litigation
On November 21, 2002, a complaint was filed by MC Squared in United
States District Court for the Southern District of New York against us,
Humbert Powell III, Chairman of the Board of Directors, Steven
Francesco, ex-Chief Executive Officer, David Devor, an officer, and
Brian Jedwab, a member of the Board of Directors, alleging breach of a
development agreement between us (originally Essential Reality, LLC)
and MC Squared. Specifically, the complaint alleges a failure by us to
provide a design credit to MC Squared on the packaging for the P5(TM).
The complaint seeks specific performance and a recall of all P5(TM)
products shipped to date without the design credits on the packaging.
We have submitted an answer with counterclaims and have made a motion
to dismiss this complaint. On October 15, 2003 the case was settled for
$53,643 payable as follows: $3,643 in full payment for royalties due as
of July 30, 2003 and $50,000 for "Non-Royalty Settlement" payable in
consecutively monthly installments of $2,000 commencing November 15,
2003. The Company may prepay the outstanding balance within 4 months
and deduct 25% or within 8 months and deduct 20%. Included in accounts
payable at December 31, 2003 is $43,643 related to this transaction.
On January 21, 2003 a complaint was filed by RDA International, Inc. in
the Supreme Court of the State of New York against us seeking payment
of $203,264 for work, labor and services performed in connection with
advertising, marketing and multimedia programs for the P5(TM). This
amount has been accrued at December 31, 2002.
F-22
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(15) COMMITMENTS AND CONTINGENCIES, Continued:
Litigation, continued
On February 28, 2003, a complaint was filed by Aaron Gavios, a former
employee, in The United States District Court for the Southern District
of New York against us, Humbert Powell III, Chairman of the Board of
Directors, and Brian Jedwab, a member of the Board of Directors,
alleging breach of a contract. Specifically, the complaint alleges
failure to provide for severance pay, failure to provide stock options
and failure to reimburse for automobile lease totaling $120,000, plus
interest and legal fees. The Company has accrued $50,000 as of December
31, 2003 for severance to this former employee.
On April 16, 2003, a complaint was filed by Ziff Davis Media, Inc. in
the Supreme Court of the State of New York against the Company
(originally, ER LLC) seeking payment of $27,443 for print advertising
for the P5(TM). On July 3, 2003 the case was settled for $10,000
payable in 4 installments as follows: $4,000 due July 10, 2003, and the
balance of $6,000 in 3 equal installments of $2,000 each payable August
10, September 10, and October 10, 2003. The $10,000 was paid in full as
of December 31, 2003.
On October 10, 2003 a complaint was filed by the Future Network USA
f/k/a/ Imagine Media Inc in the Supreme Court of the State of New York,
County of New York against Essential Reality, LLC seeking payment of
$33,405 plus interest and legal fees for advertising in one of their
magazines. The full amount is included in accounts payable and accrued
expenses as of December 31, 2003 as no payments have been made.
On December 4, 2003 a complaint was filed by the CIT Communications
Finance Corporation d/b/a/ Avaya Financial Services in the Supreme
Court of the State of New York, County of New York against Essential
Reality, Inc seeking payment of $38,084 plus interest and legal fees
for default in paying the Phone Equipment Lease Agreement dated January
7, 2002. This amount is the total due under the lease agreement.
Included in accounts payable and accrued expenses is a total of $537
which is the total of the lease payments owed at December 31, 2003.
On December 4, 2003 a complaint was filed by the Shapland Creative
Design, Inc in the Supreme Court of the State of New York, County of
Nassau against Essential Reality, LLC seeking payment of $6,300 plus
interest and legal fees for services and materials. The full amount is
included in accounts payable and accrued expenses as of December 31,
2003 as no payments have been made.
We believe we have valid defenses to these claims and intend to
vigorously defend ourselves. However, there can be no assurance that we
will be successful. The costs associated with these litigations,
including the time required to defend ourselves, as well as the
potential cost should there be an adverse judgment against us, may have
a material adverse effect on our financial condition and results of
operation.
(16) RELATED-PARTY TRANSACTIONS:
The Company had the following related-party transactions for the years
ended December 31, 2003 and 2002:
a. The Company accrued compensation expense of $218,737 and
$257,103 for certain officers and shareholders for the years
ended December 31, 2003 and 2002, respectively. These amounts
are included in due to related parties at December 31, 2003.
b. Advances from affiliated companies are from entities that are
affiliated with certain shareholders of the Company. The
advances are payable on demand and bear interest at the rate
of 10% per annum. Certain of these advances were satisfied in
September 2002, by granting the Company's interest in "other
assets" of $22,500 to these entities. At December 31, 2003,
$1,712 remains outstanding.
F-23
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(16) RELATED-PARTY TRANSACTIONS, CONTINUED:
c. Non-interest bearing advances from an affiliate of certain
shareholders, LCG Capital Group, LLC, were made in 2001 of
which $5,705 was paid in 2002 leaving a balance of $70,912
outstanding at December 31, 2003.
d. Included in product and development expense is $25,000 and
$33,700 for the years ended December 31, 2003 and 2002,
respectively, to a company owned by certain shareholders of
the Company that have consulted with the Company in the areas
of product strategy, design, and development. Balance
outstanding at December 31, 2003 equalled $19,030.
e. Included in general and administrative expenses are costs
incurred of $1,323 and $57,672 for the years ended December
31, 2003 and 2002, respectively, by two entities that are
related to certain members of LCG Capital Group. Such costs
were determined to be allocable costs to the Company and
include consulting fees related to business development,
employee salaries, occupancy, telephone, and computer leases.
In the case of employee salaries, costs are allocated to the
Company based on the time each employee conducts business
specific to the Company. In the case of the other expenses,
costs are allocated based on a percentage of resources used by
the Company. Balance at December 31, 2003 equaled $4,039.
f. Included in general and administrative expenses is $48,116 and
$72,000 at December 31, 2003 and 2002, respectively, of
marketing expense payable to a company owned by a person
related to certain members of the Company who assisted in
establishing and executing its marketing programs. Included in
accounts payable-related parties is $100,662 of this expense
at December 31, 2003.
g. Included in general and administrative expenses is $80,000 and
$7,500 at December 31, 2003 and 2002 for director's fees and
$1,107 for out of pocket expenses for December 31, 2003.
Included in due to related parties is $88,607 at December 31,
2003.
a. In March 2000, the Company entered into a consulting
agreement, which requires the Company to pay the consultant,
$0.25 for each of the first 150,000 units of the P5(TM) sold.
b. In July 2000, Essential Reality, LLC entered into a consulting
agreement with MC Squared Incorporated to help manage the
relationship with product developers. This consulting
agreement replaced a previous Development Agreement executed
between Essential Reality, LLC and MC Squared in November
1999. In connection with these agreements MC Squared was paid
$250,000. Payments are no longer being made to MC Squared. In
September 2000 the consulting agreement terminated and the
development process was managed by us internally. MC Squared
is a company owned by a person related to certain members of
our Board of Directors. Pursuant to such agreement, royalty
payments of 1.8% on net sales of the P5(TM)and 9% of the
license fees collected with respect to P5(TM) are to be paid
indefinitely. As of December 31, 2002, $1,098 was due to MC
Squared. MC Squared has sued us in connection with these
agreements. On October 15, 2003 the case was settled for
$53,643 payable as follows: $3,643 in full for royalties due
as of July 30, 2003 and $ 50,000 for "Non-Royalty Settlement"
payable in consecutively monthly installments of $2,000
commencing November 15, 2003. The Company may prepay the
outstanding balance within 4 months and deduct 25% or within 8
months and deduct 20%. The outstanding balance due MC Square
as of December 31, 2003 is $ 46,643. The amount owed for
royalties was reduced from 1.8% to 1% for the first $2,500,000
in sales and 5% license revenues. After the first $ 2,500,000
of such sales and licenses Revenues, the royalties shall
revert to 1.% and 9% respectively. The royalty owed as of
December 31, 2003 amounted to $1,047.
c. In January 2001, Essential Reality, LLC entered into a
memorandum of understanding with Apjay Technologies for the
development of certain components of the P5(TM). Pursuant to
the memorandum of understanding, we are required to pay
royalties of 1% of P5(TM)'s net sales to Apjay Technologies
indefinitely. The Company was required to pay a royalty
advance of $50,000, of which $15,000 has previously been paid
and $35,000 of which is now due because we have incorporated
the component developed pursuant to the memorandum of
understanding into the P5(TM). Included in the settlement with
VR Yad (see Note 4) was the assumption by them of outstanding
amount owed by the Company to Apjay.
d. In July 2001, the Company entered into a development agreement
with VR Yad (developer) for the development of certain
components of P5(TM). The developer accomplished the
objectives set forth in the agreement to complete development
of the P5(TM)by June 2002. Consequently, the Company is
required to pay base royalties of 1% of net sales generated
from P5(TM), indefinitely and additional 0.5% of net sales
generated from P5(TM),indefinitely. The royalty expense for
the year ended December 31, 2003 and 2002 was $3,538 and $917,
respectively. During the period of engagement, and for two
years after termination of the relationship, VR Yad was
prohibited from developing, manufacturing, marketing or
selling any product similar to the products it developed for
the Company. The Company expected to utilize the services of
VR Yad in the development of additional products, however,
alternative sources of development capability have been
identified in the event a change of developer is necessary. A
settlement and mutual release agreement was entered into the
VR Yad during the year ended December 31, 2003 (see Note 4).
e. In May 2002, the Company placed an order for the manufacture
of approximately 35,000 P5(TM)s with a third-party
manufacturer. Under the terms of the order, the Company paid a
deposit of $100,000 upon placing the order and posted letters
of credit in the amount of $2,000,000. As of September 30,
2002, there was $2,000,000 in restricted cash, upon which the
letters of credit could be drawn. Beginning in October 2002,
the Company began accepting receipt of these goods from the
manufacturer, and as of December 24, 2002, $1,842,234 has been
drawn against the letters of credit, as payment. The balance
of $157,766 was paid on January 30, 2003.
f. In May 2002, the Company entered into an agreement with a game
developer. Under the agreement the game developer was to
disclose to the Company the source code for two specific games
so that the P5(TM) software can be integrated with the game
and use their best efforts to provide reasonable technical
assistance to the Company and its developer during the
integration process. In addition, the developer was to release
software updates enabling current users of the games to use
P5(TM). The Company was to be responsible for integration and
payment to the game developer of $100,000. As of December 31,
2003 the Company has paid $66,665 and the balance of $33,335
is included in accounts payable.
g. In August 2002, the Company committed to pay a game publisher
a minimum of $35,000. At December 31, 2003, $17,500 was paid
with $17,500 included in accounts payable.
h. In August 2002, the Company committed to pay royalties to a
game publisher at the rate of $5.00 per unit. A minimum
commitment of $125,000 was required. At December 31, 2003,
$62,500 was paid with $62,500 included in accounts payable.
i. In September 2002, the Company committed to pay royalties to a
game publisher at the rate of $1.50 per unit. A minimum of
$37,500 was required. At December 31, 2003, $18,750 was paid
with $18,750 included in accounts payable.
j. In September 2002, the Company committed to pay royalties to a
game publisher at the rate of $5.00 per unit. A minimum
commitment of $187,500 was required. At December 31, 2003,
$93,750 is included in accounts payable and the remaining
$93,750 agreed to be reversed and not due.
F-25
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(18) SEVERANCE AGREEMENTS:
In January 2003, the Company terminated six personnel consisting of
various officers and support staff. The Company is obligated for
$291,000 of severance pay contingent upon the Company obtaining
installment financing of $1,000,000 minimum, excluding bridge loans.
There were no payments as of December 31, 2003.
In addition, in connection with these severance agreements, the Company
is obligated to issue to one of its former officers, five-year warrants
to purchase 250,000 shares of common stock at an exercise price of
$0.75 per share. See Note 14.
(19) SUBSEQUENT EVENTS:
On January 26, 2004 a compliant was filed by Empire Inter - Freight
Corp. in the Civil Court of the City of New York, County of New York
against Essential Reality, Inc. seeking payment of $12,419 plus
interest and legal fees for default in paying for freight services in
December 19 , 2002. The case was settled for $4,000 in May 2004.
On February 5, 2004 a complaint was filed by the UBI Soft Entertainment
in the Supreme Court of the State of New York, County of Nassau against
Essential Reality, LLC seeking payment of $93,750 plus interest and
legal fees for services and materials. The full amount is included in
accounts payable and accrued expenses as of December 31, 2003 as no
payments have been made.
On April 2, 2004 CCH Incorporated filed a Restraining Notice with the
Company's bank HSBC for one year. They are seeking payment of $6,639
for services rendered in 2003 and 2002. This amount has been accrued as
of December 31, 2003.
On May 21, 2004, GE Capital, pursuant to an equipment lease dated
October 4, 2002 for 60 months, filed with a collection agent to collect
the full amount of the lease in the amount of $21,340. This was due to
the Company being behind in its payments for 7 months starting November
1, 2003. The monthly payments in the amount of $450 have been accrued
in accounts payable for the payments that are due. The Company has 30
days to respond before a judgment is filed.
BINDING TERM SHEET AND PRIVATE PLACEMENT
On February 6, 2004 the Company executed a binding term sheet (the
"Term Sheet"), which sets forth the preliminary terms and conditions of
a proposed exchange transaction between Essential and AllianceCorner
Distributors, Inc ("Alliance" or "ACDI"). This Term Sheet supersedes
and replaces the Letter of Intent dated November 6, 2003. As proposed,
the shareholders of Alliance would exchange their shares of capital
stock in Alliance for shares of common stock of Essential.
Upon the closing of the exchange, as currently contemplated, the
shareholders of Alliance will own common stock representing
approximately 49.36% of the outstanding capital stock of the Company
before dilution.
The consummation of the transaction is contingent on a number of
factors, including but not limited to, the completion of due diligence
and the execution of a definitive agreement. There can be no assurance
that the exchange will be consummated or, if consummated, that it will
be consummated on the terms set forth in the Term Sheet.
F-26
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(19) SUBSEQUENT EVENTS, CONTINUED
As part of the exchange, the Company is required to raise funds to
complete the transaction. The Company, therefore, is offering 1,174,486
shares of Series A 6% Convertible Non Redeemable Preferred Shares (the
"Preferred Shares"), through a private placement offering ("PPO"). Each
Preferred Share shall entitle the holder the right to receive seven
hundred (700) shares of common stock of the Company. The Preferred
Shares shall convert automatically upon the effectiveness of a
certificate of amendment to the Company's Articles of Incorporation
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 to convert in to common stock of
the Company. The Preferred Shares shall pay a 6% payable in kind
dividend until such time as the Company has enough common shares to
convert all the Preferred Shares being offered into common stock of the
Company. The Preferred Shares shall be entitled to vote one vote per
share on an as converted basis on all matters on which holders of the
Company's common stock are entitled to vote.
If all shares are sold, the approximate net proceeds to the Company
would be $2,890,000.
The investors in the stated PPO shall agree to grant to ACDI an
irrevocable proxy (the "Voting Proxy") with the power to vote any and
all of the Company's common stock held by the Investors received
directly in conjunction with the PPO either through conversion of debt
or the issuance of new Units. The Voting Proxy shall apply pro rata to
the Specific Investors and only to those shares of ESSR common stock
held by the Specific Investors necessary to give ACDI control of 50.1%
of the voting stock of ESSR outstanding at all relevant times. The
Voting Proxy shall remain in effect so long as the Specific Investors
hold any shares of ESSR common stock received directly in conjunction
with the transactions contemplated herein and for the avoidance of
doubt the Voting Proxy shall apply only to such shares.
All securities issued pursuant to the exchange will be "restricted"
stock and be subject to all applicable re-sale restrictions specified
by federal and state securities laws.
The exchange shall include closing conditions including the following:
(i) consummation of all required definitive instruments and agreements,
including, but not limited to, the Exchange Agreement all in a form
reasonably satisfactory to the parties thereto; (ii) obtaining all
necessary board and third party consents, (iii) satisfactory completion
by ESSR and ACDI of all necessary technical and legal due diligence,
and (iv) receipt of the Voting Proxy.
There can be no assurance that the exchange will be consummated or, if
consummated, that it will be consummated on the terms set forth in the
Term Sheet.
The change in business conditions in the fourth quarter and the
execution of the letter of intent resulted in the recognition of
operations of the Company as related to the P5(TM), as discontinued
operations in accordance with SFAS 144 and the sale of the entire
inventory that was on hand as of December 31, 2003 at a value of $6.00
per unit in the first quarter of 2004.
On November 20, 2003 $225,000 was deposited in the escrow account with
Counsel to Alliance pursuant to the Letter of Intent dated November 6,
2003. Alliance shall be entitled to draw on such funds to pay expenses
for accounting, legal and other expenses related to the binding term
sheet noted above.
If the transaction is terminated by any party for any reason, Alliance
shall direct the escrow agent to release to Essential Reality any
remaining balance.
