-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GmhT0vF+kCQih0Z4jKyxOmYpg6LBBSkM9GeSoxS9PLSPRooWmPWNZ4Eb4yEcg/0V PImsZWnZf67tKNwSAgFA7g== /in/edgar/work/20000719/0000912057-00-032493/0000912057-00-032493.txt : 20000920 0000912057-00-032493.hdr.sgml : 20000920 ACCESSION NUMBER: 0000912057-00-032493 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20000719 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EROOM SYSTEM TECHNOLOGIES INC CENTRAL INDEX KEY: 0001110361 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 870540713 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-34882 FILM NUMBER: 675425 BUSINESS ADDRESS: STREET 1: 3770 HOWARD HUGHES PARKWAY STREET 2: SUITE 175 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027922270 MAIL ADDRESS: STREET 1: 3770 HOWARD HUGHES PARKWAY STREET 2: SUITE 175 CITY: LAS VEGAS STATE: NV ZIP: 89109 SB-2/A 1 sb-2a.txt SB-2/A As filed with the Securities and Exchange Commission on July 19, 2000. Registration No. 333-34882 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 eROOMSYSTEM TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 3610 87-0540713 ---------------------- -------------------- ---------------- (State or other (Primary Standard (I.R.S. Employer jurisdiction Industrial Classification Identification No.) of incorporation Code Number) or organization) 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070 - -------------------------------------------------------------------------------- (Address and telephone number of principal executive offices) Gregory L. Hrncir, General Counsel and Secretary 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070 - -------------------------------------------------------------------------------- (Name, address and telephone number of agent for service) Copies to: Michael J. Bonner Michael D. DiGiovanna John C. Jeppsen Parker Duryee Rosoff & Haft Robert C. Kim 529 Fifth Avenue Kummer Kaempfer Bonner & Renshaw New York, New York 10017 3800 Howard Hughes Parkway, 7th Floor (212) 878-1700 Las Vegas, Nevada 89109 (702) 792-7000 ---------------- APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ---------------- The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act in 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to such Section 8(a) may determine. EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: (i) one to be used in connection with an offering by eRoomSystem Technologies, Inc. of 1,800,000 shares of common stock (2,070,000 shares if the underwriters elect to exercise their over-allotment option) (the "Prospectus"); and (ii) one to be used in connection with the sale of 200,000 shares of common stock currently outstanding and issued to certain selling stockholders (the "Selling Stockholder Prospectus"). The Prospectus and the Selling Stockholder Prospectus will be substantially similar except for the cover page, information with respect to the selling stockholders and other updating information, all of which will be provided through a post-effective amendment to the Registration Statement on Form SB-2. An alternative cover page has been included herein and labeled "Alternative Page for Selling Stockholder Prospectus." The selling stockholders are restricted from selling their shares of common stock until 180 days after the closing of the Registrant's initial public offering, or for a longer period as required by the National Association of Securities Dealers, Inc. or the Nasdaq Stock Market not to exceed one year. SUBJECT TO COMPLETION, DATED _____________, 2000 PROSPECTUS 1,800,000 SHARES OF COMMON STOCK [eROOMSYSTEM LOGO] EROOMSYSTEM TECHNOLOGIES, INC. This is an initial public offering of 1,800,000 shares of common stock of eRoomSystem Technologies, Inc. There is currently no public market for our common stock. ---------------- We have applied for quotation of the common stock on the Nasdaq SmallCap Market under the symbol "ERMS." We currently estimate that the initial public offering price per share will be between $8.00 and $10.00. ----------------
PER SHARE TOTAL ----------------- ----------------- Initial public offering price.......................................... $ $ Underwriting discounts and commissions............................ $ $ Proceeds to eRoomSystem Technologies, before expenses.................. $ $
---------------- eRoomSystem Technologies has granted the underwriters an option for a period of 30 days to purchase up to 270,000 additional shares of common stock. The securities being sold by us are being offered on a "firm commitment" basis by Donald & Co. Securities Inc. as representative of the underwriters. Donald & Co. Securities Inc. expects to deliver the shares against payment on or about , 2000. ---------------- In addition to the shares of common stock offered by us, we will be registering 200,000 shares of our common stock on behalf of selling stockholders that will be offered through a separate prospectus. These selling stockholders are subject to a minimum lock-up of 180 days from the closing of this initial public offering. ---------------- THESE SECURITIES ARE SPECULATIVE. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ---------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- DONALD & CO. SECURITIES INC. ______________, 2000 The information in this preliminary prospectus is not complete and may be changed. eRoomSystem Technologies, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and it is not seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. [INSIDE FRONT COVER] The inside front cover is entitled "Total Intelligent In-Room Solution eRoomSystem" and contains graphics of the Registrant's current and future products and services using a hub and spoke format. The products and services depicted are: eRoomServ Refreshment Center(TM), eRoomSafe(TM), eRoomMaintenance(TM)(*), eRoomEnergy Management(TM)(*), eRoomManagement(TM)(*), eRoomHousekeeping(TM)(*), eRoomData Management(TM)(*), and eRoomInternet Connectivity(TM)(*), with a statement that the asterisks (*) denote products and services that are under development. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS The core business of eRoomSystem Technologies is the development and installation of an intelligent, in-room computer platform and communications network, or the eRoomSystem, for the lodging industry. The eRoomSystem is a computerized platform and processor-based system designed to collect and control data. The eRoomSystem supports our fully-automated and interactive eRoomServ Refreshment Centers, or Refreshment Centers, electronic room safes, or eRoomSafes, and other proposed applications. These other applications include, or will include, information management services, in-room energy management capabilities, credit card/smart card capabilities for direct billing, network access solutions, and remote engineering and maintenance services. Our interactive Refreshment Centers provide hotel guests with a selection of up to 33 different beverages and snacks and offer the lodging industry an opportunity to capture additional in-room revenues and reduce operating costs. Our eRoomSafes have sufficient storage space for large items such as laptop computers, video cameras and briefcases and generate additional revenue. Our products interface with the hotel's property management system through our eRoomSystem communications network. The hotel's property management system posts usage of our products directly to the hotel guest's room account. The solutions offered by our eRoomSystem and related products have allowed us to install our products and services in several premier hotel chains, including Marriott International, Doubletree Hotels and Bass Hotels. We believe that our hotel relationships will continue to provide us with the opportunity to install our eRoomSystem and related products worldwide. One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected over eleven million room-nights of data. Through our eRoomSystem, we are able to collect information regarding the usage of our products on a real-time basis. We use this information to help our customers increase their operating efficiencies. We also intend to market this information to suppliers of goods sold in our Refreshment Centers and to other users desiring information on the buying patterns of hotel guests for goods and services. We believe that our eRoomSystem and developing technologies will provide a foundation for expansion into the healthcare and time-share industries. We will be able to provide healthcare facilities with a comprehensive room information and management system that will allow these facilities to provide patients with a wide array of in-room amenities not available to them in the past. These amenities include Refreshment Centers, eRoomSafes, direct dial long distance, on-demand movies, Internet access and other products and services commonly found in a hotel room. Similar opportunities exist in the time-share industry. By offering a direct credit card billing system, a healthcare or time-share facility can offer similar services available in hotels. OUR OFFICES We maintain offices at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109 and 390 North 3050 East, St. George, Utah 84790. Our telephone number is (800) 316-3070. -1- THE OFFERING
Common stock offered by eRoomSystem Technologies: 1,800,000 shares Common stock to be outstanding after the offering: 6,223,753 shares Use of proceeds: We intend to use the net proceeds from this offering for funding the production and installation of eRoomSystems, Refreshment Centers and eRoomSafes, repayment of a substantial portion of our outstanding indebtedness and related accrued interest, payment of cash dividends on our Series A and Series C convertible preferred stock, advertising and promotional expenses, research and development to improve our existing products and services and to develop our future products and services, and general corporate purposes and working capital. Proposed Nasdaq SmallCap Market symbol: "ERMS"
--------------------- The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of June 30, 2000 and does not include 2,502,963 shares of common stock issuable upon exercise of outstanding stock options and warrants as of June 30, 2000, with a weighted average exercise price of $5.77 per share. --------------------- Unless otherwise noted, all information contained in this prospectus assumes that: - all outstanding convertible preferred stock will be converted into 2,070,776 shares of common stock upon the closing of this offering, including 128,791 shares of common stock to be issued upon the conversion of Series C convertible preferred stock; - all outstanding convertible notes issued in conjunction with our Series C convertible preferred stock will not be converted into shares of common stock and will be paid in full from the proceeds of this offering; - the underwriters will not exercise their option to purchase additional shares of common stock to cover over-allotments, if any; and - the public offering price will be $9.00 per share. -2- SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize the financial information for our business. The summary financial information set forth below should be read in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------------------- ------------------------ 1995 1996 1997 1998 1999 1999 2000 ---------- ----------- ---------- ---------- ----------- ---------- --------- Revenue ......................... $ 356 $ 710 $ 4,666 $ 1,011 $ 541 $ 114 $ 49 Cost of revenue ................. 301 804 3,339 793 363 45 14 Gross margin (deficit) .......... 55 (94) 1,327 218 178 69 35 Loss from operations ............ (805) (1,804) (219) (2,128) (2,586) (426) (1,027) Net loss ........................ (877) (2,219) (1,000) (4,145) (3,672) (700) (1,240) Dividends related to convertible preferred stock ............... -- -- -- (19) (607) (36) (441) Loss attributable to common ..... stockholders .................. (877) (2,219) (1,000) (4,164) (4,279) (736) (1,681) Basic and diluted loss per common share (1) ..................... (1.56) (2.61) (0.76) (1.37) (1.33) (0.21) (0.76) Basic and diluted weighted average common shares outstanding (1) ............... 560 850 1,314 3,029 3,221 3,545 2,197 Basic and diluted supplemental .. pro forma loss per common share (1)...................... (1.84) (1.66) Basic and diluted supplemental pro forma weighted average common shares outstanding (1) . 5,163 4,245
AS OF MARCH 31, 2000 -------------------------------------------------------- PRO FORMA ACTUAL PRO FORMA (2) AS ADJUSTED (3) -------------- --------------- ----------------- BALANCE SHEET DATA: Cash................................................... $ 15 $ 15 $ 11,595 Working capital (deficit).............................. (3,272) (3,272) 9,864 Total assets........................................... 5,042 5,042 16,650 Long-term liabilities.................................. 994 994 69 Total stockholders' equity (deficit)................... (290) (290) 13,777 - -----------
(1) See Note 2 of Notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. (2) The pro forma amounts reflect the conversion, upon the closing of this offering, of our outstanding Series A, Series B and Series C convertible preferred stock into 400,000 shares, 1,541,985 and 106,061 shares of our common stock, respectively. (3) Pro forma as adjusted amounts reflect the pro forma adjustments at note (2) above, as well as the sale of 1,800,000 shares of common stock in this offering at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, the conversion of the remaining shares of our Series C convertible preferred stock into an additional 22,730 shares of common stock, the issuance of 200,000 shares of common stock in connection with the bridge loan, the issuance of 42,813 shares of common stock for accrued interest and dividends between April 1, 2000 and June 30, 2000, and the issuance of 777 shares of common stock to an employee as a result of a prior error in the calculation of shares issuable to the employee. -3- RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE YOU PURCHASE ANY SHARES OF OUR COMMON STOCK. THE FOLLOWING RISKS, IF THEY OCCUR, COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION OR FUTURE RESULTS OF OPERATIONS. IF THAT OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO eROOMSYSTEM TECHNOLOGIES WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND ANTICIPATE CONTINUED OPERATING LOSSES, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY We have a history of operating losses. For the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000, we have incurred losses applicable to common stockholders of $4,164,037, $4,279,444 and $1,680,726, respectively, and our operations have used $2,931,871, $2,304,807 and $708,129 of cash, respectively. As of December 31, 1998 and 1999 and March 31, 2000, we had accumulated deficits of $9,404,597, $13,684,041 and $15,364,767, respectively, working capital deficits of $3,358,343, $2,650,616 and $3,271,963, and stockholders' deficits of $2,428,105, $23,852 and $289,813, respectively. In addition, as of March 31, 2000, we are in default under a portion of our promissory notes in the aggregate amount of $1,138,820, including accrued interest. If our revenues decline or grow at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, our business would be severely harmed. We cannot assure you that revenues will grow in the future or that we will generate sufficient revenues for profitability, or that profitability, if achieved, can be sustained on an ongoing basis. GIVEN OUR RECURRING LOSSES, ACCUMULATED DEFICITS AND DEFAULTS UNDER MANY OF OUR DEBT AGREEMENTS, WE MAY BE UNABLE TO CONTINUE AS A GOING CONCERN Our independent auditors issued a report on their audit of our consolidated financial statements for the years ended December 31, 1998 and 1999. Their report contains an explanatory paragraph in which they state that our history of recurring losses, our working capital and stockholders' deficits and our defaults under many of our debt agreements raise substantial doubt regarding our ability to continue as a going concern. We are attempting to raise additional equity capital through this offering and to arrange additional debt financing for our products. Subsequent to December 31, 1999, we received gross proceeds of $2,212,500 in debt financing and $637,500 in additional preferred equity financing through private offerings. If we fail to complete this offering, we cannot assure you that we will have sufficient capital to fund operations or that we will be able to arrange additional financing for our products. SINCE OUR REVENUE SHARING PROGRAM INCREASED OUR NEED FOR LONG-TERM FINANCING, OUR ABILITY TO INCREASE REVENUE OR ACHIEVE PROFITABILITY IS DEPENDENT UPON THE SATISFACTION BY OUR CUSTOMERS DURING A 90-DAY SEASONING PERIOD OF MINIMUM PERFORMANCE CRITERIA BEFORE AMRESCO LEASING CORPORATION WILL FUND ANY INDIVIDUAL LOAN UNDER OUR LONG-TERM FINANCING ARRANGEMENT WITH THEM The emphasis of our business model on a revenue sharing program significantly increases our need for long-term financing in addition to the proceeds from this offering because we offer our products at little or no upfront cost to our customers. In order to address our long-term capital needs, we have entered into an exclusive post-installation financing arrangement with Amresco Leasing Corporation. Under the financing arrangement, Amresco will finance up to 150% of our costs for the Refreshment Centers and eRoomSafes upon the completion of a 90-day seasoning period after installation and the satisfaction of pre-funding requirements. Prior to submitting a preliminary application for funding to Amresco, we attempt to identify properties that satisfy minimum performance, occupancy and liquidity requirements. Once an appropriate property is identified, we -4- enter into a lease with the property, install our products and submit a preliminary application for funding. If our preliminary application is approved by Amresco and after a 90-day seasoning period, we must submit a final application for funding to Amresco. In order to obtain final approval for funding, the property must have maintained its initial performance, occupancy and liquidity standards and must have retained a minimum of 20% of the gross daily revenue on a per unit basis per day during the seasoning period. If our customers fail to meet Amresco's requirements or if Amresco were to delay or refuse to provide our required financing, we cannot assure you that other long-term financing will be available in sufficient amounts or on terms acceptable to us, or at all. Our inability to obtain long-term financing will prevent us from placing additional products under our revenue sharing program or manufacturing products for sale. In addition to our long-term financing arrangement and the proceeds of this offering, we may require additional short-term financing to cover the costs of the production and installation of our products until the completion of the 90-day seasoning period. IN SHIFTING OUR BUSINESS MODEL FROM SALES TO A REVENUE SHARING PROGRAM, WE MAY BE UNABLE TO INCREASE OUR REVENUES OR ACHIEVE PROFITABILITY IF WE CANNOT SUCCESSFULLY IMPLEMENT OUR REVENUE SHARING PROGRAM OR IF THE PARTICIPATING PROPERTIES DO NOT COMPLY WITH THE COVENANTS REGARDING THE PLACEMENT OF OUR PRODUCTS AND COMPETING VENDING MACHINES We have traditionally relied upon the sale of our products. Recently, we shifted the focus of our business model from product sales to our revenue sharing program. Our business model is new and our ability to generate revenues or profits is unproven. Under our revenue sharing program, we offer our products at little or no upfront cost to our customers and share the revenue generated by our products over a seven-year period. Our success under our revenue sharing program is dependent upon the participating hotel's compliance with covenants regarding the placement of our Refreshment Centers, the location in the hotel and quantity of competing vending machines that sell goods similar to those in our Refreshment Centers, and the price of goods sold through the vending machines. We cannot assure you that our portion of the revenues generated will be sufficient to cover the costs to produce, install, maintain and finance our products. THE INTEREST RATE FOR OUR LONG-TERM FINANCING WITH AMRESCO WILL RESULT IN A HIGHER INTEREST RATE THAN WE MAY HAVE BEEN ABLE TO NEGOTIATE IF WE WERE STRONGER FINANCIALLY WHICH WILL RESULT IN REDUCED OPERATING AND PROFIT MARGINS The financing arrangement we negotiated with Amresco will result in an interest rate higher than the interest rate we may have been able to negotiate if we were stronger financially. Due to the exclusive nature of this financing arrangement in the domestic lodging industry, our ability to obtain financing for revenue sharing agreements at more advantageous interest rates during the seven-year term of the financing arrangement will be contractually restricted. The funds obtained through our financing arrangement will initially bear an interest rate equal to the seven-year treasury rate plus 12.5% that, upon reaching thresholds of funds outstanding, may be subsequently reduced to the seven-year treasury rate plus 6.5%. OUR FAILURE TO MAINTAIN OUR CURRENT RELATIONSHIPS WITH HOTEL CHAINS, TO DEVELOP NEW RELATIONSHIPS WITH OTHER HOTEL CHAINS AND TO ENTER INTO DEFINITIVE AGREEMENTS WITH THE FRANCHISEES OF THESE HOTEL CHAINS MAY RESULT IN OUR INABILITY TO INCREASE REVENUES OR ACHIEVE PROFITABILITY Although we are the exclusive or preferred vendor of interactive computerized Refreshment Centers for a number of premier hotel chains, these arrangements may not generate any sales or placements of our products. Due to the franchisor-franchisee relationship between many hotel chains and their hotel properties, we must not only establish exclusive or preferred vendor relationships with the hotel chains, but must also enter into definitive agreements with the franchisees of these hotel chains for the sale or placement of our products into the actual hotel properties. Further, all but one of our relationships with the hotel chains are not binding agreements, but are merely open-ended arrangements that are subject to change. The failure to maintain our current relationships with hotel chains, secure additional relationship with hotel chains and enter into definitive agreements with franchisees of these hotel chains will harm our ability to install additional products and services and may result in our inability to increase revenues or achieve profitability. -5- OUR ABILITY TO ESTABLISH TWO OR MORE THIRD PARTY TURNKEY MANUFACTURING SOURCES TO MEET OUR PROJECTED DEMAND IS DEPENDENT UPON OUR LIMITED EXPERIENCE IN DEALING WITH TURNKEY MANUFACTURERS AND MAY AFFECT THE NUMBER OF INSTALLATIONS UNDER OUR REVENUE SHARING PROGRAM Our Refreshment Centers require a limited amount of assembly at our St. George, Utah facility. Since our existing facility is not sufficient to meet our projected growth, we will either have to establish two or more third party turnkey manufacturing sources, expand our assembly facility or hold orders for our products unfulfilled. We presently intend to establish third party turnkey manufacturing sources to meet our projected demand. If our installations increase significantly, our ability to establish sufficient turnkey manufacturing sources is critical to our future success. The selection of suitable turnkey manufacturers is subject to our limited experience in dealing with turnkey manufacturers and is dependent upon our ability to identify turnkey manufacturers who can assemble our products on a timely basis and in a quality manner. We have had preliminary discussions with several third parties to establish turnkey manufacturing arrangements, but we have not agreed to any of the terms of such arrangements. We cannot assure you that we will be able to locate satisfactory turnkey manufacturing sources and, if located, that the additional costs of such turnkey manufacturing sources will not erode our ability to achieve profitability. WE WILL BE UNABLE TO DELIVER AND INSTALL OUR PRODUCTS TO MEET OUR PROJECTED GROWTH UNLESS WE SUCCESSFULLY EXPAND OUR EXISTING INFRASTRUCTURE AND RECRUIT ADDITIONAL PERSONNEL FROM THE SMALL LABOR MARKET OF ST. GEORGE, UTAH Using the net proceeds from this offering and our financing arrangement with Amresco, we intend to expand our customer base for our current products and to develop and market new products and services. If we are successful, our business will require the implementation of expanded operational and financial systems, procedures and controls, billing functions, the training of a larger employee base, and increased coordination among our software, hardware, accounting, finance, marketing, sales and field service staffs. We will be unable to deliver and install our products to meet our projected growth unless we expand our existing infrastructure on a timely basis. Our assembly and service and installation departments are presently insufficient to assemble, install, manage and service our projected growth. While we are actively recruiting personnel for our assembly and service and installation departments to meet our future needs, St. George, Utah has a relatively small population base from which to hire qualified employees. If we cannot recruit additional personnel to meet our projected growth, we will not be able to deliver and install our products on a timely basis. WE MAY EXPERIENCE REDUCED OPERATING MARGINS AND LOSS OF MARKET SHARE DUE TO THE INTENSE COMPETITION FROM COMPANIES WITH LONGER OPERATING HISTORIES, GREATER RESOURCES AND MORE ESTABLISHED BRAND NAMES THAT MARKET IN-ROOM AMENITIES TO THE LODGING INDUSTRY The market for in-room amenities in the lodging industry is competitive, and we expect competition to intensify in the future. Our competitors vary in size and in the scope and breadth of the products and services they offer. Our competitors, such as Dometic, Bartech, Inc., MiniBar America, Inc. and ElSafe, Inc., have longer operating histories, larger customer bases, greater brand recognition, and substantially greater capital, research and development, manufacturing, marketing, service, support, technical and other resources than we do. As a result, our competitors may be able to devote greater resources to marketing campaigns, adopt more aggressive pricing policies or devote substantially more resources to customer and business development than we can. We also anticipate additional competition from new entrants into the room management and related aspects of our business. In addition, we may from time to time make pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. Our response to this increased competition may result in reduced operating margins and loss of market share. -6- WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS TO THE HEALTHCARE AND TIME-SHARE INDUSTRIES AS WE HAVE HISTORICALLY OPERATED IN THE LODGING INDUSTRY We have traditionally focused our marketing efforts on the lodging industry. We are proposing to expand the marketing of our eRoomSystem, Refreshment Centers and eRoomSafes to the healthcare and time-share industries. As we have little or no experience in these new industries, we may not be successful in marketing our products and services outside of the lodging industry. As a result, we will be confronted with challenges and competition that we have never faced before. We cannot assure you that we will be able to meet the new challenges and competitors associated with these new industries. WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS AS WE HAVE LITTLE OR NO EXPERIENCE WITH RESPECT TO OUR PROPOSED NEW PRODUCTS AND SERVICES, SUCH AS IN-ROOM ENERGY MANAGEMENT, COORDINATION OF HOUSEKEEPING AND ENGINEERING ACTIVITIES, INTERNET ACCESS, VIDEOCONFERENCING AND OTHER COMMUNICATION DEVICES Part of our growth strategy consists of expanding our offerings to include products and services we have not provided in the past. For example, we plan to offer new products and services, such as in-room energy management, coordination of housekeeping and engineering activities, Internet access, videoconferencing and other communications. As we have little or no experience with respect to these new products and services, we may not be successful in expanding our product offerings. As a result, we cannot assure you that we will be successful in expanding our products and services or that we will be able to meet the new challenges and competitors associated with the expansion of our products and services. ALTHOUGH WE HAVE ENTERED INTO CONFIDENTIALITY AND NON-COMPETE AGREEMENTS WITH MOST OF OUR EMPLOYEES AND CONSULTANTS, IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, SUCH AS THE SOFTWARE AND THE HARDWARE FOR OUR eROOMSYSTEM AND THE INFORMATION COLLECTED BY OUR eROOMSYSTEM, AGAINST UNAUTHORIZED USE BY OTHERS, OUR COMPETITIVE POSITION COULD BE HARMED We believe our proprietary information, including the software and the hardware for our eRoomSystem and the information collected by our eRoomSystem, is important to our competitive position and is a significant aspect of the products and services we provide. If we are unable to protect our proprietary information against unauthorized use by others, our competitive position could be harmed. We generally enter into confidentiality or non-compete agreements with most of our employees and consultants, and control access to and distribution of our documentation and other proprietary information. Despite these precautions, we cannot assure you that these strategies will be adequate to prevent misappropriation of our proprietary information. We could be required to expend significant amounts to defend our rights to proprietary information. OUR ABILITY TO MARKET OUR eROOMSYSTEM SUCCESSFULLY TO THE INTERNATIONAL LODGING INDUSTRY IS SUBJECT TO OUR INEXPERIENCE WITH, AND LACK OF KNOWLEDGE OF, THE INTERNATIONAL LODGING INDUSTRY, THE RELATIONSHIP ESTABLISHED BY OUR COMPETITORS WITH HOTEL OPERATORS IN EUROPE AND THE DIFFICULTIES ASSOCIATED WITH THE INSTALLATION OF OUR PRODUCTS Part of our growth strategy is to expand into the international lodging market. Our ability to initiate and maintain successful operations in international markets include, among others, compliance with foreign laws and regulations, fluctuations in foreign currency, general political and economic trends, and language and cultural differences. As the international lodging market represents only a small portion of our current business, we will have to allocate significant resources in order to promote our products internationally. Revenues from our current operations, let alone revenues from our proposed international operations, may not offset the expense of establishing and maintaining these international operations. We do not have sufficiently experienced management or sales personnel with relationships in international markets or a knowledge of the respective laws, political and economic environment, language and cultural differences or buying patterns of customers in those markets to effectively market and sell our products in international markets. For example, Bartech, Inc. has become the leader in the minibar industry in Europe through its established relationships with numerous hotels. We may be required to enter into distributorship or other similar agreements for particular geographic areas. If so, we cannot assure you that we will be successful in soliciting the -7- best distributors, or that if distributors are selected, that the additional costs of such distributors will not erode our ability to achieve profitable sales or revenue sharing arrangements for the placement of our products. RISKS RELATED TO OUR INDUSTRY DUE TO THE HEIGHTENED REGULATORY ENVIRONMENT IN WHICH HOTEL-CASINOS OPERATE AND OUR INTENT TO MARKET TO THESE PROPERTIES, WE MAY BE SUBJECT TO INCREASED SCRUTINY BY A HOTEL-CASINO'S REGULATORY COMPLIANCE COMMITTEE WHICH HAS BROAD DISCRETION TO APPROVE OR FOREGO TRANSACTIONS WITH THIRD PARTIES Although hotel-casinos do not currently represent a material portion of the Company's business, the Company anticipates that a significant portion of its growth will come from the hotel-casino market. Due to the heightened regulatory environment in which hotel-casinos operate, our operations may be subject to review by a hotel-casino's regulatory compliance committee to verify that its involvement with us would not jeopardize its gaming license. The regulatory compliance committee of a hotel-casino has broad discretion in determining whether or not to approve a transaction with a third party, which review typically includes the character, fitness and reputation of the third party and its officers, directors and principals. If our history or operations present problems for regulated customers or potential customers, such as hotel-casinos, we would either have to expend resources to address or eliminate the concerns or forego the business. Under either scenario, our ability to increase our revenues or achieve profitability may be negatively impacted. RISKS RELATED TO THIS OFFERING FOLLOWING THIS OFFERING, OUR EXECUTIVE OFFICERS AND MEMBERS OF OUR BOARD OF DIRECTORS, INCLUDING DIRECTOR DESIGNEES, WILL BENEFICIALLY OWN APPROXIMATELY 25.8% OF THE OUTSTANDING SHARES OF OUR COMMON STOCK AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS SUBMITTED TO A VOTE OF STOCKHOLDERS Immediately following this offering, our executive officers and members of our board of directors, including director designees, will beneficially own 1,871,472 shares of common stock, or approximately 25.8% of the outstanding shares of our common stock. If the underwriters' over-allotment option is exercised in full, our executive officers and members of our board of directors, including director designees, will beneficially own approximately 24.9% of the outstanding shares of our common stock. These stockholders will have the power to influence all matters requiring approval by our stockholders, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of eRoomSystem Technologies. OUR STOCK PRICE MAY FALL AS A RESULT OF THE 3,139,681 SHARES OF COMMON STOCK, OR APPROXIMATELY 50.4% OF OUR OUTSTANDING COMMON STOCK, THAT WILL BE ELIGIBLE FOR SALE SOON AFTER THE COMPLETION OF THIS OFFERING Sales of a substantial number of shares of common stock in the public market following this offering could cause the market price for our common stock to decline. Upon completion of this offering, and based upon assumptions set forth in this prospectus, there will be 6,223,753 outstanding shares of common stock, of which 1,800,000 shares, or approximately 28.9% of our outstanding shares of common stock, will be sold in this offering plus shares issued upon exercise of the underwriter's over-allotment option, if any. All of the shares sold in this offering will be immediately available for resale. In addition, in connection with the bridge loan of $1,500,000 we received, we are registering 200,000 shares of common stock under the registration statement relating to this prospectus. These shares may be sold no earlier than 180 days following the completion of this offering by seven selling stockholders. In light of existing lock-up arrangements, up to 1,044,251 shares, or approximately 16.8% of our outstanding shares of common stock, will be immediately available for resale in accordance with Rule 144(k) under the Securities Act, and 95,430 shares will be available for sale 90 days after the date of this prospectus subject to restrictions set forth in Rule 144 under the Securities Act. These shares, along with the shares of common stock sold in this offering, represent approximately 50.4% of our outstanding shares of common stock. -8- Further, we have options and warrants outstanding to purchase 2,502,963 shares of our common stock, of which options and warrants to purchase 2,440,109 shares are immediately exercisable. The underlying shares of common stock will be available for sale one year after the date of exercise subject to the restrictions set forth in Rule 144 under the Securities Act. The sale of a substantial number of shares of our common stock within a short period of time after the closing of this offering could cause our stock price to fall. In addition, the sale of these shares could impair our abilities to raise capital through the sale of additional common stock. AS A RESULT OF OUR PRO FORMA NET TANGIBLE BOOK DEFICIT OF $0.24 PER SHARE, INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF APPROXIMATELY $6.90 PER SHARE, OR 76.7%, AND DISPARITY IN STOCK PURCHASE PRICE The initial public offering price is expected to be substantially higher than our pro forma net tangible book deficit of $0.24 per share at March 31, 2000. Accordingly, investors in this offering will experience immediate and substantial dilution of approximately $6.90 in net tangible book value per share, or approximately 76.7% of the assumed offering price of $9.00 per share. In contrast, stockholders as of March 31, 2000 paid an average price of $3.26 per share. Investors will incur additional dilution upon the exercise of outstanding stock options and warrants. DUE TO THE OUTSTANDING OPTIONS AND WARRANTS TO PURCHASE 2,502,963 SHARES OF COMMON STOCK, INCLUDING OPTIONS GRANTED IN 2000 TO OUR EXECUTIVE OFFICERS TO PURCHASE 697,844 SHARES OF COMMON STOCK, INVESTORS IN THIS OFFERING MAY EXPERIENCE ADDITIONAL DILUTION WITH RESPECT TO THE STOCK PURCHASE PRICE AND THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING We have outstanding options and warrants to purchase 2,502,963 shares of common stock at exercise prices ranging from $1.00 to $16.00 per share. Of this amount, during the six months ended June 30, 2000, we issued to our executive officers options to purchase 697,844 shares of common stock at exercise prices ranging from $4.00 to $9.60. To the extent that all or a portion of those options and warrants are exercised, the investors in this offering will experience additional dilution with respect to the stock purchase price and the number of shares of common stock outstanding. Even though the investors in this offering risk additional dilution, all of our executive officers are subject to lock-up agreements which prohibit, without the underwriter's consent, the offer or sale of any common stock within the first 18 months after the closing of this offering, the offer or sale of more than 10% of our outstanding common stock in any of the two calendar quarters immediately following the initial 18-month period, and, in any of the next four calendar quarters thereafter, the offer or sale of more than the lesser of 25% of our outstanding common stock or the amount subject to the volume limitation prescribed by Rule 144 under the Securities Act. DUE TO OUR ONE-YEAR FINANCIAL CONSULTING AGREEMENT WITH DONALD SECURITIES & CO. INC. AND OUR TWO-YEAR OBLIGATION NOT TO SELL SECURITIES OR ISSUE ANY OPTIONS OR WARRANTS TO PURCHASE OUR SECURITIES BELOW THE THEN CURRENT MARKET PRICE, OUR ABILITY TO RAISE ADDITIONAL CAPITAL IN THE FUTURE MAY BE IMPAIRED We have entered into a one-year financial consulting agreement with Donald. Pursuant to this agreement, we will receive financial advisory and investment banking services from Donald in exchange for a fee of $72,000, payable at a rate of $6,000 per month. In addition, pursuant to our underwriting agreement with Donald, Donald has the right to appoint a designee to be an advisor to our board. This advisor will not be entitled to vote, but will be entitled to the same notices given and compensation paid to the members of our board. Pursuant to the underwriting agreement with Donald, we have also agreed not to sell securities or issue options or warrants to purchase our securities below the current market price for two years. As a result of these obligations, Donald may be able to influence our future operations and our access to capital markets may be restricted. If our ability to raise additional capital is impaired, we may not be able to support our operations in the future. -9- SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION Some of the information in this prospectus contains forward-looking statements within the meaning of the federal securities laws. These statements include, among others, the following: - the use of proceeds of this offering; - those pertaining to the implementation of our operating and growth strategy; and - our projected capital expenditures. These statements may be found under "Prospectus Summary," "Risk Factors," "Dividend Policy," "Capitalization," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements typically are identified by use of terms such as "may," "will," "would," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including: - our ability to achieve corporate contracts with large hotel chains and definitive agreements with franchisees; - our successful management of new product development; - our ability to outsource the manufacture and assembly of our products effectively; - our ability to finance our products effectively and profitably; - our ability to maintain and expand our revenue sharing program; - our ability to compete effectively in the lodging industry; - our ability to successfully diversify into the international, healthcare, cruise ship and time-share markets; - our ability to manage expansion effectively; and - general economic and business conditions in our markets and industry. You should also consider carefully the statements under "Risk Factors" and other sections of this prospectus, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. -10- USE OF PROCEEDS We estimate that the net proceeds from the sale of the shares of common stock we are offering will be approximately $14.0 million, or approximately $16.2 million if the underwriters' over-allotment option is exercised in full. "Net proceeds" are what we expect to receive after paying the underwriting discount and related offering expenses. Assuming the underwriter does not exercise the over-allotment option, we expect to pay an underwriting discount and non-accountable expense allowance of $1,417,500 and expenses related to this offering of approximately $820,000. For the purpose of estimating net proceeds, we are assuming that the public offering price will be $9.00 per share. We intend to use the net proceeds from the sale of the shares for the following purposes and in the following amounts and percentages:
PROPOSED USE AMOUNT PERCENTAGE ------------ ------ ---------- Funding for production and installation of eRoomSystems, Refreshment Centers and eRoomSafes.............................................. $ 5,320,000 38.1% Repayment of a substantial portion of our outstanding indebtedness and related accrued interest............................................ 3,990,000 28.6% Payment of cash dividends on our Series A convertible preferred stock.. 235,000 1.7% Payment of cash dividends on our Series C convertible preferred stock.. 11,000 0.1% Advertising and promotional expenses................................... 1,693,000 12.1% Research and development to improve our existing products and services and to develop our future products and services..................... 800,000 5.7% General corporate purposes and working capital......................... 1,911,000 13.7% ------------------ ------------------- TOTAL $ 13,960,000 100.0% ================== ===================
The proceeds allocated to the production and installation of Refreshment Centers and eRoomSafes will be used to purchase the components for the assembly of our Refreshment Centers and eRoomSafes and the materials for the installation of our Refreshment Centers and eRoomSafes. The proceeds allocated to the repayment of our outstanding indebtedness and related accrued interest have been calculated as of June 30, 2000. This outstanding indebtedness consists of the following: - Promissory notes bearing interest rates ranging from 10% to 15% per annum issued from 1996 to 1999 and related accrued interest in the aggregate amount of approximately $1,138,820, all of which are currently in default; - Promissory note bearing an interest rate of 10% per annum issued to RSG Investments, LLC, an entity in which John J. Prehn, one of our director designees, is a member, and related accrued interest in the amount of $818,750; - Promissory note issued to Ash Capital, LLC, an entity controlled by Dr. Alan C. Ashton, one of our director designees, and related accrued interest in the amount of $287,405; - Repayment of bridge loan bearing an interest rate of 9% per annum and related accrued interest in the amount of $1,528,849; and - Convertible subordinated promissory notes bearing an interest rate of 7% per annum issued in conjunction with our Series C convertible preferred stock and related accrued interest in the amount of $216,062. -11- On September 28, 1999, we entered into an Equipment Transfer Agreement with RSG Investments whereby we executed in favor of RSG Investments a promissory note in the original principal amount of $750,000. This promissory note bears an interest rate of 10% per annum and is payable on August 1, 2000. Since this promissory note was issued in conjunction with the satisfaction of our prior obligations to RSG Investments, we did not receive any proceeds from the issuance of this promissory note. On February 15, 2000, Ash Capital loaned us $500,000 in the form of a promissory note bearing an interest rate of 10% per annum and payable on July 31, 2000. We used the proceeds from this loan for the production and installation of eRoomSystems and Refreshment Centers and general and administrative expenses. We have made payments of $228,685 on this promissory note as of June 30, 2000. On April 12, 2000, we closed our private placement of units, each unit consisting of 7% Series C convertible preferred stock, a convertible subordinated promissory note and warrants to purchase common stock. We used the gross proceeds of $850,000 from this private placement for the production and installation of eRoomSystems, Refreshment Centers and eRoomSafes and general and administrative expenses. On April 13, 2000, we issued a subordinated promissory note in the original principal amount of $1,500,000, bearing interest at the rate of 9% per annum, or the bridge loan, and 200,000 shares of common stock in conjunction with the bridge loan. We used the proceeds from the bridge loan to fund the production and installation of eRoomSystems, Refreshment Centers and eRoomSafes and general and administrative expenses. The above discussion represents our present intentions for the use of the proceeds of this offering based on our currently contemplated operations, business plan and the prevailing economic and industry conditions. Changes in the use of proceeds of this offering may be made in response to changes in our financial condition, business plans or growth strategy and changes in general industry conditions. -12- DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. Our board presently, and for the foreseeable future, intends to retain all of our earnings, if any, for the development of our business. The declaration and payment of cash dividends in the future will be at the discretion of our board and will depend upon a number of factors, including, among others, our future earnings, operations, funding requirements, restrictions under our credit facility, our general financial condition and any other factors that our board considers important. Investors should not purchase our common stock with the expectation of receiving cash dividends. The terms of our outstanding shares of Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock provide for annual cumulative dividends of 8%, 6% and 7%, respectively. Although no cash dividends have been paid to date to holders of our Series A convertible preferred stock, holders of such preferred stock have accrued cash dividends of $234,343 as of June 30, 2000. As for our Series B convertible preferred stock, we have issued dividends of $328,794 in the form of 83,446 shares of common stock as of June 30, 2000. With respect to our Series C convertible preferred stock, holders of such preferred stock have accrued cash dividends of $10,126 as of June 30, 2000. We intend to pay all accrued dividends to holders of Series A convertible preferred stock and holders of Series C convertible preferred stock from the net proceeds of this offering. Upon the closing of this offering, no shares of Series A, Series B or Series C convertible preferred stock will be outstanding and, as a result, no further dividends will accrue. -13- CAPITALIZATION The following table sets forth our capitalization as of March 31, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of our outstanding shares of Series A, Series B and Series C convertible preferred stock at March 31, 2000 into 2,048,046 shares of our common stock and recognition of beneficial conversion features, as adjusted; and - on a pro forma as adjusted basis to reflect: - the conversion of our currently outstanding shares of Series A, Series B and Series C convertible preferred stock into 2,070,776 shares of our common stock and recognition of beneficial conversion features, as adjusted; - the immediate amortization of our $1,385 debt discount and the issuance of 7,500 warrants valued at $9,148 related to the Series C convertible preferred stock; - the issuance of the bridge loan, including the issuance of 200,000 shares of common stock, of which $1,051,402 was allocated to debt and $440,374 to common stock; - the issuance of 1,800,000 shares of common stock by us in this offering at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as well as the payment of $3,583,919 in notes payable and $405,967 in accrued interest; and - the issuance of 42,813 shares of common stock valued at $130,773 for accrued interest and dividends between April 1, 2000 and June 30, 2000, and the issuance of 777 shares of common stock to an employee, valued at $2,487.
AS OF MARCH 31, 2000 ----------------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED --------------- --------------- -------------- Notes payable and current portion of long-term debt and capital lease obligations................................. $ 2,139,048 $ 2,139,048 $ 1,017,629 =============== =============== ============== Long-term debt and capital lease obligations, net of current portion................................................... $ 994,413 $ 994,413 $ 69,413 --------------- --------------- -------------- Stockholders' equity (deficit): Series A convertible preferred stock, $0.001 par value; 500,000 shares authorized, 360,000 shares outstanding (actual), none outstanding (pro forma and pro forma as adjusted)......................... 1,332,953 - - Series B convertible preferred stock, $0.001 par value; 2,500,000 shares authorized, 2,081,680 shares outstanding (actual), none outstanding (pro forma and pro forma as adjusted)................... 6,482,592 - - Series C convertible preferred stock, $0.001 par value; 2,000,000 shares authorized, 161,535 shares outstanding (actual), none outstanding (pro forma and pro forma as adjusted)......................... 456,407 - - Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares outstanding (actual, pro forma and pro forma as adjusted)...... - - - Common stock, $0.001 par value; 50,000,000 shares authorized, 2,109,387 shares outstanding (actual), 4,157,433 (pro forma) and 6,223,753 (pro forma as adjusted).......................................... 2,110 4,158 6,224 Additional paid-in capital............................... 5,961,583 19,145,745 33,784,670 Warrants and options outstanding......................... 1,454,309 1,454,309 1,463,457 Notes receivable from stockholders....................... (615,000) (615,000) (615,000) Accumulated deficit...................................... (15,364,767) (20,279,025) (20,862,267) --------------- --------------- -------------- Total stockholders' equity (deficit)................. (289,813) (289,813) 13,777,084 --------------- --------------- -------------- Total capitalization.............................. $ 704,600 $ 704,600 $ 13,846,497 =============== =============== ==============
-14- DILUTION Our pro forma net tangible book value (deficit) as of March 31, 2000 was approximately $(989,000), or $(0.24) per share of common stock. Pro forma net tangible book value (deficit) per share is determined by dividing the amount of our pro forma tangible assets less total liabilities by the pro forma number of shares of common stock outstanding at that date. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the issuance and sale of the shares of common stock offered by us at an assumed initial public offering price of $9.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the estimated net proceeds from this offering, our pro forma as adjusted net tangible book value as of March 31, 2000 would have been approximately $13,078,345, or $2.10 per share. This represents an immediate increase in pro forma net tangible book value to our existing stockholders of $2.34 per share and an immediate dilution to purchasers in this offering of $6.90 per share, or 76.7% of the assumed initial public offering price of $9.00 per share. If the initial public offering price is higher or lower, the dilution to purchasers in this offering will be greater or less, respectively. The following table illustrates the dilution on a per share basis: Assumed initial public offering price per share........................... $ 9.00 Pro forma net tangible book deficit per share at March 31, 2000......... $ (0.24) Increase in pro forma net tangible book value per share attributable to this offering........................................................ 2.34 ---------- Pro forma as adjusted net tangible book value per share after this offering................................................................ 2.10 ---------- Dilution per share to new investors....................................... $ 6.90 ==========
Assuming the exercise in full of the underwriters' over-allotment option, our pro forma as adjusted net tangible book value at March 31, 2000 would have been approximately $2.36 per share, representing an immediate increase in pro forma net tangible book value of $2.60 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $6.64 per share to purchasers in this offering. The following table summarizes, on a pro forma basis as of March 31, 2000, the differences between the number of shares of common stock purchased from us, the aggregate effective cash consideration paid to us and the average price per share paid by existing stockholders and new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $9.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
SHARES PURCHASED TOTAL CONSIDERATION ---------------------------- ----------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------------- --------- ---------------- -------- ---------------- Existing stockholders............ 4,421,699 71% $ 14,381,278 47% $ 3.26 New investors.................... 1,800,000 29% 16,200,000 53% $ 9.00 =============== ========= ================ ========= Total....................... 6,221,699 100% $ 30,581,278 100% =============== ========= ================ =========
This discussion and table assumes no exercise of any stock options and warrants outstanding as of March 31, 2000, and includes the conversion of Series A, Series B and Series C convertible preferred stock into common stock. As of March 31, 2000, there were options and warrants outstanding to purchase a total of 2,490,317 shares of common stock with a weighted average exercise price of $5.78 per share. To the extent that any of these options and warrants are exercised, there will be further dilution to new investors. -15- SELECTED FINANCIAL DATA This section presents selected historical financial data of eRoomSystem Technologies. You should read carefully the financial statements included in this prospectus, including the notes to the financial statements. The selected information in this section is not intended to replace the financial statements. We derived the selected consolidated statement of operations data presented below for each of our 1998 and 1999 fiscal years and the balance sheet data at December 31, 1998 and 1999 from our audited consolidated financial statements appearing elsewhere in this prospectus. We derived the selected consolidated statement of operations data presented below for each of our 1995, 1996 and 1997 fiscal years and the balance sheet data at December 31, 1995, 1996 and 1997 from our audited financial statements not appearing in this prospectus. We derived the selected consolidated statement of operations date below for each of our March 31, 1999 and 2000 three month periods provided and the balance sheet data at March 31, 2000 from our unaudited interim consolidated financial statements.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------ ----------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ---------- ---------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Product sales..................... $ 169 $ 360 $ 4,431 $ 917 $ 144 $ - $ - Revenue sharing arrangements...... 129 269 133 46 213 64 9 Maintenance fees.................. 58 81 102 48 183 50 40 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Total revenue.................. 356 710 4,666 1,011 540 114 49 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Cost of revenue: Product sales..................... 221 625 3,203 711 118 - - Revenue sharing arrangements...... 50 110 55 21 166 40 7 Maintenance fees.................. 30 69 81 61 78 5 7 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Total cost of revenue.......... 301 804 3,339 793 362 45 14 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Gross margin (deficit).............. 55 (94) 1,327 218 178 69 35 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Operating expenses: Selling general and administrative (exclusive of non cash compensation).................... 771 1,439 1,231 2,058 2,388 422 520 Research and development (exclusive of non cash compensation)........ 89 271 216 284 271 73 50 Non cash compensation expense..... - - 99 4 105 - 492 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Total operating expenses....... 860 1,710 1,546 2,346 2,764 495 1,062 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Loss from operations................ (805) (1,804) (219) (2,128) (2,586) (426) (1,027) ----------- ----------- ---------- ---------- ----------- ----------- ---------- Other income (expense): Interest expense.................. (73) (430) (809) (1,923) (1,445) (341) (303) Equity in income of unconsolidated, wholly owned subsidiary.......... - - - - 148 - 88 Interest and other income......... 1 15 28 313 211 67 2 ----------- ----------- ---------- ---------- ----------- ----------- ---------- Other income (expense), net.... (72) (415) (781) (1,610) (1,086) (274) (213) ----------- ----------- ---------- ---------- ----------- ----------- ---------- Loss before extraordinary loss...... (877) (2,219) (1,000) (3,738) (3,672) (700) (1,240) Extraordinary loss, net of income taxes............................. - - - (407) - - - ----------- ----------- ---------- ---------- ----------------------- ---------- Net loss............................ $ (877) $ (2,219) $ (1,000) $ (4,145) $ (3,672) $ (700) $ (1,240) =========== =========== ========== ========== =========== =========== ========== Dividends related to convertible preferred stock................... $ - $ - $ - $ (19) $ (607) $ (36) $ (441) =========== =========== ========== ========== =========== =========== ==========
-16-
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------ ----------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ---------- ---------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Loss attributable to common stockholders...................... $ (877) $ (2,219) $ (1,000) $ (4,164) $ (4,279) $ (736) $ (1,681) =========== =========== ========== ========== =========== =========== ========== Basic and diluted loss per common share............................. $ (1.56) $ (2.61) $ (0.76) $ (1.37) $ (1.33) $ (0.21) $ (0.76) =========== =========== ========== ========== =========== =========== ========== Basic and diluted weighted average common shares outstanding......... 560 850 1,314 3,029 3,221 3,545 2,197 =========== =========== ========== ========== =========== =========== ========== Basic and diluted supplemental pro forma loss per common share....... $ (1.84) $ (1.66) =========== ========== Basic and diluted supplemental pro forma weighted average common shares outstanding................ 5,163 4,245 =========== ========== BALANCE SHEET DATA: Cash................................ 236 188 330 2 113 15 Working capital deficit............. (666) (2,191) (3,702) (3,358) (2,651) (3,272) Total assets........................ 1,316 2,911 2,429 2,520 4,351 5,042 Long-term liabilities............... 1,270 2,340 83 63 867 994 Total stockholders' deficit......... (986) (2,666) (2,441) (2,428) (24) (290)
- ----------- (1) See Note 2 of the notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. -17- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and notes to our financial statements, included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors," "Special Note Regarding Forward-Looking Information" and elsewhere in this prospectus. OVERVIEW We design, assemble and market our eRoomSystem, an intelligent, in-room computer platform and communications network. The eRoomSystem supports our line of fully-automated and interactive Refreshment Centers and electronic eRoomSafes, and other proposed applications for use in the lodging and other industries. Historically, we have installed our principal products, our Refreshment Centers and eRoomSafes, in hotels. Our proprietary eRoomSystem uses our patented credit card technology that integrates with our file server located at the hotel, or the eRoomSystem file server. DESCRIPTION OF REVENUES In the past, we have received substantially all of our revenues from the sale or placement under a revenue sharing program of our products in hotels in the lodging industry, and we expect that these revenues will account for a substantial majority of our revenues for the foreseeable future. We also generate revenues from maintenance and support services. Our dependence on the lodging industry, including their guests, makes us vulnerable to downturns in the lodging industry caused by the general economic environment. Such a downturn could result in some hotels delaying or declining to purchase or place our products or failing to renew our maintenance agreements, or it could result in fewer purchases by hotel guests of goods and services from our products installed in hotels. Time spent by individuals on travel and leisure is typically discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of our operations depends, in part, upon discretionary consumer spending and economic conditions affecting disposable consumer income such as employment, wages and salaries, business conditions, interest rates, availability of credit and taxation. Historically, we have been restricted in our ability to market our products due to limited working capital. Prior to 1998, our marketing efforts focused primarily on selling our products. In 1998, as a result of the lodging industry's general lack of available financing or capital for the purchase of equipment, we modified our business model to emphasize our revenue sharing program as our primary product placement program. As a result of our shift in focus to our revenue sharing program, our gross revenues decreased in 1998 and 1999 and significantly greater capital requirements were added to our business model. However, our revenue sharing program provides us with an ongoing seven-year revenue stream under each revenue sharing agreement. Because many of our customers in the lodging industry traditionally have limited capacity to finance the purchase of our products, we designed our revenue sharing program to require little or no upfront cost to our customers. Through our revenue sharing plan, we install our products at little or no cost to our customers and share in the recurring revenues generated from sales of goods and services related to our products. Ownership of the eRoomSystems, Refreshment Centers and eRoomSafes is retained by us throughout the term of the revenue sharing agreements. We retain the right to re-deploy any systems returned to us upon the expiration or earlier termination of the revenue sharing agreements. We believe that our revenue sharing program will increase future placements of our products; however, we cannot assure you that we will be successful in this effort. We have experienced substantial fluctuations in revenues from period-to-period as a result of limited working capital to fund the assembly of our products and to maintain sufficient component inventories. In addition to limited working capital, fluctuations in revenues have partially resulted from the transition to our revenue sharing program under which revenues are recognized over the seven-year life of the contract instead of immediately upon installation of the product. We expect that for the foreseeable future, the majority of our revenues will result from the placement of our products pursuant to our revenue sharing program, followed by sales and, to a lesser extent, from maintenance -18- agreements. We project that we will receive approximately 60% of the recurring revenues from the sale of goods generated by the eRoomSystems, Refreshment Centers and eRoomSafes placed under the revenue sharing agreements. Our customers receive the remainder of the recurring revenues. Amresco will be paid from our portion of the revenues. Over the term of a revenue sharing agreement, we estimate that the revenues over the initial years are sufficient for us to recover our costs. We have installed more than 11,500 Refreshment Centers and 4,000 eRoomSafes primarily in the United States, as well as in Brazil and the Bahamas. We intend to continue to offer our products domestically and internationally to the lodging industry, and tailor our products and services for introduction into the healthcare, time-share and cruise line industries. We anticipate that a significant portion of our future revenues will be derived from these markets; however, we cannot assure you that we will be successful in this effort. We also plan to increase our revenues in the foreseeable future by bundling additional products and services with our current products, such as our in-room energy management system, a thin client network which consists of a centrally-managed network of computers configured with only essential equipment and without CD-ROM drives, diskette drives and peripheral expansion slots, a high-speed wired and wireless communications network allowing for Internet and intranet access, and information management services. We anticipate that as the installation base of our products increases, the marketability and value of the information we collect and manage will increase. We also expect to generate revenue from the packaging and marketing of our information-based data as our installation base expands. REVENUE RECOGNITION Revenues from sales of our products are recognized upon completion of installation and acceptance by the customer. Revenues from the placement of our Refreshment Centers and eRoomSafes under our revenue sharing program are accounted for similar to an operating lease with the revenues recognized as earned over the term of the agreement. In some instances, our revenue sharing agreements provide for a guaranteed minimum daily payment by the hotel. We negotiate our portion of the revenues generated under our revenue sharing program based upon the cost of the equipment installed and the estimated daily sales per unit for the specific customer. We seek a gross profit margin of approximately 40% on either the sale, or placement through our revenue sharing program, of Refreshment Centers and eRoomSafes. We enter into installation, maintenance and license agreements with our customers. Installation, maintenance and license revenues are recognized as the services are performed, or pro rata over the service period. We defer all revenue paid in advance relating to future services and products not yet installed and accepted by our customers. We anticipate profit margins will increase as a result of greater placement of our products pursuant to our revenue share program. We also expect to improve our future profit margins if we are successful in obtaining revenues through the sale of higher-priced, higher-margin, value added products such as our proposed in-room energy management system, high-speed wired and wireless communication network for use with the Internet and the intranet and our information management services. Maintenance fees are expected to constitute a greater percentage of total revenues in the future due to our focus on revenues generated from our revenue sharing program, which requires maintenance agreements. Our installation, maintenance and license agreements stipulate that we collect a maintenance fee per Refreshment Center per day to be paid monthly. We expect to generate gross profit margins of 50% from our maintenance-related revenues. We base this expectation on our historical cost of maintenance of less than $0.04 per unit per day and, pursuant to our maintenance agreements, our projected receipt of $0.08 per unit per day. DESCRIPTION OF EXPENSES Cost of product sales consists primarily of production, shipping and installation costs. Cost of revenue sharing arrangements consists primarily of depreciation of capitalized costs for the products placed in service. We capitalize the production, shipping, installation and sales commissions related to the Refreshment Centers and eRoomSafes placed under revenue sharing agreements. Cost of maintenance fee revenues primarily consists of expenses related to customer support and maintenance. -19- Selling, general and administrative expenses include selling expenses consisting primarily of advertising, promotional activities, trade shows and personnel-related expenses and general and administrative expenses consisting primarily of professional fees, salaries and related costs for accounting, administration, finance, human resources, information systems and legal personnel. Research and development expenses consist of payroll and related costs for hardware and software engineers, quality assurance specialists, management personnel, and the costs of materials used by these employees in the development of new or enhanced product offerings. In accordance with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our consolidated statements of operations. RESULTS OF OPERATIONS The following table sets forth selected statement of operations data as a percentage of total revenues for the years and three month periods indicated:
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, 1998 1999 1999 2000 -------------- -------------- -------------- -------------- Statement of Operations Data: Revenue: Product sales.......................................... 90.6% 26.7 0.0% 0.0% Revenue share arrangements............................. 4.6 39.5 56.5 18.7 Maintenance fees....................................... 4.8 33.8 43.5 81.3 -------------- -------------- -------------- -------------- Total revenue....................................... 100.0 100.0 100.0 100.0 -------------- -------------- -------------- -------------- Cost of revenue: Product sales.......................................... 70.3 21.8 -- -- Revenue share arrangements............................. 2.1 30.7 34.6 14.4 Maintenance............................................ 6.0 14.6 4.6 14.3 -------------- -------------- -------------- -------------- Total cost of revenue............................... 78.4 67.1 39.2 28.7 -------------- -------------- -------------- -------------- Gross margin.............................................. 21.6 32.9 60.8 71.3 -------------- -------------- -------------- -------------- Operating expenses: Selling, general and administrative (exclusive of non-cash compensation)................................ 203.5 441.8 370.9 1,059.8 Research and development (exclusive of non-cash compensation)......................................... 28.1 50.2 64.3 101.4 Non cash compensation expense (income)................. 0.4 19.4 -- 1,001.7 -------------- -------------- -------------- -------------- Total operating expenses............................ 232.0 511.4 435.2 2,162.9 -------------- -------------- -------------- -------------- Loss from operations...................................... (210.4) (478.5) (374.4) (2,091.6) -------------- -------------- -------------- -------------- Other income (expense): Interest expense....................................... (190.1) (267.2) (299.7) (618.4) Equity in income of unconsolidated, wholly owned subsidiary............................................ -- 27.3 -- 179.8 Interest and other income.............................. 30.9 39.0 59.1 4.8 -------------- -------------- -------------- -------------- Other expense, net.................................. (159.2) (200.9) (240.6) (433.8) -------------- -------------- -------------- -------------- Loss before income taxes and extraordinary loss........... (369.6) (679.4) (615.0) (2,525.4) Loss before extraordinary loss............................ (369.6) (679.4) (615.0) (2,525.4) Extraordinary loss, net of income taxes................... (40.3) -- -- -- -------------- -------------- -------------- -------------- Net loss.................................................. (409.9)% (679.4)% (615.0)% (2,525.4)% ============== ============== ============== ============== Dividends related to convertible preferred stock.......... (1.8) (112.3) (31.2) (897.7) ============== ============== ============== ============== Loss attributable to common stockholders.................. (411.7)% (791.7)% (646.2)% (3,423.1)% ============== ============== ============== ==============
-20- THREE MONTHS ENDED MARCH 31, 2000 AND 1999 REVENUES Product Sales -- We did not recognize revenue from product sales in the three months ended March 31, 1999 or March 31, 2000. The lack of revenue from product sales is consistent with our continued emphasis to place our products pursuant to our revenue sharing arrangement. Revenue Sharing Arrangements -- Our revenue from revenue sharing arrangements was $64,341 for the three months ended March 31, 1999 and $9,162 for the three months ended March 31, 2000, representing a decrease of $55,179, or 86%. In September 1999, we transferred approximately 2,000 Refreshment Centers under revenue share arrangements to RSi BRE, an unconsolidated, wholly owned subsidiary. Because RSi BRE is not consolidated, the related revenues are not included in our financial statements. Rather, we record our equity in RSi BRE's income for each respective period. The revenue sharing revenue for these units was recognized as revenue sharing income during the three months ended March 31, 1999. Subsequent to the transfer of the revenue sharing units in September 1999, we produced and installed approximately 800 additional Refreshment Centers and approximately 800 eRoomSafes through the three months ended March 31, 2000 which have been transferred to RSi BRE. Maintenance Fee Revenues -- Our maintenance fee revenues were $49,567 for the three months ended March 31, 1999 and $39,937 for the three months ended March 31, 2000, representing a decrease of $9,630, or 19%, from the three months ended March 31, 1999 to the three months ended March 31, 2000. The decrease from the three months ended March 31, 1999 to the three months ended March 31, 2000 was due primarily to the expiration of maintenance contracts representing 753 units. COST OF REVENUE Cost of Product Sales Revenue -- We did not realize any cost of product sales revenue during the three months ended March 31, 1999 or during the three months ended March 31, 2000. Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue was $39,409 during the three months ended March 31, 1999 and $7,073 during the three months ended March 31, 2000, representing a decrease of $32,336, or 82%. The gross margin percentage on revenue sharing revenue was 39% in the three months ended March 31, 1999 and 23% in the three months ended March 31, 2000. The decrease in gross margin percentage on revenue sharing revenue from the three months ended March 31, 1999 to the three months ended March 31, 2000 resulted from the impact of placing more expensive Refreshment Centers, which included eRoomSafes, without a corresponding increase in the related revenues. We have adjusted the percentage of revenues allocated to us to provide for a higher percentage of revenues for units including eRoomSafes. Cost of Maintenance Revenue -- Our cost of maintenance revenue was $5,260 in the three months ended March 31, 1999 and $7,020 in the three months ended March 31, 2000 representing an increase of $1,760, or 33%. The gross margin percentage on maintenance revenues was 89% in the three months ended March 31, 1999 and 82% in the three months ended March 31, 2000. The decrease in gross margin percentage from the three months ended March 31, 1999 to the three months ended March 31, 2000 was mainly due to the expiration of contracts representing 753 units and our reduced revenue to cover fixed costs associated with the cost of maintenance revenue. OPERATING EXPENSES Selling, General and Administrative -- Selling, general and administrative expenses, exclusive of non-cash compensation expense (income), were $422,442 in the three months ended March 31, 1999 and $520,344 in the three months ended March 31, 2000, representing an increase of $97,902, or 23%. Selling, general and administrative expenses represented 371% of our total revenues in the three months ended March 31, 1999 and 1060% of our total revenues in the three months ended March 31, 2000. The increase from the three months ended -21- March 31, 1999 to the three months ended March 31, 2000 was primarily due to the increase of staffing in anticipation of increased product placement activity in subsequent quarters. Research and Development Expenses -- Research and development expenses were $73,231 in the three months ended March 31, 1999 and $49,788 in the three months ended March 31, 2000, representing a decrease of $23,443, or 32%. Research and development expenses represented 64% of our total revenue in the three months ended March 31, 1999 and 101% of our total revenue in 1999. The decrease in research and development expenses resulted from the reorganization of the research and development department in an effort to maximize the efficiency of its operation. Non-Cash Compensation Expense -- Non-cash compensation expense was $0 in the three months ended March 31, 1999 and $491,825 in the three months ended March 31, 2000. The non-cash compensation expense recorded in the three months ended March 31, 2000 resulted from payments in the form of options to purchase common stock and payments in the form of common stock to consultants of the company. Other Income (Expense), Net -- Other expense was $274,093 in the three months ended March 31, 1999 and $213,018 in the three months ended March 31, 2000, representing a decrease of $61,075, or 22%. The decrease is due primarily to the recognition of $88,296 in equity income from a wholly owned subsidiary, RSi BRE and reduced interest expense related to the amortization of deferred financing costs. Income Taxes -- We had net deferred tax assets, including our net operating loss carryforwards and other temporary differences between book and tax deductions, that total approximately $3.9 million as of March 31, 2000. A valuation allowance in the amount of $3.9 million has been recorded as of March 31, 2000 as a result of uncertainties regarding the realizability of the net deferred tax assets. LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS We incurred losses attributable to common stockholders of $736,034 and $1,680,726 during the three months ended March 31, 1999 and 2000, respectively. The $944,692 increase in the loss attributable to common stockholders was due primarily to the non-cash compensation expense discussed above and a $405,250 increase in dividends related to our convertible preferred stock. We have continued to incur losses subsequent to March 31, 2000 and, as a result, have experienced an increase in accumulated deficit. We believe that we will continue to incur losses for a period of time. YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES Product Sales -- Our product sales revenue was $916,650 in 1998 and $144,282 in 1999, representing a decrease of $772,368, or 84%, from 1998 to 1999. During 1998, we shifted our focus from selling products to placing products pursuant to our revenue sharing program. Additionally, during 1998, we produced and placed approximately 2,000 refreshment centers under revenue share arrangements which subsequently have been transferred to RSi BRE, an unconsolidated, wholly owned subsidiary. Because RSi BRE is not consolidated, the related revenues are not included in our financial statements. Rather, we record our equity in RSi BRE's income for each respective period. The decrease from 1998 to 1999 was due to our transition from product sales to placement of our products pursuant to our revenue sharing program, a lack of sufficient working capital and an additional 436 refreshment centers which were produced and installed in 1999, but which have been transferred to RSi BRE. Revenue Sharing Arrangements -- Our revenue from revenue sharing arrangements was $46,524 in 1998 and $213,654 in 1999, representing an increase of $167,130, or 359%, from 1998 to 1999. During 1998, we began placing products under revenue sharing arrangements after we shifted our focus from sales of products. The increase from 1998 to 1999 was due to our continuing transition from product sales to placement of our products pursuant to our revenue sharing program. -22- Maintenance Fee Revenues -- Our maintenance fee revenues were $48,288 in 1998 and $182,581 in 1999, representing an increase of $134,293, or 278%, from 1998 to 1999. The increase from 1998 to 1999 was due primarily to maintenance revenues we earn related to the Refreshment Centers owned by RSi BRE. We perform the maintenance of the RSi BRE units and accordingly receive the maintenance revenues. The increase is also due to our placement of additional products pursuant to our revenue sharing program. COST OF REVENUE Cost of Product Sales Revenue -- Our cost of product sales revenue was $711,355 in 1998 and $118,010 in 1999, representing a decrease of $593,345, or 83%, from 1998 to 1999. The gross margin percentage on product sales was 22% in 1998 and 18% in 1999. The decrease in gross margin percentage on product sales from 1998 to 1999 primarily resulted from further reductions in production and corresponding increases in the cost per unit, and fixed costs from unapplied overhead costs. Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue was $21,104 in 1998 and $165,995 in 1999, representing an increase of $144,891, or 687%, from 1998 to 1999. The gross margin percentage on revenue sharing revenue was 55% in 1998 and 22% in 1999. The decrease in gross margin percentage on revenue sharing revenue from 1998 to 1999 resulted from the impact of placing more expensive Refreshment Centers, which included eRoomSafes, without a corresponding increase in the related revenues. When we initially began including eRoomSafes with Refreshment Centers, our intent was that a separate charge would be paid by the hotel guest for use of the safe. However, separate charges were not consistently implemented by the hotels. Subsequently, we have adjusted the percentage of revenues allocated to us when eRoomSafes are included. Cost of Maintenance Revenue -- Our cost of maintenance revenue was $60,797 in 1998 and $78,518 in 1999 representing an increase of $17,721, or 29%, from 1998 to 1999. The gross margin percentage on maintenance revenues was (26%) in 1998 and 57% in 1999. The increase in gross margin percentage from 1998 to 1999 was mainly due to the placement of additional units which enabled us to cover our fixed overhead costs. OPERATING EXPENSES Selling, General and Administrative -- Selling, general and administrative expenses, exclusive of non-cash compensation expense, were $2,058,150 in 1998 and $2,387,811 in 1999, representing an increase of $329,661, or 16%, from 1998 to 1999. Selling, general and administrative expenses represented 204% of our total revenues in 1998 and 442% of our total revenues in 1999. The increase from 1998 to 1999 was primarily due to the creation of an allowance for bad debts on notes receivable to purchase shares of preferred stock. Research and Development Expenses -- Research and development expenses were $284,532 in 1998 and $271,230 in 1999, representing a decrease of $13,302, or 5%, from 1998 to 1999. Research and development expenses represented 28% of our total revenue in 1998 and 50% of our total revenue in 1999. Non-Cash Compensation Expense -- Non-cash compensation expense was $3,955 in 1998 and $105,005 in 1999. The compensation expense recorded in 1998 related to the issuance of 908 options to a consultant for services rendered. During the year ended December 31, 1999, the non-cash compensation expense was due to the issuance of options to purchase 63,711 shares of common stock to non-employees for services rendered and the issuance of 3,134 shares of common stock for services rendered. Other Income (Expense), Net -- Interest expense was $1,922,638 in 1998 and $1,444,532 in 1999, representing a decrease of $478,106, or 25%, from 1998 to 1999. The decrease is due primarily to the conversion of $2.3 million of borrowings to equity during 1998 and the corresponding decrease in related interest expense and amortization of deferred financing costs. Income Taxes -- As of December 31, 1999, we had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $10.3 million that expire at various dates from 2008 to 2019. We had net deferred tax assets, including our net operating loss carryforwards and other temporary differences between book and tax deductions, total approximately $3.7 million as of December 31, 1999. A valuation allowance in the amount of -23- $3.7 million has been recorded as of December 31, 1999 as a result of uncertainties regarding the realizability of the net deferred tax assets. LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS We incurred losses attributable to common stockholders of $4,164,037 in 1998 and $4,279,444 in 1999. The increase in 1999 was due primarily to the $607,269 of dividends in 1999 offset by revenue and expenses discussed above and extraordinary loss on the extinguishment of debt of $407,000 during 1998. DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK During 1998, we obtained equity capital through the issuance of Series A convertible preferred stock which provides for annual cumulative dividends of 8%. The dividends on Series A convertible preferred stock represented $18,541 in 1998, $144,000 in 1999 and $35,901 in the three months ended March 31, 2000. Series A convertible preferred stock will convert to common stock upon the closing of this offering. In connection with the Series A convertible preferred stock, we will record an additional dividend of $1.8 million upon conversion which represents the contingent beneficial conversion feature, a conversion feature that provides for conversion at a ratio greater than one-to-one, that will accrue to the Series A convertible preferred stockholders at the date of conversion. During 1999, we obtained equity capital through the issuance of Series B convertible preferred stock which provides for annual cumulative dividends of 6%. The dividends on the Series B convertible preferred stock are payable in shares of common stock and represented $141,899 in 1999 and $93,460 in the three months ended March 31, 2000. Series B convertible preferred stock will convert to common stock upon the closing of this offering. In addition, the holders of Series B convertible preferred stock received a $1,249,008 beneficial conversion feature at the date of issuance and an additional $2,498,016 beneficial conversion feature on March 29, 2000 in connection with our three-for-four reverse stock split. In addition, the amendment and restatement of the Certificate of Designation for Series B convertible preferred stock on April 12, 2000 which modified the conversion rate required the recognition of an additional beneficial conversion feature. The beneficial conversion feature, as modified, is being accrued as a dividend between the date of issuance of the Series B convertible preferred stock and September 28, 2000, the date which the holders of Series B convertible preferred stock have the right to convert their shares of Series B convertible preferred stock into shares of common stock on a 1.5-for-1 basis. During March and April 2000, we obtained equity capital through the issuance of Series C convertible preferred stock which provides for annual cumulative dividends of 7%. As of March 31, 2000, there were no dividends accrued on the Series C convertible preferred stock. As of June 30, 2000, dividends of $10,126 have accrued. Since the Series C convertible preferred stock will be automatically converted into common stock upon the close of this offering, no additional dividends will accrue after the close of this offering. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2000, we had cash of $14,575 and a working capital deficit of $3,271,963 compared to cash of $113,252 and a working capital deficit of $2,650,616 at December 31, 1999. The decreases in cash and working capital were the result of cash being used in operations, investment in RSi BRE, increases in inventories and increases in deferred offering and financing costs. These uses of cash were offset, in part, by the proceeds from our Series C convertible preferred stock offering and the proceeds from the issuance of promissory notes. Our stockholders' deficit increased from $23,852 at December 31, 1999 to $289,813 at March 31, 2000. The increase in stockholders' deficit primarily resulted from the net loss for the three months ended March 31, 2000 net of proceeds received from equity financing. We anticipate that our accumulated deficit will continue to increase for a period of time. Our net cash used in operating activities for the three months ended March 31, 2000 was $708,129. Cash used in operating activities was primarily attributable to a net loss of $748,144, excluding non-cash compensation expense of $491,825. Our net cash used in operating activities for the year ended December 31, 1999 was $2,304,807. Cash used in operating activities was primarily attributed to a net loss. Our net cash used in operating activities for the year ended December 31, 1998 was $2,931,871, mostly due to a net loss of $4,145,496. This loss -24- was partially attributable to a non-cash loss on debt extinguishment of $407,000, non-cash interest expense of $813,409, amortization debt offering and financing costs of $560,921 and was partially offset by interest accrued on notes receivable from stockholders of $274,691. Our primary investing activities have historically consisted of expenditures relating to our revenue sharing program and for property and equipment. Investing activities for the three months ended March 31, 2000 consisted of purchases for equipment and additional investments in RSi BRE. Additionally in 1999, we invested $572,544 in RSi BRE. The expenditures in 1999 for Refreshment Centers were $1,711,105 compared to $246,161 for 1998. We expect our investing activity to increase significantly in the third and fourth quarter of 2000 due to an increased placement of our products under our revenue sharing program. Additionally, we anticipate that we will experience an increase in our capital expenditures and lease commitments for property and equipment consistent with anticipated growth in operations, infrastructure and personnel. Our financing activities provided $656,373 of cash for the three months ended March 31, 2000. For the three months ended March 31, 2000, cash provided from financing activities consisted of $357,177 received from the sale of preferred stock and $583,304 from borrowings on promissory notes. Our financing activities provided $2,900,872 and $4,712,097 for the years ended December 31, 1998 and 1999, respectively. In 1999, cash provided by financing activities consisted of $4,439,775 from the sale of preferred stock and warrants, $477,669 from borrowings, and $299,195 from notes payable to officers and stockholders. In 1999, cash used for financing activities consisted of $400,789 of payments on borrowings, $15,753 of payments on capital lease obligations, and $88,000 of deferred offering costs. In 1998, cash provided by financing activities consisted of $2,265,058 from borrowings and $390,043 and $600,275 from the sale of common and preferred stock, respectively. In 1998, cash used for financing activities consisted of $127,971 of payments on borrowings, $12,500 of payments on notes payable to a stockholder and officer, $9,190 of payments on capital lease obligations and $204,843 of offering costs. As of March 31, 2000, our debt, secured by our assets, consisted of $130,000 in notes issued in a 1996 private debt offering, $431,750 in notes issued in a 1997 private debt/equity offering, $35,115 in notes issued in a 1999 private debt offering, a $1,555,544 obligation payable to RSG Investments, a $100,000 note payable to an individual and a $500,000 note payable to a company. In connection with the restructuring of the obligation payable to RSG Investments, the carrying amount now consists of a $750,000 promissory note and $805,544 payable from the future cash flow stream of the units held by RSi BRE. As of March 31, 2000, our unsecured debt consisted of a $158,354 note payable to a corporation for services performed, $9,734 in notes payable to a bank and secured by vehicles, a $6,062 note an individual, a convertible promissory note $135,198, as well as $71,704 of capital lease obligations. As of March 31, 2000, we had an accumulated deficit of $15,338,759, and we were in default under a significant portion of our debt obligations. Additionally, we were past due with several of our accounts payable vendors which could affect our ability to procure inventory and services for our operations. We need to obtain additional financing to fund payment of past due and current debt obligations and to provide working capital for operations. With respect to our material commitments, we have entered into operating leases for our facilities and equipment and have entered into employment agreements with certain officers and key employees. We operate our facilities and equipment under non-cancelable operating leases with future minimum rental payments of $132,886, $119,836 and $104,030 for the years ending December 31, 2000, 2001 and 2002, respectively. The future minimum lease payments on capitalized leases are calculated to be $35,728, $35,728 and $27,776 for the years ending December 31, 2000, 2001 and 2002, respectively. Under our current agreements with our officers and key employees, we will pay base salaries of $829,592, $951,500 and $192,500 for the years ending December 31, 2000, 2001 and 2002, respectively. The decrease in base salaries for the year ended December 31, 2002 relates to the expiration of a substantial number of our current agreements with our officers and key employees during such period. In addition, the Company intends to hire an executive vice president of sales and marketing at an anticipated annual salary of $120,000. We believe that our current cash on hand, after receiving approximately $777,750 of net proceeds from the sale of units consisting of Series C convertible preferred stock, convertible promissory notes and warrants to purchase common stock, the $500,000 loan dated February 15, 2000 from Ash Capital, the $1.5 million bridge loan dated April 13, 2000 from a group of investors, together with the net proceeds from this offering and the funds from our long-term equipment financing arrangement will be sufficient to meet our capital expenditures and working -25- capital requirements, including those from our planned expansion, for at least the next twelve months. However, we may need to raise additional funds to support more rapid expansion, respond to competitive pressures, invest in our new technology offerings and other product offerings or respond to unanticipated requirements. We cannot assure you that additional funding will be available to us in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of additional product development opportunities, develop or enhance our products or services, or otherwise respond to competitive pressures would be significantly limited. FINANCING ARRANGEMENT WITH AMRESCO LEASING CORPORATION In 1999, we entered into the amended and restated program agreement with Amresco which represented an exclusive post-installation financing arrangement for the funding of units placed with domestic hotel customers under our revenue sharing agreements. On May 11, 2000, we replaced this agreement with a master business lease financing agreement. Under the terms of this agreement, we can finance up to 150% of the cost of purchase of our products, through an open-ended line of credit, over the seven-year term of the agreement. In the event that funding under this financing arrangement is in excess of $10 million, Amresco may securitize a portion of the outstanding funds under the financing arrangement. In the event of a securitization, a portion of the outstanding funds under the financing arrangement would become asset-backed securities secured by the units and the revenues generated by the units. The funding under our financing arrangement with Amresco is made on a property-by-property basis and, with respect to the funding for each property, may be prepaid by us only in full. As part of the financing, we have formed a new entity, eRoomSystem SPE, Inc., a Nevada corporation and wholly-owned subsidiary. eRoomSystem SPE will own all the units funded by Amresco under revenue sharing agreements. Amresco will take a senior security interest in the units financed under the financing agreement, and all proceeds generated by and derived from those products. The interest rate for the funds under the financing arrangement is based upon the seven-year treasury rate plus an additional incremental rate that varies depending upon the total amount outstanding under the financing arrangement. The incremental rate will vary according to the thresholds provided in the following table:
