Secured Convertible Promissory Note - eRoomSystem Technologies Inc. and Ash Capital LLC
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS. THESE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED, SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER THE ACT
OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS.
-------------------------
SECURED CONVERTIBLE PROMISSORY NOTE
OF
eROOMSYSTEM TECHNOLOGIES, INC.
$322,500 November 8, 2002
eRoomSystem Technologies, Inc., a Nevada corporation (the "Company"),
for value received, hereby promises to pay to Ash Capital, LLC, a Utah limited
liability company (the "Noteholder"), at 6405 South 3000 East, Suite 201, Salt
Lake City, Utah 84121, or its assigns, the sum of Three Hundred Twenty-two
Thousand Five Hundred Dollars ($322,500), or such other amount as may be
outstanding, plus interest accrued on unpaid principal, compounded annually, at
a rate per annum of eight percent (8%), from the date of this Note until the
principal amount hereof and all interest accrued thereon is paid (or converted,
as provided in Section 2 hereof). The principal amount of this Note, and the
interest accrued thereon, shall be payable at the principal offices of the
Noteholder or by mail to the registered address of the holder of this Note on
the earliest to occur of (i) November 8, 2003, (ii) a default under this Note in
accordance with Paragraph 8 below, (iii) a default as that term is defined in
the Security Agreement executed herewith, and (iv) the date five (5) days after
the date of any breach by the Company of any agreement with the Noteholder
and/or any affiliate of the Noteholder, unless this Note shall have been
previously converted pursuant to Section 2 hereof or as provided otherwise in
this Note. All past due amounts and accrued interest thereon shall bear interest
at eighteen percent (18%) per annum, compounded monthly, until paid.
The following is a statement of the rights of the holder of this Note
and the conditions to which this Note is subject, and to which the holder
hereof, by the acceptance of this Note, agrees:
1. Definitions. The following definitions shall apply for all purposes
of this Note:
1.1 "Company" shall mean the Company as defined above and
includes any corporation which shall succeed to or assume the obligations of the
Company under this Note.
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1.2 "Change of Control Transaction" shall mean a merger,
acquisition, or other business combination in which fifty percent (50%) or more
of the Company's outstanding voting stock is transferred to different holders in
a single transaction or a series of related transactions; provided, however, the
issuance of Series D Preferred Stock by the Company in its proposed private
placement shall not constitute a Change of Control Transaction
1.3 "Conversion Date" shall mean the date on which, pursuant
to Sections 2 and 3 hereof, the Noteholder exercises its right to convert this
Note into the Conversion Stock at the Note Conversion Price.
1.4 "Conversion Stock" shall mean the shares of Series D
Preferred Stock, $.001 par value, of the Company, with the rights and terms as
set forth in the Company's Certificate of Designation of Rights, Privileges and
Preferences of Series D Preferred Stock ("Designation"), in the form attached
hereto as Exhibit "A" and which is incorporated herein by this reference. The
number and character of shares of Conversion Stock are subject to adjustment as
provided herein and the term "Conversion Stock" shall include shares and other
securities and property at any time receivable or issuable upon conversion of
this Note in accordance with its terms. If the Conversion Date is after November
8, 2003, and the Series D Preferred Stock has not been authorized by all
requisite corporate action, Conversion Stock shall mean the shares of Common
Stock and notwithstanding anything to the contrary contained herein, this Note
may be converted at the option of Noteholder into shares of Common Stock
representing sixteen and seven tenths percent (16.7%) of the authorized capital
stock of the Company or such lesser amount representing sixteen and seven tenths
percent (16.7%) of the issued and outstanding shares of the capital stock of the
Company calculated on a fully diluted basis if the Company provides a covenant
not to increase the issued and outstanding shares of capital stock of the
Company (or securities convertible thereto) without the prior consent of
Noteholder which shall not be unreasonably withheld.
1.5 "Note Conversion Price" shall be $0.90 per share.
1.6 "Noteholder," "holder," or similar terms, when the context
refers to a holder of this Note, shall mean any person who shall at the time be
the registered holder of this Note.
2. Conversion.
2.1 (a) Conversion of Note. At any time, the Noteholder shall
have the right, at the holder's option, to convert the principal and accrued
interest on this Note, in whole or in part, into Conversion Stock at the Note
Conversion Price. Conversion under this Section 2 shall occur only upon
surrender of this Note for conversion at the principal offices of the Company,
accompanied by written notice of election to convert.