F-27
ESSENTIAL REALITY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
(19) SUBSEQUENT EVENTS, CONTINUED:
Alliance shall also refund to Essential Reality any portion of the
$225,000 that was released from escrow if both the following conditions
have occurred:
1. After December 31, 2003 Alliance has withdrawn from the
transaction due to any non-material adverse changes, and
2. Essential Reality has made securely funded arrangements to
fund expenses that exceed the $225,000 deposited in escrow.
The balance is $158,088 as of March 31, 2004.
Pursuant to the Binding Term Sheet the Company signed an Investment
Banking Agreement with Sunrise Securities Corp. a registered
broker/dealer with National Association of Securities Dealers. Sunrise
will use its "bests efforts" to raise the money provided for in the PPO
a minimum of $2,500,000 under the terms and conditions of the PPO. We
will pay the Investment Banker a $25,000 nonrefundable retainer fee and
financing fees equal to 10% of the gross proceeds of such financing
payable to Sunrise in cash and warrants issued to Sunrise to purchase
on the same terms 10% of the securities in such financing. Upon closing
the Financing, the company shall pay Sunrise a financing fee payable in
a form at the sole election of Sunrise of either (i) cash fee equal to
10% of the gross proceeds or (ii) the Company shall issue the number of
shares of Common Stock equal to 11% of the aggregate number of fully
diluted and/or converted shares of Common Stock and/or Commmon Stock
equivalents (including but not limited to Units) purchased by Investors
. In addition , the Company shall issue warrants to purchase Common
Stock equal to 10% of the aggregate number of the fully diluted and or
converted shares of Common Stock equivalents. The warrants shall be
purchased for a nominal sum and shall be exercisable for a period five
years from the date of closing with an exercise price per share equal
to the effective per share price paid by the Investors for the
securities. In the event the agreement is not renewed or terminated,
Sunrise will be entitled to a full fee for which discussions were
conducted during the term of the agreement by the Company or by Sunrise
within twelve months. In addition to the fees, Sunrise will be
reimbursed for all reasonable fees and disbursements of Sunrise outside
counsel and Sunrise travel and out of pocket expenses associated with
the financing up to $25,000 without Company approval. The Company shall
also reimburse the reasonable fees and disbursements of small business
Investment counsel, if any, incurred in connection with Financing not
to exceed 1% of the SBIC's allocation in such financing.
The Company has signed a retainer agreement with Gottlieb & Partners,
LLP as its special counsel for drafting and filing all required
regulatory documents pursuant to the terms and conditions set forth in
the Binding Term Sheet dated January 2004. The company agrees to pay a
flat fee for legal services in the amount of $60,000 to be payable at
the closing from the escrow of the Private Placement Offering.
The Company has retained Jackson Steinem, Inc. for non-legal services
in connection with the Company's proposed reorganization transaction.
The Company agrees to deliver after the closing 30,000 shares of the
Company's Common Stock as compensation for services rendered.
F-28
EXHIBIT INDEX
NUMBER DESCRIPTION
--------- -----------
2.1 Amended Contribution Agreement, dated as of April 24, 2002, by and
among Essential Reality, LLC, the Registrant (f/k/a JPAL, Inc.), Martin
Abrams, John Gentile, Anthony Gentile and LCG Capital Group, LLC.
Incorporated herein by reference from Exhibit A to the Registrant's
Proxy Statement on Schedule 14A filed on May 21, 2002.
2.2 Amendment to Amended Contribution Agreement, dated as of June 14, 2002,
by and among Essential Reality, LLC, the Registrant (f/k/a JPAL, Inc.),
Martin Abrams, John Gentile, Anthony Gentile and LCG Capital Group,
LLC. Incorporated herein by reference from Exhibit 2.2 to the
Registrant's Current Report on Form 8-K filed on July 3, 2002.
3.1 Amended and Restated Articles of Incorporation of the Registrant.
Incorporated herein by reference from Exhibit 3.1 to the Registrant's
Registration Statement on Form SB-2 filed on August 18, 2000 ("2000
SB-2").
3.2 Amendment to Articles of Incorporation filed June 20, 2002 with the
State of Nevada. Incorporated herein by reference from Exhibit 3.2 to
the Registrant's Registration Statement on Form SB-2 filed on July 19,
2002 ("2002 SB-2").
3.3 Amendment to Articles of Incorporation filed June 21, 2002 with the
State of Nevada. I incorporated herein by reference from Exhibit 3.3 to
the 2002 SB-2.
3.4 Bylaws of the Registrant. Incorporated herein by reference from Exhibit
3.2 to the 2000 SB-2.
10.1 JPAL, Inc. 2001 Stock Incentive Plan. Incorporated herein by reference
from Exhibit C to the Registrant's Proxy Statement on Schedule 14A
filed on January 18, 2002.
10.2* Manufacturing Agreement with V-Tech Communications Ltd entered into as
of May 15, 2002.
10.3* Development Agreement with VR Yad dated as of July 1, 2001.
10.4* Consulting / Advisor Agreement with Abrams Gentile Entertainment, Inc.
dated as of February 1, 2001.
10.5* Agreement with BusinessDevelopment.com LLC dated as of December 13,
2000. Amendment with Business Development.com LLC dated as of December
1,2001
10.6* Investment Banking/Advisor Agreement with SBI USA, a division of First
Securities USA, Inc., dated March 10, 2003.
10.7* Form of Investment Banking Agreement between Sunrise Security Corp. and
Essential Reality Inc.
11. Statement re Computation of Per Share Earnings.**
21. Subsidiaries of Registrant.* - None
24.1* Power of Attorney (included on signature page hereto).
31.1* Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith.
** Information required to be presented in Exhibit 11 is now provided in
note 1 to the 2003 Annual Report to Shareholders in accordance with the
provisions of FASB Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share.
28
Exhibit 10.2
VTECH LOGO
MANUFACTURING AGREEMENT
Agreement made, entered into and effective as of the last date of signing, by
and between Essential Reality, LLC (hereinafter called "Client"), a limited
liability company existing under the laws of the state of Delaware, USA, and
having an office for the transaction of business in 49 West 27th Street, 7th
Floor, New York, NY 10001, USA, and VTech Communications Ltd. (hereinafter
called "VTech"), a limited company existing under the laws of Hong Kong and
having an office for the transaction of business in Hong Kong, 23rd Floor, Tai
Ping Industrial Centre, Block 1, 57 Ting Kok Road, Tai Po, New Territories, Hong
Kong.
Witnesses that the parties hereto agree as follows:
ARTICLE 1.0 UNDERTAKING OF MANUFACTURE
1.1 VTech shall manufacture, on a non-exclusive basis, the Products for Client
according to the design and specifications provided by Client.
ARTICLE 2.0 DEFINITIONS
2.1 "Product" or "Products" shall mean each of the Products described on the
confirmed Purchase Orders from the client, as such products may be changed,
developed, improved or modified in accordance with the terms of this Agreement
from time to time by or on the behalf of either Client or VTech with Client's
prior written approval, provided that the Client agrees to a mutually agreeable
price adjustment (increase or decrease) reflecting the cost of the changes,
developments, improvements or modifications versus the original cost and accepts
any reasonable related delivery schedule changes.
2.2 "Technical Information" shall mean all technical know-how, information,
data, drawings, trade secrets, manufacturing and test data, and specifications
involving or relating to the manufacture, production, maintenance and operation
of the Products as have heretofore been or may hereafter be disclosed by Client
to VTech.
2.3 "Delivery" shall mean Delivery of Products to Client, F.O.B. vessel at the
port of export as noted in section 6.1 below, or to any other place with the
prior written consent from Client, taking into account any increased shipping
costs.
2.4 "Engineering Change" shall mean any change(s) to the electrical or
mechanical design of the Product(s) and/or manufacturing process therefore
proposed by Client and/or VTech and which would affect the cost, performance,
reliability, safety, serviceability, appearance, dimensions, tolerances, or
composition of materials thereof. All such changes shall include testing for
reliability, safety and regulatory compliance.
ARTICLE 3.0 GENERAL AND INTELLECTUAL PROPERTY
3.1 Client shall provide VTech with all Technical Information that is reasonably
necessary to enable VTech to manufacture the Products covered by this Agreement.
All Technical Information relating to the Product supplied by the Client is
original to the Client and owned by the Client and subject to Intellectual
Property ownership by the Client. VTech shall not copy, duplicate or manufacture
any Technical Information without the written consent of the Client . Vtech
represents and warrants that it will not transfer in any manner, either directly
or indirectly (other than to Client), any of the Products or Technical
Information, information about the Products or Technical Information, or
derivatives of the Products or Technical Information, without first obtaining
the specific written approval of Client.
3.2 VTech acknowledges that it does not obtain any right, title or interest in
or to the Technical nformation or to any change, development, improvement, or
modification involving or relating to the Technical Information of Client made
or conceived exclusively by Client. Any Technical Information furnished to Vtech
under or in contemplation of this Agreement shall remain the Client's property
and shall be kept strictly confidential by VTech.
43
3.3 Any changes to the Product(s) requiring rework of the design or
manufacturing process will be negotiated between the parties.
3.4 Any improvements used or useful in the development and/or manufacture of the
Product made by VTech or made by VTech in cooperation with the Client, or based
on the Technical Information, shall belong to the Client and shall be treated as
Technical Information under this Agreement. Furthermore, VTech agrees to
complete any document and cooperate with the Client in perfecting Client's
rights to such improvements.
3.5 VTech will package individual units of the Product according to the
Packaging Specification as defined by the appropriate Bill of Materials or an
acceptable substitute as may be agreed between Client and VTech.
3.6 Client may make available to VTech certain materials for use in
manufacturing the Product, which VTech shall take for such purpose and pay
therefore, with price and payment terms to be negotiated between the parties.
3.7 Any tools, models, dies, molds, prototypes or the like, made according to
the Technical Information becomes the property of the Client. Such shall be
treated as confidential and cannot be used for anyone else but the Client. They
shall be delivered to the Client upon demand FOB vessel at the port of export
noted in section 6.1.
ARTICLE 4.0 ORDERS, PRICE, AND PAYMENTS
4.1 The manufacture and sale of Products under this Agreement shall be
implemented through purchase orders placed by Client and accepted by VTech.
Client shall provide VTech with a separate Purchase Order for any tooling
charges necessary for the manufacture of the Product(s). Such tooling charges
will be clearly delineated and detailed to Client by VTech. Payment for the
tooling charges shall be made 50 % in advance and the balance to be paid upon
completion and approval of tooling.
4.2 Client shall provide VTech with its estimated non-binding order forecasts
six (6) months prior to the desired date of delivery and shall issue a confirmed
purchase order to VTech at least three (3) months prior to the shipment date
designated therein. When a confirmed purchase order is issued, Client shall
advise shipment method (whether by sea or air) for the shipment to be effected
within the month of projected delivery by VTech.
4.3 According to Client's confirmed purchase order, VTech shall procure material
for and on behalf of Client so as to meet the delivery in the first three (3)
months of the forecast as reflected on the confirmed purchase order. Client
shall pay in advance to VTech by way of cash transfer or letter of credit
payable against copies of VTech's orders (translated into English if necessary)
for the material procurement so as to meet the delivery requirement of the
purchase order. VTech shall proceed to procure the material upon receipt of the
advanced payment from Client. Furthermore, VTech shall render to Client a list
of long-lead time material within a week after receiving the rolling forecast
from Client. VTech shall seek approval from Client to procure the long lead time
material for and on behalf of Client in order to meet the shipment forecast
during the forth to sixth month or later. Client shall pay in advance to Vtech
(in the same manner as noted above) for the procurement of the long lead-time
material. VTech shall proceed with the procurement of the long lead-time
material upon receipt of an approval and the advanced payment (in the same
manner as noted above) from Client.
The letter of credit should enable VTech to draw the amount of money at any time
due to the fact that the Client is unable to consume the ordered quantity within
the manufacture completion date in accordance with terms and conditions of the
confirmed purchase order.
4.4 For the first purchase order under this Agreement, the F.O.B. price (on
board a vessel at the port of Hong Kong or Yantian, China as selected by Client
under section 6.1) for Products covered hereby shall be as set forth in Exhibit
A. Unless otherwise stated, all prices in all purchase orders to be issued under
this Agreement are inclusive of (1) state and local sales, use and similar taxes
imposed by the Peoples Republic of China or any jurisdiction or agency therein
including Hong Kong; and (2) freight and insurance charges until the Products
are FOB vessel or air craft.
44
4.5 Client's payment for Products purchased hereunder shall be settled by an
Irrevocable Letter of Credit at sight opened by Client with the bank of their
choice, thirty (30) days prior to shipment date, which letter of credit shall be
payable in the currency of the United States of America and shall name VTech as
Beneficiary and which shall be payable to VTech upon presentation of (a) a
commercial invoice in customary form, (b) clean on board ocean bill of lading or
clean air waybill, (c) tally sheets showing storage of the Products as cargo
signed by an officer of the vessel or air craft transporting the Products, and
(d) the certificate of inspection as specified on Exhibit B.
ARTICLE 5.0 CHANGES TO ORDERS
5.1 No changes as to quantity are allowed within 4 weeks from the scheduled date
of shipment ex-factory. 50% changes are allowed between 4 to 8 weeks from the
scheduled date of shipment ex-factory. Any changes are allowed beyond 8 weeks
from the scheduled date of shipment ex-factory. If there is any excess material
created by the Client due to the change, 1/2% carrying cost per month will be
paid by the Client. If the excess material is not consumed in six months, Vtech
will charge and bill the Client for the cost of the material and the bill(s)
should be paid within 30 days. VTech shall offer to ship the excess material FOB
vessel to Client at Client's request. Nothing in this section 5.1 shall limit
Client's rights under section 12.2 below. Client and VTech will agree upon the
change in cost (up or down) and any adjustments in the delivery schedule based
upon any changes made under this section. Further, if defects are noted in the
Product as produced by VTech changes to cure these defects must be made without
additional cost to Client and with the shortest possible delay in delivery.
5.2 Engineering Changes (Engineering Change Order - ECO's and Engineering Change
Note -ECN's) for processes or components may be made by the Client or VTech.
Such changes must be documented in writing using forms and procedures to be
agreed upon between VTech and Client. In the case of a change precipitated by
VTech, Client must grant approval before the change is implemented. If an
engineering change creates unused material or order cancellations, all excess
material shall be the responsibility of Client. Client and VTech will agree upon
the change in cost (up or down) and any adjustments in the delivery schedule
based upon any changes made under this section.
5.3 Client will provide evidence of regulatory compliance certification in
certain countries and VTech agrees that no changes of any type will be made that
will result in failure to comply with all applicable regulations in the
countries identified by Client.
ARTICLE 6.0 SHIPMENTS
6.1 The VTech factory is in China and the port of export is in Hong Kong or
Yantian, China at Client's option.
6.2 Client may at its option and expense elect to have the Product(s) shipped by
air freight, in which event VTech shall take all actions required to facilitate
such shipment by air and shipment shall be FOB aircraft. In the event that Vtech
is late in shipping, based upon the dates in the confirmed Purchase Order
accepted by VTech, and Client requires the late Products to be sent via air
freight then VTech shall pay the extra expense of air freight in excess of ocean
freight.
6.3 The title to and risk of the Products shall transfer to Client when the
Products are placed on board a vessel or aircraft at the port of export, as
noted in section 6.1, against clean on board bills of lading. Shipment of
Products does not constitute acceptance (despite any inspections by Client's
agent) and Client reserves its rights under sections 7.2 and 7.3 below.
ARTICLE 7.0 TESTS, QUALITY CONTROL AND INSPECTION
7.1 VTech will build the product according to ANSI 001B and/or Test
Specifications as provided by Client and accepted by VTech.
7.2 Client reserves its rights to inspect the Products upon arrival at its
facilities in the United States or elsewhere in the world.
7.3 Client or its agent (as noted on Exhibit B or as may be substituted for the
agent named) will inspect each shipment from VTech before it leaves the Vtech
manufacturing facility according to MIL-STD-105E, Single Sampling Plan, Level II
with an Acceptable Quality Level (AQL) of 2.5% for minor (that is,
non-functional and minor appearance related) defects and 0.25% for major and
critical (that is, serious appearance, functional, safety or regulatory) defects
during the first three moths of full production and, thereafter, the 0.25% limit
shall be increased to 0.40%. Client shall have the right to further inspect each
shipment and confirm non-acceptance of the shipment within 30 days after receipt
of the shipment at its own facility. In case a shipment fails to meet the
quality criteria as agreed by both VTech and the Client as noted above, the
Client shall notify VTech in writing (or by email) of the nature of the defect
and VTech will correct the problem as quickly as commercially reasonable and
will confer with Client, within five days, to reach agreement upon a recovery
plan. The cost of the recovery plan will be paid solely by VTech.
45
7.4 In the event that it is determined that the Products in question are not in
compliance with the quality criteria as agreed above, VTech shall bear all costs
of re-inspection.