THRESHOLD INTEREST RATE ------------------------------------------------------------------ ---------------------------- Aggregate funds outstanding of less than $10 million Seven-year treasury rate plus 12.5% Aggregate funds outstanding from $10 million until the first Seven-year treasury rate securitization by Amresco plus 10.0% Aggregate funds outstanding after the first securitization by Seven-year treasury rate Amresco and less than $125 million plus 9.5% Aggregate funds outstanding of more than $125 million and equal Seven-year treasury rate to $150 million plus 8.5% Aggregate funds outstanding of more than $150 million and equal Seven-year treasury rate to $175 million plus 7.5% Aggregate funds outstanding of more than $175 million Seven-year treasury rate plus 6.5%
The actual interest rate for the funding is determined on the date of funding by Amresco. Upon the assumption that the first financing would have occurred at the end of the second quarter of 2000, the applicable interest rate would have been approximately 18.625%, which is equal to the seven-year treasury rate of 6.125% plus 12.5%. In order for us to qualify for funding under our financing arrangement with Amresco, we first identify properties that possess the performance, occupancy and liquidity standards sufficient to qualify for funding. Once we identify a qualified property, we will enter into a lease with the property, install our products and submit a preliminary application for funding to Amresco. Upon the approval of our preliminary application for funding and upon the completion of a 90-day seasoning period, we will submit a final application for funding to Amresco. -26- Within seven days, Amresco will notify us as to whether, in its reasonable discretion, the minimum performance standards, as they relate to the property, have been met and whether our final application for funding is approved. Once approval is obtained, we will transfer the lease and ownership of the units to eRoomSystem SPE simultaneous with the receipt of funding from Amresco. A property will satisfy the minimum performance criteria if the property retains a minimum of 20% of the gross daily revenue generated on a per unit per day basis during the 90-day period. By requiring the property to retain a minimum of 20% of the gross daily revenue, Amresco attempts to provide the property with sufficient cash flow such that the property would not, in the event of bankruptcy, terminate the revenue sharing arrangement and, as a result, preserve the revenue stream under the revenue sharing arrangement. Although we modify the basic structure of our revenue sharing program to reflect the particular demographics of each property, our basic revenue sharing program provides that we collect an average of 90% of the initial $0.78 generated by each unit per day and 15% of all revenue generated by each unit per day over the initial $0.78 generated. The revenue generated by each unit per day is calculated by dividing the gross revenues generated by all units in the property on a monthly basis by the number of days in the month and the total number of units installed at the property. Under our basic revenue sharing program, a property must have average revenues of $0.90 per unit per day to satisfy the performance criteria of Amresco and to qualify for funding under this financing arrangement. The minimum average revenue of $0.90 is calculated as follows:
MINIMUM GROSS REVENUES AMOUNT TO eROOMSYSTEM COLLECTION RATE PER DAY TECHNOLOGIES AMOUNT TO PROPERTY ------------------------------- -------------------------- ----------------------- -------------------- 90% of the first $0.78 $0.90 $0.702 $0.078 15% above the first $0.78 $0.90 $0.018 $0.102 ========================== ======================= ==================== TOTAL $0.72 $0.12
Accordingly, if a property were to generate revenues of $0.90 per unit per day, we would receive $0.72 per unit per day and the property would receive $0.18 per unit per day. Due to the historical performance of our units, we believe that the units placed pursuant to our basic revenue sharing program will meet the performance criteria of Amresco and qualify for funding under our financing arrangement with Amresco. PRIOR PRIVATE PLACEMENTS AND FINANCINGS Since our incorporation, we have funded our operations primarily through loans and through sales of our common and preferred stock. From September 1996 through March 1997, we raised gross proceeds of $1,470,000 from a private placement of promissory notes secured by our assets. Each $20,000 promissory note had a term of one year and was accompanied by a warrant to purchase 3,300 shares of common stock at $2.67 per share exercisable for the lesser of five years or three years from the close of this offering. We issued warrants to purchase a total of 242,550 shares of common stock to investors and warrants to purchase 86,250 shares of common stock to our placement agent. The promissory notes were all in default as of January 1998. In order to avoid foreclosure on our assets, we issued to the holders of these promissory notes warrants to purchase an aggregate of 61,629 shares of common stock at $2.67 per share and an aggregate of 13,781 shares of common stock. Subsequently, in 1998, holders of promissory notes in the aggregate original principal amount of $1,040,000 converted their promissory notes into 208,000 shares of Series A convertible preferred stock and, in 1999, holders of promissory notes in the aggregate original principal amount of $300,000 converted their promissory notes and accrued interest into 119,374 shares of Series B convertible preferred stock. We issued 13,125 shares of common stock to the placement agent for assisting in the conversion of promissory notes into Series A convertible preferred stock. As of March 31, 2000, the outstanding promissory notes consisted of $130,000 in principal and $38,959 of accrued interest and were accruing, collectively, warrants to purchase 644 -27- shares of common stock per month until paid in full. Although all of the outstanding promissory notes are in default, we intend to pay off these promissory notes from the proceeds of this offering. From April 1997 through December 1997, we realized gross proceeds of $1,986,000 from a private placement of units where each $10,000 unit consisted of 938 shares of common stock and a 15% secured promissory note in the principal amount of $5,000. We issued our placement agent 24,018 shares of common stock and our merchant banker 139,846 shares of common stock in exchange for services related to this private placement. In September 1998, holders of promissory notes in the aggregate original principal amount of $115,000 converted their promissory notes and accrued interest into 11,665 shares of common stock. Then, in May 1999, holders of promissory notes in the aggregate original principal amount of $425,051 converted their promissory notes and accrued interest into 173,976 shares of Series B convertible preferred stock. As of March 31, 2000, outstanding promissory notes consisted of $431,750 in principal and $159,494 of accrued interest. Although all of the outstanding promissory notes are in default, we intend to pay off these promissory notes from the proceeds of this offering. In May 1997, we received a loan in the original principal amount of $100,000 from an individual bearing interest at the rate of 15% per annum with a one year term. We issued 7,126 shares of common stock in connection with this note. As of March 31, 2000, our obligation was $130,417 including accrued interest. We intend to pay off this promissory note from the proceeds of this offering. From January 1998 through March 1998, we received gross proceeds of $760,000 from the sale of Series A convertible preferred stock. In addition, $1,040,000 of outstanding promissory notes were converted into 208,000 shares of our Series A convertible preferred stock. We issued warrants to purchase 6,840 shares of common stock exercisable at $16.00 per share, and 13,125 shares of common stock valued at $10.67 per share, to our placement agent. Pursuant to the terms of our Series A convertible preferred stock, dividends of 8% per annum began to accrue on November 14, 1998. As of March 31, 2000, holders of Series A convertible preferred stock were owed dividends of $198,442, collectively. We intend to pay such dividends from the proceeds of this offering. From January 1998 through March 1998, we realized gross proceeds of $379,000 from a private placement of our common stock at $10.67 per share. We issued 35,532 shares of common stock to investors and warrants to purchase 4,264 shares of common stock at $12.80 per share to our placement agent. In April 1998, we issued a $100,000 short-term promissory note to an investor which was subsequently converted into 9,375 shares of common stock at a price of $10.67 per share. In addition, this investor was granted an additional 1,500 shares of common stock as an inducement to convert the promissory note, which was valued at $10.67 per share and recorded as additional interest expense in 1998. From May 1998 through August 1998, we received gross proceeds of $561,520 from a private placement of 60-day promissory notes convertible into shares of common stock at maturity at $10.67 per share. These promissory notes and accrued interest were converted into 54,296 shares of common stock. We issued 7,875 shares of common stock as a finder's fee. On July 17, 1998, we received a loan of $1,500,000 from RSG Investments. Although we were obligated to repay the funds by January 30, 1999, we defaulted and remained in default until we entered into the Equipment Transfer Agreement with RSG Investments on September 28, 1999. After the repayment of a portion of the obligation and the conversion of a portion of the obligation into shares of Series B convertible preferred stock, we remain obligated to RSG Investments in the principal amount of $750,000. As of March 31, 2000, we owed RSG Investments $1,555,544, of which we intend to pay $750,000 in principal plus accrued interest from the proceeds of this offering. From February 1999 through May 1999, we received gross proceeds of $350,000 from the private placement of 90-day promissory notes. These promissory notes have an interest rate of 15% per annum and accrue common stock at a rate of 38 shares every 30 days for every $1,000 of principal outstanding. Subsequently, promissory notes in the aggregate original principal amount of $134,885 have been repaid and promissory notes in the aggregate original principal amount of $180,000 plus interest have been converted into 81,909 shares of Series B -28- convertible preferred stock. As of March 31, 2000, we have issued 49,401 shares of common stock as interest and have $35,115 in outstanding principal and $7,948 of accrued interest. The promissory notes are in default. We intend to pay off these promissory notes with the proceeds realized from this offering. From March 1999 through September 1999, we conducted a private placement of our Series B convertible preferred stock at $3.00 per share. Through this private placement, we issued 1,355,047 shares of Series B convertible preferred stock in exchange for cash subscriptions of $4,065,141 and 726,633 shares of Series B convertible preferred stock in exchange for outstanding promissory notes, unpaid salaries to officers and $500,000 due to RSG Investments. On February 15, 2000, we received a $500,000 loan from Ash Capital. Dr. Alan C. Ashton is a director designee of eRoomSystem Technologies and owns 100% of Ash Capital. The Ash Capital loan is evidenced by a promissory note bearing simple interest at the rate of 10% per annum, payable on May 31, 2000, subsequently extended to July 31, 2000, and secured by our assets. Ash Capital was issued a warrant to purchase 18,750 shares of common stock exercisable at $4.80 per share through the second anniversary date of the close of this offering. The Ash Capital loan will be repaid partially from the sale of selected Refreshment Centers and partially from the net proceeds of this offering. From March 2000 through April 12, 2000, we conducted a private placement of $100,000 units consisting of a 7% convertible promissory note in the original principal amount of $25,000, 23,077 shares of Series C convertible preferred stock and a warrant to purchase 5,000 shares of common stock at an exercise price of $6.60 per share. Through this private placement, we raised gross proceeds of $850,000, issued promissory notes in the original principal amount of $212,500, issued 196,150 shares of Series C convertible preferred stock and issued warrants to purchase 42,500 shares of common stock. On April 13, 2000, we received the bridge loan in the principal amount of $1,500,000. The bridge loan is evidenced by a promissory note, or the Bridge Note, and bears interest at the rate of nine percent per annum. The bridge loan matures on the earlier of the closing of this offering or October 12, 2000. In addition, we issued 200,000 shares of our common stock as part of the bridge loan transaction. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133. SFAS 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including derivative instruments embedded in other contracts, or collectively referred to as derivatives, and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. We do not expect this statement to have a material impact on our results of operations, financial position or liquidity. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Our products require a limited amount of assembly at our facility in the United States. We purchase refrigerators from suppliers in Mexico, Italy and China on a purchase order basis in U.S. Dollars. All other components for our products are purchased from suppliers based in the United States. Our products are primarily marketed in the United States, the Bahamas and Brazil, and we intend to further expand our marketing to the international lodging market and to other industries domestically and internationally. As a result, our financial results could be affected by weak economic conditions in foreign markets. Because all of our revenues will be denominated in U.S. Dollars, a strengthening of the dollar could make our products less competitive in foreign markets. As we expand operations internationally, we will continue to evaluate our foreign currency exposures and risks and develop appropriate hedging or other strategies to manage those risks. We have not revised our current business practices to conform to Europe's conversion to the Euro. -29- BUSINESS OVERVIEW eRoomSystem Technologies has developed and introduced to the lodging industry an intelligent, in-room computerized platform and communications network, or the eRoomSystem. The eRoomSystem is a computerized platform and processor-based system designed to collect and control data that supports our Refreshment Centers, eRoomSafes and other applications. These other applications include in-room management capabilities, information management services, direct credit card billing and network access solutions. Our eRoomSystem delivers in-room solutions that reduce operating costs, enhance hotel guest satisfaction and provide higher operating profits to our customers. The solutions offered by our eRoomSystem and related products have allowed us to establish relationships with premier hotel chains. We have installed more than 11,500 Refreshment Centers and 4,000 eRoomSafes. These include installations in many of the Marriott International flagship properties, such as the New York Marriott Marquis, the J.W. Marriott in Washington D.C., the Marriott Camelback Inn and others. We have an exclusive contract with the purchasing subsidiary of Promus Hotel Corporation, operator of Doubletree Hotels, Embassy Suites and Hampton Inn, which was recently purchased by Hilton Hotels Corporation. We are negotiating with Bass Hotels, operator of Holiday Inn, Crowne Plaza and the Hotel Inter-Continental, and Carlson Hospitality Worldwide, operator of Radisson Hotels Worldwide, Regent International Hotels and Country Inn and Suites, to become their exclusive or preferred vendor. We have also installed our products in the Hilton, Best Western, Ramada and other established hotel chains. We believe that these relationships provide us with the opportunity to install our eRoomSystem worldwide, while our enabling technologies will provide for a natural expansion of our products and services into the healthcare, time-share and cruise line industries. Our business model focuses on our revenue sharing program that allows us to partner with our customers with respect to our products. Through our revenue sharing program, we install our products at little or no upfront cost to our customers and share in the recurring revenues generated from sales of goods and services related to our products. LODGING MARKET According to the 1999 HORWATH WORLDWIDE HOTEL INDUSTRY STUDY, the worldwide hotel marketplace consists of approximately 11.7 million hotel rooms. The regions below contain the following number of hotel rooms: REGION HOTEL ROOMS ------------------------------------- ------------------------ Europe 4.7 million United States 3.5 million Central and South America 1.5 million Asia 1.5 million Other regions 0.5 million ------------------------ TOTAL 11.7 MILLION ======================== -30- Of these 11.7 million hotel rooms, approximately three million hotel rooms are owned, managed or franchised by the ten largest hotel chains, as follows:
ROOMS UNITED ROOMS HOTEL CHAIN TOTAL ROOMS STATES INTER-NATIONAL REPRESENTATIVE BRANDS - ------------------- ---------------- -------------- ------------ ----------------------------------------- Cendant 529,000 482,000 47,000 Ramada, Days Inn and Howard Johnson Bass Hotels 461,000 341,000 120,000 Holiday Inn, Crowne Plaza and the Hotel Inter-Continental Marriott International 328,000 258,000 70,000 Ritz-Carlton, Marriott, Renaissance and Residence Inn Accor 326,000 87,000 239,000 Sofitel, Novatel and Red Roof Inns Choice Hotels 305,000 252,000 53,000 Comfort Inns & Suites, Clarion and Econolodge Best Western 302,000 187,000 115,000 Best Western International Hilton Hotels 277,000 270,000 7,000 Hilton, Doubletree Hotels, Embassy Corporation Suites and Hampton Inn Starwood Hotels 225,000 146,000 79,000 Sheraton, Westin and St. Regis Carlson Hospitality 106,000 66,000 40,000 Radisson Hotels Worldwide, Regent Worldwide International Hotels and Country Inns and Suites Hyatt Hotels 80,000 55,000 25,000 Hyatt and Hyatt Regency ---------------- -------------- ------------ TOTAL 2,939,000 2,144,000 795,000 ================ ============== ============
SOURCES: 1999 DIRECTORY OF HOTEL & MOTEL COMPANIES; HOTELS MAGAZINE - CORPORATE 300 RANKING, JULY 1999; TRAVEL RESEARCH INTERNATIONAL LIMITED; LODGING HOSPITALITY MAGAZINE - THE BRANDS REPORT, AUGUST 1999. Of the hotel chains listed above, we have installed more than 10,000 Refreshment Centers and 3,500 eRoomSafes in hotels operated by Marriott International, Best Western International, Cendant, Bass Hotels and Hilton Hotels Corporation. Many hotel properties are rated through either Automobile Association of America's diamond rating or Mobil's star rating. In order to obtain a four- or five-diamond rating from Automobile Association of America, the hotel properties are required to have minibars in all of their hotel rooms. Under Mobil's star-rating, the presence of minibars in a property's hotel rooms provides points that can be used toward a four- or five-star rating. Therefore, we believe that we can market our products to the lodging industry as an in-room amenity to enhance a hotel's ability to receive a four- or five-diamond rating or a four- or five-star rating. OUR PRODUCTS AND SERVICES eROOMSYSTEM Since our inception, it has been our objective to innovate the in-room amenities offered by the lodging industry. Our proprietary technologies create an intelligent, in-room computerized platform and communications network that comprise our eRoomSystem. At the core of our eRoomSystem is our proprietary hardware and software that operate as a multi-tasking imbedded operating system. Our hardware and software can operate multiple devices and provide an interactive environment. The interactive environment provided through our -31- eRoomSystem allows the hotel guest to input and receive information. Interactive features for the hotel guest include locking and unlocking our products, receiving pricing information from the liquid crystal display as well as other functions. The eRoomSystem provides the communication link between the hotel guest, our products, the eRoomSystem file server, and the file server located at our headquarters, or the eRoomSystem master file server. Our software is remotely upgradable from our facilities. We can also remotely adjust prices, change messages on the liquid crystal display and change the input touchpad layout. From our facilities, we can lock our products in the event a participating hotel fails to pay any fees or otherwise violates the terms of its agreement, as well as determine whether our products are active and working properly. The eRoomSystem consists of a microprocessor, memory, input/output ports, communications transceiver, liquid crystal display, touchpad, power supply and our proprietary software. The proprietary architecture of our circuit boards has been designed to minimize the need for hardware upgrades. The eRoomSystem includes an embedded system processor that handles simple instructions and routes all billing functions and processor-intensive instructions to the eRoomSystem file server. The eRoomSystem provides a platform that collects information relating to the usage of our products. The eRoomSystem is capable of supporting other functions such as the management of in-room energy, including heating, air conditioning, lighting and television and the establishment of a trouble-shooting system to manage in-room repairs and maintenance. Another extension of the eRoomSystem is a direct credit card billing process for the healthcare and time-share industries. eROOMSERV REFRESHMENT CENTERS Historically, our primary source of revenue has been from the sale or revenue sharing of our Refreshment Centers. We currently have orders on-hand for 4,428 Refreshment Centers, 2,668 of which include eRoomSafes. Approximately 50% of these orders are subject to cancellation. Sales orders account for 536 Refreshment Centers. Products to be placed under revenue sharing agreements include 3,892 Refreshment Centers, 2,688 of which include eRoomSafes. Refreshment Centers are modular in design and consist of our eRoomSystem, a small compression or thermoelectric refrigeration unit and our unique multi-vending rack. Our multi-vending rack displays up to 33 different beverages and/or snacks and maintains a full appearance through a gravity-based design. Upon removal of a product from the Refreshment Center, the gravity-based design uses the weight of the remaining products to cause such products to roll or slide forward toward the front of the multi-vending rack. The repair or replacement of any component of our Refreshment Center is relatively simple and is provided at no additional charge to the property. The Refreshment Center communicates through the eRoomSystem, which uses the hotel's existing telephone lines, cable television lines or electrical power outlets. Our Refreshment Centers operate as follows: - A hotel guest selects a beverage or snack from our Refreshment Center; - The purchase is immediately confirmed on the liquid crystal display and acknowledged by an audible beep; - The transaction information, such as product type, price and time of purchase, is simultaneously transferred to the eRoomSystem file server; - The eRoomSystem file server communicates on a real-time basis with the hotel's property management system and periodically with our eRoomSystem master file server; and - The hotel's property management system posts the purchase to the hotel guest's room account. -32- The sales data from the eRoomSystem is transmitted to the eRoomSystem file server from which hotel employees can access periodic sales activities, inventory levels for restocking purposes and demographic data. eROOMSAFE Our eRoomSafes are electronic in-room safes offered in conjunction with our eRoomSystem. The eRoomSafes include an encrypted combination that can be changed by the hotel guest. The eRoomSafes have storage space large enough for laptop computers, video cameras and briefcases. The eRoomSafes utilize the eRoomSystem to interface with the eRoomSystem file server which, in turn, communicates with the hotel's property management system. A common problem with in-room safes occurs at checkout when a guest may leave the safe locked or forget to remove his or her valuables. With our competitors' room safes, the locked safe would typically go unnoticed until a subsequent hotel guest attempts to use the safe. Through the eRoomSystem, our eRoomSafe automatically notifies the hotel at checkout that the safe door is locked, providing the guest with an opportunity to remove any valuables before leaving the hotel. THE FOLLOWING DIAGRAM REPRESENTS THE STRUCTURE AND COMMUNICATIONS NETWORK OF OUR eROOMSYSTEM, THE eROOMSYSTEM FILE SERVER, THE HOTEL PROPERTY MANAGEMENT SYSTEM, AND THE eROOMSYSTEM MASTER FILE SERVER: [GRAPHIC] eROOMDATA MANAGEMENT One of the byproducts of our technology is the information we have collected since our first product installation. To date, we have collected over eleven million room-nights of data. The eRoomSystem file server collects information regarding the usage of our Refreshment Centers on a real-time basis. We use this information to help our customers increase their operational efficiencies. The information we obtain is unique because we categorize the information according to specific consumer buying patterns and demographics. The information we collect has value in several key areas. First, we currently offer our customers, as part of our service and maintenance agreement, specific information about their guests' buying patterns and provide non-confidential information about other hotels in similar geographic regions. Second, as we continue to increase our installed room base, we believe that the information we collect will have value to the suppliers of goods sold in our Refreshment Centers, such as Coca-Cola, PepsiCo, Anheuser-Busch, Miller Brewing, Frito-Lay, Mars and others. Third, we are developing information services to categorize purchases in response to specific in-room advertising programs by such suppliers. Our lodging customers benefit in various ways from the information we provide. The hotels are responsible for restocking the goods sold from our Refreshment Centers. The real-time sales data generated by our -33- Refreshment Centers helps the hotel to maximize personnel efficiencies. The transfer of sales data to the hotel prevents guest pilferage and minimizes disputes over refreshment center usage, both of which are prevalent in the lodging industry. Finally, the ability to track product sales performance allows the hotel to stock the Refreshment Centers with more popular items, which generally leads to increased sales of product from the Refreshment Centers. Our system can provide reports on daily restocking requirements, product sales statistics showing daily, monthly and annual statistics, overnight audits, inventory control and a variety of customized reports. The chart below is an example of the type of information we can collect from a property where our products are installed: [GRAPHIC] As indicated above, a supplier of goods will be able to determine its market share by property and geographic region. We are developing an Internet-based system where suppliers will be able to track product movement, market share and other information by country, region, state, city or property type. We intend to develop strategic relationships with companies in the information services industry in order to maximize our proprietary information. S. Leslie Flegel will join our board upon the closing of this offering to assist us in packaging and marketing our proprietary information. Mr. Flegel is the chief executive officer and Chairman of the Board of The Source Information Management Company, a leading provider of information and management services in the United States and Canada. In addition, we will consider utilizing one or more other companies to assist us in the roll-out of our information services products. FUTURE PRODUCTS AND SERVICES Our research and development and marketing departments are analyzing additional value added products and services to be delivered to our customers using the platform of our eRoomSystem. We believe that such additional products and services can be bundled with our eRoomSystem or separately marketed to lodging industry customers to provide additional revenue sources for us. Although the development and delivery schedules vary for each new product and service, we believe that each of the following will be ready for marketing within the next twelve months: -34- eROOMINTERNET CONNECTIVITY. We intend to offer a high-speed wireless communications network that is designed to allow guests the option of using their laptop computers to roam throughout a property while connected to the property's network for Internet or intranet use. The high-speed wireless communications network will be able to operate at 11 mega bits per second, or mbps. We have signed a letter of intent with a wireless network provider for the exclusive use of its product in the lodging, healthcare, time-share and cruise line industries. This network consists of a master antenna with a range of up to 150 feet in any direction. In larger properties, these master antennas can be linked together to create a wireless communications network similar to a cellular telephone network on a smaller scale. To obtain wireless network access, guests can rent a PCMCIA card for their laptop computers from the hotel's front desk. PCMCIA cards provide wireless connectivity through a built-in transceiver and are compatible with PC and Macintosh computers. We also intend to increase the speed of our existing communications network to 10 mbps. With a high-speed network in place, we could offer our customers a low-cost in-room networked computer configured with only essential equipment and without CD-ROM drives, diskette drives or expansion slots, or the thin client platform. Each computer in the thin client platform will consist of a monitor, keyboard and an interpreter which will allow for access to the Internet or an intranet. In addition, the high-speed network could be used as an Ethernet port for laptop users to access the Internet or an intranet. eROOMENERGY MANAGEMENT. We are developing a technology by which our eRoomSystem will detect in-room movement through heat and/or motion sensors. Our eRoomSystem will control other devices in the room through an infrared communications portal. This technology is being developed for the lodging industry as a means of offering an energy management system. When a room is occupied, our eRoomSystem will give the guest complete control of the heating and air conditioning, lighting, television and other facilities in the room. When the room is unoccupied, the eRoomSystem will control each of these systems and adjust each according to the most energy efficient settings. When a guest opens the door to re-enter the room, our eRoomSystem will adjust all devices to their original settings. By adjusting the heating and air conditioning either up or down, typically 5 to 10 degrees, depending on the time of year, and turning off the television and lights when a room is unoccupied, a hotel or other facility can realize energy cost savings. eROOMMAINTENANCE. Through the eRoomSystem, we also intend to offer remote engineering and maintenance services. The eRoomSystem links each room to other areas of the property. By connecting each room to the front desk and to the engineering departments, we will create a management tool and communication link. When an in-room maintenance problem is discovered by engineering or housekeeping, the hotel employee can enter a code on the touchpad of our eRoomSystem, which will transmit the information to engineering and inform the front desk of a problem. If the problem is of a material nature, the front desk can hold the room until the repairs have been made. As soon as the problem is resolved, engineering or housekeeping will enter a code that notifies the front desk that the room has been repaired and is available for a guest. eROOMHOUSEKEEPING. We intend to design our eRoomSystem to dispatch housekeeping in the most efficient manner while prioritizing the rooms that need to be cleaned. eRoomHousekeeping will permit housekeepers to enter a room and input their personal codes on the eRoomSystem touchpad. eRoomHousekeeping then proceeds to time how long it takes housekeeping to prepare the room. When completed, housekeeping inputs their codes again. The system then informs them which room needs to be cleaned next. If occupancy is high, eRoomHousekeeping can direct housekeeping personnel to an unoccupied room that is scheduled for check-out. If occupancy is low and additional clean rooms are currently available, eRoomHousekeeping can direct housekeepers to rooms that are temporarily unoccupied by guests who have elected to stay another night. This process optimizes housekeeping operations, minimizes guest disturbances and in turn saves both time and money. eROOMMANAGEMENT. Our eRoomSystem has the capability to support standard credit card and smart card readers for direct billing to a customer's credit card, as well as other point of sale and automated teller-type functions. When we enter the healthcare and time-share industries, we will offer a direct credit card billing process. By placing a credit card reader adjacent to a hospital bed or in a time-share room, we can offer a billing solution previously unavailable. This billing process will allow healthcare and time-share properties to offer services and products similar to those found in hotel rooms, such as Refreshment Centers, eRoomSafes, on-demand movies, -35- direct dial long distance, Internet access and video games. We hold three patents for a credit card point of sale terminal technology that supplies billing solutions for these services. SALES AND MARKETING Historically, we have derived our revenues from the lodging industry. To date, we have installed more than 11,500 Refreshment Centers and 4,000 eRoomSafes. We have established relationships with Marriott International, Promus Hotel Corporation and Carlson Worldwide Hospitality and are negotiating to become the exclusive vendor for Bass Hotels. All of these relationships are open-ended with the exception of the arrangement with Promus Hotel Corporation that terminates on April 6, 2003 or upon prior written notice of 90 days. Further, although we are the exclusive or preferred vendor of interactive computerized Refreshment Centers for a number of premier hotel chains, these arrangements may not generate any sales or placements of our products. Due the franchisor-franchisee relationship between many hotel chains and their hotel properties, we must not only establish exclusive or preferred vendor relationships with the hotel chains, but must also enter into definitive agreements with the franchisees of these hotel chains for the sale or placement of our products into the actual hotel properties. With respect to past sales, in 1999, the J.W. Marriott in Washington D.C. and the Doubletree Denver accounted for 26.7% and 16.0% of our revenues. This concentration of revenues is not expected to continue as the revenues were the result of one-time product sales. We are currently shifting our business model to a revenue sharing program where we generate revenues over the seven-year term of each revenue sharing agreement. Our sales and marketing program consists of the following strategic initiatives: RETENTION OF SENIOR MARKETING EXECUTIVES. We are currently attempting to fill the position of executive vice president of sales and marketing of eRoomSystem Technologies, to oversee the implementation of our sales and marketing program. To this end, we have engaged an executive search firm to assist us in this process. DEPLOYMENT OF AN EXPANDED REGIONAL SALES FORCE. Our initial strategy is to hire four additional full-time employees as regional sales managers in the United States. We currently employ two regional sales managers and retain four independent sales representatives. DEVELOPMENT OF AN IN-HOUSE SALES DEPARTMENT. We intend to develop an in-house sales department whose primary objective will be to focus on the limited-service hotel sector. Each inside sales person will have a specific geographic responsibility and will work in concert with his or her regional sales manager. This approach should allow eRoomSystem Technologies to increase its market penetration by targeting mid-scale through luxury-class properties throughout highly concentrated hotel markets within the United States. CONTINUED MARKETING OF THE REVENUE SHARING PROGRAM. Emphasis on our revenue sharing program is a critical part of our sales and marketing strategy. Historically, the lodging industry has been resistant to purchase our products because of the initial capital expenditure required. In addition to product sales, we now offer our products through a revenue sharing program. Our revenue sharing program allows us to become partners with our hotel clients by installing our products at little or no upfront cost to the hotel and sharing the revenues generated from goods sold from, and usage of, our products. Amresco will finance up to 150% of our costs of our products placed under our revenue sharing program, subject to satisfaction of funding requirements. Our products will secure the financing of Amresco, which is payable over seven years. CONTINUED IMPLEMENTATION OF THE CORPORATE ACCOUNT STRATEGY. Our corporate account strategy involves the research, documentation and implementation of plans associated with hotel chains, brands, management companies and real estate investment trusts. Through this strategy, we propose to enter into a corporate agreement that defines the relationship between eRoomSystem Technologies and the respective corporate entity. Although the franchisees of these corporate hotel chains may not be required to purchase our products or have them placed on a revenue sharing basis, the corporate entity would recommend to its franchisees the use of our products. We anticipate that by the end of 2001, the majority of all sales and revenue sharing agreements will be generated indirectly as a result of our corporate account strategy. -36- We have an exclusive vendor relationship with the purchasing subsidiary for Promus Hotel Corporation. Promus has agreed to use its best efforts to cause our eRoomSystem and related products to be installed in up to 71,000 of its corporate-owned and franchised hotel rooms. We have also installed our eRoomSystem in a number of flagship properties for Marriott International, including the New York Marriott Marquis, the J.W. Marriott in Washington, D.C., the J.W. Marriott Lennox in Atlanta, the Marriott Camelback Inn and others. In the third quarter of 2000, we are scheduled to install our products into another Marriott flagship property, the new J.W. Marriott in Miami. Through our relationship with Marriott, we have been designated as Marriott's automated system of choice. We were recently selected as a recommended vendor for Carlson Worldwide Hospitality, representing Radisson Hotels Worldwide, Regent International and Country Inn and Suites. In addition, we have installed, on a trial-basis, our eRoomSystem and related products in The Bellagio - The Resort, the flagship hotel-casino of Mirage Resorts, Inc., which was recently acquired by MGM Grand, Inc. We are currently in negotiations with other major hotel-casinos for placement of our products and services. We are targeting Las Vegas, Nevada since its approximately 115,000 rooms are the most hotel rooms of any city in the world. CREATION AND ENHANCEMENT OF STRATEGIC MARKETING ALLIANCES. In conjunction with our corporate account strategy, our objective is to enter into a number of marketing alliance plans. A marketing alliance plan is a strategic relationship with a third-party whereby a finder's fee is paid to the party for its efforts in closing a sale or revenue sharing transaction. IMPLEMENTATION OF A COMPREHENSIVE DOMESTIC AND INTERNATIONAL MARKETING PLAN. We are implementing a comprehensive marketing strategy. We have entered into an agreement with Hall Communications, Inc. of Las Vegas, Nevada to provide us with brochures, corporate name and logo development, an interactive website, signage, a trade show booth, corporate video and compact disk presentations, media advertisements and other services relative to product design and corporate communications. We intend to implement our international marketing strategy utilizing the core marketing structure that we are developing domestically, including website, support materials, trade show materials and industry specific advertisements, to support our global growth strategy. eRoomSystem Technologies has a signed letter of intent with a Caribbean-based company authorizing it to serve as a limited distributor of our products in the Caribbean. We are also negotiating with potential distributors in Europe. We intend to hire a marketing coordinator who will oversee our advertising and promotional efforts by primarily utilizing hospitality trade publications. Our objective is to establish an international presence through partnering with various trade publications. In addition, we plan to attend trade shows and pursue promotional activities through a strong public-relations program. EXPANSION INTO THE HEALTHCARE, TIME-SHARE AND CRUISE LINE INDUSTRIES We believe that the healthcare industry is a natural extension for our eRoomSystem, our related products and our patented credit card technology. We will be able to provide healthcare facilities with a comprehensive room information and management system that will allow them to provide patients with a wide array of in-room amenities not available in the past. These amenities include Refreshment Centers, eRoomSafes, direct dial long distance, on-demand movies, Internet access and other products and services commonly found in a hotel room. We have completed a beta-test at the Miami Heart Institute, a facility managed by Columbia HCA, and have an agreement with Miami Heart Institute to install our eRoomSystem, Refreshment Centers and eRoomSafes and to provide the billing process for direct dial long distance and on-demand movies through third-party suppliers. Our installation at the Miami Heart Institute should occur in the second half of 2000. We also believe the same opportunities exist in the time-share industry. By offering a direct credit card billing system a time-share facility can offer the same services available in hotels. We are also currently exploring the design and engineering parameters necessary to offer our products and services to the cruise line industry. -37- SUPPLIERS AND ASSEMBLY We purchase various electrical and mechanical components, injection molded parts and basic cube refrigerators from various manufacturers and electronics firms. For example, we purchase our basic cube refrigerators from Absocold, Sanyo Corporation, Avanti or Indel-B. Although we propose to establish a turnkey manufacturing source, we currently obtain our components on a purchase order basis. Historically, our suppliers have been dependable and able to meet delivery schedules on time. We believe that, in the event we cannot obtain our components from our current suppliers, alternate suppliers can be located without incurring significant costs or delays. We do not rely on any one supplier, the loss of which would inhibit our ability to assemble our products on a timely basis. Our eRoomSystems, Refreshment Centers and eRoomSafes require a limited amount of assembly. This assembly involves electronic assembly, wiring and testing. At our St. George, Utah facility, we are able to assemble up to 2,000 units monthly. Since our existing facility is not sufficient to meet our projected growth, we will either have to establish a turnkey manufacturing source, expand our assembly facility or hold orders for our products unfulfilled. In the event that our current facility is insufficient to meet our projected growth, we propose to establish two or more third party turnkey manufacturing sources with contract manufacturers. COMPETITION eROOMSYSTEM. Although we are not aware of another company that provides in-room services through the hotel room's in-room refrigerator, there are several companies that provide in-room video entertainment and information services, such as cable television, pay-per-view movies, the Internet, video games and guest services. In addition, we may face competition from communications companies, such as cable companies, telecommunications companies, Internet and high-speed connectivity companies, and direct broadcast satellite companies, who may be able to modify their existing infrastructure to provide in-room entertainment and/or information services. Many of these companies have longer operating histories, larger customer bases, greater brand recognition and greater financial, research and development, manufacturing, marketing and technical resources. Further, as technology is subject to rapid change, new technological advancements in components used for in-room services could adversely affect our growth strategy. eROOMSERV REFRESHMENT CENTERS. We face competition from suppliers of semi-automated minibars, such as Dometic, MiniBar America, Inc. and Bartech, Inc., and suppliers of honor bars, such as Dometic and MiniBar America, Inc. Semi-automated minibars are minibars that permit sales to be automatically posted to a hotel guest's room account. Honor bars are small refrigerators where sales are manually posted to a hotel guest's room account by housekeeping services. Our fully-automated Refreshment Centers differ from semi-automated minibars and honors bars in that our Refreshment Centers permit automatic posting to a hotel guest's room account, notify the hotel guest when a purchase has been made on our flat panel display, provide the hotel with real-time transaction information for stocking and product placement purposes and, with the eRoomSystem, serve as a platform for additional in-room services. Although Dometic possesses a significant share of the honor bar market, Dometic is principally a refrigerator manufacturer. MiniBar America is principally a manufacturer of honor bars. Bartech is a French-based company that uses Indel-B refrigerators in its semi-automated minibar product. Although Bartech has generated most of its sales from Europe, it has recently established an office in the United States. These companies may have stronger relationships in the lodging industry, longer operating histories, larger customer bases, greater brand recognition and greater financial, research and development, manufacturing, marketing and technical resources. Although these competitors do not offer fully-automated minibars, these competitors compete with us for the placement of units in hotel rooms. Further, we compete with these companies on the basis of price, service, technology and financing options. eROOMSAFES. The in-room safe industry is a very competitive market with competitors throughout the world. ElSafe, Inc. is the market leader with almost 400,000 room safes installed worldwide with installations in over 45 countries. CISA Worldwide is another competitor which maintains offices in the United States, Asia, the -38- Middle East, Africa and Latin America. The principal products of ElSafe and CISA Worldwide are electronic safes, which allow the hotel guest to enter a combination to lock and unlock the safe instead of a key. Although these competitors offer stand-alone electronic safes, our fully electronic safes work in conjunction with our eRoomSystem. We compete with these companies on the basis of price, service, technology and financing options. eROOMDATA MANAGEMENT. Many companies currently providing information management services may have longer operating histories, larger customer bases and greater financial resources. However, we believe that we are the only company currently gathering and disseminating information to properties with respect to the in-room use of Refreshment Centers. WIRELESS COMMUNICATION NETWORK. There are an increasing number of competitors in the wireless telecommunications industry in the United States and throughout the world. Although implementation of advanced wireless communication networks is still in the early stages in the lodging and guest-related industries, we believe that competition for these properties will intensify as other businesses realize the profit potential of designing and implementing wireless communication network services within such facilities. Even though we intend to employ relatively new technologies, there may be a continuing competitive threat from even newer technologies. We also expect that the price we will charge for designing, implementing and maintaining such wireless communication networks may decline over time as new competitors enter the market. INTELLECTUAL PROPERTY We rely on a combination of trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers and business partners to protect our proprietary rights in our products, services, know-how and information. We currently hold three patents, Patent Nos. 4,857,714, 4,883,948 and 4,939,352, filed under the name "Credit Card Storage System," all of which protect the use of our credit card technology. These three patents expire on August 14, 2006, November 27, 2006 and July 2, 2007, respectively. These patents have not been highly utilized in the lodging industry, but we believe they are important to our future product offerings in the healthcare and time-share industries. In addition, we applied for trademarks and service marks for eRoomSystem, eRoomServ Refreshment Center, eRoomSafe, eRoomManagement, eRoomEnergy Management, eRoomData Management, eRoomInternet Connectivity, eRoomMaintenance and eRoomHousekeeping. We have also registered our logo as presented on the cover of this prospectus and have submitted two patent applications with respect to our Refreshment Centers. Our proprietary software consists of three modules and provides the operating system for our eRoomSystem. The first module is a multi-tasking operating system that permits messages to be scrolled on the flat panel display of our eRoomSystem and allows hotel guests to interface with our products. The second module is a Windows(R) based program that provides a communication link between our eRoomSystem, our eRoomSystem hotel file server and the hotel's property management system. The third module is a Windows(R) based program that collects data from our eRoomSystem hotel file server and provides a variety of management and operational reports to eRoomSystem Technologies and our customers. We do not know if our patent application or any future patent application will be issued with the full scope of claims we seek, if at all, or whether any patents we receive will be challenged or invalidated. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technology. We cannot be certain that our services do not infringe on patents or other intellectual property rights that may relate to our services. Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed on the proprietary rights of others. RESEARCH AND DEVELOPMENT We currently have two software developers and one hardware engineer on our staff. Our research and development department focuses on upgrading our proprietary software and hardware that make up our eRoomSystem. As we expand our business, we will need to increase the size of our research and development department in order to integrate additional services into our eRoomSystem and modify our eRoomSystem as needed to serve other markets. -39- HISTORICAL SUMMARY We were originally incorporated under the laws of the State of North Carolina on March 17, 1993 as InnSyst! Corporation. On September 28, 1993, InnSyst! merged with and into RoomSystems, Inc., a Virginia corporation, incorporated on August 12, 1993, or RoomSystems Virginia, whereby RoomSystems Virginia was the surviving entity. On April 29, 1996, RoomSystems Virginia merged with and into RoomSystems, Inc., a Nevada corporation, or RoomSystems. Through an agreement and plan of reorganization approved by a majority of our stockholders dated December 31, 1999, RoomSystems became the wholly owned subsidiary of RoomSystems International Corporation. Pursuant to this agreement and plan of reorganization, all shares of RoomSystems common stock, including all shares of common stock underlying outstanding options and warrants, Series A convertible preferred stock and Series B convertible preferred stock were exchanged for the identical number and in the same form of securities of RoomSystems International Corporation. On February 1, 2000, we changed our name from RoomSystems International Corporation to RoomSystems Technologies, Inc. Subsequently, on March 29, 2000, with the approval of our stockholders, we changed our name to eRoomSystem Technologies, Inc. We have three wholly owned subsidiaries, RoomSystems, RSi BRE and eRoomSystem SPE. RoomSystems is our service and maintenance subsidiary that installs all of our products, provides electronic software upgrades to our customers, provides customer service and maintenance for our products and trains hotel personnel on the use and maintenance of our products. The outstanding shares of RoomSystems common stock have been pledged to Amresco. RSi BRE was formed as part of the Equipment Transfer Agreement we entered into with RSG Investments. RSi BRE currently holds approximately 3,100 Refreshment Centers and approximately 1,800 eRoomSafes. RSG Investments was granted the right to receive a maximum of $0.57 per Refreshment Center per day of the revenue realized from the Refreshment Centers held by RSi BRE. We have pledged the outstanding shares of RSi BRE common stock to RSG Investments and do not have control over RSi BRE. The board of directors of RSi BRE consists of a majority of outside directors. RSi BRE may not make cash distributions without the unanimous approval of its board of directors. We will gain control over RSi BRE when we satisfy our obligations to RSG Investments, including the $750,000 promissory note and their rights in the revenue stream from the Refreshment Centers held by RSi BRE. Once we make all such payments or once RSG Investments accepts our offer of a lump-sum discounted present value of the payments, the ownership of the Refreshment Centers that are subject to the Equipment Transfer Agreement will be transferred from RSi BRE to us. We anticipate that RSi BRE would then be dissolved. eRoomSystem SPE was formed as part of our long-term financing with Amresco. eRoomSystem SPE will own all the products funded by Amresco under our revenue sharing program. Amresco will take a senior security interest in all of the assets of eRoomSystem SPE. Unlike RSi BRE, we will control eRoomSystem SPE and its financial results will be consolidated with those of eRoomSystem Technologies and RoomSystems. GOVERNMENT REGULATION We are subject to laws and regulations applicable to businesses generally, as well as to laws and regulations directly applicable to the lodging industry. These laws and regulations relate to qualifying to do business in the various states and in foreign nations in which we currently have, or propose to have, our products. Apart from laws and regulations applicable to us, some of our existing and potential customers are subject to additional laws or regulations, such as laws and regulations related to liquor and gaming, which may have an adverse effect on our operations. Due to the licensing requirements relating to the sale of alcohol, the inability of our revenue-sharing partners to obtain or maintain their liquor licenses will result in the loss of revenues for our revenue-sharing partners and us. In addition, due to the heightened hotel-casino regulatory environment, and our intent to market to hotel-casinos, our operations may be subject to review by a hotel-casino's compliance committee to verify that its involvement with us would not jeopardize its gaming license. The regulatory compliance committee of a hotel-casino has broad discretion in determining whether or not to approve a transaction with a third party, which review typically includes the character, fitness and reputation of the third party and its officers, directors and principals. If our history or operations present problems for a hotel-casino, we would either have to expend resources to address or eliminate the concerns or forego the business. -40- PROPERTY AND EMPLOYEES We maintain an office at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada. We lease office space at the rate of $1,590 per month. The office lease commenced on October 15, 1997 and expires on October 15, 2000. We also have offices and a research and development and assembly facility located at 390 North 3050 East, St. George, Utah. This lease commenced on November 1, 1997 and expires on October 31, 2002. The monthly lease rate is $9,000. We currently employ thirty-five full-time and five part-time employees in our St. George, Utah facility and two full-time employees in our Las Vegas office. We anticipate the largest growth in employees will occur in the area of field operations. None of our employees is subject to a collective bargaining agreement. We currently have nine employees engaged in product assembly. Currently, our in-house staff installs our products at our customers' properties. Our in-house staff, which currently consists of six employees, also performs physical maintenance of our products under our maintenance agreements. Eventually, we will outsource a portion of the installation and maintenance of our products. LEGAL PROCEEDINGS We are from time to time parties to various legal proceedings arising out of our business. Apart from the following discussion, we believe that there are no proceedings pending or threatened against us which, if determined adversely, would have a material adverse effect on our business, financial condition, results of operations or liquidity. In December 1997, Royal W. Minson II, our former president and chief operating officer, received 121,875 shares of our common stock upon the exercise of options and executed demand promissory notes in the aggregate original principal amount of $568,750 to pay for the shares. On September 27, 1999, Mr. Minson filed for protection in the United States Bankruptcy Court for the Northern District of California, Case No. 99-47533-TD-7, under Chapter 7 of the United States Bankruptcy Code. The bankruptcy schedules list Mr. Minson's shares as an asset and the demand promissory notes as liabilities. On January 5, 2000, the Bankruptcy Court entered a discharge order. We have filed a proof of claim for the demand promissory notes executed by Mr. Minson, plus accrued interest on such notes. In addition, our proof of claim sets forth offsets to Mr. Minson's asset claim of $130,000 of unpaid salary owed to him by us. We have offered to purchase Mr. Minson's shares for $140,000 plus debt extinguishment of $723,667, representing the value of the outstanding demand promissory notes and accrued interest. Our offer is expressly contingent upon the approval of the bankruptcy court and the closing of the transaction by June 30, 2000, subsequently extended by us to July 31, 2000. We are awaiting a response from the trustee of the bankruptcy estate. On March 2, 1999, Willow Creek Systems, Inc., a former supplier of circuit boards, brought an action against us that is currently pending in Salt Lake County Third District Court, State of Utah, Civil No. 99-0902417. In its complaint, Willow Creek alleges breach of contract and seeks payment in the amount of approximately $125,000 from us for materials delivered pursuant to purchase orders. In our answer to Willow Creek's amended complaint and our Responses to Willow Creek's First Set of Interrogatories, Requests for Admissions and Request for Production of Documents, we allege that the materials delivered by Willow Creek were defective, lacked quality control and were below acceptable standards in the industry. In addition, we allege that the costs of repairing and replacing the defective materials, the costs during down time for such repair and replacement and other related costs are in excess of $120,000, which we believe should be offset against Willow Creek's claim for damages. Although we believe that our documentation on this matter is sufficient to support our claims, we are unable at this time to predict the exact outcome of the matter. The case is in the final stages of discovery. Willow Creek is no longer an operating entity. -41- MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our current directors, executive officers and director designees are as follows:
NAME AGE TITLE ---- --- ----- Steven L. Sunyich 46 President, Chief Executive Officer and Chairman of the Board Derek K. Ellis 31 Chief Financial Officer and Treasurer Stephen M. Nelson 51 Chief Operating Officer Gregory L. Hrncir 33 General Counsel and Secretary Lawrence S. Schroeder 51 Director Dr. Alan C. Ashton 58 Director Designee S. Leslie Flegel 61 Director Designee John J. Prehn 39 Director Designee
Upon the completion of this offering, our board will consist of five members, each of whom will serve in that capacity for a one-year term or until a successor has been elected and qualified, subject to earlier resignation, removal or death. The number of directors comprising our board may be increased or decreased by resolution adopted by the affirmative vote of a majority of the board. Messrs. Ashton, Flegel and Prehn have agreed to join the board at the first meeting of the board following completion of this offering. We presently expect that Messrs. Ashton and Flegel will be appointed to the compensation and audit committees upon joining the board. Each of the executive officers is a full-time employee of eRoomSystem Technologies. Non-employee directors of eRoomSystem Technologies devote such time to the affairs of eRoomSystem Technologies as is necessary and appropriate. Set forth below are descriptions of the backgrounds of the executive officers, directors, director designees and key employees of eRoomSystem: STEVEN L. SUNYICH has served as our president, chief executive officer and chairman since August 1999. Mr. Sunyich has also served as our president, chief executive officer and chairman of RoomSystems and its predecessors since 1993, as president and chief executive officer of RSi BRE since its inception in September 1999, and as our president, chief executive officer and chairman of eRoomSystem SPE since its inception in May 2000. Since 1983, Mr. Sunyich has been involved with the credit card and lodging industries as a developer, inventor and engineer of high-tech products. Mr. Sunyich developed and patented our automated credit card draft capture technology. DEREK K. ELLIS has served as our chief financial officer and treasurer since August 1999. Mr. Ellis has also served as chief financial officer and treasurer of RoomSystems since 1997, as chief financial officer, treasurer and as a director of RSi BRE since its inception in September 1999, and chief financial officer, treasurer and as a director of eRoomSystem SPE since its inception in May 2000. From 1995 to 1997, Mr. Ellis served as the Director of Finance for IVY International Communications, Inc., Provo, Utah, formerly a division of Novell/Word Perfect. Mr. Ellis received his Bachelor of Science in Finance from the University of Utah. STEPHEN M. NELSON has served as chief operating officer of eRoomSystem Technologies and RoomSystems since March 2000. Prior to joining us, Mr. Nelson spent nine years with TELS Corporation where he served as its president and chief operating officer from 1996 to 1999, its executive vice president from 1994 to 1996, and its chief financial officer from 1990 to 1994. Mr. Nelson also served as a member of its board of directors from 1991 to 2000. He received his Bachelor of Science in Accounting from the University of Utah in 1974. Mr. Nelson is a certified public accountant and a member of the AICPA, UACPA, Institute of Management Accountants and American Management Association. GREGORY L. HRNCIR has served as our general counsel and secretary since September 1999. Mr. Hrncir has also served as general counsel and secretary of RoomSystems and RSi BRE since September 1999 and as general -42- counsel and secretary of eRoomSystem SPE since May 2000. In 1999, Mr. Hrncir served as general counsel for PayStation America, Inc., an e-commerce company located in Los Angeles, California. From 1994 to 1998, Mr. Hrncir served in private practice in Los Angeles, California specializing in corporate and securities matters, and represented us from 1996 to 1998. Mr. Hrncir received his Bachelor of Science from Arizona State University and his Juris Doctor from Whittier College School of Law. He is a member of the Arizona and California State bars. LAWRENCE S. SCHROEDER has served as a director of eRoomSystem Technologies since August 1999. Mr. Schroeder has also served as a director of RoomSystems since 1998. Since 1992, Mr. Schroeder has been a private consultant to the hospitality, sports and other related industries. Mr. Schroeder is also a Director of River Valley Productions, Kansas City, Missouri, and a Director of Responsive Marketing & Communications, Chicago, Illinois. Mr. Schroeder received his Bachelor of Science in Business Administration from Huron College. S. LESLIE FLEGEL has agreed to serve as a director of eRoomSystem Technologies following completion of this offering. Mr. Flegel has been the Chairman of the board of directors and chief executive officer of The Source Information Management Company, St. Louis, Missouri, since its inception in March 1995. For more than 14 years, Mr. Flegel was the principal owner and chief executive officer of Display Information Systems Company, a predecessor of The Source. Mr. Flegel received his Bachelor of Arts from the University of Missouri at Columbia. DR. ALAN C. ASHTON has agreed to serve as a director of eRoomSystem Technologies following completion of this offering. Dr. Ashton is the co-founder of WordPerfect Corporation, Orem, Utah. Dr. Ashton received a Bachelor's Degree in Mathematics and a Ph.D. in Computer Science from the University of Utah. Dr. Ashton is a former professor of Computer Science at the University of Utah and Brigham Young University. Dr. Ashton has served on the board of directors of Novell, Inc., Geneva Steel and Utah Valley State College. JOHN J. PREHN has agreed to serve as a director of eRoomSystem Technologies following completion of this offering. Since 1997, Mr. Prehn has served as managing director of Amresco, Inc. Prior to 1997, Mr. Prehn co-founded and managed Commercial Lending Corporation, the company he sold to Amresco, Inc. From 1989 to 1996, Mr. Prehn co-founded Peteco, Inc., a company that purchased, packaged and sold securitized assets. Mr. Prehn received his Bachelor of Science in Business Administration from the University of California at Berkeley. OTHER KEY EMPLOYEES RONALD C. WARD has served as vice president of research and development of RoomSystems and its predecessors since 1993. Mr. Ward has spent the last 35 years in analog and digital circuitry design. From 1991 to 1995, Mr. Ward served as Senior Staff Engineer with Dynatec Video Group. Mr. Ward has developed over 40 products in the analog and digital industry and currently holds three patents. DOUGLAS SEASTRAND has served as vice president of software development of RoomSystems since October 1999. Prior to joining us, Mr. Seastrand was an Engineering Specialist with Bechtel Nevada, Las Vegas, Nevada. From 1997 to 1999, Mr. Seastrand served as lead technical engineer for EG&G/Special Projects, Las Vegas, Nevada. From 1995 to 1997, Mr. Seastrand served as president of Prime Services, Inc., Las Vegas, Nevada. Mr. Seastrand received his Bachelor of Science in Computer Science from the University of Nevada at Las Vegas and is currently a University Regent of the University and Community College System of Nevada. SHAWN S. SUNYICH has served as vice president of field operations of RoomSystems and its predecessors since 1993. Mr. Sunyich is experienced in the design and implementation of our products and is responsible for the installation and maintenance of our products at each property, as well as support and data management. Mr. Sunyich received his Associates Degree in Computer Science from Certified Careers Institute. Mr. Sunyich is the son of Steven L. Sunyich. STEVEN A. MOULTON has served as vice president of manufacturing of RoomSystems and its predecessors since 1994. Previously, Mr. Moulton worked with Rogers Corporation and ComTel, Inc. overseeing product development and manufacturing. Mr. Moulton received a Bachelor of Arts from Weber State College and a Master of Business Administration from Brigham Young University. -43- G. DOUGLAS SCOLLIN has served as vice president of corporate accounts of RoomSystems since October 1999. Mr. Scollin is a founder and, from 1994 to 1999, served as president of Lodgstix, Wichita, Kansas, a vendor of hotel property management systems. Mr. Scollin received his Bachelor of Science in Business Administration from the University of Florida. FRANK L. HICKS, JR. has served as general manager of RoomSystems since 1996. Prior to 1996, Mr. Hicks spent 17 years with Evans & Sutherland as a contracts negotiator and financial administrator. Mr. Hicks received a Bachelor of Arts degree from the Ohio Christian College, a Masters in Business Administration from Florida State Christian College and a Juris Doctor from the Blackstone School of Law. COMPOSITION OF OUR BOARD Our Bylaws authorize not less than two and no more than nine directors. Directors hold office for a term of one year. Executive officers are elected by and serve at the discretion of our board. After this offering, we will maintain at least two independent directors on our board at all times. COMMITTEES OF OUR BOARD The board has approved an audit committee and a compensation committee to be formed immediately upon the completion of this offering. The audit committee will have the responsibility of recommending the firm that will serve as our independent public accountants, reviewing the scope and results of the audit and services provided by our independent public accountants and meeting with our financial staff to review accounting procedures and policies. The compensation committee will have the responsibility of reviewing our financial records to determine overall compensation and benefits for executive officers and to establish and administer the policies which govern employee salaries and benefit plans. DIRECTOR COMPENSATION Non-employee directors of eRoomSystem Technologies will receive an attendance fee of $500 per meeting attended. Pursuant to the 2000 Stock Option and Incentive Plan, to the extent not previously granted under a separate plan or option, non-employee directors of eRoomSystem Technologies will receive stock options to purchase 5,000 shares of common stock following the completion of this offering. In addition, non-employee directors will receive additional stock options to purchase 5,000 shares of common stock at each annual meeting conducted after 2000. Dr. Ashton was issued his options pursuant to a stock option agreement, Mr. Flegel was issued his options pursuant to our stock option plan and Mr. Prehn will be issued his options pursuant to our stock option plan. Directors who are employees of eRoomSystem Technologies or our subsidiaries do not receive compensation for their services as directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the completion of this offering, compensation of executive officers was established by Steven L. Sunyich, chief executive officer, president and Chairman of the Board. Following this offering, compensation of executive officers will be established by the board pursuant to recommendations from the board's compensation committee. No member of our compensation committee will serve as a member of a board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or compensation committee. There are no family relationships among any of our directors, executive officers or key employees other than between Steven L. Sunyich and Shawn S. Sunyich, who are father and son. 2000 STOCK OPTION AND INCENTIVE PLAN Our stock option plan was adopted by the board on February 3, 2000, approved by the stockholders on March 29, 2000 and amended and restated by the board on June 6, 2000. The stock option plan became effective on -44- February 3, 2000. The plan provides us with the vehicle to grant to employees, officers, directors and consultants stock options and bonuses in the form of stock and options. Under the plan, we can grant awards for the purchase of up to two million shares of common stock in the aggregate, including "incentive stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 and non-qualified stock options. To date, we have issued options to purchase 1,417,250 shares of common stock under our stock option plan. The compensation committee of our board has authority to determine the persons to whom awards will be granted, the nature of the awards, the number of shares to be covered by each grant, the terms of the grant and with respect to options, whether the options granted are intended to be incentive stock options, the duration and rate of exercise of each option, the option price per share, the manner of exercise and the time, manner and form of payment upon exercise of an option. EXECUTIVE COMPENSATION SUMMARY COMPENSATION INFORMATION The following table sets forth summary information concerning the total remuneration paid or accrued by eRoomSystem Technologies, to or on behalf of our chief executive officer whose total salary, bonus and other compensation exceeded $100,000 during the fiscal year ended December 31, 1999. In accordance with the rules of the Securities and Exchange Commission, or the Commission, the compensation described in this table does not include perquisites and other personal benefits received by the executive officer named in the table below which does not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for this executive officer.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------- ---------------------- SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION - --------------------------- ---- ------ ----- ------------ ------------ Steven L. Sunyich, 1999 $158,152 -- 0 -- President, chief executive officer and chairman 1998 $74,308 -- 0 $ 4,000 1997 $28,517 -- 7,350 $49,000
The amounts paid to Mr. Sunyich other than salary were pursuant to a consulting agreement. Pursuant to this consulting agreement, Mr. Sunyich received $49,000 in 1997 and $4,000 in 1998. OPTION GRANTS TO EXECUTIVE OFFICERS DURING THE YEAR ENDED DECEMBER 31, 1999 AND SUBSEQUENT TO DECEMBER 31, 1999 We did not grant any options to our executive officers during the fiscal year ended December 31, 1999. Subsequently, we granted to Mr. Sunyich options to purchase 169,879 shares of common stock at $4.00 per share, 1,392 shares of common stock at $4.67 per share, 68,878 shares of common stock at $8.80 per share and 123,700 shares of common stock at $9.60 per share. We have also granted to our other executive officers an aggregate of options to purchase 139,207 shares of common stock at $4.00 per share, 2,088 shares of common stock at $4.67 per share, 25,000 shares of common stock at $6.00 per share, 81,390 shares of common stock at $8.80 per share and 86,310 shares of common stock at $9.60 per share. The exercise price for all of the options may, in some cases, be paid by delivery of other shares. The deemed fair value for the date of grant has been adjusted solely for financial accounting purposes. EMPLOYMENT AGREEMENTS On July 12, 2000, we entered into amended and restated executive employment agreements with Steven L. Sunyich, Derek K. Ellis and Gregory L. Hrncir. In addition, on July 12, 2000, we entered in an executive employment agreement with Stephen M. Nelson. The terms of the executive employment agreements for Messrs. Sunyich, Ellis, Nelson and Hrncir will terminate on December 31, 2001, December 31, 2001, June 30, 2002 and September 26, 2002, respectively, and may be extended through the mutual agreement of the parties. -45- The base salaries for Messrs. Sunyich, Ellis, Nelson and Hrncir are $155,000, $109,250, $110,000 and $108,000, respectively. Upon a merger with a third party, a change of control, the creation of debt facility of at least $6 million or an initial public offering, the base salaries of Messrs. Sunyich, Ellis and Hrncir will increase by $30,000, $13,250, $15,000 and $12,000, respectively, for the remainder of the term of the Agreement. All of our executive officers are eligible for annual bonuses and provided with benefits customarily granted to executive officers. All of our executive employment agreements provide that the executive officer shall not, directly or indirectly, be an owner, partner, director, manager, officer or executive, or otherwise render services to or be associated with any business that competes with us during the term of employment and for a one-year period following the termination of such employment. In addition, all of our executive employment agreements with our executive officers provide for the confidentiality of our non-public information during the term of employment and for the three-year period following the termination of such employment. In the event that the employment of one of our executive officers is terminated for reasons other than for cause, permanent disability or death, the executive officer would be entitled to receive the aggregate exercise price on all of the stock options exercised by the executive officer and cash compensation equal to the greater of the remainder of the salary due under the executive officer's agreement or the then existing base salary of the executive officer for a period of 36 months. If the executive officer is terminated for cause, the executive officer would be entitled to receive cash compensation equal to the greater of the remainder of the salary due under the executive officer's agreement or the then existing base salary of the executive officer for a period of 12 months. Under either scenario, we have agreed to make payment on a bi-monthly basis. Further, in the event of termination with cause, we have agreed to purchase the shares of the executive officer acquired during the executive officer's employment at a purchase price per share equal to 120% of the fair market value of the shares. INSURANCE We maintain directors and officers liability insurance of $2,000,000 on behalf of our officers and directors insuring them against liability that they may incur in such capacities or arising out of such status. In addition, we have purchased a key man insurance policy for Steven L. Sunyich in the amount of $2,000,000. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Sections 78.7502 and 78.751 of the Nevada Revised Statutes provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. Article XII of our articles of incorporation provides for indemnification of our directors, officers, employees and other agents to the extent and under the circumstances permitted by Sections 78.7502 and 78.751 of the Nevada Revised Statutes. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions contained in our articles of incorporation, bylaws, Nevada law or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit, or proceeding, is asserted by such director, officer or controlling person, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of this issue. In addition to the indemnification of officers and directors under the Nevada Revised Statutes, we entered into indemnification agreements with Dr. Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000. Pursuant to these indemnification agreements, we agreed to hold harmless and indemnify each of them against any and all expenses incurred by them as a result of their positions as directors of eRoomSystem Technologies. In addition, we agreed to advance expenses incurred by each of them upon receipt of a written request for such advancement containing an unsecured undertaking by each of them to repay such amounts to the -46- extent that they are held to not be entitled to indemnification from eRoomSystem Technologies. The advancement of expenses specifically excludes amounts for judgments, penalties, fines and settlements. Messrs. Ashton and Prehn each possess the right to indemnification if, in civil proceedings, they acted in good faith and in a manner that they reasonably believed to be in or not opposed to the best interests of eRoomSystem Technologies, and, in criminal proceedings, they had no reasonable cause to believe that his conduct was unlawful. In addition, eRoomSystem Technologies may elect to not indemnify Messrs. Ashton and Prehn if either a majority of the directors not involved in the relevant proceeding or independent legal counsel, in a written opinion, determine that they have not met the relevant standards for indemnification. On September 28, 1999, we entered into an indemnification agreement with Donnelly Prehn which indemnifies Mr. Prehn for actions which may be taken by him as a director on behalf of RSi BRE. Pursuant to this indemnification agreement, eRoomSystem Technologies and RSi BRE, jointly and severally, agreed to hold harmless and indemnify Mr. Prehn against any and all expenses incurred by him as a result of his position as a director of RSi BRE. In addition, we agreed to advance expenses incurred by Mr. Prehn upon receipt of a written request for such advancement containing an unsecured undertaking by Mr. Prehn to repay such amounts to the extent that Mr. Prehn is held not to be entitled to indemnification from eRoomSystem Technologies. Mr. Prehn's rights to indemnification are only available if damages have not already been paid directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is adjudged by a court of competent jurisdiction to have engaged in intentional misconduct or a knowing violation of the law, if he received an improper personal benefit, or if a court of competent jurisdiction renders a final decision that such indemnification is unlawful. There is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director of officer. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS INVOLVING ASH CAPITAL On August 17, 1999, eRoomSystem Technologies and Ash Capital entered into an Agreement of Understanding with respect to the purchase by Ash Capital of 333,334 shares of Series B convertible preferred stock at a price of $3.00 per share. This agreement provides Ash Capital with representation on our board and options to purchase 70,313 shares of common stock at $4.80 per share and 56,250 shares of common stock at $8.80 per share. The Agreement of Understanding was later amended by an agreement which provided additional obligations of eRoomSystem Technologies with respect to the purchase of an aggregate of 683,336 shares of Series B convertible preferred stock as follows: Ash Capital - 333,334 shares; C&W/RSI Partners - 133,334 shares; SKM Investments, LLC - 133,334 shares; and Thunder Mountain Properties LC - 83,334 shares. Pursuant to this amendment, eRoomSystem Technologies agreed to deliver monthly and annual financial statements, make adjustments for business combinations and capital-related transactions, and issue additional shares of preferred stock to the extent that eRoomSystem Technologies sells shares of common stock, or its equivalents, for less than $3.00 per share. In addition, the shares of Series B convertible preferred stock purchased by these investors possess the same rights as other shares of Series B convertible preferred stock. In addition to the Agreement of Understanding, we entered into a Stockholders' Agreement and Proxy dated August 17, 1999 with Ash Capital in which rights were granted to Ash Capital. As a result, Ash Capital possesses the right to vote a nominee onto our board of directors, the right of first refusal with respect to the proposed sale of shares of our capital stock by our executive officers and their respective affiliates and the right to participate in the proposed sale of shares of our capital stock in an amount equal to one quarter of the number of shares proposed to be sold. In the event that there is a transfer by our executive officers and their respective affiliates that violates this agreement, Ash Capital possesses the right to sell to our executive officers and their respective affiliates the number of shares of capital stock Ash Capital would have been able to sell pursuant to its participation rights. In addition, with the exception of transfers for estate planning purposes, our executive officers and their respective affiliates agreed to transfer no more than 10,000 shares of our capital stock per year. This agreement terminates upon the earlier of the tenth anniversary of the agreement or upon the consummation of a -47- firmly underwritten public offering with gross proceeds of at least $12 million. We believe that this agreement will terminate upon the closing of this offering. On February 15, 2000, we received a $500,000 loan from Ash Capital. Dr. Alan C. Ashton is a director designee of eRoomSystem Technologies and owns 100% of Ash Capital. This loan is evidenced by a promissory note bearing simple interest at the rate of 10% per annum, payable on July 31, 2000 and secured by our assets. Ash Capital was issued a warrant to purchase 18,750 shares of common stock exercisable at $4.80 per share through the second anniversary date of the close of this offering. The primary purpose of this loan was to fund approximately 900 Refreshment Centers to be installed in several hotel properties in the United States. The Ash Capital loan has been repaid in part from the sale of these Refreshment Centers and will be paid in full from the net proceeds of this offering. TRANSACTIONS INVOLVING RSG INVESTMENTS On July 17, 1998, eRoomSystem Technologies entered into an agreement with RSG Investments through which RSG Investments loaned us $1.5 million. RSG Investments is a privately-held company in which John J. Prehn, one of our director designees, is a member. Mr. Prehn is also the managing director of Amresco. At the time of these agreements, neither RSG Investments nor Amresco were affiliated with us. The purpose of the $1.5 million loan was to fund the production of approximately 2,270 Refreshment Centers. As an inducement, we issued the principals of RSG Investments warrants to purchase 46,875 shares of common stock and agreed to pay interest at the rate of 15% per annum. Our obligation was secured by Refreshment Centers, our other assets and shares of common stock held by the officers, directors and consultants. Under this agreement, we were to "repurchase" the Refreshment Centers within 75 days, or by September 30, 1998. If we failed to "repurchase" the Refreshment Centers by such date, warrants to purchase 9,375 shares of common stock would accrue every 30 days through January 30, 1999. We failed to "repurchase" the Refreshment Centers by September 30, 1998 and remained in default through January 30, 1999, although we obtained several extensions from RSG Investments. As our obligation remained unsatisfied, we entered into a settlement with RSG Investments in the form of an Equipment Transfer Agreement dated September 28, 1999. Pursuant to the Equipment Transfer Agreement, we formed a bankruptcy-remote entity, RSi BRE, placed a representative of RSG Investments on the board of directors of RSi BRE, transferred ownership of 2,270 Refreshment Centers to RSi BRE, and granted RSG Investments the right to receive $0.57 per Refreshment Center per day of the revenue realized from the 2,270 Refreshment Centers. As part of the settlement, the RSi BRE board of directors was to consist of three individuals, a representative of eRoomSystem Technologies, a representative of RSG Investments and a third independent director. In addition, we paid $250,000 to RSG Investments, converted $500,000 of our obligation into 166,667 shares of Series B convertible preferred stock and executed a promissory note in the principal amount of $750,000 bearing an interest rate of 10% per annum. Pursuant to this settlement, RSG Investments terminated the security interest granted under the original obligation and received a security interest in all of the assets of RSi BRE. In addition, RSG Investments surrendered all warrants to purchase shares of common stock eRoomSystem Technologies previously issued to it. Pursuant to the terms of this promissory note, we transferred 829 additional Refreshment Centers to RSi BRE. We are obligated to satisfy this promissory note in full on May 1, 2000, which has been extended to August 1, 2000. In the event we do not repay this promissory note in full by August 1, 2000, RSG Investments will be entitled to receive all revenues realized from the additional Refreshment Centers after the first $0.11 per room per day, which is reserved for taxes and service and maintenance. Upon payment of the promissory note in full, the additional Refreshment Centers will be returned to eRoomSystem Technologies. In the event that we do not repay the promissory note by the earlier of December 31, 2000 or 30 days after the effective date of the registration statement for this offering, we will be in default under the promissory note and a penalty interest of 18% per annum will apply. -48- OTHER TRANSACTIONS WITH RELATED PARTIES In October 1996, in consideration for the sale of patents to eRoomSystem Technologies, we agreed to pay $125,000 and issue 65,625 shares of common stock to Steven L. Sunyich. In fiscal year 1999, Mr. Sunyich converted the remaining principal balance of $70,750 into 23,583 shares of Series B convertible preferred stock. In 1997, Kelley Family Trust and Toleman Family Trust, both of which are controlled by Steven L. Sunyich, our president, chief executive officer and chairman, purchased 84,375 and 118,125 shares of common stock, respectively, at a price of $4.67 per share, evidenced by demand promissory notes bearing simple interest at the rate of 7% per annum. On October 1, 1999, the board called the demand promissory notes of Kelley Family Trust and Toleman Family Trust. The demand promissory notes were defaulted upon and the shares of common stock were returned to us and retired. In 1997, Derek K. Ellis, our chief financial officer, purchased 120,375 shares of common stock at a price of $4.67 per share, evidenced by a demand promissory note bearing simple interest at the rate of 7% per annum. On October 1, 1999, the board called the demand promissory note of Mr. Ellis. The demand promissory note was defaulted upon and the shares of common stock were returned to us and retired. In 1997, Gregory L. Hrncir, our general counsel and secretary, purchased 50,625 shares of common stock through DM Trust at a price of $4.67 per share, evidenced by a demand promissory note bearing simple interest at the rate of 7% per annum. On October 1, 1999, the board called the demand promissory notes of DM Trust. The demand promissory note was defaulted upon and the shares of common stock were returned to us and retired. In 1998, Derek K. Ellis, our chief financial officer, loaned $10,545 to us evidenced by a promissory note. On September 1, 1999, we entered into an agreement with Mr. Ellis whereby we agreed to convert the outstanding indebtedness due on this promissory note into shares of Series B convertible preferred stock. As a result, we issued 3,742 shares of Series B convertible preferred stock and 2,989 shares of our common stock to Mr. Ellis. Steven L. Sunyich, our president, chief executive officer and chairman, loaned the sum of $205,209 to us, as evidenced by a promissory note dated January 1, 1999. In addition, William R. Shupe, a former executive officer and former consultant, loaned the sum of $83,411 to us, as evidenced by a promissory note dated January 1, 1999. On September 1, 1999, we entered into agreements whereby we agreed to convert the outstanding indebtedness due on these promissory notes. As a result, we issued 72,434 shares of Series B convertible preferred stock and 51,983 shares of our common stock to Mr. Sunyich and 29,808 shares of Series B convertible preferred stock and 25,377 shares of our common stock to Mr. Shupe. The funds loaned by Mr. Sunyich and Mr. Shupe were originally loaned to them by Riggs Family Partnership, an entity owned and controlled by Mr. Shupe. Upon inquiry, we were advised that the loans by Riggs Family Partnership had been obtained from the proceeds of what may have been an unregistered offering of our common stock by Riggs Family Partnership and Mr. Shupe. Through this offering, Riggs Family Partnership sold shares of our common stock held by two of our stockholders. We have been advised that, from April 1998 through March 1999, Riggs Family Partnership sold approximately 112,500 shares of our common stock to approximately 36 investors in exchange for approximately $1.3 million. Further, in December 1999, Riggs Family Partnership notified us of its intention to transfer to these investors approximately 60,000 additional shares of our common stock held by Riggs Family Partnership to offset the effect of our one-for-two reverse stock split. We have not been able to determine whether this unregistered offering was conducted by Riggs Family Partnership with the benefit of a state or federal exemption from registration. As a result, Riggs Family Partnership and Mr. Shupe may be subject to an examination by administrative agencies with respect to its offers and sales of our common stock or may be subject to demand for rescission by the purchasers of our common stock. Despite the possible exposure of Riggs Family Partnership and Mr. Shupe to liability, we did not have any control over Riggs Family Partnership or Mr. Shupe and did not participate in the actual offer and sale of our common stock to these purchasers. -49- On May 30, 1999, the SBD Limited Partnership, an entity controlled by Mr. Sunyich, executed a promissory note in favor of eRoomSystem Technologies in the original principal amount of $1,590,000 in consideration for the issuance of 198,750 shares of our common stock. The purpose of the issuance was to assist eRoomSystem Technologies in complying with the stock pledge requirements mandated by the terms of the $1,500,000 loan from RSG Investments. On September 28, 1999, as a result of a settlement agreement with RSG Investments, the 198,750 shares of common stock were returned to the SBD Limited Partnership. Immediately thereafter, the SBD Limited Partnership surrendered the 198,750 shares of common stock to eRoomSystem Technologies in exchange for the cancellation of the promissory note. The shares of common stock were booked as treasury stock and have been retired. On December 7, 1999 and February 14, 2000, Mr. Sunyich formally assigned to eRoomSystem Technologies Patent No. 4,939,352 and Patent Nos. 4,857,714 and 4,883,948, respectively. These patents relate to credit card point of sale technology. Each of the patent assignments have been filed with the United States Patent and Trademark Office. The assignments finalized the sale of such patents by Mr. Sunyich to us. In exchange, we issued 65,625 shares and a promissory note in the principal amount of $125,000 to Mr. Sunyich. After paying down the promissory note to approximately $70,750, we converted the remaining outstanding principal and interest into 23,583 shares of Series B convertible preferred stock. The terms of each of the affiliate transactions were as favorable to the issuer or its affiliates as those generally available from unaffiliated third parties. We lacked sufficient disinterested independent directors to ratify the affiliate transactions at the time the transactions were initiated. All future material affiliated transactions and loans will be made or entered into on terms that are no less favorable to us than those that can be obtained from unaffiliated third parties. All future material affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel. PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of June 30, 2000 and as adjusted to reflect the sale of the shares of common stock in this offering by: - each person or entity known by us to own beneficially more than five percent of our common stock; - our chief executive officer, our directors and our director designees, individually; and - all of our executive officers, directors and director designees, as a group. The beneficial ownership is calculated based on 2,350,923 shares of our common stock outstanding as of June 30, 2000 and 6,221,699 shares outstanding immediately following the completion of this offering. The shares of common stock outstanding immediately following the completion of this offering reflect the 1,800,000 shares of common stock to be sold, and 400,000, 1,541,985 and 128,791 shares of common stock as a result of the conversion of Series A, Series B and Series C convertible preferred stock, respectively, upon the completion of this offering. The conversion of preferred stock into common stock was calculated upon the assumption that the initial public offering price will be $9.00 per share. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Below, the column titled "Number of Shares Beneficially Owned" includes all shares listed in the column titled "Shares Issuable Upon Exercise of Stock Options or Warrants." Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares voting and investment power with his or her spouse, with respect to all shares of capital stock listed as owned by such person. Shares issuable upon the exercise of options that are currently exercisable or become exercisable within sixty days of June 30, 2000 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares of our common stock held by another individual. -50- Unless otherwise indicated, the address of the following stockholders is c/o eRoomSystem Technologies, Inc., 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109.