(b) Conversion in the Event of Prepayment or Payment
of Note. Without the consent of the Noteholder, the Company shall not prepay any
principal portion of this Note prior to the maturity date of the Note. At such
time that the Company has funds immediately available and elects to pay the
entire principal balance and accrued interest (whether as a prepayment with the
consent of Noteholder or payment at or after maturity of this Note), the
Noteholder shall have the option to convert the Note into Conversion Stock at
the Note Conversion Price on or before the later of (i) fifteen (15) days from
the receipt of notice of the Company's election to pay off the Note, or (ii)
fifteen (15) days after the Company has informed the Noteholder it has
authorized the Series D Preferred Stock by all requisite corporate action. The
Noteholder shall have no obligation to accept any payment less than the entire
principal balance, plus accrued interest.
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2.2 Certain Transactions. The Company shall give written
notice to the Noteholder of any Change of Control Transaction at least twenty
(20) business days prior to the date on which such Change of Control Transaction
shall take place. Prior to the closing of such Change of Control Transaction,
the Company shall, at Noteholder's election, either (i) repay all unpaid
principal and interest under this Note together with a $50,000 payment to
compensate Noteholder for its opportunity loss in foregoing an ownership
interest in the Company, or (ii) convert this Note into Conversion Stock at the
Note Conversion Price.
3. Issuance of Conversion Stock. As soon as practicable after
conversion of this Note, the Company, at its expense, will cause to be issued in
the name of and delivered to the holder of this Note, a certificate or
certificates for the number of shares of Conversion Stock to which the holder
shall be entitled upon such conversion (bearing such legends as may be required
by applicable state and federal securities laws in the opinion of legal counsel
of the Company), together with any other securities and property to which the
holder is entitled upon such conversion under the terms of this Note. Such
conversion shall be deemed to have been made (i) under Section 2 above and (ii)
immediately prior to the close of business on the date that the Note shall have
been surrendered for conversion, accompanied by written notice of election to
convert. No fractional shares will be issued upon conversion of this Note. If
upon any conversion of this Note a fraction of a share would otherwise result,
then, in lieu of such fractional share, the Company will pay the cash value of
that fractional share, calculated on the basis of the applicable Note Conversion
Price.
4. Adjustment of Number of Shares. The number and character of shares
of Conversion Stock issuable upon conversion of this Note (or any shares of
stock or other securities or property at the time receivable or issuable upon
conversion of this Note) are subject to adjustment upon the occurrence of any of
the following events:
4.1 Adjustment for Stock Splits, Stock Dividends,
Recapitalizations, etc. In the event that the Company shall fix a record date
for the determination of holders of securities affected by any stock split,
stock dividend, reclassification, recapitalization or other similar event that
will, in the future, affect the number of outstanding shares of the Company's
capital stock, then, and in each such case, the Noteholder, upon conversion of
this Note at any time after the Company shall fix the record date for such
event, shall receive, in addition to the shares of Conversion Stock issuable
upon conversion on the Conversion Date, the right to receive the securities of
the Company to which such holder would have been entitled if such holder had
converted this Note immediately prior to such record date (all subject to
further adjustment as provided in this Note).
4.2 Adjustment for Dividends and Distributions. In the event
that the Company shall make or issue, or shall fix a record date for the
determination of eligible holders of securities entitled to receive, a dividend
or other distribution payable with respect to the Conversion Stock (or any
shares of stock or other securities at the time issuable upon conversion of this
Note) that is payable in (a) securities of the Company other than capital stock
or (b) any other assets, then, and in each such case, the Noteholder, upon
conversion of this Note at any time after the consummation, effective date or
record date of such event, shall receive, in addition to the shares of
Conversion Stock (or such other stock or securities) issuable upon such
conversion prior to such date, the securities or such other assets of the
Company to which such holder would have been entitled upon such date if such
holder had converted this Note immediately prior thereto (all subject to further
adjustment as provided in this Note).