ARTICLE 8.0 WARRANTY
8.1 VTech warrants to Client that all Products manufactured for Client under
this Agreement will strictly comply with the specifications and designs supplied
to VTech by Client and will be free from all defects in workmanship and
materials for a period of one year from the date of delivery. However, this
warranty will not cover defects caused by any additional manufacturing processes
performed by the Client or any third party, or by any improper actions of the
Product's end users. VTech shall within ten days after notice by Client either
(at its option) repair or provide new replacement Products for the defective
Products qualified for this warranty or provide a cash credit to Client at FOB
value including freight and insurance costs. VTech shall have the right to
promptly inspect the claimed defective Products in Client's warehouse in the
USA. Client may accumulate a reasonable quantity of such defective Products,
which, after notice to VTech, will be returned to VTech at VTech's expense. The
replacement Products will be returned to Client with freight and insurance
prepaid by VTech to Client's warehouse in the United States of America. If after
replacement it is determined that the Products were not defective and did comply
with this Agreement then Client will pay for the replacement Products as new
purchases.
8.2 There are no other warranties than those stated in this Agreement. Vtech
disclaims all other warranties to Client or third parties by virtue of this
Agreement or otherwise, either expressed or implied, including but not limited
to implied warranties of merchantability, of fitness for a particular purpose,
and arising from usage of trade or course of dealing or performance, with
respect to the Products and accompanying written materials. This limited
warranty gives you specific legal rights, you may have others that vary from
state to state or country to country.
8.3 Except as stated herein, in no event shall EITHER PARTY be liable to THE
OTHER, ITS SUPPLIERS, CUSTOMERS or ANY OTHER third parties by virtue of this
Agreement or otherwise, for any damages whatsoever including any consequential,
incidental, indirect or special damages, whether based on contract, tort,
warranty or other legal or equitable grounds, including, without limitation,
damages for loss of business profits, business interruption, loss of business
information, or other pecuniary loss, arising out of the use of or inability to
use the Products, even if advised of the possibility of such damages. Because
some states or countries do not allow the exclusion or limitation of liability
for consequential or incidental damages, the above limitation may not apply.
8.4 In no event will VTech's aggregate liability to Client or third parties
whether for negligence, breach of contract, misrepresentation or otherwise
exceed the cost of the defective, damaged or undelivered Products as determined
by the net price invoiced to Client in respect of any single occurrence or
series of occurrences. Client understands that VTech's charges depend in part on
this exclusion of representations, terms and liabilities but Client does not
warrant or assure VTech in any manner that claimed limitations on the rights of
third parties are enforceable or valid.
8.5 VTech warrants to Client that there are no legal, administrative or
regulatory restrictions imposed by the Peoples Republic of China or any other
government, governmental or similar agency or authority, national, provincial or
local, on the export of the Products as contemplated by this Agreement.
ARTICLE 9.0 CONFIDENTIALITY/NON-COMPETITION
9.1 VTech agrees that all confidential information, including without
limitation, the Technical Information, furnished to it by or belonging to
Client, will be received and held in confidence by VTech and will be used by
VTech for the sole purpose of manufacturing the Products as set forth herein.
VTech shall take at least as stringent measures to safeguard such confidential
information or Technical Information as it uses for its own confidential
information, but no less than a reasonable degree of care. All such information
or Technical Information shall be the sole and exclusive property of Client.
VTech has or will require all of its employees, consultants, agents, or others
who have access to any of such confidential information or Technical Information
owned by Client to execute agreements with it similar in content to this section
9.1 and will exercise due diligence to obtain compliance therewith.
46
9.2 VTech agrees that it will not publish or otherwise use for its own benefit
confidential information or Technical Information received from Client without
the prior written consent of Client. The provisions of this Article 9 shall
survive any expiration or termination of this Agreement, but shall not apply to
confidential information of Client which (i) was known to VTech, as evidenced by
its written records, prior to the receipt of such confidential information from
Client, or (ii) was publicly available at the time of disclosure or subsequently
becomes publicly available through no act or failure to act of VTech, or (iii)
is subsequently disclosed to VTech by a third party who is under no obligation
of confidentiality to Client, or (iv) is developed by VTech independent and
without the use of the received or referenced material from the Client. Vtech
shall, upon request from Client, provide reasonably satisfactory written
evidence to Client to support its claim of exclusion of information from the
definition of confidential information as described above in this section.
9.3 During the period during which the parties are doing business and for the
two years following, VTech will not manufacture or sell, or assist others to
manufacture and sell, similar or competitive Products other than to or for the
Client.
ARTICLE 10.0 INDEMNIFICATION AND LIMITATION OF LIABILITY
10.1 VTech shall indemnify and hold the Client harmless from and against all
losses, costs, claims and damages, relating to or arising out of any allegation
that VTech's manufacturing processes furnished under this Agreement infringe or
violate any patent, copyright, trade secret or any other proprietary right,
provided that this indemnity shall not apply to any infringement which is due
wholly to VTech's compliance with the design or instruction furnished or given
by the Client.
10.2 Client shall indemnify and hold VTech harmless from and against all losses,
costs, claims and damages, resulting from VTech's compliance with the design or
instructions furnished or given by the Client, other than those resulting from
the gross negligence or willful misconduct of VTech or its representatives.
ARTICLE 11.0 TERM OF AGREEMENT
11.1 This non-exclusive Agreement, which shall become effective upon the
effective date as noted above, shall continue for a period of twelve (12) months
after the date of first delivery to Client at the port of export, unless this
Agreement is otherwise terminated pursuant to Article 12 hereof, and shall be
renewed every six (6) months thereafter unless either party gives the other
written notice of termination at least ninety (90) days prior to the expiration
of the original term or any extension thereof
ARTICLE 12.0 TERMINATION OF AGREEMENT
12.1 Client and VTech shall be entitled to terminate this Agreement and cancel
all outstanding purchase orders immediately upon written notice to the other
party on the occurrence of any of the following events:
12.1.1 Client or VTech breaches any provision of this Agreement or
fails to perform any of its obligations hereunder (Client's
pending merger with JPAL, Inc. and related sale of shares of
stock of the merged company, whose name will be changed to
Essential Reality, Inc. shall not be deemed a breach of this
Agreement), which breach or failure shall not have been
remedied by the breaching party within thirty (30) days after
written notice thereof; or
12.1.2 under the law of any applicable jurisdiction, Client or Vtech
becomes insolvent, suspends business or goes into liquidation,
bankruptcy or receivership or becomes a party to any procedure
for the settlement of its debts or to a dissolution proceeding,
or the equivalent of any of the foregoing in their own country;
or
47
12.1.3 upon one hundred twenty (120) days written notice to the other
party following sale, assignment, lease or other disposition
of/or voluntary parting with the control (whether in one
transaction or series of transactions) of a material portion of
the assets of Client or VTech to any person or entity except
for sales or other dispositions of assets in the ordinary
course of business Anything contained in this Agreement to the
contrary notwithstanding, Client shall not be in default or
breach under this Agreement by virtue of its merger with or
into any other company or by virtue of the sale at any time of
any membership interests or shares of stock in Client or the
merged company.
12.2 Notwithstanding anything contained in section 5.1, Client may
cancel confirmed purchase orders under this Agreement for any
reason by notifying Vtech in writing. Cancellation shall become
effective after twenty-four (24) hours following the sending by
Client of an email or a telex or cable to Vtech promptly
followed by VTech's receipt from Client of a written
cancellation notice in the form of a registered air mail letter
or facsimile from Client, or thereafter upon the date specified
in such email, telex, cable, facsimile, or letter. VTech shall
cease operation on all existing purchase order(s) in accordance
with the cancellation notice. Client shall have no liability
for cancelled purchase orders other than as set forth in this
section. In the event of a cancellation under this section,
Client will pay VTech for the materials and labor costs
incurred prior to the effective date of the cancellation for
Products which are in process or completed under the
outstanding Client purchase orders, and VTech will deliver to
Client all completed products, assemblies in process, manuals,
spare parts, and all components processed or purchased on
account of outstanding purchase orders.
12.3 Upon termination of this Agreement, VTech shall promptly return
to Client all Technical Information or other confidential
information and related data that is in written, graphic or
other tangible form and is then in the possession of VTech or
in its custody or control, including, but not limited to, all
documentation concerning the Product provided by Client or by
VTech at any time during the term of this Agreement, and VTech
shall warrant to Client in writing, within ten (10) days of
returning all confidential information, that it has permanently
destroyed all computer records or files containing any such
information and inform and confirm to Client in writing that it
no longer possesses any of the Technical Information or
confidential information in any form.
ARTICLE 13.0 FORCE MAJEURE
13.1 Any failure of Client or VTech to comply with the terms of this
Agreement if such failure is caused by circumstances not directly under
the control of the party concerned, including but not limited to
failures resulting from force majeure, acts of God, natural disasters,
fire, storm, flood, earthquake, explosion, accident, acts of the public
enemy, war, rebellion, insurrection, sabotage, epidemic, quarantine
restrictions, riots, labor disputes, transportation embargoes,
boycotts, failures or delays in transportation or the mails, inability
to secure necessary materials (including but not limited to fuel) after
reasonable efforts to find alternative sources, acts of any government,
whether national, state, local or otherwise, or any agency thereof, or
judicial action, shall be excused, provided that the nonperforming
party uses its best efforts to anticipate and mitigate the effect of
the intervening condition, and promptly performs when said condition
ceases to exist.
ARTICLE 14.0 NOTICES
14.1 Any notice required or permitted to be given hereunder shall be in
writing and shall be deemed to be properly given when sent by
registered air mail, return receipt requested, and simultaneously sent
via email and fax addressed as follows:
If to Client:
Essential Reality, LLC
49 West 27th Street, Seventh Floor
New York, NY 10001, USA
Attn: President
Tel: 212-244-3200
Fax: 212-244-9550
Email - rlevine@essentialreality.com
48
If to VTech:
Andy Leung
General Manager
VTech Communications Ltd. (Contract Manufacturing)
23/F, Tai Ping Industrial Centre
Block 1, 57 Ting Kok Road
Tai Po, N.T. Hong Kong
Tel: 852-26655266
Fax: 852-26677175
Email - andy_leung@vtech.com
or to such other address as either party may give the other party
notice of pursuant to this section 14.1. Any notice given by mail shall
be deemed to have been given on the tenth day after the mailing
thereof; provided, however, that if the contents of any such notice are
sent simultaneously by both fax and email, such notice shall be deemed
to have been received on the business day following the date of such
fax and email.
ARTICLE 15.0 GOVERNING LAW/JURISDICTION
15.1 It is expressly agreed that the laws of the State of New York, USA,
with regard to contracts to be performed entirely within the State of
New York, shall govern the validity, performance and construction of
this Agreement. Further, the parties agree that the exclusive forum for
resolution of any disputes that they cannot settle by discussion shall
be the London Court of International Arbitration sitting in London,
England and proceeding in accordance with its rules with a panel of
three arbitrators whose decision shall be final and binding on both
parties, not be subject to appeal and be enforceable in any applicable
jurisdiction..
ARTICLE 16.0 WAIVERS; AMENDMENTS
16.1 No waiver of any right hereunder by either party shall operate as a
waiver of any other rights, or of the same right with respect to any
subsequent occasion for its exercise, or of any right to damages. No
waiver by either party of any breach of this Agreement shall be held to
constitute a waiver of any other breach or a continuation of the same
breach. All remedies provided by this Agreement are in addition to all
other remedies provided by law. This agreement may not be amended
except by writing signed by each of the parties hereto.
ARTICLE 17.0 ASSIGNMENT
17.1 VTech shall, with the prior written consent of Client, be entitled to
subcontract or assign some or all of its rights and obligations
hereunder, provided, however, that any such transfer shall not relieve
VTech of its responsibilities or obligations hereunder. Further, VTech
shall obtain from such subcontractor its written agreement, comparable
in duration and scope to this Agreement, acknowledging the ownership of
Client of the Technical Information and confidential information,
requiring the subcontractor to maintain the confidentiality of all such
information and to not assist a competitor of Client. VTech shall
furnish to Client promptly after signing a complete copy of the
subcontractor's agreement in its original language and, if not in
English, an accurate translation of such agreement into English.
17.2 Any assignment by Client of any of its rights or obligations hereunder
without VTech's prior written consent shall be void. The Client may
assign its rights and obligations to any successor entity and complete
its pending merger into JPAL, Inc. and such actions shall not be a
breach or violation of this Agreement.
ARTICLE 18.0 SEVERABILITY
18.1 Every provision hereof is intended to be severable. The
unenforceability, invalidity, or illegality of any provision for any
reason whatsoever, shall not render the other provisions unenforceable,
invalid or illegal. If any provision of this Agreement is or becomes or
is deemed invalid, illegal or unenforceable under the applicable laws
or regulations of any jurisdiction, either such provision will be
deemed amended to conform to applicable laws or regulations or, if it
cannot be so amended without materially altering the intention of the
parties, it shall be stricken and the remainder of this Agreement shall
remain full force and effect.
49
ARTICLE 19.0 ENTIRETY
19.1 The foregoing Agreement and purchase orders issued hereunder
constitutes the entire agreement of the parties and supersedes and
cancels all prior communications, negotiations and agreements, oral and
written, with respect to the subject matter hereof.
IN WITNESS WHEREOF, Client and VTech have caused this Agreement to be executed
by their respective officers duly authorized as of the date written below.
VTECH COMMUNICATIONS LIMITED ESSENTIAL REALITY, LLC
By: By:
--------------------------------- --------------------------------
Title: CEO Title: PRESIDENT
--------------------------------- --------------------------------
Date: 15th May 2002 Date: 05-08-02
--------------------------------- --------------------------------
50
Exhibit A
Client to insert all relevant terms here.
EXHIBIT B - this would be the client's inspection agent's certificate that they
have inspected the Products and found them to be in compliance with the
specifications and purchase order.
51
Exhibit 10.3
[GRAPHIC OMITTED]
As of July 1, 2001
VR Yad Development Group, Ltd.
504-200 Robert Speck Parkway
Mississauga, ON L4Z 1S3
Att: Mr. Avanindra Utukuri, CEO
Re: Development Agreement ("Agreement") by and between Essential Reality, LLC
("Essential") and VR Yad Development Group, Ltd. ("VR Yad" and,
together with Essential, THE "PARTIES") REGARDING THE P5(TM)
-----------------------------------------------------------------------------
Dear Sir:
This letter shall confirm our agreement with respect to the development
work you are performing for Essential in connection with the Product (as defined
in Exhibit "A", A/K/A the P5(TM)), the scope of which is more fully outlined on
Exhibit "B", as may be amended from time to time by the Parties.
Accordingly, the Parties agree as follows:
1. As full compensation for the services to be provided hereunder,
Essential shall pay VR Yad: (i) a development fee of $30,000 USD per month
beginning on July 1, 2001 and continuing on a monthly basis for two consecutive
months thereafter ("Development Fee"); and (ii) royalties equal to one percent
(1%) of Net Sales (as defined below) of the Product ("Royalties"). At the
expiration of the 2-month period during which VR Yad receives the Development
Fee, the terms of any subsequent agreement, including compensation, shall be
negotiated by VR Yad and Essential. Absent an agreement, in writing, as to any
changes, this letter agreement shall remain in force and effect unless
terminated pursuant to paragraph 12.
Moreover, VR Yad shall also receive an additional one half of
one percent (.5%) of Net Sales as an additional royalty ("Additional Royalty"),
provided that such Additional Royalty shall be forfeited by VR Yad if, as a
result of a determination by Essential, in its sole and absolute discretion,
that VR Yad has failed to timely complete any portion of the development work
outlined in Exhibit "B" Essential engages a third party to timely complete such
work.
For the purposes of this Agreement "Net Sales" is defined as
the gross invoice and/or sales price of shipments of production units of the
Product to unrelated third parties ("Gross Sales"), less returns actually
accepted and credited, cash and/or similar trade discounts and allowances
actually granted, customs duties and sales, excise, value added and similar
taxes, insurance and freight billed through to customers allocable to that
portion of the invoiced price that is attributable to the Product. If products
subject to Gross Sales include the Product and other products sold or licensed
with the Product in a package for a single price, the amount of the price
attributable to the Product shall be determined by prorating the receipts from
the package according to the suggested retail prices or, if there is no
suggested retail price, then the values established by Essential for the several
components contained in the package.
Notwithstanding the fact that VR Yad' Royalties are earned
when Essential's related revenues are earned, such Royalties are not payable to
VR Yad unless and until such revenues are collected by Essential and such
Royalties, if any, shall be paid to VR Yad within thirty (30) calendar days
after the close of each calendar quarter in which such revenue is received by
Essential.
Essential shall reimburse VR Yad for expenses and
disbursements reasonably incurred by VR Yad in respect of its performance of its
obligations arising from this Agreement, PROVIDED, HOWEVER, that any such
expenses and disbursements shall be approved by Essential, in writing, prior to
VR Yad's expenditure or disbursement.
52
2. All information and materials relating to the Product given to you
are original, unique and proprietary to Essential and are owned and subject to
Intellectual Property ownership by Essential. Any copying, duplication or
manufacture or use of such Intellectual Property without the prior written
consent of Essential is strictly prohibited hereby and constitutes infringement
under the United States Laws and shall be enforced by Essential to the fullest
extent permitted by law.