PERCENTAGE OF SHARES NUMBER OF BENEFICIALLY OWNED SHARES -------------------- NAME OF EXECUTIVE OFFICER, DIRECTOR BENEFICIALLY PRIOR TO THE AFTER THE AND DIRECTOR DESIGNEES OWNED OFFERING 1 OFFERING - ---------------------- ------------ ------------ ----------- Steven L. Sunyich2 810,001 25.8% 12.3% Derek K. Ellis3 171,686 6.6% 2.7% Gregory L. Hrncir4 126,822 5.1% 2.0% Lawrence S. Schroeder5 58,598 2.4% 0.9% Dr. Alan C. Ashton6 404,734 6.3% 6.4% S. Leslie Flegel7 122,576 4.7% 1.9% John J. Prehn8 123,457 0.0% 2.0% All of our executive officers, directors and director 1,871,472 40.8% 25.8% designees as a group (8 persons) GREATER THAN FIVE PERCENT STOCKHOLDER - -------------------------------------- Pacific Acquisition Group II, LLC9 23501 Park Sorrento, Suite 213-B 149,333 6.4% 2.4% Calabasas, California 91302
- --------------- 1 The percentage of shares beneficially owned prior to the offering has been calculated by using each person's beneficial ownership less shares issuable upon conversion of our convertible preferred stock. We have excluded these shares since these shares are only issuable upon the consummation of our offering. 2 Reflects beneficial ownership of 60,492 shares of common stock, 270,563 shares of common stock held by trusts for which Mr. Sunyich acts as trustee and his family members are beneficiaries, 107,747 shares of common stock as a result of the conversion of Series B convertible preferred stock upon the completion of this offering, and options to purchase an aggregate of 371,199 shares of common stock. The options held by Mr. Sunyich are immediately exercisable. 3 Reflects beneficial ownership of 4,206 shares of common stock, 5,569 shares of common stock as a result of the conversion of Series B convertible preferred stock upon the completion of this offering, and options to purchase an aggregate of 161,911 shares of common stock. The options held by Mr. Ellis are immediately exercisable. 4 Reflects beneficial ownership of 1,875 shares of common stock and options to purchase an aggregate of 124,947 shares of common stock. The options held by Mr. Hrncir are immediately exercisable. 5 Reflects beneficial ownership of options to purchase 58,598 shares of common stock. The options held by Mr. Schroeder are immediately exercisable. 6 Ash Capital, controlled by Dr. Ashton, owns 12,507 shares of common stock, options to purchase 145,313 shares of common stock and 246,914 shares of common stock as a result of the conversion of Series B convertible preferred stock upon the completion of this offering. The options held by Ash Capital are immediately exercisable. 7 Mr. Flegel's beneficial ownership consists of options to purchase 112,500 shares of common stock, a warrant to purchase 2,500 shares of common stock and 7,576 shares of common stock as a result of the conversion of Series C convertible preferred stock upon the completion of this offering. The options and warrants held by Mr. Flegel are immediately exercisable. 8 Mr. Prehn's beneficial ownership consists of 123,457 shares of common stock held in the name of RSG Investments as a result of the conversion of 166,667 shares of Series B convertible preferred stock upon completion of this offering. Mr. Prehn is a member of RSG Investments. 9 Pacific Acquisition Group II, LLC is solely controlled and beneficially owned by James E. Hock, Jr. -51- DESCRIPTION OF CAPITAL STOCK eRoomSystem's authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par value; 5,000,000 shares of preferred stock, $0.001 par value; 500,000 shares of Series A convertible preferred stock, $0.001 par value; 2,500,000 shares of Series B convertible preferred stock, $0.001 par value; and 2,000,000 shares of Series C convertible preferred stock, $0.001 par value. Our current authorized capital was effected through an amendment and restatement of our articles of incorporation on March 29, 2000. On September 28, 1999, our stockholders approved a reverse split of our common stock, including all common stock underlying our outstanding options and warrants, at the rate of one share for every two shares outstanding. Due to contractual anti-dilution rights which have since been terminated, 1,471,000 shares of our common stock were excluded from the one-for-two reverse stock split. This reverse stock split did not affect our Series A or Series B convertible preferred stock and has been retroactively reflected in this prospectus. On March 29, 2000, our stockholders approved a reverse split of our common stock, including all common stock underlying our outstanding options and warrants, at a rate of three shares for each four shares outstanding. Our three-for-four reverse stock split did not affect our Series A, Series B or Series C convertible preferred stock and has been retroactively reflected in this prospectus. As of June 30, 2000, and after giving effect to the one-for-two reverse stock split and the three-for-four reverse stock split of our common stock, there were outstanding 2,352,977 shares of common stock, 360,000 shares of Series A convertible preferred stock, 2,081,680 shares of Series B convertible preferred stock and 196,150 shares of Series C convertible preferred stock. As set forth below, there are outstanding options and warrants to purchase 2,502,963 shares of common stock as of June 30, 2000. We have reserved 2,000,000 shares of common stock for issuance pursuant to our stock option plan. COMMON STOCK As of June 30, 2000, our outstanding shares of common stock were held by approximately 400 stockholders. Holders of common stock are entitled to one vote per share on all matters submitted to a vote of the shareholders. We do not allow cumulative voting of any kind, and are not required to do so under Nevada law. Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of common stock will be entitled to receive dividends, if any, as may be declared from time to time by the board out of legally available funds. Upon liquidation, dissolution, or winding up of eRoomSystem Technologies, the holders of common stock will be entitled to a pro rata share of our assets that are legally available for distribution after payment of all debts and other liabilities and subject to the prior rights of any preferred stock then outstanding. Holders of our common stock have no preemptive, subscription, redemption, or conversion rights. We have made an application for listing of our common stock on the Nasdaq SmallCap Market. Assuming that we are listed initially, we must meet minimum criteria for continued listing in order to maintain the listing of our common stock on the Nasdaq SmallCap Market. As we have a history of operating losses and as there has not been a public market for our common stock, we may not be able to meet the requirements for continued listing on the Nasdaq SmallCap Market. In the event that our common stock no longer meets the listing requirements of the Nasdaq SmallCap Market, our common stock will most likely be traded on the OTC Bulletin Board or the National Quotation Bureau Pink Sheets. If our common stock is no longer traded on the Nasdaq SmallCap Market, the visibility of our common stock to the market will most likely be reduced. PREFERRED STOCK We are authorized to issue 5,000,000 shares of undesignated preferred stock. None of the undesignated preferred stock is issued or outstanding, and we have no present plans to issue shares of undesignated preferred stock. Although our board is empowered to issue one or more series of undesignated preferred stock with such rights, preferences, restrictions and privileges as may be fixed by our board, without further action by our stockholders, we will not offer any preferred stock to any officer, director or 5% stockholder except on the same terms it is offered to all other existing or new stockholders, or unless the issuance of any preferred stock is approved -52- by a majority of our independent directors who did not have an interest in the transactions and who have access, at our expense, to our legal counsel or independent legal counsel. The issuance of the undesignated preferred stock could adversely affect the rights, including voting rights, of the holders of our common stock and could impede an attempted takeover of us. SERIES A CONVERTIBLE PREFERRED STOCK The rights of holders of common stock are subject to, and are adversely affected by, the rights of holders of Series A convertible preferred stock. We have 360,000 shares of Series A convertible preferred stock issued and outstanding out of 500,000 shares authorized. Series A convertible preferred stock is held by approximately 60 persons. Series A convertible preferred stock is subject to the following rights and preferences: CONVERSION RIGHTS. Shares of Series A convertible preferred stock automatically convert into eRoomSystem Technologies common stock immediately following the close of this offering. The Series A convertible preferred stock shall be converted into common stock on a 1:1 basis, provided that the price per share of the common stock in this offering is $10.00. If the price per share is less than $10.00, the conversion rate shall be $10.00 divided by the actual price per share. DIVIDENDS. Holders of Series A convertible preferred stock are cumulating an 8% annual dividend from November 14, 1998, payable quarterly in arrears out of legally available funds, subject to our ability to pay such dividends as limited by Nevada corporate law. To date, we have not paid dividends to holders of Series A convertible preferred stock. LIQUIDATION RIGHTS. In the event of a liquidation, dissolution or winding up of eRoomSystem Technologies, holders of Series A convertible preferred stock will be entitled to receive, out of legally available assets, a liquidation preference of $10.00 per share, plus an amount equal to any unpaid dividends to the payment date, before any payment or distribution is made to the holders of common stock or any series or class of our stock hereafter issued that ranks junior as to liquidation rights of the Series A convertible preferred stock. VOTING RIGHTS. Holders of Series A convertible preferred stock may not vote on any matter, excluding matters affecting the rights of such shareholders or as required by law. In connection with any such vote, each outstanding share of Series A convertible preferred stock will be entitled to one vote. SERIES B CONVERTIBLE PREFERRED STOCK We have issued and outstanding 2,081,680 shares of Series B convertible preferred stock out of 2,500,000 shares authorized. Series B convertible preferred stock is held by approximately 100 persons. On April 12, 2000, the Series B convertible preferred stockholders approved an amendment to the Series B Certificate designating the rights, preferences and privileges thereof as follows: CONVERSION RIGHTS. Series B convertible preferred stock is automatically convertible upon the close of this offering into our common stock. The number of shares of common stock resulting from the conversion is determined through the following formula: 2,081,680 shares x $3.00 = Shares of common of Series B convertible ---------------------- stock preferred stock 45% of initial public offering price For example, if the initial public offering price is $9.00 per share, the outstanding shares of Series B convertible preferred stock shall be converted into 1,541,985 shares of common stock upon consummation of this offering. In the event we do not close this offering by September 28, 2000, holders of Series B convertible preferred stock shall have the option to convert each share of their Series B convertible preferred stock into 1.5 shares of common stock. Holders of Series B convertible preferred stock are subject to a "lock-up" restricting resale of the underlying shares of common stock for a period of nine months following closing of this offering. -53- DIVIDENDS. Holders of Series B convertible preferred stock are entitled to an annual cumulative dividend of 6%, payable in the form of common stock at the rate of $3.00 per share, and subject to our ability to pay such dividends as limited by Nevada corporate law. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of eRoomSystem Technologies, holders of Series B convertible preferred stock will be entitled to receive, out of legally available assets, a liquidation preference of $10.00 per share, plus an amount equal to any unpaid dividends to the payment date, before any payment or distribution is made to the holders of common stock or any series or class of the our stock hereafter issued that ranks junior to the liquidation rights of Series B convertible preferred stock. VOTING RIGHTS. Holders of Series B convertible preferred stock may not vote on any matter, excluding matters affecting the rights of such shareholders or as required by law. In connection with any such vote, each outstanding share of Series B convertible preferred stock will be entitled to one vote. In addition, if we have not completed this offering by September 28, 2000, holders of Series B convertible preferred stock shall be accorded voting rights. Each share of Series B convertible preferred stock shall be entitled to one vote. SERIES C CONVERTIBLE PREFERRED STOCK We have issued and outstanding 196,150 shares of Series C convertible preferred stock out of 2,000,000 shares authorized. Series C convertible preferred stock is held by 12 persons. The shares of Series C convertible preferred stock are subject to the following rights and preferences: CONVERSION RIGHTS. Series C convertible preferred stock is automatically convertible upon the close of this offering into our common stock. The number of shares of common stock resulting from the conversion is determined through the following formula: 196,150 shares of x $3.25 = Shares of common Series C convertible ---------------------- stock preferred stock 55% of initial public offering price For example, if the initial public offering price is $9.00 per share, the outstanding shares of Series C convertible preferred stock shall be converted into 128,791 shares of common stock upon consummation of this offering. In the event we do not close this offering by January 31, 2001, shares of Series C convertible preferred stock shall be converted into shares of common stock at a rate of $3.30 per share instead of 55% of the initial public offering price. LOCK-UP. Series C convertible preferred stock is subject to a "lock-up" restricting the resale of the shares of common stock, issuable upon conversion, for a period of one year following the close of this offering, or for an additional period if mandated by Nasdaq. DIVIDENDS. Series C convertible preferred stock includes a 7% cumulative annual dividend, payable in cash, and is subject to our ability to pay such dividends as limited by Nevada law and payable when declared by our board. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of eRoomSystem Technologies, holders of Series C convertible preferred stock will be entitled to receive, out of legally available assets, a liquidation preference of $10.00 per share, plus an amount equal to any unpaid dividends to the payment date, before any payment or distribution is made to the holders of common stock or any series or class of our capital stock hereafter issued that ranks junior to the liquidation rights of the Series C convertible preferred stock. VOTING RIGHTS. Holders of Series C convertible preferred stock may not vote on any matter, excluding matters affecting the rights of such stockholders or as required by law. In connection with any such vote, each outstanding share of Series C convertible preferred stock shall be entitled to one vote. -54- OPTIONS AND WARRANTS As of June 30, 2000, there are options and warrants outstanding to purchase 2,502,963 shares of common stock at exercise prices ranging from $1.00 to $16.00 per share with a weighted average exercise price per share of $5.77. These options and warrants are exercisable at various times through the third anniversary date of this offering. We will not grant any options or warrants to purchase common stock at an exercise price of less than 85% of the fair market value of our common stock on the date of grant. REGISTRATION RIGHTS In conjunction with the offering of Series B convertible preferred stock, we granted registration and participation rights with respect to our common stock pursuant to an agreement with Ash Capital and three other investors dated September 30, 1999. These stockholders may make a demand to have the shares of common stock underlying their shares of Series B convertible preferred stock, or the Registrable Shares, or to participate in the registration of shares of common stock. The right to demand or participate in the registration of shares of common stock is suspended if such registration is prior to March 31, 2001, is prior to nine months following the last closing of our initial public offering, or is after eRoomSystem Technologies has effected two prior registrations pursuant to the registration rights granted hereunder where each registration has remained effective for at least 90 days. The costs related to registration expenses, such as filing fees, legal expenses and printing expenses, will be paid by us and the costs related to selling expenses, such as underwriting discounts, selling commissions and stock transfer taxes, will be paid by the holders of Registrable Shares. In the context of an underwritten offering, the holders of Registrable Shares acknowledge that the managing underwriter may limit the number of shares to be underwritten and require the pro rata reduction in the shares to be registered. Further, the holders of Registrable Shares agree that such shares will not be resold during a period beginning 15 days before the effective date of the registration statement and continuing until the earlier of the abandonment of the proposed public offering or 90 days after the last closing in the public offering period. In conjunction with our July 1996 through March 1997 notes offering, we distributed offering documents that contained a statement that made reference to demand and piggy-back registration rights for the shares of common stock underlying the warrants granted in the offering. These purported registration rights apply to 322,125 shares of common stock. We have not solicited or obtained waivers from the holders of these registration rights with respect to our initial public offering since we believe that sufficient grounds exist to deny such rights. Pursuant to our April 1997 through December 1997 units offering, we granted registration rights to the purchasers of units where such purchasers possessed the right to demand registration and piggy-back registration for the shares of common stock purchased. These registration rights apply to 372,375 shares of common stock. We have not solicited or obtained waivers from the holders of these registration rights with respect to our initial public offering since the shares were purchased over two years ago and are freely tradable pursuant to Rule 144(k) of the Securities Act. Pursuant to our January 1998 through March 1998 common stock offering, we granted purchasers of common stock the right to piggy-back the registration of their shares onto a future registration statement of eRoomSystem Technologies for a public offering. The determination of whether the shares of common stock purchased by these investors will be included in a future registration statement will be dependent upon the underwriter or underwriters for the public offering, as the underwriter or underwriters would have final discretion as to which shares of common stock will be registered. We have not solicited or obtained waivers from the holders of these registration rights with respect to our initial public offering since the shares were purchased over two years ago and are freely tradable pursuant to Rule 144(k) of the Securities Act. Pursuant to an offshore subscription agreement dated as of April 13, 2000, we granted registration rights for the 200,000 shares of common stock issued to the selling stockholders in connection with the bridge loan. In accordance with these registration rights, these shares of common stock have been registered in conjunction with this initial public offering. In addition, we have agreed to have a registration statement for these shares declared effective within 180 days of the closing of the bridge loan. The selling stockholders are prohibited from selling their shares of common stock until 180 days after the closing of this offering, or for a longer period as required by the -55- National Association of Securities Dealers, Inc. or the Nasdaq Stock Market not to exceed one year. Due to this lock-up restriction, the 200,000 shares of common stock issued to the selling stockholders have been registered pursuant to the registration statement for this offering, but have not been included as part of this prospectus. 2000 REVERSE STOCK SPLIT On March 29, 2000, our board and a majority of our stockholders approved by written consent our three-for-four reverse stock split. This reverse stock split affects all shares of common stock outstanding and underlying our options and warrants, but does not affect the Series A, Series B and Series C convertible preferred stock. NEVADA LAW, OUR ARTICLES OF INCORPORATION AND BYLAWS Some of the provisions of our articles of incorporation and bylaws may have the effect of discouraging some types of transactions that involve an actual or threatened change of control of eRoomSystem Technologies, which in turn could limit your ability to sell your shares at a premium. Some of these provisions are summarized below. SIZE OF BOARD AND ELECTION OF DIRECTORS. Our articles of incorporation and bylaws, when read together, provide for a minimum of two and a maximum of nine persons to serve on the board. However, the number of directors may be increased or decreased by a resolution adopted by the affirmative vote of a majority of the board. Removal of a director requires two-thirds vote of the outstanding shares of our common stock. STOCKHOLDER NOMINATIONS AND PROPOSALS. Our bylaws provide for advance notice requirements for stockholder nominations and proposals at annual meetings of our stockholders. Stockholders may nominate directors or submit other proposals only upon written notice to eRoomSystem Technologies not less than 120 days nor more than 150 days prior to the anniversary of the date of the notice to stockholders of the previous year's annual meeting. A stockholder's notice also must contain additional information, as specified in the bylaws. The board may reject proposals that are not made in accordance with the procedures contained in the bylaws or that are not properly the subject of stockholder action. CALLING SPECIAL STOCKHOLDER MEETINGS; STOCKHOLDER ACTION WITHOUT A MEETING. Matters to be acted upon by the stockholders at special meetings are limited to those specified in the notice of the meeting. A special meeting of stockholders may be called by the board, the Chairman or the president of eRoomSystem Technologies by resolution of the board or at the request in writing of stockholders holding at least 10% of the outstanding shares entitled to vote at the special meeting. As allowed by Nevada law, the bylaws provide that any action by written consent of stockholders in lieu of a meeting must be signed by the holders of at least a majority of the voting power. PREFERRED STOCK. We are authorized to issue 5,000,000 shares of undesignated preferred stock, commonly referred to as "blank check" preferred stock. None of the undesignated preferred stock is issued or outstanding, and we have no present plans to issue shares of undesignated preferred stock. Our board is empowered to issue one or more series of undesignated preferred stock with such rights, preferences, restrictions and privileges as may be fixed by our board, without further action by our stockholders. The issuance of the undesignated preferred stock could adversely affect the rights, including voting rights, of the holders of our common stock and could impede an attempted takeover of us. NEVADA ANTI-TAKEOVER STATUTES. Nevada law provides that an acquiring person who acquires a controlling interest in a Nevada corporation may only exercise voting rights on any control shares if those voting rights are conferred by a majority vote of the corporation's disinterested stockholders at a special meeting held upon the request of the acquiring person. If the acquiring person is accorded full voting rights and acquires control shares with at least a majority of all the voting power, any of our stockholders, who did not vote in favor of authorizing voting rights for the control shares, are entitled to payment for the fair value of his shares. A "controlling interest" is an interest that is sufficient to enable the acquiring person to exercise at least one-fifth of the voting power of the corporation in the election of directors. "Control shares" are outstanding voting shares that an acquiring person or associated persons acquire or offer to acquire in an acquisition and those shares acquired during the 90-day period before the person involved became an acquiring person. -56- In addition, Nevada law restricts the ability of a corporation to engage in any combination with an interested stockholder for three years from when the interested stockholder acquires shares that cause the stockholder to become an interested stockholder, unless the combination or the purchase of shares by the interested stockholder is approved by the board before the stockholder became an interested stockholder. If the combination was not previously approved, the interested stockholder may only effect a combination after the three-year period if the stockholder receives approval from a majority of the disinterested shares or the offer meets the fair price criteria. An "interested stockholder" is a person who is: - the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of a corporation; or - an affiliate or associate of a corporation and, at any time within three years immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of a corporation. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board and in the policies formulated by the board and to discourage some types of transactions that may involve actual or threatened change of control of our company. These provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or an unsolicited proposal for the potential restructuring or sale of all or a part of our company. However, these provisions could discourage potential acquisition proposals and could delay or prevent a change in control of our company. These provisions may also have the effect of preventing changes in our management. As a result of the potential adverse effects of these provisions on our stockholders, on July 11, 2000, our board approved the second amendment and restatement of our articles of incorporation whereby eRoomSystem Technologies elected not to be governed by the Nevada laws relating to an acquisition of a controlling interest in a Nevada corporation and a business combination with an interested stockholder. On July 12, 2000, our stockholders approved this second amendment and restatement of our articles of incorporation. Under Nevada law, the amendment to our articles of incorporation is not effective until 18 months after July 12, 2000 and will not apply to any combination of eRoomSystem Technologies with an interested stockholder whose date of acquiring our shares is on or before July 12, 2000. TRANSFER AGENT Our transfer agent is American Stock Transfer and Trust Company. Its address is 40 Wall Street, New York, New York 10005, and its telephone number is (718) 921-8360. -57- SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. As described below, no shares currently outstanding will be available for sale immediately after this offering because of contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse or are released could adversely affect the prevailing market price and impair our ability to raise equity capital in the future. Upon completion of the offering, we will have 6,223,753 shares of common stock outstanding. Of these shares, the 1,800,000 shares sold in the offering, plus any shares issued upon exercise of the underwriter's over-allotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. In general, affiliates include officers, directors and/or 10% stockholders. Of the remaining 4,423,753 shares outstanding, 200,000 shares of common stock issued in conjunction with our bridge loan will be registered in conjunction with this offering. Since these selling stockholders are subject to a lock-up of their shares of 180 days, or such additional period as required by the National Association of Securities Dealers, Inc. or the Nasdaq Stock Market not to exceed one year, the shares have not been included as part of this prospectus. The balance of 4,223,753 shares outstanding are "restricted securities" within the meaning of Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 144(k) promulgated under the Securities Act, which are summarized below. Sales of the restricted securities in the public market, or the availability of such shares for sale, could adversely affect the market price of the common stock. Our directors, officers and selected stockholders will enter into lock-up agreements in connection with this offering generally providing that, without first obtaining the written consent of the underwriter representative: - they will not offer or sell any of our common stock owned by them during the first 18 months following the closing of this offering; - they will not offer or sell more than 10% of our common stock owned by them in any of the next two consecutive calendar quarters after the initial 18-month period; and - they will not offer or sell more than the lesser of 25% of our outstanding common stock owned by them or the number of shares which may be sold pursuant to the volume limitation of Rule 144(e) under the Securities Act, in any of the next four calendar quarters thereafter. These stockholders have also agreed that, during the four-year period from the closing of this offering, they will not sell shares of our common stock in excess of the volume limitations of Rule 144(e) even though Rule 144(k) may be available. The underwriter representative may elect to release such stockholders from their respective lock-up agreements if, in the sole discretion of the underwriter representative, the sales of common stock will not disrupt an orderly market for our common stock. Taking into account the lock-up agreements, and assuming the underwriter representative does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: - Beginning on the date of this prospectus, all shares sold in this offering and up to 1,044,251 shares pursuant to Rule 144(k) will be immediately available for sale in the public market, excluding shares subject to lock-up arrangements. -58- _ Beginning 90 days after the date of this prospectus, 95,430 shares will be eligible for sale subject to volume limitations, as explained below, pursuant to Rule 144. In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of common stock then outstanding which will equal approximately 62,217 shares immediately after the offering; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice, and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell these shares in reliance upon Rule 144 but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell these shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, we intend to file a registration statement on Form S-8 under the Securities Act within 90 days following the date of this prospectus to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under our stock option plan will also be freely tradable in the public market. However, shares held by affiliates will be subject to lock-up agreements and the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resaleable under Rule 701. As of June 30, 2000, there were outstanding options and warrants for the purchase of 2,502,963 shares of common stock, of which 2,440,109 shares were vested and exercisable. -59- UNDERWRITING We have entered into an underwriting agreement with the underwriters named below. Donald & Co. Securities Inc., or Donald, is acting as the representative of the underwriters. The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below: UNDERWRITERS NUMBER OF SHARES - ------------ ---------------- Donald & Co. Securities Inc. ........................ Monness, Crespi, Hardt & Co., Inc. .................. L.H. Friend, Weinress, Frankson & Presson, LLC ...... Huntleigh Securities Corp. .......................... Smith Moore & Co. ................................... Ramirez & Co., Inc. ................................. TOTAL 1,800,000 ===================== This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the shares offered by this prospectus if any shares are purchased, other than those shares covered by the over-allotment option described below. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. The initial public offering price was determined through negotiations between the underwriters and us and may not be representative of the price that will prevail in the open market. Since there has not been a public market for our common stock prior to this offering, the price of our common stock may be highly volatile as a result of its response to a variety of factors. Some of these factors include actual or anticipated fluctuations in our annual and quarterly operating results, our ability to execute our business plan and meet our projected growth, additions or departures of key personnel, changes in financial estimates by securities analysts, and general economic, industry and market conditions. The representative has advised us that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to securities dealers at such price less a concession of $________ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $_______ per share to other dealers. The representatives will not change the offering price and other selling terms to public purchasers prior to the completion of this offering. We have granted the representatives an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the representatives to purchase a maximum of 270,000 additional shares from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $18,630,000, the total proceeds to us will be $16,999,875 and our net proceeds, after paying the underwriting discount and other expenses related to this offering will be approximately $16.2 million. -60- The following table provides information regarding the amount of the discount to be received by the underwriters.
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION - ---------------------- ------------------------------ ------------------------------- $ $ $
We will pay all of the total expenses of the offering, which we estimate will be approximately $__________, or $__________ if the over-allotment is exercised. In addition, we will pay to Donald $162,000 for its expenses, $186,300 if the over-allotment is exercised, of which we have paid $25,000. We have agreed to indemnify the underwriters against specific liabilities, including liabilities under the Securities Act. Our officers and directors have agreed that they will not, without the prior written consent of Donald, directly or indirectly: - they will not offer or sell any of our common stock owned by them during the first 18 months following the closing of this offering; - they will not offer or sell more than 10% of our common stock owned by them in any of the next two consecutive calendar quarters after the initial 18-month period; and - they will not offer or sell more than the lesser of 25% of our common stock owned by them or the number of shares which may be sold pursuant to the volume limitation of Rule 144 under the Securities Act, in any of the next four calendar quarters thereafter. Our officers and directors have also agreed that, during the four-year period from the closing of this offering, they will not sell shares of our common stock in excess of the volume limitations of Rule 144(e) even though Rule 144(k) may be available. In addition, for a two year period we will not sell securities to raise money or issue any options or warrants below the then current market price without Donald's consent. We and Donald will enter into a financial consulting agreement providing for Donald, or its designee, to act as financial consultant to us for a 12 month period for a fee of $72,000, payable at a rate of $6,000 per month. We have granted Donald for a period ending on the third anniversary of the closing of this offering, the right to have Donald's designee present at meetings of the board and each of its committees subject to our right to exclude such designee under limited circumstances. The designee will be entitled to the same notices and communications sent by us as we gave to our directors and will attend directors' and committees' meetings, but will not be entitled to vote at such meetings. Such designee will also be entitled to receive the same compensation payable to directors as members of the board and its committees and all reasonable expenses in attending such meetings. As of the date of this prospectus no designee has been selected. In connection with this offering, we have agreed to sell to Donald, for nominal consideration, warrants to purchase up to an aggregate of 180,000 shares of common stock exercisable initially at 120% of the initial public offering price per share for a period of four years beginning one year from the date hereof. These warrants contain antidilution provisions providing for adjustment of the exercise price upon: - the issuance of common stock, or securities exercisable or convertible into common stock, at a price less than the exercise price; and - any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. -61- In addition, the warrants grant to the holders rights commencing one year from the date of this prospectus to have common stock issued upon exercise of the warrants registered under the Securities Act. These rights include the right to require us to register these shares for a four year period and the right to include these shares for a six year period in a registration statement filed by us. Subject to the underwriters' discretion, a limited number of shares of common stock may be purchased by our full-time employees. We have made arrangements that any full-time employees may pay for such shares through payroll deduction. Rules of the Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the following rules: - Stabilizing transactions -- The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of shares, so long as stabilizing bids do not exceed a specified maximum. - Over-allotments and syndicate covering transactions -- The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. - Penalty bids -- If the representative purchases shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq SmallCap Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time. Donald received a fee as a placement agent with respect to a portion of shares of Series B convertible preferred stock sold from March 1999 through October 1999. In March and April 2000, Donald received a fee for acting as our private placement agent with respect to the sale of units consisting of Series C convertible preferred stock, convertible subordinated promissory notes and warrants to purchase common stock. In addition, Donald received a finder's fee of $27,500 for facilitating the bridge loan. In addition to the shares registered on behalf of eRoomSystem Technologies, the registration statement registers 200,000 shares on behalf of selling stockholders. Since these selling stockholders are subject to a lock-up of their shares of 180 days, or such additional period as required by the National Association of Securities Dealers, Inc. or the Nasdaq Stock Market not to exceed one year, the shares have not been included as part of this prospectus. Once the lock-up period expires, we will file a post-effective amendment to the registration statement or a prospectus supplement with respect to the shares held by the selling stockholders. In the post-effective amendment to the registration statement or prospectus supplement, we will disclose, to the extent possible, the selling price and selling terms of the selling stockholder shares and the maximum compensation to be received by a member of the National Association of Securities Dealers in connection with the sale of the selling stockholder shares. In addition, the compensation to be received, if any, by a member of the National Association of Securities Dealers and the underwriting documents to be used, if any, will be submitted for approval to the National Association of Securities Dealers prior to the release of the shares for sale. -62- LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Kummer Kaempfer Bonner & Renshaw, Las Vegas, Nevada. Certain legal matters in connection with the offering will be passed upon for the underwriters by Parker Duryee Rosoff & Haft, New York, New York. EXPERTS The consolidated balance sheets as of December 31, 1998 and 1999, and the consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended have been included in this prospectus in reliance on the report of Hansen, Barnett & Maxwell, Salt Lake City, Utah, independent certified public accountants, given on the authority of that firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS In September 1999, we engaged the firm of Arthur Andersen LLP to audit our financial statements for the fiscal years ended December 31, 1998 and 1999. On March 31, 2000, we received a letter in which Arthur Andersen resigned as our independent auditors due to its determination that its independence had been impaired. Arthur Andersen did not issue a report for our financial statements for the last two fiscal years. The resignation of Arthur Andersen was not based upon a disagreement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure while Arthur Andersen was engaged by us. On April 4, 2000, our board approved the retention of Hansen, Barnett & Maxwell as our independent auditors. AVAILABLE INFORMATION We have filed with the Commission a registration statement on Form SB-2 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits, portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information about us and the common stock, we refer you to the registration statement and to its exhibits. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, and each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits without charge at the public reference facilities the Commission maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of these materials from the Commission upon the payment of the fees prescribed by the Commission. You may also inspect these reports and other information without charge at a website maintained by the Commission. The address of this site is http://www.sec.gov. You may also obtain information on the operation of the public reference facilities of the Commission at 1-800-732-0330. Upon completion of this offering, we will become subject to the informational requirements of the Securities Exchange Act of 1934 and will be required to file reports, proxy statements and other information with the Commission. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the Commission and at the Commission's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the Commission as described above, or inspect them without charge at the Commission's website. We have applied for quotation of our common stock on the Nasdaq SmallCap Market. If we receive approval for quotation on the Nasdaq SmallCap Market, then you will be able to inspect reports, proxy and information statements and other information concerning us at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. -63- eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants................F-2 Consolidated Balance Sheets.......................................F-3 Consolidated Statements of Operations.............................F-5 Consolidated Statements of Stockholders' Deficit..................F-6 Consolidated Statements of Cash Flows............................F-11 Notes to Consolidated Financial Statements.......................F-13 F-1 HANSEN, BARNETT & MAXWELL A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS (801) 532-2200 Member of AICPA Division of Firms Fax (801) 532-7944 Member of SECPS 345 East Broadway, Suite 200 Member of Summit International Salt Lake City, Utah 84111-2693 Associates, Inc. www.hbmcpas.com REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the Stockholders eRoomSystem Technologies, Inc. We have audited the accompanying consolidated balance sheets of eRoomSystem Technologies, Inc. (a Nevada corporation) and subsidiary as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eRoomSystem Technologies, Inc. and subsidiary as of December 31, 1998 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations (excluding non-cash compensation expense (income)) and as of December 31, 1999 had a working capital deficit of $2,650,616, a stockholders' deficit of $23,852, and was in default under certain debt agreements. During the years ended December 31, 1998 and 1999, the Company's operations used $2,931,871 and $2,304,807 of cash, respectively. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. HANSEN, BARNETT & MAXWELL Salt Lake City, Utah April 13, 2000, except for the third paragraph of Note 1, as to which the date is June 2, 2000 F-2 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
December 31, -------------------------------- March 31, 1998 1999 2000 -------------- ------------- -------------- (Unaudited) CURRENT ASSETS: Cash..................................................... $ 1,850 $ 113,252 $ 14,575 Accounts receivable, net of allowance for doubtful accounts of $3,900, $15,000 and $15,000 (unaudited), respectively........................................... 35,655 40,213 13,287 Inventories.............................................. 1,488,354 697,033 999,000 Prepaid expenses and other............................... 1,250 6,250 38,698 -------------- ------------- -------------- Total Current Assets........................ 1,527,109 856,748 1,065,560 -------------- ------------- -------------- Refreshment Centers in Service, net of accumulated depreciation of $3,895, $3,858 and $5,031 (unaudited), respectively............................................. 362,266 169,791 132,579 -------------- ------------- -------------- PROPERTY AND EQUIPMENT: Production equipment..................................... 138,908 138,908 167,384 Computer equipment....................................... 130,951 171,666 173,925 Vehicles and other....................................... 76,857 76,857 46,379 -------------- ------------- -------------- 346,716 387,431 387,688 -------------- ------------- -------------- Less accumulated depreciation and amortization........... (203,381) (264,946) (269,334) -------------- ------------- -------------- Net Property and Equipment.................. 143,335 122,485 118,354 INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY....... -- 2,535,976 2,572,419 -------------- ------------- -------------- OTHER ASSETS: Patents and license rights, net of accumulated amortization of $155,211, $222,710 and $239,585 (unaudited), respectively............................ 317,279 249,780 232,905 Deferred offering and financing costs, net of accumulated amortization of $749,457, $0 and $0 (unaudited), respectively............................ 884 88,000 465,834 Deposits and other..................................... 169,416 327,851 454,472 -------------- ------------- -------------- Total Other Assets.......................... 487,579 665,631 1,153,211 -------------- ------------- -------------- Total Assets................................................ $ 2,520,289 $ 4,350,631 $ 5,042,123 ============== ============= ==============
See accompanying notes to consolidated financial statements. F-3 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' DEFICIT
March 31, 2000 Pro December 31, Forma --------------------------------- Stockholders' Deficit 1998 1999 March 31, 2000 (Note 2) --------------- --------------- --------------- --------------- (Unaudited) (Unaudited) CURRENT LIABILITIES Notes payable and current portion of long-term debt, net of discount of $0, $0 and $30,490, respectively................................. $ 2,872,570 $ 1,560,458 $ 2,114,542 Current portion of capital lease obligations... 13,212 22,061 24,506 Accounts payable............................... 1,186,995 987,013 942,407 Accrued liabilities............................ 240,475 332,835 464,243 Accrued interest............................... 293,024 290,117 425,864 Customer deposits.............................. 51,010 93,470 136,858 Deferred revenue............................... 63,875 58,868 30,660 Notes payable to stockholder................... 145,750 -- -- Preferred stock dividends payable.............. 18,541 162,542 198,443 --------------- --------------- --------------- Total Current Liabilities.................. 4,885,452 3,507,364 4,337,523 --------------- --------------- --------------- LONG-TERM DEBT, net of current portion............ 11,719 812,022 947,215 --------------- --------------- --------------- CAPITAL LEASE OBLIGATIONS, net of current portion. 51,223 55,097 47,198 --------------- --------------- --------------- COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 5 and 9) STOCKHOLDERS' DEFICIT: Series A convertible preferred stock, $0.001 par value; 500,000 shares authorized; 360,000 shares outstanding at December 31, 1998 and 1999 and March 31, 2000 and none pro forma; liquidation preference $3,798,443 at December 31, 1999 and March 31, 2000 and none pro forma............................... 1,332,953 1,332,953 1,332,953 -- Series B convertible preferred stock, $0.001 par value; 2,500,000 shares authorized, 2,081,680 shares outstanding at December 31, 1999 and March 31, 2000 and none pro forma; liquidation preference $20,816,800 at December 31, 2000 and March 31, 2000 and none pro forma............................... -- 6,171,196 6,482,592 -- Series C convertible preferred stock, $0.001 par value; 2,000,000 shares authorized, 161,535 shares outstanding at March 31, 2000; liquidation preference of $1,615,350 at March 31, 2000 and none pro forma......... -- -- 456,407 -- Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares outstanding and none pro forma........ -- -- -- -- Common stock, $0.001 par value; 50,000,000 shares authorized; 3,531,311, 2,217,291 and 2,109,387 shares outstanding, respectively, and 4,157,433 shares pro forma............... 3,532 2,218 2,110 4,157 Additional paid-in capital..................... 8,670,586 6,265,284 5,961,583 19,119,738 Warrants and options outstanding............... 1,043,362 728,538 1,454,309 1,454,309 Notes receivable from stockholders............. (4,073,941) (840,000) (615,000) (615,000) Accumulated deficit............................ (9,404,597) (13,684,041) (15,364,767) (20,253,017) --------------- --------------- --------------- --------------- Total Stockholders' Deficit................ (2,428,105) (23,852) (289,813) (289,813) --------------- --------------- --------------- =============== Total Liabilities and Stockholders' Deficit $ 2,520,289 $ 4,350,631 $ 5,042,123 =============== =============== ===============
See accompanying notes to consolidated financial statements. F-4 EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, Three Months Ended March 31, ---------------------------------- --------------------------------- 1998 1999 1999 2000 --------------- ---------------- --------------- -------------- (Unaudited) REVENUE Product sales.................................. $ 916,650 $ 144,282 $ -- $ -- Revenue sharing arrangements................... 46,524 213,654 64,341 9,162 Maintenance fees............................... 48,288 182,581 49,567 39,937 --------------- ---------------- ---------------- --------------- Total Revenue.............................. 1,011,462 540,517 113,908 49,099 --------------- ---------------- ---------------- --------------- COST OF REVENUE: Product sales.................................. 711,355 118,010 -- -- Revenue sharing arrangements................... 21,104 165,995 39,409 7,073 Maintenance.................................... 60,797 78,518 5,260 7,020 --------------- ---------------- ---------------- --------------- Total Cost of Revenue...................... 793,256 362,523 44,669 14,093 --------------- ---------------- ---------------- --------------- GROSS MARGIN...................................... 218,206 177,994 69,239 35,006 --------------- ---------------- ---------------- --------------- OPERATING EXPENSES: Selling, general and administrative (exclusive of non-cash compensation expense of $3,955 and $(105,004), $0 and $491,825, respectively)................................ 2,058,150 2,387,811 422,442 520,344 Research and development....................... 284,532 271,230 73,231 49,788 Non-cash compensation expense.................. 3,955 105,005 -- 491,825 --------------- ---------------- ---------------- --------------- Total Operating Expenses................... 2,346,637 2,764,046 495,673 1,061,957 --------------- ---------------- ---------------- --------------- LOSS FROM OPERATIONS.............................. (2,128,431) (2,586,052) (426,434) (1,026,951) --------------- ---------------- ---------------- --------------- OTHER INCOME (EXPENSE): Interest expense............................... (1,922,638) (1,444,532) (341,429) (303,650) Equity in income of unconsolidated, wholly owned subsidiary............................. -- 147,615 -- 88,296 Interest and other income...................... 312,573 210,794 67,336 2,336 --------------- ---------------- ---------------- --------------- Other Expense, Net......................... (1,610,065) (1,086,123) (274,093) (213,018) --------------- ---------------- ---------------- --------------- Loss Before Extraordinary Loss on Extinguishment of Debt........................................ (3,738,496) (3,672,175) (700,527) (1,239,969) Extraordinary Loss on Extinguishment of Debt, net of income tax benefit of $0.................... (407,000) -- -- -- --------------- ---------------- ---------------- --------------- Net Loss.......................................... (4,145,496) (3,672,175) (700,527) (1,239,969) Dividends Related to Convertible Preferred Stock.. (18,541) (607,269) (35,507) (440,757) --------------- ---------------- ---------------- --------------- Loss Attributable to Common Stockholders.......... $ (4,164,037) $ (4,279,444) $ (736,034) $ (1,680,726) =============== ================ ================ =============== Basic and Diluted Extraordinary Loss Per Common Share.......................................... $ (0.13) $ -- $ -- $ -- =============== ================ ================ =============== Basic and Diluted Loss Per Common Share........... $ (1.37) $ (1.33) $ (0.21) $ (0.76) =============== ================ ================ =============== Basic and Diluted Weighted Average Common Shares Outstanding.................................... 3,028,982 3,220,709 3,545,103 2,197,290 =============== ================ ================ =============== Basic and Diluted Supplemental Pro Forma Loss Per Common Share (Unaudited)....................... $ (1.84) $ (1.66) ================ =============== Basic and Diluted Supplemental Pro Forma Weighted Average Common Shares Outstanding (Unaudited).. 5,162,695 4,245,336 ================ ===============
See accompanying notes to consolidated financial statements. F-5 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
Series A Convertible Preferred Stock Common Stock -------------------------------- -------------------------------- Shares Amount Shares Amount Balance, December 31, 1997 ....................... -- $ -- 3,285,733 $ 3,286 Issuance of Series A convertible preferred stock upon conversion of 1996 Notes at $5.00 per share, net and issuance of common stock and warrants to placement agent .................... 360,000 1,332,953 13,125 13 Issuance of common stock in connection with conversion of 1996 Notes into Series A convertible preferred stock .......... -- -- 38,156 38 Issuance of common stock for cash at $10.67 per share, net and issuance of warrants to placement agent ................. -- -- 40,688 41 Issuance of common stock in connection with conversion of 60-day convertible notes and 1996 notes ........................... -- -- 84,661 85 Stock dividend issued to placement agent in connection with anti-dilution rights ........................... -- -- 68,948 69 Issuance of warrants in connection with financing transactions .................... -- -- -- -- Issuance of stock options to a consultant for services ........................ -- -- -- -- Accrual of interest on notes receivable from stockholders ................... -- -- -- -- Series A convertible preferred stock dividend accrual ......................... -- -- -- -- Net loss ......................................... -- -- -- -- ------------------------------------------------------------ Balance, December 31, 1998 ....................... 360,000 $ 1,332,953 3,531,311 $ 3,532 ============================================================
Additional Warrants And Notes Receivable Paid-in Options From Capital Outstanding Shareholders Balance, December 31, 1997 ....................... $ 6,910,699 $ 225,904 $ (3,799,250) Issuance of Series A convertible preferred stock upon conversion of 1996 Notes at $5.00 per share, net and issuance of common stock and warrants to placement agent .................... 139,987 17,479 -- Issuance of common stock in connection with conversion of 1996 Notes into Series A convertible preferred stock .......... 406,962 -- -- Issuance of common stock for cash at $10.67 per share, net and issuance of warrants to placement agent ................. 371,644 18,358 -- Issuance of common stock in connection with conversion of 60-day convertible notes and 1996 notes ........................... 841,179 -- -- Stock dividend issued to placement agent in connection with anti-dilution rights ........................... 115 -- -- Issuance of warrants in connection with financing transactions .................... -- 777,666 -- Issuance of stock options to a consultant for services ........................ -- 3,955 -- Accrual of interest on notes receivable from stockholders ................... -- -- (274,691) Series A convertible preferred stock dividend accrual ......................... -- -- -- Net loss ......................................... -- -- -- ------------------------------------------------- Balance, December 31, 1998 ....................... $ 8,670,586 $ 1,043,362 $ (4,073,941) =================================================
Accumulated Deficit Total Balance, December 31, 1997 ....................... $ (5,240,376) $ (1,899,737) Issuance of Series A convertible preferred stock upon conversion of 1996 Notes at $5.00 per share, net and issuance of common stock and warrants to placement agent .................... -- 1,490,432 Issuance of common stock in connection with conversion of 1996 Notes into Series A convertible preferred stock .......... -- 407,000 Issuance of common stock for cash at $10.67 per share, net and issuance of warrants to placement agent ................. -- 390,043 Issuance of common stock in connection with conversion of 60-day convertible notes and 1996 notes ........................... -- 841,264 Stock dividend issued to placement agent in connection with anti-dilution rights ........................... (184) -- Issuance of warrants in connection with financing transactions .................... -- 777,666 Issuance of stock options to a consultant for services ........................ -- 3,955 Accrual of interest on notes receivable from stockholders ................... -- (274,691) Series A convertible preferred stock dividend accrual ......................... (18,541) (18,541) Net loss ......................................... (4,145,496) (4,145,496)) --------------------------------- Balance, December 31, 1998 ....................... $ (9,404,597) $ (2,428,105) =================================
See accompanying notes to consolidated financial statements. F-6 EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (CONTINUED)
Series A Convertible Series B Convertible Preferred Stock Preferred Stock ----------------------------------------------------------------- Shares Amount Shares Amount ----------------------------------------------------------------- Balance, December 31, 1998 ............................ 360,000 $ 1,332,953 -- $ -- Issuance of Series B convertible preferred stock for cash and conversion of notes at $3.00 per share, net ...................... -- -- 2,081,680 5,849,826 Issuance of common stock to entity controlled by the Company's president in exchange for note receivable .................... -- -- -- -- Return of common stock from entity controlled by the Company's president .............. -- -- -- -- Issuance of common stock for interest in connection with conversion of notes payable to stockholders at $3.20 per share ......... -- -- -- -- Issuance of common stock for interest in connection with 90-day convertible notes at $3.20 per share ................................. -- -- -- -- Issuance of common stock for services at $3.20 per share and issuance of stock options ................................... -- -- -- -- Issuance of warrants in connection with financing transactions ........................ -- -- -- -- Return of warrants in connection with troubled debt restructuring ........................ -- -- -- -- Accrual of interest on notes receivable from stockholders .................................. -- -- -- -- Series A convertible preferred stock dividend accrual ................................... -- -- -- -- Series B convertible preferred stock dividend accrual payable in the form of common stock ............................... -- -- -- -- Series B convertible preferred stock beneficial conversion dividend ..................... -- -- -- 321,370
Warrants Common Stock Additional And -------------------------------- Paid-in Options Shares Amount Capital Outstanding ------------------------------------------------------------------ Balance, December 31, 1998 ............................ 3,531,311 $ 3,532 $ 8,670,586 $ 1,043,362 Issuance of Series B convertible preferred stock for cash and conversion of notes at $3.00 per share, net ...................... -- -- -- -- Issuance of common stock to entity controlled by the Company's president in exchange for note receivable .................... 198,750 199 1,589,801 -- Return of common stock from entity controlled by the Company's president .............. (198,750) (199) (1,589,801) -- Issuance of common stock for interest in connection with conversion of notes payable to stockholders at $3.20 per share ......... 83,500 84 264,398 -- Issuance of common stock for interest in connection with 90-day convertible notes at $3.20 per share ................................. 41,410 41 121,566 -- Issuance of common stock for services at $3.20 per share and issuance of stock options ................................... 3,134 3 5,962 99,040 Issuance of warrants in connection with financing transactions ........................ -- -- -- 92,830 Return of warrants in connection with troubled debt restructuring ........................ -- -- -- (506,694) Accrual of interest on notes receivable from stockholders .................................. -- -- -- -- Series A convertible preferred stock dividend accrual ................................... -- -- -- -- Series B convertible preferred stock dividend accrual payable in the form of common stock ............................... 28,936 29 141,870 -- Series B convertible preferred stock beneficial conversion dividend ..................... -- -- -- --
Notes Receivable from Accumulated Shareholders Deficit Total --------------------------------------------------- Balance, December 31, 1998 ............................ $ (4,073,941) $ (9,404,597) $ (2,428,105) Issuance of Series B convertible preferred stock for cash and conversion of notes at $3.00 per share, net ...................... -- -- 5,849,826 Issuance of common stock to entity controlled by the Company's president in exchange for note receivable .................... (1,590,000) -- -- Return of common stock from entity controlled by the Company's president .............. 1,590,000 -- -- Issuance of common stock for interest in connection with conversion of notes payable to stockholders at $3.20 per share ......... -- -- 264,482 Issuance of common stock for interest in connection with 90-day convertible notes at $3.20 per share ................................. -- -- 121,607 Issuance of common stock for services at $3.20 per share and issuance of stock options ................................... -- -- 105,005 Issuance of warrants in connection with financing transactions ........................ -- -- 92,830 Return of warrants in connection with troubled debt restructuring ........................ -- -- (506,694) Accrual of interest on notes receivable from stockholders .................................. (235,951) -- (235,951) Series A convertible preferred stock dividend accrual ................................... -- (144,000) (144,000) Series B convertible preferred stock dividend accrual payable in the form of common stock ............................... -- (141,899) -- Series B convertible preferred stock beneficial conversion dividend ..................... -- (321,370) --
See accompanying notes to consolidated financial statements. F-7 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
Series A Convertible Series B Convertible Preferred Stock Preferred Stock ----------------------------------------------------------------- Shares Amount Shares Amount ----------------------------------------------------------------- Return of common stock as payment of shareholder notes receivable ....................... -- -- -- -- Reserve for shareholder notes receivable .............. -- -- -- -- Net loss .............................................. -- -- -- -- -------------------------------------------------------------- Balance, December 31, 1999 ............................ 360,000 $ 1,332,953 2,081,680 $ 6,171,196 ==============================================================
Warrants Common Stock Additional And -------------------------------- Paid-in Options Shares Amount Capital Outstanding ------------------------------------------------------------------ Return of common stock as payment of shareholder notes receivable ....................... (1,471,000) (1,471) (2,939,098) -- Reserve for shareholder notes receivable .............. -- -- -- -- Net loss .............................................. -- -- -- -- ------------------------------------------------------------------ Balance, December 31, 1999 ............................ 2,217,291 $ 2,218 $ 6,265,284 $ 728,538 ==================================================================
Notes Receivable from Accumulated Shareholders Deficit Total --------------------------------------------------- Return of common stock as payment of shareholder notes receivable ....................... 2,940,569 -- -- Reserve for shareholder notes receivable .............. 529,323 -- 529,323 Net loss .............................................. -- (3,672,175) (3,672,175) --------------------------------------------------- Balance, December 31, 1999 ............................ $ (840,000) $ (13,684,041) $ (23,852) ===================================================
See accompanying notes to consolidated financial statements. F-8 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (CONTINUED)
Series A Convertible Preferred Series B Convertible Preferred Stock Stock ------------------------------- ------------------------------- Shares Amount Shares Amount -------------- -------------- -------------- -------------- Balance, December 31, 1999 ....................... 360,000 $ 1,332,953 2,081,680 $ 6,171,196 Issuance of common stock in connection with 90-day convertible notes at $3.20 per share (unaudited) ................... -- -- -- -- Issuance of common stock in connection with shareholder note payable at $3.20 per share (unaudited) ................... -- -- -- -- Series B convertible preferred stock dividend accrual payable in the form of common stock, net (unaudited) .............. -- -- -- -- Series B convertible preferred stock beneficial conversion dividend (unaudited) .... -- -- -- 311,396 Return of common stock as a result of a default on a note receivable from shareholder (unaudited) ....................... -- -- -- -- Issuance of Series C convertible preferred stock for cash at $2.83 per share (unaudited) ................................... -- -- -- -- Issuance of options and warrants to employees and non employees (unaudited) ................................... -- -- -- -- Issuance of warrants for financing activities (unaudited) ........................ -- -- -- -- Issuance of warrants related to advertising agreement (unaudited) ............. -- -- -- -- Series A convertible preferred stock dividend accrual (unaudited) .................. -- -- -- -- Net loss (unaudited) ............................. -- -- -- -- -------------- -------------- -------------- -------------- Balance, March 31, 2000 (Unaudited) .............. 360,000 $ 1,332,953 2,081,680 $ 6,482,592 ============== ============== ============== ==============
Series C Convertible Preferred Stock Common Stock ------------------------------- ------------------------------- Shares Amount Shares Amount -------------- -------------- -------------- -------------- Balance, December 31, 1999 ....................... -- $ -- 2,217,291 $ 2,218 Issuance of common stock in connection with 90-day convertible notes at $3.20 per share (unaudited) ................... -- -- 7,991 8 Issuance of common stock in connection with shareholder note payable at $3.20 per share (unaudited) ................... -- -- 1,365 1 Series B convertible preferred stock dividend accrual payable in the form of common stock, net (unaudited) .............. -- -- 23,365 23 Series B convertible preferred stock beneficial conversion dividend (unaudited) .... -- -- -- -- Return of common stock as a result of a default on a note receivable from shareholder (unaudited) ....................... -- -- (140,625) (140) Issuance of Series C convertible preferred stock for cash at $2.83 per share (unaudited) ................................... 161,535 456,407 -- -- Issuance of options and warrants to employees and non employees (unaudited) ................................... -- -- -- -- Issuance of warrants for financing activities (unaudited) ........................ -- -- -- -- Issuance of warrants related to advertising agreement (unaudited) ............. -- -- -- -- Series A convertible preferred stock dividend accrual (unaudited) .................. -- -- -- -- Net loss (unaudited) ............................. -- -- -- -- -------------- -------------- -------------- -------------- Balance, March 31, 2000 (Unaudited) .............. 161,535 $ 456,407 2,109,387 $ 2,110 ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. F-9 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (CONTINUED)
Notes Additional Warrants and Receivable Paid-In Options From Capital Outstanding Shareholders -------------- -------------- -------------- xxxx 12345678901234 12345678901234 12345678901234 Balance, December 31, 1999 ....................... $ 6,265,284 $ 728,538 $ (840,000) Issuance of common stock in connection with 90-day convertible notes at $3.20 per share (unaudited) ................... 25,555 -- -- Issuance of common stock in connection with shareholder note payable at $3.20 per share (unaudited) ................... 4,373 -- -- Series B convertible preferred stock dividend accrual payable in the form of common stock, net (unaudited) ......... 93,437 -- -- Series B convertible preferred stock beneficial conversion dividend (unaudited) ................................... -- -- -- Return of common stock as a result of a default on a note receivable from shareholder (unaudited) .................. (449,860) -- 450,000 Issuance of Series C convertible preferred stock for cash at $2.83 per share (unaudited) ................... 22,794 51,082 (225,000) Issuance of options and warrants to employees and non employees (unaudited) ................................... -- 491,825 -- Issuance of warrants for financing activities (unaudited) ........................ -- 135,152 -- Issuance of warrants related to advertising agreement (unaudited) ............ -- 47,712 -- Series A convertible preferred stock dividend accrual (unaudited) ............ -- -- -- Net loss (unaudited) ............................. -- -- -- -------------- -------------- -------------- Balance, March 31, 2000 (Unaudited) .............. $ 5,961,583 $ 1,454,309 $ (615,000) ============== ============== ==============
Accumulated Deficit Total -------------- -------------- Balance, December 31, 1999 ....................... $ (13,684,041) $ (23,852) Issuance of common stock in connection with 90-day convertible notes at $3.20 per share (unaudited) ................... -- 25,563 Issuance of common stock in connection with shareholder note payable at $3.20 per share (unaudited) ................... -- 4,374 Series B convertible preferred stock dividend accrual payable in the form of common stock, net (unaudited) ......... (93,460) -- Series B convertible preferred stock beneficial conversion dividend (unaudited) ................................... (311,396) -- Return of common stock as a result of a default on a note receivable from shareholder (unaudited) .................. -- -- Issuance of Series C convertible preferred stock for cash at $2.83 per share (unaudited) ................... -- 305,283 Issuance of options and warrants to employees and non employees (unaudited) ................................... -- 491,825 Issuance of warrants for financing activities (unaudited) ........................ -- 135,152 Issuance of warrants related to advertising agreement (unaudited) ............ -- 47,712 Series A convertible preferred stock dividend accrual (unaudited) ............ (35,901) (35,901) Net loss (unaudited) ............................. (1,239,969) (1,239,969) -------------- -------------- Balance, March 31, 2000 (Unaudited) .............. $ (15,364,767) $ (289,813) ============== ==============
See accompanying notes to consolidated financial statements. F-10 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, Three Months Ended March 31, ----------------------------------- --------------------------------- 1998 1999 1999 2000 --------------- --------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) Net loss....................................... $ (4,145,496) $ (3,672,175) $ (700,527) $ (1,239,969) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................ 134,617 292,877 63,276 39,979 Amortization of deferred offering and financing costs and accretion of debt discount................................... 560,921 35,997 -- -- Interest accrued on notes receivable from stockholders............................... (274,691) (235,951) (65,576) -- Non-cash compensation expense................ 3,955 105,005 -- 491,825 Extraordinary loss related to debt extinguishment............................. 407,000 -- -- -- Interest expense paid by issuance of common stock, warrants, and stock options......... 813,409 478,919 203,111 77,649 Reserve against stockholders notes receivable -- 529,323 -- -- Amortization of deferred compensation........ 41,019 -- 12,431 -- Undistributed equity in income of unconsolidated subsidiary.................. -- (46,242) -- 8,419 Changes in operating assets and liabilities, net of transfers to unconsolidated subsidiary: Accounts receivable.......................... 182,643 (4,558) (94,698) 26,926 Inventories.................................. (808,192) 613,898 1,144,813 (294,404) Prepaid expenses, deposits and other......... (108,099) (163,435) (30,818) (125,281) Accounts payable............................. 241,016 (97,689) 234,165 24,392 Accrued liabilities.......................... 114,984 (178,228) 201,288 267,155 Other liabilities............................ (94,957) 37,452 28,848 15,180 ---------------- ----------------- ---------------- -------------- Net Cash Provided By (Used In) Operating Activities............................... (2,931,871) (2,304,807) 996,313 (708,129) ---------------- ----------------- ---------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to refreshment centers in service.... (246,161) (1,711,105) (1,350,679) -- Purchase of property and equipment............. (50,599) (12,239) -- (2,259) Cash investment in wholly owned, unconsolidated subsidiary.................... -- (572,544) -- (44,862) ---------------- ----------------- ---------------- -------------- Net Cash Used In Investing Activities...... (296,760) (2,295,888) (1,350,679) (47,121) ---------------- ----------------- ---------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings....................... 2,265,058 477,669 362,000 583,304 Principal payments on notes payable............ (127,971) (400,789) (1,804) (1,984) Proceeds from issuance of notes payable to officers and stockholders.................... -- 299,195 -- -- Principal payments on notes payable to stockholder and officer...................... (12,500) -- -- -- Principal payments on capital lease obligations (9,190) (15,753) (3,771) (5,454) Other offering and financing costs paid........ (204,843) (88,000) -- (276,470) Proceeds from issuance of common stock......... 390,043 -- -- -- Proceeds from issuance of preferred stock and warrants..................................... 600,275 4,439,775 -- 357,177 ---------------- ----------------- ---------------- -------------- Net Cash Provided By Financing Activities.. 2,900,872 4,712,097 356,425 656,573 ---------------- ----------------- ---------------- -------------- Net Increase (Decrease) In Cash.................... (327,759) 111,402 2,059 (98,677) Cash At Beginning of Year.......................... 329,609 1,850 1,850 113,252 ---------------- ----------------- ---------------- -------------- Cash At End Of Year................................ $ 1,850 $ 113,252 $ 3,909 $ 14,575 ================ ================= ================ ==============
See accompanying notes to consolidated financial statements. F-11 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, Three Months Ended March 31, ----------------------------------- --------------------------------- 1998 1999 1999 2000 --------------- --------------- --------------- -------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest......................... 296,935 126,857 4,489 3,649 Non-cash investing and financing activities Issuance of common stock in payment of debt offering costs............................. 84,000 -- -- -- Accrual of preferred stock dividends......... 18,542 607,269 35,506 440,757 Issuance of common stock as payment of debt obligations................................ 1,261,521 386,088 -- -- Issuance of preferred stock as payment of debt obligations........................... 1,040,000 1,410,051 -- -- Value of warrants converted to debt.......... -- 506,694 98,169 56,063 Cancellation of stockholder notes receivable and related accrued interest in exchange for return of 1,471,000 shares of common stock...................................... -- 2,940,569 -- -- Property and equipment acquired by capital lease...................................... -- 28,476 -- -- Retirement of common stock................... -- -- -- 450,000 Issuance of warrants for advertising agreement.................................. -- -- -- 135,152 Note receivable for Series C preferred offering................................... -- -- -- 225,000 Sale of assets for settlement of accounts payable to related parties................. -- -- -- 12,935 Accrued interest, accounts payable and payable to stockholder converted to notes payable.................................... -- 401,162 98,169 56,063
See accompanying notes to consolidated financial statements. F-12 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 1. ORGANIZATION AND NATURE OF OPERATIONS ORGANIZATION AND PRINCIPLES OF CONSOLIDATION eRoomSystem Technologies, Inc., a Nevada corporation ("eRoomSystem Technologies"), is the successor to RoomSystems, Inc. ("RSI"). RSI was originally incorporated as InnSyst! Corporation, a North Carolina corporation, on March 17, 1993 and on April 17, 1996, was reincorporated as a Nevada corporation. On April 29, 1996, RSI and RoomSystems Finance Corporation ("RSF") entered into a Reorganization Plan and Merger Agreement whereby RSF became a wholly owned subsidiary of RSI (see Note 3). On October 15, 1997, the operations of RSF were effectively transferred to RSI and RSF was dissolved. On August 31, 1999, RoomSystems International Corporation ("RSIC") was incorporated in Nevada as a wholly owned subsidiary of RSI. As of December 31, 1999, RSI, RSIC and their shareholders entered into an Agreement and Plan of Reorganization wherein RSI became a wholly owned subsidiary of RSIC. On March 29, 2000 and corrected on May 30, 2000, RSIC changed its name to eRoomSystem Technologies, Inc. These reorganizations have been accounted for as reorganizations of entities under common control with the assets and liabilities reflected at carry-over basis in a manner similar to pooling-of-interests accounting. The accompanying consolidated financial statements have been restated to reflect the equivalent eRoomSystem Technologies shares for all periods presented. On September 29, 1999, eRoomSystem Technologies formed a new bankruptcy-remote entity, RSi BRE, Inc. ("RSi BRE"), as a wholly owned subsidiary (see Note 4). The accompanying consolidated financial statements include the accounts of eRoomSystem Technologies, and its wholly owned subsidiary RSI, after elimination of intercompany accounts and transactions. RSi BRE has not been consolidated in the accompanying financial statements since the Company does not have the ability to control RSi BRE's operations. eRoomSystem Technologies and RSI are collectively referred to as "eRoomSystem Technologies" or the "Company." RSi BRE has been accounted for under the equity method of accounting. NATURE OF OPERATIONS AND RELATED RISKS The Company designs, assembles and markets a complete line of fully-automated Refreshment Centers and eRoomSafes traditionally installed in hotels. The Refreshment Centers and eRoomSafes use proprietary software and patented credit card technology that integrate with the data collection computer in each hotel. The Company has suffered recurring net losses and as of December 31, 1999, had a working capital deficit of $2,650,616, a stockholders' deficit of $23,852, and was in default under certain debt agreements. During the years ended December 31, 1998 and 1999, the Company's operations used $2,931,871 and $2,304,807 of cash, respectively. Additionally, at December 31, 1999 the Company was past due on accounts payable with several vendors which could affect the Company's ability to procure inventory and services for its operations. As of March 31, 2000, the Company had a working capital deficit of $3,271,963 and a stockholders' deficit of $289,813. During the three months ended March 31, 2000, the Company's operations used $708,129 of cash. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company needs to obtain additional financing to fund payment of past due and current debt obligations and to provide working capital for operations. Management is attempting to raise additional equity capital through a public offering of common stock and a private offering of preferred stock and debt, and to arrange debt financing for product sales. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. F-13 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) The Company is subject to certain risk factors frequently encountered by companies lacking adequate capital and which are in the early stages of developing a business line that may impact its ability to become a profitable enterprise. These risk factors include, among others: a. The Company's business model is capital intensive and will require significant additional equity or debt financing. This additional funding may not be available in sufficient amounts or on acceptable terms to the Company, or at all. b. The Company faces competition from companies that have substantially greater capital resources, research and development, manufacturing and marketing resources than the Company. c. The Company's ability to implement its strategy is dependent upon its ability to retain key employees, ability to attract and retain additional qualified personnel and its ability to manage expansion effectively. 2. SIGNIFICANT ACCOUNTING POLICIES UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY The Company's Board of Directors has authorized the filing of a registration statement with the United States Securities and Exchange Commission to register shares of its common stock in connection with a proposed initial public offering ("IPO"). If the IPO is consummated under the terms presently anticipated, 360,000 outstanding shares of Series A convertible preferred stock, 2,081,680 outstanding shares of Series B convertible preferred stock and 161,535 outstanding shares of Series C convertible preferred stock as of March 31, 2000 will be automatically converted into 2,048,046 shares of common stock upon the closing of the IPO. In connection with the Series A preferred stock conversion, the Company will record a dividend of $1,800,000 related to the Series A preferred stock contingent beneficial conversion feature (see Note 10). The Series B convertible preferred stock beneficial conversion feature totaled $3,747,024, as adjusted (see Note 10), and is being recognized over the period from the date of issuance and from the date of modification of the Series B convertible preferred stock through September 28, 2000, which is the earliest date at which the Series B convertible preferred stockholders have the unmitigated option to convert their shares. During the year ended December 31, 1999, the Company recorded a dividend of $321,370 to the Series B stockholders related to the beneficial conversion feature. During the three month period ended March 31, 2000, the Company recorded a dividend of $311,396 to the Series B stockholders related to the beneficial conversion feature. The remaining portion of the Series B convertible preferred stock beneficial conversion feature, as adjusted, will be recognized as a dividend to the holders of Series B convertible preferred stock during the period commencing April 1, 2000 and ending September 28, 2000. The effect of the conversion of the preferred stock outstanding at March 31, 2000 and the beneficial conversion features, as adjusted, have been reflected as unaudited pro forma stockholders' equity in the accompanying consolidated balance sheet. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and 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 these estimates. INVENTORIES Inventories include direct materials, direct labor and manufacturing overhead costs and are stated at the lower of cost (using the first-in, first-out method) or market value. Inventories consist of the following: F-14 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED)
December 31, --------------------------------- March 31, 1998 1999 2000 --------------- --------------- -------------- Finished goods.................................. $ 997,248 $ 284,382 $ 323,435 Work-in process................................. 115,561 160,764 141,984 Parts and raw materials......................... 375,545 251,887 533,581 --------------- --------------- -------------- $1,488,354 $ 697,033 $ 999,000 =============== =============== ==============
Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technical innovation, it is possible that estimates of the net realizable value could change in the near term. REFRESHMENT CENTERS IN SERVICE AND PROPERTY AND EQUIPMENT Refreshment Centers (including eRoomSafes, if applicable) and property and equipment are stated at cost, less accumulated depreciation and amortization. Major additions and improvements are capitalized, while minor repairs and maintenance costs are expensed when incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, after taking into consideration residual values for Refreshment Centers, which are as follows: Refreshment Centers in service................... 7 years Production equipment............................. 3 - 5 years Computer and office equipment.................... 3 - 7 years Vehicles......................................... 7 years Depreciation and amortization expense related to Refreshment Centers in service and property and equipment was $84,028 and $277,030 for the years ended December 31, 1998 and 1999, respectively, and $23,104 for the period ended March 31, 2000. On retirement or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company's debt obligations approximate fair value based on current interest rates available to the Company. CAPITALIZED SOFTWARE COSTS In accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material for the years ended December 31, 1998 and 1999 or the period ended March 31, 2000. The Company has charged its software development costs to research and development expense in the accompanying consolidated statements of operations. PATENTS AND LICENSE RIGHTS Patents and license rights consist of patents and licenses purchased from a related party (see Note 6). These costs are being amortized on a straight-line basis over the estimated life of the related patents or licenses of F-15 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 7 years. Management evaluates the recoverability of these costs on a periodic basis, based on revenues from the products related to the technology, existing or expected revenue trends and projected cash flows. DEFERRED OFFERING AND FINANCING COSTS The Company capitalizes direct costs associated with the acquisition of debt financing. These costs are amortized over the life of the related debt as additional interest expense. If the underlying debt is repaid or extinguished prior to the scheduled maturity, the costs are removed from the accounts and considered in the determination of the gain or loss from extinguishment. Certain debt has been converted to equity and the related unamortized debt financing costs have been recorded as equity offering costs. The Company also capitalizes direct costs associated with the acquisition of equity financing which are netted against the actual equity proceeds. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows from the related asset or group of assets over their remaining life in measuring whether the assets are recoverable. As of December 31, 1999 and March 31, 2000, the Company does not consider any of its long-lived assets to be impaired. REVENUE RECOGNITION The Company generates revenues from either the sale of Refreshment Centers and eRoomSafes or from leases of Refreshment Centers and eRoomSafes under revenue sharing agreements. Under the revenue sharing agreements, the Company receives a portion of the sales generated by the units and under certain agreements is guaranteed a minimum daily revenue amount. The Company also generates revenues from maintenance services. Revenue from the sale of Refreshment Centers and eRoomSafes is recognized upon completion of installation and acceptance by the customer. The revenue sharing agreements are accounted for as operating leases with revenues being recognized as earned over the lease period. Maintenance revenues are recognized as the services are performed or pro rata over the service period. The maintenance services are not integral to the functionality of the Refreshment Centers and are at the option of the customer. In connection with the revenue sharing agreements, a portion of the revenues received by the Company are classified as maintenance fees based upon vendor-specific objective evidence of fair value. The Company defers revenue paid in advance relating to future services and products not yet installed and accepted by the customer. INCOME TAXES The Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for companies to F-16 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) report information about derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This statement is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material impact on the Company's results of operations, financial position or liquidity. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25." Interpretation No. 44 provides definitive guidance regarding accounting for stock-based compensation to non-employee directors. Interpretation 44 allows non-employee directors to be treated as "employees" for purposes of applying APB Opinion No. 25. The Company has retroactively applied this interpretation for all issuances to non-employee directors during the year ended December 31, 1999 and the three months ended March 31, 2000. NET LOSS PER COMMON SHARE The Company computes net loss per share in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options, warrants and shares issuable upon the conversion of Series A, Series B, and Series C convertible preferred stock. As of December 31, 1998 and 1999 and March 31, 2000, there were 360,000 shares of Series A convertible preferred stock outstanding, as of December 31, 1999 and March 31, 2000 there were 2,081,680 shares of Series B convertible preferred stock outstanding, respectively, as of March 31, 2000 there were 161,535 shares of Series C convertible preferred stock outstanding, and as of December 31, 1998 and 1999 and March 31, 2000, there were options and warrants outstanding to purchase 598,030, 866,508 and 2,490,317 shares of common stock, respectively, that were not included in the computation of diluted net loss per common share as their effect would have been anti-dilutive, thereby decreasing the net loss per common share. 3. MERGER WITH RSF AND RELATED AGREEMENTS RSF was incorporated in April 1995 by eRoomSystem Technologies' president and one of the Company's legal advisors, both of whom are stockholders of the Company, for the purpose of arranging financing for the sale or lease of Refreshment Centers. The separate legal entity was a requirement of PFC Group, Inc. ("PFC"), an unrelated lender under the Assignment Agreement discussed below. In May 1995, RSI and RSF entered into a Master Sale and Assignment Agreement (the "Assignment Agreement") with PFC. Under the Assignment Agreement, Refreshment Centers were manufactured by RSI and sold to RSF. RSF entered into revenue sharing agreements with certain hotels and obtained financing from PFC to purchase the units from RSI. RSI entered into installation, maintenance and license agreements with the hotels and provided the related services. Title to the Refreshment Centers was transferred to PFC; however, RSF had an option to repurchase the units at the end of the lease for ten percent of the net book value of the equipment, as defined. In January 1996, RSF entered into a stock purchase and sale agreement with PFC in which RSF acquired the residual value of the Refreshment Centers sold to PFC under the Assignment Agreement in exchange for shares of RSF's common stock. On April 29, 1996, RSI and RSF entered into a Reorganization Plan and Merger Agreement whereby RSF became a wholly owned subsidiary of RSI. F-17 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 4. RSG INVESTMENT TRANSACTIONS AND SETTLEMENT On July 17, 1998, the Company entered into an Equipment Purchase and Sale Agreement (the "Equipment Agreement") with RSG Investments, LLC ("RSG"), an unrelated lender. Under the terms of the Equipment Agreement, RSG paid $1.5 million for the production of approximately 2,270 Refreshment Centers (the "RSG Units") to be installed in six hotel properties in the United States under revenue sharing agreements. Pursuant to the Equipment Agreement, title to the RSG units transferred to RSG and the Company was to repurchase the RSG Units within 75 days, or by September 30, 1998. The repurchase price was based upon the $1.5 million bearing interest at 15 percent per annum and was secured by common stock of the Company pledged by certain officers, directors and consultants to the Company and the assets of the Company. Due to the Company's obligation to repurchase the RSG Units, this transaction was treated as a collateralized borrowing in the accompanying December 31, 1998 consolidated balance sheet. As an inducement for RSG to enter into the Equipment Agreement, the Company issued to the principals of RSG warrants to purchase 46,875 shares of common stock at $12.80 per share. These warrants were valued by the Company at the time of issuance at $253,347 using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5 percent, expected dividend yield of 0 percent, volatility of 58.2 percent, and expected life of 4.9 years. In the event that the Company did not meet the obligation to repurchase the units, additional warrants to purchase 9,375 shares of the Company's common stock at $12.80 per share accrued to RSG every thirty days through January 28, 1999, whereupon the Equipment Agreement would be in default. During the years ended December 31, 1998 and 1999, the Company issued additional warrants to purchase 37,500 and 9,375 shares of common stock, respectively, in connection with the Equipment Agreement. These additional warrants were valued by the Company at the time of issuance at $202,597 and $50,750, respectively, using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5 percent, expected dividend yield of 0 percent, volatility of 58.2 percent, and expected life of 4.9 years. All of the warrants issued to RSG were exercisable for a period of three years subsequent to the Company's IPO. On January 28, 1999, the Company was unable to meet the terms of the repurchase obligation and the Equipment Agreement was in default. RSG granted the Company several extensions to meet the terms under the Equipment Agreement, the last of which was signed on May 19, 1999. RSG placed certain conditions on the Company, the failure to meet any of the conditions would result in RSG's foreclosure on the pledged common stock and the assets of the Company. On September 28, 1999, the Company and RSG entered into a settlement agreement in the form of the Equipment Transfer Agreement (the "Transfer Agreement"), which provided for the following: - eRoomSystem Technologies formed a new bankruptcy-remote entity, RSi BRE, Inc. ("RSi BRE"), as a wholly owned subsidiary. The ownership of the RSG Units and the related revenue sharing agreements were transferred to RSi BRE. RSG is to receive $0.57 per unit per day of the revenue realized from the revenue sharing agreements covering 2,270 of the RSG Units over the remaining life of their seven year revenue sharing agreements. However, the $0.57 per unit per day is paid only after $0.11 per unit per day has been paid to eRoomSystem Technologies to cover taxes and maintenance. To the extent that at least $0.68 per unit per day in revenue is not realized from the RSG Units, the Company has no obligation to pay the difference to RSG. Rather, RSG is subject to the risk that revenues generated from the RSG Units are not at least $0.68 per unit per day. To the extent that the revenue per unit per day exceeds $0.68, the incremental amount is paid to eRoomSystem Technologies. - RSG converted one-third of the principal amount of the loan, or $500,000, into 166,667 shares, at $3.00 per share, of Series B convertible preferred stock. F-18 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) - eRoomSystem Technologies paid $250,000 to RSG upon the execution of the Transfer Agreement and executed a promissory note in the amount of $750,000 bearing 10 percent interest to be repaid on the earlier of May 1, 2000 (which has since been extended to August 1, 2000) or 30 days after the completion of the Company's IPO. This note is secured by the assets of the Company. - eRoomSystem Technologies transferred $750,000 of cash and other assets into RSi BRE to pay for the manufacture and installation of at least an additional 750 Refreshment Centers. If eRoomSystem Technologies fails to pay the $750,000 note to RSG prior to December 31, 2000, the $750,000 note will be forgiven and in exchange RSG will receive $0.57 per unit per day from the additional 750 units over the remaining term of their seven year revenue sharing agreements. This obligation is under the same terms as the $0.57 per unit per day payments discussed above. - RSG terminated the pledge of the common stock of the stockholders and the assets of the Company. - RSG remitted to the Company all payments received under the revenue sharing agreements for the RSG Units. - RSG forgave the interest due on the repurchase obligation up to August 1, 1999. - RSG returned to eRoomSystem Technologies the warrants to purchase 93,750 shares of the Company's common stock, and the warrants which accrued during the period commencing September 30, 1998 through January 28, 1999. In accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," the Company has accounted for this transaction as a troubled debt restructuring. Accordingly, no gain or loss has been recognized from this transaction. Rather, the Company combined all liabilities to RSG at the time of the Transfer Agreement including the principal amount of the repurchase obligation of $1,500,000, accrued interest of $298,849 and the value of the warrants of $506,694. The total liability of $2,305,543 was reduced by the $250,000 of cash paid and the $500,000 of Series B convertible preferred stock that was issued to RSG. The remaining liability is being amortized by the Company over the remaining life of the underlying revenue sharing agreements using an estimated effective interest rate of approximately 41 percent. This estimated effective interest rate could fluctuate in future periods depending upon the level and timing of revenues generated from the RSG units and the timing of the remaining $750,000 payment due to RSG. The board of directors of RSi BRE is comprised of one appointee from the Company, one appointee from RSG and one independent appointee. All operating decisions, including disbursements, of RSi BRE require unanimous consent of RSi BRE's board of directors. As a result, the Company does not control RSi BRE. In accordance with EITF 96-16, "Investor's Accounting for an Investee When the Investor has a Majority of the Voting Interest But the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", the Company has determined that RSi BRE does not qualify for consolidation in the Company's financial statements. Rather, the Company's investment in RSi BRE is reflected as an "Investment in Wholly Owned, Unconsolidated Subsidiary" in the accompanying December 31, 1999 consolidated balance sheet and is being accounted for under the equity method of accounting. At December 31, 1999 and March 31, 2000, the assets and liabilities of RSi BRE consisted of the following: F-19 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED)