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4.3 Adjustment for Reorganization, Consolidation, Merger. In
the event of any reorganization not considered a Change of Control Transaction
of the Company (or any other corporation the stock or other securities of which
are at the time receivable upon the conversion of this Note) after the date of
this Note, or in the event, after such date, the Company (or any such
corporation) shall consolidate with or merge into another corporation or convey
all or substantially all of its assets to another corporation where such
transaction is not considered a Change of Control Transaction, then, and in each
such case, the Noteholder, upon the conversion of this Note (as provided in
Section 2) at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the conversion of
this Note prior to such consummation, the stock or other securities or property
to which such Noteholder would have been entitled upon the consummation of such
reorganization, consolidation, merger or conveyance if such holder had converted
this Note immediately prior thereto, all subject to further adjustment as
provided in this Section 4, and the successor or purchasing corporation in such
reorganization, consolidation, merger or conveyance (if other than the Company)
shall duly execute and deliver to the Noteholder a supplement hereto
acknowledging such corporation's obligations under this Note. In each such case,
the terms of the Note shall be applicable to the shares of stock or other
securities or property receivable upon the conversion of this Note after the
consummation of such reorganization, consolidation, merger or conveyance.
4.4 Conversion of Stock. In the event that all of the
authorized Conversion Stock of the Company is converted, pursuant to the
Company's Articles of Incorporation, into other capital stock or securities or
property, or the Conversion Stock otherwise ceases to exist, then the
Noteholder, upon conversion of this Note at any time after the date on which the
Conversion Stock is so converted or ceases to exist (the "Termination Date"),
shall receive, in lieu of the number of shares of Conversion Stock that would
have been issuable upon such conversion immediately prior to the Termination
Date (the "Former Number of Shares of Conversion Stock"), the stock and other
securities and property to which such Noteholder would have been entitled to
receive upon the Termination Date if such holder had converted this Note with
respect to the Former Number of Shares of Conversion Stock immediately prior to
the Termination Date (all subject to further adjustment as provided in this
Note).
4.5 Notice of Adjustments. The Company shall promptly give
written notice of each adjustment or readjustment of the number of shares of
Conversion Stock or other securities issuable upon conversion of this Note, by
first class mail, postage prepaid, to the registered holder of this Note at the
holder's address as shown on the Company's books. The notice shall describe the
adjustment or readjustment and show in reasonable detail the facts on which the
adjustment or readjustment is based.
4.6 No Change Necessary. The form of this Note need not be
changed because of any adjustment in the number of shares of Conversion Stock
issuable upon its conversion.
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4.7 Reservation of Stock. The Company has taken all necessary
corporate action and obtained all necessary government consents and approvals to
authorize the issuance of this Note and, prior to the conversion hereof, the
shares of Conversion Stock issuable upon conversion of this Note. If at any time
the number of authorized but unissued Series D Preferred Stock or other
securities shall not be sufficient to effect the conversion of this Note, then
the Company will take such corporate action as may, in the opinion of its legal
counsel, be necessary to increase its authorized but unissued Series D Preferred
Stock or other securities to such number of shares of Common Shares or other
securities as shall be sufficient for such purpose.
5. Fully Paid Shares. All shares of Conversion Stock issued upon the
conversion of this Note shall be validly issued, fully paid and non-assessable.
6. No Rights or Liabilities as Shareholder. This Note does not by
itself entitle the Noteholder to any voting rights or other rights as a
shareholder of the Company. In the absence of conversion of this Note, no
provisions of this Note, and no enumeration herein of the rights or privileges
of the holder, shall cause such holder to be a shareholder of the Company for
any purpose.
7. Corporate Action; No Impairment. The Company will not, by amendment
of its Articles of Incorporation or bylaws, or through reorganization,
consolidation, merger, dissolution, issue or sale of securities, repurchase of
securities, sale of assets or any other action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate, or as reasonably
requested by Noteholder, in order to protect the rights of the Noteholder under
this Note against wrongful impairment. Until the Company has adopted the
Designation, the Company shall not negotiate with or entertain discussions with
any party regarding a Change of Control Transaction without the prior written
consent of the Noteholder. Except to adopt the Designation, the Company shall
not amend its Articles of Incorporation or issue any capital stock or options to
purchase any capital stock of the Company without the prior written consent of
the Noteholder; provided, however, that the Company: (A) may issue stock in
connection with the exercise or conversion of currently outstanding options,
warrants and other convertible securities; (B) may issue options to purchase
common stock, pursuant to its 2000 Stock Option and Incentive Plan, to its sale
representatives at the end of each fiscal quarter based on the placement of the
Company's products during such quarter, and (C) may issue not more than 300,000
shares of common stock in satisfaction of existing trade payables, such
issuances at not less than 75% of the closing bid price of the Company's common
stock on the date of settlement
8. Default. The Company will be in default if the Company fails to make
any payment when due hereunder. The Company will also be in default if any of
the following occurs and such default is not cured within a ten (10) day period
after the Noteholder has given the Company written notice of such default:
(a) The Company breaches any material obligation to the
Noteholder hereunder.