3. Any specifications, drawings, sketches, models, technical or
business information or data, written, oral or otherwise, relating, in any way,
to the Product (hereinafter "Information") furnished to you under or in
contemplation of this Agreement shall remain Essential's property and shall not
be disclosed to any third party. All copies of such Information in written,
graphic or other tangible form shall be returned promptly to Essential at
Essential's request.
4. All non-public information regarding the Product that is furnished
or disclosed to VR Yad during the term of this Agreement, as well as the terms
of this Agreement and any Information provided hereunder, shall be considered
"Proprietary Information." Proprietary Information does not include information
that has been or is disclosed to the public other than as a result of a breach
of a confidentiality obligation owed to Essential or is otherwise independently
developed or furnished by a third party not subject to a contractual
restriction. Unless otherwise agreed to in writing by Essential or required by
law, VR Yad will: (a) keep Proprietary Information confidential and not disclose
or reveal any Proprietary Information to any persons or entities other than
those employed by VR Yad or on VR Yad' s behalf who are actively and directly
engaged in Essential's activities under this Agreement (which persons or
entities will be caused by Essential to observe the terms and conditions set
forth herein as though each such person or entity was bound hereby); and (b) not
use the Proprietary Information for any purpose other than in connection with
the services provided to Essential by VR Yad.
Moreover, Essential shall be able to issue press releases and
other marketing or other written materials and to publicize the relationship
outlined herein by both public written communication and verbal reference,
including, without limitation, references on Essential's web-site and in its
business plans and collateral materials. VR Yad shall not, except with the prior
written approval of Essential, issue press releases and/or other marketing or
other written materials, or communicate with any third party in any way, with
respect to the relationship outlined herein. VR Yad shall send Essential a final
copy of any such approved communication promptly following the release of such
information.
5. It is understood and agreed that all work performed by VR Yad for
or on behalf of Essential shall be considered "Work for Hire" as defined in the
United States Copyright Law, and VR Yad hereby assigns to Essential all right,
title and interest, including without limitation, the copyright (and all
renewals thereof), in any and all countries in the world, in and to all works
resulting from such services ("Work Product"). VR Yad agrees to cooperate with
Essential or its designees and to execute such documents of assignment, oaths,
declarations or other documents, prepared by or for Essential, to enable
Essential to perfect or enforce its proprietary rights in and to the Work
Product and such cooperation and execution shall be at no additional
compensation to VR Yad; PROVIDED, HOWEVER, that Essential agrees to reimburse VR
Yad for reasonable out-of-pocket expenses incurred by VR Yad at Essential's
specific request.
6. Any improvements used and/or useful in the development and/or
manufacture of the Product or any applications thereto, made, developed and/or
conceived by you, or based on the Information, shall belong solely to Essential;
shall be treated as Information under this Agreement and you shall have no
rights, title, interest in or to such improvements. Furthermore, you agree to
complete any document and cooperate with Essential in perfecting our rights to
such improvements.
7. During the period that Essential and you have a relationship, and
for two (2) years after termination of such relationship, you will not develop,
manufacture, market or sell applications for any similar Product, or for any
other product that you develop for or on behalf of Essential, other than for or
to Essential.
8. Notwithstanding any other clause herein, all source code owned by
the Parties prior to entering into this Agreement, which such Party can
demonstrate in writing was developed by or on behalf of such party prior to the
date hereof ("Preexisting Properties"), and all intellectual property rights
associated therewith shall remain the property of the respective party. Any
modifications, derivations, improvements or patches created by either party in
respect of the Product or Essential's pre-existing code shall be the property of
Essential. Any modifications, derivations, improvements or patches created by
either party in respect of VR Yad's pre-existing code shall be the property of
VR Yad. To the extent that VR Yad's Preexisting Properties are incorporated in
the Product or required, in Essential's sole discretion, to be used in the
manufacture, improvement, maintenance, sales, marketing, support or use of the
Product, Essential and its distributors, contractors, customers, licensees and
end users shall have the exclusive, world-wide, royalty free license with
respect to the same, including the right to sublicense VR Yad's Preexisting
Properties.
53
9. You agree that your obligations, which by their nature should
survive the termination or expiration of this or any other agreement with
Essential, e.g. obligations respecting use and disclosure of Information and/or
Indemnification, shall survive such termination or expiration.
10. You further appreciate that any violation of this Agreement will
cause Essential irreparable harm for which money damages alone cannot provide an
adequate remedy. Therefore, you hereby consent in the event of a violation or
breach of this Agreement, to the issuance of a restraining order or injunction
without bond against such violations or breaches.
11. You agree to execute and provide such further documentation as
shall be necessary and consistent with the terms set as set forth herein.
Additionally, you agree to use your best efforts to cause your employees,
consultants, agents and/or subcontractors to execute such agreements or other
documents with respect to all matters, including, without limitation, the
matters referred to in Sections 2, 3, 4, 5, 6, 7 and 8 hereof as Essential may
request.
12. Either party shall have the right, exercisable in its sole
discretion, to cancel this Agreement on thirty (30) days prior written notice to
the other party whereupon the Parties shall have no further liability or
obligation to each other with respect to this Agreement, PROVIDED, HOWEVER, that
if, at the time of such termination, the Product meets all of the specifications
itemized in Schedule "B", then Essential's obligation to pay the Development
Fee, the Royalties and the Additional Royalty shall survive such termination and
the Development Fee, Royalties and Additional Royalty shall be paid to VR Yad as
provided for under this agreement. Upon termination of this Agreement VR Yad
shall forthwith turn over all applications, demos, software, enhancements,
modifications, hardware, prototypes, tools, models, dies, molds, test results,
or the like, made or generated during the course of its work on the Product,
together with all assignment documents as required hereunder, as directed by
Essential.
13. Within thirty (30) calendar days after the close of each calendar
quarter beginning with the first calendar quarter in which any Royalties are due
hereunder, Essential shall provide VR Yad with a written statement showing the
gross sales for such calendar quarter, an itemization of all amounts deducted
therefrom in arriving at Net Sales, a calculation of the Royalties payable to VR
Yad in respect of such period, an itemized statement of any amounts deducted,
withheld or offset from such Royalties and an itemized statement of any amounts
deemed to have become non-collectible or collection of which has been foregone
by Essential. Each such statement shall be accompanied by payment of the amount
of Royalties due and shall be sent to VR Yad at the address set forth above.
14. VR Yad hereby indemnifies Essential and its affiliates, its and
their respective successors and assigns, and its and their respective officers,
directors, members, employees, and agents, and agrees to defend them and hold
them harmless, from and against (i) any and all loss arising out of, based upon
or resulting from any claim or injury proximately caused by infringement by VR
Yad of third party intellectual property rights in the design of the Product or
claims based upon inherent design defects in the Product created by VR Yad,
except for such claim or injury related to infringement of third-party
Intellectual Property rights as could not reasonably have been avoided through
the exercise of due diligence (but not excluding claim or injury resulting from
the intentional, reckless or negligent acts of VR Yad's employees and
contractors, whether or not VR Yad's own due diligence could have discovered
such claim or injury); and (ii) claims for compensation by any of VR Yad's
employees, consultants and/or subcontractors for services performed by such
subcontractors at VR Yad's direction or request with respect to the development
of the Product.
15. Except as provided in Paragraph 14, neither party shall be liable
to the other for special, incidental, consequential or punitive damages of any
nature, for any reason, including, without limitation, the breach of this
Agreement or any termination of this Agreement (unless such breach was willfully
improper), whether such liability is asserted on the basis of contract, tort
(including negligence or strict liability) or otherwise, even if the other party
has been warned of the possibility of such damages. All remedies, including,
without limitation, the termination of this Agreement and all of the remedies
provided by law (and not excluded pursuant to the foregoing sentence), shall be
deemed cumulative and not exclusive.
16. The Parties acknowledge that they are independent contractors and
that no employer/employee or joint venture relationship is created by this
Agreement an and that neither party has any right to act on behalf of the other
party or to represent that it has such right or authority, unless expressly
provided by prior written agreement signed by such party.
54
17. VR Yad may not assign its rights or obligations under this
Agreement without the prior written consent of Essential. The rights and
obligations of Essential hereunder may, in whole or in part, be sold,
transferred or assigned by Essential to any parent, subsidiary, affiliated or
successor entity.
18. The Parties hereto consent to the exclusive personal and subject
matter jurisdiction and venue of the Supreme Court of the State of New York,
County of New York, and of the United States District Court for the Southern
District of New York, and further consent that any process or notice of motion
or other application to the Court or a Judge thereof may be served outside the
State of New York by registered or certified mail or by personal service,
provided a reasonable time for appearance is allowed and waive any objection to
jurisdiction on grounds of venue or forum non conveniens, or any similar
grounds. Any notice or service of process may be made to the address of the
Parties listed above. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New York without giving
effect to its laws governing the conflicts of laws.
19. This Agreement, sets forth the entire understanding of the parties
with respect to the subject matter hereof, and supersedes all existing
agreements between them concerning such subject matter. No amendment to or
modification of this Agreement shall be valid or binding unless made in writing
and signed by the party against whom enforcement thereof is sought. Each party
has taken all corporate action necessary for the authorization, execution and
delivery of this Agreement and this Agreement constitutes the legal, valid and
binding obligation of both Parties, enforceable against each other in accordance
with its terms except as enforcement may be limited by any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and except as enforcement may be limited by general principles
of equity.
Please acknowledge your agreement to the foregoing by executing a copy
of this Agreement and returning a copy to us.
Very truly yours,
ESSENTIAL REALITY, LLC
By:
Name:
Title:
Read and Agreed to as of the
1st day of July, 2001
VR YAD DEVELOPMENT GROUP, LTD.
By:
Name:
Title:
55
EXHIBIT "A"
A computer PC and/or microprocessor I/O device that measures the
finger bend and/or orientation of the user's hand for use in the manufacturing,
sale, adaptation, improvement, maintenance, support or use of a glove device
which may also include sensors that receive and/or transmit additional
information, as it may be revised or enhanced from time to time hereafter.
56
EXHIBIT "B"
SEE ATTACHED
57
Exhibit 10.4
EXECUTION COPY
ESSENTIAL REALITY, LLC
CONSULTING/ADVISOR AGREEMENT
This Consulting Agreement ("Agreement") is made as of February 1, 2001
("Effective Date"), by and between Abrams Gentile Entertainment, Inc.
("Consultant") a __________ corporation, and Essential Reality, LLC ("ER"), a
Delaware limited liability company ("Consultant" and "ER" being the "Parties").
In consideration of the mutual covenants and promises contained herein,
the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I.
CHARACTER AND EXTENT OF SERVICES / PERIOD OF AGREEMENT / TERMINATION / FEES
SECTION 1.1. REFERRAL SERVICES. ER hereby authorizes Consultant, on a
non-exclusive basis, to locate business entities and/or individuals with whom ER
may develop a business relationship ("Relationship"). Consultant will clear all
introductions to any potential Relationship, in advance, with ER and will
provide ER (or its representative) with notice of the time and place of all
schedule meetings with a potential Relationship.
SECTION 1.2. CONSULTING SERVICES. ER hereby retains Consultant, and
Consultant hereby agrees to provide consulting services to ER for the Term (as
defined in SECTION 1.5 below), upon the terms and subject to the conditions
hereinafter set forth.
Consultant is hereby engaged as general consultant and advisor to ER
and will provide such consultation and advice as ER may reasonably request.
Without limiting the generality of the foregoing, Consultant hereby agrees (and
shall cause its directors, officers, employees and agents to agree) to (a) use
its (or their) reasonable efforts to promote the interests of ER (b) use its (or
their) best efforts to procure "Relationships" for ER in the manner provided in
SECTION 1.1 above; (c) if practical, attend meetings with entities to pursue a
potential "Relationship"; and (d) review and comment on new marketing
strategies, products and services for ER. Consultant (and its directors,
officers, employees and agents) shall have no authority or power to (i) bind or
commit ER to agreements of any kind; (ii) incur any debt, obligation or
liability or enter into any contract or commitment on behalf of ER; or (iii)
alter, amend, terminate or otherwise change any sales order, contract or other
document issued by ER.
Consultant shall (and shall cause its directors, officers, employees
and agents to) faithfully and diligently perform its duties and responsibilities
hereunder in a good and businesslike manner including, without limitation (a)
providing supplier contact names; (b) providing the names and details of
contacts met at trade shows and other events; (c) promptly responding to phone
messages and emails; and (d) keeping ER informed of the status of its
discussions with potential Relationships and other activities.
As and when requested by ER, Consultant shall provide a written report
detailing its efforts with respect to the services provided to ER pursuant to
this Agreement.
Consultant agrees to comply with, and be bound by, the operational
policies, procedures and practices of ER in effect from time to time. Consultant
shall not be entitled to any additional benefits or monetary or non-monetary
compensation for services rendered to ER except as expressly provided herein.
Any agents engaged or alleged to be engaged by Consultant are at its own risk,
expense and supervision and shall have no claim against ER for salaries,
commissions or other expenses.
SECTION 1.3. INSURANCE. Consultant agrees to obtain all the insurance
necessary for its own protection in connection with its work under this
Agreement. Such insurance shall include but not be limited to workers'
compensation insurance, unemployment insurance, and disability insurance.
58
SECTION 1.4. NATURE OF RELATIONSHIP. Consultant is an independent
contractor for federal and state income tax purposes together with any other
withholding tax purposes and, for the avoidance of doubt, is not an employee,
agent or partner ER for any purposes including but not limited to compensation,
benefits, workers' compensation insurance, unemployment insurance or disability
insurance, with the exception that Consultant (and its directors, officers,
employees and agents) shall be deemed employees for hire of ER under the work
for hire provisions hereof. Consultant shall not have any authority to bind ER
or make any representation or promise or enter into any agreement on behalf of
ER without prior written authorization of ER.
SECTION 1.5. TERM. This Agreement commences on the Effective Date and runs
until the date which is six months after the Effective Date, unless renewed or
extended, in writing, by mutual agreement of the Parties.
SECTION 1.6. TERMINATION. Either party may terminate this Agreement at
anytime by giving the other party 15 days' prior written notice.
SECTION 1.7. CONSULTANT FEES. Consultant shall receive a monthly consulting
fee having a total value of $8,333 USD ("Fee"), payable within fifteen (15) days
after the end of each month, PROVIDED, HOWEVER, that until ER sells common stock
or other securities convertible into or exchangeable for common stock that
results in the receipt by ER of at least $1,000,000 in aggregate gross proceeds
(a "Financing"), only $5,000 USD of the Fee shall be due and owing to Consultant
each month and Consultant shall accrue the unpaid portion of the Fee. Should ER
consummate a Financing, ER shall then pay to Consultant the accrued unpaid
balance, if any, of the Consulting Fee due to Consultant at the time of the
Financing.
SECTION 1.8. EXPENSES. Unless otherwise expressly agreed in writing by ER,
Consultant shall be responsible for and shall pay all of its own expenses
incurred in connection with its performance of services under this Agreement.
SECTION 1.9. NO OTHER PAYMENT OR RIGHTS. Consultant acknowledges and agrees
that, except for the compensation set forth in SECTION 1.7, it will not have any
rights to receive compensation from ER for any transactions or arrangements with
a "relationship", and will not seek or accept compensation from a potential or
existing relationships in consideration of any existing or prospective business
arrangement between such a relationship and ER. Except for payment of amounts to
Consultant under SECTION 1.7, ER shall not be under any obligation to provide
Consultant with any further information, notices or updates regarding its
ongoing negotiations, discussions, relationship or future dealings or
arrangements with a "Relationship".
ARTICLE II.
INDEMNIFICATION
SECTION 2.1. INDEMNITY. To the fullest extent permitted by law, Consultant
shall indemnify and hold harmless ER and its members, officers, directors,
agents and employees from and against all claims, damages, losses and expenses
of any kind including but not limited to attorneys' fees, which arise out of or
result from, or allegedly arise out of or result from, Consultant's performance
or obligations under this Agreement or resulting from any partnership, alliance
or other venture with a "relationship" caused or alleged to be caused in whole
or in part by any act or omission of Consultant or of its employees or agents,
and/or by a breach or alleged breach by Consultant of any representation,
warranty or covenant made in this Agreement and/or any statement made by
Consultant to a "relationship" or other party not in furtherance of Consultant's
performance under this Agreement. Such obligation shall not be construed to
negate, abridge, or otherwise reduce any other right or obligation of indemnity
which would otherwise exist as to any party or person described in this SECTION
2.1.
ARTICLE III.
CONFIDENTIAL INFORMATION
SECTION 3.1. CONFIDENTIALITY. Consultant agrees that it will not at any
time, whether during or after the termination or cessation of its engagement,
except as expressly authorized by ER in writing and for its benefit, use,
divulge, or disclose (or enable anyone else to use, divulge, or disclose) to any
person or entity any Proprietary Information (as defined below) which it
presently possesses or which it may obtain during the course of its engagement.