December 31, 1999 March 31, 2000 ---------------- ----------------- Cash......................................................... $ 189,659 $ 48,946 Accounts receivable.......................................... 66,507 142,068 Inventory.................................................... 414,860 -- Refreshment centers in service............................... 2,097,363 2,712,727 Accumulated depreciation..................................... (217,797) (298,876) Accrued liabilities.......................................... (4,616) (15,689) Customer deposits............................................ (10,000) (16,757) ---------------- ----------------- Net Assets................................................... $ 2,535,976 $ 2,572,419 ================ =================
For the period from its inception (September 29, 1999) to December 31, 1999 and for the three months ended March 31, 2000, the revenues and expenses of RSi BRE consisted of the following:
December 31, 1999 March 31, 2000 ---------------- ----------------- Revenue sharing agreement revenues........................... $ 212,919 $ 181,115 Depreciation................................................. (53,947) (81,080) Other operating expenses..................................... (16,654) (13,030) Interest income.............................................. 5,297 1,291 ---------------- ----------------- Net Income................................................... $ 147,615 $ 88,296 ================ =================
5. NOTES PAYABLE AND LONG-TERM DEBT 1996 PRIVATE DEBT OFFERING During the period from September through December 31, 1996, the Company raised $1,310,000 of debt funding through a best efforts private placement of promissory notes (the "1996 Notes"). An additional $160,000 was raised through March 1997. The 1996 Notes bore interest at 12 percent per annum paid quarterly and matured one year from the date of issuance. In the event the Company did not repay all principal and accrued interest at the end of the one-year term, the 1996 Notes were extended for an additional year and the interest rate increased to 15 percent per annum. If the 1996 Notes were extended for the additional year, all outstanding principal was to be amortized on a monthly basis over the second year. The 1996 Notes are secured by the assets of the Company. The investors in the 1996 Notes were also issued 242,550 warrants to purchase shares of common stock of eRoomSystem Technologies at $2.67 per share which are exercisable for a period of the earlier of the five years from the date of issuance or three years subsequent to the closing of the Company's IPO. The warrants issued in connection with the debt were valued by the Company at the time of issuance at $148,764 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.4 percent, expected dividend yield of 0 percent, volatility of 22.2 percent, and expected life of 3.3 years. The value of the warrants was recorded as warrants outstanding and the related debt was recorded net of the value of the warrants. The difference between the face amount of the debt and the recorded value was accreted to interest expense over the extended term of the debt. In addition, the Company agreed to pay the placement agent a 12 percent selling commission and issued the agent and brokers 86,250 warrants to purchase common stock at $2.67 per share which are exercisable for a period of the earlier of five years from the date of issuance or three years subsequent to the Company's IPO. The value of the these warrants of $52,900 was determined using the Black-Scholes option pricing model with the assumptions disclosed above. The commissions paid of $157,200 were recorded as deferred debt offering costs and were amortized to interest expense over the extended term of the debt. F-20 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) During late 1997 and early 1998, the Company defaulted on all of the 1996 Notes. To avoid foreclosure on the assets of the Company by the holders of 1996 Notes, the Company agreed to issue each of the holders of the 1996 Notes the following: - On a monthly basis commencing on the maturity date of each note and continuing until the date of pay off or conversion into equity securities, a warrant to purchase 99 shares of common stock at $2.67 per share for every $20,000 of outstanding principal which are exercisable for a period of two years subsequent to the closing of the Company's IPO. During the years ended December 31, 1998 and 1999 and for the three months ended March 31, 2000, the Company issued warrants to purchase 38,089, 19,233 and 4,290 shares of common stock, respectively, which were valued (utilizing the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 2000, respectively: risk free interest rates at 5.4, 5.7 and 6.7 percent, expected dividend yield of 0 percent, volatility at 49.0, 96.5 and 95.0 percent, and expected lives at 2.8, 3.0 and 2.3 years, respectively) at amounts ranging from $8.32 to $8.69, $1.63 to $4.99 and $1.05 per share, respectively. These amounts were recorded as additional interest expense on the debt. - 188 shares of common stock for every $20,000 of outstanding principal, or a total of 13,781 shares of common stock which were valued at $10.67 per share at their date of issuance in 1998. - An additional 469 shares of common stock for every $20,000 of outstanding principal converted into Series A convertible preferred stock. During 1998, holders of $1,040,000 of outstanding principal elected to convert their 1996 Notes into 208,000 shares of Series A convertible preferred stock at an agreed upon value of $5.00 per share. In connection with this conversion, the Company issued 24,375 shares of common stock which were valued at $10.67 per share. The total value of $407,000 related to the issuance of the 13,781 common shares issued to avoid foreclosure and the 24,375 common shares issued to induce the conversion to Series A convertible preferred stock has been recognized as an extraordinary loss from debt extinguishment in the accompanying December 31, 1998 statement of operations. In connection with the above mentioned conversion of the 1996 Notes into Series A convertible preferred stock, the Company issued 13,125 shares of common stock to the original placement agent for assisting in the conversion. These shares were valued at $10.67 per share and have been treated as a cost of the conversion of the 1996 Notes into Series A convertible preferred. In May 1999, the remaining holders of the 1996 Notes were offered the right to convert their notes into Series B convertible preferred stock at the rate of $3.00 per share. Notes consisting of $300,000 of outstanding principal and $58,124 of accrued interest were converted into 119,374 shares of Series B convertible preferred stock. As of December 31, 1999, the remaining 1996 Notes in the amount of $130,000 are in default and are continuing to accrue warrants on a monthly basis. 1997 PRIVATE DEBT AND EQUITY OFFERING In April 1997, the Company began a private placement offering of promissory notes (the "1997 Notes") and shares of common stock. The offering (as amended) consisted of 198.6 units at $10,000 per unit, totaling gross proceeds of 1,986,000, each unit consisting of 938 shares of common stock and a $5,000 promissory note. The 1997 Notes bear interest at 15 percent, payable quarterly, were due in one year and are secured by the assets of the Company. In connection with the private placement offerings, the Company agreed to issue common stock to a placement agent (the "Merchant Banker") such that the Merchant Banker would own 5.9 percent of the F-21 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) issued and outstanding capital stock of the Company immediately preceding the filing of a registration statement relating to an IPO of the Company's securities. In May 1998, the Company entered into an agreement with the Merchant Banker which eliminated its anti-dilution rights in exchange for the issuance of 68,948 shares of common stock and the forgiveness of $50,014 in receivables from the Merchant Banker. The additional shares issued have been reflected as a stock dividend inasmuch as no additional services were provided by the Merchant Banker. In September 1998, holders of the 1997 Notes were offered the right to convert the 1997 notes and accrued interest into common stock at a rate of $10.67 per share. Note holders consisting of $115,000 in outstanding principal and $9,428 of accrued interest elected to convert their 1997 Notes into 11,665 shares of common stock at that time. The Company incurred $11,082 of offering costs associated with this conversion which was recorded as an offset to additional paid-in capital. In May 1999, remaining holders of the 1997 Notes were offered the right to convert the notes and accrued interest into Series B convertible preferred stock at the rate of $3.00 per share. 1997 Note holders consisting of $425,051 in outstanding principal and $96,882 of accrued interest elected to convert their 1997 Notes into 173,976 shares of Series B convertible preferred stock at that time. In addition, the Company paid $5,000 in cash to one investor. As of December 31, 1999, the remaining 1997 Notes in the amount of $431,750 are in default. 1998 CONVERTIBLE 60 DAY NOTES OFFERING In May 1998, the Company issued $561,520 of 10 percent convertible promissory notes, with a term of sixty days. These notes were convertible at maturity into common stock at a price of $10.67 per share. These convertible promissory notes were secured by the assets of the Company. In October 1998, the Company converted $561,520 of outstanding principal and $17,632 of accrued interest into 54,296 shares of common stock. In connection with this conversion, the Company agreed to issue 7,875 shares of common stock as a finders fee. These shares were valued at $10.67 per share and recorded as deferred offering costs and amortized to interest expense over the term of the notes. In addition, the Company incurred $45,462 of offering costs associated with this conversion which was recorded as an offset to additional paid-in capital. 1998 PROMISSORY NOTE During 1998, the Company issued a $100,000 short-term promissory note to an investor which was subsequently converted into 9,375 shares of common stock at a price of $10.67 per share. In addition, this investor was granted an additional 1,500 shares of common stock as an inducement to convert the promissory note, which was valued at $10.67 per share and recorded as additional interest expense in 1998. 1999 PRIVATE DEBT OFFERING From February through May 1999, the Company offered 15 percent promissory notes with a term of ninety days (the "1999 Notes"). Interest was payable at maturity. Additionally, the 1999 Notes provided for the holders to receive 37.5 shares of common stock every thirty days for each $1,000 of principal outstanding. The Company received $350,000 from the issuance of the 1999 Notes. The 1999 Notes are secured by the assets of the Company. During 1999, the Company paid off $134,885 of the 1999 Notes with cash and converted $180,000 of the 1999 Notes and 7,479 shares of accrued but unissued common stock (which were valued at $4.00 per share) into 81,909 shares of Series B convertible preferred stock. In addition, during 1999 the Company accrued and issued 41,410 shares of common stock that were not converted into Series B convertible preferred stock. As of December 31, 1999, $35,115 of these notes remain outstanding and are in default. As of March 31, 2000, the Company had accrued 49,401 shares of common stock on the Series B convertible preferred stock. F-22 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 2000 NOTE PAYABLE TO STOCKHOLDER On February 15, 2000, the Company received a $500,000 loan from a company, wholly owned by a stockholder and nominee to the board of directors. The loan is evidenced by a promissory note, bears interest at the rate of 10 percent per annum, matures on May 31, 2000 (subsequently extended to July 31, 2000) and is secured by the assets of the Company. In addition, the Company issued a warrant for the purchase of 18,750 shares of common stock, which is exercisable at $4.80 per share for two years subsequent to the closing of the IPO. The warrants issued were valued at $25,938 based upon their fair value measured using the Black-Scholes option pricing model with the following assumptions: 6.7 risk-free interest rate, 70.45 percent volatility and a 2.30 year estimated life. The Company charged the value of the warrants to interest expense. 2000 CONVERTIBLE PROMISSORY NOTES During March and April 2000, convertible promissory notes were issued in connection with the Series C convertible preferred stock offering. See Note 10. Notes payable and long-term debt consists of the following:
December 31, ------------------------------- March 31, 1998 1999 2000 ------------- -------------- ------------- 1996 Notes secured by assets of the Company, in default as of December 31, 1998 and 1999, interest at 15% per annum and accruing warrants to purchase common stock on a monthly basis (see description above)................... $ 429,725 $ 130,000 $ 130,000 1997 Notes secured by assets of the Company, in default as of December 31, 1998 and 1999, interest of 15% per annum (see description above).......................................... 870,500 431,750 431,750 1999 Notes secured by assets of the Company, in default as of December 31, 1999, interest at 15% per annum and accruing shares of common stock on a monthly basis (see description above) -- 35,115 35,115 Note payable to RSG net of discount of $35,136 and $0 as of December 31, 1998 and 1999, respectively, secured by assets of the Company, imputed interest at 41% per annum, (see Note 4) 1,464,864 1,555,544 1,555,544 Note payable to a corporation for services performed, in default as of December 31, 1999, interest at 22% per annum, unsecured............ -- 102,290 158,354 Note payable to an individual, secured by assets of the Company, in default as of December 31, 1998 and 1999, interest at 15% per annum, unsecured....................................... 100,000 100,000 100,000 Note payable to a bank, interest at 10% per annum, due in monthly installments through June 2002, secured by vehicle........................ 13,740 10,290 9,372 Note payable to a bank, interest at 9.25% per annum, due in monthly installments through April 2000, secured by a vehicle................ 5,460 1,429 362
F-23 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED)
December 31, ------------------------------- March 31, 1998 1999 2000 ------------- -------------- ------------- Note payable to an individual, interest at 15% per annum, unsecured............................ -- 6,062 6,062 Convertible promissory note, bearing interest at 7% per annum, shown net of $30,490 discount and $9,312 in deferred loan costs as of March 31, 2000 (see description above)................ -- -- 135,198 Note payable to a company, interest at 10% per annum, matures June 30, 2000, secured by the assets of the Company, in addition, the Company issued a warrant for the purchase of 18,750 shares of common stock (see description above).. -- -- 500,000 ------------- -------------- ------------- Total notes payable and long-term debt............. 2,884,289 2,372,480 3,061,757 Less: Current portion.............................. (2,872,570) (1,560,458) (2,114,542) ------------- -------------- ------------- $ 11,719 $ 812,022 $ 947,215 ============= ============== =============
None of the notes in default have been extended. Moreover, holders of the notes in default have not taken any action to foreclose on the notes. In addition, subsequent to March 31, 2000, the Company made a principal payment of $230,000 on the note in the original principal amount of $500,000. Future maturities of notes payable and long-term debt as of December 31, 1999 are as follows:
Year Ending December 31, ------------------------ 2000................................................ $ 1,560,458 2001................................................ 4,210 2002................................................ 32,043 2003................................................ 109,871 2004................................................ 163,711 Thereafter........................................... 502,187 --------------- Total............................................... $ 2,372,480 ===============
6. NOTES PAYABLE TO STOCKHOLDERS In March 1996, the Company's president, who is also a principal stockholder, agreed to purchase 187,500 shares of RSI's common stock from a stockholder for $500,000. As payment for the shares, the president signed a $250,000 note payable obligation to the selling stockholder, which bore interest at 7 percent and was due on March 14, 1998, and signed another $250,000 promissory note payable to the selling stockholder, which bore interest at 7 percent and was due on demand. In October 1996, the Company agreed to assume the president's rights and obligations under the agreements and repurchased the shares as treasury shares as per the terms of the original agreement with no additional compensation or consideration paid to the president. In March 1998, the Company and the stockholder agreed to rescind and to return the 187,500 shares of stock to the original stockholder. Accordingly, no loss was recognized on this transaction. In October 1996, in connection with the Company's acquisition of certain patents and license rights from the Company's president, the Company agreed to pay the president $125,000 as well as issue the president 65,625 shares of common stock. The $125,000 obligation was originally due March 1, 1997 without interest. During 1997, 1998 and 1999, the Company paid $41,750, $12,500 and $0, respectively, in cash F-24 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) towards the principal on this obligation. In December, 1999, the Company's president agreed to convert the remaining principal balance of $70,750 into 23,583 shares of Series B preferred stock at $3.00 per share. During the years ended December 31, 1998 and 1999, the Company's president loaned the Company $75,000 and $130,209, respectively. Additionally, during the year ended December 31, 1999, the Company's chief financial officer, who is a stockholder, and another stockholder loaned the Company $10,545 and $83,441, respectively. These loans were evidenced by promissory notes which bore interest at 10 percent. In addition, the note holders were also to receive 100 shares of common stock per month for every $1,000 of principal outstanding. In connection with these agreements, the Company accrued and issued 83,500 shares of common stock which were valued at $3.20 per share. During September 1999, all amounts outstanding on these notes were converted into 105,984 shares of Series B convertible preferred stock at a rate of $3.00 per share. 7. LEASES CAPITALIZED LEASE OBLIGATIONS Certain equipment is leased under capital lease agreements. The following is a summary of assets held under capital lease agreements:
December 31, --------------------------------- March 31, 1998 1999 2000 --------------- --------------- -------------- Property and equipment.......................... $ 75,126 $ 103,602 $ 28,476 Less: Accumulated amortization.................. (29,320) (62,701) (5,537) --------------- --------------- -------------- $ 45,806 $ 40,901 $ 22,939 =============== =============== ==============
The following is a schedule of future minimum lease payments under capital lease agreement together with the present value of the net minimum lease payments at December 31, 1999:
Year Ending December 31, ------------------------ 2000................................................ $ 35,728 2001................................................ 35,728 2002................................................ 27,776 --------------- Total net minimum lease payments....................... 99,232 Less: Amount representing interest.................... (22,074) --------------- Present value of net minimum lease payments............ 77,158 Less: Current portion................................. (22,061) --------------- Total............................................... $ 55,097 ===============
OPERATING LEASES AS LESSOR The Company accounts for its revenue sharing agreements as operating leases. As of December 31, 1999 and March 31, 2000, the Company had only one revenue sharing agreement for which the customer was contractually obligated to pay minimum monthly payments. Agreements with all other customers provide for an allocation of revenues to the Company with no minimum monthly payment. Accordingly, the Company is unable to estimate future amounts to be received under these agreements. F-25 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) Future minimum payments to be received under the contract that provides for minimum monthly amounts are as follows:
Year Ending December 31, ------------------------ 2000................................................ $ 132,457 2001................................................ 132,457 2002................................................ 132,457 2003................................................ 132,457 2004................................................ 132,457 Thereafter........................................... 264,914 --------------- Total............................................... $ 927,199 ===============
OPERATING LEASES AS LESSEE The Company leases its operating facilities and certain equipment under non-cancelable operating leases. Rent expense for the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000 was $100,098, $115,245 and $30,895, respectively. As of December 31, 1999 minimum rental payments under non-cancelable operating leases were as follows:
Year Ending December 31, ------------------------ 2000................................................ $ 132,886 2001................................................ 119,836 2002................................................ 104,030 --------------- Total............................................... $ 356,752 ===============
8. INCOME TAXES The Company paid no federal or state income taxes. The significant components of the Company's deferred income tax assets as of December 31, 1998 and 1999 are as follows:
1998 1999 ---------------- ----------------- Deferred Income Tax Assets: Net operating loss carryforwards.......................... $ 2,533,815 $ 3,640,709 Reserves and accrued liabilities.......................... 121,422 82,602 ---------------- ----------------- Total deferred income tax assets.................... 2,655,237 3,723,311 Valuation allowance....................................... (2,611,073) (3,687,977) ---------------- ----------------- Net deferred tax asset.............................. 44,164 35,334 ---------------- ----------------- Deferred Income Tax Liability: Tax depreciation in excess of book........................ (44,164) (35,334) ---------------- ----------------- Total deferred income tax liabilities............... (44,164) (35,334) ---------------- ----------------- Net deferred income taxes........................... $ -- $ -- ================ =================
The amount of and ultimate realization of the deferred income tax assets is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance against its deferred income tax assets. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of these deferred income tax assets to warrant the valuation allowance. F-26 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) The following is a reconciliation of the amount of tax benefit that would result from applying the federal statutory rate to pretax (loss)/income with the benefit from income taxes:
December 31, --------------------------------- March 31, 1998 1999 2000 --------------- --------------- -------------- Benefit at statutory rate (34%)................. $ (1,409,469) $ (1,248,540) $ (421,589) Non-deductible expenses......................... 414,216 220,108 196,303 Change in valuation allowance................... 1,049,973 1,076,904 241,654 State tax benefit, net of federal tax benefit... (54,720) (48,472) (16,368) --------------- --------------- -------------- Net Benefit From Income Taxes.............. $ -- $ -- $ -- =============== =============== ==============
The following summarizes the tax net operating loss carryforwards and their respective expiration dates as of December 31, 1999: 2008................................................ $ 44,043 2010................................................ 930,194 2011................................................ 2,188,074 2017................................................ 820,111 2018................................................ 3,191,461 2019................................................ 3,133,899 --------------- Total net operating loss carryforwards.............. $ 10,307,782 =============== 9. COMMITMENTS AND CONTINGENCIES LEGAL MATTERS In March 1999, a vendor of the Company filed a lawsuit that alleges breach of contract and seeks payment in the amount of approximately $125,000 from the Company related to purchases of materials from the vendor. The Company has responded to the lawsuit, and management believes that the materials delivered by the vendor were defective. In addition, the Company's costs resulting from the defective materials are in excess of $120,000. Although the Company, after consultation with legal counsel, believes that their defenses have merit, they are unable to predict the outcome of this matter. The Company is the subject of certain legal matters, which it considers incidental to its business activities. It is the opinion of management, after discussion with legal counsel, that the ultimate disposition of these legal matters will not have a material impact on the consolidated financial condition or results of operations of the Company. In January 1999, the Company received $288,620 as a loan from an officer and a consultant. The proceeds were loaned to the officer and the consultant by the Riggs Family Partnership, a third party which had received the proceeds from an unregistered offering of the Company's common stock. The loans from the officer and the consultant were subsequently converted into 102,242 shares of Series B convertible preferred stock and 77,353 shares of common stock, collectively. This unregistered offering was performed outside the Company and without its knowledge. The Company has not been able to determine whether the unregistered offering was conducted with the benefit of a state or federal exemption from registration. The Company was not privy to any offering materials that may have been used or distributed with respect to the offering, and that it has no independent knowledge regarding the status of the investors. The Company also maintains that it did not have any control over, or contractual relationship with, the Riggs Family Partnership. In the event a successful claim is asserted against the Riggs Family Partnership as a result of the unregistered offering, the Company may be subject to a potential disgorgement of the proceeds received plus interest. No amount has been reclassified from stockholders' deficit to a liability in the accompanying financial statements for any possible payments which may result from the outcome of this unasserted claim. F-27 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) EMPLOYMENT AGREEMENTS During 1999, the Company entered into employment agreements with certain of its officers and key employees. The agreements are for periods of 24 to 36 months with an option to extend the terms for up to an additional 12 months upon mutual agreement of the Company and the officer/employee. Upon the successful completion of certain events (including an IPO of the Company's common stock), the officers/employees are to receive increases in their base salaries at percentages ranging up to 28 percent. In the event of termination of employment without cause, the officer/employee is entitled to cash compensation equal to their base salary for the lesser of the remainder of their employment agreement or a period of one to twelve months (depending on the officer/employee). Additionally, upon termination (with or without cause), the agreements allow certain of the officers to require repurchase of the officer's common stock by the Company at a price equal to 200 percent of its fair market value at the date of termination. The agreements also prevent the officers/employees from competing with the Company for up to one year from the date of termination of their employment. ADVERTISING AGREEMENT On March 24, 2000, the Company entered into a letter of agreement with an advertising agency. Under the terms of the agreement, the advertising agency is to assist the Company in the development and implementation of the Company's creative design related to its advertising, marketing and promotion. The agreement lasts for a term of one year and provides for the agency to be compensated as follows: months one through four - on March 29, 2000, the Company issued the agency a warrant to purchase 125,000 shares of common stock at $4.80 per share, and months five through twelve - the Company is to pay the agency $43,687 per month in cash. In addition, the Company also agreed to pay all outside expenses incurred by the agency on behalf of the Company which is estimated to be $450,000. The warrants issued were valued at $135,152 based upon their fair value measured using the Black-Scholes option pricing model with the following assumptions: 6.7 percent risk-free interest rate, 0 percent expected dividend yield, 83.41percent volatility, and a 1.76 year estimated life. The Company changed $101,364 of the value of the warrants to deferred offering costs relating to the proposed IPO and $33,788 were charged to prepaid expense. REGISTRATION RIGHTS In 1999, in connection with certain of its debt and equity offerings and the conversion of certain debt to equity, the Company has granted stockholders of 407,906 shares of common stock, warrants to purchase 242,550 shares of common stock and 683,333 shares of Series B convertible preferred stock the right, subject to applicable terms and conditions, to require the Company to register their common shares on a best efforts basis (or equivalent common shares upon the exercise of the warrants or conversion of the preferred stock) under the Securities Act for offer to sell to the public. Additionally, the Company has also granted certain stock and warrant holders the right to join in any registration of securities of the Company (subject to certain exceptions). The Company is obligated to pay all offering expenses related to offerings requested by the stock and warrant holders under these agreements. The stockholders are obligated to pay all selling expenses. FINANCING AGREEMENT During 1999, the Company entered into a program agreement with a finance company to provide funding for Refreshment Centers which the Company places with customers under revenue sharing agreements. Under the terms of the program agreement, the finance company will fund the Company's product costs for each Refreshment Center that has been in service for 90 days subject to the hotel meeting certain requirements. The Company is obligated to repay the financing over seven years, with a formula-based variable interest rate. As part of the financing, eRoomSystem Technologies will form a new entity, eRoomSystem SPE, Inc. eRoomSystem SPE will be a Nevada corporation as a wholly owned subsidiary. eRoomSystem SPE will own all of the Refreshment Centers funded by the finance company as well as the F-28 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) revenue sharing agreements. The finance company will take a senior security interest in the Refreshment Centers financed under the program agreement. As of December 31, 1999, no Refreshment Centers have been funded under the program agreement. 10. STOCKHOLDERS' EQUITY AMENDMENT TO ARTICLES OF INCORPORATION On February 2, 2000, with stockholder approval, the Company filed articles of amendment to its articles of incorporation. The amended articles of incorporation authorize the Company to issue 500,000 shares of $0.001 par value Series A preferred stock, 2,500,000 shares of $0.001 par Series B preferred stock and 2,000,000 shares of $0.001 par value Series C preferred stock and 20,000,000 shares of $0.001 par common stock. The Company's board of directors is authorized, without stockholder approval, to designate and determine the preferences, limitations and relative rights granted to or imposed upon each share of preferred stock which are not fixed by the amended articles of incorporation. On March 29, 2000, and corrected on May 30, 2000, the Company filed an amendment and restatement of the Company's Articles of Incorporation, as amended and restated on February 2, 2000. The amended and restated articles of incorporation: (i) changed the Company's name to "eRoomSystem Technologies, Inc."; (ii) increased the Company's authorized capital stock to 60,000,000 shares; (iii) increased the authorized number of shares of the Company's common stock from 20,000,000 shares to 50,000,000 shares; and (iv) authorized 5,000,000 shares of undesignated preferred stock at $0.001 par value. REVERSE STOCK SPLITS On September 28, 1999, the Company's board of directors approved a one-for-two reverse stock split related to its outstanding common stock and common stock options and warrants. However, in connection with their employment agreements, officers which held 996,000 shares of common stock and a former consultant which held 475,000 shares of common stock were excluded from the effect of this reverse stock split. On March 29, 2000, the Company's board of directors approved a three-for-four shares reverse stock split related to its common stock and common stock options and warrants. Additionally, in connection with the sale of the Series A and B convertible preferred stock, the holders of Series A and B convertible preferred stock were excluded from the effect of these reverse stock splits. The 1999 and 2000 stock splits have been retroactively reflected in the accompanying consolidated financial statements for all periods presented. STOCK ISSUANCES FOR SERVICES During the year ended December 31, 1999, the Company issued shares of common stock to officers, key employees and outside parties for services provided and as bonuses. The shares issued have been valued by the Company's Board of Directors at estimated fair values based on other issuances of shares for cash and on the terms of related transactions. During 1999, the Company issued 1,864 shares of its common stock to certain officers and key employees and recorded $5,965 of related compensation expense, respectively. The shares issued in 1999 were valued at $3.20 per share. 1997 STOCK OPTION EXERCISE During the year ended December 31, 1997, certain option and warrant holders exercised options and warrants to purchase 1,733,500 shares of common stock in exchange for partial recourse notes receivable of $3,799,250. The notes were due on demand, bore interest at 7 percent per annum and the principal and accrued interest could be paid by surrendering shares of common stock to the Company. During the years ended December 31, 1998 and 1999, the Company accrued $274,691 and $235,951, respectively, of interest related to these notes receivable. On the dates the options and warrants were granted to employees during 1997, the exercise price of $1.75 per share was greater than the fair value of the Company's common F-29 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) stock. Accordingly, no compensation was recognized. Warrants granted to third-party consultants were valued at their fair value based upon the Black-Scholes option pricing model and resulted in the recognition of approximately $93,000 of compensation expense during 1997. EITF 95-16, "Accounting for Stock Compensation Arrangements with Employer Loan Features Under APB No. 25, requires employee notes received upon exercise of stock options to be accounted for as the issuance of new stock options with a new measurement date if the notes are nonrecourse to the employee. The notes received in connection with the exercise of these options were partial recourse to the stockholders. Accordingly, they were not nonrecourse notes and were therefore not considered to be the issuance of new stock options. In connection with their employment/consulting agreements, certain stockholders had been exempted from the effects of the reverse stock split discussed above. During the year ended December 31, 1999, the Company demanded payment on notes receivable with principal balances totaling $3,143,000. Holders of 1,471,000 shares of common stock with a principal obligation totaling $2,574,250 and accrued interest of $366,319 surrendered their shares to the Company as satisfaction of the obligation. Since these officers and former consultant immediately returned all of these shares to the Company, no compensation was recognized in connection with the exclusion of these shares from the reverse stock split. However, as of December 31, 1999, a holder of 121,875 shares of common stock with a principal balance of $568,750 and accrued interest of $50,938 had filed for bankruptcy protection. As a result, the Company is currently negotiating with the bankruptcy trustee for the return of the shares. However, the fair value of the shares is less than the principal and accrued interest on the note receivable. Accordingly, as of December 31, 1999 the Company has recorded a reserve of $229,688 against the note receivable to reflect it at the fair value of the underlying collateral. As of December 31, 1999, a note receivable from the exercise of 140,625 stock options with a principal balance of $656,250 and accrued interest of $93,385 remained outstanding for which the Company had not yet demanded repayment. As a result of the decline in the value of the underlying collateral and because the Company does not believe it will receive payment beyond the return of the underlying common stock, the Company recorded a reserve of $299,635 to reflect the note receivable at the fair value of the underlying collateral. At March 31, 2000, the Company cancelled a note receivable from a stockholder which was used to purchase shares of common stock. The value of the note receivable was $656,250. As consideration for the cancellation of the note receivable, 140,625 shares of common stock were returned to the Company by the stockholder and retired. 1998 STOCK TRANSACTIONS In January 1998, the Company sold 35,532 shares of common stock in a private placement at $10.67 per share. The Company received cash proceeds of $335,042, net of $43,958 in offering costs. The placement agent of the offering received a cash commission of 12.5 percent and warrants to purchase 4,264 shares of common stock, exercisable at $12.80 per share which are exercisable for a period of three years. The Company has valued these warrants at $4.31 per share using the Black-Scholes option pricing model with the following assumptions: risk free rate of 5.4 percent, expected dividend yield of 0 percent, volatility of 58.2 percent and an expected life of 3.3 years. During the year ended December 31, 1998, the Company sold an additional 5,156 shares of common stock to an investor at $10.67 per share. 1998 SERIES A CONVERTIBLE PREFERRED STOCK OFFERING In January 1998, the Company issued 360,000 shares of Series A convertible preferred stock at a price of $5.00 per share. The Company received $600,275 in net cash proceeds (net of offering costs of $159,725) and issued 152,000 shares of Series A convertible preferred stock. In addition, the Company issued 208,000 shares of Series A convertible preferred stock relating to the conversion of $1,040,000 of 1996 Notes. The F-30 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) placement agent received a cash commission of 13 percent, due diligence and non-accountable expense allowances (for a total of $149,843), 13,125 shares of common stock (valued at $10.67 per share) and warrants to purchase 6,840 shares of common stock exercisable at $16.00 per share which are exercisable for a period of two years subsequent to the Company's IPO. The Company has valued these warrants at $2.56 per share using a Black-Scholes option pricing model with the following assumptions: risk free rate of 5.6 percent, expected dividend yield of 0 percent, volatility of 58.2 and an expected life of 2.1 years. The Series A convertible preferred stock is automatically converted into shares of common stock upon the consummation of an IPO on a one-to-one basis if the IPO price is at lease $10.00 per share. If the initial public offering price is less than $10.00 per share, the conversion rate for the shares of Series A convertible preferred stock will be $10.00 divided by the IPO price. On November 14, 1998, holders of Series A convertible preferred stock commenced cumulating an 8% annual dividend. The annual dividend requirement applicable to Series A preferred shares outstanding at December 31, 1999 is $144,000, or $0.40 per share. Due to certain provisions of the Series A convertible preferred stock, the Company's one-for-two reverse stock split declared on September 28, 1999 did not affect the number of shares of Series A convertible preferred stock outstanding. No dividends have been paid to date to holders of Series A convertible preferred stock. As of December 31, 1998 and 1999, holders of Series A convertible preferred stock were owed dividends of $18,541 and $162,541, respectively. In accordance with EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" the Company will record (upon conversion of the Series A convertible preferred stock) a dividend to the Series A convertible preferred stockholders of $1,800,000. This dividend represents the contingent beneficial conversion feature of the Series A convertible preferred stock which accrues to the Series A convertible preferred stockholders at the date of conversion. In the event of a liquidation, dissolution or winding up of eRoomSystem Technologies, holders of the Series A preferred stock will be entitled to receive, out of legally available assets, a liquidation preference of $10.00 per share, plus an amount equal to any unpaid dividends to the payment date, before any payment or distribution is made to holders of common stock or any series or class of stock there after issued that rank junior as to the liquidation rights of the Series A preferred stock. The holders of the Series A shares may not note on any matter, excluding matters affecting the rights of such stockholders or as required by law. In connection with such note, each share of Series A preferred stock will be entitled to one note. 1999 SERIES B CONVERTIBLE PREFERRED STOCK OFFERING From May through September 1999, the Company issued 2,081,680 shares of Series B convertible preferred stock at a price of $3.00 per share. The Company received $3,584,256 in net cash proceeds (net of cash offering costs of $480,885) and issued 1,355,047 shares of Series B convertible preferred stock. In addition, the Company issued 726,633 shares of Series B convertible preferred stock upon the conversion of $2,265,599 of promissory notes and unpaid salaries of certain officers and as part of the settlement with RSG Investments (Note 4). The placement agent received a cash commission of 9 percent on shares which they placed and a non-refundable expense allowance of 2.5 percent. Effective January 1, 2000 and in connection with the Series B convertible preferred stock offering, the Company agreed to pay an individual a finder's fee of $51,250 plus interest at 10 percent, which is payable from proceeds of the Company's IPO and agreed to issue an option to purchase 1,125 shares of common stock at an exercise price of $4.80 per share. In the event the Company does not complete an IPO by September 28, 2000, the Company is obligated to issue additional options to purchase 1,125 shares of common stock per month until September 30, 2000, at which time an additional 1,125 options are to be issued and the finder's fee and accrued interest are due and payable in full. The Company has accounted for the finders fee and the fair value of the initial 1,125 options as a cost of the Series B convertible preferred stock offering. F-31- eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) Pursuant to the terms of the Series B convertible preferred stock, the shares are automatically converted into shares of common stock upon the consummation of an IPO or a business combination where controlling interest of the Company is acquired. Before the modification as explained below, the conversion was at the lower of (i) $3.00 per share or (ii) 50 percent of the IPO price per share. On April 12, 2000, the certificate of designation for the Series B preferred stock was amended to modify the conversion rate to be determined by dividing $3.00 by 45 percent of the IPO price per share. In the event the Company does not close its IPO by September 28, 2000, each holder of Series B preferred stock shall have the option to convert their Series B stock into the Company's common stock or remain a Series B preferred stockholder after that date. Upon election, each Series B share converts into 1.5 shares of common stock. The holders of the Series B preferred stock are entitled to an annual cumulative dividend of six percent, payable in common stock. The annual dividend requirement applicable to Series B convertible preferred stock outstanding is $374,702, or $0.18 per share. As of December 31, 1999, and March 31, 2000, the Company had accrued common stock dividends of 28,936 and 23,365 shares with a value of $141,899 and $93,460, respectively related to the Series B convertible preferred stock. In accordance with EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," the Company determined that the holders of the Series B convertible preferred stock had received a beneficial conversion feature at the date of issuance. This beneficial conversion feature was valued at $1,249,008 and is being accrued as a dividend between the date of issuance of the Series B convertible preferred stock and September 28, 2000, the date which the Series B convertible preferred stockholders have the right to convert their shares. By modifying the terms of the beneficial conversion feature, when the value of the common stock was $3.20 per share, the beneficial conversion feature was increased by $2,498,016. The increase to the beneficial conversion feature is being accrued as a dividend from April 12, 2000 through September 28, 2000. In the event of a successful IPO prior to that date, the remaining unaccrued beneficial conversion feature will be accrued and recognized at the effective date of the IPO. During the year ended December 31, 1999 and the three months ended March 31, 2000, the Company recorded dividends of $321,370 and $311,396 to the Series B convertible preferred stockholders related to the beneficial conversion feature. In the event of any liquidations, dissolution or winding up of the Company, holders of Series B convertible preferred stock will be entitled to receive, out of legally available assets, a liquidation preference of $10.00 per share, plus an amount equal to any unpaid dividends to the payment date, before any payment or distribution is made to holders of common stock or any series or class thereafter issued that ranks junior to the liquidation rights of the Series B convertible preferred stock. The holders of Series B convertible preferred stock may not vote on any matter, excluding matters affecting the rights of such stockholders or as required by law. In connection with any such vote, each outstanding share of Series B convertible preferred stock will be entitled to one vote. In addition, if the Company has not completed an IPO by September 28, 2000, holders of Series B convertible preferred stock will be accorded voting rights. In such event, each share of Series B convertible preferred stock will be entitled to one vote. 1999 COMMON STOCK ISSUANCE On May 30, 1999, the Company sold 198,750 shares of common stock to an entity controlled by the Company's president in exchange for a promissory note in the amount of $1,590,000. The purpose of the stock sale was to assist the Company in complying with certain stock pledge requirements set forth in the Equipment Agreement with RSG (see Note 4). On September 28, 1999 as a result of the Transfer Agreement with RSG, the 198,750 shares of common stock were returned to the Company in exchange for the cancellation of the promissory note. The shares have been reflected as issued and retired in the accompanying statement of stockholders' deficit for the year ended 1999. 2000 SERIES C CONVERTIBLE PREFERRED STOCK OFFERING During March and April 2000, the Company issued $212,500 of 7% secured, subordinated, convertible promissory notes, 196,150 shares of 7% Series C convertible preferred stock and warrants to purchase F-32 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 42,500 shares of common stock at $6.60 per share in a private placement offering. The Company received $777,750 in net proceeds (net of offering costs of $72,250). The gross proceeds consisted of $650,000 in cash and $200,000 in irrevocable subscription agreements. The 7% Series C convertible preferred stock was issued at $3.25 per share and will be automatically converted into common stock upon the close of an initial public offering at the rate determined by $3.25 divided by 55 percent of the IPO price per share, provided the IPO closes by January 31, 2001, otherwise at $3.30 per share. The promissory notes bear interest at 7 percent per annum, payable semi-annually and mature on December 31, 2001. The notes may be converted at the option of the holders into common stock at 85 percent of the IPO price per share, commencing 30 days following the closing of the IPO. The total proceeds from the offering were allocated to the financial instruments issued based upon their relative fair values, and resulted in allocating $164,169 to the promissory notes before offering costs of $16,664, $31,875 to the beneficial debt conversion feature, $538,140 to the 7% Series C convertible preferred stock and $60,230 to the warrants. Based upon the estimated market value of the common stock of $3.20 per share at the date of the offering, there was no beneficial conversion feature associated with the 7% Series C convertible preferred stock. As of March 31, 2000, the Company had issued $175,000 of 7% secured, subordinated, convertible promissory notes, 161,535 shares of 7% Series C convertible preferred stock and warrants to purchase 35,000 shares of common stock at $6.60 per share in the private placement offering. The Company received $659,625 in net proceeds (net of offering costs of $40,375). The proceeds from the offering were allocated to the financial instruments issued based upon their relative fair values and resulted in allocating $135,198 to the promissory notes before offering costs of $9,312, $26,250 to the beneficial debt conversion feature, $456,407 to the 7% Series C convertible preferred stock and $51,082 to the warrants. While the allocated value of the warrants was less than their fair value of $58,759, the fair value was measured using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.0 percent, expected dividend yield of 0 percent, volatility of 100 percent, and expected lives of 3.25 years. The debt issuance costs will be amortized through December 31, 2001, the discount on the promissory notes of $30,490 will be amortized as interest expense through December 31, 2001. In the event of any liquidation, holders of the Series C convertible preferred stock will be entitled to receive, out of legally available assets, a liquidation preference of $10.00 per share plus an amount equal to any unpaid dividends to the payment date before any payment or distribution is made to the holders of common stock or any series or class of the Company's capital stock that ranks junior to the liquidation rights of the Series C convertible preferred stock. The holders of the Series C convertible preferred stock may not vote on any matter, excluding matters affecting the rights of such stockholders or as required by law. In connection with any such vote, each outstanding share of Series C convertible preferred stock shall be entitled to one vote. OTHER ISSUANCES OF COMMON STOCK AND WARRANTS During the first quarter of 2000, the Company also issued 1,365 shares of common stock to an employee who loaned money to the Company. Interest on the loan accrued at 10% per annum. The shares were issued as a payment of interest and the value of the shares issued was $4,374 or $3.20 per share. Additionally, the Company issued 7,991 shares of common stock to the holders of the 1999 Private Debt offering who are entitled to receive shares for the payment of interest. The value of the shares issued as an interest payment was $25,563 or $3.20 per share. F-33 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 11. STOCK OPTIONS AND WARRANTS STOCK-BASED COMPENSATION The Company accounts for its stock options issued to directors, officers and employees under Accounting Principles Board Opinion No. 25 and related interpretations ("APB 25"). Under APB 25, compensation expense is recognized if an option's exercise price on the measurement date is below the fair value of the Company's common stock. The Company accounts for options and warrants issued to non-employees in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which requires these options and warrants be accounted for at their fair value. NON EMPLOYEE GRANTS During the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000, the Company issued options to purchase 938, and 63,711 and 321,000 shares of common stock, respectively. The exercise price was $12.80, and ranged from $4.80 to $9.60, and $4.00 to $9.60 for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 2000, respectively. These options were valued in accordance with SFAS 123 (utilizing the Black-Scholes option pricing model with the following weighted average assumptions for the years ended 1998 and 1999 and the three months ended March 31, 2000, respectively: risk free interest rate of 5.6, 6.2 and 6.7, expected dividend yield of 0 percent, volatility of 58.2, 100.6 and 86.05 percent, expected lives of 3.2, 2.6 and 3.3 years, respectively) at amounts ranging from $1.58, $1.37 to $1.63 and $1.15 to $1.98 per share, respectively. EMPLOYEE GRANTS During 1998 and 1999 the Company granted options to purchase 9,375 and 269,909 shares of common stock, respectively. The exercise price ranged from $11.33 and $4.80 to $8.80 per share, respectively. There was no intrinsic value relating to these options and vested upon grant. On February 3, 2000, the Board of Directors adopted, and on March 29, 2000, a majority of the shareholders' approved the creation of the 2000 Stock Option Plan ("2000 Plan") with 2,000,000 shares of common stock reserved for issuance thereunder. The plan provides both the direct award or sale of shares and for the grant of options to purchase shares. A committee, designated by the board of directors, will administer the plan and has the discretion to determine the employees, directors, independent contractors and advisors who will receive awards, the type of awards (stock, incentive stock options or non-qualified stock options) to be granted, the term, vesting and exercise prices. The exercise price for the options may be paid in cash, in shares of the Company's common stock valued at fair market value on the exercise date or through a same-day sale program without any cash outlay by the optionee. In the event of a change in control (as defined), all restrictions on all awards or sales of shares issued under the plan will lapse and vesting on all unexercised options will accelerate to the date of the change in control. In February and March 2000, the Company issued options for the purchase of 1,119,768 shares of common stock to certain officers and employees of the Company pursuant to the 2000 Plan. With the exception of options to purchase 74,917 shares of common stock, these options vested immediately. The exercise prices range from $4.00 to $9.60 per share. The options are exercisable through the third anniversary of the closing of this offering. SFAS 123 requires pro forma information regarding net income (loss) as if the Company had accounted for its stock options granted to employees subsequent to December 31, 1994 under the minimum fair value method of the statement. The minimum fair value of the stock options was estimated at the grant date by the Company using the Black-Scholes option pricing model. The following weighted average assumptions were used in the Black-Scholes model for the years ended 1998 and 1999 and the three months ended March 31, 2000, respectively: weighted-average risk-free interest rate of 5.5, 6.3 and 6.7 percent, a weighted average dividend yield of 0 percent, volatility of 58.2, 100.6 and 85.4 percent, and a F-34 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) weighted-average expected lives of 3.8, 2.7 and 3.3 years, respectively. Following are the pro forma disclosures and the related impact on the net income (losses):
December 31, --------------------------------- March 31, 1998 1999 2000 --------------- --------------- -------------- Loss attributable to common stockholders as reported..................................... $ (4,164,037) $ (4,279,444) $ (1,654,718) Loss attributable to common stockholders pro forma........................................ (4,209,596) (4,725,793) (3,205,670) Basic and diluted loss per common share as reported..................................... (1.37) (1.33) (0.75) Basic and diluted loss per common share pro forma........................................ (1.39) (1.47) (1.47)
Due to the nature and timing of option grants, the resulting pro forma compensation cost may not be indicative of future years. OUTSTANDING STOCK OPTIONS AND WARRANTS The Company has from time to time granted stock options and warrants to employees, directors, consultants and in connection with financing transactions (see Notes 4, 5 and 10). A summary of stock option and warrant activity for the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000 is as follows:
Weighted Options and Average Warrants Price Range Exercise Price --------------- --------------- --------------- Balance, December 31, 1997...................... $ 454,575 2.67 - 6.00 3.19 Granted.................................... 143,455 2.67 - 16.00 10.33 --------------- Balance, December 31, 1998...................... 598,030 2.67 - 16.00 5.00 Granted.................................... 362,228 1.33 - 9.60 5.56 Forfeited.................................. (93,750) 12.80 12.80 --------------- Balance, December 31, 1999...................... 866,508 2.67 - 16.00 4.39 Granted.................................... 1,623,809 1.00 - 9.60 6.53 --------------- Balance, March 31, 2000......................... 2,490,317 $1.00 - 16.00 5.78 ===============
F-35 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) A summary of stock option and warrant grants with exercise prices less than, equal to or greater than the estimated market value on the date of grant during the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000 is as follows:
Weighted Average Fair Options and Weighted Value of Warrants Average Options and Granted Exercise Price Warrants --------------- --------------- --------------- Year Ended December 31, 1998: Grants with exercise price less than estimated market value..................... 105,416 2.67 8.46 Grants with exercise price greater than estimated market value..................... 38,039 13.78 4.88 --------------- Year Ended December 31, 1999: Grants with exercise price less than estimated market value..................... 19,233 2.40 2.20 Grants with exercise price greater than estimated market value..................... 342,995 5.66 1.82 --------------- Three Months Ended - March 31, 2000: Grants with exercise price less than estimated market value..................... 4,290 1.20 2.46 Grants with exercise price greater than estimated market value..................... 1,619,519 6.49 1.44
A summary of the options and warrants outstanding and exercisable as of December 31, 1999 and March 31, 2000 follows: DECEMBER 31, 1999
Weighted Average Range of Exercise Number Remaining Weighted Average Weighted Average Price Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $ 1.33 - 2.67 398,304 2.5 years $ 2.65 398,304 $ 2.65 2.68 - 5.33 366,914 2.6 years 4.76 366,914 4.76 5.34 -16.00 101,290 2.6 years 9.72 101,290 9.72 ------------------ ------------------- 866,508 866,508 ================== ===================
MARCH 31, 2000
Weighted Average Range of Exercise Number Remaining Weighted Average Weighted Average Price Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $1.00 - 2.67 402,219 2.25 years $ 2.64 402,219 $ 2.64 2.68 - 5.33 1,204,056 2.78 years 4.45 1,204,056 4.45 5.34 -16.00 884,042 3.05 years 9.03 821,188 9.08 ------------------ ------------------- 2,490,317 2,427,463 ================== ===================
F-36 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) 12. SEGMENT INFORMATION In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes disclosures related to components of a company for which separate financial information is available and evaluated regularly by a company's chief operating decision makers in deciding how to allocate resources and in assessing performance. It also requires segment disclosures about products and services as well as geographic areas. The Company has determined that it did not have any separately reportable operating segments as of December 31, 1998 and 1999. However, the Company does sell Refreshment Centers in geographic locations outside of the United States. Revenues attributed to individual countries based on the location of sales to unaffiliated customers for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 2000 is as follows:
December 31, --------------------------------- March 31, 1998 1999 2000 --------------- --------------- -------------- Revenue: United States................................ $ 769,062 $ 540,517 $ 49,099 Other Countries.............................. 242,400 -- -- --------------- --------------- -------------- Total Revenue................................ $ 1,011,462 $ 540,517 $ 49,099 =============== =============== ==============
13. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company's historical revenues and receivables have been derived solely from the lodging industry. The Company offers credit terms on the sale of its Refreshment Centers and in connection with its revenue sharing contracts. The Company performs ongoing credit evaluations of its customers' financial condition and does not require collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. During the year ended December 31, 1998, revenues from three customers accounted for 40.8, 25.1 and 24 percent of total revenues. During the year ended December 31, 1999, revenues from two customers accounted for 26.7 and 16.0 percent of total revenues. During the three months ended March 31, 2000, no single customer accounted for a material amount of the Company's revenue. No other customer accounted for more than 10 percent of total revenues in any year presented. 14. SUBSEQUENT EVENTS 2000 STOCK OPTION PLAN In February and March 2000, the Company issued options for the purchase of 1,119,768 shares of common stock to certain officers and employees of the Company at prices ranging from $4.00 to $9.60 per share NON-EMPLOYEE STOCK OPTION GRANTS During the three months ended March 31, 2000, the Company issued options to purchase 321,000 shares of common stock to various non employees at prices ranging from $4.00 to $9.60. F-37 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) NOTE PAYABLE TO STOCKHOLDER In February 2000, the Company received a $500,000 loan from a company, wholly owned by a stockholder and nominee to the board of directors. Also, the Company issued a warrant for the purchase of 18,750 shares of common stock. CANCELLATION OF NOTE RECEIVABLE At March 31, 2000, the Company cancelled a note receivable from a stockholder which was used to purchase shares of common stock. The value of the note receivable was $656,250. As consideration for the cancellation of the note receivable, 140,625 shares of common stock were returned to the Company by the stockholder and retired. 2000 SERIES C CONVERTIBLE PREFERRED STOCK During March and April 2000, the Company issued $212,500 of 7% secured, subordinated, convertible promissory notes, 196,150 shares of 7% Series C convertible preferred stock and warrants to purchase 42,500 shares of common stock at $6.60 per share in a private placement offering for net proceeds of $777,750 (net of $72,250 of offering costs). ADVERTISING AND MARKETING LETTER OF AGREEMENT On March 24, 2000, the Company entered into a letter of agreement with an advertising agency. The Company issued warrants to purchase 125,000 shares of common stock as part of the agreement. AMENDMENT TO SERIES B CONVERTIBLE PREFERRED STOCK DESIGNATION The certificate of designation for the Series B convertible preferred stock was amended on April 12, 2000 to modify the conversion rate to $3.00 divided by 45 percent of the IPO price per share. ADDITIONAL WARRANTS ISSUED During the first quarter of 2000, the Company issued 4,291 warrants to purchase common stock in connection with the 1996 defaulted notes. OTHER SUBSEQUENT EVENTS On March 31, 2000, the Company issued 22,484 shares of common stock to holders of the Series B convertible preferred stock. During the first quarter of 2000, the Company issued 1,365 shares of common stock to an employee who loaned money to the Company. Additionally, the Company issued 7,991 shares of common stock to the holders of the 1999 Private Debt offering. During the second quarter of 2000, the Company issued 29,972 shares of common stock to holders of the Series B convertible preferred stock (unaudited). The Company also issued 1,818 shares of common stock to an employee who loaned money to the Company (unaudited). Additionally, the Company issued 9,850 shares of common stock to holders of the 1999 Private Debt offering (unaudited). Also, the Company issued 777 shares of common stock to a vendor (unaudited). 2000 BRIDGE LOAN On April 13, 2000, the Company issued a $1,500,000, 9% secured, subordinated promissory note and 200,000 shares of common stock for irrevocable subscription agreements in a private placement offering. The Company received $1,472,500 (net of offering costs of $27,500) in net cash proceeds. The promissory F-38 eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS UNAUDITED) note bears interest at nine percent per annum, payable semi-annually and matures on the earlier of the closing of the IPO or October 13, 2000. The proceeds from the offering were allocated to the financial instruments issued based upon their relative fair values and resulted in allocating $1,051,769 to the promissory note before offering costs of $19,643 and $440,374 to the common stock. FINANCING AGREEMENT On May 11, 2000, the Company entered into a Master Business Lease Financing Agreement (the "Agreement"), whereby the Company may receive funding of up to 150% of the fully-burdened cost of its products under the terms of an open-ended line of credit. The Company is obligated to repay amounts borrowed under the agreement over a seven-year term using a formula-based variable interest rate. The financing will be secured by products funded by the equipment financier and all proceeds generated and derived from such products. F-39 ================================================================================ No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. --------------- TABLE OF CONTENTS PAGE Prospectus Summary..................................................1 Risk Factors........................................................4 Special Note Regarding Forward-Looking Information.....................................................10 Use of Proceeds....................................................11 Dividend Policy....................................................13 Capitalization.....................................................14 Dilution...........................................................15 Selected Financial Data............................................16 Management's Discussion and Analysis of Financial Condition And Results of Operations......................................................18 Business...........................................................30 Management.........................................................42 Certain Relationships and Related Transactions.....................47 Principal Stockholders.............................................50 Description of Capital Stock.......................................52 Shares Eligible for Future Sale....................................58 Underwriting.......................................................60 Legal Matters......................................................63 Experts............................................................63 Change in Accountants..............................................63 Available Information..............................................63 Index to Consolidated Financial Statements........................F-1 --------------- Through and including _________, 2000, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. 1,800,000 Shares of Common Stock eROOMSYSTEM TECHNOLOGIES, INC. [INSERT LOGO] DONALD & CO. SECURITIES INC. ================================================================================ [Alternative Page for Selling Stockholder Prospectus] SUBJECT TO COMPLETION, DATED __________, 2000 PROSPECTUS 200,000 SHARES OF COMMON STOCK ON BEHALF OF SELLING STOCKHOLDERS [eROOMSYSTEM LOGO] eROOMSYSTEM TECHNOLOGIES, INC. The stockholders named under the caption "Selling Stockholders" from time to time may offer to sell up to 200,000 shares of common stock of eRoomSystem Technologies, Inc. We are not selling any shares of common stock on behalf of selling stockholders and will not receive any cash or other proceeds in connection with the sale of shares by selling stockholders. ------------------ eRoomSystem Technologies' common stock is traded on the Nasdaq SmallCap Market under the symbol "ERMS." On __________, 2000, the last reported sale price of eRoomSystem Technologies' common stock was __________. ------------------ THESE SECURITIES ARE SPECULATIVE. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ ______________, 2000 The information in this preliminary prospectus is not complete and may be changed. eRoomSystem Technologies, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and it is not seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 78.7502 and 78.751 of the Nevada Revised Statutes provides for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Article XII of our amended and restated articles of incorporation (Exhibit 3.01 hereto) provides for indemnification of our directors, officers, employees and other agents to the extent and under the circumstances permitted by Sections 78.7502 and 78.751 of the Nevada Revised Statutes. In addition to the indemnification of officers and directors under the Nevada Revised Statutes, we entered into indemnification agreements with Dr. Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000. Pursuant to these indemnification agreements, we agreed to hold harmless and indemnify each of them against any and all expenses incurred by them as a result of their positions as directors of eRoomSystem Technologies. In addition, we agreed to advance expenses incurred by each of them upon receipt of a written request for such advancement containing an unsecured undertaking by each of them to repay such amounts to the extent that they are held to not be entitled to indemnification from eRoomSystem Technologies. The advancement of expenses specifically excludes amounts for judgments, penalties, fines and settlements. Messrs. Ashton and Prehn each possess the right to indemnification if, in civil proceedings, they acted in good faith and in a manner that they reasonably believed to be in or not opposed to the best interests of eRoomSystem Technologies, and, in criminal proceedings, they had no reasonable cause to believe that his conduct was unlawful. In addition, eRoomSystem Technologies may elect to not indemnify Messrs. Ashton and Prehn if either a majority of the directors not involved in the relevant proceeding or independent legal counsel, in a written opinion, determine that they have not met the relevant standards for indemnification. On September 28, 1999, we entered into an indemnification agreement with Donnelly Prehn which indemnifies Mr. Prehn for actions to be taken by him as a director on behalf of RSi BRE. Pursuant to this indemnification agreement, eRoomSystem Technologies and RSi BRE, jointly and severally, agreed to hold harmless and indemnify Mr. Prehn against any and all expenses incurred by him as a result of his position as a director of eRoomSystem Technologies. In addition, we agreed to advance expenses incurred by Mr. Prehn upon receipt of a written request for such advancement containing an unsecured undertaking by Mr. Prehn to repay such amounts to the extent that Mr. Prehn held to not be entitled to indemnification from eRoomSystem Technologies. Mr. Prehn's rights to indemnification are only available if damages have not already been paid directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is adjudged by a court of competent jurisdiction to have engaged in intentional misconduct or a knowing violation of the law, if he received an improper personal benefit, or if a court of competent jurisdiction renders a final decisions that such indemnification is unlawful. The Underwriting Agreement (Exhibit 1.01 hereto) provides for indemnification by ourselves, our underwriters and the directors and officers of the underwriters, for certain liabilities, including liabilities arising under the Securities Act, and affords certain rights of contribution with respect thereto. Even though indemnification for liabilities arising under the Securities Act may be provided to certain directors and officers pursuant to the foregoing provisions, we have been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee $ 5,993 NASD filing fee 5,000 Nasdaq Small Cap listing fee 5,000 Printing and engraving costs 50,000 Legal fees and expenses 260,000 Accounting fees and expenses 420,000 Blue Sky fees and expenses 45,000 Transfer Agent and Registrar fees 10,000 Miscellaneous expenses 19,007 ------------------------------------- ----------------- TOTAL $ 820,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. From April 1997 through June 2000, we have granted or issued and sold the following unregistered securities: (1) On April 14, 1997, we commenced a private placement of up to $1,800,000 of units, or the 1997 Units Offering, consisting of promissory notes and common stock, underwritten on a best-efforts basis by Spectrum Securities, Inc., or Spectrum. Spectrum had an over-allotment option of 15% or $270,000. We offered 180 units at price of $10,000 per unit, or 1997 Units. Each 1997 Unit consisted of 938 shares of common stock and a $5,000 15% secured promissory note, or 1997 Note. We received cash subscriptions of $1,986,000 from the 1997 Units Offering and issued 372,375 shares of common stock and 1997 Notes in the aggregate principal amount of $993,000. Spectrum received a cash commission of 15% and 24,018 shares of common stock for serving as placement agent. In addition, Pacific Acquisition Group II, LLC was issued 139,846 shares of common stock for serving as our merchant banker. This offering was exempt from registration in reliance on Rule 506 of Regulation D of the Securities Act. The securities were issued to independent third parties who were either accredited or sophisticated non-accredited investors, either alone or with a purchaser representative. Each of the investors received a private placement memorandum disclosing information about the securities and our corporate, business and financial matters. (2) In May 1997, we received a loan in the original principal amount of $100,000 from Frank Lyons. To evidence the transaction, we issued a promissory note bearing an interest rate of 15% per annum and 7,125 shares of common stock to Mr. Lyons. We paid a cash finder's fee of 15% on the transaction. The note is currently outstanding and in default with $30,417 in accrued interest as of March 31, 2000. We intend to repay the note and accrued interest from the net proceeds of this offering. This issuance of securities was exempt from registration in reliance on Section 4(2) of the Securities Act. Mr. Lyons was an accredited investor. (3) On January 9, 1998, we commenced a private placement, or Series A convertible preferred stock offering, of up to 1,200,000 shares of Series A convertible preferred stock at a price of $5.00 per share, underwritten on a best-efforts basis by Capital Bay Securities, or CBS. We received cash subscriptions of $760,000, and issued 152,000 shares of Series A convertible preferred stock. CBS received 13% in the form of a commission, due diligence and non-accountable expense allowances, and warrants to purchase 6,840 shares of common stock exercisable at $16.00 per share for serving as placement agent. Pursuant to the terms of the Series A convertible preferred stock, the shares are automatically converted into shares of common stock upon the closing of an initial public offering on a one-to-one basis if the initial public offering price is at least $10.00 per share. If the initial public offering II-2 price is less than $10.00 per share, the conversion rate will be $10.00 divided by the initial public offering price. On the six-month anniversary of the close of the Series A convertible preferred stock offering, or November 14, 1998, holders of Series A convertible preferred stock started to accrue an 8% annual dividend, payable in the form of cash. The reverse stock split did not affect the number of shares of Series A convertible preferred stock outstanding. No dividends have been paid to date to holders of Series A convertible preferred stock. As of March 31, 2000, holders of Series A convertible preferred stock were owed dividends of $198,444. We intend to pay such dividends from the proceeds of this offering. This offering was exempt from registration in reliance on Rule 506 of Regulation D of the Securities Act. The securities were issued to independent third parties and to existing stockholders, each of whom were accredited investors. Each of the investors received a private placement memorandum disclosing information about the securities and our corporate, business and financial matters. (4) On January 16, 1998, we commenced a private placement, or the 1998 Common Stock Offering, of up to 60,938 shares of common stock, at a price of $10.67 per share. The 1998 Common Stock Offering was underwritten on a best-efforts basis by Spectrum. We received cash subscriptions of $379,000, and issued 35,531 shares of common stock. Spectrum received a cash commission of 12.5% and warrants to purchase 4,264 shares of common stock, exercisable at $12.80 per share, for serving as placement agent. This offering was exempt from registration in reliance on Rule 506 of Regulation D of the Securities Act. The securities were issued to independent third parties and to existing stockholders, each of who were accredited investors. Each of the investors received a private placement memorandum disclosing information about the securities and our corporate, business and financial matters. (5) On January 23, 1998, we offered to convert our 1996 12% secured promissory notes, or the 1996 Notes, into shares of Series A convertible preferred stock. Pursuant to this offer, $1,040,000 of the $1,470,000 1996 Notes were converted into 208,000 shares of Series A convertible preferred stock. This offering was exempt in reliance on Rule 506 of Regulation D of the Securities Act. The investors were either accredited or sophisticated non-accredited investors, either alone or with a purchaser representative. Each of the investors received a private placement memorandum disclosing information about the securities and our corporate, business and financial matters. (6) In January 1998, we issued 13,781 shares of common stock to holders of the 1996 Notes, at a rate of 188 shares of common stock per $20,000 in outstanding principal, to prevent the foreclosure of our assets by holders of the 1996 Notes. This offering was exempt from registration in reliance upon Section 4(2) of the Securities Act. The investors were either accredited or sophisticated non-accredited investors. (7) In April 1998, we issued a $100,000 short-term promissory note to an existing stockholder which was subsequently converted into 9,375 shares of common stock at a price of $10.67 per share. In addition, this investor was granted an additional 1,500 shares of common stock as an inducement to convert the promissory note, which was valued at $10.67 per share and recorded as additional interest expense in 1998. This offering was exempt from registration in reliance upon Section 3(a)(9) and Section 4(2) of the Securities Act. The investor was an accredited investor. (8) In May 1998, we offered 10% unsecured promissory notes, or the 1998 Notes, with a term of sixty days and automatically convertible at maturity into common stock at the rate of $10.67 per share. We received cash subscriptions totaling $561,520 and issued 54,296 shares of common stock to the holders of the 1998 Notes, which amount included $17,632 of accrued interest. This offering was exempt from registration in reliance upon Section 4(2) of the Securities Act. The securities were issued to independent third parties and to existing stockholders, each of whom were either accredited or sophisticated non-accredited investors. (9) In October 1998, we offered to convert the 1997 Notes into shares of common stock at a rate of $10.67 per share of common stock. As a result of the conversion, we converted $115,000 in outstanding principal and $24,568 in accrued interest into 26,169 shares of common stock. This offering was exempt in reliance upon Section 3(a)(9) and Section 4(2) of the Securities Act. The investors were accredited investors and sophisticated non-accredited investors. II-3 (10) From February 1999 through May 1999, we offered 15% unsecured promissory notes, or the 1999 Notes, with a term of ninety days and interest accruing at the rate of 37.5 shares of common stock every thirty days for every $1,000 of outstanding principal. We received $350,000 from the sale of 1999 Notes. $134,885 of the 1999 Notes have been paid off, and $180,000 of the 1999 Notes have been converted into 81,909 shares of Series B convertible preferred stock, which amount includes accrued interest and shares of common stock. All of the outstanding 1999 Notes are in default. As of March 31, 2000, we have issued 50,137 shares of common stock as interest and have outstanding $35,115 in principal and $7,947 of accrued interest on the 1999 Notes. We intend to repay the 1999 Notes from the proceeds of this offering. This offering was exempt in reliance upon Section 4(2) of the Securities Act. The securities were issued to independent third parties who were either accredited or sophisticated non-accredited investors. (11) From March 1999 through October 1999, we conducted a private placement, or the 1999 Preferred Stock Offering, of up to $4,000,000 of Series B convertible preferred stock at $3.00 per share. The 1999 Preferred Stock Offering was co-underwritten on a best-efforts basis by Donald & Co. Securities Inc. and CBS. Donald & Co. and CBS received a commission of 9% and a non-refundable expense allowance of 2.5%. Upon completion of the 1999 Preferred Stock Offering, we issued 1,355,047 shares of Series B convertible preferred stock in exchange for cash subscriptions of $4,065,133 and 726,633 shares of Series B convertible preferred stock in exchange for certain outstanding promissory notes and unpaid salaries to certain officers and as part of the settlement with RSG Investments. Pursuant to the terms of the Series B convertible preferred stock, the shares are automatically converted into common stock upon the closing of an initial public offering or a business combination where a controlling interest of eRoomSystem Technologies is acquired. The conversion is at 45% of the initial public offering price, or, if an initial public offering does not close by September 28, 2000, at 1.5 shares of common stock per share of Series B convertible preferred stock. The reverse stock split did not affect the number of shares of Series B convertible preferred stock outstanding. This offering was exempt in reliance on Rule 506 of Regulation D of the Securities Act. The securities were issued to independent third parties and to existing stockholders who were either accredited investors or sophisticated non-accredited investors. Each of the investors received a private placement memorandum disclosing information about the securities and our corporate, business and financial matters. (12) In May 1999, holders of 1997 Notes were offered the right to convert their 1997 Notes and accrued interest into Series B convertible preferred stock at the rate of $3.00 per share. Holders of 1997 Notes consisting of $425,051 in outstanding principal, plus accrued interest, converted into 175,562 shares of Series B convertible preferred stock. As of March 31, 2000, 1997 Notes outstanding consisted of $431,750 in principal and $159,480 of accrued interest. All of the outstanding 1997 Notes are in default. We intend to pay off the 1997 Notes from the net proceeds of this offering. This offering was exempt from registration in reliance on Section 3(a)(9) and Section 4(2) of the Securities Act. The investors were either accredited or sophisticated non-accredited investors. Each of the investors received a private placement memorandum disclosing information about the conversion and our corporate, business and financial matters. (13) On May 30, 1999, we issued 198,750 shares of our common stock to the SBD Limited Partnership, an entity controlled by Steven L. Sunyich, our president, chief executive officer and chairman, in exchange for a promissory note in favor eRoomSystem Technologies in the original principal amount of $1,590,000.00. The purpose of the issuance was to assist eRoomSystem Technologies in complying with the stock pledge requirements mandated by the terms of the $1,500,000 loan from RSG Investments. On September 30, 1999, we entered into an Equipment Transfer Agreement with RSG, and the 198,750 shares of common stock were returned to the SBD Limited Partnership. In turn, the SBD Limited Partnership surrendered the 198,750 shares of common stock to eRoomSystem Technologies in exchange for the cancellation of the promissory note. The shares of common stock were booked as treasury stock and have been retired. This offering was exempt in reliance on Section 4(2) of the Securities Act. Mr. Sunyich was an accredited investor. (14) On September 1, 1999, we entered into promissory note purchase agreements with Steven L. Sunyich, our chief executive officer and Chairman of the Board, Derek Ellis, our chief financial officer, II-4 and a former executive officer of and consultant to eRoomSystem Technologies, in which we agreed to convert the outstanding indebtedness due on their respective demand promissory notes into shares of Series B convertible preferred stock. As a result of these agreements, we issued 72,434 shares of Series B convertible preferred stock and 51,981 shares of our common stock to Mr. Sunyich, 3,742 shares of Series B convertible preferred stock and 2,990 shares of our common stock to Mr. Ellis, and 29,808 shares of Series B convertible preferred stock and 25,376 shares of our common stock to the former executive officer and consultant. This offering was exempt in reliance on Section 4(2) of the Securities Act. Messrs. Sunyich and Ellis were each accredited investors. (15) On December 7, 1999 and February 14, 2000, Mr. Sunyich formally assigned to us all of his rights in Patent No. 4,939,352 and Patent Nos. 4,857,714 and 4,883,948, which relate to credit card point of sale technology. In exchange, we issued 65,625 shares of common stock and a promissory note in the principal amount of $125,000 to Mr. Sunyich. After paying down the promissory note to approximately $70,000, we converted the remaining outstanding principal and interest into 23,524 shares of Series B convertible preferred stock. This offering was exempt in reliance on Section 4(2) of the Securities Act. Mr. Sunyich was an accredited investor. (16) On December 30, 1999, we entered into conversion agreements with Steven L. Sunyich, our chief executive officer and Chairman of the Board, and Derek Ellis, our chief financial officer, in which we agreed to convert unpaid salaries in exchange for shares of Series B convertible preferred stock. As a result of these agreements, we issued 73,052 shares of Series B convertible preferred stock to Mr. Sunyich and 3,776 shares of Series B convertible preferred stock to Mr. Ellis. This offering was exempt in reliance on Section 4(2) of the Securities Act. Messrs. Sunyich and Ellis were each accredited investors. (17) On February 15, 2000, we received a loan in the original principal amount of $500,000 from Ash Capital, LLC, an entity controlled by Dr. Alan C. Ashton, a director designee of the Company. To evidence this transaction, we issued a promissory note bearing an interest rate of 10% and warrants to purchase 18,750 shares of common stock to Ash Capital. We intend to repay the note and accrued interest from the net proceeds of this offering. This issuance of securities was exempt from registration in reliance on Section 4(2) of the Securities Act. Dr. Ashton is an accredited investor. (18) In March and April 2000, we conducted a private placement, or the 2000 Units Offering, of up to $3,000,000 of units where each $100,000 unit consisted of a 7% convertible promissory note in the original principal amount of $25,000, 23,077 shares of Series C convertible preferred stock and a warrant to purchase 5,000 shares of common stock at an exercise price of $6.60 per share. The 2000 Units Offering was underwritten on a best-efforts basis by Donald & Co. Securities Inc., who received a commission of 8% and a non-accountable expense allowance of 0.5% As a result of the 2000 Units Offering, we received cash of $850,000 which resulted in the issuance of 196,150 shares of Series C convertible preferred stock, notes in the original principal amount of $212,500 and warrants to purchase 42,500 shares of common stock. Pursuant to the terms of the Series C convertible preferred stock, the shares are automatically converted into common stock upon the closing of an initial public offering at 55% of the initial public offering price if the initial public offering closes by January 31, 2001. If the initial public offering is not closed by January 31, 2001, Series C convertible preferred stock shall convert at $3.30 per share. This offering was exempt from registration in reliance on Rule 506 of Regulation D of the Securities Act. The securities were issued to independent third parties and to existing stockholders, each of who were an accredited investor. Each of the investors received a private placement memorandum disclosing information about the securities and our corporate, business and financial matters. (19) On March 30, 2000, we issued a warrant to purchase 125,000 shares of common stock, exercisable at $4.80 per share through December 31, 2001, to Hall Communications, Inc. for advertising, marketing and promotional services. This offering was exempt from registration in reliance on Section 4(2) of the Securities Act. The investor was an accredited investor. (20) On April 13, 2000, we issued 200,000 shares of common stock in conjunction with the receipt of a $1,500,000 loan evidenced by a promissory note of the same date. This offering was exempt in reliance on Regulation S of the Securities Act. The securities were offered and sold outside of the United II-5 States to the following seven independent third party investors: (i) 566768 Ontario Limited, (ii) B.H. Capital Investments, L.P., (iii) Myra Heller, (iv) Rachelle Heller, (v) Plazacorp Investments Limited, (vi) Queens Centre Corner Limited and (vii) Jay Smith. (21) As of June 30, 2000, we have issued options pursuant to our 2000 Stock Option Plan to purchase an aggregate of 1,417,250 shares of our common stock. The issuances of options and warrants to employees and consultants of eRoomSystem Technologies under the 2000 Stock Option Plan were exempt under Section 4(2) and Rule 701 of the Securities Act as transactions pursuant to a compensatory benefit plan or written compensation contract. Of the Rule 701 issuances, none of the securities were issued to consultants. Of the Section 4(2) issuances, the securities were issued to existing stockholders, officers, director, consultants or former consultants who were either accredited or sophisticated non-accredited investors. Each of the sophisticated non-accredited investors had access to our corporate, business and financial information. (22) As of June 30, 2000, with the exception of the options and warrants discussed in this Item 26, we have issued and outstanding options and warrants to purchase 883,211 shares of common stock. Of this amount, we issued warrants to purchase 390,429 shares of common stock in conjunction with a private placement conducted from September 1996 through March 1997 in reliance on Section 4(2) of the Securities Act. The remaining options and warrants to purchase 492,782 shares of common stock were issued to employees, consultants, investors and other service providers of eRoomSystem Technologies in reliance upon Section 4(2) of the Securities Act. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits See exhibits listed on the Exhibit Index following the signature page of the Form SB-2 which is incorporated herein by reference. (b) Financial Statement Schedules None. ITEM 28. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 24 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing Form SB-2 and authorized this pre-effective amendment no. 3 to registration statement to be signed on its behalf by the undersigned, in the City of Las Vegas, State of Nevada, on the 19th day of July 2000. eROOMSYSTEM TECHNOLOGIES, INC. By: * ------------------------------------- Steven L. Sunyich Its: President, Chief Executive Officer and Chairman of the Board of Directors In accordance with the requirements of the Securities Act of 1933, this pre-effective amendment no. 3 to the registration statement was signed by the following persons in the capacities and on the dates stated:
SIGNATURE TITLE DATE - --------- ----- ---- * President, Chief Executive Officer and July 19, 2000 - ------------------------------------ Chairman of the Board of Directors Steven L. Sunyich (Principal Executive Officer) * Chief Financial Officer and Treasurer July 19, 2000 - ------------------------------------ (Principal Financial and Accounting Officer) Derek K. Ellis /s/ GREGORY L. HRNCIR General Counsel and Secretary July 19, 2000 - ------------------------------------ Gregory L. Hrncir * Director July 19, 2000 - ------------------------------------ Lawrence S. Schroeder *By: /s/ GREGORY L. HRNCIR Attorney-in-Fact July 19, 2000 -------------------------------- Gregory L. Hrncir
II-7 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT NAME PAGE ------ ------------- ---- 1.01 Form of Underwriting Agreement *** 2.01 Agreement and Plan of Reorganization by and between RoomSystems International Corporation and * RoomSystems, Inc. dated December 31, 1999 (incorporated by reference as Exhibit 2.01 to the Registrant's Registration Statement on Form SB-2, File No. 333-34882, filed on April 14, 2000, or the Registration Statement) 2.02 Transfer Pricing Agreement by and between RoomSystems International Corporation and RoomSystems, * Inc. dated December 31, 1999 (incorporated by reference as Exhibit 2.02 to the Registration Statement) 3.01 Amendment and Restatement of Articles of Incorporation (incorporated by reference as Exhibit * 3.01 to the Registration Statement) 3.02 Certificate of Correction dated May 30, 2000 ** 3.03 Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series A * convertible preferred stock (incorporated by reference as Exhibit 3.02 to the Registration Statement) 3.04 Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series B * convertible preferred stock (incorporated by reference as Exhibit 3.03 to the Registration Statement) 3.05 Certificate of Designation, Preferences, Rights and Limitation of Series C convertible preferred * stock (incorporated by reference as Exhibit 3.04 to the Registration Statement) 3.06 Amended and Restated Bylaws ** 3.07 Second Amendment and Restatement of Articles of Incorporation *** 3.08 Second Amended and Restated Bylaws *** 4.01 Form of Common Stock Certificate (incorporated by reference as Exhibit 4.01 to the Registration * Statement) 4.02 Form of Certificate for Series A convertible preferred stock (incorporated by reference as * Exhibit 4.02 to the Registration Statement) 4.03 Form of Certificate for Series B convertible preferred stock (incorporated by reference as * Exhibit 4.03 to the Registration Statement) 4.04 Form of Certificate for Series C convertible preferred stock (incorporated by reference as * Exhibit 4.04 to the Registration Statement) 5.01 Opinion of Kummer Kaempfer Bonner & Renshaw *** 10.01 Amended and Restated 2000 Stock Option and Incentive Plan ** 10.02 Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard Hughes Parkway * Associates Limited Partnership dated October 8, 1997 (incorporated by reference as Exhibit 10.02 to the Registration Statement) 10.02A Exhibits to Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard ** Hughes Parkway Associates Limited Partnership dated October 8, 1997 10.03 Lease Agreement by and between RoomSystems, Inc. and Pam Joy Realty, Inc. dated October 10, 1997 ** 10.04 Master Corporate Agreement by and between Innco Corporation and RoomSystems, Inc. dated April 6, * 1998 (incorporated by reference as Exhibit 10.04 to the Registration Statement) 10.04A Exhibits to Master Corporate Agreement by and between Innco Corporation and RoomSystems, Inc. ** dated April 6, 1998
II-8
EXHIBIT NUMBER DOCUMENT NAME PAGE ------ ------------- ---- 10.05 Indemnification Agreement by and between RoomSystems, Inc. and Alan C. Ashton dated August 17, * 1999 (incorporated by reference as Exhibit 10.07 to the Registration Statement) 10.06 Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC, C&W/RSI * Partners, LLC, SKM Investment, LLC and Thunder Mountain Investments, LC dated August 17, 1999 (incorporated by reference as Exhibit 10.09 to the Registration Statement) 10.06A Exhibits to Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC, ** C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder Mountain Investments, LC dated August 17, 1999 10.07 First Amendment to Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, * LLC, C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder Mountain Investments, LC dated September 30, 1999 (incorporated by reference as Exhibit 10.10 to the Registration Statement) 10.08 Promissory Note Repurchase Agreement by and between Steven L. Sunyich and RoomSystems, Inc. * dated September 1, 1999 (incorporated by reference as Exhibit 10.11 to the Registration Statement) 10.09 Indemnification Agreement by and between RSi BRE, Inc. and Donnelly Prehn dated September 27, * 1999 (incorporated by reference as Exhibit 10.12 to the Registration Statement) 10.10 Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International * Corporation, RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999 (incorporated by reference as Exhibit 10.13 to the Registration Statement) 10.10A Exhibits to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems ** International Corporation, RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999 10.11 Amendment to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems * International Corporation, RSi BRE, Inc. and RSG Investments, LLC dated November 23, 1999 (incorporated by reference as Exhibit 10.14 to the Registration Statement) 10.12 Conversion Agreement by and between Steven L. Sunyich and RoomSystems, Inc. dated December 30, * 1999 (incorporated by reference as Exhibit 10.15 to the Registration Statement) 10.13 Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital, LLC * dated February 15, 2000 (incorporated by reference as Exhibit 10.16 to the Registration Statement) 10.13A Exhibits to Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash ** Capital, LLC dated February 15, 2000 10.14 Letter Agreement by and between eRoomSystem Technologies, Inc. and Hall Communications, Inc. * dated March 30, 2000 (incorporated by reference as Exhibit 10.17 to the Registration Statement) 10.15 Form of Hotel Revenue Sharing Lease Agreement ** 10.16 Form of Noncompetition and Nondisclosure Agreement (Sales) (incorporated by reference as Exhibit * 10.19 to the Registration Statement) 10.17 Form of Consulting Agreement (incorporated by reference as Exhibit 10.20 to the Registration * Statement) 10.18 Form of Sales Representation Agreement (incorporated by reference as Exhibit 10.21 to the * Registration Statement) 10.19 Form of Executive Employment Agreement (incorporated by reference as Exhibit 10.22 to the * Registration Statement) 10.20 Form of Offshore Loan Subscription Agreement dated as of April 13, 2000 (incorporated by * reference as Exhibit 10.23 to the Registration Statement)