(b) A receiver is appointed for any part of the Company's
property, the Company makes an assignment for the benefit of creditors, or any
proceeding is commenced either by the Company or against the Company under any
bankruptcy or insolvency laws.
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(c) The Company materially defaults under the Security
Documents referred to in Section 9 below.
(d) The Company suspends its normal business operations or
otherwise fails to continue to operate its business in the ordinary course.
In the event of a default under this Section 8, Noteholder shall, in addition to
any other remedies allowed by law, be entitled to accelerate all unpaid
principal and interest under this Note.
9. Security Agreement. This Note is secured by a security interest in
certain collateral, which security interest was granted by the Company to the
original holder of the Note pursuant to the terms of a certain security
agreement (the "Security Agreement"), and a certain pledge agreement (the
"Pledge Agreement") (which together are sometimes referred to herein as the
"Security Documents"), which agreements are dated on or about the date of this
Note, are among the original holder of the Note and the Company, and are
incorporated herein by this reference.
10. Revolving Line of Credit. [Intentionally omitted]
11. Waiver and Amendment. ANY PROVISION OF THIS NOTE MAY BE AMENDED,
WAIVED, MODIFIED, DISCHARGED OR TERMINATED SOLELY UPON THE WRITTEN CONSENT OF
BOTH THE COMPANY AND THE NOTEHOLDER.
12. Assignment; Binding upon Successors and Assigns. The Company may
not assign any of its obligations hereunder without the prior written consent of
Noteholder. The terms and conditions of this Note shall inure to the benefit of
and be binding upon the successors and permitted assigns of the parties.
13. Waiver of Notice; Attorneys' Fees. The Company and all endorsers of
this Note hereby waive notice, demand, notice of nonpayment, presentment,
protest and notice of dishonor. If any action at law or in equity is necessary
to enforce this Note or to collect payment under this Note, the Noteholder shall
be entitled to recover, as an element of the costs of suit and not as damages,
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which it may be entitled. Noteholder will be entitled to recover
its costs of suit, regardless of whether such suit proceeds to final judgment.
14. Construction of Note. The terms of this Note have been negotiated
by the Company, the original holder of this Note and their respective attorneys
and the language hereof will not be construed for or against either Company or
Noteholder. Unless otherwise explicitly set forth, a reference to a Section will
mean a Section in this Note. The titles and headings herein are for reference
purposes only and will not in any manner limit the construction of this Note
which will be considered as a whole.
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15. Notices. Any notice or other communication required or permitted to
be given under this Note shall be in writing, shall be delivered by hand or
overnight courier service, by certified mail, postage prepaid, or by facsimile,
and will be deemed given upon delivery, if delivered personally, one business
day after deposit with a national courier service for overnight delivery, or one
business day after transmission by facsimile with confirmation of receipt, and
three days after deposit in the mails, if mailed, to the following addresses:
(i) If to the Noteholder:
6405 South 3000 East, Suite 201
Salt Lake City, Utah 84121
Facsimile: (801) 453-2090
(ii) If to Company:
eRoomSystem Technologies, Inc.
106 East 13200 South
Draper, UT 84020-8954
Facsimile: (801) 572-3122
or to such other address as may have been furnished to the other party in
writing pursuant to this Section 15, except that notices of change of address
shall only be effective upon receipt.
16. Governing Law. This Note shall be governed by and construed under
the internal laws of the United States and the State of Utah as applied to
agreements among Utah residents entered into and to be performed entirely within
Utah, without reference to principles of conflict of laws or choice of laws.
17. Trust Account. The Company and Noteholder acknowledge and agree
that amounts borrowed pursuant to this Note have been placed in a trust account
for the benefit of Noteholder, all as set forth in a letter agreement dated
November 8, 2002 ("Letter Agreement") and that such amounts shall be held and
delivered as set forth in the Letter Agreement.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name as of the date first above written.
eROOMSYSTEM TECHNOLOGIES, INC.
By: /s/ Derek K. Ellis
----------------------------------------
Derek K. Ellis
Chief Financial Officer and Treasurer
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<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION OF RIGHTS, PRIVILEGES AND PREFERENCES
OF SERIES D PREFERRED STOCK
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC.