Consultant shall keep strictly confidential all Proprietary Information
entrusted to it and shall not use or attempt to use any such Proprietary
Information in any manner which may injure or cause loss or may be calculated to
injure or cause loss, whether directly or indirectly, to ER, any Affiliate or
any Relationship. Consultant further agrees that upon the termination of its
engagement (irrespective of the time, manner, or cause of termination) it will
surrender and deliver to ER all Relationships or other lists, computer discs and
records, plans, sketches, documents, books, records, files, notes, memoranda and
data, or other materials of every kind relating to any matter, and all copies
thereof, within the scope of ER's or any Affiliate's business or related in any
way to any of ER's or any Affiliate's business, Customer or other entities with
which ER does business. Consultant recognizes that the disclosure of Proprietary
Information by it may give rise to irreparable injury to ER, which may not be
adequately compensated by damages. Accordingly, in the event of a breach or
threatened breach by Consultant of this
59
SECTION 3.1, ER shall be entitled to an injunction restraining Consultant from
disclosing, in whole or in part, the Proprietary Information defined in this
Section, or from rendering any services to any person, firm, corporation,
association or other entity to which such Proprietary Information, in whole or
in part, has been disclosed or is threatened to be disclosed. Nothing herein
shall be construed as prohibiting ER from pursuing any other remedies available
to it for such breach or threatened breach, including the recovery of damages
from Consultant. Notwithstanding anything in this Agreement to the contrary, the
Parties agree that Consultant may properly divulge Proprietary Information if it
is compelled to do so by a court of law, administrative agency, or other binding
legal process or procedure; provided, that, Consultant has given ER reasonable
advance written notice of such impending disclosure so that ER may obtain an
appropriate protective order or any other protective action. Further,
notwithstanding anything in this Agreement to the contrary, the Parties agree
that Consultant shall continue to own the list of contacts which it brings to
the consulting relationship, and shall have no obligation to include this
contact list in the materials which it is obligated to return to ER upon
termination of its engagement. These undertakings shall survive the termination
of Consultant's engagement.
SECTION 3.2. DEFINITION OF PROPRIETARY INFORMATION. The term "Proprietary
Information" means any and all information, oral or written, that ER or any
Affiliate of ER regards as confidential or proprietary in nature, including
without limitation ER's or its Affiliates': business plans, operations,
procedures, routines and records, including current or potential investments,
investors, partners and/or clients; actual or potential marketing, product and
service development plans, strategies, ideas, contacts or forecasts; budgets,
financial information and pricing methods and information; lists of past,
existing or potential clients, customers, members, partners, advisors and
investors; proprietary programs, processes and software, including computer
programs in source or object code and all related documentation and training
materials; Work Product, as defined by SECTION 4.1 herein; and trade secrets,
patents inventions, research, designs, methods, discoveries, works of
authorship, Work Product, improvements or ideas developed or otherwise produced,
acquired or used by ER or its Affiliates. Notwithstanding anything in this
Agreement to the contrary, Proprietary Information shall not include any
information that (i) is or was known by Consultant prior to Consultant's
engagement hereof by ER and was not utilized by Consultant during the period of
its engagement by ER; or (ii) is or becomes publicly known through no fault of
Consultant.
SECTION 3.3. DEFINITION OF AFFILIATE. For purposes of this Agreement,
"Affiliates" shall include any person or entity which controls ER, any entity
controlled by ER and any entity under common control with ER, and any person who
is or was an employee, officer, member, contractor, consultant, agent, client,
Customer, partner, investor, alliance group or resource partner of ER or any of
the ER members, subsidiaries, clients, investors, partners, alliance groups or
resource partners, and each of their respective successors and assigns. As used
above, the terms client, partner, investor, alliance group or resource partner
shall include any and all potential clients, partners, investors, alliance
groups or resource partners with which the ER has, or any of the ER
subsidiaries, clients, partners, investors, alliance groups or resource partners
have, in an ongoing business relationship.
60
ARTICLE IV.
OWNERSHIP
SECTION 4.1. WORK PRODUCT Consultant agrees that all work performed under
this Agreement, and all materials made, conceived, expressed, developed, or
actually or constructively reduced to practice by Consultant solely or jointly
with others in connection with any services under this Agreement or any Exhibit
hereto (the "Work Product") are Proprietary Information and the property of ER.
"Work Product" shall include, but shall not be limited to, all expression,
notes, records, inventions, improvements, developments, discoveries, business
development strategies, marketing plans, computer software, and trade secrets,
whether or not subject to patent or copyright protection. All Work Product shall
be deemed to be a work made for hire and made in the course of the services
rendered hereunder, and all right, title and interest therein shall vest in ER
without the necessity of any further consideration. To the extent that title to
any Work Product may not, by operation of law, vest in ER or such Work Product
may not be considered works made for hire, all right, title and interest therein
are hereby irrevocably assigned to ER. ER shall have the exclusive right to use
the Work Product, whether original or derivative, for all purposes. Consultant
agrees to assist ER, its designee(s), or its affiliates, at the expense of ER,
to obtain and from time to time, enforce, perfect, and defend the rights of ER
in the Work Product and any copyrights, patents, or other intellectual property
rights relating thereto in any and all countries, and to execute all documents
reasonably necessary for ER to do so. Consultant further waives any "moral"
rights or other rights with respect to attribution of authorship or integrity of
such Work Product as Consultant may have under any applicable law.
Upon the expiration or termination of this Agreement, or upon the earlier
request of ER, Consultant will deliver to ER all property of ER relating to, and
all tangible embodiments of, Work Product in Consultant's possession or control.
Consultant agrees that if in the course of performing services, Consultant
incorporates into any Work Product developed hereunder any invention,
improvement, development, concept, discovery, or other proprietary information
owned by him or in which he has an interest ("Item"), Company is hereby granted
and shall have a nonexclusive, royalty-free, perpetual, irrevocable, worldwide
license to make, have made, modify, reproduce, display, transmit, perform, use,
and sell such Item as part of or in connection with such Work Product.
Consultant shall, from time to time, upon ER request, execute, acknowledge,
and deliver such instruments as may be necessary and proper to evidence,
maintain, effectuate, or defend any and all of the rights of ER under any
provision of this Agreement, as well as perfect, protect, evidence and renew
ER's rights in the Work Product and/or to effectuate any other of the purposes
and intents of this Agreement. ER shall have, and is hereby granted, the right
and power for and on behalf of Consultant, as Consultant's attorney-in-fact, to
execute, acknowledge and deliver any such instruments which Consultant shall
fail to execute, acknowledge or deliver within five business days after ER's
request therefor. ER's foregoing authority as attorney-in-fact is a right and
power coupled with an interest and is forever irrevocable.
ARTICLE V.
OTHER
SECTION 5.1. REPRESENTATIONS. Consultant represents, warrants and covenants
that: (a) its activities and services performed in connection with this
Agreement will not violate or conflict with any other agreement or obligation by
which Consultant is bound; (b) this Agreement has been duly authorized by
appropriate action and when executed and delivered will be binding upon it in
accordance with the terms hereof; and (c) except for interests that Consultant
has previously disclosed to ER, there exists no direct or indirect private
interest of Consultant (including corporate stockholdings or other business
agreements and obligations), which is, or may appear to be incompatible with the
provision of services called for under this Agreement. Consultant shall not
undertake any action or voluntarily suffer any state of affairs that may result
or appear to result in a conflict of interest, with Consultant's obligations
under this Agreement.
SECTION 5.2. BROKERAGE FEES. Consultant represents, warrants and covenants
that except as set forth expressly in this Agreement, no person, company nor any
entity has been retained or is owed any commission, brokerage or contingent fee
in connection with the Agreement and the establishment of consulting
relationship between ER and Consultant provided for herein. Any such asserted
claim not expressly set forth herein as being the responsibility of ER shall be
the sole obligation of Consultant.
61
SECTION 5.3. NOTICES. All notices concerning this Agreement shall be in
writing and shall be deemed to have been given: at the time when received if
sent by hand or by facsimile transmission; on the day after deposit with an
overnight express mail service; or five days after being when mailed at any
general or branch United States Post Office enclosed in a registered or
certified postpaid envelope addressed to the addresses of the respective Parties
stated below or to such changed address as such Parties may have fixed by
notice:
TO ER:
Essential Reality, LLC
253 West 28th Street
New York, NY 10001
Attn: David Devor, COO
Fax: (212) 244-9550
TO CONSULTANT:
Abrams Gentile Entertainment, Inc.
244 West 54th Street, 9th Floor
Attn:
Fax: (212) 765-1987
; PROVIDED, HOWEVER, that any notice of change of address shall be deemed given
upon receipt.
SECTION 5.4. ENTIRE AGREEMENT. This Agreement contains the entire agreement
and understanding of the Parties with respect to the subject matter hereof,
supersedes any prior agreements and understandings with respect thereto and
cannot be modified, amended or waived, in whole or in part, except in writing
signed by each of the Parties. Any such purported modification, amendment, or
waiver shall be null and void. A discharge of the terms of this Agreement shall
not be deemed valid unless by full performance of the Parties hereto or by
writing signed by the Parties hereto. A waiver by ER of any breach by Consultant
of any provision or condition of this Agreement to be performed by Consultant
shall not be deemed a waiver of similar or dissimilar provisions or conditions
at the same or any prior or subsequent time. Neither party has been induced to
enter into this Agreement by any representation or promise not expressly set
forth herein.
SECTION 5.5. BINDING EFFECT AND TRANSFERABILITY. This Agreement shall be
freely transferable by ER and shall inure to the benefit of and be binding upon
the successors and assigns of ER (whether resulting from any reorganization,
consolidation or merger of ER, or of any business to which all or substantially
all of the assets of ER are sold, or otherwise). Neither this Agreement nor any
interest hereunder shall be transferable in any manner by Consultant.
SECTION 5.6. GOVERNING LAW. This Agreement shall be governed in all
respects by the law of the State of New York (without regard to the choice of
laws principles thereof) and applicable Federal law, as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
SECTION 5.7. ARBITRATION OF ALL DISPUTES. Any controversy or claim arising
out of or relating to this Agreement shall be submitted exclusively for
resolution to arbitration in the City of New York, State of New York, by a
single impartial arbitrator in accordance with the Commercial Rules of the
American Arbitration Association. The cost of any arbitration proceeding
hereunder shall be borne equally by Consultant and ER; provided, however, that
Consultant and ER shall be responsible for the attorneys' fees and expenses of
their respective counsel. In the absence of fraud, the award of the arbitrator
shall be binding upon the Parties and judgment thereon may be entered in any
court having jurisdiction thereof.
SECTION 5.8. EQUITABLE RELIEF. Consultant agrees that it would be
impossible or inadequate to measure and calculate ER's damages from any breach
of the covenants set forth in SECTIONS 1, 3, OR 4 of this Agreement.
Accordingly, Consultant agrees that if he or she breaches the obligations under
SECTIONS 1, 3, OR 4, ER has, in addition to any other right or remedy available,
the right to obtain from any court of competent jurisdiction an injunction
(temporary, preliminary or permanent), or other interim, ancillary or
conservatory remedy or relief, restraining such breach or threatened breach and
granting specific performance of any such provision.
62
SECTION 5.9. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, and by each party on separate counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
SECTION 5.10. SEVERABILITY. If any section, term or provision of this
Agreement shall be held or determined to be unenforceable, the balance of this
Agreement shall nevertheless continue in full force and effect unaffected by
such holding or determination. The Parties agree that it is their intention and
agreement that any such section, term or provision which is held or determined
to be unenforceable as written shall nonetheless be enforced and binding to the
fullest extent permitted by law as though such section, term or provision had
been written in such a manner and to such an extent as to be enforceable under
the circumstances.
SECTION 5.11. NONSOLICITATION. During the period commencing on the date
hereof and ending one year after the later of the termination or natural
expiration date of this Agreement, Consultant shall not directly or indirectly
solicit for employment or hire any person who was employed by ER or worked for
ER as a consultant at any time during such period. Additionally, Consultant
shall not directly or indirectly induce any of ER's customers and/or their
affiliates to terminate or fail to renew, in whole or in part, their business
relationship with ER, in favor of a different entity introduced or referred by
Consultant.
IN WITNESS WHEREOF the Parties have caused this Agreement to be executed as
of the date first above written.
Abrams Gentile Entertainment, Inc. Essential Reality, LLC
By: By:
---------------------------------- ------------------------------------
Name: Name: David Devor
Title: Title: COO
63
Exhibit 10.5
CLIENT AGREEMENT
BusinessDevelopment.com, LLC
253 West 28th Street, 2nd Floor
New York, New York 10001
As of December 13, 2000
David Devor, Chief Operating Officer
Essential Reality, LLC
253 West 28th Street, Second Floor
New York, NY 10001
Dear Mr. Devor:
This letter agreement (the "Letter Agreement") affirms our mutual understanding
regarding the business relationship between Essential Reality, LLC ("Client")
and BusinessDevelopment.com, LLC ("bd.com").
The parties agree that the parameters of bd.com's services and obligations to
Client are described more fully below and that the general terms governing this
Letter Agreement are described more fully on Attachment A hereto.
bd.com shall use commercially reasonable efforts to introduce Client to certain
business relationships of bd.com as shall be mutually determined by Client and
bd.com ("Prospect(s)"), for the purpose of facilitating, joint ventures,
strategic alliances, partnerships and/or any revenue generating business
opportunity or relationships, including licensing arrangements and/or other
transactions ("Transaction(s)") with Client.
The parties further agree that bd.com's compensation for its efforts on behalf
of Client shall be (i) a non-refundable monthly retainer of $6,000 USD
("Retainer") paid to bd.com upon the execution of this Letter Agreement and
continuing until either party shall notify the other, by at least thirty (30)
days notice, in advance, in writing, of its intention to terminate this
Agreement; and (ii) for any Transaction(s) consummated with any of the Companies
bd.com shall receive such other compensation as shall determined by mutual
agreement; PROVIDED, HOWEVER, that the parties hereto agree that the services to
be provided by bd.com hereunder are valuable and integral to the growth and
development of the Client and that bd.com's provision of the services called for
hereunder constitute services substantially different in form and substance than
traditional consulting services and as such bd.com shall not be compensated in
form or amount as would a traditional consultant providing services appearing to
be similar to the services to be performed by bd.com hereunder. Furthermore, the
parties hereby agree that the form of compensation to bd.com for the provision
of the services contemplated hereunder shall be in the form of cash, equity in
the Client or a combination of both, to be determined by mutual agreement by the
parties and Client and bd.com hereby agree that Client shall not enter into any
Transaction unless and until Client and bd.com negotiate in good faith the terms
of a written agreement which sets forth bd.com's compensation resulting from
such Transaction. If the parties cannot agree on the terms of bd.com's
compensation, the compensation shall be determined by arbitration pursuant to
the provisions of Section 8 of Attachment A, with the arbitrators determining
bd.com's compensation based upon the fair market value of the services provided
and the benefit received by Client; PROVIDED, HOWEVER, that bd.com shall also be
entitled to reimbursement of all fees in such arbitration and a 20% premium on
its compensation if the Client elects to proceed with such Transaction before a
written agreement is reached with bd.com on its compensation.
Client shall keep bd.com informed and provide bd.com with any and all
information, notices and updates regarding its ongoing negotiations,
discussions, meetings, relationships and current and future dealings and/or
arrangements relating to or arising from the services provided by bd.com
hereunder, including without limitation, the consummation of any contract,
agreement, deal, transaction, partnership, alliance or other contractual
relationship resulting from or relating to such services.
64
The parties further agree, that this Letter Agreement contains the entire
agreement and understanding of the parties with respect to the subject matter
hereof, and shall only apply to the introductions and/or related services
enumerated herein ("bd.com Services"). Any other introductions or related
services, whether in addition to or in replacement of any of the bd.com
Services, shall be negotiated and agreed to by the parties prior to any such
introduction or related service, and the terms of such introductions or related
services, including, without limitation, the compensation arrangement, shall be
set forth on an Annex 1 ("Annex 1") which shall be attached to and become part
of this Letter Agreement. Furthermore, any transaction, whether with an entity
specified herein or with any other entity that bd.com introduces to or
identifies to the Client, which is other than a Transaction(s) as contemplated
herein, including any and all business combinations (such transactions, an
"Other Transaction"), shall be negotiated in good faith or agreed to by the
parties prior to the consummation of any such Other Transaction and the terms of
such Other Transaction and the services associated therewith, including, without
limitation, bd.com's compensation therefore, shall be set forth on such Annex 1
which shall be attached to and become part of this Letter Agreement. The terms
and provisions of this Letter Agreement, including, without limitation, the
arbitration provisions of Section 8 of Attachment A, shall govern any such new
introductions or related services, as well as the compensation arrangements,
agreed to and listed on Annex 1 in the event the parties can not agree on
bd.com's compensation; PROVIDED, HOWEVER, that bd.com shall also be entitled to
reimbursement of all fees in such arbitration and a 20% premium on its
compensation if the Client elects to proceed with such Transaction before a
written agreement is reached with bd.com on its compensation.