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EXHIBIT NUMBER DOCUMENT NAME PAGE ------ ------------- ---- 10.21 Form of Secured Subordinated Promissory Note dated as of April 13, 2000 (incorporated by * reference as Exhibit 10.24 to the Registration Statement) 10.22 Form of Installation, Co-Maintenance and Software Licensing and Upgrade Agreement ** 10.23 + Master Business Lease Financing Agreement by and among Amresco Leasing Corporation, 119 eRoomSystem SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated May 11, 2000 10.24 Indemnification Agreement by and between eRoomSystem Technologies, Inc. and John J. Prehn dated ** May 31, 2000 10.25 Amended and Restated Executive Employment Agreement of Steven L. Sunyich dated June 6, 2000 ** 10.26 Second Amended and Restated Executive Employment Agreement of Steven L. Sunyich dated July 12, *** 2000 10.27 Amended and Restated Executive Employment Agreement of Derek K. Ellis dated July 12, 2000 *** 10.28 Executive Employment Agreement of Stephen M. Nelson dated July 12, 2000 305 10.29 Amended and Restated Executive Employment Agreement of Gregory L. Hrncir dated July 12, 2000 *** 10.30 Shareholders' Agreement and Proxy by and among Ash Capital, LLC, RoomSystems, Inc. and certain * stockholders of RoomSystems, Inc. dated August 17, 1999 (incorporated by reference as Exhibit 10.08 to the Registration Statement) 16.01 Letter regarding Change in Certifying Accountant (incorporated by reference as Exhibit 16.01 to * the Registration Statement) 21.01 List of Subsidiaries ** 23.01 Consent of Hansen, Barnett & Maxwell 307 23.02 *Consent of Kummer Kaempfer Bonner & Renshaw (included in Exhibit 5.01) --- 24.01 Power of Attorney ** 27.01 Financial Data Schedule 309 99.01 Consent of Dr. Alan C. Ashton (incorporated by reference as Exhibit 99.01 to the Registration * Statement) 99.02 Consent of S. Leslie Flegel (incorporated by reference as Exhibit 99.02 to the Registration * Statement) 99.03 Consent of John J. Prehn ** 99.04 Request for Withdrawal of Exhibits to the Registration Statement dated June 23, 2000 ***
- -------------- * Previously filed. ** Previously filed as an exhibit to the registrant's Pre-Effective Amendment No. 1 to its Registration Statement on Form SB-2, as filed with the Commission on June 9, 2000. *** Previously filed as an exhibit to the registrant's Pre-Effective Amendment No. 2 to its Registration Statement on Form SB-2, as filed with the Commission on July 14, 2000. + Confidential treatment has been requested with respect to certain portions of this agreement, including the exhibits thereto, of which certain portions have been omitted and filed separately with the Commission. II-10 EX-10.23 2 ex-10_23.txt EXHIBIT 10.23 EXHIBIT 10.23 EXECUTION COPY CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE COMMISSION. ================================================================================ MASTER BUSINESS LEASE FINANCING AGREEMENT AMRESCO LEASING CORPORATION, as Lender eROOM SYSTEM SPE, INC., as Borrower ROOMSYSTEMS, INC. and eROOM SYSTEM TECHNOLOGIES, INC. Dated May 11, 2000 ================================================================================ TABLE OF CONTENTS ARTICLE 1 DEFINITIONS; ACCOUNTING TERMS..................................................................1 Section 1.1 DEFINITIONS.........................................................................1 Section 1.2 ACCOUNTING TERMS...................................................................16 ARTICLE 2 BUSINESS LEASES, LEASE FINANCING LOANS; SERVICING.............................................16 Section 2.1 THE BUSINESS LEASES................................................................16 Section 2.2 THE LEASE FINANCING LOANS..........................................................17 Section 2.3 CONDITIONS TO BORROWING; TRANSACTION APPROVAL OR DENIAL............................18 Section 2.4 ADVANCE FUNDED LEASE FINANCING LOANS...............................................19 Section 2.5 ADVANCE FUNDING TRANSACTION APPROVAL...............................................19 Section 2.6 BORROWINGS DURING TERM.............................................................19 Section 2.7 USE OF PROCEEDS....................................................................19 Section 2.8 PRE-SECURITIZATION PERIOD..........................................................20 Section 2.9 TIMELINE OF EVENTS.................................................................22 Section 2.10 INTEREST RATES AND PAYMENT DATES...................................................23 Section 2.11 PREPAYMENTS........................................................................23 Section 2.12 INTEREST COMPUTATIONS..............................................................23 Section 2.13 EVIDENCE OF INDEBTEDNESS...........................................................24 Section 2.14 EQUIPMENT SERVICING................................................................24 Section 2.15 CONSOLIDATION OF LEASE FINANCING NOTES INTO CREDIT \ ENHANCEMENT NOTES..................................................................25 ARTICLE 3 SECURITY INTEREST.............................................................................25 Section 3.1 GRANT OF SECURITY INTEREST.........................................................25 Section 3.2 CHIEF EXECUTIVE OFFICE; LOCATION OF PLEDGED ASSETS.................................26 Section 3.3 PERFECTION OF SECURITY INTEREST....................................................27 Section 3.4 GENERAL COVENANTS..................................................................27 Section 3.5 ASSIGNMENT OF INSURANCE PROCEEDS...................................................28 Section 3.6 LEGENDS............................................................................28 ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS.....................................................28 Section 4.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE eROOM PARTIES.....................28 Section 4.2 REPRESENTATIONS AND WARRANTIES OF THE LENDER.......................................31 ARTICLE 5 CONDITIONS PRECEDENT TO EFFECTIVENESS, EACH LOAN POOL AND THE LEASE FINANCING LOANS...........33 Section 5.1 EFFECTIVENESS......................................................................33 Section 5.2 THE INITIAL LEASE FINANCING LOAN...................................................35 Section 5.3 THE LEASE FINANCING LOANS..........................................................36 Section 5.4 SUBSEQUENT LOAN POOLS..............................................................36
i ARTICLE 6 DELIVERY OF FINANCIAL REPORTS, DOCUMENTS AND OTHER INFORMATION................................37 Section 6.1 ANNUAL FINANCIAL STATEMENTS........................................................37 Section 6.2 QUARTERLY FINANCIAL STATEMENTS.....................................................37 Section 6.3 OTHER INFORMATION..................................................................38 Section 6.4 NO DEFAULT CERTIFICATE.............................................................38 Section 6.5 OTHER DOCUMENTS....................................................................38 Section 6.6 NOTICES OF DEFAULTS................................................................38 ARTICLE 7 AFFIRMATIVE COVENANTS.........................................................................38 Section 7.1 BOOKS AND RECORDS..................................................................38 Section 7.2 INSPECTIONS AND AUDITS.............................................................38 Section 7.3 PERFORM OBLIGATIONS................................................................39 Section 7.4 NOTICE OF LITIGATION...............................................................39 Section 7.5 INSURANCE..........................................................................39 Section 7.6 PRIORITY OF LIEN ON EQUIPMENT AND LEASES; FURTHER SECURITY.........................39 Section 7.7 MAINTENANCE OF SEPARATE EXISTENCE..................................................39 Section 7.8 TAXES..............................................................................40 Section 7.9 BUSINESS LEASE PRODUCTION REQUIREMENT..............................................40 Section 7.10 DIRECTION TO LESSEES...............................................................40 Section 7.11 SAFE UNIT REFRESHMENT CENTERS......................................................40 Section 7.12 CASUALTY EVENTS....................................................................40 Section 7.13 SERVICING, BILLING AND MAINTENANCE MANUAL..........................................41 Section 7.14 INSTALLATION AND MAINTENANCE OF EQUIPMENT..........................................41 Section 7.15 MISAPPLIED PAYMENTS................................................................41 Section 7.16 LEGAL OPINION......................................................................41 ARTICLE 8 NEGATIVE COVENANTS............................................................................41 Section 8.1 LIENS..............................................................................41 Section 8.2 CHANGES IN BUSINESS................................................................41 Section 8.3 CHANGE OF OFFICE ADDRESS...........................................................41 Section 8.4 AMENDMENT OF THE CHARTER DOCUMENTS.................................................41 Section 8.5 SALE, TRANSFER OR TERMINATION OF PLEDGED ASSETS....................................41 ARTICLE 9 ADDITIONAL COVENANTS OF THE PARTIES...........................................................42 Section 9.1 EXCLUSIVITY........................................................................42 Section 9.2 RIGHT OF FIRST REFUSAL.............................................................42 Section 9.3 MARKETING; TRADITIONAL EQUIPMENT FINANCING.........................................42 Section 9.4 MERGER; CONSOLIDATION..............................................................43 Section 9.5 LENDER COVENANT TO FINANCE; BORROWER'S EXCLUSIVE REMEDY............................44 Section 9.6 TERMINATION OF EXISTING LIENS......................................................44 Section 9.7 CREATION OF NEW LOAN POOLS.........................................................44 Section 9.8 DIRECTION TO LESSEES...............................................................44 Section 9.9 PRINCIPAL PLACE OF BUSINESS........................................................44 ARTICLE 10 EVENTS OF DEFAULT; EVENTS OF ACCELERATION....................................................44 Section 10.1 EVENTS OF DEFAULT..................................................................45
ii Section 10.2 RIGHTS AND REMEDIES ON EVENT OF DEFAULT............................................46 Section 10.3 EVENTS OF ACCELERATION.............................................................47 Section 10.4 RIGHTS AND REMEDIES ON EVENT OF ACCELERATION.......................................48 ARTICLE 11 LIQUIDATED DAMAGES...........................................................................50 Section 11.1 LIQUIDATED DAMAGES.................................................................50 Section 11.2 PLEDGE AND GRANT OF SECURITY INTEREST FOR LIQUIDATED DAMAGE OBLIGATION..................................................................50 ARTICLE 12 MISCELLANEOUS PROVISIONS.....................................................................51 Section 12.1 FEES AND EXPENSES..................................................................51 Section 12.2 INDEMNIFICATION....................................................................51 Section 12.3 WAIVER OF TRIAL BY JURY............................................................52 Section 12.4 MODIFICATIONS, CONSENTS AND WAIVERS; ENTIRE AGREEMENT..............................52 Section 12.5 REMEDIES CUMULATIVE................................................................53 Section 12.6 FURTHER ASSURANCES.................................................................53 Section 12.7 NOTICES............................................................................53 Section 12.8 CONSTRUCTION; GOVERNING LAW; CONSENT TO JURISDICTION...............................54 Section 12.9 CONFIDENTIALITY....................................................................55 Section 12.10 SEVERABILITY.......................................................................55 Section 12.11 BINDING EFFECT: NO ASSIGNMENT OR DELEGATION........................................55 Section 12.12 TERM OF AGREEMENT; TERMINATION.....................................................56 Section 12.13 NO JOINT VENTURE...................................................................56 Section 12.14 COUNTERPARTS.......................................................................56 Section 12.15 CERTAIN REMEDIES...................................................................56 Section 12.16 USURY..............................................................................57 Section 12.17 SURVIVAL OF CERTAIN PROVISIONS.....................................................57 ARTICLE 13 SECURITIZATION SERVICES......................................................................57 Section 13.1 SECURITIZATION.....................................................................57
SCHEDULE I - Refreshment Center Loan Amount EXHIBIT A - GUIDELINES EXHIBIT B - FORM OF LEASE FINANCING NOTE EXHIBIT C - FORM OF CREDIT ENHANCEMENT NOTE EXHIBIT D - FORM OF BORROWING NOTICE EXHIBIT E - FORM OF TRANSACTION APPROVAL EXHIBIT F - FORM OF ACKNOWLEDGMENT EXHIBIT G - FORMS OF BUSINESS LEASE EXHIBIT H - FORM OF CUSTODIAL AGREEMENT EXHIBIT I - FORM OF LICENSE AGREEMENT EXHIBIT J - FORM OF PURCHASE AGREEMENT EXHIBIT K - FORM OF SERVICING AGREEMENT EXHIBIT L - FORM OF STOCK PLEDGE AGREEMENT EXHIBIT M - FORM OF PLEDGE AND SECURITY AGREEMENT iii EXHIBIT N - FORM OF LEGAL OPINION OF COUNSEL TO THE eROOM PARTIES EXHIBIT O - CONFIDENTIAL eROOM DOMESTIC PRICE AND PRODUCT SCHEDULE EXHIBIT P - THRESHOLD PLAN CALCULATION EXHIBIT Q - PERCENTAGE PLAN CALCULATION EXHIBIT R - PLATINUM PLAN CALCULATION EXHIBIT S - ACTUAL COST OF GOODS SOLD EXHIBIT T - FORM OF CONFIDENTIALITY AGREEMENT iv MASTER BUSINESS LEASE FINANCING AGREEMENT THIS MASTER BUSINESS LEASE FINANCING AGREEMENT (this "AGREEMENT") is made as of this 11th day of May 2000, by and among eRoom System SPE, Inc., a Nevada corporation, having an office at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109 (the "BORROWER"), RoomSystems Inc., a Nevada corporation, having an office at 390 North 3050 E., St. George, Utah 84790 ("RSi"), eRoom System Technologies, Inc., a Nevada corporation having an office at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109 ("eROOM"; and collectively, with the Borrower and RSi, the "eRoom Parties") and AMRESCO Leasing Corporation, 412 E. ParkCenter Blvd., Suite 300, Boise, Idaho 83767 (the "LENDER"). W I T N E S S E T H: WHEREAS, the Lender, RSi and eRoom are parties to the Program Agreement which provides for the creation of a program to engage in (i) the origination by eRoom of Business Leases for the Equipment to hotels and time-shares located in the United States, (ii) the purchase by the Borrower from eRoom of certain Business Leases and Equipment, (iii) the receipt by the Borrower and RSi of a License to use the Equipment Intellectual Property, (iv) the making of Lease Financing Loans by the Lender to the Borrower secured by the Pledged Assets to enable eRoom and the Borrower to engage in (i) - (iii) above, and (v) the disposition of pools of Business Leases or Lease Financing Loans through Securitizations (collectively, the "PROGRAM"); WHEREAS, subject to the terms and conditions hereinafter set forth, to finance the operation of the Program the Lender is willing to extend Lease Financing Loans to the Borrower; WHEREAS, the parties agree that in order to facilitate Securitizations it may be necessary to consolidate the Lease Financing Loans into several Loan Pools, each of which will be separate from the other Loan Pools (except as otherwise described herein); and NOW, THEREFORE, in consideration of the premises and covenants herein contained, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS; ACCOUNTING TERMS Section 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "ACCELERATED LOAN AMOUNT" shall mean for any Lease Financing Loan, all amounts owed under the related Note, including but not limited to all unamortized principal, all accrued and unpaid interest (and interest thereof) and the Prepayment Amount. 1 "ACKNOWLEDGEMENT" shall mean an Acknowledgement by the eRoom Parties in substantially the form set out hereto as Exhibit F. "ACTUAL COST OF GOODS SOLD" shall mean the actual cost incurred by the eRoom Parties in connection with the manufacture, assembly and installation (excluding all internal costs, expenses and overhead of any of the eRoom Parties) of the related Refreshment Centers, as described in more detail on Exhibit S hereto. "ADVANCE FUNDED LEASE FINANCING LOAN" shall mean any Lease Financing Loan funded by the Lender in connection with an Advance Funding Transaction Approval Obligation. "ADVANCE FUNDING TRANSACTION APPROVAL OBLIGATION" shall mean, prior to the expiration of the Seasoning Period for the Business Leases relating to a Lease Financing Loan, the Lender's obligation to make a decision regarding Transaction Approval for such Lease Financing Loan as provided in Sections 2.4 and 2.5 hereof. "AFFILIATE" shall mean, as to any Person, any other Person that directly or indirectly controls, or is under common control with, or is controlled by, such Person and includes (i) any Person who directly or indirectly holds 5% or more of any class of voting stock of such Person or (ii) an Affiliate of such Person. As used in this definition, the term "CONTROL" (including its use in the phrases "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise); provided, that at all times Sunyich shall be an Affiliate. "AGGREGATE CREDIT ENHANCEMENT AMOUNT" shall mean, for a Loan Pool, a limited guarantee from the Borrower guaranteeing all Program Loans in the Program Pool of which such Loan Pool is a part, in an amount equal to 1.01% of the then outstanding Loan Amount of all of the Lease Financing Loans in such Loan Pool. "AGREEMENT" shall mean this Master Business Lease Financing Agreement, as it may be amended from time to time. "AVERAGE DAILY eROOM THRESHOLD PLAN REVENUE" shall have the meaning as set forth in Schedule I. "AVERAGE DAILY eROOM PLATINUM PLAN REVENUE" shall have the meaning as set forth in Schedule I. AVERAGE DAILY eROOM PERCENTAGE PLAN REVENUE" shall have the meaning as set forth in Schedule I. "AVERAGE GROSS REVENUE" shall mean the average revenue per day produced by the Refreshment Centers subject to a Business Lease. "BORROWER" shall have the meaning assigned to such term in the first paragraph of 2 this Agreement. "BORROWING DATE" shall mean the Business Day specified in a Borrowing Notice on which the Borrower requests the Lender to make a Lease Financing Loan and on which the Lender makes such Lease Financing Loan to the Borrower. "BORROWING NOTICE" shall mean a notice of the Borrower to the Lender in substantially the form set out as Exhibit D hereto certifying that each of the requirements for the issuance of a Lease Financing Loan have been satisfied. "BUSINESS DAY" shall mean any day that is not a Saturday, Sunday or other day on which commercial banking institutions in the States of Texas, Idaho, Minnesota, Utah or Nevada are authorized or obligated by law or executive order to be closed. "BUSINESS LEASE" shall mean a lease (or revenue sharing agreement), substantially in the form of Exhibit G hereto (including any and all schedules, supplements and amendments thereto and modifications thereto), providing for the leasing and use of the Equipment and/or Refreshment Centers by hotels and time-shares located in the United States that provides for a sharing of revenues, or any other kind of payment or arrangement between one of the eRoom Parties (or any of their Affiliates) and such hotels and time-shares. "CARRY FORWARD AMOUNT" shall mean, for each Loan Pool an amount equal to the sum of (i) the difference between (A) the Monthly Payment Amount due on all prior Disbursement Dates and (B) the amount actually distributed to the Lender pursuant to Section 2.8(c)(iii) as the Monthly Payment Amount on all prior Disbursement Dates and (ii) interest at the then current Interest Rate on the amount determined by clause (i) hereof. "CASUALTY EVENT" shall mean an event that causes all or a portion of the Equipment leased pursuant to a Business Lease to be lost, stolen, damaged beyond repair or destroyed. "COLLECTED FUNDS" shall mean, for each Loan Pool, all revenues, lease payments and other amounts actually collected by the Custodian on all Business Leases related to such Loan Pool commencing upon the Funding Date of each Lease Financing Loan. "COMMITMENT TERMINATION DATE" shall mean the seventh anniversary of the Start Date. "COMPLIANCE CERTIFICATE" shall have the meaning set forth in Section 5.3(b)(iv) hereof. "CONFIDENTIAL INFORMATION" shall mean all information which has or will be disclosed by any party to this Agreement in connection with the Program and all terms contained in this Agreement, provided that Confidential Information shall not include information which is publicly available, was acquired by any party to this Agreement from third parties or is required to be disclosed by law. 3 "CREDIT ENHANCEMENT AMOUNT" shall mean, for a Lease Financing Loan, a limited guarantee from the Borrower guaranteeing all Program Loans in the Program Pool of which such Lease Financing Loan is a part in an amount equal to 1.01% of the then outstanding Loan Amount of such Lease Financing Loan. "CREDIT ENHANCEMENT NOTE" shall mean the promissory note, or other evidence of indebtedness, evidencing the indebtedness, including the then outstanding Loan Amount, accrued interest and the Aggregate Credit Enhancement Amount, of the Borrower under all the Lease Financing Loans relating to a Loan Pool amended, restated and consolidated into such Credit Enhancement Note, in substantially the form set forth in Exhibit C hereto. "CREDIT ENHANCEMENT PREPAYMENT" shall mean for any Lease Financing Loan and Prepayment Date, the lesser of (i) the outstanding Credit Enhancement Amount for such Lease Financing Loan and (ii) the Program Credit Enhancement Amount. "CUMULATIVE LEASE FINANCING LOANS" shall mean the sum of the original Loan Amount of all Lease Financing Loans funded under the Program. "CUSHION AMOUNT" shall mean, the Next Monthly Payment Amount minus the amount on deposit in the Loan Payment Account as of such Distribution Date without giving effect to any disbursements on such Disbursement Date with respect to all Lease Financing Loans in such Loan Pool. "CUSTODIAL ACCOUNT" shall mean the account of such name created pursuant to each Custodial Agreement. "CUSTODIAL AGREEMENT" shall mean each Custodial Agreement executed in connection with a Loan Pool by and among the Borrower, the Lender, the Servicer and the Custodian, a form of which is attached hereto as Exhibit H. "CUSTODIAL FEE" shall mean the fee payable to the Custodian on each Payment Date, which shall be in an amount set out in a letter agreement or other agreement among eRoom, the Lender and the Custodian. "CUSTODIAN" shall mean Norwest Bank Minnesota, National Association, or some other bank or trust company acting as custodian under a Custodial Agreement. "CUSTOMER" shall mean any customer or potential customer of the eRoom Parties (or any of their Affiliates) that desires to have a Refreshment Center or Equipment. "DEFAULT" shall mean an event that with notice or lapse of time or both would constitute an Event of Default or an Event of Acceleration. "DELINQUENT PROGRAM LOAN" shall mean a Program Loan on which any portion of the Monthly Payment Amount is delinquent or otherwise in default. 4 "DISBURSEMENT DATE" shall mean, for each Loan Pool, the 10th day of each month, or if such day is not a Business Day, the next succeeding Business Day beginning for each Lease Financing Loan in the month following the month in which the Funding Date occurs. "DISCOUNTED VALUE" shall mean, with respect to each Lease Financing Loan, the amount calculated by discounting all remaining scheduled Monthly Payment Amounts from their respective due dates to the Prepayment Date of such Lease Financing Loan in accordance with acceptable financial practices and at a discount factor (applied on a monthly basis) equal to the Reinvestment Rate. "DOLLARS" AND "$" shall mean the lawful money of the United States of America. "EQUIPMENT" shall mean, individually or collectively, Standard Unit Equipment and Safe Unit Equipment, as the context may require. "EQUIPMENT INTELLECTUAL PROPERTY" shall mean all Intellectual Property of any of the eRoom Parties (or any of their Affiliates) necessary to manufacture, sell, lease, install, maintain, service or operate the Equipment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and the regulations promulgated thereunder. "eROOM PARTIES" shall mean eRoom, RSi and the Borrower. "eROOM" shall have the meaning assigned to such term in the first paragraph of this Agreement. "EVENT OF ACCELERATION" shall have the meaning specified in Section 10.3. "EVENT OF DEFAULT" shall have the meaning specified in Section 10.1. "FINAL PAYMENT DATE" shall mean for each Lease Financing Loan, the date on which a Lease Financing Loan is, by its terms, scheduled to terminate assuming that all amounts owed thereunder shall be paid on a timely basis. "FINANCIAL STATEMENTS" shall mean all financial statements delivered to the Lender pursuant to Sections 6.1 and 6.2 hereof. "FIXED CHARGE COVERAGE RATIO" shall mean for any Person, the ratio of (a) the Person's cash flow to (b) the sum of fixed charges and rental expense of such Person, determined by the Lender in its sole discretion consistent with the Lender's normal business practices. "FUNDING DATE" shall mean, with respect to each Lease Financing Loan, the date on which the Lender first funds such Lease Financing Loan, which in the case of a Lease Financing Loan that is not an Advance Funded Lease Financing Loan, shall be a date in the month following the end of the related Seasoning Period. 5 "GENERAL INTANGIBLES" shall mean any computer programs, source codes, hardware schematics and working drawings, operating manuals, procedural documentation, performance data, customer lists, guidelines, applications, files, records, memoranda, reports, information (including sales, business, financial, accounting, media and other information) or other similar items. "GUIDELINES" shall mean the general and business specific underwriting guidelines set out on Exhibit A hereto. "INDEBTEDNESS" shall mean with respect to any Person all (i) liabilities or obligations, direct and contingent, which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person on any given date, including, without limitation, lease obligations required to be shown as a liability on the balance sheet of such Person in accordance with generally accepted accounting principles; (ii) liabilities or obligations of others for which such Person is directly or indirectly liable, by way of guaranty or otherwise; and (iii) liabilities or obligations secured by Liens on any assets of such Person, whether or not such liabilities or obligations shall have been assumed by it. "INITIAL LOAN POOL" shall mean the initial pool of Lease Financing Loans accumulated from the Start Date through the initial Securitization of such Lease Financing Loans. "INTELLECTUAL PROPERTY" shall mean any patent, copyright, trademark, service mark, trade name or other mark, license, invention, or design, registered or unregistered. "INTEREST PERIOD" shall mean with respect to each Lease Financing Loan (i) the period from the Borrowing Date of such Lease Financing Loan to (but excluding) the first Payment Date and (ii) thereafter, the period from a Payment Date to (but excluding) the next succeeding Payment Date. "INTEREST RATE" shall mean the annual rate of interest (calculated on the basis of a year of 360 days and subject to Section 2.15(d)) borne by each Lease Financing Loan, as set forth in the related Note, which rate shall be determined for each such Lease Financing Loan as follows: (i) For all Lease Financing Loans until $10,000,000 in cumulative volume of Lease Financing Loans have been funded, 7-Year Treasury plus 12.50%; (ii) For all Lease Financing Loans funded after the first $10,000,000 in cumulative volume of Lease Financing Loans have been funded but prior to completion of the first Securitization, 7-Year Treasury plus 10.00%; (iii) For all Lease Financing Loans funded after the first Securitization until $125,000,000 in cumulative volume of Lease Financing Loans have been funded, 7-Year Treasury plus 9.50%; 6 (iv) For all Lease Financing Loans funded during the time period that the total amount of Lease Financing Loans funded is between $125,000,001 and $150,000,000 in cumulative volume, 7-Year Treasury plus 8.50%; (v) For all Lease Financing Loans funded during the time period that the total amount of Lease Financing Loans funded is between $150,000,001 and $175,000,001 in cumulative volume, 7-Year Treasury plus 7.50%; and (vi) For all Lease Financing Loans funded after the total amount of all Lease Financing Loans exceeds a cumulative volume of $175,000,001, 7-Year Treasury plus 6.50%; provided, that in the event that at any time the Borrower shall fail to meet the production requirements set out in Section 7.9, (A) the interest rate on any Lease Financing Loans previously funded by the Lender shall be automatically and retroactively increased to 12.50% and (B) the interest rate on all future Lease Financing Loans shall be 12.50%, provided, further, that upon the Borrower's later satisfaction of the production requirements set out in Section 7.9, the interest rate for all Lease Financing Loans funded thereafter shall be as set forth in clauses (i) - (vi) above. "INVESTORS" shall mean the owners of the securities issued in a Securitization. "LATEST BALANCE SHEET" shall have the meaning set forth in Section 4.1(m) hereof. "LEASE FINANCING LOAN" shall mean a loan of funds, effected pursuant to this Agreement, by the Lender to the Borrower, related to a Business Lease in the United States of America and secured by the related Pledged Assets. "LEASE FINANCING NOTE" shall mean the promissory note, or other evidence of indebtedness evidencing the obligations of the Borrower under a Lease Financing Loan, in substantially the form set out as Exhibit B hereto. "LENDER" shall mean AMRESCO Leasing Corporation, a Nevada corporation, and its successors and assigns. "LESSEE" shall mean the lessee under a Business Lease relating to a Lease Financing Loan and each successor or assignee of such lessee's interest under such Business Lease. "LICENSE" shall mean a nonrevocable license to use all Equipment Intellectual Property granted by eRoom to the Borrower and RSi for a term which will end upon the satisfaction in full of all obligations of the eRoom Parties to Lender under this Agreement and the Operative Documents. "LICENSE AGREEMENT" shall mean the License Agreement dated as of May 11, 2000, by and among eRoom, RSi and the Borrower, pursuant to which a License is granted to RSi and the Borrower, a form of which is attached hereto as Exhibit I. 7 "LIEN" shall mean any mortgage, deed of trust, pledge, hypothecation, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement and any lease in the nature of a grant of a security interest or lien). "LIQUIDATED DAMAGES" shall mean an amount equal to 50% of the present value of the Projected Annual Spread Income calculated as of the date the first breach of any Liquidated Damages Obligation occurs, utilizing a discount rate of 10% per annum, and a term which begins in the year in which such breach occurs (including such year), and which ends in the year 2006. "LIQUIDATED DAMAGES COLLATERAL" shall mean, collectively, the eRoom Parties' right, title and interest in and to all Residual Profits, Refreshment Centers, Equipment, Intellectual Property, Equipment Intellectual Property, Licenses, Business Leases, accounts, goods, inventory, documents, chattel paper, deposit accounts, equipment, General Intangibles, contracts, certificates of title, fixtures, credits, claims, demands, assets and other personal property of the eRoom Parties, whether now owned, existing, hereafter acquired, held, used, or sold, and any other property, rights and interests of the eRoom Parties which at any time relate to, arise out of or in connection with the foregoing or which shall come into the possession or custody or under the control of the eRoom Parties or any of their agents, representatives, associates or correspondents, in connection with the foregoing; any and all additions and accessions, replacements, substitutions, and improvements, of or to all of the foregoing and all products, rents, profits, offspring, and proceeds thereof; PROVIDED, HOWEVER, that Liquidated Damages Collateral shall not include any of the foregoing which constitutes Pledged Assets. "LIQUIDATED DAMAGES OBLIGATION" shall mean any obligation of the eRoom Parties set forth in Sections 9.1, 9.2, 9.3(a) 9.4, 9.6, 9.7, 9.8 or 9.9(a) hereof. "LOAN AMOUNT" shall have the meaning specified in Section 2.2(b) for Lease Financing Loans and Section 2.4 for Advance Funded Lease Financing Loans. "LOAN PAYMENT ACCOUNT" shall mean for each Loan Pool, the loan payment account established and maintained by the Custodian pursuant to the related Custodial Agreement. "LOAN POOL" shall mean the pool of Lease Financing Loans extended by the Lender to the Borrower from the cut-off date of the last Securitization of Lease Financing Loans until the cut-off date of the next Securitization; provided that all Lease Financing Loans extended by the Lender to the Borrower during the period from the Start Date to the cut-off date of the initial Securitization shall be the Initial Loan Pool. "LOAN POOL ACCELERATED AMOUNT" shall mean for each Loan Pool, all amounts owed under all the Lease Financing Loans advanced by the Lender hereunder and included in such Loan Pool and all amounts owed under the related Notes, including but not limited to, all unamortized principal, all accrued and unpaid interest (and interest thereon) and the Prepayment Amount for the Lease Financing Loans in such Loan Pool. 8 "LOSS RESERVE ACCOUNT" shall mean for each Loan Pool, a loss reserve account established and maintained by the Custodian pursuant to the related Custodial Agreement. "LOSS RESERVE AMOUNT" shall mean, for each Loan Pool, five percent (5%) of the difference between (i) the monthly gross revenues and all other amounts from all Business Leases collected by the Custodian pursuant to the Custodial Agreement related to such Loan Pool and (ii) the sum of the amounts paid, disbursed or reserved pursuant to clauses (i) - (iii) of Section 2.8(c) with respect to all Lease Financing Loans related to such Business Leases, until the amounts reserved for such Lease Financing Loans equal the Reserve Cap for such Lease Financing Loans. "MAKE WHOLE PREMIUM" shall mean, with respect to any Lease Financing Loan, a premium equal to the excess, if any, of the Discounted Value over the outstanding Loan Amount of such Lease Financing Loan. The Make Whole Amount shall in no event be less than zero. "MASTER CUSTODIAL AGREEMENT" shall mean the Master Custodial Agreement by and among the eRoom Parties, the Lender, RSi and the Custodian to be executed within 90 days of the date of this Agreement. "MINIMUM DAILY SAFE UNIT CHARGE" shall have the meaning set forth in Section 7.11(a). "MONTHLY PAYMENT AMOUNT" shall mean, for each Lease Financing Loan (i) the amount of principal due during the prior calendar month on such Lease Financing Loan as provided in the related Note plus (ii) interest on such amount in an amount equal to the product of (A) the Interest Rate for such Lease Financing Loan and (B) the remaining principal balance of such Lease Financing Loan and (iii) any other amounts owing under the related Note with respect to such Lease Financing Loan. "NET BORROWER PERCENTAGE PLAN REVENUE" shall have the meaning as set forth in Schedule I. "NET BORROWER REVENUE" shall have the meaning as set forth in Schedule I. "NET WORTH" shall mean, as at any date, all amounts which would be included under shareholder's equity on a consolidated balance sheet of the eRoom Parties as of such date in accordance with generally accepted accounting principles, consistently applied. "NEXT MONTHLY PAYMENT AMOUNT" shall mean, for all Lease Financing Loans in a Loan Pool and for each Disbursement Date, the Monthly Payment Amount due in the following month for all such Lease Financing Loans. "NOTE" shall mean, individually or collectively, as the context may require, the Lease Financing Notes and/or the Credit Enhancement Notes. 9 "OPERATIVE DOCUMENTS" shall mean collectively, this Agreement, the Notes, the Program Agreement, the License Agreement, the Purchase Agreement, the Stock Pledge Agreement, the Master Custodial Agreement, the Servicing Agreements, the Custodial Agreements and the Pledge and Security Agreements. "OVERALL LEASE FINANCING LOANS" shall mean the sum of the Cumulative Lease Financing Loans and the Proposed Advance Funded Lease Financing Loans. "PAYMENT DATE" shall mean for each Lease Financing Loan, the first Business Day of each month commencing in the month following the month in which the Funding Date for such Lease Financing Loan occurs. "PBGC" shall have the meaning set forth in Section 4.1(p) hereof. "PERCENTAGE CALCULATION" shall have the meaning as set forth in Schedule I. "PERCENTAGE PLAN" shall mean any of the Percentage Plans set forth on Exhibit O. "PERMITTED LIENS" shall mean with respect to any Person, item of Equipment or Business Leases: (i) Liens imposed by law, such as carriers', warehousemen's, materialmen's and mechanics' liens, or Liens arising out of judgments or awards against such Person with respect to which such Person at the time shall currently be prosecuting an appeal or proceedings for review; and, (ii) Liens for taxes not yet subject to penalties for nonpayment and Liens for taxes the payment of which is being contested as permitted by Section 7.3 hereof. "PERSON" shall mean any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, incorporated organization or government or any agency or political subdivision thereof. "PLAN" shall have the meaning set forth in Section 4.1(p). "PLATINUM CALCULATION" shall have the meaning as set forth in Schedule I. "PLATINUM PLAN" shall mean any of the Platinum Plans set forth on Exhibit O. "PLEDGED ASSETS" shall mean, for each Loan Pool, the collateral securing each Lease Financing Loan included in such Loan Pool, which shall consist of (i) the related Business Lease and the Refreshment Centers and Equipment leased thereunder, (ii) all amounts held in the related Custodial Account by the Custodian pursuant to the related Custodial Agreement, (iii) all amounts held in the related Loan Payment Account by the Custodian pursuant to the related Custodial Agreement, (iv) the stock of RSi pledged to the Lender pursuant to the related Stock Pledge Agreement and (v) the Licenses. "PLEDGE AND SECURITY AGREEMENT" shall mean each Pledge and Security Agreement by and among the Borrower, eRoom and RSi in favor of the Lender executed in connection with a Loan Pool prior to the consolidation of the Lease Financing Notes into a Credit Enhancement Note, a form of which is attached as Exhibit M. 10 "PREPAYMENT AMOUNT" shall mean (i) with respect to a Lease Financing Loan that has been consolidated into a Credit Enhancement Note, an amount equal to the sum of (A) the outstanding Loan Amount of such Lease Financing Loan on the Prepayment Date, (B) all interest accrued and unpaid on the Loan Amount of such Lease Financing Loan from the immediately preceding Payment Date through the Prepayment Date, if any, plus an additional month of interest on such Loan Amount, (C) all accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments due through the Prepayment Date, (D) if any Program Loan Deficiencies exist on the Prepayment Date, the Credit Enhancement Prepayment and (E) the Make Whole Premium, and (ii) with respect to a Lease Financing Loan that has not been consolidated into a Credit Enhancement Note, items (A), (B) and (E) above for such Lease Financing Loan. "PREPAYMENT DATE" shall have the meaning set forth in Section 2.11(a) hereof. "PREPAYMENT NOTICE" shall have the meaning set forth in Section 2.11(a) hereof. "PRE-SECURITIZATION PERIOD" with respect to a Lease Financing Loan shall mean, the period of time between the funding of such Lease Financing Loan and the Securitization of such Lease Financing Loan or the Business Lease pledged as collateral for such Lease Financing Loan. "PRICE AND PRODUCT SCHEDULE" shall mean the list of prices and products offered by eRoom to hotels and time-shares, as set out in Exhibit O hereto, as such schedule may be amended by written agreement of eRoom and the Lender from time to time. "PROGRAM" shall have the meaning specified in the recitals hereto. "PROGRAM AGREEMENT" shall mean the Amended and Restated Program Agreement dated as of March 10, 1999, by and among RSi, eRoom (formerly known as RoomSystem Technologies, Inc. and RoomSystems International Corp.), Sunyich and the Lender, as at any time amended and in effect. "PROGRAM CREDIT ENHANCEMENT AMOUNT" shall mean, with respect to each Lease Financing Loan, an amount equal to the product of (i) the ratio of (A) the outstanding Loan Amount plus the Credit Enhancement Amount on the Prepayment Date of such prepaying Lease Financing Loan to (B) the outstanding loan amounts plus the outstanding credit enhancement amounts of all Program Loans in the related Program Pool that are not Delinquent Program Loans, multiplied by (ii) the sum (without duplication) of (A) the Program Prepayment Amounts for all Delinquent Program Loans in the related Program Pool on the Prepayment Date plus (B) any other outstanding Program Loan Deficiencies with respect to such Program Pool. "PROGRAM LOAN" shall mean a commercial loan made by the Lender (or one of its Affiliates) to a third party that is included in a pool of loans formed by the Lender (or one of its Affiliates). "PROGRAM LOAN DEFICIENCIES" shall mean any defaults or delinquencies on any of the Program Loans, as determined by the Lender in its sole discretion. 11 "PROGRAM POOL" shall mean a pool of Program Loans. "PROGRAM PREPAYMENT AMOUNT" shall mean, with respect to any Delinquent Program Loan, an amount equal to the sum of (i) the outstanding loan amount of such Delinquent Program Loan on the prepayment date, (ii) all accrued and unpaid interest on such Delinquent Program Loan to the Prepayment Date, (iii) all accrued and unpaid scheduled monthly credit enhancement obligation payments on such Delinquent Program Loan to the Prepayment Date and (iv) the make whole premium with respect to such Delinquent Program Loan. "PROJECTED ANNUAL SPREAD INCOME" shall be equal to the number of projected Refreshment Centers for each year shown below, multiplied by $122.40:
PROJECTED REFRESHMENT YEAR CENTERS ---- ------- 2000 25,000 2001 50,000 2002 100,000 2003 100,000 2004 100,000 2005 100,000 2006 100,000
"PROPERTY TAX RESERVE ACCOUNT" shall mean for each Loan Pool, an escrow reserve account established and maintained by the Custodian pursuant to the related Custodial Agreement for payment of applicable property or use taxes on the Equipment subject to each Business Lease related to such Loan Pool. "PROPERTY TAX RESERVE AMOUNT" shall mean for each Loan Pool and each Disbursement Date, an amount equal to the product of (i) *** per day (ii) the number of days since the last Disbursement Date (or 30 days in the case of the first Disbursement Date) and (iii) the number of Refreshment Centers included in the Business Leases relating to the Lease Financing Loans in such Loan Pool. "PROPOSED ADVANCE FUNDED LEASE FINANCING LOANS" shall mean the sum of the Loan Amount of all Advance Funded Lease Financing Loans submitted by Borrower to Lender and then under consideration for funding. "PURCHASE AGREEMENT" shall mean the Business Lease and Equipment Purchase and Sale Agreement dated as of May 11, 2000, by and between eRoom and the Borrower, pursuant to which the Borrower will purchase Business Leases (other than the right to service such Business Leases) and Equipment from eRoom, from time to time, a form of which is attached hereto as Exhibit J. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION 12 "RECALCULATED PERCENTAGE CALCULATION" shall have the meaning as set forth in Schedule I. "RECALCULATED THRESHOLD CALCULATION" shall have the meaning as set forth in Schedule I. "REFRESHMENT CENTER" shall mean either a Standard Unit Refreshment Center or a Safe Unit Refreshment Center, as applicable. "REFRESHMENT CENTER LOAN AMOUNT" for each Lease Financing Loan shall have the meaning specified on Schedule I hereto under the Threshold Plan, the Percentage Plan or the Platinum Plan, as applicable. "REINVESTMENT RATE" shall mean the bond equivalent yield to maturity implied by either (i) the yield reported, as of 10:00 A.M. (New York City time) on the Business Day next preceding the Prepayment Date, on the display designated as "Page 678" on the Bridge Capital Telerate Service (or such other display as may replace Page 678 on the Bridge Capital Telerate Service) for actively traded United States Treasury obligations having a maturity equal to the Remaining Average Life, or (ii) if such yields shall not be reported as of such time or the yields reported as of such times shall not be ascertainable, the Treasury Constant Maturity Series yields reported (for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Prepayment Date) in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor publication) for actively traded United States Treasury obligations having a constant maturity equal to the Remaining Average Life. Such implied yield shall be determined, if necessary, by (A) converting United States Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice, and (B) interpolating linearly between reported yields. "REMAINING AVERAGE LIFE" shall mean, with respect to each Lease Financing Loan, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) the outstanding Loan Amount on the Prepayment Date into (ii) the sum of the products obtained by multiplying (A) the principal portion of each remaining scheduled Monthly Payment Amount by (B) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Prepayment Date and the Final Payment Date. "RESERVE CAP" shall mean with respect to all Lease Financing Loans in a Loan Pool, an amount equal to 200% of the sum of all Monthly Payment Amounts on such Lease Financing Loans. "RESIDUAL PROFITS" shall mean, for each Loan Pool, all revenues and other amounts collected by the Custodian and not required to be disbursed or retained pursuant to Section 2.8(c)(i) - (v). "RESIDUAL PROFITS COLLECTION ACCOUNT" shall mean the account of such name created pursuant to the Master Custodial Agreement. 13 "RIGHT OF FIRST REFUSAL" shall have the meaning assigned to such term in Section 9.2 hereof. "RSi" shall have the meaning assigned to such term in the first paragraph of this Agreement. "RSi STOCK" shall mean all of the issued and outstanding capital stock of RSi. "SAFE UNIT EQUIPMENT" shall mean all network computer systems, equipment (including refrigerators and safes) and all other personal property related to a Safe Unit Refreshment Center. "SAFE UNIT REFRESHMENT CENTER" shall mean a fully-automated refreshment center (including but not limited to a Convenience Center) or RoomServ refreshment center that includes an attached room safe (including but not limited to RoomSafe). "SCHEDULED MONTHLY CREDIT ENHANCEMENT OBLIGATION PAYMENT" shall mean, with respect to a Lease Financing Loan, an amount equal to (i) the product of (A) the Interest Rate on such Lease Financing Loan and (B) the Credit Enhancement Amount for such Lease Financing Loan DIVIDED BY (ii) twelve (12). "SEASONING PERIOD" shall mean the period beginning on the first day of the month following the month in which all Equipment subject to the applicable Business Lease is installed and fully operational, and ending ninety (90) days thereafter; provided that in the case of any Lease Financing Loan that has a remaining term of less than 82 months as provided in Section 2.2(c), the Seasoning Period shall be the period beginning 90 days prior to the date of funding of such Lease Financing Loan and ending on the date of such Lease Financing Loan. "SECURITIZATION" shall mean the disposition of pools of Business Leases or Loan Pools of Lease Financing Loans through securitization or any other form of transfer of such assets from the Borrower's or the Lender's balance sheet. "7-YEAR TREASURY" shall mean the yield to maturity for the United States Treasury bond equal to seven (7) years (as determined by the Lender) as set forth in THE WALL STREET JOURNAL, as of the Business Day immediately preceding the date of funding of the related Lease Financing Loan. "SERVICER" shall mean RSi, as servicer under the Servicing Agreement or any successor or assign thereof. "SERVICING AGREEMENT" shall mean each Servicing Agreement executed in connection with a Loan Pool by and among the Servicer, the Borrower, the Lender, as Lender and Back-Up Servicer and the Custodian, pursuant to which RSi will service the Equipment and the Business Leases related to the Lease Financing Loans in such Loan Pool, a form of which is attached hereto as Exhibit K. 14 "SERVICING FEE" shall mean, for each Loan Pool and for each Disbursement Date, the product of (i) *** (ii) the number of days since the last Disbursement Date (or 30 days in the case of the first Disbursement Date) and (iii) the number of units of installed Refreshment Centers included in the Business Leases relating to the Lease Financing Loans in such Loan Pool. "STANDARD LEASE" shall mean a lease entered into between a Customer and any party other than an eRoom Party or an Affiliate of an eRoom Party, providing for the lease of Equipment or a Refreshment Center that does not provide for a sharing of revenues between any eRoom Party or Affiliate and such Customer. "STANDARD UNIT EQUIPMENT" shall mean all network computer systems and software (including network systems, room management systems and restocking systems), equipment (including refrigerators) and other personal property related to a Standard Unit Refreshment Center. "STANDARD UNIT REFRESHMENT CENTER" shall mean a fully-automated refreshment center (including but not limited to a Convenience Center or RoomServ refreshment center) that does not include an attached room safe. "START DATE" shall mean the date of the initial Lease Financing Loan made hereunder. "STOCK COLLATERAL" shall have the meaning given to such term in the Stock Pledge Agreements. "STOCK PLEDGE AGREEMENT" shall mean each Stock Pledge and Security Agreement executed in connection with a Loan Pool by and among the Lender, RSi and eRoom, a form of which is attached hereto as Exhibit L. "SUNYICH" shall mean Steve L. Sunyich. "TERM" shall mean have the meaning set forth in Section 12.12(a) hereof. "THRESHOLD AMOUNT" shall have the meaning as set forth in Schedule I. "THRESHOLD CALCULATION" shall have the meaning as set forth in Schedule I. "THRESHOLD PLAN" shall mean any of the Threshold Plans set forth on Exhibit O. "TRADITIONAL EQUIPMENT FINANCING" shall mean any financing requested or obtained by a Customer to facilitate the Customer's purchase of Equipment, or any Standard Lease requested or obtained by a Customer. "TRANSACTION" shall mean the funding of a Lease Financing Loan or an Advance Funded Lease Financing Loan. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION 15 "TRANSACTION APPROVAL" shall mean a written approval of a Lease Financing Loan, in substantially the form set forth in the attached Exhibit E, and executed by the Lender. "TRANSACTION SUBMISSION PACKAGE" shall have the meaning assigned to such term in Exhibit A hereto entitled "Guidelines." "UCC" shall mean the Uniform Commercial Code (or any comparable law) in effect in any relevant jurisdiction, the laws of which govern the attachment or perfection of security interests under this Agreement. "UNDERPERFORMING PROPERTY" shall mean a hotel or timeshare property under (i) a Threshold Plan that earned a share of the Average Gross Revenues (less the portion of such revenues paid to eRoom) during the Seasoning Period of less than 20% of the total revenue generated by the Refreshment Centers in such hotel or timeshare property during the Seasoning Period, or (ii) a Platinum Plan that does not qualify for a Refreshment Center Loan Amount under Option 1 or Option 2 of Section C to Schedule I to this Agreement and where such hotel or time-share property earned a share of the Average Gross Revenues (less the portion of such revenues paid to eRoom and the guaranteed payment to eRoom) during the Seasoning Period of less than 20% of the total revenue generated by the Refreshment Centers in such hotel or timeshare property during the Seasoning Period. Section 1.2 ACCOUNTING TERMS. Except as otherwise defined or provided herein, any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given thereto, and all financial computations shall be made, in accordance with generally accepted accounting principles, consistently applied. ARTICLE 2 BUSINESS LEASES, LEASE FINANCING LOANS; SERVICING Section 2.1 THE BUSINESS LEASES. (a) Subject to the requirements of Section 2.1(c) below, eRoom will be solely responsible for the negotiation, origination, servicing and management of each Business Lease. (b) Pursuant to the Purchase Agreement, eRoom will sell, assign, transfer, set over and otherwise convey without recourse to the Borrower, each Business Lease related to a Lease Financing Loan, other than the right to service the Business Lease, which shall be transferred by eRoom to RSi pursuant to the Servicing Agreement. (c) Prior to or contemporaneously with the closing date of the transfer of a Business Lease from eRoom to the Borrower as required by Section 2.1(b), eRoom shall sell, assign, transfer, set over and otherwise convey the related Equipment to the Borrower pursuant to the Purchase Agreement and eRoom shall, pursuant to the License 16 Agreement, have granted to the Borrower and RSi a License to use all the related Equipment Intellectual Property. (d) The Borrower and the Lender agree that in connection with any Business Lease financing: (i) for each proposed Lease Financing Loan, the related Business Lease and the Lessee thereof shall be underwritten by the Lender as part of the Transaction Approval process; (ii) the form of Business Lease must be substantially similar to one of the form(s) of Business Lease set out in Exhibit G and must contain a term of 84 months and pricing terms that incorporate one of the options set out on Exhibit O; and, (iii) any proposed change to a form of Business Lease set out in Exhibit G must be acceptable to the Lender in its reasonable discretion as evidenced by a written acknowledgement of such changed form by the Lender. (e) In the event the Borrower wishes to obtain Business Lease Financing for a Business Lease that is in a form that is not substantially similar to those set out in Exhibit G or that contains pricing terms that are not one of the options set out in Exhibit G, the Borrower shall submit a form of such proposed Business Lease (the "Proposed Lease Form") to the Lender at least 30 days prior to the date the Borrower wishes to obtain such Lease Financing Loan. Upon receipt of the Proposed Lease Form, the Lender shall, within 14 days of receipt, indicate whether it will make a Lease Financing Loan with respect to the Proposed Lease Form. Section 2.2 THE LEASE FINANCING LOANS. (a) The Lender hereby agrees, subject to the terms and conditions of this Agreement, to make Lease Financing Loans to the Borrower during the Term of this Agreement. Unless the Borrower and the Lender shall agree, in writing, to extend the Term, the Lender shall have no obligation to make any Lease Financing Loans after the Commitment Termination Date. (b) The amount of each Lease Financing Loan shall be equal to the Refreshment Center Loan Amount for all Refreshment Centers included in the related Business Leases and installed at the related hotel or time-share property or properties that secure such Lease Financing Loan (such amount, the "LOAN AMOUNT"). (c) The term of each Lease Financing Loan (other than an Advance Funded Lease Financing Loan) shall be eighty-two (82) months from the date of such Lease Financing Loan. The term of each Advance Funded Lease Financing Loan shall be eighty-four (84) months from the date of such Advance Funded Lease Financing Loan, which shall be funded on the first Business Day in the Seasoning Period. If the remaining term of the Business Lease related to a Lease Financing Loan is less than eighty-two (82) months, upon the Lender's consent (determined by the Lender in its sole and absolute discretion), the term of such loan may be adjusted to correspond to the remaining term of the related Business Lease (but not less than the remaining term of the related Business Lease); PROVIDED, HOWEVER, that the Loan Amount of such Lease Financing Loan shall be reduced consistent with the methodology provided in the table below to adjust for the reduced term of the related Business Lease. 17
REMAINING TERM OF TERM OF LEASE NEW BORROWER REVENUE BUSINESS LEASE FINANCING LOAN ADVANCE RATE* -------------- -------------- ------------- 78 79 $9.61 72 73 $9.22 66 67 $8.79 61 62 $8.41 51 52 $7.54 41 42 $6.53 31 32 $5.34 21 22 $3.95 11 12 $2.32 1 2 $ .42
* This amount shall be inserted in clause (i)(A) of the definition of "REFRESHMENT CENTER LOAN AMOUNT" for the Threshold Plan and clause (i)(A) of the definition of "REFRESHMENT CENTER LOAN AMOUNT" for the Percentage Plan. (d) Notwithstanding the foregoing, if the Lessee of the Business Lease related to a proposed Lease Financing Loan is an Underperforming Property, the Lender shall have the right, but not the obligation to fund such proposed Lease Financing Loan. Section 2.3 CONDITIONS TO BORROWING; TRANSACTION APPROVAL OR DENIAL. (a) Prior to requesting a Lease Financing Loan hereunder, the Borrower must submit to the Lender an initial Borrowing Notice on which the Borrower shall certify that each of the requirements other than those indicated with asterisks thereon set out thereto has been satisfied (or otherwise waived by the Lender in writing). (b) The Lender shall, within 7 Business Days after its receipt of the initial Borrowing Notice for a requested Lease Financing Loan, determine whether the proposed transaction satisfies the preliminary requirements for a Lease Financing Loan. (c) In the event that the Lender indicates that the proposed transaction satisfies the preliminary requirements for a Lease Financing Loan, the Lender shall so inform the Borrower in writing, within 7 Business Days after its receipt of the initial Borrowing Notice for the requested Lease Financing Loan. (d) At the end of the related Seasoning Period for a Business Lease (or, as provided below, sooner in the case of Lease Financing Loans for which the Lender has an Advance Funding Transaction Approval Obligation), the Borrower will present to the Lender for its review a full Transaction Submission Package (excluding those items previously submitted as part of the Borrowing Notice) relating to such Business Lease. (e) Within 7 Business Days after its receipt of the Transaction Submission Package, the Lender shall determine, in its reasonable discretion, whether the proposed transaction satisfies the requirements for a Lease Financing Loan. (f) In the event that the Lender approves the issuance of a Lease Financing Loan for a proposed transaction, the Lender shall execute and deliver to the 18 Borrower a Transaction Approval. In the event that the Lender does not approve the issuance of a Lease Financing Loan for a proposed transaction, the Lender shall execute and deliver to the Borrower a transaction denial. (g) On the Business Day prior to the closing of each Lease Financing Loan, the eRoom Parties shall provide the Lender with an Acknowledgement that the related Transaction Submission Package and representations and warranties set forth in Section 4.1 hereto are, and will as of the date of such closing, be true and correct in all material respects and that the Borrower has satisfied the Guidelines and all terms and conditions of this Agreement. The eRoom Parties agree that upon the Securitization of any Business Leases or Lease Financing Loans, they will each execute a similar Acknowledgement in connection with the Securitization. (h) Notwithstanding the foregoing, the obligation of the Lender to make a Lease Financing Loan is subject to the satisfaction (or waiver) of the conditions set out in Section 5.3 hereof. Section 2.4 ADVANCE FUNDED LEASE FINANCING LOANS. Upon the satisfaction of the requirements set out in Section 2.5(a) and (b), the Borrower can request advance funding of certain Lease Financing Loans no less than ten (10) Business Days prior to the first day of the Seasoning Period for the related Business Lease and the Lender hereby agrees, on the terms and subject to the conditions of this Agreement to make Advance Funded Lease Financing Loans. The "LOAN AMOUNT" for each Advance Funded Lease Financing Loan shall equal (a) $600 for each Standard Unit Refreshment Center and (b) $800 for each Safe Unit Refreshment Center. Section 2.5 ADVANCE FUNDING TRANSACTION APPROVAL. Upon satisfaction of the terms and conditions of this Agreement, the Borrower can request an Advance Funded Lease Financing Loan from the Lender no less than ten (10) Business Days prior to the first day of the Seasoning Period with respect to the related Business Lease upon the satisfaction of the following additional conditions: (a) the eRoom Parties must have at least 10,000 installed Refreshment Centers which have completed the related Seasoning Period and which have been funded by the Lender through Lease Financing Loans; and (b) as of the date of the request for such advance funding, the average revenues received by the Borrower (after giving effect to the revenue sharing allocations under the related Business Leases and excluding any revenues for each Advance Funded Lease Financing Loan which has not completed its respective Seasoning Period) must be at least 1 cent ($.01) per day for each *** of Overall Lease Financing Loans. Section 2.6 BORROWINGS DURING TERM. On the Borrowing Date specified for each Lease Financing Loan hereunder, the Lender shall make available the Loan Amount at the office of the Lender or, if the Borrower shall make a written request to the Lender, wire or cause to be wired such amount to such account or accounts of the Borrower specified in such written request and which shall be located within the State of Utah. Section 2.7 USE OF PROCEEDS. The proceeds of each Lease Financing Loan hereunder shall be used by the Borrower solely for lawful business or commercial purposes. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION 19 Section 2.8 PRE-SECURITIZATION PERIOD. (a) During the Pre-Securitization Period, the Lender shall retain the Lease Financing Loans in a Loan Pool in accordance with the terms hereof. (b) The Custodian shall, on behalf of the Lender and the Borrower as their interests may appear, hold the Pledged Assets for a Loan Pool (other than the stock of RSi, which shall be held by the Lender). Pursuant to the related Custodial Agreement, the Custodian shall collect directly from each Lessee the Collected Funds and shall deposit such Collected Funds into the Custodial Account created pursuant to such Custodial Agreement. (c) On each Disbursement Date for each Loan Pool, the Custodian (based on the report provided to the Custodian pursuant to the related Servicing Agreement) shall disburse the Collected Funds held on deposit in the Custodial Account established for such Loan Pool to the parties or accounts indicated in the following priorities (to the extent of funds available therefor): (i) *** (ii) *** (iii) *** (iv) *** (v) to the Residual Profits Collection Account, if necessary to cover a shortfall in funds available to pay items (i) - (iv) of Section 2.8(c) with respect to any other Loan Pools; and (vi) *** (d) Notwithstanding the foregoing, to the extent that Collected Funds for any Disbursement Date are insufficient to make a full disbursement of the amounts required for a Loan Pool in clauses (i) - (iii) above, the Custodian shall, to the extent of funds available therefor, withdraw amounts from (x) first, the Loss Reserve Account for such Loan Pool and (y) second, the Residual Profits Collection Account and disburse such amounts in accordance with the priorities set out in such clauses (i) - (iii) of Section 2.8(c). CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION 20 (e) Notwithstanding clause (d) above, to the extent that Collected Funds for any Disbursement Date are insufficient to make a full payment to the related Loss Reserve Account for a Loan Pool pursuant to clause (c)(iv) above, the Custodian shall, to the extent of funds available therefor, withdraw amounts from the Residual Profits Collection Account and distribute such amounts to such Loss Reserve Account pursuant to such clause (c)(iv) above. (f) On the Disbursement Date in May of each year, any amounts remaining in the Property Tax Reserve Account with respect to each Loan Pool, after the payment of all applicable taxes for the prior calendar year, will be released and applied as payments in accordance with the priorities set out in clauses (iii) - (vi) of Section 2.8(c) for the related Loan Pool. (g) On each Disbursement Date, the Custodian will provide each of the eRoom Parties and the Lender with an accounting of the disbursements and allocations of Collected Funds with respect to each Loan Pool for such Disbursement Date. (h) In the event that on any Disbursement Date more than one Loan Pool has a shortfall in Collected Funds and amounts on deposit in the related Loss Reserve Account such that such Loan Pool requires amounts on deposit in the Residual Profits Collection Account to satisfy the payments required by Section 2.8(c)(i) - (iv) above, amounts distributed from the Residual Profits Collection Account shall be allocated PRO RATA among such Loan Pools based upon the then outstanding Loan Amount of all Lease Financing Loans in such Loan Pools. (i) On each Disbursement Date, after the making of all of the disbursements from the Custodial Account set out in Section 2.8(c) above, the Custodian shall disburse the amounts on deposit in the Loan Payment Account to the parties or accounts indicated in the following priorities (to the extent of funds available therefor): (i) to the Lender, an amount equal to the sum of (A) the Monthly Payment Amount for such Disbursement Date with respect to all Lease Financing Loans in such Loan Pool, (B) the Carry Forward Amount for such Disbursement Date with respect to all Lease Financing Loans in such Loan Pool, and (C) if applicable, the Accelerated Loan Amount for such Disbursement Date with respect to all Lease Financing Loans in such Loan Pool (ii) to the Custodial Account for such Loan Pool, an amount equal to the amount of interest accrued since the prior Disbursement Date on funds on deposit in the Loan Payment Account on the day prior to such Disbursement Date; and (iii) any amount remaining in the Loan Payment Account after making the disbursements set out in subclauses (i) and (ii) of this clause (i) shall be retained in the Loan Payment Account. (j) On the final Disbursement Date with respect to a Loan Pool, all amounts on deposit in the Loss Reserve Account and Loan Payment Account shall, to the 21 extent not required to be distributed pursuant to Section 2.8(c) or (i), be distributed to the Borrower. Section 2.9 TIMELINE OF EVENTS. The following is a timeline showing the sequence of events relating to a Lease Financing Loan. February 15, 2000 Equipment installed at a hotel or time-share property in connection with a Business Lease between eRoom and a Lessee. March 1 - May 31, 2000 Seasoning Period. March 1, 2000 RSi bills the Lessee under the Business Lease for the period from February 15 - February 29. April 1, 2000 Lessee's due date for lease payment for period from February 15 - February 29 (this payment belongs to eRoom). Also RSi bills the Lessee for the month of March. May 1, 2000 Lessee's due date for lease payment for the March lease payment - this payment belongs to eRoom. Also RSi bills the Lessee for the month of April. June 1, 2000 Lessee's due date for the April lease payment (this payment belongs to eRoom). RSi bills the Lessee for the May lease payment. June 5, 2000 Funding Date. Lender makes Lease Financing Loan to the Borrower (which has acquired the Business Lease and related Equipment from eRoom pursuant to the Purchase Agreement). Lender withholds Monthly Payment Amount for June from amounts loaned on such Lease Financing Loan. July 1, 2000 Initial Payment Date. Custodian receives the May lease payment directly from the Lessee (this payment belongs to the Program and will be distributed on the Disbursement Date pursuant to Section 2.8). Also RSi bills the Lessee for the June lease payment. 22 July 10, 2000 Initial Disbursement Date. Amounts received by the Custodian on the Business Leases since the Funding Date will be disbursed pursuant to Section 2.8. August 1, 2000 Payment Date. Lessee's due date for the June lease payment and the billing date for the month of July. August 10, 2000 Disbursement Date. Amounts received by the Custodian on the Business Leases since the prior Distribution Date will be disbursed pursuant to Section 2.8. Section 2.10 INTEREST RATES ANDPAYMENT DATES. The Borrower shall pay interest on the unpaid principal amount of each Lease Financing Loan from the Borrowing Date of such Lease Financing Loan until the date such Lease Financing Loan shall have been repaid in full (whether at scheduled maturity or by acceleration or otherwise) at a rate per annum equal to the Interest Rate for such Lease Financing Loan as specified in the related Note or this Agreement. Section 2.11 PREPAYMENTS. (a) Each Lease Financing Loan is subject to prepayment in whole, but not in part. In the event of prepayment, the Borrower shall pay the related Prepayment Amount. The Prepayment Amount is due and payable regardless of whether the prepayment by the Borrower is made voluntarily or involuntarily, including any prepayment required by the Lender's exercise of its rights upon the occurrence of an Event of Acceleration. In the event that the Borrower ELECTS to prepay any Lease Financing Loan, the Borrower shall deliver written notice (the "PREPAYMENT NOTICE") of such prepayment election to the Lender not less than thirty (30) days nor more than sixty (60) days from the proposed prepayment date (such date or the date of the exercise of Lender's rights of acceleration upon the occurrence of an Event of Acceleration, the "PREPAYMENT DATE"). Within twenty (20) days of the Lender's receipt of such Prepayment Notice, the Lender shall deliver a written notice to the Borrower setting forth the estimated total amount of the Prepayment Amount payable on the proposed Prepayment Date, which amount shall be subject to adjustment for changes in the Reinvestment Rate. (b) On the Prepayment Date, the Borrower shall pay the Lender the related Prepayment Amount, with respect to the related Lease Financing Loan to be prepaid. Section 2.12 INTEREST COMPUTATIONS. All interest due on any Payment Date shall be computed from and including the immediately preceding Payment Date to but excluding such Payment Date. 23 Section 2.13 EVIDENCE OF INDEBTEDNESS. (a) Each Lease Financing Loan shall be evidenced by a single Lease Financing Note dated as of the related Borrowing Date payable to the order of the Lender in the principal amount specified in such Note and otherwise duly completed. As provided in Section 2.15, each Lease Financing Note may at any time and at the discretion of the Lender be consolidated with other Lease Financing Notes into a Credit Enhancement Note. (b) The Lender shall maintain records showing all Lease Financing Loans made by the Lender hereunder, all payments made on account of the Lease Financing Loans, the computation and payment of interest, and other amounts due and sums paid hereunder. Section 2.14 EQUIPMENT SERVICING. (a) In consideration for the Servicing Fee, RSi shall service all of the Equipment and the Business Leases in accordance with the Servicing Agreements. (b) To secure RSi's obligations under the Servicing Agreements, the eRoom Parties will pledge to the Lender (i) pursuant to Article 3 hereof, the Equipment Intellectual Property and, (ii) pursuant to the Stock Pledge Agreements, the stock of RSi. (c) In the event that a Lessee fails to make a payment under a Business Lease within 15 days of the due date thereof, RSi shall disrupt the related Equipment through its electronic locking mechanism thereby rendering the Equipment unusable. In the event that a Business Lease is in default for a period of sixty (60) days or more, RSi shall promptly take all action (including legal action) necessary to gain possession of the related Equipment and shall use its best efforts to enter into a new Business Lease or sell the Equipment. (d) In the event that any of the eRoom Parties receive proceeds from any sale of Equipment pursuant to clause (c) above, the lesser of (i) the then outstanding Loan Amount of the related Lease Financing Loan or (ii) the proceeds actually received shall immediately be delivered to the Custodian for deposit in the Loss Reserve Account related to such Loan Pool, but such proceeds shall not be counted toward the Reserve Cap. (e) Any new Business Lease with respect to the Equipment pursuant to clause (c) above, shall be pledged as security for the applicable Lease Financing Loan and all revenues received by the Custodian with respect to such new Business Lease shall be disbursed by the Custodian pursuant to the priorities set out in Section 2.8(c) for the related Loan Pool. 24 Section 2.15 CONSOLIDATION OF LEASE FINANCING NOTES INTO CREDIT ENHANCEMENT NOTES. (a) The Lender, in its sole discretion, may at any time, and from time to time, consistent with the terms of this Agreement, amend, restate and consolidate all of the Lease Financing Notes relating to the Lease Financing Loans in a Loan Pool into a Credit Enhancement Note. (b) Each Credit Enhancement Note shall be substantially in the form attached hereto as Exhibit C and shall include the Borrower's obligation to pay the Aggregate Credit Enhancement Amount. The eRoom Parties shall cooperate with the Lender in the process of consolidating such Notes and shall execute any and all documents required by the Lender in connection therewith; including but not limited to, a Credit Enhancement Note. (c) The interest rate on the Credit Enhancement Note shall be equal to the weighted average of the Interest Rates (after making the adjustment in such Interest Rates specified in clause (d) below) on all Lease Financing Loans consolidated in such Credit Enhancement Note. (d) Notwithstanding anything to the contrary herein, upon the consolidation of Lease Financing Loans in a Loan Pool into a Credit Enhancement Note, the Interest Rate otherwise determined pursuant to the definition of "INTEREST RATE" shall be lowered on each such Lease Financing Loan by an amount equal to *** per annum. (e) Upon execution and delivery of a Credit Enhancement Note, the Lease Financing Notes amended, restated and consolidated in such Credit Enhancement Note shall automatically be cancelled. (f) Following the amendment, restatement and consolidation of the Lease Financing Notes relating to the Lease Financing Loans in a Loan Pool into a Credit Enhancement Note, the related Pledge and Security Agreement, Stock Pledge Agreement (as amended from time to time), and UCC-1 Financing Statements shall continue to secure the prompt and complete payment and performance of such Credit Enhancement Note and all obligations contained therein. ARTICLE 3 SECURITY INTEREST Section 3.1 GRANT OF SECURITY INTEREST. To secure the due payment and performance of any and all obligations of the eRoom Parties hereunder and under any and all Notes executed in connection with or related to this Agreement (1) eRoom hereby pledges and grants to the Lender, a continuing security interest in, and Lien on, all of eRoom's right, title and interest in and to the Equipment Intellectual Property, (2) eRoom shall execute a Stock Pledge Agreement for each Loan Pool that provides for a grant by eRoom to the Lender of a continuing Lien upon, and first priority security interest in, all CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION 25 of eRoom's right, title and interest in, to and under the Stock Collateral and (3) the Borrower shall execute a Pledge and Security Agreement for each Loan Pool which will provide for a grant by the Borrower to the Lender of a continuing Lien upon, and a first priority security interest in, all of the Borrower's right, title and interest in, to and under all of the Pledged Assets related to such Loan Pool including (without limitation) the following: (a) any and all Business Leases included in all Transaction Submission Packages submitted to the Lender pursuant to this Agreement and related to such Loan Pool and all of the Borrower's right, title and interest in, to and under any contracts, including any security agreements, or other documents executed by, or in favor of, the Borrower in connection therewith; (b) any and all Refreshment Centers and Equipment related to any of the foregoing Business Leases; (c) the Collected Funds, the Custodial Accounts, the Loss Reserve Accounts, the Loan Payment Accounts, the Property Tax Reserve Accounts and any other bank or similar accounts in the name, or held for the benefit of, the Borrower or the Lender and all amounts on deposit therein; (d) the Licenses; (e) all additions, accessions, replacements, substitutions and improvements to any of the foregoing; and (f) any and all proceeds of the foregoing, including all insurance payments (whether or not the Lender is the loss payee thereof). Section 3.2 CHIEF EXECUTIVE OFFICE; LOCATION OF PLEDGED ASSETS. The Borrower represents and warrants to the Lender that (i) the address of the Borrower's chief executive office is its address stated in Section 12.7, (ii) all records (including books of account) pertaining to the Pledged Assets are kept by the Borrower at such address or at the office of one of the eRoom Parties set out in Section 12.7 and (iii) to the best of the Borrower's knowledge, no Refreshment Center or Equipment is kept at any location that is not expressly specified or permitted by any Business Lease applicable thereto. The Borrower covenants to the Lender that the Borrower will notify the Lender of any change in the foregoing representations not later than ten (10) Business Days after such change shall have occurred. The Borrower covenants that the Borrower shall maintain all records pertaining to the Pledged Assets at the Borrower's chief executive office or at the office of one of the eRoom Parties set out in Section 12.7 and that the Borrower will not store, use or locate any of the Pledged Assets at any place other than its chief executive office or, with respect to any Refreshment Centers and Equipment, at such locations as are expressly specified or permitted under any Business Lease applicable thereto. 26 Section 3.3 PERFECTION OF SECURITY INTEREST. (a) To perfect the Lender's security interest in the Pledged Assets with respect to each Loan Pool, the Borrower shall execute one or more UCC financing statements and other UCC financing statement amendments and/or assignments and other notices appropriate under applicable law in form and substance satisfactory to the Lender. To perfect the Lender's security interest in the Equipment Intellectual Property, eRoom shall execute one or more UCC financing statements and other UCC financing statement amendments and/or assignments and other notices appropriate under applicable law in form and substance satisfactory to the Lender. The related eRoom Party will pay all filing or recording costs with respect to such UCC financing statements and all costs of filing or recording this Agreement or any other instrument, agreement or document executed or delivered in connection with the transactions contemplated hereby (including the cost of all federal, state or local, documentary, stamp or other taxes), in each case, in all public offices where filing or recording is deemed by the Lender to be necessary or desirable. The Borrower and eRoom each hereby authorizes the Lender to take all action at the expense of such party (including, without limitation, the filing of any UCC financing statements or amendments thereto without the signature of such party) which the Lender may deem necessary or desirable to perfect or otherwise protect the Liens and security interest created hereunder or under any of the Operative Documents and to obtain the benefits of this Agreement or any of the Operative Documents. Without limiting the generality of the foregoing, the eRoom Parties shall, at their own expense, execute and deliver such instructions, documents and certificates and take and cause to be taken all such actions as the Lender may request (including, without limitation, the execution and filing of all financing and continuation statements under the UCC) to evidence, maintain, protect, perfect and continue the perfection of the Liens and security interest granted to the Lender in any Pledged Assets, the Equipment Intellectual Property and the rights and interests of the Lender hereunder. (b) On or prior to the date of this Agreement, eRoom shall deliver the RSi Stock to the Lender along with all necessary stock powers duly executed in blank. (c) The Lender shall have the right at any time at Borrower's expense, to the extent provided in Section 11.2, to cause the perfection of the security interest granted to the Lender in the Liquidated Damages Collateral by whatever means the Lender shall deem to be necessary, and the Borrower shall cooperate fully with the Lender in connection therewith. Section 3.4 GENERAL COVENANTS. The Borrower (and, with respect to the Equipment Intellectual Property, eRoom) shall: (a) furnish the Lender from time to time at the Lender's request written statements and schedules further identifying and describing the Pledged Assets and Equipment Intellectual Property in such detail as the Lender may reasonably require; 27 (b) advise the Lender promptly, in sufficient detail, of the occurrence of any event which would have a material adverse effect on the value of the Pledged Assets or Equipment Intellectual Property or on the Lender's security interest therein; (c) promptly execute and deliver to the Lender such further security agreements or other instruments, documents, certificates and assurances and take such further actions as the Lender may from time to time in its sole discretion deem reasonably necessary to perfect, protect or enforce its security interest in the Pledged Assets or Equipment Intellectual Property or otherwise to effectuate the intent of this Agreement; and (d) use commercially reasonable efforts to enforce the provisions of the Business Leases requiring the Lessees to maintain the Refreshment Centers and Equipment leased thereunder. Section 3.5 ASSIGNMENT OF INSURANCE PROCEEDS. The eRoom Parties shall, or shall cause all Lessees to, maintain insurance in scope and amount required by the related Business Lease. Each eRoom Party shall pay over to the Custodian as Collected Funds all sums it receives from Lessees which may have become payable under or in respect of any policy of insurance owned by such Lessees. Section 3.6 LEGENDS. The Borrower will conspicuously mark, or cause to be conspicuously marked, with the following legend the cover page of each original copy of all Business Leases (including all security agreements, and all promissory notes and instruments, as defined in the UCC, evidencing any monetary obligation owing to the Borrower in connection with such Business Leases): ALL OF THE RIGHTS OF eROOM HEREUNDER HAVE BEEN ASSIGNED TO AMRESCO LEASING CORPORATION. ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS Section 4.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE eROOM PARTIES. Each of the eRoom Parties hereby represents and warrants to the Lender as follows: (a) ORGANIZATION. Each of the eRoom Parties is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted or is proposed to be conducted. (b) QUALIFICATION; LICENSES. Each of the eRoom Parties is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or leasing of its properties or the conduct of its business requires such qualifications, except where the failure to be so qualified or to have obtained such licenses or approvals would not have a 28 material adverse effect on the transactions contemplated by this Agreement and the other Operative Documents to which it is a party. (c) NO VIOLATION OF LAW OR AGREEMENTS. The execution and delivery of this Agreement by each of the eRoom Parties in the manner contemplated herein and the performance and compliance with the terms hereof by it (i) shall not violate: (A) its articles of incorporation or bylaws, or (B) any laws that could have any material adverse effect whatsoever upon the validity, performance or enforceability of any of the terms of this Agreement or the other Operative Documents applicable to such eRoom Party, and (ii) will not constitute a material default (or an event that, with notice or lapse of time or both, would constitute a material default) under, or result in the breach of, any material contract, agreement or other instrument to which such eRoom Party is a party or that may be applicable to it or any of its assets. (d) NO CONSENT. The execution and delivery of this Agreement and the other Operative Documents to which it is a party by each of the eRoom Parties in the manner contemplated herein and the performance and compliance with the terms hereof by it do not require the consent or approval of any governmental authority, or if such consent or approval is required, it has been obtained. (e) LEGAL, VALID AND BINDING OBLIGATIONS. Assuming due authorization, execution and delivery by each other party hereto or thereto, this Agreement and the other Operative Documents to which it is a party and all of the obligations of each eRoom Party hereunder are the legal, valid and binding obligations of such eRoom Party and are enforceable in accordance with the terms of this Agreement, except as such enforcement may be limited by applicable debtor relief laws. (f) POWER AND AUTHORITY. Each of the eRoom Parties has the full power and authority to enter into and consummate all transactions contemplated by this Agreement and the other Operative Documents to which it is a party, has duly authorized the execution, delivery and performance of this Agreement and the other Operative Documents to which it is a party, and has duly executed and delivered this Agreement and such other documents, and has taken all requisite corporate action to make this Agreement and such other documents valid, binding and enforceable upon such eRoom Party in accordance with its terms. (g) NO VIOLATION OF LAW. Each eRoom Party's execution and delivery of this Agreement and the other Operative Documents to which it is a party and its performance and compliance with the terms hereof and thereof will not constitute a violation of, any law, any order or decree of any court, or any order, regulation or demand of any federal, state or local governmental or regulatory authority. (h) NO ACTIONS. No action, suit or other proceeding or investigation is pending or, to the best of any eRoom Party's knowledge, threatened before any court or any federal, state or local governmental or regulatory authority (i) asserting the invalidity of this Agreement or the other Operative Documents to which it is a party, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or 29 the other Operative Documents to which it is a party, or (iii) seeking any determination or ruling that would materially and adversely affect the ability of a eRoom Party to perform its obligations under this Agreement or the other Operative Documents to which it is a party. (i) NO FILINGS REQUIRED. No consent, approval, authorization or order of, registration or filing with or notice to, any court or any federal, state or local governmental or regulatory authority is required for the execution, delivery and performance by the eRoom Parties of this Agreement (other than those that have been obtained or will be obtained prior to the effective date of this Agreement). (j) INTELLECTUAL PROPERTY; NO INFRINGEMENT. No eRoom Party is infringing upon, or otherwise violating the rights of any third party with respect to any Intellectual Property. The use of General Intangibles by the eRoom Parties in connection with their respective businesses and operations or the transactions contemplated under this Agreement and the other Operative Documents does not, and will not, violate or otherwise infringe the rights of any third party. The eRoom Parties own and possess all Intellectual Property and General Intangibles necessary for the conduct of their businesses and operations, including, without limitation, the development, manufacture, sale, leasing, maintenance, installation, servicing and operation of the Equipment and no eRoom Party is aware of any claim to the contrary or challenge by any person to the rights of a eRoom Party with respect to such Intellectual Property and General Intangibles. (k) AVERAGE REVENUE. As of the date of this Agreement, the average revenue per day of all installed Refreshment Centers (excluding revenue generated from room safes) in businesses is at least $1.10/unit. (l) PROPERTIES, PRIORITY OF LIENS. As of the Funding Date of each Lease Financing Loan, the Borrower will have good and marketable title to the related Pledged Assets, free and clear of any Lien of any nature whatsoever, except for Permitted Liens and the rights of the Lessees under the related Business Leases. The Liens which will be created and granted to the Lender by this Agreement and any other Operative Document shall constitute valid first priority Liens on the Pledged Assets, subject to no Lien other than Permitted Liens. (m) FINANCIAL STATEMENTS. Each of the Financial Statements is correct and complete in all material respects and presents fairly the financial position of the eRoom Parties as of its date, and has been prepared in accordance with generally accepted accounting principles consistently applied. The eRoom Parties do not have any material obligation, liability or commitment, direct or contingent, which is not reflected in the Financial Statements. There has been no material adverse change in the financial position or operations of the eRoom Parties since the date of the latest balance sheet included in the Financial Statements (the "LATEST BALANCE SHEET"). (n) TAX RETURNS. Each eRoom Party has filed all federal and state income tax returns required to be filed by it and has not failed to pay any taxes, or interest 30 and penalties relating thereto, on or before the due dates thereof except with respect to which such eRoom Party has duly filed extensions. Except to the extent that reserves therefor are reflected in the Financial Statements, (i) there are no material federal, state or local tax liabilities of a eRoom Party due or to become due for any tax year ended on or prior to the date of the Latest Balance Sheet, whether incurred in respect of or measured by the income of such entity, which are not properly reflected in the Latest Balance Sheet, and (ii) there are no material claims pending or, to the knowledge of any eRoom Party proposed or threatened against a eRoom Party for past federal, state or local taxes, except those, if any, as to which proper reserves are reflected in the Financial Statements. (o) FULL DISCLOSURE. Neither the Financial Statements nor any certificate, opinion, or any other statement made or furnished in writing to the Lender by or on behalf of the eRoom Parties in connection with this Agreement or the transactions contemplated herein, as of the effective dates thereof or at the time such documents were delivered to the Lender contained, or at the date hereof contains, any untrue statement of a material fact, or as of the effective date thereof or at the time such documents were delivered to the Lender omitted, or at the date hereof omits, to state a material fact required to be stated therein or necessary to make the statements contained therein or herein not misleading. (p) ERISA. No eRoom Party has a pension or other employee benefit plans which is subject to the provisions of Title IV of ERISA (any such plans which have been or may hereafter be adopted or assumed by a eRoom Party are hereinafter referred to individually as a "PLAN" and, collectively, as the "PLANS"), the application of which could give rise to direct or contingent liabilities of such eRoom Party to the Pension Benefit Guaranty Corporation ("PBGC"), the Department of Labor or the Internal Revenue Service. No eRoom Party is a participating employer in any Plan under which more than one employer makes contributions as described in Sections 4063 and 4064 of ERISA. No eRoom Party is a participating employer in a multi-employer plan as defined in Section 4001(a) of ERISA, which participation could give rise to withdrawal liability on the part of the eRoom Party under Subtitle E of Title IV of ERISA. (q) INVESTMENT COMPANY. The Borrower is not an "investment company" or a company "controlled by" an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.2 REPRESENTATIONS AND WARRANTIES OF THE LENDER. The Lender hereby represents and warrants to the eRoom Parties as follows: (a) ORGANIZATION. The Lender is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted. (b) QUALIFICATIONS. The Lender is duly qualified to do business as a foreign corporation in good standing in all jurisdictions in which the ownership or leasing of its properties or the conduct of its business requires such qualifications, except where 31 the failure to be so qualified would not have a material adverse effect on the transactions contemplated by this Agreement and the other Operative Documents. (c) NO VIOLATION OF LAW OR AGREEMENTS. The execution and delivery of this Agreement by the Lender in the manner contemplated herein and the performance and compliance with the terms hereof by it (i) shall not violate: (A) its articles of incorporation or bylaws, or (B) any laws that could have any material adverse effect whatsoever upon the validity, performance or enforceability of any of the terms of this Agreement and the other Operative Documents applicable to the Lender, and (ii) will not constitute a material default (or an event that, with notice or lapse of time or both, would constitute a material default) under, or result in the breach of, any material contract, agreement or other instrument to which the Lender is a party or that may be applicable to it or any of its assets. (d) NO CONSENT. The execution and delivery of this Agreement and the other Operative Documents by the Lender in the manner contemplated herein and the performance and compliance with the terms hereof by it do not require the consent or approval of any governmental authority, or if such consent or approval is required, it has been obtained. (e) LEGAL, VALID AND BINDING OBLIGATIONS. Assuming due authorization, execution and delivery by each other party hereto, this Agreement and the other Operative Documents and all of the obligations of the Lender hereunder are the legal, valid and binding obligations of the Lender, enforceable in accordance with the terms of this Agreement, except as such enforcement may be limited by applicable debtor relief laws. (f) POWER AND AUTHORITY. The Lender has the full power and authority to enter into and consummate all transactions contemplated by this Agreement and the other Operative Documents, has duly authorized the execution, delivery and performance of this Agreement and the other Operative Documents, and has duly executed and delivered this Agreement and the other Operative Documents, and has taken all requisite corporate action to make this Agreement and the other Operative Documents valid, binding and enforceable upon the Lender in accordance with its terms. (g) NO VIOLATION OF LAW. The Lender's execution and delivery of this Agreement and the other Operative Documents and all other related documents, its performance and compliance with the terms hereof and thereof will not constitute a violation of, any law, any order or decree of any court, or any order, regulation or demand of any federal, state or local governmental or regulatory authority. (h) NO ACTIONS. No action, suit or other proceeding or investigation is pending or, to the best of the Lender's knowledge, threatened before any court or any federal, state or local governmental or regulatory authority (i) asserting the invalidity of this Agreement and the other Operative Documents to which it is a party, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement and the other Operative Documents or (iii) seeking any determination or ruling that would 32 materially and adversely affect the ability of the Lender to perform its obligations under the Agreement or the other Operative Documents to which it is a party. (i) NO FILINGS REQUIRED. No consent, approval, authorization or order of, registration or filing with or notice to, any court or any federal, state or local governmental or regulatory authority is required for the execution, delivery and performance by the Lender of this Agreement (other than those that have been obtained or will be obtained prior to the effective date of this Agreement and other than any such actions, approvals, etc., under any state securities laws or "Blue Sky" statutes, as to which the Lender makes no such representation or warranty). ARTICLE 5 CONDITIONS PRECEDENT TO EFFECTIVENESS, EACH LOAN POOL AND THE LEASE FINANCING LOANS Section 5.1 EFFECTIVENESS. This Agreement shall become effective upon the satisfaction (or waiver by the Lender in its sole discretion) of the following conditions precedent: (a) The Borrower shall have: (i) duly executed and delivered to the Lender this Agreement; (ii) delivered to the Lender the fully executed Stock Pledge Agreement and the Pledge and Security Agreement relating to the Initial Loan Pool; (iii) delivered to the Lender the fully executed License Agreement, and Purchase Agreement; (iv) duly executed and delivered to the Lender appropriate UCC financing statements to enable the Lender to perfect and preserve the priority of its security interest in the Liquidated Damages Collateral and the Pledged Assets relating to the Initial Loan Pool; (v) otherwise fully complied with all of the terms and conditions of the Operative Documents; (vi) delivered to the Lender: (A) a copy of the articles of incorporation of the Borrower, certified by the Secretary of State of Nevada; (B) a copy of the bylaws of the Borrower, certified by the Secretary of the Borrower; (C) a copy of all corporate action taken by the Borrower to authorize the Borrower's execution and delivery of each of the Operative Documents 33 and the consummation of the transactions contemplated thereby, certified by the Secretary of the Borrower; (D) a good standing certificate relating to the Borrower dated as of a date not more than ten (10) days prior to the date of this Agreement from the Secretary of State of Nevada; (E) an incumbency certificate with respect to the officers of the Borrower, certified by the Secretary of the Borrower; (F) the legal opinion of Gregory L. Hrncir, in-house counsel to the Borrower, in the form set out as Exhibit N hereto and satisfactory to the Lender; and (G) copies of the Financial Statements, all of which shall be certified as true and correct by an officer of the Borrower. (b) RSi shall have delivered to the Lender: (i) a copy of the articles of incorporation of RSi, certified by the Secretary of State of Nevada; (ii) a copy of the bylaws of RSi, certified by the Secretary of RSi; (iii) a copy of all corporate action taken by RSi to authorize RSi's execution and delivery of each of the Operative Documents to which it is a party and the consummation of the transactions contemplated thereby, certified by the Secretary of RSi; (iv) a good standing certificate relating to RSi dated as of a date not more than ten (10) days prior to the date of the making of the initial Lease Financing Loan from the Secretary of State of Nevada; (v) an incumbency certificate with respect to the officers of RSi, certified by the Secretary of RSi; and (vi) the legal opinion of Gregory L. Hrncir, in-house counsel to RSi, in the form set out as Exhibit N hereto and satisfactory to the Lender. (c) eRoom shall have delivered to the Lender: (i) a copy of the articles of incorporation of eRoom, certified by the Secretary of State of Nevada; (ii) a copy of the bylaws of eRoom, certified by the Secretary of eRoom; 34 (iii) a copy of all corporate action taken by eRoom to authorize eRoom's execution and delivery of each of the Operative Documents to which it is a party and the consummation of the transactions contemplated thereby, certified by the Secretary of eRoom; (iv) a good standing certificate relating to eRoom dated as of a date not more than ten (10) days prior to the date of the making of the initial Lease Financing Loan from the Secretary of State of Nevada; (v) an incumbency certificate with respect to the officers of eRoom, certified by the Secretary of eRoom; (vi) the legal opinion of Gregory L. Hrncir, in-house counsel to eRoom, in the form set out as Exhibit N hereto and satisfactory to the Lender; and (vii) the RSi Stock with executed stock powers in blank. (d) (i) The Borrower shall have complied and shall then be in compliance with all the terms, covenants and conditions of this Agreement; (ii) There shall exist no Default or Event of Default or Event of Acceleration hereunder; (iii) The representations and warranties contained in Section 4 hereof shall be true and correct in all material respects; and (iv) The Lender shall have received such other documents, certificates and information as it may reasonably request. Section 5.2 THE INITIAL LEASE FINANCING LOAN. The obligation of the Lender to make the initial Lease Financing Loan hereunder, shall be subject to the following conditions precedent: (a) The Lender shall have received evidence satisfactory to it that the eRoom Parties have fully complied with all of the terms and conditions of this Agreement (including the terms and conditions of Section 9.6 hereof) and the other Operative Documents; (b) The Lender shall have received duly executed appropriate UCC financing statements for filing in each jurisdiction in which Pledged Assets would be deemed located or otherwise necessary or advisable to enable the Lender to create and/or perfect and preserve a first priority security interest in all of the Pledged Assets; (c) The Lender shall have received a fully executed copy of the Custodial Agreement relating to the Initial Loan Pool and the Custodian shall have established the Custodial Account, the Loss Reserve Account, the Loan Payment Account and the Property Tax Reserve Account with respect to the Initial Loan Pool in its name for the benefit of the Borrower and the Lender, as their interest may appear; and 35 (d) The Lender shall have received a fully executed copy of the Servicing Agreement relating to the Initial Loan Pool; and Section 5.3 THE LEASE FINANCING LOANS. The obligation of the Lender to make any Lease Financing Loan hereunder, including the initial Lease Financing Loan, shall be subject to the following conditions: (a) The Lender shall have received a Borrowing Notice relating to such Lease Financing Loan (b) (i) The Borrower shall have complied and shall then be in compliance with all the terms, covenants and conditions of this Agreement and the Operative Documents; (ii) There shall exist no Default or Event of Default or Event of Acceleration hereunder; (iii) The representations and warranties contained in Section 4.1 hereof shall be true and with the same effect as though such representations and warranties had been made at the time of the making of such Lease Financing Loan; (iv) The Lender shall have received a certificate with respect to the compliance by the Borrower with the conditions specified in clauses (b)(i), (ii) and (iii) above (a "Compliance Certificate") dated the date of the making of such Lease Financing Loan, executed on behalf of the Borrower by one of its officers; (v) The Lender shall have received such other documents, certificates and information as it may request; (vi) The Lender shall have received copies of the most recent Financial Statements then required to be delivered hereunder; (v) The Guidelines and all terms and conditions of this Agreement shall have been satisfied to the satisfaction of the Lender; and (c) All legal matters incident to such Lease Financing Loan shall be reasonably satisfactory to counsel for the Lender. Section 5.4 SUBSEQUENT LOAN POOLS. The obligation of the Lender to create any Loan Pool other than the Initial Loan Pool and to perform any other obligation hereunder, shall be subject to the following conditions precedent: (a) The Borrower shall have delivered to the Lender the fully executed Stock Pledge Agreement, Pledge and Security Agreement, Servicing Agreement and Custodial Agreement relating to such Loan Pool; (b) The Borrower shall have duly executed and delivered to the Lender the appropriate UCC financing statements to enable the Lender to perfect and preserve the priority of its security interests in the Pledged Assets relating to such Loan Pool; and 36 (c) The Borrower shall have complied and shall then be in compliance with all the terms, covenants and conditions of this Agreement and the Operative Documents. ARTICLE 6 DELIVERY OF FINANCIAL REPORTS, DOCUMENTS AND OTHER INFORMATION So long as the Borrower is indebted to the Lender and until payment in full of each of the Notes and full and complete performance of all of its other obligations arising hereunder, the eRoom Parties shall deliver to the Lender: Section 6.1 ANNUAL FINANCIAL STATEMENTS. Annually, as soon as available, but in any event within ninety (90) days after the last day of each of its fiscal years, a balance sheet of the eRoom Parties as at such last day of the fiscal year, and statements of income and retained earnings and changes in financial position, for such fiscal year, each prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail, such financial statements of the eRoom Parties to be certified without qualification by a firm of independent certified public accountants which, if none of the eRoom Parties is then a public company traded on a nationally recognized stock exchange, must be reasonably satisfactory to the Lender, as fairly presenting the financial position and the results of operations of the eRoom Parties as at and for the year ending on its date and as having been prepared in accordance with generally accepted accounting principles. Section 6.2 QUARTERLY FINANCIAL STATEMENTS. As soon as available, but in any event within sixty (60) days after the end of each calendar quarter (other than the fourth calendar quarter of each fiscal year) of the eRoom Parties a balance sheet as of the last day of each such quarter and statements of income and retained earnings for such quarter, all in reasonable detail, each such statement to be certified, on behalf of the eRoom Parties by an officer of eRoom, as fairly presenting the financial position and the results of operations of the eRoom Parties at its date and for such quarter and as having been prepared in accordance with generally accepted accounting principles consistently applied (subject to year-end audit adjustments). (a) Simultaneously with the delivery of each set of quarterly and annual financial statements returned to Section 6.1 and Section 6.2 (a), a certificate of the treasurer or chief financial officer of eRoom (i) certifying that none of the eRoom Parties has violated the provisions of Section 9.4 (i)-(iii) and (ii) that no Event of Default or Event of Acceleration then exists or if such event does exist setting forth the details thereof and the action the eRoom Parties are taking or are proposing to take with respect thereto. 