CERTIFICATE OF DESIGNATION
OF RIGHTS, PRIVILEGES AND PREFERENCES
OF
SERIES D CONVERTIBLE PREFERRED STOCK
eRoomSystem Technologies, Inc., a Nevada corporation (the
"Corporation"), hereby certifies that the following resolution was duly adopted
by action of the Board of Directors of the Corporation dated October 28, 2002:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, the Board of Directors designates and creates a
series of Preferred Stock from the authorized shares of Preferred Stock, par
value $0.001 per share, of the Corporation, and that the designation and amount
thereof and the powers, preferences and rights of the shares of such series, and
the qualifications, limitations or restrictions thereof, shall be as follows:
1. Designation and Amount. The shares of such series shall be
designated as "Series D Convertible Preferred Stock" (the "Series D Preferred")
and the number of shares constituting the Series D Preferred shall be 2,777,778.
2. Dividends. The holders of shares of Series D Preferred shall be
entitled to receive dividends, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend (payable
other than in common stock of the Corporation ("Common Stock")) on the Common
Stock, at the rate of $0.054 per share per annum (as adjusted for any stock
dividends, combinations or splits with respect to such shares after the filing
of this Certificate), or, if greater (as determined on a per annum basis and on
an as converted basis for the Series D Preferred) an amount equal to that paid
on any other outstanding stock of this Corporation, payable when and if declared
by the Board of Directors. Such dividends shall not be cumulative.
3. Liquidation, Dissolution or Winding Up; Certain Mergers,
Consolidations and Asset Sales.
3.1 Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation (a
"Liquidation"), the holders of shares of Series D Preferred then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, after and subject to the payment in full of
all amounts required to be distributed to the holders of any other class or
series of stock of the Corporation ranking on liquidation prior and in
preference to the Series D Preferred, but before any payment shall be made to
the holders of Common Stock or any other class or series of stock ranking on
liquidation junior to the Series D Preferred by reason of their ownership
thereof, an amount per share equal to (i) the sum of (A) $0.90 for each
outstanding share of Series D Preferred and (B) an amount equal to declared but
unpaid dividends on such share (subject to adjustment of such fixed dollar
amounts for any stock splits, stock dividends, combinations, recapitalizations
or the like after the filing of this Certificate). If upon any Liquidation, the
remaining assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of shares of Series D
Preferred and any other class of series of stock ranking on liquidation on a
parity with the Series D Preferred ("Parity Stock") the full amount to which
they shall be entitled, the holders of shares of Series D Preferred and any
Parity Stock shall share ratably in any distribution of the assets and funds of
the Corporation in proportion to the respective amounts which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
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3.2 Participation. Upon the completion of the
distribution required by Section 3.1, the holders of shares of Series D
Preferred (on an as converted basis) and Common Stock then outstanding shall be
entitled to be paid out of the remaining assets of the Corporation additional
amounts on a pro rata basis.
3.3 Certain Transactions. The merger or consolidation of
the Corporation into or with any other entity, or the sale of all or
substantially all of the assets of the Company, as a result of which the
stockholders of the Corporation immediately prior to such transaction, in their
capacities as such, own, immediately following such transaction, less than 50%
of the surviving or buying entity or its parent, shall be deemed to be a
Liquidation for all purposes of this Section 3.
3.4 Noncash Consideration. In any Dissolution, if the
consideration received by the Corporation or its shareholders is other than
cash, its value for purposes of this Section 3 will be determined as follows:
(a) Securities not subject to investment letter or other
similar restrictions on free marketability covered by Section 3.4(b):
(1) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange or market over the
30-calendar-day period ending 3 trading days prior to the closing;
(2) If actively traded over-the-counter (other than
through the Nasdaq National Market), the value shall be deemed to be the average
of the closing bid or sale prices (whichever is applicable) over the
30-calendar-day period ending 3 trading days prior to the closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of a majority of the Series D Preferred.
(b) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as stated in Section 3.4(a) to reflect the approximate fair
market value thereof, as mutually determined by the Corporation and the holders
of a majority of the Series D Preferred.