Either party shall have the right to cancel this Letter Agreement at any time
upon 30 days' written notice to the other party. The parties agree, however,
that termination of this Letter Agreement shall not affect any rights of bd.com
or obligations by Client that accrue prior to termination or those which survive
termination of this Letter Agreement, including but not limited to those rights
and obligations included in any and all attachments to this Letter Agreement.
The compensation to be earned by bd.com for any services performed prior to the
termination of this Letter Agreement shall survive termination of this Letter
Agreement, even if the relationship between the Client and a party to whom
bd.com has introduced Client prior to termination of this Letter Agreement is
formalized or otherwise develops within two (2) years subsequent to the
termination of this Letter Agreement.
Your signature below indicates your agreement with the terms and conditions
contained herein. We look forward to working with you.
Very truly yours,
BusinessDevelopment.com, LLC
By:
Michael Alpert
President & CEO
Agreed to and Accepted:
Essential Reality, LLC
By:
Name:
Title:
65
ATTACHMENT "A"
GENERAL PROVISIONS
1. INDEPENDENT CONTRACTOR. bd.com and Client acknowledge that they are
independent contractors and that no employer/employee or joint venture
relationship is created by the Letter Agreement. Other than bd.com acting as
Client's representative in respect of the services described on this Attachment
A to the Letter Agreement, bd.com does not have any right to act on behalf of
Client or to represent that it has such right or authority, unless expressly
provided by prior written agreement signed by Client and bd.com. All services
performed by bd.com shall be at such times and in such manner as bd.com shall
determine.
2. REPRESENTATIONS AND WARRANTIES. (a) Each party has taken all corporate action
necessary for the authorization, execution and delivery of this Letter Agreement
and this Letter Agreement constitutes the legal, valid and binding obligation of
both parties, enforceable against each other in accordance with its terms except
as enforcement may be limited by any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and except
as enforcement may be limited by general principles of equity.
(b) Client shall provide bd.com with such information about Client as bd.com
shall reasonably request. No document, exhibit, schedule, statement, certificate
or other writing furnished to bd.com by or on behalf of Client, pursuant to this
Letter Agreement or otherwise, will contain, any untrue statement of a material
fact or will omit to state a material fact necessary to make the statements
contained herein and therein not misleading.
3. INDEMNITY. Client shall indemnify, defend and hold bd.com (and its members,
directors, officers, employees, agents, affiliates, controlling parties and
representatives on Client's Board of Directors) harmless from and against all
claims, liability, loss or damage, together with all reasonable costs and
expenses related thereto (including legal and accounting fees and expenses),
arising from the performance of its obligations under this Letter Agreement
other than those resulting from the gross negligence or willful misconduct of
bd.com or its representatives.
4. ASSIGNMENT OF RIGHTS. Neither party shall be entitled to assign its rights or
obligations under this Letter Agreement without the express written consent of
the other party; PROVIDED, however, that the rights and obligations of bd.com
hereunder may, in whole or in part, be sold, transferred or assigned by bd.com
to any parent, subsidiary, affiliated or successor entity.
5. NONSOLICITATION. Client agrees not to solicit or hire any of bd.com's
employees or former employees, without bd.com's prior written consent, during
the course of this Letter Agreement and for a period of one (1) year thereafter.
6. NON-EXCLUSIVE RELATIONSHIP. (a) The parties acknowledge that this Letter
Agreement does not create an exclusive relationship between them and that bd.com
is not precluded from providing similar services to a competitor or potential
competitor of Client and Client is not precluded from retaining a competitor or
potential competitor of bd.com to provide Client with similar services.
(b) Client further acknowledges that introductions, strategic relationships
and/or joint ventures facilitated on behalf of Client pursuant to the services
provided under the Letter Agreement may be provided to and on behalf of another
client of bd.com and that bd.com may be receiving compensation from such other
client as well for the introduction and facilitation of any such relationships.
Client further acknowledges and agrees that in any such event of the provision
of services hereunder involving the Client and another client of bd.com, that
bd.com shall be deemed to have used its good faith best efforts in facilitating
the subject relationship between both such clients of bd.com in a fair manner
and Client shall have no claim against bd.com asserting otherwise.
7. PRESS RELEASES; PUBLIC DISCLOSURE. (a) During the term of this agreement,
bd.com shall be able to issue press releases and other marketing or other
written materials in respect of bd.com's services provided to Client, after
obtaining prior approval from Client. bd.com shall send Client a copy of each
communication promptly following release of such information.
(b) bd.com may post on their Web site the Client's name (including any logos,
trademarks or other intellectual property) and a description of their business
purpose.
INITIAL:
66
(c) Notwithstanding anything contained herein to the contrary, nothing contained
herein shall be construed as limiting bd.com's ability to make use of any
information provided to bd.com by Client in connection with carrying out its
services hereunder.
(d) Client agrees that under no circumstances shall it issue any press releases,
make any posting on their Web site(s) or make any communication or otherwise
disseminate any information in any manner whatsoever, that relates, whether
directly or indirectly, to, bd.com, any relationship between bd.com and Client,
any of the services, introductions or transactions discussed herein or resulting
herefrom, or in any way relating to or arising from the subject matter of this
Letter Agreement, without bd.com's prior written consent.
8. ARBITRATION OF ALL DISPUTES. Any controversy or claim arising out of or
relating to this Letter Agreement shall be settled by arbitration in the City of
New York, State of New York, by a panel of three arbitrators, one of whom shall
be appointed by Client, one by bd.com and the third of whom shall be appointed
by the first two arbitrators. If the first two arbitrators cannot agree on the
appointment of a third arbitrator, then the third arbitrator shall be appointed
by the American Arbitration Association. The arbitration shall be conducted in
accordance with the American Arbitration Association, except with respect to the
selection of arbitrators which shall be as provided in this Section. The cost of
any arbitration proceeding hereunder shall be borne equally by Client and
bd.com; PROVIDED, HOWEVER, that Client and bd.com shall be responsible for the
attorneys' fees and expenses of their respective counsel. In the absence of
fraud, the award of the arbitrators shall be binding upon the parties and
judgment thereon may be entered in any court having jurisdiction thereof.
9. ENTIRE LETTER AGREEMENT; AMENDMENT. This Letter Agreement, sets forth the
entire understanding of the parties with respect to the subject matter hereof,
and supersedes all existing agreements between them concerning such subject
matter. No amendment to or modification of this Letter Agreement shall be valid
or binding unless made in writing and signed by the party against whom
enforcement thereof is sought.
10. EXPENSES. Except as otherwise specifically provided in this Letter
Agreement, Client and bd.com will bear their own expenses in relation to this
Letter Agreement and the matters contemplated hereby.
11. NOTICE. All notices or other communications required or permitted by this
Letter Agreement shall be in writing and effective when received, and delivery
shall be made personally or by (a) registered or certified mail, return receipt
requested, postage prepaid, or (b) a nationally recognized courier or (c)
confirmed facsimile transmission, addressed to the other party at the address
set forth in this Letter Agreement.
12. WAIVERS. No course of dealing nor any delay on the part of any party hereto
in exercising any rights hereunder shall operate as a waiver of any such rights.
No waiver of any default or breach of this Letter Agreement shall be deemed a
continuing waiver or a waiver of any other breach or default.
13. GOVERNING LAW. This Letter Agreement shall be governed, interpretedand
construed in accordance with the laws of the State of New York without giving
effect to its laws governing the conflicts of laws.
14. INVALIDITY. If any clause, paragraph, section or part of this Letter
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Letter Agreement.
15. COUNTERPARTS. This Letter Agreement may be executed simultaneously in two or
more counterparts, which may be by facsimile, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
16. SURVIVAL. The provisions of Sections 3, 5, 7 and 8 and shall survive the
termination of this Letter Agreement.
INITIAL:
67
AMENDMENT TO THAT CERTAIN LETTER AGREEMENT EXECUTED BY AND BETWEEN
BUSINESSDEVELOPMENT.COM, LLC AND ESSENTIAL REALITY, LLC
THIS FIRST AMENDMENT TO CLIENT AGREEMENT (this "Amendment") is
made and entered into as of the 1st day of September, 2001, by and between
ESSENTIAL REALITY, LLC ("Client"), and BUSINESSDEVELOPMENT.COM, LLC ("bd.com").
BACKGROUND STATEMENT
A. Client and bd.com entered into that certain Client
Agreement dated as of December 13, 2000 ("Client Agreement").
B. Client and bd.com have now agreed to modify the Client
Agreement and amend it as set forth in this Amendment.
STATEMENT OF AGREEMENT
NOW, THEREFORE, for and in consideration of the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Client and bd.com
hereby covenant and agree as follows:
1. DEFINED TERMS. Except as otherwise expressly defined in
this Amendment, all capitalized terms herein will have the same meaning herein
as ascribed to such terms in the Client Agreement.
2. RETAINER. The Retainer shall be equal to a monthly retainer
having a current total value of $15,000 USD, payable, in full, in cash,
beginning September 1, 2001 and, thereafter, within fifteen (15) days after the
end of each month.
3. REVENUE SHARE. With respect to any Transaction directly or
indirectly with a Prospect resulting from an introduction by BD during the term
of the Client Agreement (whether or not the Client Agreement has been terminated
prior to the time such Transaction is consummated or entered into), Client shall
pay to BD a fee equal to a percentage of the revenues that Client receives, or
has the right to receive from or as a result of the Transaction ("Gross
Proceeds"), payable in the form of cash and/or warrants, for 3 years from the
date Client receives it's first payment of such Gross Proceeds (such fee, the
"Revenue Share"). The Revenue Share shall be mutually agreed to by BD and Client
prior to the consummation of any Transaction but in no event shall the
percentage of such Revenue Share exceed 4%.
4. EXPENSES. Client hereby agrees that irrespective of any
other compensation agreements reached with bd.com, Client shall reimburse bd.com
for all expenses incurred by bd.com in connection with the performance of its
services pursuant to the Client Agreement which have been previously approved by
Client.
Except as amended hereby, the Client Agreement, including the compensation
arrangements set forth therein not otherwise modified hereby, shall remain in
full force and effect.
IN WITNESS WHEREOF, Client and bd.com have executed and
delivered this Amendment as of the day and year first above written.
BUSINESSDEVELOPMENT.COM, LLC ESSENTIAL REALITY, LLC
By: By:
------------------------------- ------------------------------------
President & CEO Name:
Date: Title:
Date:
68
Exhibit 10.6
[GRAPHIC OMITTED]
March 10, 2003
Essential Reality, Inc.
49 West 27th Street, Suite 7 East
New York, New York 10001
We are pleased to set forth the terms of the retention of First
Securities USA, Inc., member NASD/SiPC through its SBI USA division ("INVESTMENT
BANKER") by ESSENTIAL REALITY, INC. (collectively with its
affiliates,subsidiaries, successors, and assigns, the "COMPANY").
1. The Company hereby engages the Investment Banker, and the Investment
Banker hereby accepts such engagement, as the Company's exclusive financial
advisor, for six (6) months from the date of this Agreement, in connection with
the management of a "PIPE" (private investment in public equity) private
placement (the "PRIVATE PLACEMENT") of equity securities, which may or may not
include common stock and warrants to purchase common stock (the "SECURITIES"),
of the Company, on a best efforts basis. Subject to the terms hereof, the
Company and the Investment Banker anticipate that the gross dollar amount of
Securities to be offered in the Private Placement shall be up to $5,000,000. The
minimum dollar amount for the Private Placement shall be $3,000,000. In
connection with its role as financial advisor, the Investment Banker would
expect its services to include assistance with the preparation of the Memorandum
(as hereinafter defined), as well as such other investment banking services as
may be mutually agreed upon by Investment Banker and the Company.
2. In connection with the Investment Banker's activities on the Company's
behalf, (a) the Investment Banker will familiarize itself with the business,
operations, properties, financial condition, and prospects of the Company, and
(b) the Company will cooperate with the Investment Banker and will furnish the
Investment Banker with all information and data concerning the Company (the
"INFORMATION") which the Investment Banker deems appropriate and will provide
the Investment Banker with access to the Company's officers, directors,
employees, independent accountants, and legal counsel. The Company represents
and warrants that, to the Company's knowledge, all Information made available to
the Investment Banker by, or on behalf of, the Company will, at all times during
the period of engagement of the Investment Banker hereunder, be complete and
correct in all material respects and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances under which
such statements are made. The Company further represents and warrants that any
projections provided by, or on behalf of, it to the Investment Banker will have
been prepared in good faith and will be based upon assumptions which, in light
of the circumstances under which they are made, are reasonable. The Company
acknowledges and agrees that, in rendering its services hereunder, the
Investment Banker will be using and relying on the Information without
independent verification thereof by the Investment Banker or independent
appraisal by the Investment Banker of any of the Company's assets. The
Investment Banker does not assume responsibility regarding the Company or any
other party. Any advice rendered by the Investment Banker pursuant to this
Agreement may not be disclosed publicly without our prior written consent.
FIRST SECURITIES USA, INC., MEMBER NASD/SIPC
69
March 10, 2003
Page 2
3. (a) The Private Placement shall be structured as a transaction exempt
from Section 5 of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and shall comply with Section 4(2) of the Securities
Act and Regulation D thereunder and state securities law.
(b) The Private Placement shall be structured to permit the initial closing
(the "INITIAL CLOSING") thereof upon the receipt and acceptance by the
Company of $3,000,000 of irrevocable subscriptions for the Securities,
together with payment therefor, and additional closings (each an
"ADDITIONAL CLOSING") from time to time thereafter until the receipt
and acceptance by the Company of irrevocable subscriptions for a
maximum of $5,000,000, unless the Company and the Investment Banker
shall otherwise agree. The feasibility of the Private Placement will
depend upon the results of the Investment Banker's investigation of the
Company, information, including the Information about the Company that
the Investment Banker may receive including, but not limited to, due
diligence reports concerning the Company's operations, management, and
business plan, and the continuation of the operation of the Company
without material adverse change.
(c) The Investment Banker shall be entitled to invite to participate in the
Private Placement such other member firms of the National Association
of Securities Dealers, Inc. and certain qualifying foreign entities, as
it shall determine. The aggregate compensation payable to the
Investment Banker pursuant to Paragraph 4 hereof shall be allocated by
agreement between the Investment Banker and such other firms (the
Investment Banker and such other firms participating in the Private
Placement, collectively, the "PLACEMENT AGENTS"), and may be contained,
in the discretion of the Investment Banker, in the Sales Agreement (as
hereinafter defined). The Investment Banker may, in its sole
discretion, agree with the other Placement Agents to act as the
representative thereof.
(d) The Company will use best efforts to promptly prepare a Confidential
Offering Memorandum (the "MEMORANDUM") relating to the Private
Placement. The Company will also endeavor in good faith, in cooperation
with the Placement Agents and counsel to the Placement Agents, whenever
requested by the Investment Banker, to qualify the Securities and the
securities issuable upon the conversion, exchange, or exercise thereof,
as applicable, the Agent's Warrants (as hereinafter defined), and the
securities issuable upon the exercise of the Agent's Warrants, and all
underlying securities, if any, for offer and sale under the applicable
securities laws of such jurisdictions as the Investment Banker may
reasonably designate, provided, however, that the Company shall not be
required thereby to qualify to do business in any jurisdiction in which
it is not otherwise engaged in business and shall not be required to
subject itself to general service of process in connection therewith.
(e) The Company and the Investment Banker shall enter into a Sales Agency
Agreement (the "SALES AGREEMENT") which shall contain the definitive
terms of the Private Placement.
(f) The Private Placement will be qualified for sale by the Investment
Banker's counsel with the Securities and Exchange Commission ("SEC")
and in every state of residence of every investor as required by law.
The legal fees, not to exceed $500 per state, and the state filing fees
as set by each state's statutes, for qualifying the offering in all
states required shall be borne by the Company.
4. The Investment Banker shall be compensated for its services as follows:
(a) The Company shall pay to the Investment Banker upon execution of this
Agreement, a retainer of $25,000 (the "Retainer"). The Retainer shall
be paid 100% in common stock of the Company. The calculation of the
stock payment shall be performed based on the average of the closing
prices for the five business days prior to the execution of the
Agreement. The Investment Banker shall remit to the Company a designee
list for issuance of the shares. Payment shall be due upon execution of
this Agreement.
(b) The Company shall pay to the Investment Banker at the Initial Closing
and at each Additional Closing (each a "Closing"), commissions in cash
equal to 10% of the aggregate gross proceeds of the Securities sold in
the Private Placement.
(c) (i) The Company will authorize, and the Investment Banker or its
designees shall be entitled to receive at the Closing, purchase
warrants (the "AGENT'S WARRANTS") for the purchase of a number of
Securities equal to 10% of the number of Securities sold in the Private
Placement. The Agent's Warrants will be exercisable for five years at a
price per Security equal to 110% of the offering price per Security.
Such warrants will contain standard net issuance (i.e., cashless
exercise) and anti-dilution provisions.