37 (b) The Lender agrees to execute a Confidentiality Agreement substantially in the form of Exhibit T hereto with respect to the information provided by the eRoom Parties in Section 6.1 and 6.2. Section 6.3 OTHER INFORMATION. Promptly after a written request thereof such other financial data or information evidencing compliance with the requirements of this Agreement as the Lender may reasonably request from time to time. Section 6.4 NO DEFAULT CERTIFICATE. At the same time as it delivers the financial statements required under the provisions of Sections 6.1 and 6.2, a certificate on behalf of each of the eRoom Parties by one of its officers to the effect that, to the best of such officer's knowledge after due inquiry, there has not occurred (i) any Default, Event of Default or Event of Acceleration hereunder or (ii) any event which would constitute or cause a material adverse change in the condition, financial or otherwise, of the operations of any of the eRoom Parties or, if such cannot be so certified, specifying in reasonable detail the exceptions, if any, to such statement. Section 6.5 OTHER DOCUMENTS. Such other documents, reports, notices, financial statements or other financial information as shall be reasonably requested by the Lender. Section 6.6 NOTICES OF DEFAULTS. Promptly, notice of the occurrence of any Default, Event of Default or Event of Acceleration hereunder, or any event which would constitute or cause a material adverse change in the condition, financial or otherwise, of the operations of the Borrower. ARTICLE 7 AFFIRMATIVE COVENANTS So long as the Borrower is indebted to the Lender, and until payment in full of each of the Notes and full and complete performance of all of its other obligations arising hereunder the eRoom Parties shall: Section 7.1 BOOKS AND RECORDS. Keep proper books of record and account in accordance with generally accepted accounting principles, consistently applied in which full, true and correct entries shall be made of all dealings or transactions in relation to its business and activities. All executed originals of the Business Leases shall be marked with a legend on the cover page disclosing the security interest in favor of the Lender in a form and format approved by the Lender. Section 7.2 INSPECTIONS AND AUDITS. Permit the Lender to make or cause to be made, inspections and audits of any books, records and papers of the eRoom Parties (including the Business Leases and financial and other information pertaining to the Equipment) and to make extracts therefrom and copies thereof at all such reasonable times as the Lender may reasonably require; provided that unless an Event of Default or Event of Acceleration has occurred and is continuing, the Lender agrees to limit such inspections to no more than one per calendar quarter. Such originals shall be retained by the eRoom Parties and not delivered to any third party. All costs associated with such inspections and audits shall be at the expense of the Lender unless such inspection or 38 audit reveals a material misstatement, in which case the cost and expense of such inspections or audit shall be borne by the eRoom Parties. Section 7.3 PERFORM OBLIGATIONS. Pay and discharge all of its obligations and liabilities, including, without limitation, all taxes, assessments and governmental charges upon its income and properties, when due, unless and to the extent only that such obligations, liabilities, taxes, assessment and governmental charges shall be contested in good faith and by appropriate proceedings and that, to the extent required by generally accepted accounting principles then in effect, proper and adequate book reserves relating thereto are established by the eRoom Parties. Section 7.4 NOTICE OF LITIGATION. Immediately notify the Lender in writing of any litigation, legal proceeding or dispute involving amounts in excess of One Hundred Thousand Dollars ($100,000) instituted against any of the eRoom Parties and regardless of the subject matter thereof (excluding, however, any actions relating to workmen's compensation claims or negligence claims relating to use of motor vehicles, if fully covered by insurance, subject to deductibles). The parties agree that such notice has been provided with respect to the Willow Creek matter. Section 7.5 INSURANCE. (i) Maintain at its own expense or cause Lessees to maintain all-risk insurance on each item of Equipment and other assets material to the conduct of the business of the eRoom Parties in an amount at least equal to the book or fair market value thereof, whichever is greater, and liability insurance with respect to each item of Equipment in amounts customarily maintained by similar businesses, (ii) maintain at its own expense property insurance, all-risk liability insurance, business interruption insurance and all other insurance material to the conduct of the business of the eRoom Parties as set forth in each Pledge and Security Agreement, and (iii) deliver to the Lender, upon the Lender's request, evidence (which shall be in form and substance satisfactory to the Lender) of the maintenance thereof. The eRoom Parties shall maintain the insurance policies required hereunder in the name of the Lender, its successors and assigns, as loss payee and as named insured. Section 7.6 PRIORITY OF LIEN ON EQUIPMENT AND LEASES; FURTHER SECURITY. Whenever any Borrowing Notice with respect to a Lease Financing Loan is delivered, cause the Lender to have a valid first-priority, perfected Lien on and security interest in the Pledged Assets including (i) all Refreshment Centers and Equipment relating to the Business Lease to be financed with the proceeds of such Lease Financing Loan, (ii) all Business Leases, and (iii) all instruments and chattel paper evidencing any Business Leases. Each Business Lease and the Refreshment Centers and Equipment related thereto shall be free and clear of any Lien, charge or encumbrance other than Permitted Liens. The eRoom Parties shall assist the Lender in evidencing and/or perfecting such security interest by completing and assisting in filing or recording UCC financing statements and such other instruments, certificates or agreements requested by the Lender. Section 7.7 MAINTENANCE OF SEPARATE EXISTENCE. Maintain (i) records and books of account separate from those of any Affiliate and (ii) adequate capitalization for the conduct of each of their respective business. 39 Section 7.8 TAXES. Pay all taxes, assessments and other governmental impositions related to their properties, businesses and operations other than property taxes on the Equipment. Section 7.9 BUSINESS LEASE PRODUCTION REQUIREMENT. Originate Business Leases which result in Cumulative Lease Financing Loans as set forth in the following table:
PERIOD CUMULATIVE LEASE FINANCING LOANS February 6, 2000 - February 5, 2001 $10,000,000 or more February 6, 2001 - February 5, 2002 $20,000,000 or more
If Cumulative Lease Financing Loans are equal to or greater than $20,000,000 as of February 5, 2002, the production requirement will be satisfied in full. If the Cumulative Lease Financing Loans are less than $20,000,000 as of February 5, 2002 the production requirement shall not be satisfied until such time as the Cumulative Lease Financing Loans equal or exceed $25,000,000. Section 7.10 DIRECTION TO LESSEES. Upon the funding of a Lease Financing Loan or Advance Funded Lease Financing Loan, the Borrower shall instruct the Lessee, in writing, to make all payments under the related Business Lease to the related Custodial Account. Section 7.11 SAFE UNIT REFRESHMENT CENTERS. (a) Ensure that the daily minimum charge to hotel or time-share guests for the room safe component of each Safe Unit Refreshment Center offered pursuant to a Percentage Plan is equal to or greater than $1.34 per day (the "MINIMUM DAILY SAFE UNIT CHARGE"). (b) Contractually agree with the Customer in the related Business Lease that the monthly payment from the Customer to the Borrower for each Safe Unit Refreshment Center offered pursuant to a Percentage Plan shall be equal to or greater than the sum of: (i) 25% of the monthly gross revenues generated from each such Safe Unit Refreshment Center and (ii) the product of (A) .95, (B) the Customer's daily room occupancy rate, (C) the Minimum Daily Safe Unit Charge, and (D) the number of days in the applicable month. The Borrower shall promptly enforce against each Customer the contractual agreement referenced in the preceding sentence of this Section 7.11(b). Section 7.12 CASUALTY EVENTS. Upon the occurrence of a Casualty Event, the Borrower shall either (i) pay the accelerated portion (on a pro rata basis) of the Accelerated Loan Amount of any Lease Financing Loan relating to a Business Lease for which all or a portion of the related Equipment has been lost, stolen, damaged beyond repair or destroyed or (ii) within 90 days after such Casualty Event, replace such portion of the related Equipment that has been lost, stolen, damaged beyond repair or destroyed with similar Equipment that is in good working condition. 40 Section 7.13 SERVICING, BILLING AND MAINTENANCE MANUAL. Within 90 days of the date of this Agreement, prepare a detailed Equipment servicing, billing and maintenance manual in a form acceptable to the Lender. Section 7.14 INSTALLATION AND MAINTENANCE OF EQUIPMENT. Install or cause the Lessee to install the Equipment in accordance with the Customer Installation Manual attached as an exhibit to the Servicing Agreement and maintain or cause the Lessee to maintain the Equipment in accordance with the Customer Maintenance Manual attached as an exhibit to the Servicing Agreement. Section 7.15 MISAPPLIED PAYMENTS. Immediately upon receipt thereof, at any time after the Funding Date with respect to any Lease Financing Loan, forward any payments received by it with respect to the Business Lease related to such Lease Financing Loan to the Custodian for deposit in the related Custodial Account. Section 7.16 LEGAL OPINION. Deliver to the Lender within 45 days of the date of this Agreement, a legal opinion of outside counsel to the eRoom Parties (which counsel must be acceptable to the Lender) in the form set out as Exhibit N hereto and which must be acceptable to the Lender in its sole discretion. ARTICLE 8 NEGATIVE COVENANTS So long as the Borrower is indebted to the Lender and until payment in full of each of the Notes and full and complete performance of all of its other obligations arising hereunder: Section 8.1 LIENS. None of the eRoom Parties shall create, or assume or permit to exist any Lien on any of the Equipment or any other equipment purchased and provided as collateral or the Business Leases or any of the Pledged Assets except (i) Liens in favor of the Lender and (ii) Permitted Liens. Section 8.2 CHANGES IN BUSINESS. None of the eRoom Parties shall make any material change in its business, or in the nature of its operations, or liquidate or dissolve itself (or suffer any liquidation or dissolution). Section 8.3 CHANGE OF OFFICE ADDRESS. The Borrower shall not change the address of its principal office or place of business or open any other office or place of business in any jurisdiction unless the Borrower shall have provided to the Lender written notice thereof within ten (10) days of such action. Section 8.4 AMENDMENT OF THE CHARTER DOCUMENTS. The Borrower shall not amend the articles of incorporation or by-laws of the Borrower, or agree to do the same, if the effect of any such amendment is to materially adversely affect the Borrower's ability to perform its obligations hereunder. Section 8.5 SALE, TRANSFER OR TERMINATION OF PLEDGED ASSETS. The eRoom Parties shall not sell or transfer any of the Pledged Assets without the prior written consent of the Lender. The eRoom Parties shall not terminate any Business Lease or relocate any Equipment without the prior written consent of the Lender. 41 ARTICLE 9 ADDITIONAL COVENANTS OF THE PARTIES Section 9.1 EXCLUSIVITY. (a) During the Term of this Agreement, the eRoom Parties hereby covenant and agree, with respect to each Business Lease to a hotel or time-share property located in the United States that: (i) the eRoom Parties shall request financing in the form of Lease Financing Loans from the Lender, (ii) the Lender shall have the exclusive right to provide such financing and (iii) in connection with such financing, the eRoom Parties shall use their best efforts to provide Lender with the information required in items k, l, m and n of Section 1 of the Business Specific Underwriting Requirements of the Guidelines, (iv) upon the specific written request of Lender, the eRoom Parties shall use their best efforts to provide the Lender with all of the information required in the Business Specific Underwriting Requirements of the Guidelines and (v) shall use their best efforts to facilitate communication and information exchange between Lender and Lessees. (b) During the Term of this Agreement, if the Guidelines and all terms and conditions of this Agreement are not satisfied, the Lender shall continue to have the exclusive right (but not the obligation) to provide Lease Financing Loans to the Borrower pursuant to the terms of this Agreement, however, in the event that the Lender declines to exercise its exclusive right to engage in business lease financing for any Business Lease pursuant to the terms of this Section 9.1(b), the eRoom Parties may sell or finance such Business Lease to, or with, a third party. Section 9.2 RIGHT OF FIRST REFUSAL. During the Term of this Agreement, the eRoom Parties hereby acknowledge and agree that the Lender shall have an exclusive right of first refusal (the "RIGHT OF FIRST REFUSAL") to provide financing for all Refreshment Centers, Equipment or any other goods, equipment or personal property provided by any of the eRoom Parties or their Affiliates to all customers in all industries (other than the hotel and time-share industries in which the Lender has the exclusive right set out in Section 9.1) pursuant to a lease (or revenue sharing agreement) that provides for the sharing of revenue or any other kind of payment or arrangement between any of the eRoom Parties (or their Affiliates) and such customer. In the event that the Lender does not exercise the Right of First Refusal with respect to a new industry within 90 days from the date the Lender receives notice from eRoom requesting the Lender to consider such industry, this covenant shall be null and void with respect to such industry. If the Lender agrees to exercise the Right of First Refusal for an industry, the eRoom Parties and the Lender shall document such program in a mutually agreed upon time period and upon mutually acceptable terms. Section 9.3 MARKETING; TRADITIONAL EQUIPMENT FINANCING. (a) (i) During the Term of this Agreement, the eRoom Parties covenant and agree to use their best efforts to market Refreshment Centers to Customers in the hotel and time-share industries through Business Leases satisfying the 42 requirements set forth herein and which offer Customers lease terms of 84 months and the pricing terms set out in Exhibit O (unless the Lender agrees in its sole discretion to lease or pricing terms that either from those set out in Exhibit O). Notwithstanding the foregoing, the eRoom Parties shall be allowed to sell Refreshment Centers to Customers that do not finance such purchase or which finance such purchase through Traditional Equipment Financing. (ii) During the Term of this Agreement, the eRoom Parties shall not offer Business Leases to Customers unless such Business Leases are for a lease term of 84 months and are on the pricing terms set out in Exhibit O. (iii) During the Term of this Agreement, except as expressly permitted by this Agreement, the eRoom Parties shall not allow or permit any third party to offer or provide leases (or revenue sharing arrangements) that provide for the leasing and use of Equipment and/or Refreshment Centers to hotels or time-shares located within the United States that provide for a sharing of revenue, or any other kind of payment or arrangement. (b) eRoom shall provide the Lender with written notice that a proposed Customer intends to utilize or is considering utilizing Traditional Equipment Financing within five (5) Business Days from the date eRoom first becomes aware of such Customer's intentions. (c) The Lender shall credit twenty-five percent (25%) of the amount financed by the Lender through Traditional Equipment Financing (calculated based on the cost of the Equipment financed) against the cumulative volume amounts set forth in the definition of "Interest Rate" and for purposes of Section 7.9. (d) For each Traditional Equipment Financing Transaction entered into between the Lender and a Customer and funded by the Lender, the Lender shall pay eRoom a cash referral fee of 0.50% of the principal amount financed by the Lender. Section 9.4 MERGER; CONSOLIDATION. Without the written consent of the Lender, the eRoom Parties will not, nor will any of them permit any of their subsidiaries or Affiliates to: (i) enter into any transaction of merger or consolidation or amalgamation, unless the person or entity resulting from such merger or consolidation (if not the relevant eRoom Party) shall expressly assume, by supplemental agreement satisfactory in form to the Lender and executed and delivered to the Lender, the due and punctual performance and observance of each and every covenant and condition of this Agreement and the other Operative Documents to be performed and observed by the eRoom Parties, (ii) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or (iii) convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its assets, whether now owned or hereafter acquired (including without limitation) receivables, but excluding any inventory or other assets sold or disposed of in the ordinary course of business). The eRoom Parties shall not be in breach of the covenant reflected in item (iii) unless the Lender provides the eRoom Parties with notice of the violation of such covenant within ninety (90) days from 43 the date that the Lender receives Financial Statements from the eRoom Parties pursuant to Section 6.1 and 6.2 that make such violation reasonably and clearly apparent. Section 9.5 LENDER COVENANT TO FINANCE; BORROWER'S EXCLUSIVE REMEDY. The Lender hereby covenants and agrees that upon presentation by the Borrower of a Transaction Submission Package that meets the requirements of this Agreement and the Guidelines, the Lender shall provide Lease Financing Loans pursuant to the terms hereof. In the event that the Lender fails to provide Lease Financing Loans pursuant to the terms hereof after receipt of a Transaction Submission Package that meets the requirements of this Agreement and the Guidelines, the Lender shall have 90 days to cure such failure. If, at the end of such 90 day period, the Lender has not cured such failure the Borrower's sole remedy shall be the right to terminate the Lender's exclusive rights under Section 9.1 hereof. Section 9.6 TERMINATION OF EXISTING LIENS. Immediately upon completion of the initial public offering of shares in any of the eRoom Parties or upon the sale of ten percent (10%) or more of the capital stock of any of the eRoom Parties in a single transaction or a series of transactions, the eRoom Parties shall (i) pay in full all debt related to all existing Liens on any of the property of any of the eRoom Parties, (ii) terminate all such Liens, and (iii) evidence such termination by providing to the Lender copies of Uniform Commercial Code termination statements relating to all such Liens. Section 9.7 CREATION OF NEW LOAN POOLS. The eRoom Parties hereby covenant and agree that they will cooperate with the Lender in the creation of new Loan Pools, including executing all documents necessary to create such Loan Pool and to secure the collateral comprising such Loan Pool Section 9.8 DIRECTION TO LESSEES. The eRoom Parties hereby covenant and agree that until the termination of all of their obligations under this Agreement, they shall instruct each Lessee to make all payments on its Business Lease (after the Funding Date with respect to the related Lease Financing Loan) directly to the Custodian and not to any eRoom Party or any other entity. Section 9.9 PRINCIPAL PLACE OF BUSINESS. (a) The Borrower hereby covenants and agrees that it shall maintain its principal place of business in the State of Idaho until such time as the Lender becomes licensed in Nevada under the Nevada Installment Loan and Finance Act (the "Nevada Installment Loan Act"). (b) The Lender hereby covenants and agrees that it shall use good faith and its reasonable efforts to obtain all necessary licenses under the Nevada Installment Loan Act. ARTICLE 10 EVENTS OF DEFAULT; EVENTS OF ACCELERATION 44 Section 10.1 EVENTS OF DEFAULT. If any one or more of the following events (each, an "EVENT OF DEFAULT") shall occur and be continuing, the Lender (i) shall be relieved of all its obligations hereunder (including the obligation to fund any future Lease Financing Loans), but shall not be relieved of its rights hereunder and (ii) shall have the rights and remedies set out in Section 10.2, upon written notice to that effect given to the Borrower by the Lender (except that in the case of the occurrence of any Event of Default described in paragraphs (c) - (e) of this Section 10.1 no such notice shall be required), without presentment or demand for payment, notice of nonpayment, protest or further notice or demand of any kind, all of which are expressly waived by the Borrower, and the Lender may exercise any of the remedies specified in Section 10.2 or elsewhere in this Agreement: (a) Any of the eRoom Parties shall fail to perform or observe any of the covenants contained in Section 7.1, 7.2, 7.3, 7.4, 7.7, 7.8, 7.10, 7.15, 8.2, 8.3, 8.4, 8.5 or Article 9 (other than Section 9.9(b)) hereof and such failure shall continue for thirty (30) days (five (5) days with respect to Section 7.15) after the earlier of such eRoom Party's receipt of notice thereof or the occurrence of such event; (b) Any representation or warranty made by any of the eRoom Parties in writing to the Lender in any of the Operative Documents or in connection with the making of any Lease Financing Loan, or any certificate, statement or report made or delivered in compliance with this Agreement, shall have been false or misleading in any material respect when made or delivered; or (c) Any of the eRoom Parties shall make an assignment for the benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent, petition or apply to any tribunal for the appointment of a receiver, custodian, or any trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of seventy-five (75) days or more; or any order for relief shall be entered in any such proceeding; or any of the eRoom Parties by any act or omission shall indicate its consent to, approval of or `acquiescence in any such petition, application or proceeding or the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any custodianship, receivership or trusteeship to continue undischarged for a period of seventy-five (75) days or more; or (d) Any of the eRoom Parties shall generally not pay their debts as such debts become due or shall admit in writing their inability to pay their debts as such debts become due; or (e) Any of the eRoom Parties shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar, law; or shall have made any fraudulent transfer of its property to or for the 45 benefit of a creditor at a time when other creditors similarly situated have not been paid; or shall have suffered or permitted, while insolvent, any creditor to obtain a Lien upon any of its property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof; or (f) Any judgment against any of the eRoom Parties or any attachment, levy of execution against any of its assets or properties for any amount in excess of One Hundred Thousand Dollars ($100,000) (not covered by insurance) shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of ninety (90) days or more; or (g) This Agreement, the Master Custodial Agreement, the License' Agreement or the Purchase Agreement shall for any reason cease to be valid and binding on any of the eRoom Parties, or any of the eRoom Parties shall so state in writing. Section 10.2 RIGHTS AND REMEDIES ON EVENT OF DEFAULT. (a) If an Event of Default shall have occurred and be continuing, the Lender shall have the right (but not the obligation), itself or through any of its agents (including the Borrower), with or without notice to the Borrower (as provided below), as to any or all of the Pledged Assets, by any available judicial procedure, or without judicial process (PROVIDED, HOWEVER, that it is in compliance with the UCC), to take possession of the Pledged Assets and without liability to the eRoom Parties for trespass to enter any premises where the Pledged Assets may be located for the purpose of taking possession of or removing the Pledged Assets, and, generally, to exercise any and all rights afforded to a secured party under the UCC or other applicable law. Without limiting the generality of the foregoing, the Borrower agrees that the Lender shall have the right to sell, lease, or otherwise dispose of all or any part of the Pledged Assets, whether in its then condition or after further preparation or processing, either at public or private sale or any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such terms and conditions, all as the Lender in its sole discretion may deem advisable, and it shall have the right to purchase such Pledged Assets at any such sale; and, if any Pledged Assets shall require rebuilding, repairing, maintenance, preparation, the Lender shall have the right, at its option, to do such rebuilding or repairing for the purpose of putting the Pledged Assets in such salable or disposable form as it shall deem appropriate. At the Lender's request, the Borrower shall assemble the Pledged Assets and make them available to the Lender at places which the Lender shall select, whether at Borrower's premises or elsewhere, and make available to the Lender, without rent, all of Borrower's premises and facilities for the purpose of the Lender's taking possession of, removing or putting the Pledged Assets in saleable or disposable form. The proceeds of any such sale, lease or other disposition of the Pledged Assets shall be applied, first to the expenses of retaking, holding, storing, processing and preparing for sale, selling, lease, leasing and the like, and to the reasonable attorneys' fees and legal expenses incurred by the Lender and to the payment of any other amounts required by applicable law. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands against the Lender arising out of the repossession, removal, retention or sale or lease of the Pledged Assets. 46 (b) The Borrower authorizes the Lender and does hereby make, constitute and appoint the Lender, and any officer, employee or agent of the Lender, with full power of substitution, as Borrower's true and lawful attorney-in-fact, effective as of the date hereof, with power, in its own name or in the name of the Borrower, during the continuance of an Event of Default, to endorse any notes, checks, drafts , money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Pledged Assets that may come into possession of the Lender, to sign and endorse any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to Pledged Assets to pay or discharge taxes, Liens, security interests or other encumbrances at any time levied or placed on or threatened against the Pledged Assets; to demand, collect, issue receipt for, compromise, settle and sue for monies due in respect of the Pledged Assets: to notify Lessees and other persons obligated with respect to the Pledged Assets to make payments directly to the Lender; and, generally, to do, at the Lender's option and at Borrower's expense, at any time, or from time to time, all acts and things which the Lender deems necessary to protect, preserve and realize upon the Pledged Assets and the Lender's security interest therein to effect the intent of this Agreement all as fully and effectually as the Borrower night or could do; and the Borrower hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable as long as any of the obligations of the eRoom Parties under the Operative Documents shall be outstanding. Section 10.3 EVENTS OF ACCELERATION. If any one or more of the following events (each, an "EVENT OF ACCELERATION") shall occur and be continuing with respect to a Loan Pool, the Lender shall be relieved of its obligation to fund any future Lease Financing Loans (but shall not be relieved of any of its rights hereunder) and the Loan Pool Accelerated Amount related to each such Loan Pool shall immediately become due and payable upon written notice to that effect given to the Borrower by the Lender (except that in the case of the occurrence of any Event of Acceleration described in paragraphs (c) - (e) of this Section 10.3 no such notice shall be required), without presentment or demand for payment, notice of nonpayment, protest or further notice or demand of any kind, all of which are expressly waived by the Borrower, and the Lender may exercise any of the remedies specified in this Agreement: (a) The Collected Funds and the amounts to be withdrawn from the Loss Reserve Account and the Residual Profits Collection Account for each Loan Pool pursuant to Section 2.8(d) of this Agreement on any Disbursement Date for such Loan Pool shall be insufficient to pay the amounts specified in Section 2.8(c)(i) - (iii). (b) Failure to perform or observe any of the covenants contained in Sections 7.5, 7.6, 7.11, 7.12, 7.13, 7.14, 7.16, 8.1 or 8.5 hereof and such failure shall continue for thirty (30) days after the earlier of the Borrower's having notice thereof or the occurrence of such event; (c) Any of the eRoom Parties shall make an assignment for the benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent, petition or apply to 47 any tribunal for the appointment of a receiver, custodian, or any trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of sixty (60) days or more; or any order for relief shall be entered in any such proceeding; or any of the eRoom Parties by any act or omission shall indicate its consent to, approval of or `acquiescence in any such petition, application or proceeding or the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more; (d) Any of the eRoom Parties shall generally not pay their debts as such debts become due or shall admit in writing their inability to pay their debts as such debts become due; (e) Any of the eRoom Parties shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar, law; or shall have made any fraudulent transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or shall have suffered or permitted, while insolvent, any creditor to obtain a Lien upon any of its property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof; (f) Any Lien of the Lender against the Pledged Assets with respect to such Loan Pool shall at any time fail to be a valid, first-priority perfected Lien, subject to no prior or equal Lien other than a Permitted Lien; (g) Any of the Operative Documents relating to such Loan Pool shall for any reason cease to be valid and binding on any of the eRoom Parties or any of the eRoom Parties shall so state in writing. Section 10.4 RIGHTS AND REMEDIES ON EVENT OF ACCELERATION. (a) If an Event of Acceleration shall have occurred and be continuing, the Lender (and its successor and assigns) shall have the right, itself or through any of its agents (including the Borrower), with or without notice to the Borrower (as provided below), as to any or all of the Pledged Assets related to such Loan Pool, by any available judicial procedure, or without judicial process (PROVIDED, HOWEVER, that it is in compliance with the UCC), to take possession of the Pledged Assets related to such Loan Pool and without liability for trespass to enter any premises where the Pledged Assets related to such Loan Pool may be located for the purpose of taking possession of or removing the Pledged Assets related to such Loan Pool, and, generally, to exercise any and all rights afforded to a secured party under the UCC or other applicable law. Without 48 limiting the generality of the foregoing, the Borrower agrees that the Lender shall have the right to sell, lease, or otherwise dispose of all or any part of the Pledged Assets related to such Loan Pool, whether in its then condition or after further preparation or processing, either at public or private sale or any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such terms and conditions, all as the Lender in its sole discretion may deem advisable, and it shall have the right to purchase at any such sale; and, if any Pledged Assets related to such Loan Pool shall require rebuilding, repairing, maintenance, preparation, the Lender shall have the right, at its option, to do such rebuilding or repairing for the purpose of putting the Pledged Assets related to such Loan Pool in such salable or disposable form as it shall deem appropriate. At the Lender's request, the Borrower shall assemble the Pledged Assets related to such Loan Pool and make them available to the Lender at places which the Lender shall select, whether at Borrower's premises or elsewhere, and make available to the Lender, without rent, all of Borrower's premises and facilities for the purpose of the Lender's taking possession of, removing or putting the Pledged Assets related to such Loan Pool in saleable or disposable form. The proceeds of any such sale, lease or other disposition of the Pledged Assets related to such Loan Pool shall be applied, first to the expenses of retaking, holding, storing, processing and preparing for sale, selling, lease, leasing and the like, and to the reasonable attorneys' fees and legal expenses incurred by the Lender and to the payment of any other amounts required by applicable law. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands against the Lender arising out of the repossession, removal, retention or sale or lease of the Pledged Assets related to such Loan Pool. (b) The Borrower authorizes the Lender and does hereby make, constitute and appoint the Lender, and any officer, employee or agent of the Lender, with full power of substitution, as Borrower's true and lawful attorney-in-fact, effective as of the date hereof, with power, in its own name or in the name of the Borrower, during the continuance of an Event of Acceleration, to endorse any notes, checks, drafts , money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Pledged Assets related to such Loan Pool that may come into possession of the Lender, to sign and endorse any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to Pledged Assets related to such Loan Pool to pay or discharge taxes, Liens, security interests or other encumbrances at any time levied or placed on or threatened against the Pledged Assets related to such Loan Pool; to demand, collect, issue receipt for, compromise, settle and sue for monies due in respect of the Pledged Assets related to such Loan Pool: to notify Lessees and other persons obligated with respect to the Pledged Assets related to such Loan Pool to make payments directly to the Lender; and, generally, to do, at the Lender's option and at Borrower's expense, at any time, or from time to time, all acts and things which the Lender deems necessary to protect, preserve and realize upon the Pledged Assets related to such Loan Pool and the Lender's security interest therein to effect the intent of this Agreement all as fully and effectually as the Borrower night or could do; and the Borrower hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be 49 irrevocable as long as any of the obligations of the eRoom Parties under the Operative Documents shall be outstanding. Article 11 LIQUIDATED DAMAGES Section 11.1 LIQUIDATED DAMAGES. (a) Notwithstanding the foregoing, if any of the eRoom Parties breach any Liquidated Damages Obligation, the eRoom Parties shall pay to the Lender Liquidated Damages within sixty (60) days of the Borrower's receipt of notice of such breach, unless such breach is cured to the satisfaction of the Lender within such sixty (60) day period. (b) The eRoom Parties and the Lender expressly acknowledge and agree that it would be extremely difficult to determine the Lender's actual damages as a result of any breach of a Liquidated Damages Obligation, and that the Liquidated Damages are a fair and reasonable estimate of such actual damages in light of the magnitude of the actual or anticipated harm that will be caused to the Lender by any such breach. (c) The eRoom Parties acknowledge and agree that their obligations to pay Liquidated Damages are joint and several. (d) The Liquidated Damages shall be reduced by sixty-six and two-thirds percent (66 2/3%) if both Donnelly Prehn and William Cole are not employed on a full-time basis by the Lender (or AMRESCO Commercial Finance, Inc. or AMRESCO, INC. or their successors or assigns) on the date the related breach of a Liquidated Damages Obligation occurs, unless (1) both Derek Ellis and Steven L. Sunyich are not employed by eRoom on such date (unless eRoom replaces either Messrs. Ellis or Sunyich with a successor that holds a substantially similar position and that is acceptable to the Lender as of the date of such replacement in its reasonable and good faith judgment), and/or (2) the Lender replaces either Donnelly Prehn or William Cole with a successor that holds a substantially similar position and that is acceptable to eRoom as of the date of such replacement in its reasonable and good faith judgment, in which event, the Liquidated Damages shall not be reduced. Section 11.2 PLEDGE AND GRANT OF SECURITY INTEREST FOR LIQUIDATED DAMAGE OBLIGATION. (a) As collateral security for the prompt and complete payment and performance when due of each Liquidated Damages Obligation, and of the eRoom Parties' obligation to pay Liquidated Damages, the eRoom Parties hereby amend, modify and restate the continuing security interest in, and lien on, all of the eRoom Parties' right, title and interest in and to the Liquidated Damages Collateral which lien and security interest were granted by the eRoom Parties pursuant to the Program Agreement. Without 50 limiting the generality of the foregoing, this Agreement also secures the payment of all amounts that constitute part of the Liquidated Damages that would be owed by the eRoom Parties to the Lender, but for the fact they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any of the eRoom Parties. (b) All rights of the Lender and security interests hereunder, shall be absolute and unconditional irrespective of: (i) any change in the time, manner, amount or place of payment of, or any other term of, all or any of the Liquidated Damages Obligation or the Liquidated Damages or any other amendment or waiver of or any consent to any departure from this Agreement; (ii) any exchange, release or non-perfection of all or any part of the Liquidated Damages Collateral or any other collateral, or any release from, amendment to, waiver of, or consent to departure from any or all of the Liquidated Damage Obligation or the Liquidated Damages, or (iii) to the fullest extent permitted by law, any other circumstances which might otherwise constitute a defense available to, or a discharge of the eRoom Parties. (c) At the request of the Lender, the eRoom Parties shall execute all UCC financing statements and other documents and shall deliver items (including but not limited to stock certificates) to the Lender required to continue the perfection of the Lender's security interests granted pursuant to the Program Agreement and amended, modified and restated pursuant to this Section 11.2. ARTICLE 12 MISCELLANEOUS PROVISIONS Section 12.1 FEES AND EXPENSES. The Lender and the eRoom Parties: (i) shall equally share all legal fees and related costs incurred by the Lender in connection with the negotiation and drafting of this Agreement and the Operative Documents and (ii) shall each pay their own legal fees and related costs associated with each Lease Financing Loan. The eRoom Parties shall pay their own legal fees and related costs in connection with the negotiation and drafting of this Agreement and the Operative Documents. If it is determined in a judicial proceeding that a party to this Agreement has failed to perform under any provision of this Agreement or the Operative Documents, and if the other party shall employ attorneys or incur other expenses for the enforcement, performance or observance of the terms of this Agreement or the Operative Documents on the part of the nonperforming party, then such other party, shall be reimbursed by the nonperforming party, on demand, for reasonable attorneys' fees and other out-of-pocket expenses including any such costs and expenses incurred in any bankruptcy or insolvency proceedings or on appeal. Section 12.2 INDEMNIFICATION. (a) The eRoom Parties agree to defend, indemnify, pay and hold harmless (jointly and severally) the Lender and the officers, directors, counsel, agents and affiliates of the Lender (collectively, the "ALC INDEMNITEES") from and against any and 51 all losses, liabilities, damages and claims, whether based on any federal, state or foreign laws, statutes, rules and regulations, on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by or asserted against any ALC Indemnitee, in any manner relating to, arising out of or resulting from any of the Operative Documents, or the transactions contemplated thereby (collectively, the "ALC INDEMNIFIED LIABILITIES"); PROVIDED, HOWEVER, that none of the eRoom Parties shall have any obligation to any ALC Indemnitee hereunder with respect to ALC Indemnified Liabilities to the extent such ALC Indemnified Liabilities arise from the gross negligence or willful misconduct of that ALC Indemnitee as determined by a final judgment of a court of competent jurisdiction. To the extent that the undertaking to defend, indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the eRoom Parties shall contribute the maximum that they are permitted to pay and satisfy under applicable law to the payment and satisfaction of all ALC Indemnified Liabilities incurred by the ALC Indemnitee or any of them. (b) The Lender agrees to defend, indemnify, pay and hold harmless the eRoom Parties and the officers, directors, counsel, agents and affiliates of the eRoom Parties (collectively, the "eROOM INDEMNITEES") from and against any and all losses, liabilities, damages and claims, whether based on any federal, state or foreign laws, statutes, rules and regulations, on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by or asserted against any such eRoom Indemnitee, in any manner relating to, arising out of or resulting from the Lender's disclosure of information, or representations, regarding the Equipment or Refreshment Centers to third parties (collectively, the "eROOM INDEMNIFIED LIABILITIES"); PROVIDED, HOWEVER, that the Lender shall have no obligation to any eRoom Indemnitee hereunder with respect to Indemnified Liabilities to the extent such eRoom Indemnified Liabilities arise from the gross negligence or willful misconduct of that eRoom Indemnitee as determined by a final judgment of a court of competent jurisdiction. To the extent that the undertaking to defend, indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Lender shall contribute the maximum that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all eRoom Indemnified Liabilities incurred by the eRoom Indemnitee or any of them. Section 12.3 WAIVER OF TRIAL BY JURY. THE PARTIES, INCLUDING ANY ASSIGNEES, HEREBY WAIVE (A) THEIR RIGHT TO TRIAL BY JURY OF DISPUTES, CLAIMS OR CONTROVERSIES BETWEEN THEMSELVES ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS, INSTRUMENTS OR TRANSACTIONS RELATING TO THIS AGREEMENT, WHETHER ARISING IN CONTRACT, TORT OR OTHERWISE; AND (B) THEIR RIGHT TO ANY CONSEQUENTIAL OR PUNITIVE DAMAGES. Section 12.4 MODIFICATIONS, CONSENTS AND WAIVERS; ENTIRE AGREEMENT. No modification, amendment or waiver of or with respect to any provision of this Agreement or the other Operative Documents, nor consent to any departure by any of the eRoom Parties from any of the terms or conditions thereof, shall in any event be effective unless 52 it shall be in writing and signed by each of the eRoom Parties and the Lender. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No consent to or demand on any of the eRoom Parties in any case shall entitle any of the eRoom Parties to any other or further notice or demand in similar or other circumstances. This Agreement embodies the entire agreement and understanding between the Lender and each of the eRoom Parties relating to the subject matter hereof and supersedes all prior agreements and understandings including the Program Agreement; PROVIDED, HOWEVER, that the parties hereto agree that Article IV, "Traditional Equipment Financing" and Article III, Section 8, "Securitization Servicers" of the Program Agreement shall remain in full force and effect and shall be binding on the parties. Section 12.5 REMEDIES CUMULATIVE. Each and every right granted to the Lender hereunder or under any Operative Document or other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Lender to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. The due payment and performance of the Borrower's indebtedness, liabilities and obligations under each Lease Financing Loan and the related Note and the other documents delivered in connection therewith shall be without regard to any counterclaim, right of set-off or any other claim whatsoever which the Borrower may have against the Lender and without regard to any other obligation of any nature whatsoever which the Lender may have to the Borrower, and no such counterclaim or set-off shall be asserted by the Borrower in any action, suit or proceeding instituted by the Lender for payment or performance of the Borrower's indebtedness, liabilities or obligations under any Note or any of the other documents delivered in connection therewith, or otherwise other than that no Event of Default or Event of Acceleration has occurred under any of the Operative Documents or that the Lender has breached its obligations under any of the Operative Documents. Section 12.6 FURTHER ASSURANCES. At any time and from time to time, upon the request of the Lender, the Borrower shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Lender may reasonably request to fully effect the purposes of any of the Operative Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with any Lease Financing Loan or Securitization, subject to the confidentiality requirements set forth in Section 12.9 hereof. Section 12.7 NOTICES. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or, if by other means, when received by the other party at the address as follows: 53 (1) If to the Borrower: eRoom System SPE, Inc. 3770 Howard Hughes Parkway Suite 175 Las Vegas, Nevada 89109 Attention: Steven L. Sunyich and Gregory L. Hrncir (2) If to RSi: RoomSystems, Inc. 390 North 3050E. St. George, Utah 84790 Attention: Steven L. Sunyich and Gregory L. Hrncir (3) If to eRoom: eRoom System Technologies, Inc. 3770 Howard Hughes Parkway Suite 175 Las Vegas, Nevada 89109 Attention: Steven L. Sunyich (4) If to ALC: AMRESCO Leasing Corporation 412 E. ParkCenter Boulevard Suite 300 Boise, Idaho 83706 Attention: William C. Cole or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). Section 12.8 CONSTRUCTION; GOVERNING LAW; CONSENT TO JURISDICTION. (a) The headings used in this Agreement and the table of contents are for convenience only and shall not be deemed to constitute a part hereof. All uses herein of the masculine gender or of singular or plural terms shall be deemed to include uses of the feminine or neuter gender or plural or singular terms, as the context may require. (b) Each party acknowledges that it has had the opportunity to consult with legal counsel in the preparation and review of this Agreement. The parties therefore stipulate that the rule of construction that ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement to favor any party against the other. (c) This Agreement shall be construed in accordance with the laws of the State of Idaho, without regard to conflicts of law principles. The parties hereto 54 irrevocably (i) agree that any suit, action or other legal proceeding arising out of or relating to this Agreement may be brought in a court of record in the State of Idaho or in the courts of the United States of America located in such state, (ii) consent to the jurisdiction of each such court in any such suit, action or proceeding, and (iii) waive any objection which it may have to the laying of venue of any such suit, action or proceeding in any of such courts and any claim that any such suit, action or proceeding has been brought in an inconvenient forum. Section 12.9 CONFIDENTIALITY. The parties, without the prior written consent of the other party, will not disclose or use, and will direct their agents and representatives not to disclose or use any Confidential Information at any time or in any manner other than in connection with the parties' participation in the Program. Notwithstanding the foregoing, (a) the Lender shall be allowed to disclose Confidential Information to statistical rating agencies, investors, monoline insurers, investment bankers, equipment leasing or financing companies, conduit purchasers, warehouse credit providers, other potential sources of capital and other parties involved in a Securitization or the providing of financing to the Lender and (b) eRoom shall be allowed to disclose the general existence of the Program, the Lender's agreement to provide Lease Financing Loans and eRoom's relationship with the Lender, but eRoom shall have no authorization, without the Lender's express written consent, to disclose the structure or financial terms of the Program or any Lease Financing Loans. Upon the written request of any party to this Agreement ("REQUESTING PARTY"), the party to whom such request is directed ("RECIPIENT PARTY") will promptly return to the Requesting Party all originals and all copies of Confidential Information, and the Recipient Party will promptly destroy all written information prepared by such Recipient Party or any of its agents or representatives which contain or refer to Confidential Information. Section 12.10 SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Agreement is independent and compliance by the Borrower with any of them shall not excuse noncompliance by the Borrower with any other. The Borrower shall not take any action the effect of which shall constitute a breach or violation of any provision of this Agreement. Section 12.11 BINDING EFFECT: NO ASSIGNMENT OR DELEGATION. This Agreement shall be binding upon and inure to the benefit of the Borrower and its successors and to the benefit of the Lender and its successors and assigns. The rights and obligations of the Borrower under this Agreement, including the Borrower's right to receive Residual Profits, shall not be assigned or delegated without the prior written consent of the Lender, and any purported assignment or delegation without such consent shall be void. The Lender may sell, assign, delegate or otherwise transfer its rights and obligations under this Agreement to one or more purchasers, assignees or transferees. 55 Section 12.12 TERM OF AGREEMENT; TERMINATION. (a) The term of this Agreement (the "TERM") shall commence on the date hereof and shall continue until the Commitment Termination Date unless terminated earlier pursuant to Section 12.12(b). (b) Notwithstanding anything to the contrary herein, this Agreement shall terminate upon the earliest to occur of (x) the date on which the Lender, in its sole discretion, terminates the agreement as a result of the Borrower's failure to meet the production requirements set out in Section 7.9 or (y) at the discretion of the Lender upon the occurrence of an Event of Default or an Event of Acceleration. (c) Upon termination of the Agreement, (i) the Lender shall have no further obligation to provide Lease Financing Loans, (ii) the Lender's exclusive right to provide business lease financing shall terminate and (iii) in the event that such termination is as a result of an Event of Acceleration, the Accelerated Loan Amount of all Lease Financing Loans which have not been included in a Securitization shall immediately become due and payable. Section 12.13 NO JOINT VENTURE. This Agreement and the Program are not intended and shall not be construed as creating a partnership or joint venture for any purpose whatsoever. Section 12.14 COUNTERPARTS. This Agreement may be executed in counterparts, so that when all parties have signed this form of Agreement, such signatures taken together form one complete agreement. Section 12.15 CERTAIN REMEDIES. Without in any way limiting the remedies otherwise available under this Agreement, the parties hereto acknowledge that in the event of any breach or nonperformance by any party of the agreements or covenants required by this Agreement to be performed or observed by it, the other parties shall be entitled to such equitable remedies as may be appropriate, including without limitation specific performance. 56 Section 12.16 USURY. The amount of interest payable or paid on any Lease Financing Loan under the terms of this Agreement shall be limited to an amount which shall not exceed the maximum nonusurious rate of interest allowed by the applicable laws of the State of Idaho or any applicable law of the United States permitting a higher maximum nonusurious rate that preempts such applicable Idaho laws, which could lawfully be contracted for, charged or received. Section 12.17 SURVIVAL OF CERTAIN PROVISIONS. All agreements, representations and warranties made herein shall survive the delivery of this Agreement. In addition, the provisions of Sections 12.1, 12.2, 12.8(c) and 12.9 shall survive the termination of this Agreement. ARTICLE 13 SECURITIZATION SERVICES Section 13.1 SECURITIZATION. (a) On or prior to the date on which $25,000,000 of Lease Financing Loans have been funded hereunder, the Lender at its sole discretion may choose to engage in a Securitization. Thereafter, the Lender will use its best efforts to engage in a Securitization. (b) The eRoom Parties agree to cooperate with the Lender in effecting a Securitization (including signing any documents necessary thereto) in such format as the Lender reasonably determines will maximize the economic interests of the Lender. To such end the provisions of Article III, Section 8 "Securitization Services" of the Program Agreement are incorporated herein. (c) The Lender agrees that, without the written consent of the eRoom Parties, it will not take any action to effect a Securitization that would result in the eRoom Parties receiving less than the Residual Profits from a Loan Pool after such Residual Profits are first allocated as credit support on all other Loan Pools as provided in Section 2.8 hereof. 57 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date first above written. eROOM SYSTEM SPE, INC. By:___________________________________ Name:_________________________________ Title:________________________________ ROOMSYSTEMS, INC. By:___________________________________ Name:_________________________________ Title:________________________________ eROOM SYSTEM TECHNOLOGIES, INC. By:___________________________________ Name:_________________________________ Title:________________________________ AMRESCO LEASING CORPORATION, as Lender By:___________________________________ Name:_________________________________ Title:________________________________ ACKNOWLEDGED: STEVEN L. SUNYICH _________________________ 58 SCHEDULE I DETERMINATION OF REFRESHMENT CENTER LOAN AMOUNT With respect to each Refreshment Center, the Borrower in the related Borrowing Notice shall indicate whether it is requesting a Lease Financing Loan under the Threshold Plan, the Percentage Plan or the Platinum Plan (and, if the Platinum Plan is selected, the type of Platinum Plan) A. THRESHOLD PLAN. The "REFRESHMENT CENTER LOAN AMOUNT" for each Refreshment Center financed under the Threshold Plan is equal to the lesser of (i) the product obtained by multiplying (A) ***, (B) Net Borrower Revenue, and (C) *** and (ii) *** times the Actual Cost of Goods Sold for such Refreshment Center; provided that the Lender may in its sole discretion, adjust the Refreshment Center Loan Amount to (A) be equal to the Actual Costs of Goods Sold even if such amount is greater than the amount set out in clause (i) above or (B) be determined by clause (i) above even if such clause (i) is greater than clause (ii) above. "NET BORROWER REVENUE" with respect to a Business Lease is determined by the Lender in its sole discretion as either (i) the Average Daily eRoom Threshold Plan Revenue during the Seasoning Period less ***, or (ii) the highest Average Daily eRoom Threshold Plan Revenue during any calendar month period during the Seasoning Period less ***. "AVERAGE DAILY eROOM THRESHOLD PLAN REVENUE" shall mean the average revenue received by eRoom (or Borrower) per Refreshment Center per day using either (i) if the Lease Financing Loan satisfies requirement number 3 of the Business Specific Underwriting Requirements of the Guidelines, the Threshold Calculation, or (ii) if the Lease Financing Loan does not satisfy requirement number 3 of the Business Specific Underwriting Requirements of the Guidelines (or if Lender does not receive information adequate to determine if requirement number 3 has been satisfied), but Lender elects to fund such Lease Financing Loan, either the Recalculated Threshold Calculation or the Threshold Calculation, as determined in Lender's sole and absolute discretion. "THRESHOLD CALCULATION" shall mean a calculation of the revenue due eRoom (or Borrower) from the Lessee under the applicable Threshold Plan, as shown by way of example in Step 1 of Exhibit P. "RECALCULATED THRESHOLD CALCULATION" shall mean a calculation of the revenue due eRoom (or Borrower) from the Lessee under the applicable Threshold Plan, assuming for such calculation, that the related Lessee's occupancy during the Seasoning Period was equal to the Lessee's average occupancy for the previous *** months (or since the opening of the related hotel or timeshare property if less than *** months), as shown by way of example in Step 2 of Exhibit P. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION I-1 B. PERCENTAGE PLAN. The "REFRESHMENT CENTER LOAN AMOUNT" for each Refreshment Center financed under the Percentage Plan is equal to the lesser of (i) the product obtained by multiplying (A) ***, (B) Net Borrower Percentage Plan Revenue, and (C) *** and (ii) *** times the Actual Cost of Goods Sold for such Refreshment Center; provided that the Lender may in its sole discretion, adjust the Refreshment Center Loan Amount to (A) be equal to the Actual Costs of Goods Sold even if such amount is greater than the amount set out in clause (i) above or (B) be determined by clause (i) above even if such clause (i) is greater than clause (ii) above. "NET BORROWER PERCENTAGE PLAN REVENUE" with respect to a Business Lease is determined by the Lender in its sole discretion as either (i) the Average Daily eRoom Percentage Plan Revenue during the Seasoning Period less ***, or (ii) the highest Average Daily eRoom Percentage Plan Revenue during any calendar month period during the Seasoning Period less ***. "AVERAGE DAILY eROOM PERCENTAGE PLAN REVENUE" shall mean the average revenue received by eRoom (or Borrower) per Refreshment Center per day using either: (i) if the Lease Financing Loan satisfies requirement number 3 of the Business Specific Underwriting Requirements of the Guidelines, either (as determined by Lender in its sole and absolute discretion), (A) the Percentage Calculation, or (B) if the Lessee's average occupancy for the previous *** months (or since the opening of the related hotel or time-share property if less than *** months) is more than *** occupancy, the Recalculated Percentage Calculation, assuming for purposes of such Recalculated Percentage Calculation, that the Lessee's average occupancy for the previous *** months (or since the opening of the related hotel or time-share property if less than *** months) equals *** occupancy, or (ii) if the Lease Financing Loan does not satisfy requirement number 3 of the Business Specific Underwriting Requirements of the Guidelines (or if Lender does not receive information adequate to determine if requirement number 3 has been satisfied), but Lender elects to fund such Lease Financing Loan, either the Recalculated Percentage Calculation or the Percentage Calculation, as determined in Lender's sole and absolute discretion. "PERCENTAGE CALCULATION" shall mean a calculation of the revenue due eRoom (or Borrower) from the Lessee under the applicable Percentage Plan, as shown by way of example in Step 1 of Exhibit Q. "RECALCULATED PERCENTAGE CALCULATION" shall mean a calculation of the revenue due eRoom (or Borrower) from the Lessee under the applicable Percentage Plan, assuming for such calculation, that the related Lessee's occupancy during the Seasoning Period was equal to the Lessee's average occupancy for the previous *** months (or since the opening of the related hotel or timeshare property if less than *** months), as shown by way of example in Step 2 of Exhibit Q, and subject to the minimum conditions described in Section 7.11 of the Agreement for any such Percentage Plan. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION I-2 C. PLATINUM PLANS. The "REFRESHMENT CENTER LOAN AMOUNT" for each Refreshment Center financed under the Platinum Plan is calculated using the same methodology used to calculate the "Refreshment Center Loan Amount" described in Section A of this Schedule I under the Threshold Plan, except that the Average Daily eRoom Platinum Plan Revenue (defined below) shall be substituted for the "Average Daily eRoom Threshold Plan Revenue". The "AVERAGE DAILY eROOM PLATINUM PLAN REVENUE" shall mean the amount calculated using either Option 1, Option 2 or Option 3 below, as applicable: Option 1: If the Lessee has a Fixed Charge Coverage Ratio of at least 1.4:1 and occupancy of *** for the previous *** month period, the "Average Daily eRoom Platinum Plan Revenue" shall be equal to the average revenue received by eRoom (or Borrower) per Refreshment Center per day using the Platinum Calculation. Option 2: If the Lessee has a Fixed Charge Coverage Ratio between *** and *** and occupancy of at least *** for the previous *** month period, the "Average Daily eRoom Platinum Plan Revenue" shall be equal to the average revenue received by eRoom (or Borrower) per Refreshment Center per day using the Platinum Calculation. Notwithstanding the foregoing, Lender may, in its sole and absolute discretion, and at any time limit all such Lease Financing Loans funded under this Option 2 to no more than *** of the then current Overall Lease Financing Loans. Option 3: In all other cases (including cases in which Lender does not receive information adequate to determine the Lessee's Fixed Charge Coverage Ratio), the "Average Daily eRoom Platinum Plan Revenue" shall be equal to the Average Daily eRoom Threshold Plan Revenue (described in Section A of this Schedule I) under the theoretical assumption that the Lessee to such Platinum Plan Business Lease had selected a Threshold Plan instead of a Platinum Plan; provided however, that the Average Daily eRoom Platinum Plan Revenue calculated pursuant to Option 3 shall not exceed the amount calculated in Option 1 above, assuming that the Lessee had qualified for Option 1 above. "PLATINUM CALCULATION" shall mean a calculation of the revenue due eRoom (or Borrower) from the Lessee under the applicable Platinum Plan, as shown by way of example in Exhibit R. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION I-3 EXHIBIT A GUIDELINES GENERAL UNDERWRITING GUIDELINES The Borrower shall certify that: 1. At all times during the Term of the Agreement, the Business Leases related to all Lease Financing Loans funded under the Program must have average revenues to the Borrower (after giving effect to the revenue sharing allocations under the related Business Leases) per installed Refreshment Center of at least once cent ($.01) per day for each *** advanced by the Lender as Lease Financing Loans under the Program. 2. There is no existing default on any indebtedness or equity obligations of any of the eRoom Parties. 3. The eRoom Parties must have and must have maintained at all times during the term of the Agreement, a Net Worth of at least $2 million at all times (determined on quarterly basis). 4. During the Term of the Agreement, no more than 20% of the Business Leases related to any Lease Financing Loan (determined by reference to the total units of Refreshment Centers subject to such Business Leases) are or have been more than 90 days delinquent in the payment of rents or other obligations thereunder. 5. During the Term of the Agreement, the eRoom Parties must maintain working capital of at least $250,000 (determined quarterly). 6. During the Term of this Agreement, the eRoom Parties must maintain a liabilities to net worth ratio of no more than 3.0:1 (determined on a quarterly basis. BUSINESS SPECIFIC UNDERWRITING REQUIREMENTS 1. The Borrower must submit a full credit package relating to the proposed Lease Financing Loan (the "TRANSACTION SUBMISSION PACKAGE") including: a. Deal summary; b. Copies of all required UCC- 1 financing statements; c. Verification of business' first three months payments (including dates received); CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION A-1 d. Last two years' plus interim-financial statements of business, if applicable; e. Last two years' income tax returns of business, if applicable; f. Business Lease and all supporting documentation; g. Estoppel certificate signed by business/lessee; h. ACH authorization forms (unless declined by business); i. Bill of Sale for Equipment from eRoom to the Borrower; j. License for Equipment Intellectual Property to the Borrower and RSi; k. Last one (1) year's occupany rates for the business; l. Last one (1) year's average daily room rate for the business; m. Last one (1) year's average daily room rate for properties comparable to the business; n. The Average Gross Revenue during the Seasoning Period; and o. Evidence that such business has been in operation for at least one year. 2. In addition, the Borrower must certify that: a. The Lessee is not an Underperforming Property. b. Neither of the first two full rental payments under the related Business Lease have been more than 15 days late. 1. The Lessee (a) if a hotel, either has (i) a Fixed Charge Coverage Ratio of at least 1.40:1 and 50% occupancy or (ii) a Fixed Charge Coverage Ratio of 1.00:1 and either: (A) 65% occupancy and 100% of average daily room rate for comparable properties, or (B) 75% occupancy and 85% of average daily room rate for comparable properties; or (b) if a commercial business other than a hotel, has a Fixed Charge Coverage Ratio of at least 1.30:1; provided however, if the Business Lease related to the Lease Financing Loan is a Platinum Plan and the related Lease Financing Loan qualifies for a Refreshment Center Loan Amount under Option 2 of Section C to Schedule I to this Agreement, the Lessee need not satisfy the requirements of sections (a) or (b) herein. A-2 EXHIBIT B FORM OF LEASE FINANCING NOTE Lease Financing Loan No. _______ US $______________ ___________, ____ FOR VALUE RECEIVED, the undersigned (the "BORROWER") promises to pay to the order of AMRESCO Leasing Corporation, a Nevada corporation (together with its successors and assigns, the "LENDER"), the principal sum of _____________________ and __/___ Dollars (US $_______), with interest thereon, to be computed from the date of this Note at the Applicable Interest Rate (defined in Paragraph 3 below). This Lease Financing Note is executed and delivered by the Borrower pursuant to that certain Master Business Lease Financing Agreement, dated May 11, 2000 (as amended from time to time, the "AGREEMENT"), by and among the Borrower, the Lender, RoomSystems, Inc. and eRoom System Technologies, Inc. to evidence the obligation of the Borrower to repay the Lease Financing Loan made by the Lender to the Borrower in accordance with the terms of the Agreement. This Lease Financing Note is entitled to the benefit and security of the Agreement and the other Operative Documents, to which reference is hereby made for a statement of all of the terms and conditions under which the Lease Financing Loan evidenced hereby is made. The Agreement requires certain of the terms of the Lease Financing Loan to be evidenced by a Borrowing Notice and Transaction Approval, and reference is hereby made to the related Borrowing Notice and Transaction Approval for such terms. 1. DEFINED TERMS. As used in this Note, the term "INDEBTEDNESS" means the principal of, interest on, or any other amounts due at any time under, this Lease Financing Note, the Operative Documents or any other document delivered in connection with the Lease Financing Loan, including the Prepayment Amount; provided that such amounts are related to the Lease Financing Loan. Event of Default, Event of Acceleration and other capitalized terms used but not defined in this Lease Financing Note shall have the meanings given to such terms in the Agreement (or, if not defined in the Agreement, as defined in the other Operative Documents). 2. ADDRESS FOR PAYMENT. All payments due under this Note shall be payable at 412 E. ParkCenter Blvd., Suite 300, Boise, Idaho 83706, or such other place as may be designated by written notice to the Borrower from or on behalf of the Lender. 3. PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be paid as follows: (a) This Lease Financing Note shall evidence a Lease Financing Loan made under the Agreement. The Lease Financing Loan shall bear interest at a rate (the "APPLICABLE INTEREST RATE") equal to __________ percent (____%) per annum; PROVIDED, HOWEVER, that if a "NON-PRODUCTION EVENT" occurs, the Applicable Interest Rate will automatically and retroactively be increased to the sum of 7-Year Treasury B-1 (determined as of the date of the Lease Financing Loan evidenced hereby) plus 12.50%. Interest under this Lease Financing Note shall be computed on the basis of a year of 360 days. The term "NON-PRODUCTION EVENT" shall mean the failure of the Borrower to satisfy the Business Lease and Cumulative Lease Financing Loan production requirements set forth in Section 7.9 of the Agreement. The term "7-YEAR TREASURY" shall mean the yield to maturity for the United States Treasury bond equal to seven (7) years (as determined by the Lender) as set forth in THE WALL STREET JOURNAL as of the Business Day immediately preceding the date of funding of this Lease Financing Loan. (b) Consecutive monthly installments of principal and interest, each in the amount of _____________________ and __/___ Dollars (US $_______), shall be payable on the first (1st) day of each month (or, if such day is not a Business Day, the next succeeding Business Day), in arrears, beginning on ________________ (as provided in the Agreement), until the entire unpaid principal balance evidenced by this Lease Financing Note is fully paid; provided that notwithstanding anything to the contrary herein the initial monthly installment due hereunder shall be due on the date of this Lease Financing Note and shall be deducted by the Lender from the Loan Amount hereof. Any accrued interest remaining past due for 30 days or more shall be added to and become part of the unpaid principal balance and shall bear interest at the rate or rates specified in this Lease Financing Note, and any reference below to "accrued interest" shall refer to accrued interest which has not become part of the unpaid principal balance. Any remaining principal and interest shall be due and payable on _______________ or on any earlier date on which the unpaid principal balance of this Lease Financing Note becomes due and payable, by acceleration or otherwise (the "MATURITY DATE"). The unpaid principal balance shall continue to bear interest after the Maturity Date at the Default Rate set forth in this Lease Financing Note, until and including the date on which it is paid in full. (c) Any regularly scheduled monthly installment of principal and interest that is received by the Lender before the date it is due shall be deemed to have been received on the due date. 4. APPLICATION OF PAYMENTS. If at any time the Lender receives, from the Borrower or otherwise, any amount applicable to the Indebtedness that is less than all amounts due and payable at such time, the Lender may apply that payment to amounts then due and payable in any manner and in any order determined by the Lender, in the Lender's discretion. The Borrower agrees that neither the Lender's acceptance of a payment from the Borrower in an amount that is less than all amounts then due and payable nor the Lender's application of such payment shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. 5. SECURITY. The Indebtedness is secured, among other things, by the Pledged Assets described in the Agreement, and reference is made to the Agreement and B-2 the other Operative Documents for other rights of the Lender concerning the collateral for the Indebtedness. 6. ACCELERATION. If an Event of Acceleration has occurred and is continuing, the entire unpaid principal balance, any accrued interest, the Prepayment Amount and all other amounts payable under this Lease Financing Note and the Agreement with respect to the related Lease Financing Loan shall at once become due and payable, at the option of the Lender, without any prior notice to the Borrower. The Lender may exercise this option to accelerate regardless of any prior forbearance. 7. LATE CHARGE. If any monthly amount payable under this Lease Financing Note or under the Agreement is not received by the Lender within 15 days after the amount is due, the Borrower shall pay to the Lender, immediately and without demand by the Lender, a late charge equal to five percent (5%) of such amount. The Borrower acknowledges that its failure to make timely payments will cause the Lender to incur additional expenses in connection with the related Lease Financing Loan, and that it is extremely difficult and impractical to determine those additional expenses. The Borrower agrees that the late charge payable pursuant to this Paragraph represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Lease Financing Note, of the additional expenses the Lender will incur by reason of such late payment. The late charge is payable in addition to, and not in lieu of, any interest payable at the Default Rate pursuant to Paragraph 8. 8. DEFAULT RATE. So long as any monthly installment or any other payment due under this Lease Financing Note remains past due for 30 days or more, interest under this Lease Financing Note shall accrue on the unpaid principal balance from the earlier of the due date of the first unpaid monthly installment or other payment due, as applicable, at a rate (the "DEFAULT RATE") equal to the lesser of three (3) percentage points above the Applicable Interest Rate or the maximum interest rate which may be collected from the Borrower under applicable law. If the unpaid principal balance and all accrued interest are not paid in full on the Maturity Date, the unpaid principal balance and all accrued interest shall bear interest from the Maturity Date at the Default Rate. The Borrower also acknowledges that its failure to make timely payments will cause the Lender to incur additional expenses in connection with the related Loan, that, during the time that any monthly installment or payment under this Lease Financing Note is delinquent for more than 30 days, the Lender will incur additional costs and expenses arising from its loss of the use of the money due and from the adverse impact on the Lender's ability to meet its other obligations and to take advantage of other investment opportunities, and that it is extremely difficult and impractical to determine those additional costs and expenses. The Borrower also acknowledges that, during the time that any monthly installment or other payment due under this Lease Financing Note is delinquent for more than 30 days, the Lender's risk of nonpayment of this Note will be materially increased and the Lender is entitled to be compensated for such increased risk. The Borrower agrees that the increase in the rate of interest payable under this Lease Financing Note to the Default Rate represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Lease Financing Note, of the additional costs and expenses the Lender will incur by reason of the Borrower's delinquent payment and the additional B-3 compensation the Lender is entitled to receive for the increased risks of nonpayment associated with a delinquent loan. 9. VOLUNTARY AND INVOLUNTARY PREPAYMENTS. The Lease Financing Loan may be prepaid in whole but not in part. In the event of prepayment, the Borrower shall pay the related Prepayment Amount. The Prepayment Amount is due and payable regardless of whether the prepayment by the Borrower is made voluntarily or involuntarily, including any prepayment required by the Lender's exercise of its rights upon the occurrence of an Event of Default or an Event of Acceleration. In the event the Borrower elects to prepay the related Lease Financing Loan, the Borrower shall, at the dates and times specified therein, deliver written notice to the Lender in accordance with Section 2.11(a) of the Agreement. 10. COSTS AND EXPENSES. The Borrower shall pay on demand all expenses and costs, including fees and out-of-pocket expenses of attorneys and expert witnesses and costs of investigation, incurred by the Lender as a result of any default under this Lease Financing Note or in connection with efforts to collect any amount due under this Lease Financing Note, or to enforce the provisions of the Agreement, including those incurred in post-judgment collection efforts, in any appeal, and in any bankruptcy proceeding (including any action for relief from the automatic stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure proceeding. 11. FORBEARANCE. Any forbearance by the Lender in exercising any right or remedy under this Lease Financing Note or the Agreement or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of that or any other right or remedy. The acceptance by the Lender of any payment after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of the Lender's right to require prompt payment when due of all other payments or to exercise any right or remedy with respect to any failure to make prompt payment. Enforcement by the Lender of any security for the Borrower's obligations under this Lease Financing Note shall not constitute an election by the Lender of remedies so as to preclude the exercise of any other right or remedy available to the Lender. 12. WAIVERS. Presentment, demand, notice of dishonor, protest, notice of acceleration, notice of intent to demand or accelerate payment or maturity, presentment for payment, notice of nonpayment, grace, and diligence in collecting the Indebtedness are waived by the Borrower and all endorsers and guarantors of this Lease Financing Note and all other third party obligors. 13. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from the Borrower in connection with the Lease Financing Loan is interpreted so that any interest or other charge provided for in the Agreement, whether considered separately or together with other charges provided for in the Agreement, violates that law, and the Borrower is entitled to the benefit of that law, that interest or charge is hereby reduced to the extent necessary to eliminate that violation. The Borrower agrees to an effective rate of interest that is the stated rate of interest plus any additional rate of interest resulting from any other charges or fees that B-4 are to be paid by the Borrower to the Lender that may be found by a court of competent jurisdiction to be interest. The amounts, if any, previously paid to the Lender in excess of the permitted amounts shall be applied by the Lender to reduce the unpaid principal balance of this Lease Financing Note. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from the Borrower has been violated, all Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of the Lease Financing Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Lease Financing Note. 14. COMMERCIAL PURPOSE. The Borrower represents that the Indebtedness is being incurred by the Borrower solely for lawful business or commercial purposes. 15. COUNTING OF DAYS. Except where otherwise specifically provided, any reference in this Lease Financing Note to a period of "days" means calendar days, not Business Days. 16. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. The provisions of Sections 12.3 and 12.8 of the Agreement are hereby incorporated into this Lease Financing Note by this reference to the fullest extent as if the text of such Sections were set forth in their entirety herein. 17. CAPTIONS. The captions of the paragraphs of this Lease Financing Note are for convenience only and shall be disregarded in construing this Lease Financing Note. 18. NOTICES. All notices, demands and other communications required or permitted to be given by the Lender to the Borrower pursuant to this Lease Financing Note shall be given in accordance with Section 12.7 of the Agreement. 19. INDIVIDUAL LEASE FINANCING LOAN. This Lease Financing Note is issued as part of the business lease financing arrangement between the Lender and the Borrower, as described in the Agreement. The Borrower may not re-borrow any amounts under this Lease Financing Note that it has previously borrowed and repaid under this Lease Financing Note. 20. AUTHORITY. The Borrower (and the undersigned representative of the Borrower) represents that the Borrower has full power, authority and legal right to execute and deliver this Lease Financing Note, and that this Lease Financing Note constitutes the valid and binding obligation of the Borrower. 21. CONSOLIDATION; AMENDMENT. The Lender, in its sole discretion, may at any time, amend, restate and consolidate this Lease Financing Note with other Lease Financing Notes relating to Lease Financing Loans in the same Loan Pool into a Credit Enhancement Note. The Borrower hereby agrees that it shall cooperate with the Lender B-5 in the process of consolidating this Lease Financing Note and shall execute any and all documents required by the Lender in connection therewith. 22. FULL RECOURSE. Notwithstanding anything to the contrary herein or in the Agreement, the obligations of the Borrower hereunder are full recourse obligations enforceable against the Borrower to the maximum extent allowable under the law. B-6 IN WITNESS WHEREOF, the Borrower has signed and delivered this Lease Financing Note under seal or has caused this Lease Financing Note to be signed and delivered under seal by its duly authorized representative. The Borrower intends that this Lease Financing Note shall be deemed to be signed and delivered as a sealed instrument. eROOM SYSTEM SPE, INC. By:________________________________ Name:______________________________ Title:_____________________________ B-7 EXHIBIT C FORM OF CREDIT ENHANCEMENT NOTE $ --------------- PURSUANT to the Master Business Lease Financing Agreement (the "AGREEMENT") dated as of May 11, 2000 among eRoom System SPE, Inc., a Nevada corporation, having an office at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109 (the "BORROWER"), RoomSystems Inc., a Nevada corporation, having an office at 390 North 3050 E., St. George, Utah 85790 ("RSi"), eRoom System Technologies, Inc., a Nevada corporation having an office at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109 ("eROOM"; and collectively, with the Borrower and RSi, the "eROOM PARTIES") and AMRESCO Leasing Corporation, 412 E. ParkCenter Blvd., Suite 300, Boise, Idaho 83767 (the "LENDER"), the eRoom Parties and the Lender agreed that the Lender, in its sole discretion, may amend, restate and consolidate all of the Lease Financing Notes relating to the Lease Financing Loans in a Loan Pool into a Credit Enhancement Note. WHEREAS, it is the intent of the Lender and the Borrower to amend, restate and consolidate those Lease Financing Notes relating to the Lease Financing Loans for Loan Pool No. _____ described in Schedule I hereto into this single Credit Enhancement Note; FOR VALUE RECEIVED, the Borrower hereby promises to pay to the order of the Lender, the principal sum of ______________________________ Dollars and __ Cents ($ ____________) (the "AGGREGATE LOAN AMOUNT") and an amount of up to ________________________________ Dollars and __ Cents ($_________) (the "AGGREGATE CREDIT ENHANCEMENT AMOUNT"), and all other amounts owed under the Operative Documents related to Loan Pool No. _____, together with all interest accrued thereon, at the times and place and in the manner specified in the Operative Documents. This Credit Enhancement Note is one of a series of notes (the "PROGRAM NOTES") issued by certain business owners or landlords of commercial properties (the "PROGRAM BORROWERS") in connection with Program Loans made or to be made by the Lender to the Program Borrowers as part of the [_________] Program. This Credit Enhancement Note evidences the Borrower's obligation, INTER ALIA, (i) to repay the Lease Financing Loans set forth on Schedule I attached hereto and made a part hereof (each such loan, a "CONSOLIDATED LOAN" and collectively, the "CONSOLIDATED LOANS") made by the Lender to the Borrower in an aggregate principal amount equal to the Aggregate Loan Amount, (ii) to guarantee the payment of delinquencies or defaults in respect of Program Loans or any obligations in connection therewith, as determined in Lender's sole discretion ("PROGRAM LOAN DEFICIENCIES"; each such delinquent or defaulted Program Loan or related obligation, a "DELINQUENT PROGRAM LOAN") in an amount up to the Aggregate Credit Enhancement Amount, (iii) to pay, subject to rebate, the Scheduled Monthly Credit Enhancement Obligation Payment, (iv) to pay interest on the Aggregate Loan Amount, and (v) to pay all Indebtedness. For purposes of this paragraph, a "delinquent" Program Loan is defined as a C-1 Program Loan where the loan payments are past due by one or more days. Moreover, a "defaulted" Program Loan is defined as a Program Loan where an event of default has occurred and remains uncured under the loan documents for such Program Loan. 1. DEFINITIONS. Terms defined in the Agreement which are not otherwise defined herein shall have the meanings ascribed to such terms in the Agreement. Terms defined herein and also defined in the Agreement shall have the meanings defined herein with respect to the Consolidated Loans. The following terms shall have the meanings set forth on Schedule II attached hereto and made a part hereof: [__________] Program, Applicable Interest Rate, Consolidation Payment, Credit Enhancement Amount, Indebtedness, Loan Amount, Loan Deficiency, Note Amount, Ratable Share, Scheduled Monthly Loan Payment, State and Stated Maturity Date. All terms defined in the singular will have the same meaning when used in the plural and vice versa. 2. INTEREST. This Credit Enhancement Note shall evidence the Consolidated Loans made under the Agreement. The Borrower agrees to pay interest on the outstanding Note Amount at the Applicable Interest Rate from the Consolidation Date (defined below) until the Consolidated Loans have been discharged or otherwise paid in full in accordance with the terms hereof. Interest shall be payable in one (1) month installments on each Payment Date and, unless otherwise expressly stated, in arrears (as provided in the Agreement). Interest on the Aggregate Loan Amount shall be paid as part of the Scheduled Monthly Loan Payment, and interest on the outstanding Aggregate Credit Enhancement Amount shall be paid, subject to rebate, as the Scheduled Monthly Credit Enhancement Obligation Payment. All computations of interest shall be made by the Lender on the basis of a year of 360 days and shall be allocated in twelve (12) equal monthly installments. Notwithstanding the foregoing paragraph, upon the occurrence and during the continuation of an Event of Default, the Borrower shall instead pay interest on the outstanding Note Amount at a rate (the "DEFAULT RATE") per annum equal to the Applicable Interest Rate PLUS three percent (3.00%), payable upon demand by the Lender. All obligations hereunder which are not paid by the Borrower when due and payable shall bear interest at the Default Rate. 3. GUARANTEE. As more fully specified herein, the Borrower hereby irrevocably and unconditionally guarantees and promises to pay to the Lender (the "GUARANTEE") an amount up to the Aggregate Credit Enhancement Amount PLUS the aggregate Scheduled Monthly Credit Enhancement Obligation Payments for the payment of Program Loan Deficiencies. 