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(c) Other non-cash consideration shall be valued at the
fair market value thereof, as mutually determined by the Corporation and the
holders of a majority of the Series D Preferred. In a transaction described in
Section 3.3, the pricing of the non-cash consideration in connection with the
dissolution is the same as it was priced in the underlying transaction, as
determined in good faith by the Corporation's Board of Directors. If the holders
of not less than a majority of the Series D Preferred object to the Board's
determination of the value of a transaction described in Section 3.3, the
Corporation and the holders of not less than a majority of the Series D
Preferred shall each appoint one independent investment-banker or qualified
appraiser and such persons shall in turn select a third investment-banker or
qualified appraiser, which group of three persons shall then determine, by
majority vote, the fair market value thereof.
3.5 Noncompliance. In the event the requirements of this
Section 3 are not complied with as to any transaction, the Corporation shall
forthwith either:
(a) cause the closing of such transaction to be postponed
until such time as the requirements of this Section 3 have been complied with;
or
(b) cancel such transaction, in which event the rights,
preferences and privileges of the holders of Preferred Stock shall revert to and
be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice given pursuant to Section 3.6.
3.6 Notice. The Corporation shall give each holder of
record of Series D Preferred written notice of any impending transaction which
constitutes or would result in a Liquidation not later than 15 days prior to the
stockholders' meeting called to approve such transaction, or 15 days prior to
the closing of such transaction, whichever is earlier, and shall also notify
such holders in writing of the final approval of such transaction. The first of
such notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 3, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than 20 days after the
Corporation has given the first notice provided for herein or sooner than 10
days after the Corporation has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened upon the written
consent of the holders of Series D Preferred that represent at least a majority
of the voting power of all then outstanding shares of Series D Preferred.
4. Voting Rights. The holders of the Series D Preferred shall have the
following voting rights:
4.1 General. Except as otherwise required by law or as
set forth in Section 4.2, the shares of Series D Preferred shall be voted
together with the Common Stock and all other series of Preferred Stock at any
annual or special meeting of the stockholders of the Corporation, or may act by
written consent in the same manner as the Common Stock and any other series of
Preferred Stock. Each holder of Series D Preferred shall be entitled to such
number of votes for the Series D Preferred held by it on the record date fixed
for such meeting or on the effective date of such written consent as shall be
equal to the whole number of shares of Common Stock into which the shares of
Series D Preferred held by such holder are convertible immediately after the
close of business on the record date fixed for such meeting or on the effective
date of such written consent.
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4.2 Protective Provisions. The vote or written consent of
the holders of a majority of all shares of Series D Preferred then outstanding
shall be required for any action which:
(a) changes the rights, preferences, privileges,
qualifications, limitations or restrictions of the Series D Preferred;
(b) increases or decreases the authorized number of
shares of Series D Preferred;
(c) issues or creates any new class of equity security
having rights preferential to or on parity with the rights of the Series D
Preferred with respect to dividends or amounts distributable on Liquidation, or
which amends the terms of or reclassifies any class of equity securities with
the same effect;
(d) redeems, repurchases or otherwise acquires any shares
of any class of equity securities or any securities or instruments convertible
into, exchangeable for or carrying any right to acquire equity securities, or
authorizes or creates a sinking fund for any such purpose; or
(e) amends the Corporation's Certificate of Incorporation
(including without limitation the adoption or effectiveness of any certificate
of rights, Privileges and Preferences of any new class or series of Preferred
Stock) in any way which adversely affects the rights, preferences or privileges
of the Series D Preferred.
5. Conversion Rights. The holders of Series D Preferred shall have
conversion rights as follows:
5.1 Right to Convert. Each share of Series D Preferred
shall be convertible, without the payment of any additional consideration by the
holder thereof and at the option of the holder thereof, at any time, at the
office of the Corporation or any transfer agent for the Series D Preferred, into
the number of fully paid and nonassessable shares of Common Stock determined by
dividing $0.90 by the Conversion Price in effect at the time of conversion. The
price at which shares of Common Stock will be deliverable upon conversion of the
Series D Preferred Stock (the "Conversion Price") shall initially be $0.15 per
share of Common Stock. Such initial Conversion Price shall be subject to
adjustment as provided in this Section 5.
5.2 Automatic Conversion. Each share of Series D
Preferred shall automatically be converted, at the Conversion Price then in
effect, upon the election by vote or written consent of a majority of shares of
Series D Preferred to convert into Common Stock.