70
March 10, 2003
Page 3
(ii) The Company agrees, at its expense, to grant the Agent's Warrants,
piggyback registration rights to register the Securities (the
"UNDERLYING SECURITIES") issuable, directly or indirectly, upon the
exercise of the Agent's Warrants for resale at any time during the term
of the Agent's Warrants. The Company will bear all the costs of such
piggyback registration, except for customary underwriting discounts and
commissions. The Company shall not enter into any agreement or take any
other step that would impair the registration rights of any of such
holders granted hereby.
5. The Company agrees to promptly reimburse the Investment Banker, upon
request from time to time, for all out-of-pocket expenses incurred by Investment
Banker (including fees and disbursements of counsel, and of other consultants
and advisors retained by Investment Banker) in connection with the matters
contemplated by this Agreement. Any expense incurred in connection with the
Private Placement in an amount in excess of $750.00 (other than those items
specifically listed below) shall require the prior approval of the Company. The
Investment Banker shall invoice the Company from time to time for out-of-pocket
expenses incurred with payment due upon receipt of the invoice. In addition, the
Company shall pay all of its costs and expenses incident to the purchase, sale,
and delivery of the Securities and the securities issuable upon the conversion,
exchange, or exercise thereof; all blue sky fees and expenses as set forth in
section 3(f); all fees of the counsel to the Investment Banker not to exceed
$5,000; fees of counsel and accountants for the Company; printing costs,
including costs of printing the Memorandum and any amendments, supplements, or
exhibits thereto, including a reasonable quantity of Memoranda as determined by
the Investment Banker; and costs of background checks at $450 each if additional
research is not required.
6. Indemnification.
(a) Company Indemnity Obligations. The Company hereby agrees to indemnify
and hold harmless each Placement Agent and their respective affiliates, their
respective directors, officers, agents, and employees and affiliates, and each
other person, if any, controlling any such Placement Agent or any of their
respective affiliates from and against all claims, liabilities, losses, damages,
actions and expenses incurred, including fees and disbursements of counsel
related to or arising out of any untrue statement or alleged untrue statement of
a material fact contained in any private placement memorandum or in any
information (whether oral or written) or other documents furnished or made
available to Investment Banker by the Company or the omission or alleged
omission by the Company to state in any such documents or information a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
(b) Investment Banker Indemnity Obligations. Investment Banker agrees to
indemnify and hold the Company (including its agents, directors, officers,
employees and controlling persons within the meaning of Section 15 of the
Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934)
harmless from and against all claims, liabilities, losses, damages and expenses
incurred, including fees and disbursements of counsel related to any warranty,
representation or guarantee made by Investment Banker regarding the Company
beyond the information and materials furnished to Investment Banker by the
Company.
(c) Indemnity Limitations. Notwithstanding the foregoing, neither party
shall be obligated to indemnify the other party or any of its agents, directors,
officers, employees or controlling persons under this agreement, with respect to
any claim, liability, loss, damage or expense that is finally judicially
determined to have resulted primarily from such party's gross negligence or
misfeasance.
(d) Rights and Procedures. The indemnity rights and obligations shall be in
addition to any rights that any Indemnified Persons person or entity entitled to
indemnification hereunder (each an "Indemnified Person") may have at common law
or otherwise, including not limited to any right of contribution. If any
litigation or proceeding is brought against any Indemnified Person in respect of
which indemnity may be sought against a party pursuant hereto (the "Indemnifying
Party"), such Indemnified Person shall promptly notify the Indemnifying Party in
writing of the commencement of such litigation or proceeding, but the omission
to so notify the Indemnifying Party shall not relieve the Indemnifying Party its
obligation or liability which the Indemnifying Party may have to any Indemnified
Person under this agreement. If any action, proceeding, or investigation is
commenced as to which an Indemnified Person demands indemnification, the
Indemnified Person shall have the right to retain counsel of its own choice to
represent it, the Indemnifying Party shall pay the reasonable fees and expenses
of such counsel, and such counsel shall to the extent consistent with its
professional responsibilities cooperate with the Indemnifying Party and any
counsel designated by the Indemnifying Party; provided that the Indemnifying
Party shall not be responsible for the fees and expenses of more than one
counsel. In case any such litigation or proceeding shall be brought against any
Indemnified Person, the Indemnifying Party shall be entitled to participate in
such litigation or proceeding with counsel of the Indemnifying Party's choice at
the Indemnifying Party's expense.
71
March 10, 2003
Page 4
7. The Company represents, warrants, and covenants that:
(a) There will be included in the Memorandum audited financial
statements of the Company for the two fiscal years preceding the
date of the Memorandum (reported on by a national accounting firm
or an accounting firm reasonably acceptable to the Investment
Banker) and, if requested by the Investment Banker, current
unaudited comparative interim financial statements. The financial
statements will present fairly the financial condition of the
Company and the results of its operations and cash flows at the
time and for the periods covered by such financial statements, and
such statements will be substantially as heretofore represented to
the Investment Banker.
(b) The Company has prepared and delivered to the Investment Banker its
most recent financial statements and projections constituting its
best estimate of revenues, earnings and cash flow and shall update
such estimates on a monthly basis during the registration period.
(c) The Company shall secure director and officer liability insurance
(provided that such insurance can be obtained at a reasonable cost
as determined by the Company and the Investment Banker) in an
amount and from an insurer reasonably satisfactory to the
Investment Banker, provided that the amount of coverage shall not
exceed that which is customary for companies of comparable size and
in the same industry as the Company.
(d) The Investment Banker has advised the Company, and the Company has
advised the Investment Banker, that neither has dealt with or
engaged any finder in connection with the proposed Private
Placement.
(e) For a three-year period from date of the Initial Closing, the
Investment Banker shall have the right to appoint a designee
observer to the Board of Directors of the Company, in the sole
discretion of the Investment Banker. Such observer will have the
right to attend all meetings of the Board of Directors, however,
such observer shall have no voting rights. Such observer shall be
entitled to receive reimbursement for all reasonable out-of-pocket
expenses incurred in attending such meetings, including, but not
limited to food, lodging, and transportation. The Investment Banker
shall be given notice of such meetings at the same time and in the
same manner as directors of the Company are informed. The
Investment Banker and observer shall be indemnified to the same
extent as the other directors.
(f) Until the date of the last Additional Closing, the Company will
notify the Investment Banker promptly of the occurrence of any
event which might materially affect the Private Placement or the
status of the Company.
(g) If the Company and the Investment Banker determine to utilize the
services of a financial printer in connection with the Private
Placement, the Company agrees to use a printer which is reasonably
acceptable to the Investment Banker and a stock transfer company as
their transfer agent which is reasonably acceptable to the
Investment Banker.
8. The Company shall not use the name of the Investment Banker or of any of
the Investment Banker's divisions or affiliates in any promotional material,
press release or other written or oral communication without the express written
consent of the Investment Banker. Not withstanding the forgoing, the Investment
Banker's approval shall not be unreasonably withheld.
9. The Investment Banker's intention as expressed in this Letter of Intent
is subject to the following general conditions:
(a) The Investment Banker shall be satisfied with the Company's
progress as well as its outlook for the future.
(b) The Company will provide for appropriate "comfort letters" from its
independent certified public accountants with respect to the
audited financial statements and other financial information and
other data contained in the Memorandum as specified in the Sales
Agreement and with regard to the period from the date of the
audited financial statements to a date a few days prior to both the
offering date and the closing date.
(c) All relevant terms, conditions, and circumstances relating to the
proposed Private Placement will be satisfactory to the Investment
Banker and counsel to the Placement Agents.
(d) The Sales Agreement will contain appropriate representations and
covenants of the Company, including reciprocal covenants of
indemnity, and will provide for satisfactory opinions of counsel to
the Company.
72
March 10, 2003
Page 5
(e) There will have been no materially adverse change in the business
or financial condition of the Company, no materially adverse change
in the overall capital markets in the United States, no declaration
of a banking moratorium by the Federal government or New York
State, no outbreak of major hostilities or other national or
international calamity, and no action by any government in respect
of its monetary affairs which has a material adverse effect on the
United States securities markets, or other event which, in the sole
discretion of the Investment Banker, would materially adversely
affect its ability to complete the Private Placement.
10. It is understood that the Investment Banker's undertaking to conduct
the proposed Private Placement is subject to the Memorandum, all amendments,
supplements, and exhibits thereto or other documentation related thereto, being
reasonably satisfactory to the Investment Banker and counsel to the Placement
Agents.
The Investment Banker intends to proceed with the Private Placement
immediately after availability of the required final documentation and the terms
of this Letter of Intent and the Sales Agreement have been satisfied; provided,
however, that the Investment Banker reserves the right not to proceed with the
Private Placement if, in its sole judgment, market conditions are unsuitable for
such offering, or information comes to its attention relating to the Company,
its management, or its industry, which could, in the Investment Banker's sole
judgment, preclude a successful offering of the Securities.
Except for the provisions set forth in Paragraphs 4, 5, 6, and 10 of
this Agreement, it is not intended to be, and shall not be construed as a
binding contract for the Private Placement. A legal obligation between the
Company and the Investment Banker for the Private Placement shall be only as set
forth in a duly negotiated and mutually executed written Sales Agreement which
shall be in form and content satisfactory to each of the Investment Banker and
the Company.
11. As described in Paragraph 9, the Company and the Investment Banker
agree that the following provisions shall be legally binding on the Company:
(a) If the Company or the Investment Banker decides not to proceed
with the Private Placement for any reason whatsoever, all expenses
incurred by the Investment Banker in connection with the Private
Placement pursuant to Paragraph 5 will be repaid promptly by the
Company in accordance with all provisions described herein.
(b) If, after executing this Agreement and prior to the execution of
the Sales Agreement, the Company elects not to expeditiously
proceed with the Private Placement even though the Investment
Banker is ready, willing, and able to conduct the Private
Placement, then the Company agrees that (1) it will not sell any
of its capital stock through another placement agent for a period
of at least six months, or (2) if it does so, then the Company
shall pay to the Investment Banker $50,000 in addition to the
amounts paid to it pursuant to subparagraph (a) hereof, which the
Company and the Investment Banker agree will be fair compensation
to the Investment Banker for services performed with respect to
the proposed Private Placement.
(c) If prior to the final Additional Closing of the Private Placement
and within a period of 12 months from the date hereof, the Company
is acquired, merges, sells all or substantially all of its assets,
or otherwise effects a corporate reorganization with any other
entity and, as a result, the Private Placement contemplated hereby
is abandoned by the Company (a "TRANSACTION"), then, in addition
to any amounts paid to it pursuant to subparagraph (a) hereof, the
Company shall pay the Investment Banker a cash fee of $50,000 in
addition to the amounts paid to it pursuant to subparagraph (a)
hereof, which the Company and the Investment Banker agree will be
fair compensation to the Investment Banker for services performed
with respect to the proposed Private Placement.
(d) Commencing on the date hereof and terminating on the earlier of:
(i) date of the Final Additional Closing; or (ii) the termination
of either party of this Agreement, the Company shall refrain from
negotiating with any other placement agent or investment banker or
other person regarding a possible public or private offering of
any of the Company's securities.
(e) The Investment Banker and the Company agree that any controversy
arising out of or relating to this letter of intent or proposed
offering contemplated hereby, shall be settled by arbitration in
Orange County, California in accordance with the rules then in
effect on the National Association of Securities Dealers, Inc.
73
March 10, 2003
Page 7
12. The validity and interpretation of this Agreement shall be governed by
the law of the State of California applicable to agreements made and to be fully
performed therein.
13. The benefits of this Agreement shall inure to the respective successors
and assigns of the parties hereto and of the indemnified parties hereunder and
their successors and assigns and representatives, and the obligations and
liabilities assumed in this Agreement by the parties hereto shall be binding
upon their respective successors and assigns.
14. For the convenience of the parties hereto, any number of counterparts
of this Agreement may be executed by the parties hereto. Each such counterpart
shall be, and shall be deemed to be, an original instrument, but all such
counterparts taken together shall constitute one and the same Agreement. This
Agreement may not be modified or amended except in writing signed by the parties
hereto.
If the foregoing correctly sets forth the understanding we have
heretofore reached regarding the proposed Private Placement, please sign and
return the enclosed copy of this letter by March 10, 2003. If this Letter of
Intent is not signed by such date, and an extension has not been mutually agreed
upon in writing by the Company and the Investment Banker, this Letter of Intent
will be considered void. By accepting this letter, the Company agrees to keep
this letter and all terms confidential and not to "shop" it with any other
placement agents or underwriters.
Very truly yours,
SBI USA, A DIVISION OF: FIRST SECURITIES USA, INC.
BY: BY:
------------------------------- -------------------------------
SHELLY SINGHAL STANLEY C. BROOKS
MANAGING DIRECTOR PRESIDENT
ACCEPTED AND AGREED TO
THIS _____ DAY OF _____________________, ________
ESSENTIAL REALITY, INC.
BY:
HUMBERT B. POWELL, III
CHAIRMAN
74
Exhibit 10.7
[SUNRISE SECURITIES CORP. LOGO]
MEMBER NASD/SIPC
DR. AMNON MANDELBAUM
MANAGING DIRECTOR
INVESTMENT BANKING
TELEPHONE (212) 421-1616 FACSIMILE (212) 750-7277
Mr. Humbert B. Powell, Chairman Essential Reality, Inc. 263 Horton Highway
Mineola, NY 11501
INVESTMENT BANKING AGREEMENT
Dear Humbert:
This agreement ("Agreement") is made and entered into this December ___, 2003,
between SUNRISE SECURITIES CORP. ("Sunrise") and ESSENTIAL REALITY, INC.
(together with all subsidiaries, affiliates, successors and other controlled
units, either existing or formed subsequent to the execution of this engagement,
the "Company").
In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The Company hereby engages Sunrise upon the terms and conditions as set forth
herein as its exclusive placement agent and investment banker with respect to
Financings (as defined below) upon the terms and conditions set forth herein.
Sunrise understands that the Company seeks Financing in the amount of
approximately $1,500,000 to $3,500,000 from the sale of securities of the
Company in the form of units ("Units") comprised of securities of the Company
that will be convertible and/or exercisable into shares of common stock
("Common Stock") of the Company. It is acknowledged and agreed that any
Financing is on a best efforts basis only. This Agreement should not be
construed as a firm commitment or guarantee of any Financing. Sunrise and the
Company agree and acknowledge that the decision to consummate a Financing
shall be in the Company's sole and absolute discretion.
2. Except as otherwise specified in Paragraph 6 hereof, this Agreement shall be
effective for a period of nine (9) months, commencing upon the execution
hereof and shall continue thereafter unless and until terminated on thirty
days written notice by either party to the other party.
3. During the term of this Agreement, Sunrise shall provide the Company with
such regular and customary consulting advice as is reasonably requested by
the Company, provided that Sunrise shall not be required to undertake duties
not reasonably within the scope of the financial advisory or investment
banking services contemplated by this Agreement. It is understood and
acknowledged by the parties that the value of Sunrise's advice is not readily
quantifiable, and that Sunrise shall be obligated to render advice upon the
request of the Company, in good faith, but shall not be obligated to spend
any specific amount of time in so doing.
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
4. Sunrise shall render such other financial advisory and investment and/or
investment banking services as may from time to time be agreed upon in
writing by Sunrise and the Company.
5. In consideration for the services rendered by Sunrise to the Company pursuant
to this Agreement, the Company shall compensate Sunrise as follows:
A. Upon the execution hereof, the Company shall pay to Sunrise a
nonrefundable cash retainer fee of twenty five thousand dollars ($25,000)
(the "Retainer Fee").
B. Upon the closing of each Financing, the Company shall pay to Sunrise a
financing fee (the "Financing Fee") that shall be payable in a form
determined at the sole election of Sunrise of either (i) the Company shall
pay to Sunrise a cash fee equal to ten percent (10%) of the gross proceeds in
such Financing or (ii) the Company shall issue to Sunrise and/or its
designees such number of shares of Common Stock equal to eleven percent (11%)
of the aggregate number of fully diluted and/or converted shares of Common
Stock and/or Common Stock equivalents (including, but not limited to Units)
as are purchased by Investors (as defined below). Convertible securities
shall be treated as equity for purposes of calculating the Financing Fee.
Securities acquired or otherwise received by financing sources ("Investors")
are referred to as "Securities". In addition, the Company shall issue to
Sunrise and/or its designees warrants (the "Warrants") to purchase such
number of shares of the Common Stock equal to 10% of the aggregate number of
the fully diluted and/or converted shares of Common Stock and/or Common Stock
equivalents (including, but not limited to Units) purchased by the Investors
(after giving effect to any increase in shares under a ratchet or similar
provision pursuant to which the number of shares initially acquired is
subsequently increased) on the same terms and conditions. The Warrants shall
be purchased for a nominal sum and shall be exercisable for a period of five
years from the date of Closing with an exercise price per share equal to the
effective per share price paid by the Investors for the Securities. The terms
of the Warrants shall be set forth in one or more agreements (the "Warrant
Agreements") in form and substance reasonably satisfactory to Sunrise and the
Company. The Warrant Agreements shall contain customary terms, including
without limitation, provisions for cashless exercise, change of control,
price based antidilution, and customary demand and piggyback registration
rights. With respect to funds in escrow, Sunrise's Financing Fee shall be
calculated and paid in full at the Company's first closing upon such funds.