4. REQUIRED PAYMENTS AND REBATES. (a) CONSOLIDATION PAYMENT. On the date hereof (the "CONSOLIDATION DATE"), the Borrower shall pay the Lender the Scheduled Monthly Credit Enhancement Obligation Payment for each Consolidated Loan. (b) SCHEDULED MONTHLY LOAN PAYMENTS. The Borrower agrees to pay the Lender an amount equal to the Scheduled Monthly Loan Payment for each Consolidated Loan C-2 on each Payment Date until the earliest of (A) the acceleration or prepayment of such Consolidated Loan (SUBJECT TO THE FULFILLMENT OF PREPAYMENT AMOUNTS UNDER SECTION 5), (B) the applicable Loan Amount Repayment Date (as defined in Section 4(e), below) or (C) the applicable Stated Maturity Date. The Scheduled Monthly Loan Payment for each Consolidated Loan equals (1) the monthly installment amount which will fully amortize the Loan Amount and the Credit Enhancement Amount of such Consolidated Loan (including the applicable interest on such amounts) over the period from the next calendar month following the Consolidation Date (the "INITIAL PAYMENT DATE") through the applicable Stated Maturity Date LESS (2) the Scheduled Monthly Credit Enhancement Obligation Payment for such Consolidated Loan. (c) SCHEDULED MONTHLY CREDIT ENHANCEMENT OBLIGATION PAYMENTS. The Borrower agrees to pay the Lender an amount equal to the Scheduled Monthly Credit Enhancement Obligation Payment for each Consolidated Loan (i) on the Consolidation Date (as part of the Consolidation Payment) and (ii) on each Payment Date, commencing on the Initial Payment Date, until the earliest of (A) the discharge, acceleration or prepayment of such Consolidated Loan (SUBJECT TO THE FULFILLMENT OF PREPAYMENT AMOUNTS UNDER SECTION 5), (B) payment in full of the applicable Credit Enhancement Amount or (C) the applicable Stated Maturity Date. Each Scheduled Monthly Credit Enhancement Obligation Payment shall be subject to the Monthly Enhancement Rebate provided for in Section 4(d), below. (d) MONTHLY ENHANCEMENT REBATES. (i) If, on any Payment Date, there are no outstanding Program LoanDeficiencies, the Borrower shall be entitled to a rebate on each Consolidated Loan (a "MONTHLY ENHANCEMENT REBATE") in an amount equal to the Scheduled Monthly Credit Enhancement Obligation Payment for such Consolidated Loan PLUS the Borrower's pro rata portion of recoveries of Program Loan Deficiencies with respect to previously paid Scheduled Monthly Credit Enhancement Obligation Payments which have not been previously rebated. On the Initial Payment Date, if there are no outstanding Program Loan Deficiencies, the Borrower shall also be entitled to a rebate of the Scheduled Monthly Credit Enhancement Obligation Payments paid pursuant to Section 4(a). (ii) If, on any Payment Date, there are outstanding Program Loan Deficiencies, the amount of each Monthly Enhancement Rebate will be reduced, in whole or in part, by an amount which would equal the Borrower's PRO RATA portion of such Program Loan Deficiency or Deficiencies MULTIPLIED by the applicable Ratable Share, PROVIDED, HOWEVER, that in no event shall the Monthly Enhancement Rebate be reduced by more than the Scheduled Monthly Credit Enhancement Obligation Payment. For the purposes of this subsection (ii), the Borrower's PRO RATA portion of any Program Loan Deficiency shall be calculated by (A) dividing the Borrower's aggregate Scheduled Monthly Credit Enhancement Obligation Payments by the aggregate Scheduled Monthly Credit Enhancement Obligation Payments of all non-delinquent Program Loans and (B) multiplying such amount by the Program Loan Deficiency or Deficiencies. C-3 (iii) Any payment (excluding prepayments) made under this Credit Enhancement Note which is less than (A) the aggregate of (1) the Scheduled Monthly Loan Payment on each Consolidated Loan and (2) the Scheduled Monthly Credit Enhancement Obligation Payment on each Consolidated Loan, MINUS (B) the allocated Monthly Enhancement Rebate, if any, shall be applied ratably among the Consolidated Loans, in accordance with their respective Ratable Shares (see Schedule I), creating a Loan Deficiency on each of the Borrower's Consolidated Loans. If the Borrower's Consolidated Loans are subject to any Loan Deficiency, the Borrower will not be entitled to any Monthly Enhancement Rebate on any Consolidated Loan. (iv) Each Monthly Enhancement Rebate, if any, will be credited against the payment of the Scheduled Monthly Credit Enhancement Obligation Payment for the applicable Consolidated Loan due on the immediately succeeding Payment Date. (e) DISCHARGE; REPAYMENT OF THE CREDIT ENHANCEMENT AMOUNT. (i) At any time after the Loan Amount of any Consolidated Loan has been paid in full by the Borrower pursuant to Section 4(b), above (the "LOAN AMOUNT REPAYMENT DATE"), the Borrower may elect to have such Consolidated Loan discharged by making a payment in an amount (the "DISCHARGE AMOUNT") equal to the lesser of (A) the outstanding Credit Enhancement Amount of such Consolidated Loan and (B) the Program Credit Enhancement Amount, if any, as of such date. (ii) In the event that the Borrower does not elect to discharge any Consolidated Loan in accordance with paragraph (i), above, on the applicable Loan Amount Repayment Date, the Borrower shall instead repay the outstanding Credit Enhancement Amount of such Consolidated Loan in monthly installments (each such installment to be in an amount equal to the Scheduled Monthly Loan Payment for such Consolidated Loan) on each Payment Date, commencing on the first Payment Date following the Loan Amount Repayment Date, until the earliest of (A) payment in full of the outstanding Credit Enhancement Amount, (B) the discharge or acceleration of such Consolidated Loan (IN ACCORDANCE WITH SECTION 4 AND 5) or (C) the applicable Stated Maturity Date. (iii) Upon payment of the Loan Amount and either (A) the Discharge Amount of any Consolidated Loan or (B) the amount described in Section 4(e)(ii), such Consolidated Loan and the Borrower's obligations hereunder relating to such Consolidated Loan shall be terminated. (f) STATED MATURITY DATE. Unless earlier repaid, prepaid or accelerated hereunder, the outstanding Loan Amount of each Consolidated Loan and all accrued and unpaid interest thereon, the outstanding Credit Enhancement Amount of such Consolidated Loan and all accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments shall be due and payable in full on the applicable Stated Maturity Date. 5. PREPAYMENTS. C-4 (a) PROCEDURES. Each Consolidated Loan is subject to prepayment in whole, but not in part. In the event of prepayment, Borrower shall pay the Prepayment Amount as such term is defined below. The Prepayment Amount is due and payable regardless of whether the prepayment by Borrower is made voluntarily or involuntarily, including any prepayment required by the holder's exercise of its rights of acceleration upon the occurrence of an Event of Acceleration. In the event that the Borrower ELECTS to prepay any Consolidated Loan, the Borrower shall deliver written notice (the "PREPAYMENT NOTICE") of such prepayment election to the Lender not less than thirty (30) days nor more than sixty (60) days from the proposed prepayment date (such date or the date of Lender's exercise of its rights of acceleration upon the occurrence of an Event of Acceleration, the "PREPAYMENT DATE"). Within twenty (20) days of the Lender's receipt of such Prepayment Notice, the Lender shall deliver a written notice to the Borrower setting forth the estimated total amount of the Prepayment Amount (as defined below) payable on the proposed Prepayment Date, which amount shall be subject to adjustment for Delinquent Program Loans and changes in the Reinvestment Rate. (b) PREPAYMENT AMOUNT. On the Prepayment Date, the Borrower shall pay the Lender an amount, with respect to the Consolidated Loan to be prepaid (the "PREPAYMENT AMOUNT"), equal to the sum of (i) the outstanding Loan Amount of such Consolidated Loan on the Prepayment Date, (ii) all interest accrued and unpaid on the Loan Amount of such Consolidated Loan from the immediately preceding Payment Date through the Prepayment Date, if any, PLUS an additional month of interest on such Loan Amount, (iii) all accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments due to the Prepayment Date, (iv) if any Program Loan Deficiencies exist on the Prepayment Date, the lesser of (A) the outstanding Credit Enhancement Amount and (B) the Program Credit Enhancement Amount (the "Credit Enhancement Prepayment"), and (v) the Make Whole Premium. (c) DEFINITIONS. For purposes of this Section 5, the following terms have the following meanings: "DISCOUNTED VALUE" means, with respect to each Consolidated Loan, the amount calculated by discounting all Remaining Scheduled Monthly Loan Payments from their respective scheduled due dates to the Prepayment Date, in accordance with acceptable financial practice and at a discount factor (applied on a monthly basis) equal to the Reinvestment Rate. "MAKE WHOLE PREMIUM" means, with respect to each Consolidated Loan, a premium equal to the excess, if any, of the Discounted Value over the outstanding Loan Amount of such Consolidated Loan. The Make Whole Premium shall in no event be less than zero. "PROGRAM CREDIT ENHANCEMENT AMOUNT" means, with respect to each Consolidated Loan, an amount equal to the product of (i) the ratio of (A) the outstanding loan amount plus the outstanding credit enhancement amount on the Prepayment Date of such prepaying Program Loan to (B) the outstanding loan amounts plus the outstanding credit enhancement amounts of all Program Loans that are not Delinquent Program Loans, multiplied by (ii) the sum (without duplication) of (A) the Program Prepayment Amounts for all Delinquent C-5 Program Loans on the Prepayment Date plus (B) any other outstanding Program Loan Deficiencies on the Prepayment Date. "PROGRAM PREPAYMENT AMOUNT" means, with respect to any Delinquent Program Loan, an amount equal to the sum of (i) the outstanding loan amount of such Delinquent Program Loan on the Prepayment Date, (ii) all accrued and unpaid interest on such Delinquent Program Loan to the Prepayment Date, (iii) all accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments on such Delinquent Program Loan to the Prepayment Date, and (iv) the Make Whole Premium with respect to such Delinquent Program Loan. "REMAINING AVERAGE LIFE" means, with respect to each Consolidated Loan, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) the outstanding Loan Amount of such Consolidated Loan on the Prepayment Date into (ii) the sum of the products obtained by multiplying (A) the principal portion of each Remaining Scheduled Monthly Loan Payment by (B) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Prepayment Date and the Loan Amount Repayment Date. "REMAINING SCHEDULED MONTHLY LOAN PAYMENTS" means, with respect to each Consolidated Loan, an amount equal to the sum of all Scheduled Monthly Loan Payments that would be due during the period from the Prepayment Date to and including the Loan Amount Repayment Date. 6. PAYMENT PROCEDURES. (a) METHOD AND TIMING. The Borrower shall make each payment due hereunder in one aggregate amount per calendar month, not later than 3:00 p.m. (New York City time) on the day when due, in lawful money of the United States of America (in freely transferable U.S. dollars and in immediately available funds), at such place or places identified by Lender by Electronic Transfer of Funds. BY WRITTEN NOTICE TO THE BORROWER, THE LENDER MAY REQUEST BORROWER TO MAKE SUCH PAYMENTS AT OTHER PLACES AND BY OTHER METHODS AND BORROWER SHALL THEREAFTER MAKE SUCH PAYMENTS IN ACCORDANCE WITH SUCH WRITTEN NOTICE FROM LENDER. (b) COMPUTATION OF TIME PERIODS. In this Credit Enhancement Note, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including", the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including". (c) CALCULATIONS. All calculations of the Monthly Enhancement Rebate, the Make Whole Premium and other amounts due on prepayment or acceleration and the amounts actually received by the Lender with respect to Delinquent Loans will be made by the Lender. The Borrower agrees that all such calculations will be conclusive and binding, absent manifest error. (d) APPLICATION. The Lender shall apply timely payments made under this Credit Enhancement Note in the following order with respect to each Consolidated Loan: (i) to C-6 accrued and unpaid interest on the Loan Amount, (ii) to any late payment charges due pursuant to Section 6(f), below, (iii) to accrued and unpaid Scheduled Monthly Credit Enhancement Obligation Payments, (iv) to the Make Whole Premium, if any, (v) to the Loan Amount, UNTIL THE OUTSTANDING LOAN AMOUNT IS ZERO, and (vi) the balance, if any, to the Credit Enhancement Amount to the extent then due and unpaid. Notwithstanding the foregoing, any payment (excluding prepayments) made under this Credit Enhancement Note which is less than (A) the aggregate of (1) the Scheduled Monthly Loan Payment on each Consolidated Loan and (2) the Scheduled Monthly Credit Enhancement Obligation Payment on each Consolidated Loan MINUS (B) the allocated Monthly Enhancement Rebate, if any, shall be applied ratably among the Loans, in accordance with their respective Ratable Shares. (e) LATE PAYMENT CHARGE: If, on any Payment Date, the Lender has not received the full Scheduled Monthly Loan Payment due on such Payment Date in accordance with Section 6(a), above, the Borrower shall pay to the Lender, promptly on demand, as liquidated damages, a late payment charge of $750 per Consolidated Loan. 7. CONCERNING THE GUARANTEE. (a) Nature of the Guarantee. The Guarantee is absolute, unconditional, irrevocable and continuing in nature. The Guarantee is a guarantee of prompt and punctual payment and performance and is not merely a guarantee of collection. The obligations of the Borrower under this Credit Enhancement Note with respect to the Guarantee are direct and primary obligations of the Borrower and are independent of the obligations (the "PROGRAM OBLIGATIONS") of any Program Borrower or any other Person with respect to any Program Note or any document or instrument relating thereto (each a "PROGRAM LOAN DOCUMENT" and, collectively, the "PROGRAM LOAN DOCUMENTS"), and a separate action or actions may be brought and prosecuted against the Borrower to enforce the Guarantee, irrespective of whether any action is brought against any Program Borrower or any other Person or whether any Program Borrower or any other Person is joined in any such action or actions. The liabilities and obligations of the Borrower under this Credit Enhancement Note shall be absolute and unconditional notwithstanding any event or occurrence, including without limitation: (i) any lack of validity or enforceability of any Program Loan Document; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Program Obligations under any Program Document, or any other amendment or waiver of or any consent to departure therefrom including, without limitation, any increase in any Program Loan; (iii) any taking, exchange, release or non-perfection of any collateral, or any taking, release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Program Obligations; C-7 (iv) any manner of application of any collateral, or proceeds thereof, to all or any of the Program Obligations, or any manner of sale or other disposition of any collateral or any other assets of the Program Borrowers; (v) any change, restructuring or termination of the structure or existence of any Program Borrower; (vi) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against the Lender, whether in connection with the transactions contemplated by this Credit Enhancement Note and the other Operative Documents or otherwise; (vii) any impossibility or impracticality of performance, illegality, FORCE MAJEURE, any act of government, or any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Program Borrower or a guarantor, or any other circumstance or event or happening whatsoever, whether foreseen or unforeseen and whether similar or dissimilar to anything referred to above in this Section 7; or (viii) any variation in the percentage amount of Aggregate Credit Enhancement among Program Borrowers. The Guarantee shall continue to be effective or be reinstated (at any time, including, without limitation, after discharge or termination of any Consolidated Loan or this Credit Enhancement Note), as the case may be, if at any time any payment (or part thereof) of any of the Program Obligations is rescinded or must otherwise be returned by the Lender upon the insolvency, bankruptcy or reorganization of any Program Borrower, all as though such payment had not been made. (b) RELATIONSHIP TO OTHER AGREEMENTS. Nothing herein shall in any way modify or limit the effect of terms or conditions set forth in any other document, instrument or agreement executed by the Borrower or in connection with the Program Obligations, but each and every term and condition hereof shall be in addition thereto. (c) CONSENTS AND WAIVERS. The Borrower acknowledges that the obligations undertaken herein involve the guarantee of obligations of Persons other than the Borrower and, in full recognition of that fact, consents and agrees that the Lender may, at any time and from time to time, without notice or demand, and without affecting the enforceability or continuing effectiveness hereof: (i) supplement, modify, amend, extend, renew, accelerate or otherwise change the time for payment or the terms of the Program Obligations or any part thereof; (ii) supplement, modify, amend or waive, or enter into or give any agreement, approval or consent with respect to, the Program Obligations or any part thereof, or any of the Program Documents or any additional security or guaranties, or any condition, covenant, default, remedy, right, representation or term thereof or thereunder; (iii) accept new or additional instruments, documents or agreements in exchange for or relative to any of the Program Documents or the Program Obligations or any part thereof; (iv) accept partial payments on the Program Obligations; (v) receive and hold additional security or guaranties for the Program Obligations or any part thereof; C-8 (vi) release, reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute, transfer and/or enforce any security or guaranties, and apply any security and direct the order or manner of sale thereof as the Lender in its sole and absolute discretion may determine; (vii) release any Person from any personal liability with respect to the Program Obligations or any part thereof; (viii) settle, release on terms satisfactory to the Lender or by operation of applicable laws or otherwise liquidate or enforce any Program Obligation and any security or guarantee therefor in any manner, consent to the transfer of any security and bid and purchase at any sale; and/or (ix) consent to the merger, change or any other restructuring or termination of the partnership or corporate existence, as the case may be, of the Borrower, any Program Borrower or any other Person, and correspondingly restructure the Program Obligations, and any such merger, change, restructuring or termination shall not affect the liability of the Borrower or the continuing effectiveness hereof, or the enforceability hereof with respect to all or any part of the Program Obligations. In addition to the foregoing, the Borrower consents and agrees that Lender may add or delete Program Borrowers and Program Loans. Borrower waives any defense to enforcement of this guarantee based upon variation of risk in the addition or deletion of Program Borrowers or in adding or deleting Program Loans before or after the date hereof. The Borrower hereby waives promptness, diligence, notice of acceptance, presentment, demand, notice of dishonor, protest and any other notice with respect to any of the Program Obligations and the Guarantee and any requirement that the Lender or any Program Borrower protect, secure, perfect or insure any lien or any property subject thereto or exhaust any right or take any action against any Program Borrower or any other Person or any collateral. Borrower hereby waives any rights it may now or hereinafter have to an appraisal of any security or collateral for the Program Obligations, including, without limitation, any such rights provided by statute. BORROWER ALSO WAIVES ALL DEFENSES THAT IT MAY BE ENTITLED TO UNDER SURETYSHIP LAW REGARDING THE GUARANTEE. (d) SUBROGATION. (i) Except as set forth in subsection (ii), below, the Borrower will not exercise any rights which it may acquire by way of subrogation under the Guarantee, by any payment made hereunder or otherwise. (ii) If the Borrower should make a payment under the Guarantee, the Borrower's sole claim and recourse for repayment of amounts so paid shall be to amounts actually received by the Lender in respect of Program Loan Deficiencies and held by the Lender for credit against either the next Scheduled Monthly Credit Enhancement Obligation Payment or the next Scheduled Monthly Loan Payment due from the Borrower on each Consolidated Loan; PROVIDED, HOWEVER, that if the Borrower prepays a Consolidated Loan and pays a Credit Enhancement Prepayment, such Borrower is not entitled to any future recoveries with respect to such Consolidated Loan. The Lender does not represent or warrant that (A) any such amounts will be recovered on Delinquent Program Loans, (B) amounts recovered on Delinquent Program Loans or other monies will be actually received and held by the Lender for such credit, or (C) to the extent, if any, that such monies are so received and held by the Lender, C-9 such monies will be sufficient to reimburse or indemnify the Borrower for all amounts paid under the Guarantee. (e) LIABILITY. The liability of the Borrower hereunder is joint and several and is independent of any other guaranties at any time in effect with respect to all or any part of the Program Obligations, and the Borrower's liability hereunder may be enforced regardless of the existence of any such guaranties. Any termination by or release of any guarantor in whole or in part shall not affect the continuing liability of the Borrower hereunder, and no notice of any such termination or release shall be required. (f) Borrower is entering into the Guarantee as a material inducement to Lender to enter into the Program and to make the Lease Financing Loans and Borrower acknowledges that Lender would not enter into the Program or make such Lease Financing Loans absent the Guarantee. 8. SECURITY ARRANGEMENTS. This Credit Enhancement Note is entitled to the benefits of and is secured by the pledge, liens, security title, rights and security interests granted under the Agreement, the Pledge and Security Agreement and the other Operative Documents, as the same may be amended, supplemented or renewed, from time to time. 9. REMEDIES. If an Event of Acceleration occurs, the Lender may take (but is not obligated to take) any or all of the following actions: (a) declare the entire Note Amount, all interest, the Make Whole Premium on each Consolidated Loan and any other amounts payable hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, (b) proceed to enforce or cause to be enforced any remedies provided under any of the Operative Documents or (c) exercise any other remedies available at law or in equity. The Borrower agrees that upon the occurrence of an Event of Acceleration, the Borrower shall pay all costs and expenses actually incurred by Lender (including, without limitation, reasonable attorneys' fees and disbursements) incident to the enforcement, collection, protection or preservation of any right or claim of the Lender under the Operative Documents, including any such fees or costs incurred in connection with any bankruptcy or insolvency proceeding of Borrower. 10. UNDERSTANDINGS WITH RESPECT TO WAIVERS, AGREEMENTS AND CONSENTS: THE BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES ALL OF THE WAIVERS, AGREEMENTS AND CONSENTS ("WAIVERS") SET FORTH IN THIS CREDIT ENHANCEMENT NOTE BOTH AS BORROWER HEREUNDER AND AS GUARANTOR WITH RESPECT TO THE GUARANTEE, AND THAT EACH AND ALL SUCH WAIVERS ARE BEING MADE KNOWINGLY, INTENTIONALLY, VOLUNTARILY, WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEY. THE BORROWER FURTHER ACKNOWLEDGES THAT THE GUARANTEE AND SUCH WAIVERS ARE A MATERIAL INDUCEMENT TO THE LENDER TO ENTER INTO THE PROGRAM AND MAKE THE LEASE FINANCING C-10 LOANS AND TO CONSOLIDATE THE LEASE FINANCING NOTES INTO THE CREDIT ENHANCEMENT NOTES; THAT THE TERMS OF THE CONSOLIDATED LOANS ARE FAVORABLE TO BORROWER AND THAT THE LENDER WOULD NOT HAVE ENTERED INTO THE PROGRAM OR HAVE ENTERED INTO THE CONSOLIDATED LOANS ON SUCH TERMS WITHOUT SUCH GUARANTEE AND WAIVERS; AND THE BORROWER HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES SUCH WAIVERS WITH RESPECT TO EACH OTHER PROGRAM LOAN. THE BORROWER ACKNOWLEDGES AND AGREES THAT NEITHER THE LENDER, NOR ANY OF ITS AFFILIATES, AGENTS OR REPRESENTATIVES HAS MADE AND NO SUCH PERSON IS MAKING OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE GUARANTEE, INCLUDING ANY REPRESENTATION OR WARRANTY CONCERNING ANY PROGRAM BORROWER'S PERFORMANCE, THE FINANCIAL CONDITION OF ANY PROGRAM BORROWER, OR THE ABILITY OF ANY PROGRAM BORROWER TO PERFORM ITS PROGRAM OBLIGATIONS. THE BORROWER ACKNOWLEDGES THAT IT HAS SUFFICIENT KNOWLEDGE AND EXPERIENCE TO BE CAPABLE OF EVALUATING THE RISKS OF ITS CONSOLIDATED LOANS AND GUARANTEE. IF ANY OF THE WAIVERS HEREIN ARE DETERMINED TO BE UNENFORCEABLE UNDER APPLICABLE LAW, SUCH WAIVERS SHALL BE EFFECTIVE TO THE MAXIMUM EXTENT PERMITTED BY SUCH LAW. 11. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, AND THE LENDER BY ITS ACCEPTANCE OF THIS CREDIT ENHANCEMENT NOTE IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THIS CREDIT ENHANCEMENT NOTE. 12. LIMITATION ON INTEREST. NOTWITHSTANDING ANY OTHER PROVISION HEREOF, IN NO EVENT SHALL THE AMOUNT OR RATE OF INTEREST OR OTHER AMOUNTS PAYABLE, CONTRACTED FOR, CHARGED OR RECEIVED UNDER OR IN CONNECTION WITH THIS CREDIT ENHANCEMENT NOTE, FROM TIME TO TIME OR FOR WHATEVER REASON, EXCEED THE MAXIMUM RATE OR AMOUNT, IF ANY, SPECIFIED BY APPLICABLE LAW. IF ANY SUCH PAYMENT IS FOUND TO BE USURIOUS, SUCH PORTION OF THE PAYMENT THAT IS CONSIDERED USURIOUS SHALL BE TREATED AS A PRINCIPAL PAYMENT. 13. MISCELLANEOUS. (a) AMENDMENT. Neither this Credit Enhancement Note nor any provision hereof may be amended, altered, modified, changed, waived, discharged or terminated, except by an instrument in writing signed by the Lender and its assigns. (b) ASSIGNMENT. This Credit Enhancement Note is freely assignable in whole or in part, from time to time, by the Lender and the Lender may grant participation interests C-11 herein. Without limiting the foregoing, the Borrower understands and agrees that the Lender intends to and may sell, pledge, grant a security interest in, collaterally assign, transfer, deliver or otherwise dispose of this Credit Enhancement Note and Borrower's other Operative Documents (or any interest therein, or its rights and powers thereunder), from time to time, in connection with a Securitization. The Borrower may only assign this Credit Enhancement Note and the rights and obligations under this Credit Enhancement Note (including the rights to rebates or credits as provided in Section 4(d)) in full but not in part, (i) with the prior written consent of the Lender, (ii) to entities qualified to be Program Borrowers and (iii) upon payment to Lender of (A) a fee in an amount equal to one percent (1%) of the outstanding Aggregate Loan Amount on the date of any such assignment and (B) all expenses incurred by the Lender in connection therewith (including attorneys fees and costs). For purposes of this Credit Enhancement Note, a change in control of the Borrower (whether by stock sale, issuance or otherwise) shall constitute an assignment of this Credit Enhancement Note. This Credit Enhancement Note shall be binding upon Borrower, its heirs, devises, administrators, executives, personal representatives, successors, receivers, trustees, and permitted assignees, including all successors in interest of the Borrower, and shall inure to the benefit of the Lender, and the successors and assignees of the Lender. (c) TIME OF THE ESSENCE. For all payments to be made and obligations to be performed under this Credit Enhancement Note, time is of the essence. (d) SEVERABILITY. Whenever possible this Credit Enhancement Note and each provision hereof shall be interpreted in such manner as to be effective, valid and enforceable under applicable law. If and to the extent that any such provision shall be held invalid and unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provisions hereof, and any determination that the application of any provision hereof to any person or under any circumstance is illegal and unenforceable shall not affect the legality, validity and enforceability of such provision as it may be applied to any other person or in any other circumstance. (e) NO WAIVER; REMEDIES CUMULATIVE. No failure to exercise and no delay in exercising on the part of the Lender of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. All rights and remedies provided in this Credit Enhancement Note or any other Loan Document or any law shall be available to Lender and shall be cumulative. (f) HEADINGS DESCRIPTIVE. The headings of the various sections, subsections and paragraphs of this Credit Enhancement Note are for convenience of reference only, do not constitute a part hereof and shall not affect the meaning or construction of any provision hereof. (g) GOVERNING LAW. THIS CREDIT ENHANCEMENT NOTE AND ALL OPERATIVE DOCUMENTS ARE ENTERED INTO IN THE STATE OF IDAHO, AND THE VALIDITY, ENFORCEABILITY, CONSTRUCTION AND INTERPRETATION OF THIS CREDIT ENHANCEMENT NOTE SHALL BE CONSTRUED, APPLIED, ENFORCED C-12 AND GOVERNED UNDER AND BY THE LAWS OF THE STATE OF IDAHO WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. 14. LOAN POOL FLEXIBILITY. Lender shall have the right, at its sole and absolute discretion upon written notice to Borrower, to transfer (a "Transfer"), within eighteen (18) months from the effective date of this Credit Enhancement Note, all or any of the Consolidated Loans and all Liens related to such Consolidated Loans, from the Program to any other loan program formed by Lender. Upon the occurrence of a Transfer, the applicable Operative Documents shall be automatically amended and reclassified to reflect the Transfer. The Borrower shall execute all amendments or other documents Lender deems necessary to effectuate a Transfer. THIS DOCUMENT IS EXECUTED UNDER SEAL AND INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT. ATTESTED: eROOM SYSTEM SPE, INC. By: By: ------------------------------- ------------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ---------------------------- ---------------------------- (SEAL) Address: -------------------------- C-13 CORPORATE ACKNOWLEDGEMENT STATE OF ) ----------------- ) ss. COUNTY OF ) ----------------- On the ____ day of __________________, 200__, before me a Notary Public personally appeared ____________________, to me known to be the person named in and who executed the foregoing instrument, who, being duly sworn, did depose and say that he/she resides at _______________________________________________; that he/she is the ________________ of __________________________, the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by authority of the board of directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office this _____ day of ___________________, 200__. ----------------------------------------- Notary Public My commission expires: - ------------------------ C-14 SCHEDULE I SCHEDULE OF CONSOLIDATED LOANS Credit Scheduled Loan Enhancement Monthly Loan Loan Number Date of Loan Amount Amount Payment Maturity Date Ratable Share ----------- ------------ ------ ------ ------- ------------- -------------
C-15 SCHEDULE II CERTAIN DEFINITIONS "[ ] PROGRAM" means the series of loans made by the Lender to the Program Borrowers in an aggregate amount not to exceed $300,000,000 and to be funded by the Lender no later than __________ __, 200_. "APPLICABLE INTEREST RATE" means a rate equal at any time to the weighted average of the Interest Rates on the Consolidated Loans less 0.25% per annum; PROVIDED, HOWEVER, that if a Non-Production Event occurs, the Applicable Interest Rate will automatically and retroactively be increased to the sum of the 7-Year Treasury (determined as of ____________) plus 12.25%. "CONSOLIDATION PAYMENT" means $____________, but will change if the Funding Date is any day other than the date hereof. "CREDIT ENHANCEMENT AMOUNT" means, as applicable, each of the credit enhancement amounts set forth on Schedule I attached to the Credit Enhancement Note. Among Program Borrowers the percentage of Credit Enhancement Amount to Aggregate Loan Amount may vary and the percentage amount for each Program Borrower is set by Lender in its sole and absolute discretion. "INDEBTEDNESS" means the principal of, interest on, and any other amounts due at any time under, this Credit Enhancement Note, the Operative Documents or any other document delivered in connection with the Consolidated Loans, including the Prepayment Amount; provided, that such amounts are related to the Consolidated Loans. "LOAN AMOUNT" means, as applicable, each of the loan amounts set forth on Schedule I attached to the Credit Enhancement Note. "LOAN DEFICIENCY" means a delinquency or default with respect to any Loan or related Indebtedness. "NOTE AMOUNT" means the Aggregate Credit Enhancement Amount PLUS the Aggregate Loan Amount. "RATABLE SHARE" means, with respect to each Consolidated Loan, the fraction, expressed as a percentage, corresponding to such Consolidated Loan on Schedule I attached to the Credit Enhancement Note. For a given Consolidated Loan, its Ratable Share will equal the original Loan Amount (of said given loan) divided by the original Aggregate Loan Amount of the Borrower. "SCHEDULED MONTHLY LOAN PAYMENT" means, with respect to each Consolidated Loan, the Scheduled Monthly Loan Payment corresponding to such Consolidated Loan on Schedule I attached to the Credit Enhancement Note. C-16 "STATED MATURITY DATE" means, with respect to each Consolidated Loan, the Maturity Date corresponding to such Consolidated Loan listed on Schedule I attached to the Credit Enhancement Note. C-17 Warehouse ALLONGE Allonge endorsement attached to the Note, in the stated principal amount of $____________, executed by ________________ payable to the order of AMRESCO LEASING CORPORATION, a Nevada corporation. Pay to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as custodian or trustee under the applicable custodian agreement or indenture, and its successors and/or assigns, without recourse or warranty. AMRESCO LEASING CORPORATION, a Nevada corporation By: -------------------------- Name: Title: C-18 Securitization ALLONGE Allonge endorsement attached to the Credit Enhancement Note, in the stated principal amount of $____________, executed by ________________ payable to the order of AMRESCO LEASING CORPORATION, a Nevada corporation. Pay to the order of AMRESCO COMMERCIAL FINANCE, INC., a Nevada corporation without recourse or warranty. AMRESCO LEASING CORPORATION, a Nevada corporation By: -------------------------- Name: Title: Pay to the order of ACFI FUNDING CORP., a Delaware corporation without recourse or warranty. AMRESCO COMMERCIAL FINANCE, INC., a Nevada corporation By: -------------------------- Name: Title: Pay to the order of FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, a national banking association, as custodian or trustee under the applicable custodial or trust agreement, without recourse or warranty. ACFI FUNDING CORP., a Delaware corporation By: -------------------------- Name: Title: C-19 EXHIBIT D BORROWING NOTICE THE AGREEMENT PURSUANT TO WHICH THIS NOTICE IS DELIVERED REQUIRES YOU TO MAKE THE REQUESTED LEASE FINANCING LOAN, IF ALL CONDITIONS CONTAINED IN THE AGREEMENT ARE SATISFIED AND OCCURRING ON A DATE SELECTED BY US, WHICH DATE SHALL BE NOT MORE THAN SEVEN (7) BUSINESS DAYS AFTER YOUR RECEIPT OF THE BORROWING NOTICE (OR ON SUCH OTHER DATE TO WHICH WE MAY AGREE). - --------------------, ------ VIA: ------------------------ AMRESCO Leasing Corporation 412 E. ParkCenter Blvd. Suite 300 Boise, Idaho 83767 Re: BORROWING NOTICE issued pursuant to Master Business Lease Financing Agreement, dated May 11, 2000, by and among the undersigned (the "BORROWER"), you, as lender (the "LENDER"), RoomSystems, Inc. and eRoom System Technologies, Inc. (as amended from time to time, the "AGREEMENT") Ladies and Gentlemen: This constitutes an irrevocable Borrowing Notice pursuant to the terms of the above-referenced Agreement. SECTION 1. REQUEST. The Borrower hereby requests that the Lender issue a Lease Financing Loan in accordance with the terms of the Agreement. Following is the information required by the Agreement with respect to this Borrowing Notice: (a) AMOUNT. The Loan Amount of the Lease Financing Loan shall be $_______________ (minimum Loan Amount $25,000), which amount is equal to the Refreshment Center Loan Amount for the Business Lease described below. (b) DESIGNATION AND TERM. The Lease Financing Loan is a: [Check one] _____ Lease Financing Loan that has completed the Seasoning Period (82 month term) _____ Advance Funded Lease Financing Loan (84 month term) D-1 (c) TYPE OF BUSINESS LEASE. The type of Business Lease (and the calculation amounts) for the related Refreshment Centers is: [check one] _____ Threshold Plan _____ Percentage Plan _____ Platinum Plan If the Platinum Plan, check one of the following: _____ 100% Guarantee _____ 10% Participation _____ 25% Participation (d) BUSINESS LEASE. The Business Lease relating to the Lease Financing Loan is [Provide a general description of the Business Lease, including the parties thereto, the date thereof, specific Equipment related thereto and the location and type of property covered by such Business Lease in reasonable detail]. (e) MATURITY DATE. The Maturity Date of the Lease Financing Loan is as follows: -----------------, ------. (f) AMORTIZATION PERIOD. The principal of this Lease Financing Loan shall be amortized over a period of: [Check one]: ____ 82 months (Seasoned Lease Financing Loan) ____ 84 months (Advance Funded Lease Finance Loan) (g) ACCOMPANYING DOCUMENTS. All documents, instruments and certificates required to be delivered pursuant to the conditions precedent contained in Sections 5.1, 5.2 and 5.3 of the Agreement, including all appropriate UCC financing statements will be delivered, and the Borrower will have complied with all terms, covenants and conditions of the Agreement, on or before the closing date. (h) WIRING INFORMATION. Please wire the proceeds of the Lease Financing Loan on or before the closing date into our account in accordance with the following wiring information: ------------------------------------------------- ------------------------------------------------- D-2 SECTION 2. OUTSTANDING LOAN AMOUNTS. The information contained in the following table is true, correct and complete, to the undersigned's knowledge. The undersigned acknowledges and agrees that the final determination of the information shall be made by the Lender, in accordance with the terms of the Agreement. - -------------------------------------------------------------------------------- Current outstanding amount of all seasoned Lease Financing Loans - -------------------------------------------------------------------------------- Current outstanding amount of all Advance Funded Lease Financing Loans - -------------------------------------------------------------------------------- Total current outstanding amount of all Lease Financing Loans - -------------------------------------------------------------------------------- Outstanding amount of all seasoned Lease Financing Loans after this proposed loan - -------------------------------------------------------------------------------- Outstanding amount of all Advance Lease Financing Loans after this proposed loan - -------------------------------------------------------------------------------- Outstanding total amount of all Lease Financing Loans after this proposed loan - -------------------------------------------------------------------------------- SECTION 3. CERTIFICATION. The Borrower hereby certifies that each of the following requirements has been satisfied. [Indicate if waived by Lender] 1. The Business Leases related to all Lease Financing Loans funded under the Program must have average revenues to the Borrower (after giving effect to the revenue sharing allocations under the related Business Leases) per installed Refreshment Center of at least *** per day for each one cent ($.01) advanced by the Lender as Lease Financing Loans under the Program. 2. There is no existing default on any indebtedness or equity obligations of any of the eRoom Parties. 3. The eRoom Parties have and have maintained a Net Worth of at least $2 million (determined on quarterly basis). 4. No more than 20% of the Business Leases related to any Lease Financing Loan (determined by reference to the total units of Refreshment Centers subject to such Business Leases) are or have been more than 90 days delinquent in the payment of rents or other obligations thereunder. 5. eRoom maintains working capital of at least $250,000 (determined quarterly). CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION D-3 6. The Lessee is not an Underperforming Property. * 7. None of the first three rental payments under the related Business Lease have been more than 10 late. * 8. During the Term of this Agreement, the eRoom Parties must maintain a liabilities to net worth ratio of no more than 3.0:1 (determined on a quarterly basis. SECTION 4. TRANSACTION SUBMISSION PACKAGE. Attached hereto is a Transaction Submission Package for the proposed Lease Financing Loan, consisting of the following items: a. Deal summary; b. Copies of all required UCC- 1 financing statements;* c. Verification of business' three months payments (including dates received);* d. Last two years' plus interim financial statements of business, if applicable; e. Last two years' income tax returns of business, if applicable; f. Business Lease and all supporting documentation;* g. Estoppel certificate signed by business/lessee;* h. ACH authorization forms (unless declined by business);* i. Bill of Sale for Equipment from eRoom to the Borrower; and* j. Licenses for Equipment Intellectual Property to the Borrower and RSi;* k. Last one (1) year's occupancy rates for the business; l. Last one (1) year's average daily room rate for the business; m. Last one (1) year's average daily room rate for properties comparable to the business; n. The Average Gross Revenue during the Seasoning Period; and o. Evidence that the business has been in operation for at least one year. *Not Required as part of initial Borrowing Notice. D-4 SECTION 5. CAPITALIZED TERMS. All capitalized terms used but not defined in this Borrowing Certificate shall have the meanings ascribed to such terms in the Agreement. Sincerely, eRoom System SPE, Inc. By: --------------------------------- Name: --------------------------------- Title: --------------------------------- [SEAL] D-5 EXHIBIT E TRANSACTION APPROVAL FORM Pursuant to Section 2.2 or 2.3 of that certain Master Business Lease Financing Agreement dated May 11, 2000, among the undersigned (the "Lender"), eRoom System SPE, Inc., as Borrower, RoomSystems, Inc. and eRoom System Technologies Inc., the Lender hereby confirms its approval of the proposed Lease Financing Loan described in the attached Borrowing Notice, with the following terms. Designation _____ Seasoned Lease Financing Loan - 82 month term (Check One) _____ Advance Funded Lease Financing Loan - 84 month term Loan Amount $ ----------------------- Term months ------- Amortization Period 82 months ----- 84 months ----- Closing Date no later than ---------------, ------- Dated: --------------------, ------ AMRESCO LEASING CORPORATION By: -------------------------- Name: -------------------------- Title: -------------------------- E-1 EXHIBIT F FORM OF ACKNOWLEDGEMENT AMRESCO Leasing Corporation 412 E. ParkCenter Blvd. Suite 300 Boise, Idaho 83767 Re: Acknowledgement issued pursuant to Master Business Lease financing Agreement dated as of May 11, 2000, by and among the undersigned (the "Borrower"), you, as lender (the "Lender"), RoomSystems, Inc. and eRoom System Technologies Inc. (as amended from time to time, the "Agreement") Ladies and Gentlemen: This constitutes an Acknowledgement pursuant to Section 2.3(e) of the Agreement. We hereby acknowledge that the Transaction Submission Package submitted to you on _______________, _____ and the representation and warranties set forth in Section 4.1 of the Agreement are, and will, as of the date of the closing of the Lease Financing Loan described below, be true and correct in all material respects and that the Borrower has satisfied the Guidelines and all terms and conditions of the Agreement. Loan Amount $ ----------------------- Term months ------- ---------------, ------- Sincerely, eROOM SYSTEM SPE, Inc. By: --------------------------- Name: --------------------------- Title: --------------------------- Dated: ----------- F-1 EXHIBIT H FORM OF CUSTODIAL AGREEMENT THIS CUSTODIAL AGREEMENT (this "AGREEMENT") is made as of this ____ day of __________________, 2000, by and among [ROOMSYSTEMS SPE], a Nevada [corporation] (the "BORROWER"), AMRESCO LEASING CORPORATION, a Nevada corporation (the "LENDER"), NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "CUSTODIAN") and ROOMSYSTEMS, INC., a Nevada corporation (the "SERVICER"). W I T N E S S E T H: WHEREAS, the Borrower is the lessor under certain Business Leases providing for the leasing of Refreshment Centers and related Equipment to hotels and timeshares located in the United States; and WHEREAS, pursuant to the Master Business Lease Financing Agreement, dated __________________, 2000, by and among the Lender, the Borrower and the other parties named therein (the "MASTER AGREEMENT"), the Lender has agreed to provide financing to the Borrower, in the form of Lease Financing Loans, secured by, INTER ALIA, the related Business Leases and Pledged Assets; and WHEREAS, the Borrower, the Lender, the Servicer [and the other parties named therein] have entered into the Servicing Agreement, dated as of ______________ ____, 2000, in order to provide for the servicing of the Business Leases; and WHEREAS, the Lender and the Borrower wish to set forth the terms and conditions pursuant to which the Custodian will (i) review the Business Leases, (ii) take possession of, and exercise control over the Business Leases and certain documents and instruments related thereto, and (iii) receive all payments due under the Business Leases and distribute the Collected Funds pursuant to the Master Agreement; and WHEREAS, the Custodian has agreed to act as agent for the Borrower and the Lender for the foregoing purposes, all upon the terms and conditions and subject to the limitations set forth herein; NOW, THEREFORE, in consideration of the premises and covenants herein contained, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: H-1 ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Master Agreement. In addition, the following capitalized terms shall have the meanings set forth below: "ACCOUNTS" shall mean, collectively, the Custodial Account, the Property Tax Reserve Account and the Loss Reserve Account. "CERTIFICATION" shall have the meaning assigned to such term in Section 2.2(b). "CUSTODIAL FILE" shall mean, with respect to each Lease Financing Loan financed under the Master Agreement, the related Business Lease securing such Lease Financing Loan and all other documents and instruments necessary to obtain payment from the Lessee of all amounts due under the Business Lease. "CUSTODIAL ACCOUNT" shall mean the segregated trust account established and maintained in accordance with Section 3.1(b) and entitled "Norwest Bank Minnesota, National Association, as Custodian, Custodial Account - Loan Pool #___," for the benefit of the Lender and the Borrower, as their interests may appear. "ITEMS" shall have the meaning assigned to such term in the UCC. "LEASE SCHEDULE" shall have the meaning assigned to such term in Section 2.2(a). "LOSS RESERVE ACCOUNT" shall mean the segregated trust account established and maintained in accordance with Section 3.1(b) and entitled "Norwest Bank Minnesota, National Association, as Custodian, Loss Reserve Account - Loan Pool #___," for the benefit of the Lender and the Borrower, as their interests may appear. "PERMITTED INVESTMENTS" shall mean _____. "PROPERTY TAX RESERVE ACCOUNT" shall mean the segregated trust account established and maintained in accordance with Section 3.1(b) and entitled "Norwest Bank Minnesota, National Association, as Custodian, Property Tax Reserve Account - Loan Pool #____" for the benefit of the Lender and the Borrower, as their interests may appear. "REPRESENTATIVES" shall have the meaning assigned to such term in Section 3.1(a). "REQUEST FOR RELEASE" shall have the meaning assigned to such term in Section 2.3. H-2 ARTICLE II CUSTODY OF LEASE DOCUMENTS Section 2.1 CUSTODIAN TO ACT AS AGENT; ACCEPTANCE OF CUSTODIAL FILES. The Custodian, as the duly appointed agent of the Lender and the Borrower for these purposes, hereby agrees that it shall hold each Business Lease and the other documents constituting each Custodial File which are delivered to the Custodian, as agent of the Lender and the Borrower, in trust, for the use and benefit of the Lender and the Borrower, as their interests may appear. The Custodian undertakes to perform such duties and only such duties as are specifically set forth in this Agreement. Except upon compliance with the provisions of Section 2.3, no Business Lease or other document constituting a part of a Custodial File shall be delivered by the Custodian to the Lender, the Borrower, or any other person or shall be otherwise released from the possession of the Custodian. Section 2.2 DELIVERY AND REVIEW OF CUSTODIAL FILES. (a) Not less than ___ Business Days after the Borrowing Date of each Transaction closed under the Master Agreement, the Lender shall deliver to the Custodian the Custodial Files containing the Business Leases and related documents submitted by the Borrower to the Lender in each Transaction Submission Package. The Lender shall provide the Custodian a schedule and an electronic file (the "LEASE SCHEDULE") of Business Leases, containing the information set forth in Schedule I attached hereto for each Business Lease. The Custodian shall be entitled to rely upon the Business Leases and the Lease Schedules provided by the Lender as the conclusive schedules in its review, pursuant to paragraph (b) below. (b) The Custodian agrees, for the benefit of the Lender and the Borrower, to maintain physical possession of the Custodial Files, and to review each Custodial File delivered to the Custodian by the Lender pursuant to paragraph (a) above, to verify whether they are complete on their face and whether each Business Lease is an original. Such review will be performed by the Custodian in accordance with acceptable review procedures. Within ___ Business Days after the delivery to the Custodian of such Custodial Files (or within such other period of time as the Custodian, the Lender and the Borrower shall agree), the Custodian shall deliver to the Lender and the Borrower a certificate (the "CERTIFICATION"), in substantially the form annexed hereto as EXHIBIT B. If in performing the review required by this Section 2.2(b), the Custodian finds any document or documents constituting a part of the Custodial File to be missing or defective in any material respect, the Custodian shall promptly so notify the Lender and the Borrower. Section 2.3 CUSTODIAN TO COOPERATE; RELEASE OF CUSTODIAL FILES. Upon the receipt by the Custodian of a request for release of a Custodial File (the "REQUEST FOR RELEASE"), in substantially the form annexed hereto as EXHIBIT C, executed by the H-3 Borrower and acknowledged by the Lender and certifying with respect to the Business Lease related to such Custodial File that (i) all payments due from the Lessee under the Business Lease have been paid to the Custodial Account, (ii) the Lender and the Borrower intend to dispose of the Business Lease or the related Lease Financing Loan through a Securitization or otherwise, or (iii) the Lender has agreed to release its security interest in the Business Lease after repayment of the entire Loan Amount of the Lease Financing Loan secured by such Business Lease, the Custodian shall promptly release the related Custodial File to the Borrower. ARTICLE III ACCOUNTS, COLLECTIONS AND DISBURSEMENTS SECTION 3.1 ESTABLISHMENT OF ACCOUNTS. (a) Concurrently with the execution of this Agreement, the Custodian shall establish and maintain with the Custodian's corporate trust department the Custodial Account for the purpose of collecting directly from each Lessee all payments due under the Business Leases. The Custodial Account shall be in the name of the Custodian, as agent of the Lender and the Borrower, for the use and benefit of the Lender and the Borrower, as their interests may appear. The Lender and the Borrower acknowledge and agree that only the Custodian and/or the employees, designated representatives and agents of the Custodian (the "REPRESENTATIVES") shall have access to the Custodial Account, and hereby grant to the Custodian and its Representatives exclusive and unrestricted access to the Custodial Account. (b) Concurrently with the execution of this Agreement, the Custodian shall also establish and maintain with the Custodian's corporate trust department the Property Tax Reserve Account and the Loss Reserve Account. On each Disbursement Date, the Custodian shall make deposits and disbursements to and from the foregoing accounts, as described in Section 3.5(a). (c) The Custodian shall hold amounts deposited in the Accounts in trust for Lender and the Borrower, as their interests may appear, and shall not commingle such amounts either between Accounts or with any other amounts held by the Custodian on behalf of the Lender, the Borrower or any other Person. (d) The Custodian shall invest amounts held in the Accounts in Permitted Investments, at the written direction of [the Lender]. All earnings on Permitted Investments shall be credited to the related Account. SECTION 3.2 APPOINTMENT OF ATTORNEY-IN-FACT. The Borrower hereby makes, constitutes and appoints the Custodian as its true and lawful attorney-in-fact, with full power of substitution: (a) to receive and open all mail addressed to the Borrower, its agents or its employees, at the Custodial Account; (b) to remove therefrom any notes, checks, acceptances, drafts, money orders or other instruments under the terms of this H-4 Agreement, with full power to endorse the name of the Borrower and its agents and employees upon any such notes, checks, acceptances, drafts, money orders, instruments or other documents, and to effect the deposit and collection thereof to the Custodial Account; (c) to sign the name of the Borrower and its agents and employees on drafts against its debtors, on notices to such debtors, on assignments and notices of assignments, financing statements or other public records or notices and on all other instruments and documents; and (d) to do any and all things necessary or take such action in the name and on behalf of the Borrower to carry out the intent of this Agreement. The Borrower agrees that neither the Custodian nor any of its Representatives shall be liable for any acts of commission or omission or for any error or judgment or mistake of fact or law in respect to the exercise of this power of attorney, except for the gross negligence and willful misconduct of the Custodian, and/or its Representatives. This power of attorney shall be irrevocable during the term of this Agreement. SECTION 3.3. RECEIPT OF RENTS. On or before the Borrowing Date with respect to a Lease Financing Loan, the Borrower shall instruct all Lessees in writing to send all payments due under the Business Leases to the Custodial Account by delivering to each Lessee, by certified mail, return receipt requested, a letter substantially in the form of EXHIBIT A attached hereto. The Borrower shall not collect any payments due under the Business Leases in any other manner. Cash receipts and other payments received on account of the Business Leases will be deposited in the Custodial Account by direct mail or a third-party messenger. If the Borrower receives any rent payments or any other payment in respect of a Business Lease, outside of the Custodial Account arrangement described herein, the Borrower shall immediately transmit such payments to the Custodial Account, properly endorsed to the Custodian. SECTION 3.4 CREDIT TO CUSTODIAL ACCOUNT. Credit and collections of the money deposited to the Custodial Account shall be subject to the Custodian's standard collection and credit procedure for similar deposits received by the Custodian through other channels. The Borrower hereby agrees to indemnify and hold the Custodian harmless against any loss, cost, attorneys' fees, claims, interest expense or suit suffered by the Custodian and arising out of or in connection with its receiving, processing or depositing of checks, drafts or other payment items pursuant to this Agreement, other than such arising out of the Custodian's gross negligence or willful misconduct. Section 3.5 DISBURSEMENTS FROM CUSTODIAL ACCOUNT. (a) On each Disbursement Date, the Custodian shall disburse the Collected Funds held on deposit in the Custodial Account to the parties or accounts indicated in the following priorities (to the extent of funds available therefor): (i) to the Servicer, the Servicing Fee for such Disbursement Date; (ii) to the Property Tax Reserve Account, the Property Tax Reserve Amount for such Disbursement Date; H-5 (iii) to the Lender, an amount equal to (x) the Monthly Payment Amount for such Disbursement Date, (y) the Carry Forward Amount and (z), if applicable, the Accelerated Loan Amount for such Disbursement Date with respect to all Lease Financing Loans; (iv) to the Loss Reserve Account, the Loss Reserve Amount for such Disbursement Date; (v) to the Residual Profits Collection Account, if necessary to cover a shortfall in funds available to pay items (i) - (iv) of Section 2.8(c) of any other Loan Pools; and (vi) to the Borrower, the Residual Profits for such Disbursement Date. (b) Notwithstanding the foregoing, to the extent that Collected Funds for any Disbursement Date are insufficient to make a full payment of the amounts required in clauses (i) - (iii) above, the Custodian shall, to the extent of funds available therefor, withdraw amounts (x) first, from the Loss Reserve Account and (y) second, the Residual Profits Collection Account and disburse such amounts in accordance with the priorities set out in such clauses (i) -(iii). (c) Notwithstanding clause (b) above, to the extent that Collected Funds for any Disbursement Date are insufficient to make a full payment to the Loss Reserve Account pursuant to clause (a)(iv) above, the Custodian shall, to the extent of funds available therefor, withdraw amounts from the Residual Profits Collection Account and distribute such amounts to the Loss Reserve Account pursuant to clause (a)(iv) above. (d) On the Disbursement Date in [January] of each year, any amounts remaining in the Property Tax Reserve Account, after the payment of all applicable taxes for the prior calendar year, will be applied as payments in accordance with the priorities set out in clauses (iii) - (vi) of Section 3.5(a). ARTICLE IV REPORTS, DOCUMENTS AND OTHER INFORMATION SECTION 4.1 MAINTENANCE OF RECORDS. The Custodian will maintain a record of all checks and other negotiable Items forwarded to the Custodial Account to facilitate reconstruction of a deposit should the need arise and the request be made. On each Disbursement Date, the Custodian will provide each of the Borrower, the Lender and the Servicer with an accounting of the disbursements and allocations of Collected Funds for each Disbursement Date. The Custodian shall, on or before the _________ (____) day of each month, provide the Lender, the Borrower and the Servicer with copies of all payments and correspondence received from Lessees, including checks, invoices, advances and any H-6 other correspondence and information regarding withdrawals, forwarded to the Custodial Account during the previous calendar month. The Custodian shall not be liable, however, for any failure to make and/or provide such a record due to clerical error, unexpected film or equipment failure, inability to obtain film or equipment or otherwise. The Servicer shall monitor the activities in the Custodial Account by direct, on-line computer access to account balance and activity information and by receiving and reconciling monthly reports from the Custodian, with respect to deposits and withdrawals from the Custodial Account. SECTION 4.2 [RIGHT TO INSPECT. The Custodian shall endeavor, but shall not be obligated or required to inspect all Items forwarded to the Custodial Account to identify Items which bear a restrictive notation, such as "paid in full" or similar language, and if such statements are identified, shall notify the Borrower [and the Servicer] of Items bearing such restrictions. If the Borrower disputes such restrictive statement, the Borrower, within _______ (__) days from the date of notice from the Custodian, shall use its best efforts to obtain a replacement Item without such restriction from its maker or substitute its own Item, or if a substitute is not provided within ______ (__) days, the Lender may deposit in the Custodial Account such Item bearing the restrictive statement. The Borrower agrees that the Custodian shall not have any liability in the event it processes any Item bearing such restriction, except in instances of willful misconduct.] SECTION 4.3 CUSTODIAN TO PROVIDE ACCESS TO INFORMATION. The Lender and the Borrower shall be provided by the Custodian such access to the books and records of the Custodian relating to the Custodial Files and to the operations of the Custodian respecting the administration of the Custodial Files (such access to be during business hours and to be upon reasonable advance notice) as shall be reasonably necessary to permit the Lender and the Borrower to take all necessary action to ensure the compliance by the Custodian with the terms and conditions of this Agreement. In addition, the Custodian shall comply with all reasonable requests for information by the Lender and the Borrower, from time to time, relating to the subject matter of this Agreement. ARTICLE V CONCERNING THE CUSTODIAN Section 5.1 CUSTODIAN'S FEES AND EXPENSES. The [Servicer/Borrower] covenants and agrees to pay to the Custodian from time to time, and the Custodian shall be entitled to, reasonable compensation for all services rendered by it in the exercise and performance of any of the powers and duties hereunder of the Custodian, and the [Servicer/Borrower] will pay or reimburse the Custodian upon its request for all reasonable expenses, disbursements and advances incurred or made by the Custodian in accordance with any of the provisions of this Agreement (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its gross negligence or willful misconduct. H-7 The Custodian shall be authorized to charge for Items returned to it, including returned checks, in accordance with the Custodian's usual and customary banking procedures. SECTION 5.2 REPLACEMENT OF CUSTODIAN. (a) No resignation or removal of the Custodian and no appointment of a successor Custodian shall become effective until the acceptance of appointment by the successor Custodian pursuant to this Section. The Lender and the Borrower may agree to remove the Custodian by so notifying the Custodian and appointing a successor Custodian. The Custodian may resign from the obligations and duties hereby imposed upon it upon giving sixty (60) days written notice to the Lender and the Borrower. (b) Either the Lender or the Borrower may remove the Custodian if (i) the Custodian fails to comply with Section 5.4, (ii) the Custodian is adjudged a bankrupt or insolvent, (iii) a receiver or other public officer takes charge of the Custodian or its property, or (iv) the Custodian otherwise becomes incapable of acting. (c) If the Custodian resigns or is removed, or if a vacancy exists in the office of the Custodian for any reason, the Lender shall promptly appoint (with the consent of the Borrower - such consent not to be unreasonable withheld) a successor Custodian by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Custodian and one copy to the successor Custodian. If no successor Custodian shall have been so appointed, the Lender or the resigning Custodian may petition any court of competent jurisdiction for the appointment of a successor Custodian. (d) The Custodian hereby agrees that it shall take all actions reasonably necessary and shall cooperate with the Lender and the Borrower to facilitate any transfer of the Custodial Files and all of its obligations, duties and rights hereunder. Any successor Custodian shall be a depository institution subject to supervision or examination by federal or state authority and shall be able to satisfy the other requirements contained in Section 5.4. SECTION 5.3 MERGER OR CONSOLIDATION OF CUSTODIAN. Any Person into which the Custodian may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Custodian shall be a party, or any Person succeeding to the business of the Custodian, shall be the successor of the Custodian hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. SECTION 5.4 REPRESENTATIONS OF CUSTODIAN. The Custodian hereby represents that it is a depository institution subject to supervision or examination by a federal or state authority, has a combined capital and surplus of at least $50,000,000, is qualified to do business in the jurisdiction in which it will establish the Accounts and hold any Custodial File and has corporate trust powers acting in its fiduciary capacity. H-8 ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.1 NOTICES. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or, if by other means, when received by the other party at the address as follows: (1) If to the Borrower: [RoomSystems SPE] 390 North 3050E St. George, Utah 84790 Attention: Steven L. Sunyich (2) If to the Lender: AMRESCO Leasing Corporation 412 E. ParkCenter Boulevard Suite 300 Boise, Idaho 83706 Attention: William C. Cole (3) If to the Custodian: Norwest Bank Minnesota, National Association [Address] Attention: Corporate Trust Department (4) If to the Servicer: RoomSystems, Inc. 390 North 3050E. St. George, Utah 84790 Attention: Steven L. Sunyich or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). SECTION 6.2 OTHER AGREEMENTS. Except as expressly herein provided, nothing contained in this Agreement shall in any way supersede, limit or otherwise modify any obligations of the Borrower or act as a waiver of the rights of the Lender under the Master Agreement or any document or instrument referenced therein or entered into in connection therewith, including without limitation the Stock Pledge Agreement, or any right or remedy available to the Lender at law or in equity. H-9 SECTION 6.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement (and with respect to the relationship between the Lender and the Borrower, this Agreement, the Master Agreement and the other documents and instruments referenced therein and delivered pursuant thereto) constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof and supersede, merge, and replace, all prior negotiations, offers, promises, representations, warranties, agreements and writing with respect to such subject matter, both written and oral. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the parties hereto. SECTION 6.4 ASSIGNMENTS. The Borrower shall not assign its rights or obligations under this Agreement without the prior written consent of the Lender, which consent may be withheld in the Lender's sole discretion. The Lender may assign any or all of its rights, title, interests or duties, in whole or in part, hereunder without the prior written consent of the Borrower. The Lender shall notify the Borrower of any such assignment within ten (10) days of such assignment taking effect. SECTION 6.5 WAIVER. Any party may waive the performance of any obligation owed to it by any other party or parties hereunder or for the satisfaction of any condition precedent to the waiving party's duty to perform any of its covenants. Any such waiver shall be valid only if contained in a writing signed by the party to be charged. SECTION 6.6 BORROWER REMAINS LIABLE. Neither the Custodian nor the Lender shall not, by reason of this Agreement, have any obligation or liability under the Business Leases, nor shall the Custodian and the Lender be obligated to perform any of the obligations or duties of the Borrower thereunder, all of which shall remain the sole and exclusive obligations of the Borrower. SECTION 6.7 INDEPENDENT CONTRACTOR. In connection with any actions that the Borrower may take under this Agreement in connection with any Refreshment Center, Equipment, Business Lease or the related Collected Funds, the Borrower is, and shall act as, an independent contractor and shall not have any authority to make any commitments, statements or representations, or incur any obligations, or behalf of the Lender, or to bind or commit the Lender in any manner, to make, alter, or execute any document or agreement on behalf of the Lender. The Borrower shall not use any name or mark of the Lender or any affiliate of the Lender in any way unless it has the Lender's prior written approval. The Borrower shall not accept service of any legal process in any action that may be brought against the Lender, or employ attorneys to defend without the Lender's prior written approval. SECTION 6.8 INDEMNIFICATION. Neither the Lender nor the Custodian (each, an "INDEMNITEE") shall be liable for any acts, omissions, errors of judgment or mistakes of fact or law including acts, omissions, errors or mistakes in connection with H-10 the Business Leases and the Collected Funds, except for gross negligence or willful misconduct of such Indemnitee. The Borrower agrees to indemnify, defend and hold each Indemnitee harmless from and against any and all claims, demands, loss, liability or expenses (including reasonable attorneys' fees) arising out of (i) such Indemnitee's compliance with the terms of this Agreement, (ii) the following by the Indemnitee of any instructions given by the Borrower relating to any claim by any third party that the deposit or processing of any Item was unauthorized or improper, or (iii) any claim by any third party that the Borrower failed to perform any condition precedent to the negotiation of any Item. This indemnification and hold harmless agreement shall not apply to any claim arising out of the gross negligence or willful misconduct of such Indemnitee. SECTION 6.9 GOVERNING LAW; ATTORNEYS' FEES. (a) GOVERNING LAW AND VENUE. This Agreement shall be governed by, construed, interpreted and applied in accordance with the laws of the State of Idaho, without giving effect to any conflict of laws rules that would refer the matter to the laws of another jurisdiction. In the event any action or dispute is initiated hereunder, each party hereto hereby irrevocably submits to the exclusive jurisdiction of the courts of the State of Idaho in Ada County, for the purposes of any action arising out of this Agreement, or the subject matter hereof or thereof. To the extent permitted by applicable law, each party hereby waives and agrees not to assert, by way of motion, as a defense or otherwise in any such action, any claim (i) that it is not subject to the jurisdiction of the above-named courts, (ii) that the action is brought in an inconvenient forum, (iii) that it is immune from any legal process with respect to itself or its property, (iv) that the venue of the suit, action or proceeding is improper or (v) that this Agreement, or the subject matter hereof, may not be enforced in or by such courts. (b) ATTORNEYS' FEES. The prevailing party in any action or proceeding relating to this Agreement shall be entitled to recover from the non-prevailing parties, reasonable attorneys' fees and other costs incurred with or without trial, in bankruptcy or on appeal, in addition to any other relief to which such prevailing party may be entitled. SECTION 6.10 PARTIES IN INTEREST. Nothing in this Agreement, whether expressed or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liability of any third persons to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Agreement. SECTION 6.11 TIME OF ESSENCE. Time is of the essence of each and every provision of this Agreement. H-11 SECTION 6.12 SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Agreement is independent and compliance by the Borrower with any of them shall not excuse noncompliance by the Borrower with any other. The Borrower shall not take any action the effect of which shall constitute a breach or violation of any provision of this Agreement. SECTION 6.13 TERMINATION. This Agreement shall terminate upon termination of the Master Agreement, and the final remittance of all funds due to the Lender thereunder, or at such earlier time as the Lender and the Borrower may mutually agree. SECTION 6.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. Any counterpart may be delivered by facsimile; PROVIDED, HOWEVER, that attachment thereof shall constitute the representation and warranty of the person delivering such signature that such person has full power and authority to attach such signature and to deliver this Agreement. Any facsimile signature shall be replaced with an original signature as promptly as practicable. H-12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date first above written. [eROOMSYSTEMS SPE], as Borrower By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- AMRESCO LEASING CORPORATION, as Lender By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Custodian By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- ROOMSYSTEMS, INC., as Servicer By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- H-13 SCHEDULE I LEASE SCHEDULE For each Business Lease, the Lender shall provide the following information: (a) the account number; (b) each Lessee's name and address; (c) the location (street address, city, state and zip code) of leased Equipment; (d) the term of the Business Lease; (e) the beginning date and ending date of the Business Lease; and (f) the amount and frequency of rental payments. H-14 EXHIBIT A TO CUSTODIAL AGREEMENT LETTER TO LESSEES (Date) (Name and Address of Lessee) Ladies and Gentlemen: This letter is to inform you that, pursuant to [RoomSystems SPE's] financing arrangements relating to Business Leases, all future amounts payable under your Business Lease should be forwarded to a Custodial Account at the following address: Norwest Bank Minnesota, National Association [RoomSystems SPE/ALC] Custodial Account Number ___ [Address] PLEASE DO NOT SEND ANY FUTURE PAYMENTS UNDER THE BUSINESS LEASE DIRECTLY TO [ROOMSYSTEMS SPE]. All amounts due and payable should be sent to the address sent forth above. If you have any questions, please contact _____________ at [RoomSystems SPE], phone number: (___) ________. Very truly yours, [RoomSystems SPE] By: ------------------------------ A-1 EXHIBIT B TO CUSTODIAL AGREEMENT CERTIFICATION (Date) AMRESCO Leasing Corporation 412 E. ParkCenter Blvd. Suite 300 Boise, Idaho 83767 [RoomSystems SPE] 390 North 3050 E. St. George, Utah 85790 Re: Custodial Agreement, dated as of ____________, __, 2000 (the "Custodial Agreement"), among AMRESCO Leasing Corporation (the "Lender"), [RoomSystems SPE] (the "Borrower"), RoomSystems, Inc. (the "Servicer") and Norwest Bank Minnesota, National Association (The "Custodian") Ladies and Gentlemen: In accordance with the provisions of Section 2.2(b) of the Custodial Agreement, the undersigned, as Custodian, hereby certifies that except as noted in the attached Exception Report, it has received a Custodial File with respect to each Business Lease identified on the Lease Schedule. Attached to this Certification is the Exception Report, which indicates the document exceptions. The undersigned has made no independent examination of any documents contained in any Custodial File beyond the review specifically required by Section 2.2(b) of the Custodial Agreement in accordance with acceptable review procedures. Other than the review required by Section 2.2(b) of the Custodial Agreement in accordance with acceptable review procedures, the undersigned makes no representations as to: (i) the validity, legality, sufficiency, collectability, effectiveness, recordability, enforceability or genuineness of any of the documents contained in any Custodial File or the Lease Schedule, or (ii) the collectability, insurability, effectiveness or suitability of any such Business Lease. B-1 NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Custodian By: ------------------------------ Name: ------------------------------ Title: ------------------------------ B-2 EXHIBIT C TO CUSTODIAL AGREEMENT REQUEST FOR RELEASE (Date) Norwest Bank Minnesota, National Association, as Custodian [Address] Re: Custodial Agreement, dated as of ____________ __, 2000 (the "Custodial Agreement"), among AMRESCO Leasing Corporation (the "Lender"), [RoomSystems SPE] (the "Borrower"), RoomSystems, Inc. (the "Servicer") and Norwest Bank Minnesota, NATIONAL ASSOCIATION (THE "CUSTODIAN") In connection with the administration of the Business Leases held by you as the Custodian, we request the release of the Custodial File for the Business Lease described below, for the reason indicated. Lessee's Name, Address & Zip Code: Business Lease Number: Reason for Requesting Documents (check one) 1. Final Payment due under Business Lease Received 2. Securitization of Business Lease/Lease Financing Loan 3. Lease Financing Loan secured by Business Lease Paid in Full 4. Other (explain) C-1 [RoomSystems SPE], as Borrower By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- Date: ---------------------------------- ACKNOWLEDGED: AMRESCO Leasing Corporation, as Lender By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- Date: ---------------------------------- C-2 EXHIBIT I FORM OF LICENSE AGREEMENT THIS LICENSE AGREEMENT (this "AGREEMENT"), dated this 11th day of May, 2000, is by and among eRoom System Technologies, Inc., a Nevada corporation ("LICENSOR") and eRoom System SPE, Inc., a Nevada corporation ("eROOM SPE") and RoomSystems Inc., a Nevada corporation ("RSi," and collectively with eRoom SPE, "LICENSEE"). W I T N E S S E T H: WHEREAS, eRoom SPE desires to purchase certain Equipment and the related Business Leases from Licensor and to use certain intellectual property assets owned by Licensor in connection with that certain Master Business Lease Financing Agreement dated May 11, 2000 (the "MASTER AGREEMENT"), among RSi, eRoom SPE, as borrower, Licensor and AMRESCO Leasing Corporation (the "LENDER"). Capitalized terms used in this Agreement and not defined therein have the meanings given to such terms in the Master Agreement; WHEREAS, RSi desires to service certain Equipment and the related Business Leases and to sublicense and use certain intellectual property assets owned by Licensor in connection with the Master Agreement and each Servicing Agreement; and WHEREAS, Licensor is willing to license the use of such intangible assets to Licensee in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency is hereby acknowledged, Licensor and Licensee agree as follows: 1. AGREEMENT AND TERM. The parties agree that the terms and conditions of this Agreement apply to the license of the Intangible Assets (as defined in Section 2 of this Agreement) to Licensee by Licensor. The term of this Agreement commences on date of execution of the Master Agreement and this Agreement shall continue to be in effect until all obligations of RSi and eRoom SPE to the Lender under the Master Agreement and the Operative Documents have been satisfied in full. 2. INTANGIBLE ASSETS. "INTANGIBLE ASSETS" shall mean those Intellectual Property and other intangible assets identified in Exhibit A attached hereto and all other Equipment Intellectual Property. For the purposes of this Agreement, Intangible Assets shall also include all enhancements, modifications and derivative works thereof created by Licensor or Licensee in the ordinary course of business. 3. GRANT AND CONDITIONS OF LICENSE. Licensor hereby grants Licensee a perpetual, worldwide, non-transferable, nonexclusive, fully paid, royalty-free license (the "LICENSE") to use the Intangible Assets in accordance with the terms and conditions of I-1 this Agreement. The License granted under this Agreement provides the Licensee the unrestricted and unqualified right to use the Intangible Assets and such License shall include the right of Licensee to sublicense its rights in the Intangible Assets to certain third parties, with the express consent of Licensor, which consent will not be unreasonably withheld. 4. PROPRIETARY MARKINGS. Licensee shall not remove or destroy any proprietary markings or proprietary legends placed upon or contained within the Intangible Assets. Licensee may duplicate certain documentation associated with the Intangible Assets, at no additional charge, for Licensee's use in connection with the provision of Intangible Assets so long as all required proprietary markings are retained on all duplicate copies. 5. OWNERSHIP/GOODWILL. Licensor hereby acknowledges that it is the sole and exclusive owner of all of the right, title and interest in and to the Intangible Assets and any modifications, enhancements and derivative works of the Intangible Assets (whether created by Licensor or Licensee), and Licensee agrees that it will not at any time do or cause to be done any act or thing in any way impairing or tending to impair any part of such right, title and interest. Licensor further represents and warrants to Licensee that the Intangible Assets do not directly or indirectly violate or infringe upon any copyright, trademark, service mark, patent, trade secret, or other proprietary or intellectual property right of any third party or contribute to such violation or infringement ("INFRINGEMENT"). Licensee shall not in any manner represent that it has any ownership in the Intangible Assets or any registrations associated therewith, and Licensee acknowledges that use of the Intangible Assets shall not create in Licensee's favor any right, title or interest in the Intangible Assets, other than in the License. Licensee further acknowledges that all goodwill arising from use of the Intangible Assets by Licensee shall inure to the benefit of Licensor. 6. QUALITY CONTROL. Licensee agrees to maintain the quality of all products and/or services associated with the Intangible Assets at levels consistent with the high quality of products and/or services that have been associated with the Intangible Assets in the past. Upon at least fifteen (15) days prior written notice, Licensor shall have the right during the term of this Agreement to conduct reasonable reviews of the use of the Intangible Assets by Licensee from time to time during each calendar year, but not more than two (2) times per calendar year. 7. INFRINGEMENT/UNAUTHORIZED USE OF THE MARK. Licensee shall indemnify and hold Licensor and its successors, officers, directors and assigns harmless from and against any and all actions, claims, damages, liabilities, costs and expenses (including reasonable attorneys' fees) resulting from or arising out of or based upon any claim of Infringement or any unauthorized or unlawful use of the Intangible Assets by Licensee. The parties agree to notify each other promptly in the event either party believes any of the Intangible Assets are being infringed or adversely affected by any unauthorized and/or unlawful use by third parties. The parties agree to cooperate with each other in the protection and enforcement of the rights of the Intangible Assets against any unauthorized and/or unlawful use by third parties. Licensor may take all actions I-2 reasonably necessary to prevent infringement and/or unauthorized use of the Intangible Assets, and any and all recoveries from such actions will be the sole and exclusive property of Licensor. 8. DISCLAIMER OF WARRANTY. Other than as specifically stated herein, Licensor disclaims all warranties of any kind, including without limitation, any statutory, or implied or otherwise arising from course of dealing or usage of trade, as to the Intangible Assets in any manner whatsoever, or in particular, any warranties of merchantability or fitness for a particular purpose. 9. TAXES. Unless Licensee provides Licensor with a valid tax exemption number, Licensee shall pay directly or reimburse Licensor for all taxes, assessments, permits and fees, however designated, which are levied upon Licensee's rights to use the Intangible Assets as provided hereunder, excluding personal property taxes, franchise taxes and taxes based upon Licensor's income. 10. BINDING NATURE AND ASSIGNMENT. This Agreement shall be binding on the parties and their respective successors and assigns, but Licensee shall not have the power to assign this Agreement without obtaining the prior written consent of Licensor, provided, however, that a merger or a sale of all or substantially all of Licensee's assets shall not be deemed an assignment subject to this Section 10. If Licensee subcontracts or delegates any of its duties or obligations of performance in this Agreement to any third party, Licensee shall remain fully responsible for complete performance of all of Licensee's obligations set forth in this Agreement and for any such third party's compliance with the provisions set forth in this Agreement. 11. CONFIDENTIALITY. The parties acknowledge that in the course of performance of their obligations pursuant to this Agreement, the parties may obtain confidential and/or proprietary information of the other or its affiliates or customers. Each party hereby agrees that all information communicated to it by the other party, shall be and was received in strict confidence, shall be used only for purposes of this Agreement, and shall not be disclosed without the prior written consent of the other party, except as may be necessary by reason of legal, accounting or regulatory requirements beyond the reasonable control of the parties, so long as each party provides the other with timely prior notice of such requirement. 12. INJUNCTIVE RELIEF. Each party acknowledges and agrees that in the event of a breach by it of this Agreement, the other party shall have the nonexclusive right to apply for and receive the issuance of injunctive relief, including, without limitation, an ex parte or other temporary restraining order, a temporary or preliminary injunction and a permanent injunction to enforce the terms, provisions, covenants, obligations, duties and conditions described herein. 13. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if and when delivered personally or transmitted by telex, facsimile (receipt confirmed) or telegram, mailed by registered or certified mail (return receipt requested) or sent by a recognized next business day courier to the I-3 following persons at the following addresses (or such other address for a party as shall be specified by like notice): In the case of Licensor: eRoom System Technologies, Inc. 3770 Howard Hughes Parkway Las Vegas, Nevada 89109 Attention: Steven L. Sunyich and Gregory Hrncir In the case of Licensee: Room Systems, Inc. 390 North 3050E. St. George, Utah 84790 Attention: Steven L. Sunyich and Gregory Hrncir eRoom System SPE, Inc. 3770 Howard Hughes Parkway, Suite 175 Las Vegas, Nevada 89109 Attention: Steven L. Sunyich and Gregory Hrncir Either party may from time to time change its address for notification purposes by giving the other party written notice of the new address and the date upon which it will become effective; first class, postage prepaid, mail shall be acceptable for provision of change of address notices. 14. RELATIONSHIP OF PARTIES. Licensee is performing pursuant to this Agreement only as an independent contractor. Licensee shall not act or attempt to act or represent itself, directly or by implication, as an agent of Licensor or its affiliates or in any manner assume or create, or attempt to assume or create, any obligation on behalf of, or in the name of, Licensee or its affiliates. 15. SEVERABILITY. If any provision of this Agreement is declared or found to be illegal, unenforceable, or void, then the obligations arising under such provision shall be null and void and each provision not so affected shall be enforced to the full extent permitted by law. 16. WAIVER. No delay or omission by either party hereto to exercise any right or power hereunder shall impair such right or power or be construed to be a waiver thereof. No change, waiver or discharge hereof shall be valid unless in writing and signed by an authorized representative of the party against whom such change, waiver or discharge is sought to be enforced. 17. REMEDIES. All remedies set forth in this Agreement shall be cumulative and not alternative to any other remedies available to either party at law, in equity or otherwise, and may be enforced concurrently or from time to time. 18. SURVIVAL OF TERMS. Termination or expiration of this Agreement for any reason shall not release either party from any liabilities or obligations set forth in this I-4 Agreement which (i) the parties have expressly agreed shall survive any such termination or expiration, or (ii) remain to be performed or by their nature would be intended to be applicable following any such termination or expiration. 19. GOVERNING LAW; VENUE; ATTORNEYS' FEES. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAW OF THE STATE OF IDAHO WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS. VENUE FOR ANY ACTION SHALL LIE SOLELY IN ADA COUNTY, IDAHO, AND THE PARTIES HEREBY SUBMIT AND CONSENT TO THE EXCLUSIVE PERSONAL JURISDICTION IN THE FEDERAL AND STATE COURTS OF ADA COUNTY, IDAHO FOR ANY ACTION OR DISPUTE THAT MAY ARISE IN CONNECTION WITH OR OUT OF THIS AGREEMENT. IN ANY SUCH ACTION, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER ALL EXPENSES INCURRED IN CONNECTION WITH THE ACTION, AND ANY APPEAL THEREOF, INCLUDING BUT NOT LIMITED TO, ITS COSTS AND REASONABLE ATTORNEYS' FEES. THE TERMS OF THIS SECTION WILL SURVIVE ANY TERMINATION OF THIS AGREEMENT. 20. ENTIRE AGREEMENT. This Agreement constitutes the entire and exclusive statement of the agreement between the parties with respect to its subject matter and there are no oral or written representations, understandings or agreements relating to this Agreement which are not fully expressed or referenced in this Agreement. This Agreement shall not be amended except by a written agreement signed by both parties. All exhibits and documents referenced in this Agreement or attached to this Agreement are an integral part of this Agreement. In the event of any conflict between the terms and conditions of this Agreement and any such exhibits or documents, the terms of this Agreement shall be controlling, unless specifically otherwise stated or agreed. 21. THIRD PARTY BENEFICIARY. The parties hereto acknowledge that the Lender is an express intended third party beneficiary hereof entitled to enforce all rights of Licensee hereunder as if it were actually a party hereto. 22. NO TERMINATION. This Agreement cannot be terminated by the parties hereto at any time or for any reason prior to the satisfaction in full of all Obligations of the eRoom Parties to the Lender under the Master Agreement. 23. GRANT OF LIEN. The Licensor hereby acknowledges that the Licensee shall be permitted to grant, and the Licensor hereby waives any rights it may have to prevent, hinder or otherwise obstruct the Licensee from granting, a lien and security interest in this Agreement and all rights of the Licensee to use the Intangible Assets to the Lender. I-5 IN WITNESS WHEREOF, Licensor and Licensee acknowledge that each of the provisions of this Agreement were expressly agreed to and have each caused this Agreement to be signed and delivered by its duly authorized officer or representative, as of the Effective Date. eROOM SYSTEM TECHNOLOGIES, INC. By:________________________________ Name:______________________________ Title:_____________________________ ROOMSYSTEMS, INC. By:________________________________ Name:______________________________ Title:_____________________________ eROOM SYSTEM SPE, INC. By:________________________________ Name:______________________________ Title:_____________________________ I-6 EXHIBIT A INTANGIBLE ASSETS I-7 EXHIBIT J FORM OF BUSINESS LEASE AND EQUIPMENT PURCHASE AND SALE AGREEMENT THIS BUSINESS LEASE AND EQUIPMENT PURCHASE AND SALE AGREEMENT (this "AGREEMENT"), is made and entered into as of this 11th day of May, 2000, by and between eRoom System Technologies, Inc., a Nevada corporation (the "SELLER") and eRoom System SPE, Inc., a Nevada corporation (the "PURCHASER"). RECITALS WHEREAS, the Seller, the Purchaser, RoomSystems Inc. ("RSi") and AMRESCO Leasing Corporation ("ALC") are parties to the Master Business Lease Financing Agreement dated as of May 11, 2000 (the "MASTER AGREEMENT") which provides for the creation of a program (the "PROGRAM") which will consist of the following elements: (i) the Seller will originate Business Leases of Equipment to hotels and timeshares located in the United States, (ii) the purchase by the Purchaser from the Seller of the Business Leases and Equipment pursuant to this Purchase Agreement, (iii) the grant of a License by the Seller to the Purchaser to use the Equipment Intellectual Property pursuant to the License Agreement, (iv) the servicing of the Business Leases and Equipment by RSi pursuant to the Servicing Agreement, (v) the making of Lease Financing Loans by ALC to the Purchaser secured by the Pledged Assets to finance (i) - (iii) above and (vi) the disposition of the Business Leases or Lease Financing Loans through Securitizations. Capitalized terms used herein and not defined herein have the meanings assigned to such terms in the Master Agreement; and WHEREAS, pursuant to this Agreement, the Seller will, from time to time, sell, assign, transfer, set over and otherwise convey without recourse to the Purchaser, each Business Lease (other than the right to service such Business Lease) related to a Lease Financing Loan and each piece of Equipment related to such Business Lease. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, the parties hereto mutually covenant and agree as follows: 1. OFFER TO SELL; ACCEPTANCE. (a) From time to time, the Seller shall submit an offer (an "OFFER") to sell one or more Business Leases and the Equipment related thereto (but not the right to service such Business Leases and Equipment) that meet the requirements set out in the Master Agreement to the Purchaser. (b) Each Offer shall be sent by the Seller to the Purchaser (with a copy to ALC) in the form attached hereto as Exhibit A. J-1 (c) Provided that the Offer meets the requirements set out in the Master Agreement and this Agreement (as determined by ALC pursuant to the Master Agreement), the Purchaser shall indicate its acceptance of the Offer by countersigning the Offer and returning such countersigned Offer to the Seller (with a copy to ALC). 2. SALE AND PURCHASE OF BUSINESS LEASES AND THE EQUIPMENT LEASED THEREUNDER. From time to time on a Purchase Date the Seller shall sell, assign, transfer, set over and otherwise convey Business Leases and the Equipment leased thereunder and related to Lease Financing Loans to the Purchaser, free and clear of all liens, claims, liabilities and encumbrances, in consideration of the Purchase Price therefor (as defined in Section 3 herein), and on the terms and subject to the conditions contained in this Purchase Agreement and Master Agreement. 3. PURCHASE PRICE. The Business Leases and the Equipment leased thereunder shall be sold, transferred and assigned to the Purchaser in consideration of the payment by the Purchaser to the Seller in an amount equal to the Loan Amount for the Lease Financing Loan related to such Business Lease (the "PURCHASE PRICE"), which sum the Purchaser shall remit to the Seller in immediately available funds at the Closing of such sale. 4. SELLER'S REPRESENTATIONS AND WARRANTIES. The Seller represents and warrants to the Purchaser as follows: (a) TITLE TO BUSINESS LEASES AND THE EQUIPMENT. The Seller has good and marketable title to the Business Leases and the Equipment related thereto, free and clear of all mortgages, liens, security interests, charges, options, rights, claims or other encumbrances. (b) CONDITION OF ASSETS. The Equipment is free from material defects, either patent or latent, and has been maintained in accordance with normal industry practice, and is in good operating condition and repair and are suitable for the purposes for which such assets are currently used. (c) DUE ORGANIZATION. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada, with full power and authority to own its properties and to carry on its business as it is now being conducted. (d) AUTHORITY TO EXECUTE AGREEMENT. The execution, delivery and performance of this Agreement have been duly authorized, adopted and approved by the board of directors of the Seller. The Seller has taken all necessary corporate action and has all of the necessary corporate power to enter into and perform this Agreement. (e) ENFORCEABILITY OF AGREEMENT. This Agreement constitutes the valid and binding obligation of the Seller enforceable against the Seller in J-2 accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. (f) NO CONFLICT WITH CHARTER DOCUMENTS OR MATERIAL CONTRACTS. The execution, delivery and performance of this Agreement will not (a) result in the violation of the provisions of the Seller's Articles of Incorporation or Bylaws or any statute, law, ordinance, rule, regulation, permit, order, writ, judgment, injunction, decree or award issued, enacted or promulgated by any governmental entity or any arbitrator, (b) conflict with or result in a breach or violation of any term or provision of any material agreement to which the Seller is a party or by which the Seller is bound or affected or to which any of the Seller's properties or assets are bound or affected, or (c) otherwise adversely affect the contractual or other legal rights or privileges of the Seller. (g) BUSINESS OPERATED IN COMPLIANCE WITH LAW IN ALL MATERIAL RESPECTS; LITIGATION. To the Seller's knowledge, there are no violations by the Seller of any laws, statutes, ordinances, rules, regulations, orders, or requirements of any governmental agency or body having jurisdiction over the Seller, the Business Leases or the Equipment, the compliance or noncompliance with which could have a material adverse effect on the Seller. There are no actions, suits or proceedings pending or threatened, governmental or otherwise, against the Seller relating to the Business Leases or the Equipment or which would prevent or interfere with the execution and performance of this Agreement. 5. PURCHASER'S REPRESENTATIONS AND WARRANTIES. The Purchaser hereby represents, warrants and covenants to the Seller as follows: (a) DUE ORGANIZATION. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada, with full power and authority to own its properties and to carry on its business as it is now being conducted. (b) AUTHORITY TO EXECUTE AGREEMENT. The execution, delivery and performance of this Agreement have been duly authorized, adopted and approved by the board of directors of the Purchaser. The Purchaser has taken all necessary corporate action and has all of the necessary corporate power to enter into and perform this Agreement. (c) ENFORCEABILITY OF AGREEMENT. This Agreement constitutes the valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms, EXCEPT as enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting J-3 creditors' rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. 6. COVENANTS OF THE SELLER. Prior to the Closing, the Seller shall: (a) obtain all consents or approvals required in order to permit the consummation of the transaction contemplated by this Agreement and the Master Agreement; (b) provide for and undertake to deliver Business Leases to the Borrower; and (c) perform all of its obligations under this Agreement and the Master Agreement in a timely manner. 7. COVENANT OF THE PURCHASER. The Purchaser will perform all of its obligations under this Agreement and the Master Agreement in a timely manner. 8. CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligation of the Seller to consummate the transactions contemplated by this Agreement and the Master Agreement is subject to the satisfaction of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser contained in this Agreement and the Master Agreement shall be true and correct in all respects on the date of this Agreement and on the related Purchase Date as though made on and as of the related Purchase Date, if the related Purchase Date is not the date of this Agreement. (b) PERFORMANCE OF OBLIGATIONS OF THE PURCHASER. Prior to or on the related Purchase Date, the Purchaser shall have performed or complied with in all respects all covenants and agreements required to be performed or complied with by or under this Agreement and the Master Agreement. (c) AUTHORIZATION. All action necessary to authorize the execution, delivery and performance of this Agreement by the Purchaser and the consummation of the transaction contemplated hereby shall have been duly and validly taken by the Purchaser. (d) PAYMENT OF PURCHASE PRICE. The Purchaser shall have caused the Purchase Price to be paid, and have delivered, or caused to be delivered all closing documents, as set forth in Section 11 herein, at the Closing. 9. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligation of the Purchaser to consummate the transactions contemplated by this Agreement and the Master Agreement is subject to the satisfaction of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Seller contained in this Agreement and the Master Agreement shall be true J-4 and correct in all respects on the date of this Agreement and on the related Purchase Date as though made on and as of the related Purchase Date, if the related Purchase Date is not the date of this Agreement. (b) PERFORMANCE OF OBLIGATIONS OF THE SELLER. The Seller shall have performed or complied with in all respects all covenants and agreements required to be performed or complied with by it under this Agreement and the Master Agreement prior to or at the Closing. (c) AUTHORIZATION. All action necessary to authorize the execution, delivery and performance of this Agreement by the Seller and the consummation of the transactions contemplated hereby shall have been duly and validly taken by the Seller. 10. MUTUAL CONDITION. The obligations of the Seller and the Purchaser to consummate the transaction contemplated by this Agreement are subject to the satisfaction of the mutual condition that, on each Purchase Date, no action, suit or proceeding shall be pending or threatened before any court or governmental agency in which damages or other relief in connection with this Agreement or the consummation of the transaction contemplated hereby is sought from the Seller or the Purchaser. 11. CLOSING. (a) TIME. Unless this Agreement has been terminated in accordance with its terms, the Closing for the consummation of the transaction contemplated by this Agreement (the "CLOSING") shall take place on the date hereof or as soon thereafter as practicable. The date specified for the sale of a Business Lease and related Equipment in an Offer is the "PURCHASE DATE" for such Business Loan and related Equipment. (b) CLOSING DOCUMENTS TO THE PURCHASER. On each Purchase Date, the Seller shall have duly executed a bill of sale in substantially the form of Exhibit B hereto transferring to the Purchaser all of the Seller's right, title and interest in the related Business Lease and Equipment related thereto. (c) CLOSING DOCUMENTS TO THE SELLER. On each Purchase Date, the Purchaser shall deliver to the Seller payment, in immediately available funds, in the amount of the Purchase Price. 12. TERMINATION. This Agreement may be terminated by either party hereto prior to the Closing upon the mutual written consent of the parties hereto or upon written notice to the other party if: (a) Any of the representations or warranties of the other party contained herein is inaccurate in any material respect; J-5 (b) Any obligation to be performed by the other party is not performed during the period specified, or at or prior to the date specified herein for such performance; or (c) Any condition to the obligation to perform this Agreement of the party seeking to terminate the same has not been satisfied or complied with by the related Purchase Date or the date specified herein for such satisfaction or compliance; and any such inaccuracy, failure of performance or non-satisfaction of or non-compliance with a condition, (i) if it is capable of being cured, has not been cured within fifteen (15) days after written demand therefor, or (ii) has not been waived by the party seeking to terminate this Agreement. 