5.3 Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of the Series D Preferred. In lieu
of any fractional shares to which the holder would otherwise be entitled
(computing the number of shares of Common Stock to which any holder is entitled
on an aggregate basis with respect to all shares to be converted by such holder
at the time of such conversion), the Corporation shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock, determined by
the Board of Directors in good faith. Before any holder of Series D Preferred
shall be entitled to convert the same into full shares of Common Stock pursuant
to Section 5.1, and before the Corporation shall be obligated to issue
certificates for shares of Common Stock upon the automatic conversion of Series
D Preferred pursuant to Section 5.2, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for Series D Preferred and, in the case of a conversion
pursuant to Section 5.1, shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state therein the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder, or to its nominee(s),
a certificate or certificates for the number of shares of Common Stock to which
such holder or nominee(s) shall be entitled as set forth above, together with
cash in lieu of any fraction of a share. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Series D Preferred to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
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5.4 Adjustments to Conversion Price for Dilutive Issues.
(a) Additional Shares of Common Stock. For purposes of
this Section 5.4, "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to Section 5.4(b), deemed to be issued) by the
Corporation after the issuance of the Series D Preferred, other than shares of
Common Stock issued or issuable:
(i) upon conversion of shares of Series D Preferred;
(ii) to vendors and key customers;
(iii) as a dividend or distribution on the Series D
Preferred;
(iv) in any event for which adjustment is made
pursuant to Section 5.5, 5.6 or 5.7 hereof; or
(v) by way of dividend or other distribution on
shares excluded from the definition of Additional Shares of Common Stock by this
Section 5.4(a).
(b) Deemed Issue of Additional Shares of Common Stock. In
the event the Corporation at any time or from time to time shall issue any
rights, options or warrants to subscribe for, purchase or otherwise acquire
Common Stock or Convertible Securities ("Options") or any evidence of
indebtedness, shares or securities directly or indirectly convertible into or
exchangeable for Common Stock ("Convertible Securities") or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto, without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities shall, subject to the exclusions set forth in Section
5.4(a), be deemed to be Additional Shares of Common Stock issued as of the time
of such issue or, in case such a record date shall have been fixed, as of the
close of business on such record date; provided that in any such case in which
Additional Shares of Common Stock are so deemed to be issued:
(i) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
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(ii) if such Options or Convertible Securities by
their terms provide, with
the passage of time or otherwise, for any increase or decrease in the
consideration payable to the Corporation, or any increase or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to equal the lesser of (A) a price that
reflects such increase or decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities or (B) a
price calculated as if such Options or Convertible Securities were excluded from
the definition of "Additional Shares of Common Stock," it being the
Corporation's intent that the issuance of such Options or Convertible
Securities, together with the foregoing adjustments in their terms, will not
have the net effect of increasing the Conversion Price of the Series D
Preferred;
(iii) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities that shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible
Securities or Options for Common Stock the only Additional Shares of Common
Stock issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities that
were actually converted or exchanged, plus the additional consideration, if any,
actually received by the Corporation upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 5.4(e)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(iv) in the case of any Options that expire by their
terms not more than 30 days after the date of issue thereof, no adjustment of
the Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (iii) above; and
(v) if such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Conversion Price that became
effective on such record date shall be canceled as of the close of business on
such record date, and thereafter the Conversion Price shall be adjusted pursuant
to this Section 5.4 as of the actual date of their issuance.
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(c) No Adjustment of Conversion Price. No adjustment of
the Conversion Price, in respect of the issuance of Additional Shares of Common
Stock or otherwise, shall be made unless the consideration per share for
Additional Shares of Common Stock issued by the Corporation is less than the
Conversion Price in effect on the date of, and immediately prior to, the issue
of such Additional Shares of Common Stock.
(d) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Corporation shall issue
Additional Shares of Common Stock without consideration or for a consideration
per share less than the Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event, the Conversion Price
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by dividing:
(i) an amount equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to such issue or subject to
options, warrants, conversion rights and other similar rights outstanding
immediately prior to such issue or (without duplication) reserved for issuance
under option plans and other plans applicable to employees or directors of the
Corporation, multiplied by the Conversion Price in effect immediately prior to
such issue, plus (B) the aggregate consideration, if any, received by the
Corporation for the issuance and sale of such Additional Shares of Common Stock
by
(ii) the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issue or subject to options,
warrants, conversion rights and other similar rights outstanding immediately
prior to such issue or (without duplication) reserved for issuance under option
plans and other plans applicable to employees or directors of the Corporation,
plus (B) the number of such Additional Shares of Common Stock so issued.