For the purposes of this Agreement, the term "Financing" shall mean any debt
financing or equity investment in the Company, or any combination thereof
(i.e., where the funds are received by the Company, as distinct from funds
received by selling shareholders). Without limiting the foregoing, Financing
shall include lease financing, vendor financing, government sponsored
financing or any similar transaction or combination thereof. Sunrise's fee
shall be based upon the percentages set forth in this Paragraph 5B above of
the gross total credit facility before any deductions, including but not
limited to fees, deposits, transaction expenses, reserves, insurance or other
amounts withheld or paid by the lender/Investor/facility provider. Financing
shall be deemed to include total value of Securities sold directly or
indirectly, in connection with the Financing, including proceeds received by
the Company upon exercise of options, warrants and/or similar securities, and
any amounts paid into escrow and any amounts payable in the future whether or
not subject to any contingency.
6. In the event that this Agreement shall not be renewed or if terminated for
any reason, notwithstanding any such non-renewal or termination, Sunrise
shall be entitled to a full fee as provided under Paragraph 5 hereof, for any
Financing for which the discussions were conducted during the term of this
Agreement by the Company or by Sunrise on behalf of the Company which is
consummated within a period of twelve (12) months after non-renewal or
termination of this Agreement. Upon termination of this Agreement, Sunrise
shall provide the Company with a written list of parties with whom it had
discussions in connection with any Financing, which list shall govern the
operation of this Paragraph.
2
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
7. In addition to the fees payable hereunder, and regardless whether any
Financing set forth in Paragraph 5 hereof is proposed or consummated, the
Company shall reimburse Sunrise for all reasonable fees and disbursements of
Sunrise's outside counsel and Sunrise's reasonable travel and out-of-pocket
expenses incurred in connection with the services performed by Sunrise
pursuant to this Agreement, including without limitation, filing fees,
printing and duplicating costs, postage, hotel, food and associated expenses
including long-distance telephone calls; provided that to the extent such
reimbursements referenced in this Paragraph 7 exceed $25,000 in the
aggregate, they, thereafter, shall be subject to the Company's prior
approval. In addition to the fees payable hereunder, and regardless whether
any Financing set forth in Paragraph 5 hereof is proposed or consummated, the
Company shall also reimburse the reasonable fees and disbursements of a small
business investment company's ("SBIC") counsel, if any, incurred in
connection with Financing, provided that such aggregate amount shall not
exceed 1% of the SBIC's allocation in such Financing.
8. The Company acknowledges that all opinions and advice (written or oral) given
by Sunrise to the Company in connection with Sunrise's engagement are
intended solely for the benefit and use of the Company in considering the
transaction or financing to which they relate, and the Company agrees that no
person or entity other than the Company shall be entitled to make use of or
rely upon the advice of Sunrise to be given hereunder, and no such opinion or
advice shall be used for any other purpose or reproduced, disseminated,
quoted or referred to at any time, in any manner or for any purpose, nor may
the Company make any public references to Sunrise, or use Sunrise's name in
any annual reports or any other reports or releases of the Company without
Sunrise's prior written consent, which shall not be unreasonably withheld.
9. The Company acknowledges that Sunrise and its affiliates are in the business
of providing financial services and consulting advice to others. Nothing
herein contained shall be construed to limit or restrict Sunrise in
conducting such business with respect to others, or in rendering such advice
to others, except as such advice may relate to matters relating to the
Company's business and properties.
10.The Company recognizes and confirms that, in advising the Company and in
fulfilling its engagement hereunder, Sunrise will use and rely on data,
material and other information furnished to Sunrise by the Company. The
Company acknowledges and agrees that in performing its services under this
engagement, Sunrise may rely upon the data, material and other information
supplied by the Company without independently verifying its accuracy,
completeness or veracity, except to the extent Sunrise has actual knowledge
to the contrary. The Company represents and warrants to Sunrise that all such
information concerning the Company provided by the Company in response to
requests made by Sunrise or otherwise, will be true and accurate in all
material respects and will not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein not misleading in light of the circumstances under which
such statements are made. Sunrise shall be under no obligations to make an
independent appraisal of assets or an investigation or inquiry as to any
information regarding, or any representations of, any other participant in a
Financing, and shall have no liability with regard thereto. The Company
acknowledges and agrees that Sunrise will be using and relying upon such
information supplied by the Company and its officers, agents and others and
any other publicly available information concerning the Company without any
independent investigation or verification thereof or independent appraisal by
Sunrise of the Company or its business or assets. If, in Sunrise's opinion
after completion of its due diligence process, the condition of the Company,
financial or otherwise, and its prospects are not substantially as
represented or do not fulfill Sunrise's expectations, Sunrise shall have the
sole discretion to review and determine its continued interest in proposed
Financings. The Company further represents and agrees that (i) the Company is
not obligated to pay any finder in connection with any proposed Financing
pursuant to this Agreement and in any and all events that any parties other
than Sunrise ("Other Parties") seek compensation relating to the closing of
3
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
any proposed Financing, Sunrise shall be entitled to receive its full
compensation from the Company as set forth in this Agreement and that Sunrise
shall have no obligation whatsoever to pay any Other Parties, (ii) the
Company shall deliver at the closing of each Financing conducted hereunder
(a) a certificate of each of the Company's President and Treasurer to the
effect that the Company's information provided to the Investors does not
contain any untrue statement of material fact or fail to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and all necessary corporate approvals have been
obtained to enable the Company to deliver the Securities in accordance with
the terms of the Financing, and (b) a 10b-5 opinion of counsel for the
Company satisfactory to Sunrise to the effect that the Company's information
provided to the Investors does not (except with respect to the financial
statements or forecasts as to which no opinion need be expressed) contain any
untrue statement of material fact or fail to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, in light of the circumstances in which they were made, and such
other opinions as Sunrise and/or Sunrise's counsel shall reasonably require,
(iii) as of the date hereof, there is no litigation pending or involving the
business or property of the Company, (iv) the Company owns or possesses free
of all encumbrances its assets, trademarks, patents, and copyrights necessary
to conduct its business, (v) all taxes which are due and payable by the
Company have been paid in full and the Company has no tax deficiency or
claims outstanding or proposed against it, (vi) the financial statements of
the Company present the financial position as of the date hereof and such
financial statements have been prepared in accordance with generally accepted
accounting principals, (vii) any Financing shall only be conducted and
closed, at the sole expense of the Company, through an escrow account and
escrow agent that are both pre-approved by Sunrise, and (viii) all "blue sky"
legal work shall be performed by the Company's counsel at the Company's sole
expense.
11.Since Sunrise will be acting on behalf of the Company in connection with its
engagement hereunder, the Company and Sunrise have entered into a separate
indemnification agreement substantially in the form attached hereto as
Schedule A and dated the date hereof, providing for the indemnification of
Sunrise by the Company. Sunrise has entered into this Agreement in reliance
on the indemnities set forth in such indemnification agreement.
12.Sunrise shall perform its services hereunder as an independent contractor and
not as an employee of the Company or an affiliate thereof. It is expressly
understood and agreed to by the parties hereto that Sunrise shall have no
authority to act for, represent or bind the Company or any affiliate thereof
in any manner, except as may be agreed to expressly by the Company in writing
from time to time.
13.A. This Agreement and the Schedule A attached hereto constitute the entire
agreement and understanding of the parties hereto, and supersede any and all
previous agreements and understandings, whether oral or written, between the
parties with respect to the matters set forth herein.
B. Any notice or communication permitted or required hereunder shall be in
writing and shall be deemed sufficiently given if hand-delivered or sent (i)
postage prepaid by registered mail, return receipt requested, or (ii) by
facsimile to the respective parties as set forth below, or to such other
address as either party may notify the other of in writing:
if to the Company, to: ESSENTIAL REALITY, INC.
263 Horton Highway
Mineola, NY 11501
Attn: Mr. Humbert B. Powell, Chairman
4
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
if to Sunrise, to: SUNRISE SECURITIES CORP.
641 Lexington Ave., 25th Floor
New York, New York 10022
Attn: Dr. Amnon Mandelbaum, Managing Director
C. This Agreement shall be binding upon and inure to the benefit of each of
the parties hereto and their respective successors, legal representatives and
assigns.
D. This Agreement may be executed in any number of counterparts, each of
which together shall constitute one and the same original document. This
Agreement may be executed and delivered by exchange of facsimile copies
showing the parties' signatures, and those signatures need not be affixed to
the same copy. The facsimile copies showing the signatures of the parties
will constitute originally signed copies of the same Agreement requiring no
further execution.
E. No provision of this Agreement may be amended, modified or waived, except
in a writing signed by all of the parties hereto.
F. This Agreement shall be construed in accordance with and governed by the
laws of the State of New York, without giving effect to its conflict of law
principles. The parties hereby agree that any dispute which may arise between
them arising out of or in connection with this Agreement shall be adjudicated
before a court located in New York City, and they hereby submit to the
exclusive jurisdiction of the courts of the State of New York located in New
York, New York and of the federal courts in the Southern District of New York
with respect to any action or legal proceeding commenced by any party, and
irrevocably waive any objection they now or hereafter may have respecting the
venue of any such action or proceeding brought in such a court or respecting
the fact that such court is an inconvenient forum, relating to or arising out
of this Agreement, and consent to the service of process in any such action
or legal proceeding by means of registered or certified mail, return receipt
requested, in care of the address set forth in Paragraph 13B hereof.
The parties hereby waive trial by jury in any action or proceeding involving,
directly or indirectly, any matter in any way arising out of or in connection
with this Agreement.
[REST OF PAGE INTENTIONALLY LEFT BLANK.]
5
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
If the foregoing correctly sets forth the understanding between Sunrise and
the Company with respect to the foregoing, please so indicate your agreement
by signing in the place provided below, at which time this letter shall
become a binding contract.
SUNRISE SECURITIES CORP.
By Its Authorized Signatory:
By:
Amnon Mandelbaum
Managing Director
Accepted and Agreed:
ESSENTIAL REALITY, INC.
By Its Authorized Signatory:
By:
Name:
Title:
6
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
[SUNRISE SECURITIES CORP. LOGO]
MEMBER NASD/SIPC
SCHEDULE A
INDEMNIFICATION PROVISIONS
In connection with the engagement of SUNRISE SECURITIES CORP. (`Sunrise") by
ESSENTIAL REALITY, INC. (the "Company") pursuant to a letter agreement dated
December __, 2003 between the Company and Sunrise as it may be amended from time
to time (the "Letter Agreement"), the Company, hereby agrees as follows:
1. In connection with or arising out of or relating to the engagement of Sunrise
under the Letter Agreement, or any actions taken or omitted, services
performed or matters contemplated by or in connection with the Letter
Agreement, the Company agrees to reimburse Sunrise, its affiliates and their
respective directors, officers, employees, agents and controlling persons
(each an "Indemnified Party") promptly upon demand for actual, out-of-pocket
expenses (including reasonable fees and expenses for legal counsel) as they
are incurred in connection with the investigation of, preparation for or
defense of any pending or threatened claim, or any litigation, proceeding or
other action in respect thereof (collectively, a "Claim"). The Company also
agrees (in connection with the foregoing) to indemnify and hold harmless each
Indemnified Party from and against any and all out-of-pocket losses, claims,
damages and liabilities, joint or several, to which any Indemnified Party may
become subject, including any amount paid in settlement of any litigation or
other action (commenced or threatened) to which the Company shall have
consented in writing (such consent not to be unreasonably withheld), whether
or not any Indemnified Party is a party and whether or not liability
resulted; provided, however, that the Company shall not be liable pursuant to
this sentence in respect of any loss, claim, damage or liability to the
extent that a court or other agency having competent jurisdiction shall have
determined by final judgement (not subject to further appeal) that such loss,
claim, damage or liability was incurred solely as a direct result of the
willful misconduct or gross negligence of such Indemnified Party.
2. An Indemnified Party shall have the right to retain separate legal counsel of
its own choice to conduct the defense and all related matters in connection
with any Claim. The Company shall pay the reasonable fees and expenses of
such legal counsel, and such counsel shall to the fullest extent, consistent
with its professional responsibilities, cooperate with the Company and any
legal counsel designated by the Company.
3. The Company will not, without the prior written consent of each Indemnified
Party settle, compromise or consent to the entry of any judgement in any
pending or threatened Claim in respect of which indemnification may be
reasonably sought hereunder (whether or not any Indemnified Person is an
actual or potential party to such Claim), unless such settlement, compromise
or consent includes an unconditional, irrevocable release of each Indemnified
Person against whom such Claim may be brought hereunder from any and all
liability arising out of such Claim.
4. In the event the indemnity provided for in paragraphs 1 and 2 hereof is
unavailable or insufficient to hold any Indemnified Party harmless, then the
Company shall contribute to amounts paid or payable by an Indemnified Party
in respect of such Indemnified Party's losses, claims, damages and
liabilities as to which the indemnity provided for in paragraphs 1 and 2
hereof is unavailable or insufficient (i) in such portion as appropriately
reflects the relative benefits received by the Company, on the one hand, and
the Indemnified Party, on the other hand, in connection with the matters as
to which losses, claims, damages or liabilities relate, or (ii) if the
allocation provided by (i) above is not permitted by applicable law, in such
proportion as appropriately reflects not only the relative benefits referred
to in clause (i) but also the relative fault of the Company, on the one hand,
and the Indemnified Parties, on the other hand, as well as any other
equitable considerations. The amounts paid or payable by a party in respect
of losses, claims, damages and liabilities referred to above shall be deemed
to include any reasonable legal or other out-of-pocket fees and expenses
incurred in defending any litigation, proceeding or other action or claim.
Notwithstanding the provisions hereof, Sunrise's share of the liability
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
hereunder shall not be in excess of the amount of fees actually received by
Sunrise under the Letter Agreement (excluding any amounts received as
reimbursement of expenses by Sunrise).
5. It is understood and agreed that, in connection with Sunrise's engagement by
the Company under the Letter Agreement, Sunrise may also be engaged to act
for the Company in one or more additional capacities, and that the terms of
any such additional engagement may be embodied in one or more separate
written agreements. These Indemnification Provisions shall apply to the
engagement under the Letter Agreement and to any such additional engagement
and any modification of such additional engagement; provided, however, that
in the event that the Company engages Sunrise to act as a dealer manager in
an exchange or tender offer or as an underwriter in connection with the
issuance of securities by the Company or to furnish an opinion letter, such
further engagement may be subject to separate indemnification and
contribution provisions as may be mutually agreed upon.
6. These Indemnification Provisions shall remain in full force and effect in
connection with the transaction contemplated by the Letter Agreement whether
or not consummated, and shall survive the expiration of the period of the
Letter Agreement, and shall be in addition to any liability that the Company
might otherwise have to any Indemnified Party under the Letter Agreement or
otherwise.
7. Each party hereto consents to personal jurisdiction and service of process
and venue in any court in the State of New York in which any claim for
indemnity is brought by any Indemnified Person.
8. These Indemnification Provisions may be executed in any number of
counterparts, each of which shall be deemed an original but all of which when
taken together shall constitute one and the same instrument. These
Indemnification Provisions may be delivered by facsimile, and facsimile
signatures shall be treated as original signatures for all applicable
purposes.
SUNRISE SECURITIES CORP.
By Its Authorized Signatory:
By:
Amnon Mandelbaum
Managing Director
ESSENTIAL REALITY, INC.
By Its Authorized Signatory:
By:
Name:
Title:
2
Sunrise Securities Corp.
641 Lexington Ave., 25th Floor, New York, NY 10022
EXHIBIT 31.1
CERTIFICATIONS
I, John Gentile, certify that:
1. I have reviewed this annual report on Form 10-KSB of Essential Reality,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial
reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: June 29, 2004
/s/ John Gentile
--------------------------------
John Gentile
Principal Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, George A. Mellides, certify that:
1. I have reviewed this annual report on Form 10-KSB of Essential Reality,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial
reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: June 29, 2004
/s/ George A. Mellides
--------------------------------
George A. Mellides
Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SS.1350)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350),
the undersigned, John Gentile, Interim President, Chief Operating Officer and
principal executive officer of Essential Reality, Inc. a Nevada corporation (the
"Company"), does hereby certify, to his knowledge, that: The Annual Report on
Form 10-KSB for the year ended December 31, 2003 of the Company (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ John Gentile
--------------------------------------
John Gentile, Interim President,
Chief Operating Officer and Director
(principal executive officer)
June 29, 2004
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SS.1350)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
ss.1350), the undersigned, George Mellides, Acting Chief Financial Officer of
Essential Reality, Inc. a Nevada corporation (the "Company"), does hereby
certify, to his knowledge, that: The Annual Report on Form 10-KSB for the year
ended December 31, 2003 of the Company (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
and the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ George Mellides
------------------------------
George Mellides
Acting Chief Financial Officer
June 29, 2004
Next Section
Previous Section