(e) Determination of Consideration. For purposes of this
Section 5.4, the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be determined as follows:
(i) Cash, Property and Services. Such consideration
shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of
indebtedness (other than Convertible Securities), be computed on the basis of
the face amount of such indebtedness on the date of such issue;
(C) insofar as it consists of (1)
property other than cash or indebtedness (other than Convertible Securities), or
(2) services rendered, be computed at the fair value thereof at the time of such
issue as determined in good faith by the Board of Directors; and
(D) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in Sections 5.4(e)(i)(A),
(B) and (C), allocable to the Additional Shares of Common Stock, as determined
by the Board of Directors in good faith.
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(ii) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 5.4(b), relating to
Options and Convertible Securities, shall be determined by dividing:
(A) the total amount, if any, received
or receivable by the Corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(B) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
The consideration per share so determined shall be subject to adjustment
pursuant to Sections 5.4(b)(ii) through(v).
5.5 Adjustment for Stock Splits, Dividends and
Combinations. If the Corporation, at any time or from time to time after the
original issuance of the Series D Preferred, shall effect a subdivision of the
outstanding Common Stock, or shall fix a record date for determination of
stockholders entitled to receive a dividend of Common Stock on its outstanding
Common Stock, the Conversion Price then in effect immediately before such
subdivision or as of such record date shall be proportionately reduced, and if
the Corporation shall combine the outstanding shares of Common Stock, the
Conversion Price then in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section 5.5 shall become
effective at the close of business on the date the subdivision or combination
becomes effective or on the record date for determining holders of any class of
securities entitled to receive the dividend, provided that if such record date
shall have been fixed and such dividend shall not have been fully paid on the
date fixed therefor, the adjustment previously made in the Conversion Price that
became effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the Conversion Price shall be
adjusted pursuant to this Section 5.5 as of the time of actual payment of such
dividend.
5.6 Adjustments for Other Dividends and Distributions. In
the event the Corporation at any time or from time to time shall make or issue,
or fix a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock, then and in each such event
provision shall be made so that the holders of shares of Series D Preferred
shall receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of securities of the Corporation
that they would have received had their shares of Series D Preferred been
converted into shares of Common Stock on the date of such event, giving effect
to all adjustments called for with respect to such securities during the period
from the date of such event to and including the conversion date.
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5.7 Recapitalizations. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this Section 5 or Section 3.3) provision shall be made so that the
holders of the Series D Preferred shall thereafter be entitled to receive upon
conversion of the Series D Preferred the number of shares of stock or other
securities or property, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of the Series D
Preferred after the recapitalization so that the provisions of this Section 5
(including without limitation Section 5.4) shall be applicable after that event
on a basis as equivalent to its application prior to such recapitalization as
practicable.
5.8 No Impairment. The Corporation will not, by amendment
of this Certificate of Rights, Privileges and Preferences or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the Series D Holders against impairment.
5.9 Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding Series D Preferred; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series D Preferred, in addition to such other
remedies as shall be available to the Holders of such shares of Series D
Preferred, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
5.10 Certificate of Conversion Price. Upon the occurrence
of each adjustment or readjustment of the Conversion Price pursuant to this
Section 5, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series D Preferred a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series D Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for the Series D Preferred at the
time in effect, and (C) the number of shares of Common Stock and the nature and
amount, if any, of other property which at the time would be received upon the
conversion of a share of Series D Preferred.
5.11 Notices of Record Date. In the event the Corporation
takes a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each holder of Series D
Preferred, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
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6. Redemption. The Corporation shall not have the right to redeem
shares of Series D Preferred and holders of Series D Preferred shall not have
the right to cause the Corporation to redeem such shares.
7. Notices. Any notice required by this Certificate to be given to the
holders of shares of Series D Preferred shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each holder of record
at its address appearing on the books of the Corporation.
Shareholder approval was not required to approve this Certificate.
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IN WITNESS WHEREOF, ERoomSystem Technologies, Inc. has caused this
Certificate of Designation of Rights, Privileges and Preferences to be signed
and attested this 12th day of November, 2002.
ATTEST: eROOMSYSTEM TECHNOLOGIES, INC.
By:/s/ Gregory L. Hrncir By: /s/ David S. Harkness
------------------------ -----------------------
Name: Gregory L. Hrncir Name: David S. Harkness
Secretary President
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