13. MISCELLANEOUS. (a) SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations, warranties and covenants in this Agreement shall survive investigation by the parties hereto as well as the Closing contemplated hereby. (b) NO WAIVER. The failure or delay of either party to exercise its rights under this Agreement or to complain of any act, omission or default on the part of the other party, no matter how long the same may continue, or to insist upon the strict performance of any of the terms or provisions herein, shall not be deemed or construed to be a waiver by such party of its rights under this Agreement or a waiver of any subsequent breach or default of the terms or provisions of this Agreement. (c) HEADINGS. The headings or captions of each section herein have been inserted for the purpose of convenience of reference only, and such headings or captions are not a part of this Agreement and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement. (d) SEVERABILITY. If any provision or provisions of this Agreement, or any portion of any provision hereof or thereof, shall be deemed invalid or unenforceable pursuant to a final determination of any arbitrator or court of competent jurisdiction, or as a result of future legislative action, such determination or action shall be construed so as not to affect the validity or effect of any other portion hereof or thereof, unless, as a result of such determination or action, the consideration to be received or enjoyed by any party hereto would be materially impaired or reduced. (e) NOTICES. Any notice, request, instruction or other document to be given hereunder by any party hereto shall be in writing and delivered personally, by facsimile transmission, or sent by commercial expedited delivery service or registered or certified mail, addressed as follows: J-6 IF TO THE SELLER: eRoom System Technologies, Inc. 3770 Howard Hughes Parkway Suite 175 Las Vegas, Nevada 89109 Attention: Steven L. Sunyich and Gregory L. Hrncir Facsimile Number: (702) 792-2403 IF TO THE PURCHASER: eRoom System SPE, Inc. 3770 Howard Hughes Parkway Suite 175 Las Vegas, Nevada 89109 Attention: Steven L. Sunyich and Gregory L. Hrncir Facsimile Number: (435) 628-8611 (f) GOVERNING LAW; WAIVER OF JURY TRIAL; CONSTRUCTION; CONSENT TO JURISDICTION. The provisions of Section 12.3 and 12.8 of the Master Agreement are hereby incorporated into this Agreement by reference to the fullest extent as if such Sections were set forth in their entirety herein. (g) FURTHER ASSURANCES. The Seller and the Purchaser each agree to execute and deliver at or after the Closing such other instruments and documents as shall be reasonably necessary for the implementation and consummation of the transactions contemplated by this Agreement. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be an original, but both of which shall constitute one agreement. (i) ARM'S LENGTH CONTRACT. This Agreement has been negotiated "at arms length" by the parties hereto, each represented by counsel of its choice and each having an equal opportunity to participate in the drafting of the provisions hereof. Accordingly, in construing the provisions of this Agreement neither party shall be presumed or deemed to be the "drafter" or "preparer" of the same. 14. THIRD PARTY BENEFICIARIES. The parties hereto acknowledge that ALC is an express intended third party beneficiary hereof entitled to enforce all rights of any party hereto hereunder as if it were actually a party hereto. [SIGNATURE PAGE FOLLOWS] J-7 IN WITNESS WHEREOF, the Seller and the Purchaser have duly executed this Agreement as of the day and year first above written. eROOM SYSTEM TECHNOLOGIES, INC. By:___________________________________ Its: eROOM SYSTEM SPE, INC. By:___________________________________ Its: J-8 EXHIBIT A FORM OF OFFER eRoom System SPE, Inc. 3770 Howard Hughes Parkway Suite 175 Las Vegas, Nevada 89109 Attn: Re: Offer to Sell Business Leases and Equipment Ladies and Gentlemen: This is an Offer, as defined in the Business Lease and Equipment Purchase and Sale Agreement, dated May 11, 2000 between eRoom System SPE, Inc. (the "Purchaser") and eRoom System Technologies, Inc. (the "Seller"). We hereby offer to sell to you the Business Leases and Equipment (but not the right to service such Business Leases and Equipment) listed on the attached schedule. The Purchase Price for the Business Leases and Equipment subject to this Offer is $______ (the Loan Amount for the Lease Financing Loan related to such Business Leases as provided in the Master Business Lease Financing Agreement, dated May 11, 2000, among the Purchaser, the Seller, AMRESCO Leasing Corporation and RoomSystems, Inc.). Please indicate your acceptance of this Offer by countersigning the Offer at the space indicated below. Sincerely, eRoom System Technologies, Inc. By:_____________________________________ Name: Title: ACKNOWLEDGED AND ACCEPTED: eRoom System SPE, Inc. By:_____________________________________ Name: Title: J-9 cc: AMRESCO Leasing Corporation 412 East ParkCenter Blvd. Suite 300 Boise, Idaho 83706 Attn: William C. Cole J-10 EXHIBIT B FORM OF BILL OF SALE J-11 EXHIBIT L FORM OF STOCK PLEDGE AND SECURITY AGREEMENT THIS STOCK PLEDGE AND SECURITY AGREEMENT dated as of May 11, 2000 (the "AGREEMENT") by and among eRoom System Technologies, Inc., a Nevada corporation having an office at 3770 Howard Hughes Parkway, Las Vegas, Nevada 89109 ("eROOM"), RoomSystems, Inc., a Nevada corporation with its business located at 390 North 3050E, St. George, Utah 84790 ("RSi") and AMRESCO Leasing Corporation, a Nevada corporation (the "LENDER"). W I T N E S S E T H: To secure the obligations of the Borrower under Loan Pool #____ created under that certain Master Business Lease Financing Agreement dated as of May 11, 2000 (the "MASTER AGREEMENT") among RSi, the Lender, eRoom System SPE, Inc. (the "BORROWER") and eROOM, eROOM hereby grants and conveys to the Lender a security interest in and to all of the issued and outstanding shares of the common stock of RSi now owned or hereafter acquired by eROOM, including without limitation, the shares described in EXHIBIT "A" hereto, together with any and all proceeds or other sums arising from or by virtue of, and all dividends and distributions (cash or otherwise) payable and/or distributable with respect to, all or any of the shares described above; and all cash, securities, dividends, and other property at any time and from time to time receivable or otherwise distributed in respect of or in exchange for any or all of the shares described above and any other property substituted or exchanged therefor (collectively, the "STOCK COLLATERAL"). Capitalized items used herein and not defined herein shall have the respective meanings assigned to such terms in the Master Agreement. 1. GRANT. eRoom hereby grants and conveys to the Lender a security interest in all of the Stock Collateral (the "SECURITY INTEREST"). 2. WARRANTY; PARI PASSU. eRoom hereby warrants and represents that except for the security interest granted hereby, the Stock Collateral is legally and equitably owned by eRoom free and clear of any and all liens, security interests, claims, charges and other encumbrances whatsoever other than any of the security interest granted by eRoom to the Lender pursuant to similar Stock Pledge and Security Agreements relating to the other Loan Pools with which the security interest created hereby shall be considered to be PARI PASSU in right with all other such pledges and security interests. 3. REPRESENTATIONS AND WARRANTIES; RELATED COVENANTS. eRoom represents, warrants, covenants and agrees to and with the Lender that: (a) eRoom is the legal and beneficial owner of the Stock Collateral issued by RSi and at the time of creation or acquisition of any additional shares, eRoom will be the legal and beneficial owner of such additional shares; (b) the Stock Collateral currently issued by RSi is duly authorized and issued, fully paid and non-assessable, and all documentary, stamp or other taxes or fees owing in connection with the issuance, transfer L-1 and/or pledge thereof have been paid; (c) no dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Stock Collateral; (d) the Stock Collateral is free and clear of all liens, mortgages, pledges, charges, security interests or other encumbrances, options, warrants, puts, calls and other rights of third persons, and restrictions, other than (i) the Security Interest, and (ii) restrictions on transferability imposed by applicable state and federal securities laws; (e) eRoom has full right and authority to pledge the Stock Collateral for the purposes and upon the terms set out herein, and the execution, delivery and performance of this Agreement are not in contravention of any indenture, agreement or undertaking to which eRoom is a party or by which eRoom is bound; (f) certificates representing the Stock Collateral issued by RSi have been delivered to Lender, together with a duly executed blank stock power with signatures guaranteed, for each certificate; (g) the Stock Collateral described on EXHIBIT "A" constitutes all of the issued and outstanding capital stock of RSi; (h) RSi has not issued, and there are not outstanding, any options, warrants or other rights in favor of eRoom to acquire capital stock of RSi. 4. STOCK COLLATERAL COVENANTS. Until such time as all the Notes issued under the Master Agreement are repaid in full, eRoom covenants and agrees as follows: (a) To pay and perform and cause the Borrower to pay and perform, all of their obligations under the Master Agreement according to its terms. (b) To defend all right and title to the Stock Collateral against any and all claims and demands whatsoever. (c) To retain legal and beneficial ownership of the Stock Collateral and not to sell, exchange, assign, loan, deliver, pledge, hypothecate or otherwise dispose of the Stock Collateral or any portion thereof without the prior written consent of the Lender. (d) To keep the Stock Collateral free and clear of all liens, charges, encumbrances, taxes and assessments, and to pay when due all taxes, payments, and/or assessments in any way relating to the Stock Collateral or any part thereof. 5. ADDITIONAL COVENANTS. (a) Further Acts, Assurances. eRoom covenants and agrees to, from time to time, promptly execute and deliver to the Lender all such other assignments, certificates, supplemental writings and financing statements as the Lender requests in order to perfect or evidence the Security Interest. eRoom further agrees that if eRoom shall at any time acquire any additional shares of the capital stock of any class of RSi, and whether such acquisition shall be by purchase, exchange, reclassification, dividend or otherwise eRoom shall forthwith (and without the necessity for any request or demand by the Lender) deliver the certificates representing such shares to the Lender, in the same manner and with the same effect as described herein. Upon delivery, such shares shall thereupon constitute Stock Collateral and shall be subject to the Security Interest herein L-2 created, for the purposes and upon the terms and conditions set forth in this Agreement, the Master Agreement, the Notes and the other Operative Documents. (b) Inspection. eRoom shall allow the Lender to inspect all records of eRoom and RSi relating to the Stock Collateral, and to make and take away copies of such records during normal business hours. (c) Changes. eRoom and RSi shall promptly notify the Lender of any material change in any fact or circumstance warranted or represented by eRoom in this Agreement or in any other writing furnished by eRoom to the Lender in connection with the Stock Collateral. (d) Claims. eRoom and RSi shall promptly notify the Lender of any claim, action or proceeding affecting title to the Stock Collateral, or any part thereof, or the Security Interest, and at the request of the Lender, shall appear in and defend, at it or their expense, any such action or proceeding. (e) Costs. eRoom and RSi shall promptly pay to the Lender the amount of all reasonable costs and expenses of the Lender (or its assigns), including, but not limited to, attorneys' fees, incurred by the Lender (or its assigns) in connection with this Agreement and the enforcement of the rights of the Lender hereunder. (f) No Other Stock. RSi shall not issue any other shares of common or other stock of RSi to any party. 6. CONVERSIONS; ETC. Should the Stock Collateral, or any part thereof, ever be in any manner converted by RSi into another property of the same or another type or any money or other proceeds ever be paid or delivered to eRoom as a result of eRoom's rights in the Stock Collateral, then in any such event (except as otherwise provided herein), all such property, money and other proceeds shall be and/or become part of the Stock Collateral, and eRoom covenants forthwith to pay or deliver to the Lender all of the same which is susceptible of delivery; and at the same time, if the Lender deems it necessary and so requests, eRoom will properly endorse or assign the same to the Lender. Without limiting the generality of the foregoing, eRoom hereby agrees that the shares of capital stock of the surviving corporation in any merger or consolidation involving RSi or any of the Stock Collateral shall be deemed to constitute the same property as the Stock Collateral. With respect to any such property of a kind requiring an additional security agreement, financing statement or other writing to perfect a security interest therein in favor of the Lender, eRoom will forthwith execute and deliver to the Lender whatever the Lender shall deem necessary or proper for such purpose. 7. EVENTS OF DEFAULT. For the purposes of this Agreement, each of the following shall constitute a "STOCK PLEDGE AGREEMENT EVENT OF DEFAULT" by eRoom: (a) The occurrence of an Event of Default or an Event of Acceleration under the Master Agreement. L-3 (b) Failure by eRoom to comply with or perform any provision of this Agreement. (c) Subjection of all or any part of the Stock Collateral to levy of execution or other judicial process. 8. REMEDIES UPON DEFAULT. Upon the occurrence of any Stock Pledge Agreement Event of Default and at the option of the Lender, in addition to any rights, remedies and privileges which the Lender may have under the Master Agreement, the Lender also shall have all of the rights, remedies and privileges with respect to repossession, retention and sale of the Stock Collateral and disposition of the proceeds as are accorded to the Lender by the applicable sections of the UCC. 9. EXERCISING SHAREHOLDER RIGHTS AFTER THE OCCURRENCE OF A STOCK PLEDGE AGREEMENT EVENT OF DEFAULT. Upon the occurrence and during the continuance of a Stock Pledge Agreement Event of Default, the Lender, without the consent of eRoom, may; (a) At any time vote or consent in respect of any of the Stock Collateral and authorize any Stock Collateral to be voted and such consents to be given, ratify and waive notice of any and all meetings, and take such other action as shall seem desirable to the Lender, in its discretion, to protect or further the interest of the Lender in respect of any of the Stock Collateral as through it were the outright owner thereof, and, RST hereby irrevocably constitutes and appoints the Lender its sole proxy and attorney-in-fact, with full power of substitution to vote and act with respect to any and all Stock Collateral standing in the name of eRoom or with respect to which eRoom is entitled to vote and act. The proxy and power of attorney herein granted are coupled with interest, are irrevocable, and shall continue throughout the term of this Agreement; (b) In respect of any Stock Collateral, join in and become a party to any plan of recapitalization, reorganization or readjustment (whether voluntary or involuntary) as shall seem desirable to the Lender in respect of any such Stock Collateral, and deposit any such Stock Collateral under any such plan; make any exchange, substitution, cancellation or surrender of such Stock Collateral required by any such plan and take such action with respect to any such Stock Collateral as may be required by any such plan or for the accomplishment thereof; and no such disposition, exchange, substitution, cancellation or surrender shall be deemed to constitute a release of Stock Collateral from the Security Interest of this Agreement; (c) Receive all payments of whatever kind made upon or with respect to any Stock Collateral; and (d) Transfer into its name, or into the name or names of its nominee or nominees, all or any of the Stock Collateral. 10. GENERAL PROVISIONS. L-4 (a) The Lender may exercise its rights with respect to the Stock Collateral held hereunder without being obligated to consider or take notice of any right of contribution, reimbursement, subrogation or marshaling of assets which any of the RSi Parties may have or claim to have against any person or persons or with respect to any other collateral. No delay or omission on the part of the Lender in exercising any right hereunder shall operate as a waiver of such right or any other right under this Agreement. A waiver on any one occasion shall not be construed as a bar to or waiver of any right and/or remedy on any future occasion. (b) The Lender shall have no duty as to the collection or protection of the Stock Collateral held hereunder or of any income thereon, or as to the preservation of any rights pertaining thereto, beyond the safe custody of the Stock Collateral. (c) The Lender may assign this Agreement and, if assigned, the assignee shall be entitled to performance of all of eRoom's and RSi's obligations and agreements hereunder, and the assignee shall also be entitled to all of the rights and remedies of the Lender hereunder. (d) The terms, warranties and agreements contained in this Agreement shall bind and inure to the benefit of the respective parties hereto, and their respective legal representatives, successors and assigns. (e) This Agreement may not be changed orally, but may be changed only by an agreement in writing signed by the parties against whom enforcement of any waiver, change, modification or discharge is sought. (f) The provisions of Sections 12.3 and 12.8 of the Master Agreement are hereby incorporated into this Agreement by this reference to the fullest extent as if such Sections were set forth in their entirety herein. (g) Notices to either party shall be in writing and shall be delivered personally or by mail addressed to the party at the address herein set forth or otherwise designated in writing. 11. WAIVERS. Except for any notices required under the Master Agreement, eRoom hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever in respect of the Notes (including, without limitation, notice of intent to accelerate and of acceleration), as well as any requirement that the Lender or any other holder of the Notes exhaust any right or remedy or take any action in connection with the Notes or any of the other Operative Documents before exercising any right or remedy under this Agreement. The obligations of eRoom hereunder shall not be affected or impaired by reason of the happening from time to time of any of the following, although without notice to or the consent of eRoom: (a) the renewal or extension of the maturity of or the acceptance of partial payments with respect to any and all amounts due and owing under the Notes or any other Operative Document, or any part thereof; L-5 (b) the alteration in any manner of the terms of any of the Notes, Operative Documents or any part thereof either as to the maturities thereof, rates of interest, methods of payment, parties thereto or otherwise; (c) the waiver by the Lender or any other holder of the Notes of the performance or observance by any of the RSi Parties of any of their agreements, covenants, terms or conditions contained in the Notes or in any of the other Operative Documents; (d) the voluntary or involuntary liquidation, dissolution, sale of all or substantially all of the assets, marshalling of assets and liabilities, receivership, conservatorship, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, winding up, or other similar proceedings affecting any RSi Party; (e) the release by operation of law or otherwise of any of the other obligors from the performance or observance of any of the agreements, covenants, terms or conditions contained in the Notes or in any of the other Operative Documents; or (f) the release of any security for the Notes, whether under the Master Agreement, this Agreement or any of the other Operative Documents. L-6 IN WITNESS WHEREOF, the parties have respectively signed these presents as of the day and year first above written. eROOM SYSTEM TECHNOLOGIES, INC., By: ___________________________ Name: Its: ROOMSYSTEMS, INC. By: ___________________________ Name: Its: AMRESCO LEASING CORPORATION By: ___________________________ Name: Its: L-7 EXHIBIT A LIST OF STOCK COLLATERAL NUMBER OF SHARES CLASSIFICATION CERTIFICATE NO. L-8 EXHIBIT M FORM OF PLEDGE AND SECURITY AGREEMENT ================================================================================ PLEDGE AND SECURITY AGREEMENT by and among eRoom System SPE, Inc., eRoom System Technologies, Inc. and RoomSystem, Inc. in favor of AMRESCO LEASING CORPORATION, as Secured Party ================================================================================ PLEDGE AND SECURITY AGREEMENT (this "SECURITY AGREEMENT"), dated May 11, 2000, by eRoom System SPE, Inc. (the "BORROWER"), eRoom System Technologies, Inc. ("eRoom") and RoomSystem, Inc. ("RSi"; and collectively with eRoom and the Borrower, the "eROOM PARTIES"), in favor of AMRESCO LEASING CORPORATION, a Nevada corporation (together with its successors and assigns, the "SECURED PARTY"). PRELIMINARY STATEMENTS A. During the life of Loan Pool #____ created on the date hereof, the Secured Party will make certain lease financing loans (each a "LEASE FINANCING LOAN" and, collectively, the "LEASE FINANCING LOANS") to the Borrower reflected in the Lease Financing Notes to the Secured Party (the "LEASE FINANCING NOTES"), in a form prepared by and acceptable to Secured Party, which Lease Financing Notes will evidence the Borrower's obligation, INTER ALIA, (i) to repay the Lease Financing Loans and (ii) to pay interest and other amounts as set forth therein. B. It is a condition to the making of the Lease Financing Loans, that the Borrower shall have executed and delivered this Security Agreement whereby the Borrower, in order to provide security for the full payment when due of all amounts payable under the Lease Financing Notes related to the Loan Pool, shall pledge and grant to the Secured Party a security interest in the collateral described herein. C. The Parties hereto anticipate that the Lease Financing Notes, may, at some time in the future, be amended, restated and consolidated into a Credit Enhancement Note pursuant to Section 2.15 of the Master Agreement. The Parties acknowledge and agree that following such amendment, restatement and consolidation, the security interest in the collateral described herein shall continue to provide security for the full payment of all amounts payable under such Credit Enhancement Note. NOW THEREFORE, in consideration of the foregoing and in order to induce the Secured Party to make the Lease Financing Loans available to the Borrower and for other good and valuable consideration, the receipt and sufficiency of which the eRoom Parties hereby acknowledge, the eRoom Parties and the Secured Party agree as follows: ARTICLE I DEFINITIONS AND OTHER TERMS Section 1.1 DEFINED TERMS. The following terms shall have the meanings herein specified unless the context otherwise requires. All terms not otherwise defined herein shall have the meaning accorded to such terms in the Master Business Lease Financing Agreement dated as of May 11, 2000, among the Secured Party, the Borrower, eRoom and RSi (the "MASTER AGREEMENT"). All terms defined in the singular will have the same meaning when used in the plural and vice versa. "CODE" means the Internal Revenue Code of 1986 as amended. M-1 "COLLATERAL" has the meaning ascribed to such term in Section 2.1. "DEFAULT RATE" has the meaning ascribed to such term in the related Note. "FINANCING STATEMENTS" means the UCC financing statements, prepared by Secured Party, and delivered to Borrower and which Borrower must execute and deliver to Secured Party as a condition under the Loan Documents. "LEASE FINANCING LOAN" and "LEASE FINANCING LOANS" have the meanings ascribed to such terms in the preliminary statements of this Security Agreement. "LOAN DOCUMENTS" means the Notes, this Security Agreement and any guarantee, mortgage, deed of trust or other instrument, agreement, certificate or other writing, now or hereafter executed and delivered in connection with the Notes or the Obligations. "MASTER AGREEMENT" shall have the meaning set out in the preamble to this Section 1.1. "OBLIGATIONS" means each and every obligation, covenant, agreement, indebtedness and liability of the Borrower to the Secured Party evidenced by, arising under or in connection with any of the Notes related to the Loan Pool (including, without limitation, indebtedness, obligations and liabilities in respect of principal, interest, the Make Whole Premium, the Credit Enhancement Amount and the Scheduled Monthly Credit Enhancement Obligation Payments for each of the related Lease Financing Loans), this Security Agreement, or any other Loan Document, and any future advances thereon, renewals, extensions, modifications, amendments, substitutions and consolidations thereof, including the Borrower's obligations to pay (or reimburse the Secured Party for) all costs and expenses (including attorneys fees and disbursements) incurred by the Secured Party in obtaining, maintaining, protecting and preserving its interest in the Collateral or its security interest therein, foreclosing, retaking, holding, preparing for sale or lease, selling or otherwise disposing or realizing on the Collateral or in exercising its rights hereunder or as a secured party under the UCC, any other applicable law, regulation or rule or this Security Agreement, including interest on such costs and expenses which shall accrue at the rate of eight percent (8%) per annum, and all other indebtedness, obligations and liabilities of any kind of the Borrower to the Secured Party, now or hereafter existing (including future advances whether or not pursuant to commitment), arising directly between the Borrower and the Secured Party relating to the Loan Documents, whether absolute or contingent, joint and/or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, or direct or indirect, and whether incurred by the Borrower as principal, surety, endorser, guarantor, accommodation party or otherwise. "PROCEEDS" shall mean "proceeds" as such term is defined in the UCC or under other relevant law and shall include, but shall not be limited to, (a) any and all proceeds of any insurance (insuring the Collateral or otherwise required to be maintained hereunder, including return of unearned premium), indemnity, warranty or guaranty M-2 payable to the Secured Party or Borrower from time to time, and claims for insurance, indemnity, warranty or guaranty effected or held for the benefit of the Borrower, with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to the Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person acting under color of governmental authority) and (c) any and all interest, income, dividends, distributions and earnings on the Collateral or other monies, revenues or other amounts derived from the Collateral. "UCC" means the Uniform Commercial Code (or any comparable law) in effect in any relevant jurisdiction the laws of which govern the perfection of security interests hereunder. Section 1.2 RULES OF CONSTRUCTION. When used in this Security Agreement: (a) "or" is not exclusive; (b) a reference to a law includes any amendment or modification of such law; (c) a reference to a Person includes its permitted successors and permitted assigns; and (d) a reference to an agreement, instrument or document shall -, include such agreement, instrument or document as the same may be amended, modified or supplemented from time to time in accordance with its terms. ARTICLE II SECURITY INTERESTS Section 2.1 PLEDGE AND GRANT OF SECURITY INTEREST. As collateral security for the prompt and complete payment and performance when due of all of the Obligations, the Borrower hereby pledges and grants to the Secured Party, a continuing security interest in, and Lien on, all of the Borrower's right, title and interest in and to all of the Pledged Assets related to the Loan Pool including (without limitation) the following (collectively, the "COLLATERAL"): (a) any and all Business Leases included in all Transaction Submission Packages submitted to the Secured Party pursuant to the Master Agreement and related to the Loan Pool and all of the Borrower's right, title and interest in, to and under any contracts, including any security agreements, or other documents executed by, or in favor of, the Borrower in connection therewith; (b) any and all Refreshment Centers and Equipment related to any of the Business Leases related to the Lease Financing Loans in such Loan Pool; (c) the Collected Funds, the Custodial Account, the Loan Payment Account, the Loss Reserve Account, the Property Tax Reserve Account and any other bank or similar accounts related to the Loan Pool in the name, or held for the benefit of, the Borrower or the Secured Party and all amounts on deposit therein; (d) the Licenses; M-3 (e) all additions, accessions, replacements, substitutions and improvements to any of the foregoing; and (f) any and all Proceeds of the foregoing, including all insurance payments (whether or not the Secured Party is the loss payee thereof). Without limiting the generality of the foregoing, (x) this Agreement also secures the payment of all amounts which constitute part of the Obligations and would be owed by the Borrower to the Secured Party but for the fact they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Borrower and (y) the Liens created hereby with respect to the Licenses shall be pari passu with the Lien granted to the Secured Party on such Licenses in connection with other Loan Pools. Section 2.2 SECURITY INTEREST ABSOLUTE. All rights of the Secured Party and the security interests hereunder shall be absolute and unconditional irrespective of: (a) any change in the time, manner, amount or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Notes or any other Loan Document; (b) any exchange, release or nonperfection of all or any part of the Collateral or any other collateral, or any release from, amendment to, waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (c) to the fullest extent permitted by law, any other circumstances which might otherwise constitute a defense available to, or a discharge of, the Borrower or a third party pledgor. ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS Section 3.1 REPRESENTATIONS AND WARRANTIES. Each of the eRoom Parties hereby represents and warrants that the representations and warranties of such eRoom Party set out in the Master Agreement are true and correct in all material respects as of the date hereof and each eRoom Party hereby restates such representations and warranties in full. Section 3.2 CHIEF EXECUTIVE OFFICE; LOCATION. (a) The chief executive office of the Borrower is located at 3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109. (b) The Borrower will neither change its name, federal tax payor identification number, or its chief executive office, nor the location of its business, property or assets (including the Collateral), nor assume a different name, nor conduct its M-4 business or affairs under any other name or in any other location, nor merge, consolidate, or change its corporate structure (whether by stock sale, issuance, purchase or otherwise), nor change its use of any item of Collateral, without in each instance providing the Secured Party with not less than ten (10) days prior written notice of the proposed action and specifying within such notice and with reasonable clarity and particularity the timing and nature of such proposed action. Additionally, the Borrower shall provide such other information in connection with the proposed action as the Secured Party may reasonably request and shall have taken all action, reasonably satisfactory to the Secured Party, to maintain the security interest of the Secured Party in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. Section 3.3 NO CONSENT REQUIRED. Except for the filing of the Financing Statements in the locations set forth on Exhibit A hereto, no consent of any other Person and no authorization, approval or other action by and no notice to or filing with, any court, government, agency or regulatory authority is required (a) for the grant by the Borrower of the pledge and security interest granted hereby or for the execution, delivery or performance of this Security Agreement, the Notes and other Loan Documents or (b) for validity, perfection or maintenance of the pledge, lien and security interest created hereby. Section 3.4 TITLE TO THE COLLATERAL. The Borrower has and will maintain good and marketable title to the Collateral (excluding the stock of RSi pledged by eRoom to the Secured Party pursuant to the Stock Pledge Agreement), free of all Liens (other than Permitted Liens and the security interest granted to the Secured Party hereunder). Section 3.5 NO LIENS. With respect to each Lease Financing Loan, there is no Lien (including any federal or state tax lien), suit (including any action, proceeding, or other litigation pending, or to the Borrower's knowledge, threatened) or judgment (including any award, injunction, order) filed with, registered, indexed or recorded in any public office, court, arbitration panel, administrative agency or regulatory authority (or intended so to be), directly or indirectly, identifying or encumbering or covering or involving the Collateral or which could have a material adverse effect on the Borrower or the Borrower's ability to perform its Obligations other than Permitted Liens or Liens that will be removed on or prior to the Funding Date of such Lease Financing Loan. Other than the security interest granted to the Secured Party hereunder and the Permitted Liens, the Borrower has not and, without the prior written consent of the Secured Party, will not enter into any agreement or understanding or take, permit or suffer to exist any action (including the filing of a financing statement, agreement, pledge, mortgage, notice or registration) or event (whether by operation of law or otherwise) for the purpose of, or that may have the effect of, directly or indirectly, (a) granting a Lien on (including any state of federal tax Lien), pledging, transferring, assigning, selling, disposing of, or encumbering any Collateral, any interest therein or rights pertaining thereto or involving the Borrower, or (b) changing, modifying, supplementing, or increasing the amount of credit, loans, indebtedness or value secured by the Permitted Liens, if any, or the amount, property or assets encumbered thereby. M-5 Section 3.6 MAINTENANCE OF COLLATERAL AND BUSINESS. At the Borrower's sole cost and expense, the Borrower shall (a) keep, use, operate and maintain the Collateral and (b) not do or suffer to be done any act whereby the value of the Collateral or any part or interest therein may be lessened in any material respect. The Borrower shall notify the Secured Party promptly of any actual or threatened destruction or material damage or impairment of any component of the Collateral or if Borrower receives a notice of violation from any governmental entity or agency. Section 3.7 PERFECTED SECURITY INTEREST. This Security Agreement and the grant and transfer of the Collateral hereunder creates a valid and enforceable security interest in the Collateral. Upon filing of the Financing Statements in the locations set forth on Exhibit A hereto, such security interest will be perfected and subject to no prior or equal security interest other than and only to the extent of the Permitted Liens. The execution and filing of the Financing Statements has been duly authorized by all appropriate action on the part of the Borrower (and any other Person named as debtor therein) and the Borrower (and any other Person named as debtor therein) has duly executed the Financing Statements. Section 3.8 NO VIOLATION; INDEMNITY. The Borrower has not and shall not acquire, obtain, make, manufacture, produce, operate, hold, possess, maintain, use, sell, transfer, grant, pledge, or dispose of (for purposes of this Section 3.8, collectively "the Borrower's use") any of its securities, property or assets (including any proceeds of the Lease Financing Loans and the Collateral) in violation of any statute, law, rule, ordinance, regulation, policy, procedure, injunction, award, decree, judgment, contract, agreement, understanding, or right or interest of any other Person (for purposes of this Section 3.8, each such event a "violation"), and to the Borrower's knowledge no such violation has been made by any other Person and no basis for a claim of any such violation exists. The Borrower shall indemnify and hold the Secured Party harmless from and against any such violation, and any other loss, liability, damage, cost or expense whatsoever (including attorneys' fees and disbursements) arising out of or in connection with the Borrower's use of any of its securities, property or assets (including any proceeds of the Lease Financing Loans and the Collateral). Section 3.9 INSPECTION. The Borrower shall allow the Secured Party, its agents and representatives, from time to time, to inspect the Collateral and the Borrower's books and records pertaining thereto and the Borrower will assist (and permit abstracts and photocopies of the Borrower's books and records to be taken and retained by) the Secured Party, its agents and representatives in making any such inspection. Section 3.10 INSURANCE. At the Borrower's sole cost and expense, the Borrower shall maintain the insurance required in the Master Agreement. In addition to the foregoing, the Borrower shall: (a) (i) keep the Collateral insured against loss or damage by fire, theft, collision and other hazards as may be required by the Secured Party and by policies of fire, extended coverage and other insurance with such company or companies, in such amounts (and, with respect to policies required for property, fire and flood insurance in M-6 an amount not less than the lesser of (A) the replacement value of new Equipment that is substantially similar to the Equipment lost or damaged, and (B) the Loan Amount payable under the Note, as may be required by the Secured Party, but in no event less than the minimum amount required to prevent the imposition of any coinsurance requirement on the insured, (ii) maintain liability insurance of not less than one million dollars, and (iii) maintain business interruption insurance with scope and coverage reasonably satisfactory to the Secured Party; (b) cause all insurance policies required hereunder or under the Master Agreement (i) to be maintained by providers either (A) having ratings of not less than B++ from A.M. Best Company Inc. (or comparable ratings from a comparable rating agency) or (B) who, if not so rated, have been approved by the Secured Party and (ii) to contain a standard lender's loss payable endorsement or mortgagee's endorsement providing for payment directly to the Secured Party and/or its designees and to provide for a minimum of thirty (30) days notice to the Secured Party prior to cancellation or modification or nonrenewal; (c) timely pay all premiums, fees and charges required in connection with all of its insurance policies and otherwise continue to maintain such policies in full force and effect; (d) promptly deliver the insurance policies, certificates (and renewals) thereof or other evidence of compliance herewith to the Secured Party; and (e) promptly notify the Secured Party of any loss covered by such insurance policies and allow the Secured Party to join the Borrower in adjusting any loss in excess of $20,000. Section 3.11 ACCURACY OF INFORMATION. All information, reports, statements and financial and other data furnished (or hereafter furnished) by the Borrower to the Secured Party, its agents or representatives hereunder or in connection with the Borrower's application for the Lease Financing Loans and the Obligations, are (and shall be on the date so furnished) true, complete and correct. Borrower hereby authorizes Secured Party to request credit bureau reports while any of the Obligations are outstanding. ARTICLE IV SPECIAL PROVISION CONCERNING RIGHTS AND DUTIES WHILE IN POSSESSION OF COLLATERAL Section 4.1 BORROWER'S POSSESSION. Upon and during the continuance of an Event of Default or an Event of Acceleration, to the extent the same shall, from time to time, be in the Borrower's possession, the Borrower will hold all securities, instruments, chattel paper, documents, certificates and money and other writings evidencing or relating to the Collateral in trust for the Secured Party and, upon request or as otherwise M-7 provided herein, promptly deliver the same to the Secured Party in a form received and at a time and in a manner satisfactory to the Secured Party. With respect to the Collateral in the Borrower's possession the Borrower shall at the Secured Party's request take such action as the Secured Party in its discretion deems necessary or desirable to create, perfect and protect the Secured Party's security interest in any of the Collateral. Section 4.2 SECURED PARTY'S POSSESSION. With respect to all of the Collateral delivered or transferred to, or otherwise in the custody or control of (including any items in transit to or set apart for) the Secured Party or any of its agents, associates or correspondence in accordance with this Security Agreement, the Borrower agrees that: (a) such Collateral will be, and is deemed to be in the sole possession of the Secured Party; (b) the Borrower has no right to withdraw or substitute any such Collateral without the consent of the Secured Party, which consent may be withheld or delayed in the Secured Party's sole discretion; (c) the Borrower shall not take or permit any action, or exercise any voting and other rights, powers and privileges in respect of the Collateral inconsistent with the Secured Party's sole possession thereof; and (d) the Secured Party may in its sole discretion and without notice, without obligation or liability except to account for property actually received by it, and without affecting or discharging the Obligations, (i) further transfer and segregate the Collateral in its possession; (ii) subject to its obligations under the Master Agreement, receive Proceeds and hold the same as part of the Collateral and/or apply the same as hereinafter provided; and (iii) exchange any of the Collateral for other property upon reorganization, recapitalization or other readjustment. Following the occurrence of an Event of Default or Event of Acceleration, the Secured Party is authorized (A) to exercise or cause its nominee to exercise all or any rights, powers and privileges (including to vote) on or with respect to the Collateral with the same force and effect as an absolute owner thereof; (B) whether any of the Obligations be due, in its name or in the Borrower's name or otherwise, to demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement the Secured Party deems desirable with respect to, any of the Collateral; and (C) to extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Collateral. Notwithstanding the rights accorded the Secured Party with respect to the Collateral and except to the extent provided below or required by the UCC or other applicable law (which requirement cannot be modified, waived or excused), the Secured Party's sole duty with respect to the Collateral in its possession (with respect to custody, preservation, safekeeping or otherwise) will be to deal with it in the same manner that the Secured Party deals with similar property owned and possessed by it. Without limiting the foregoing, the Secured Party, and any of its officers, directors, partners, trustees, owners, employees and agents, to the extent permitted by law (1) will have no duty with respect to the Collateral or the rights granted hereunder; (2) will not be required to sell, invest, substitute, replace or otherwise dispose of the Collateral; (3) will not be required to take any steps necessary to preserve any rights against prior parties to any of the Collateral; (4) will not be liable for (or deemed to have made an election of or exercised any right or remedy on account of) any delay or failure to demand, collect or realize upon any of the Collateral; and (5) will have no obligation or liability in connection with the Collateral or arising under this Security Agreement. The Borrower agrees that such standard of care is reasonable and appropriate under the circumstances. M-8 ARTICLE V EVENTS OF DEFAULT AND EVENT OF ACCELERATION Section 5.1 EVENT OF DEFAULT AND EVENT OF ACCELERATION. The occurrence of any Event of Default or Event of Acceleration under the Master Agreement shall be considered an Event of Default or an Event of Acceleration, respectively, hereunder. ARTICLE VI REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT OR EVENT OF ACCELERATION Section 6.1 RIGHTS AND REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT. If an Event of Default shall have occurred and be continuing, the Secured Party (and its successors and assigns) shall have the right (but not the obligation), itself or through any of its agents (including the Borrower), with or without notice to the Borrower (as provided below), as to any or all of the Collateral, by any available judicial procedure, or without judicial process (PROVIDED, HOWEVER, that it is in compliance with the UCC), to take possession of the Collateral and without liability to the eRoom Parties for trespass to enter any premises where the Collateral may be located for the purpose of taking possession of or removing the Collateral, and, generally, to exercise any and all rights afforded to a secured party under the UCC or other applicable law. Without limiting the generality of the foregoing, the Borrower agrees that the Secured Party shall have the right to sell, lease, or otherwise dispose of all or any part of the Collateral, whether in its then condition or after further preparation or processing, either at public or private sale or any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such terms and conditions, all as the Secured Party in its sole discretion may deem advisable, and it shall have the right to purchase at any such sale; and, if any Collateral shall require rebuilding, repairing, maintenance, preparation, the Secured Party shall have the right, at its option, to do such rebuilding or repairing for the purpose of putting the Collateral in such salable or disposable form as it shall deem appropriate. At the Secured Party's request, the Borrower shall assemble the Collateral and make them available to the Secured Party at places which the Secured Party shall select, whether at Borrower's premises or elsewhere, and make available to the Secured Party, without rent, all of Borrower's premises and facilities for the purpose of the Secured Party's taking possession of, removing or putting the Collateral in saleable or disposable form. The proceeds of any such sale, lease or other disposition of the Collateral shall be applied, first to the expenses of retaking, holding, storing, processing and preparing for sale, selling, lease, leasing and the like, and to the reasonable attorneys' fees and legal expenses incurred by the Secured Party and to the payment of any other amounts required by applicable law. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale or lease of the Collateral. M-9 Section 6.2 RIGHTS AND REMEDIES UPON OCCURRENCE OF EVENT OF ACCELERATION. If an Event of Acceleration shall have occurred and be continuing, the Secured Party (and its successors and assigns) shall have the right (but not the obligation), itself or through any of its agents (including the Borrower), with or without notice to the Borrower (as provided below), as to any or all of the Collateral related to such Loan Pool, by any available judicial procedure, or without judicial process (PROVIDED, HOWEVER, that it is in compliance with the UCC), to take possession of the Collateral related to such Loan Pool and without liability for trespass to enter any premises where the Collateral related to such Loan Pool may be located for the purpose of taking possession of or removing the Collateral related to such Loan Pool, and, generally, to exercise any and all rights afforded to a secured party under the UCC or other applicable law. Without limiting the generality of the foregoing, the Borrower agrees that the Secured Party shall have the right to sell, lease, or otherwise dispose of all or any part of the Collateral related to such Loan Pool, whether in its then condition or after further preparation or processing, either at public or private sale or any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such terms and conditions, all as the Secured Party in its sole discretion may deem advisable, and it shall have the right to purchase at any such sale; and, if any Collateral related to such Loan Pool shall require rebuilding, repairing, maintenance, preparation, the Secured Party shall have the right, at its option, to do such rebuilding or repairing for the purpose of putting the Collateral related to such Loan Pool in such salable or disposable form as it shall deem appropriate. At the Secured Party's request, the Borrower shall assemble the Collateral related to such Loan Pool and make them available to the Secured Party at places which the Secured Party shall select, whether at Borrower's premises or elsewhere, and make available to the Secured Party, without rent, all of Borrower's premises and facilities for the purpose of the Secured Party's taking possession of, removing or putting the Collateral related to such Loan Pool in saleable or disposable form. The proceeds of any such sale, lease or other disposition of the Collateral related to such Loan Pool shall be applied, first to the expenses of retaking, holding, storing, processing and preparing for sale, selling, lease, leasing and the like, and to the reasonable attorneys' fees and legal expenses incurred by the Secured Party and to the payment of any other amounts required by applicable law. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale or lease of the Collateral related to such Loan Pool. Section 6.3 ADDITIONAL RIGHTS OF THE SECURED PARTY. Upon the occurrence of an Event of Default or an Event of Acceleration, the Secured Party may, from time to time, in its discretion, and without the assent of any of the eRoom Parties, without advertisements or notices of any kind (except for the notice specified in Section 6.5 below regarding notice required in connection with a public or private sale), or demand of performance or other demand, or obligation or liability (except to account for amounts actually received) to or upon any of the eRoom Parties or any other person (all such advertisements, notices and demands, obligations and liabilities, if any, hereby being expressly waived and discharged to the extent permitted by law), forthwith, directly or through its agents or representatives, (a) disclose such default and other matters (including the name, address and telephone number of the Borrower) in connection therewith in the Secured Party's reasonable discretion (and eRoom Parties each M-10 understand that the Secured Party intends to make such disclosure, from time to time); (b) to the extent permitted by applicable law enter any premises, with or without the assistance of other persons or legal process; (c) require the relevant eRoom Party to account for (including accounting for any products and Proceeds of any Collateral), segregate, assemble, make available and deliver to the Secured Party, its agents or representatives, the Collateral; (d) take possession of, operate, render unusable, collect, transfer and receive, recover, appropriate, foreclose, extend payment of, adjust, compromise, settle, release any claims included in, and do all other acts or things necessary or, in the Secured Party's sole discretion appropriate, to protect, maintain, preserve and realize upon, the Collateral and any products and proceeds thereof, in whole or in part; and (e) exercise all rights, powers and interests with respect to any and all Collateral, and sell, assign, lease, license, pledge, transfer, negotiate (including endorse checks, drafts, orders, or instruments), deliver or otherwise dispose (by contract, option(s) or otherwise) of the Collateral or any part thereof. Any such disposition may be in one or more public or private sales, at such price, for cash or credit (or for future delivery without credit risk) and upon such other terms and conditions as it deems appropriate, with the right of the Secured Party to the extent permitted by law upon any cash sale or sales, public or private, to purchase the whole or any part of said Collateral, free of any right, claim or equity of redemption of or in any of the eRoom Parties (such rights, claims and equity or redemption, if any, hereby being expressly waived). Without limiting the foregoing, upon the eRoom Parties' failure to abide by and comply with their obligations hereunder, in addition to its other rights and remedies, the Secured Party may (but is not required to), in its sole discretion and to the extent it deems necessary, advisable or appropriate, take or cause to be taken such actions or things to be done (including the payment or advancement of funds, or requiring advancement of funds to be held by the Secured Party to fund such obligations, including taxes or insurance) as may be required hereby (or necessary or desirable in connection herewith) to correct such failure (including causing the Collateral to be maintained or insurance protection required hereby to be procured and maintained) and any and all costs and expenses incurred (including attorney's fees and disbursements) in connection therewith shall be included in the Obligations and shall be immediately due and payable and bear interest at the Default Rate. Section 6.4 APPLICATION OF PROCEEDS. The Secured Party may apply the net proceeds, if any, of any collection, receipt, recovery, appropriation, foreclosure or realization, or from any use, operation, sale, assignment, lease, pledge, transfer, delivery or disposition of all or any of the Collateral, after deducting all reasonable costs and expenses (including attorneys fees, court costs and legal expenses) incurred in connection therewith or with respect to the care, safekeeping, custody, maintenance, protection, administration or otherwise of any and all of said Collateral or in any way relating to the rights of the Secured Party under this Security Agreement, (a) first, to the satisfaction of the Obligations, in whole or in part, in such order as the Secured Party may, in its discretion, elect; (b) second, to the payment, satisfaction or discharge of any of other Indebtedness or obligation as required by any law, rule or regulation; and (c) lastly, the surplus, if any, to the Borrower. M-11 Section 6.5 REQUIRED NOTICE OF SALE. In exercising its rights, powers and remedies as secured party, the Secured Party agrees to give the Borrower five (5) days notice of the time and place of any public sale of Collateral or of the time after which any private sale of Collateral may take place, unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The Borrower agrees that such period and notice is commercially reasonable under the circumstances. ARTICLE VII POST-DEFAULT POWER OF ATTORNEY Section 7.1 POST-DEFAULT POWER OF ATTORNEY. Each of the eRoom Parties hereby irrevocably constitutes and appoints, effective on and after the occurrence of an Event of Default or Event of Acceleration, the Secured Party acting through any officer or agent thereof, with full power of substitution, as such eRoom Party's true and lawful attorney-in-fact with full irrevocable power and authority in such eRoom Party's place and stead and in the such eRoom Party's name or in its own name, from time to time in the Secured Party's discretion, to receive, open and dispose of mail addressed to the eRoom Parties, to take any and all action, to do all things, to execute, endorse, deliver and file any and all writings, documents, instruments, notices, statements (including financing statements, and writings to correct any error or ambiguity in any Loan Document), applications and registrations (including registrations and Licenses), checks, drafts, acceptances, money orders, or other evidence of payment or proceeds, which may be or become necessary or desirable in the sole discretion of the Secured Party to accomplish the terms, purposes and intent of this Security Agreement and the other Loan Documents, including the right to appear in and defend any action or proceeding brought with respect to the Collateral, and to bring any action or proceeding, in the name and on behalf of the eRoom Parties, which the Secured Party, in its discretion, deems necessary or desirable to protect its interest in the Collateral. Said attorney or designee shall not be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law, unless and then only to the extent that the same constitutes its gross negligence or willful misconduct. This power is coupled with an interest and is irrevocable. THIS POWER DOES NOT AND SHALL NOT BE CONSTRUED TO AUTHORIZE ANY CONFESSION OF JUDGMENT. ARTICLE VIII INDEMNIFICATION Section 8.1 INDEMNIFICATION. Each of the eRoom Parties agree to indemnify (jointly and severally) the Secured Party and hold the Secured Party harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Secured Party in any way relating, in any M-12 way arising out of or in connection with any actual or attempted sale, lease or other disposition of, and any exchange, enforcement, collection, compromise or settlement of any of the Collateral and receipt of the Proceeds thereof, and for the care of the Collateral and defending or asserting the rights and claims of the Secured Party in respect thereof, and for the care of the Collateral and defending or asserting the rights and claims of the Secured Party in respect thereof, by litigation or otherwise, including expense of insurance, and all such expenses shall be Obligations hereunder. ARTICLE IX OBLIGATIONS ABSOLUTE Section 9.1 OBLIGATIONS ABSOLUTE. The Obligations will be absolute, unconditional and irrevocable and will be paid or satisfied strictly in accordance with their respective terms under all circumstances whatsoever, including: (a) the invalidity or unenforceability of all or any of, or any part of, this Security Agreement, the Note or any other Loan Document, or any consent, waiver, amendment or modification thereof; (b) the existence of any claim, setoff, defense or other right which the eRoom Parties may have at any time against the Secured Party, or any other Person, whether in connection with this Security Agreement, any other Loan Documents, the transactions contemplated hereby, thereby or otherwise all of which each of the eRoom Parties hereby waives to the maximum extent permitted by law; or (c) the loss, theft, damage, destruction or unavailability of the Collateral to the eRoom Parties for any reason whatsoever, it being understood and agreed that the eRoom Parties retains all liability and responsibility with respect to the Collateral. ARTICLE X ASSIGNMENT AND DISSEMINATION OF INFORMATION Section 10.1 ASSIGNMENT. This Security Agreement is freely assignable, in whole or in part, by the Secured Party and, to the extent of any such assignment, the Secured Party shall be fully discharged from all responsibility. The eRoom Parties understand and agree that the Secured Party intends to and may, from time to time, sell, pledge, grant a security interest in and collaterally assign, transfer and deliver or otherwise encumber or dispose of the Notes, this Security Agreement and the other Loan Documents and its rights and powers hereunder and thereunder, in whole or in part, in connection with the Securitization or any other assignment or other disposition of the Notes. The eRoom Parties may not, in whole or in part, directly or indirectly, assign this Security Agreement or any Loan Document or their rights hereunder or thereunder or delegate their duties hereunder without, in each instance, the specific prior written consent of the Secured Party, which consent may be withheld or delayed in the Secured Party's sole discretion. M-13 Section 10.2 DISSEMINATION OF INFORMATION. If Secured Party determines at any time to sell, transfer or assign the Notes, Security Agreement, or other Loan Documents, and any or all servicing rights with respect thereto, or to otherwise issue a Securitization involving the Loan Documents, Secured Party may forward TO each purchaser, transferee, assignee, investor or their perspective successors in such Securitization or any rating agency rating such Securitization and each prospective investor, all documents and information which Secured Party now has or may hereafter acquire relating to the Loan Document and the eRoom Parties, as Secured Party determines necessary or desirable. ARTICLE XI FURTHER ASSURANCE Section 11.1 FURTHER ASSURANCE. The Borrower agrees at any time and from time to time, at the Borrower's sole cost and expense, to obtain, procure, execute and deliver, file and affix such further agreements, bills of sale and assignments, instruments, documents, warehouse receipts, bills of lading, vouchers, invoices, notices, statements, writings, (including financing statements, and writings to correct any error or ambiguity in any Loan Document), powers (including stock and bond powers, and powers of attorney), tax stamps and information, and to do or cause to be done all such further acts and things (including the execution, delivery and filing of financing statements on Form UCC- 1, payment of filing fees and transfer, gains and recording taxes) as the Secured Party may reasonably request, from time to time, in its discretion. Without limiting the foregoing, the Borrower authorizes the Secured Party to the extent permitted under the UCC to execute and file, or file without the Borrower's signature, any and all financing statements, amendments thereto and continuations thereof as the Secured Party deems necessary or appropriate and the Borrower shall pay and indemnify the Secured Party for and hold the Secured Party harmless from any and all costs and expenses in connection therewith. The Borrower agrees that it will promptly notify the Secured Party of and agree to correct any defect, error or omission in the contents of any of the Loan Documents or in the execution, delivery or acknowledgement thereof. The Borrower further agrees to execute, prior to or within three months following closing, a Form 4506 REQUEST FOR COPY OR TRANSCRIPT OF TAX FORM, which form will be provided by Secured Party. ARTICLE XII TERM, PARTIAL RELEASE AND REINSTATEMENT Section 12.1 TERM. This Security Agreement shall be immediately in full force and effect upon the parties' execution below. Upon indefeasible payment in full of all of the Obligations, this Security Agreement and the security interest granted hereunder shall terminate and the Secured Party, at the Borrower's expense, will execute and deliver to the Borrower the proper instruments (including UCC termination statements) acknowledging the termination of such security interest, and will duly assign, transfer and M-14 deliver (without recourse, representation or warranty) such Collateral as may be in the Secured Party's possession, and not to be retained, sold, or otherwise applied or released pursuant to this Security Agreement, to the Borrower, except that the obligations of the eRoom Parties under Articles 8, 9, 11 and 13 shall survive indefinitely. Section 12.2 PARTIAL RELEASE. Upon the indefeasible payment in full of any Lease Financing Loan (including, without limitation, any Make Whole Premium or other amounts payable by the Borrower with respect to such Lease Financing Loan) in accordance with the provisions of the related Note, the security interest hereunder with respect to the relevant Collateral shall terminate, and the Secured Party, at the expense of the Borrower, will execute and deliver to the Borrower the proper instruments (including UCC partial release statements) acknowledging the termination of such security interest, and will duly assign, transfer and deliver (without recourse, representation or warranty) such of the relevant Collateral as may be in the possession of the Secured Party and has not theretofore been sold or otherwise applied or released pursuant to this Security Agreement, to the Borrower, and shall take such other action as the Borrower may reasonably request to effectuate the foregoing. Section 12.3 REINSTATEMENT. This Security Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any amount received by the Secured Party in respect of the Obligations is rescinded or must otherwise be restored or returned by the Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or upon the appointment of any intervenor or conservator of, or trustee or similar official for, the Borrower or any substantial part of the Borrower's assets, or otherwise, all as though such payments had not been made. ARTICLE XIII MISCELLANEOUS Section 13.1 AMENDMENTS, CONSENTS, AUTHORIZATIONS. None of the terms or provisions of this Security Agreement or any other Loan Document may be waived, altered, modified, or amended except in each instance by a specific written instrument duly executed by the Secured Party. Without limiting the foregoing, no action or omission to act shall be deemed to be a consent, authorization, representation or agreement of the Secured Party, under the UCC or otherwise, unless, in each instance, the same is in a specific writing signed by the Secured Party. The inclusion of Proceeds in the Collateral does not and shall not be deemed to authorize the Borrower to sell, exchange or dispose of the Collateral or otherwise use the Collateral in any manner not otherwise specifically authorized herein. Section 13.2 NOTICES. All notices and other communications given pursuant to or in connection with this Security Agreement shall be in duly executed writing delivered to the parties at the addresses set forth below (or such other address as may be provided by one party in a notice to the other party): M-15 If to the Secured Party: AMRESCO LEASING CORPORATION RoomSystems, Inc. 412 E. Parkcenter Blvd. 390 North 3050E Suite 300 St. George, Utah 84790 Boise, Idaho 83706 Attention: Steven L. Sunyich Facsimile Number: (208) 333-2050 Facsimile Number: (435) 628-8611 eRoom System Technologies, Inc., eRoom System SPE, Inc. 3770 Howard Hughes Parkway, Suite 175 3770 Howard Hughes Parkway, Suite 175 Las Vegas, Nevada 89109 Las Vegas, Nevada 89109 Attention: Steven L. Sunyich Attention: Steven L. Sunyich Facsimile Number: (702) 792-2403 Facsimile Number: (435) 628-8611 Notice delivered in accordance with the foregoing shall be effective (a) when delivered, if delivered personally or by receipted-for telex, telecopier, or facsimile transmission, (b) two (2) days after being delivered in the United States (properly addressed and all fees paid) for overnight delivery service to a courier (such as Federal Express) which regularly provides such service and regularly obtains executed receipts evidencing delivery or (c) five (5) days after being deposited (properly addressed and stamped for first-class delivery) in a daily serviced United States mail box. Section 13.3 REASONABLENESS. If at any time the Borrower believes that the Secured Party has not acted reasonably in granting or withholding any approval or consent under the Notes, this Security Agreement, or any other Loan Document or otherwise with respect to the Obligations, as to which approval or consent either the Secured Party has expressly agreed to act reasonably, or absent such agreement, a court of law having jurisdiction over the subject matter would require the Secured Party to act reasonably, then the Borrower's sole remedy shall be to seek injunctive relief or specific performance and no action for monetary damages or punitive damages shall in any event or under any circumstance be maintained by the Borrower against the Secured Party. Section 13.4 RECOVERY OF SUMS REQUIRED TO BE PAID. The Secured Party shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Obligations as the same become due, without regard to whether or not the balance of the Obligations shall be due, and without prejudice to the right of the Secured Party thereafter to bring an action of foreclosure, or any other action, for a default or defaults by the Borrower existing at the time such earlier action was commenced. Section 13.5 WAIVERS. EACH OF THE eROOM PARTIES HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES ALL OF THE WAIVERS SET M-16 FORTH IN THIS SECURITY AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS KNOWINGLY, INTENTIONALLY, VOLUNTARILY, WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEY; EACH OF THE eROOM PARTIES FURTHER ACKNOWLEDGES THAT SUCH WAIVERS ARE A MATERIAL INDUCEMENT TO THE SECURED PARTY TO MAKE THE LEASE FINANCING LOANS TO THE BORROWER AND THAT THE SECURED PARTY WOULD NOT HAVE MADE THE LEASE FINANCING LOANS WITHOUT SUCH WAIVERS; AND EACH OF THE eROOM PARTIES HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES SUCH WAIVERS WITH RESPECT TO EACH OTHER LEASE FINANCING LOAN IN THE PROGRAM. Section 13.6 WAIVER OF TRIAL BY JURY. EACH OF THE eROOM PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, AND THE SECURED PARTY BY ITS ACCEPTANCE OF THE NOTES AND THIS SECURITY AGREEMENT AND OTHER LOAN DOCUMENTS IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THE NOTES, THIS SECURITY AGREEMENT, OR ANY OTHER LOAN DOCUMENT OR THE OBLIGATIONS. Section 13.7 RELATIONSHIP. The relationship of the Secured Party to the Borrower hereunder is strictly and solely that of secured lender on the one hand and borrower on the other and nothing contained in the Notes, the Master Agreement or the Operative Documents, this Security Agreement or any other Loan Document or otherwise in connection with the Obligations is intended to create, or shall in any event or under any circumstance be construed as creating, a partnership, joint venture, tenancy-in-common, joint tenancy or other relationship of any nature whatsoever between the Secured Party and the Borrower other than as secured lender on the one hand and borrower and guarantor on the other. Section 13.8 TIME IS OF THE ESSENCE. For all payments to be made and all obligations to be performed under the Loan Documents, time is of the essence. Section 13.9 GOVERNING LAW; BINDING EFFECT. THIS SECURITY AGREEMENT AND ALL LOAN DOCUMENTS ARE ENTERED INTO IN THE STATE OF IDAHO, SECURED PARTY'S CHIEF EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS IS LOCATED IN THE STATE OF IDAHO, AND ALL NOTICES AND SUMS PAYABLE UNDER THE LOAN DOCUMENTS RELATING TO THIS SECURITY AGREEMENT WILL BE SENT TO THE SECURED PARTY IN THE STATE OF IDAHO. BORROWER AND SECURED PARTY AGREE THAT THE VALIDITY, ENFORCEABILITY, CONSTRUCTION AND INTERPRETATION OF THIS SECURITY AGREEMENT, AND OF ALL TRANSACTIONS AND DOCUMENTS UNDER OR RELATING TO IT, WILL BE CONSTRUED, APPLIED, ENFORCED AND GOVERNED UNDER THE LAWS OF THE STATE OF IDAHO (WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW), PROVIDED HOWEVER, THAT WITH RESPECT TO THE M-17 CREATION, ATTACHMENT, PERFECTION, PRIORITY AND ENFORCEMENT OF ANY LIENS CREATED BY THIS SECURITY AGREEMENT, THE LAWS OF THE STATE WHERE THE APPLICABLE PROPERTY IS LOCATED SHALL APPLY. This Security Agreement shall be binding upon the Borrower, and the heirs, devises, administrators, executives, personal representatives, successors, receivers, trustees, and (without limiting Section 10.1 hereof) assignees, including all successors in interest of the Borrower in and to all or any part of the Collateral, and shall inure to the benefit of the Secured Party, and the successors and assignees of the Secured Party. Section 13.10 SEVERABILITY. Whenever possible this Security Agreement, the Note and each Loan Document and each provision hereof and thereof shall be interpreted in such manner as to be effective, valid and enforceable under applicable law. If and to the extent that any such provision shall be held invalid and unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provisions hereof or thereof, and any determination that the application of any provision hereof or thereof to any person or under any circumstance is illegal and unenforceable shall not affect the legality, validity and enforceability of such provision as it may be applied to any other person or in any other circumstance. Section 13.11 HEADINGS DESCRIPTIVE. The headings, titles and captions used herein are for convenience only and shall not affect the construction of this Security Agreement or any term or provision hereof. Section 13.12 COUNTERPARTS. This Security Agreement may be executed in a number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same agreement. Section 13.13 ACKNOWLEDGEMENT. With respect to the amendment, restatement and consolidation of the Lease Financing Notes into the Credit Enhancement Note and the credit enhancement features contained therein, each of the eRoom Parties acknowledges that Secured Party's underwriting guidelines and standards are applied on a case by case basis and that waivers may be granted in any particular case (including in the case of a borrower to be included in a pool with Borrower). Each of the eRoom Parties further acknowledges that Secured Party's underwriting guidelines or standards may be modified at any time by Secured Party without notice to the eRoom Parties. Section 13.14 ATTORNEYS FEES AND COSTS. Each of the eRoom Parties agrees that upon the occurrence of an Event of Default or an Event of Acceleration, the Borrower shall pay all costs and expenses actually incurred by Secured Party (including without limitation attorney's fees and disbursements) incident to the enforcement, collection, protection or preservation of any right or claim of Secured Party under the Loan Documents, including any such fees or costs incurred in connection with any bankruptcy or insolvency proceeding of Borrower. Section 13.15 LOAN POOL FLEXIBILITY. Following the amendment, restatement and consolidation of the Lease Financing Notes into the Credit Enhancement Note, the M-18 Secured Party shall have the right, at its sole and absolute discretion upon written notice to Borrower, to transfer (a "Transfer"), within eighteen (18) months from the effective date of this Security Agreement, all or any of the Lease Financing Loans and all Liens related to such Lease Financing Loans, from the related AMRESCO Securitization Program (as described in the related Credit Enhancement Note) to any other loan pool program formed by Secured Party. Upon the occurrence of a Transfer, the Loan Documents shall be automatically amended and reclassified to reflect the Transfer. The Borrower shall execute all amendments or other documents Secured party deems necessary to effectuate a Transfer. M-19 IN WITNESS WHEREOF, the eRoom Parties have executed and entered into this Security Agreement and delivered it to the Secured Party on and as of the date set forth below. This document is executed under seal and intended to take effect as a sealed instrument. eROOM SYSTEM SPE, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ eROOM SYSTEM TECHNOLOGIES, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ ROOMSYSTEMS INC. By:______________________________________ Name:____________________________________ Title:___________________________________ AMRESCO LEASING CORPORATION By:______________________________________ Name:____________________________________ Title:___________________________________ M-20 INDIVIDUAL ACKNOWLEDGEMENT STATE OF _________________ ) )ss. COUNTY OF ________________ ) On the __ day of ___________, 200__, before me a Notary Public personally appeared ______________, to me known to be the person named in and who executed the foregoing instrument, who, being duly sworn, did depose and say that he/she resides at _____________________ and acknowledged that he/she executed the same by his/her voluntary act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office this ____ day of _____________, 200__. _____________________________ Notary Public My commission expires: __________________________ M-21 CORPORATE ACKNOWLEDGEMENT STATE OF _________________ ) )ss. COUNTY OF ________________ ) On the _____ day of ___________, 2000, before me a Notary Public personally appeared ______________________, to me known to be the person named in and who executed the foregoing instrument, who, being duly sworn, did depose and say that he/she resides at _______________________________________; that he/she is the _______________ of AMRESCO Leasing Corporation, the corporation described in and which executed the foregoing instrument; and that he/she his/her name thereto by authority of the board of directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office this ____ day of _________________, 200__. _____________________________ Notary Public My commission expires: __________________________ M-22 CORPORATE ACKNOWLEDGEMENT STATE OF _________________ ) ) ss. COUNTY OF ________________ ) On the _____ day of ___________, 2000, before me a Notary Public personally appeared ______________________, to me known to be the person named in and who executed the foregoing instrument, who, being duly sworn, did depose and say that he/she resides at _______________________________________; that he/she is the _______________ of eRoom System SPE, Inc., the corporation described in and which executed the foregoing instrument; and that he/she his/her name thereto by authority of the board of directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office this ____ day of _____________, 200__. _____________________________ Notary Public My commission expires: __________________________ M-23 CORPORATE ACKNOWLEDGEMENT STATE OF _________________ ) ) ss. COUNTY OF ________________ ) On the _____ day of ___________, 2000, before me a Notary Public personally appeared ______________________, to me known to be the person named in and who executed the foregoing instrument, who, being duly sworn, did depose and say that he/she resides at _______________________________________; that he/she is the _______________ of eRoom System Technologies, Inc., the corporation described in and which executed the foregoing instrument; and that he/she his/her name thereto by authority of the board of directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office this ____ day of _________________, 200__. _____________________________ Notary Public My commission expires: __________________________ M-24 CORPORATE ACKNOWLEDGEMENT STATE OF _________________ ) )ss. COUNTY OF ________________ ) On the _____ day of ___________, 2000, before me a Notary Public personally appeared ______________________, to me known to be the person named in and who executed the foregoing instrument, who, being duly sworn, did depose and say that he/she resides at _______________________________________; that he/she is the _______________ of RoomSystems, Inc., the corporation described in and which executed the foregoing instrument; and that he/she his/her name thereto by authority of the board of directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and official seal of office this ____ day of _________________, 200__. _____________________________ Notary Public My commission expires: __________________________ M-25 EXHIBIT A LIST OF FINANCING STATEMENTS JURISDICTION DESCRIPTION OF FILING M-26 EXHIBIT N FORM OF OPINION OF COUNSEL TO THE eROOM PARTIES [Date] AMRESCO Leasing Corporation 412 E. ParkCenter Boulevard Suite 300 Boise, Idaho 83706 Re: Master Business Lease Financing Agreement dated as of May 11, 2000 among AMRESCO Leasing Corporation, eRoom System SPE, Inc., RoomSystems, Inc and eRoom System Technologies, Inc. Ladies and Gentlemen: We have acted as [special] counsel to eRoom System SPE, Inc., a Nevada corporation (the "BORROWER"), RoomSystems, Inc., a Nevada corporation ("RSi") and eRoom System Technologies, Inc. ("eROOM" and collectively with the Borrower and RSi, the "eROOM PARTIES") in connection with the transactions contemplated by that certain Master Lease Financing Agreement dated as of May 11, 2000 among AMRESCO Leasing Corporation ("AMRESCO") and the eRoom Parties (the "AGREEMENT"). This opinion is rendered at the request of the eRoom Parties pursuant to Section 5.1 of the Agreement. All capitalized terms used in this letter, without definition, have the meanings assigned to them in the Agreement. In connection with this letter, we have examined executed originals or copies of executed originals of each of the following documents, each of which is dated the date hereof or as of the date hereof, unless otherwise noted (collectively, the "OPERATIVE DOCUMENTS"): (a) the Agreement; (b) the form of Lease Financing Note, which is not dated; (c) the form of Credit Enhancement Note, which is not dated; (d) the License Agreement; (e) the Purchase Agreement; (f) the Stock Pledge Agreement; (g) the form of Pledge and Security Agreement; and (h) the Confidentiality Agreement. In addition, we have examined the following documents (collectively, the "DUE DILIGENCE DOCUMENTS"): [insert a list of all the documents, including certificates of good standing, articles of incorporation, bylaws, corporate records and certificates and documents of public officials examined in order to give the opinion.] We have examined originals or certified copies of such corporate records of each of the eRoom Parties and other certificates and documents of officials of the eRoom Parties, public officials and others as we have deemed appropriate for purposes of this letter. As to various questions of fact relevant to this letter, we have relied, without independent investigation, upon the Due Diligence Documents and certificates of public officials, certificates of officers of the AMRESCO Leasing Corporation [Date] Page 2 RSi Parties and representations and warranties of each of the eRoom Parties in the Operative Documents, all of which we assume to be true, correct and complete. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all copies submitted to us as conformed, certified or reproduced copies. We have assumed the legal capacity of all natural persons. We have assumed the due authorization, execution and delivery of the Agreement by AMRESCO and that the Agreement and each of the Operative Documents to which it is a party constitutes the legal, valid and binding obligation of AMRESCO, enforceable against AMRESCO in accordance with its terms. Based upon the foregoing and subject to the assumptions, exceptions, qualifications and limitations set forth hereinafter, we are of the opinion that: 1. Each of the eRoom Parties is validly existing as a corporation in good standing under the laws of the State of Nevada, the jurisdiction in which each is organized, and is duly qualified and in good standing as a foreign corporation in all other jurisdictions in which it conducts business. 2. Each of the eRoom Parties has obtained all necessary licenses and approvals in all jurisdictions in which its business requires such licenses and approvals, except where the failure to have obtained such licenses or approvals would not have a material adverse effect on the transactions contemplated by the Operative Documents. Each eRoom Party has corporate power to enter into the Agreement and any other Operative Document to which it is a party. 3. (a) The execution and delivery of the Agreement by the respective eRoom Parties and the performance by each eRoom Party of its obligations thereunder have been duly authorized by all necessary corporate action on the part of such eRoom Party; (b) the Agreement has been duly and validly executed and delivered by each eRoom Party; and (c) the Agreement constitutes the valid and binding obligation of each eRoom Party, enforceable against each such party in accordance with its terms. 4. The execution and delivery of the Agreement by the respective eRoom Parties, do not, and the performance by each eRoom Party of its obligations under the Agreement will not, result in any violation of any law, rule or regulation of any Included Law (defined below) or any order, writ, judgment or decree. 5. The execution and delivery of the Agreement by the respective eRoom Parties do not, and the performance by the eRoom Parties of their respective obligations under the Agreement will not, (a) result in a violation of the Articles of Incorporation or By-Laws of such eRoom Party or (b) breach or result in a default or result in the AMRESCO Leasing Corporation [Date] Page 3 acceleration of or entitle any party to accelerate under any agreement or instrument to which any eRoom Party is bound. 6. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (each, a "FILING") is required under any of the Included Laws for the due execution and delivery of the Agreement by any of the eRoom Parties and the performance by the eRoom Parties of their respective obligations under the Agreement. 7. None of the eRoom Parties is a party to any adversial action, suit, or proceeding pending or, to the best of our knowledge, threatened, or before any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality. The opinions and other matters in this letter are qualified in their entirety and subject to the following: A. We express no opinion as to the laws of any jurisdiction other than the Included Laws. We have made no special investigation or review of any published constitutions, treaties, laws, rules or regulations or judicial or administrative decisions ("LAWS"), other than a review of (i) the Laws of the State of Idaho, (ii) Chapter 78 of the Nevada Revised Statutes and (iii) the Federal Laws of the United States of America. For purposes of this opinion, the term "INCLUDED LAWS" means the items described in clauses (i), (ii) and (iii) of the preceding sentence that are, in our experience, normally applicable to transactions of the type contemplated in the Agreement. B. This opinion letter is limited to the matters expressly stated herein and no opinions are to be inferred or may be implied beyond the opinions expressly set forth herein. C. The matters expressed in this letter are subject to and qualified and limited by (i) applicable bankruptcy, insolvency, fraudulent transfer and conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally; and (ii) general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). D. We have assumed that no fraud, dishonesty, forgery, coercion, duress or breach of fiduciary duty exists or will exist with respect to any of the matters relevant to the opinions expressed in this letter. E. We express no opinion as to the compliance of the transactions contemplated by the Agreement with any regulations or governmental requirements applicable to any party other than the eRoom Parties. F. This letter is solely for your benefit and no other Persons shall be entitled to rely upon this letter. Without our prior written consent, this letter may not be quoted in whole or in part or AMRESCO Leasing Corporation [Date] Page 4 otherwise referred to in any document and may not be furnished or otherwise disclosed to or used by any other Person, except for (i) delivery of copies hereof to counsel for the addressees hereof, (ii) inclusion of copies hereof in a closing file, and (iii) use hereof in any legal proceeding arising out of the transactions contemplated by the Agreement filed by an addressee hereof against this law firm or in which any addressee hereof is a defendant. Very truly yours, EXHIBIT O eROOM (OR BORROWER) DOMESTIC PRICE AND PRODUCT SCHEDULE
(1) (2) (3) (4) (5) (6) (7) - -------------------------------------------------------------------------------------------------------------------------------- Desc. Height Width Depth Ship Wt. Selection Cubic Feet Capacity - -------------------------------------------------------------------------------------------------------------------------------- RS 500M 20" 20" 21" 50 lbs 10 1.8 - -------------------------------------------------------------------------------------------------------------------------------- RS 1000 25 1/4" 19" 20" 60 lbs 10 2.3 - -------------------------------------------------------------------------------------------------------------------------------- RS 2000 22 1/2" 19 1/4" 21" 64 lbs 19 1.8 - -------------------------------------------------------------------------------------------------------------------------------- RS 3000 22" 19" 17" 59 lbs 19 1.9 - -------------------------------------------------------------------------------------------------------------------------------- RS 5000 27 1/2" 19" 20" 73 lbs 22 2.4 - -------------------------------------------------------------------------------------------------------------------------------- RS 6000 27 7/8" 19" 17" 69 lbs 22 2.3 - -------------------------------------------------------------------------------------------------------------------------------- Glass Door Depends on Unit Depends on Unit Depends on Unit 8 lbs N/A 1.8 to 1.9 - -------------------------------------------------------------------------------------------------------------------------------- Glass Door Depends on Unit Depends on Unit Depends on Unit 10 lbs N/A 2.3 to 2.4 - -------------------------------------------------------------------------------------------------------------------------------- Depends on Unit Depends on Unit Depends on Unit N/A 8 N/A Module Tray - -------------------------------------------------------------------------------------------------------------------------------- Laminate Front Depends on Unit Depends on Unit Depends on Unit N/A N/A N/A Panel - -------------------------------------------------------------------------------------------------------------------------------- RoomSafe RSS 10_ 6" Depends on Unit Depends on Unit 30 lbs N/A 1.2 LowBoy - -------------------------------------------------------------------------------------------------------------------------------- RoomSafe RSS 10_ Depends on Unit 8" Depends on Unit 52 lbs N/A 2.5 HighBoy - -------------------------------------------------------------------------------------------------------------------------------- RSC Classic Depends on Unit Depends on Unit Depends on Unit 60 lbs N/A N/A (Cabinet) - -------------------------------------------------------------------------------------------------------------------------------- CCC- Classic Depends on Unit Depends on Unit Depends on Unit 80 lbs N/A N/A Cabinet - --------------------------------------------------------------------------------------------------------------------------------
(1) (8) (9) (10) - -------------------------------------------------------------------------- Percentage Plan Platinum Plan Threshold Plan Desc. (always (fixed payment 90/10, then 15/85 includes a Safe) plans) after threshold - -------------------------------------------------------------------------- RS 500M 25/75 $.50 $.519 $.425 10/90 $.310 25/75 - -------------------------------------------------------------------------- RS 1000 25/75 $.534 $.574 $.459 10/90 $.346 25/75 - -------------------------------------------------------------------------- RS 2000 25/75 $.656 $.695 $.556 10/90 $.406 25/75 - -------------------------------------------------------------------------- RS 3000 25/75 $.740 $.821 $.640 10/90 $.490 25/75 - -------------------------------------------------------------------------- RS 5000 25/75 $.720 $.779 $.620 10/90 $.470 25/75 - -------------------------------------------------------------------------- RS 6000 25/75 $.773 $.859 $.673 10/90 $.523 25/75 - -------------------------------------------------------------------------- Glass Door $.06 fee $.05 all plans $.054 - -------------------------------------------------------------------------- Glass Door $.08 fee $.06 all plans $.068 - -------------------------------------------------------------------------- Module Tray $.08 fee $.06 all plans $.068 - -------------------------------------------------------------------------- Laminate Front $.01 fee $.01 all plans $.01 Panel - -------------------------------------------------------------------------- RoomSafe RSS 10_ $1.34 fee 75/25 $.156 $.174 LowBoy $.156 10/90 $.156 25/75 - -------------------------------------------------------------------------- RoomSafe RSS 10_ $1.34 fee 75/25 $.207 $.230 HighBoy $.207 10/90 $.207 25/75 - -------------------------------------------------------------------------- RSC Classic N/A $.163 $.181 (Cabinet) $.163 10/90 $.163 25/75 - -------------------------------------------------------------------------- CCC- Classic Safe Fee Split $.176 $.196 Cabinet 88/12 $.176 10/90 $.176 25/75 - --------------------------------------------------------------------------
O-1 Notes: 1. Revenue splits: the first number in the fraction indicates eRoom's (or Borrower's) share. (Ex: 25/75 would mean eRoom (or Borrower) receive 25% of revenues). 2. Relative to the Percentage Plan: a. The percentages for Lessees under 100 rooms will be as follows: instead of 25/75 on Refreshment Center revenue, it will be 27/73; and instead of 75/25 on fees for room safes, it will be 73/27 b. If a cabinet is ordered for the Refreshment Center, the 25/75 split on the Refreshment Center revenue will remain the same; however, the revenue from the room safe will be split 88/12 (under 100-room properties will be 40/10). c. For room safes, "$1.34 fee 75/25" means that the Lessee must charge each guest a fee of $1.34 for safe usage and this fee will be split 75% to eRoom (or Borrower), 25% to the Lessee. 3. Relative to the Platinum Plan: a. There are three options for each Refreshment Center model. For example, the RS 5000 allows i) a fixed payment of $.72 per room per day, ii) a fixed payment of $.62 per room per day with 10% of all revenues paid to eRoom (or Borrower) and iii) a fixed payment of $.47 per room per day with 25% of all revenues paid to eRoom (or Borrower). b. $.025 will be added to the Refreshment Center thresholds of any property under 100 rooms. (Example: The threshold for the RS 5000 would increase from $.72 to $.745.) 4. Relative to the Threshold Plan: a. For purposes of calculating the payment split to eRoom (or Borrower), the monthly Refreshment Center revenue is calculated. Then, the average revenue per room per day is calculated and this number is then applied to the applicable threshold. b. eRoom (or Borrower) receives 90% up to the threshold amount and then 15% thereafter. However, *** of the *** is paid to the hotel franchisor. For example, the RS 5000 provides that eRoom (or Borrower) receives 90% of the first $.779 cents per room per day and then 10% of any revenue over $.779 with *** by eRoom (or Borrower) to the hotel franchisor. CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION O-2 EXHIBIT P THRESHOLD PLAN CALCULATION GENERAL ASSUMPTIONS: # of hotel rooms 300 # of days in current month 30 Total Refreshment Center revenue in current month $12,000 Threshold 77.9 cents Refreshment Center model RS 5000 Threshold Plan Revenue Split - 90%/10% (10% to Lessee) up to Threshold, then, 15%/85% (85% to Lessee) after Threshold where eRoom (or borrower) pays *** of *** to Lessee's corporate franchisor (if applicable). STEP 1: AVERAGE DAILY eROOM THRESHOLD PLAN REVENUE CALCULATED PURSUANT TO THE THRESHOLD CALCULATION Step 1 Unique Assumptions: Hotel occupancy during Seasoning Period 80% # of occupied room days in current month (30 x 300 x 80%) 7,200 Average revenue per room per day in current month ($12,000/300/30) $1.33 AVERAGE DAILY eROOM THRESHOLD PLAN REVENUE = 75.62 CENTS (90% x .779) + [(15% - 5%) x (1.33 x ***)] = .7562 STEP 2: AVERAGE DAILY eROOM THRESHOLD PLAN REVENUE CALCULATED PURSUANT TO THE RECALCULATED THRESHOLD CALCULATION Step 2 Unique Assumptions: Hotel occupancy for previous *** month period 70% Adjusted # of occupied room days in current month (30 x 300 x 70%) 6,300 Adjusted total Refreshment Center Revenue in current month $10,500 (6,300/7,200 x $12,000) Adjusted average revenue per room per day ($10,500/300/30) $1.17 AVERAGE DAILY eROOM THRESHOLD PLAN REVENUE = .7402 CENTS (90% x .779) + [(15% - 5%) x (1.17 x .779)] = .7402 CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION P-1 EXHIBIT Q PERCENTAGE PLAN CALCULATION GENERAL ASSUMPTIONS: # of hotel rooms 300 # of days in current month 30 Refreshment Center revenue (excluding room safe) in current month $12,000 Daily charge for room safe $1.34 Refreshment Center model RS 5000 with LowBoy room safe Percentage Plan Revenue Split: RS 5000 revenues 25%/75% (75% to Lessee) LowBoy revenues 75%/25% (25% to Lessee) STEP 1: AVERAGE DAILY eROOM PERCENTAGE PLAN REVENUE CALCULATED PURSUANT TO THE PERCENTAGE CALCULATION Step 1 Unique Assumptions: Hotel occupancy 80% # of room days in current month (30 x 300 x 80%) 7,200 Revenue from room safe in current month (7,200 x $1.34) $9,648 eRoom (or Borrower) share of RS 5000 revenue ($12,000 x 25%) $3,000 eRoom (or Borrower) share of LowBoy room safe revenue ($9,648 x 75%) $7,236 eRoom (or Borrower) total monthly revenue share $10,236 AVERAGE DAILY eROOM PERCENTAGE PLAN REVENUE = $1.14 ($10,236/300 hotel rooms/30 days per month) STEP 2: AVERAGE DAILY eROOM PERCENTAGE PLAN REVENUE CALCULATED PURSUANT TO THE RECALCULATED PERCENTAGE CALCULATION Step 2 Unique Assumptions: Hotel occupancy for previous *** month period 70% Adjusted # of room days in current month (30 x 300 x 70%) 6,300 Adjusted total RS 5000 revenue in current month (6,300/7,300 x $12,000) $10,500 Adjusted total LowBoy revenue in current month (6,300/7,300 x $9,648) $8,326 eRoom (or Borrower) share of RS 5000 revenue ($10,500 x 25%) $2,625 eRoom (or Borrower) share of LowBoy revenue ($8,326 x 75%) $6,245 eRoom (or Borrower) total monthly revenue share $8,870 AVERAGE DAILY eROOM PERCENTAGE PLAN REVENUE = 98.56 CENTS ($8,870/300 hotel rooms/30 days per month) CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION Q-1 EXHIBIT R PLATINUM PLAN CALCULATION GENERAL ASSUMPTIONS: # of hotel rooms 300 # of days in current month 30 Total Refreshment Center Revenue in current month $12,000 Refreshment Center model RS 5000 Platinum Plan Revenue Split - $.47 fixed payment guarantee Then, 25% to eRoom (or Borrower) with 75% to Lessee AVERAGE DAILY eROOM PLATINUM PLAN REVENUE CALCULATED PURSUANT TO THE PLATINUM CALCULATION Step 1 Unique Assumptions: Hotel occupancy 80% # of room days in current month (30 x 300 x 80%) 7,200 Average revenue per room per day in current month ($12,000/300/30) $1.33 AVERAGE DAILY eROOM PLATINUM PLAN REVENUE = 80.25 CENTS (.47 fixed payment + $1.33 x 25%) R-1 EXHIBIT S [ACTUAL COST OF GOODS SOLD] For purposes of this Agreement, the "Actual Cost of Goods Sold" shall be calculated for the models listed herein as set out herein and for all models not listed herein, in a manner substantially similar to that set out herein.
- -------------------------------------------------------------------------------- COST OF GOODS - -------------------------------------------------------------------------------- Refreshment Centers RS 5000 RS 3000 RS 500M - -------------------------------------------------------------------------------- Manufacturing Cost - -------------------------------------------------------------------------------- Rack Assembly *** *** *** - -------------------------------------------------------------------------------- Electronic Tray *** *** *** - -------------------------------------------------------------------------------- Communication Module *** *** *** - -------------------------------------------------------------------------------- Refrigerators *** *** *** - -------------------------------------------------------------------------------- Glass Doors - -------------------------------------------------------------------------------- Miscellaneous Parts *** *** *** - -------------------------------------------------------------------------------- Labor Hours for Assembly *** *** *** - -------------------------------------------------------------------------------- Hourly Labor Cost *** *** *** - -------------------------------------------------------------------------------- Adjustment for Labor Inefficiency *** *** *** - -------------------------------------------------------------------------------- Material Shrinkage Adjustment *** *** *** - -------------------------------------------------------------------------------- Total Manufacturing Cost *** *** *** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shipping Cost - -------------------------------------------------------------------------------- Unallocated Inbound Freight *** *** *** - -------------------------------------------------------------------------------- Outbound Freight *** *** *** - -------------------------------------------------------------------------------- Total Shipping Cost *** *** *** - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Commission *** *** *** - -------------------------------------------------------------------------------- Installation Cost *** *** *** - -------------------------------------------------------------------------------- FULLY BURDENED COST *** *** *** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Safes Low Boy High Boy - -------------------------------------------------------------------------------- Manufacturing Cost - -------------------------------------------------------------------------------- Safe Bracket Assembly *** *** - -------------------------------------------------------------------------------- Safe Box *** *** - -------------------------------------------------------------------------------- Miscellaneous Parts *** *** - -------------------------------------------------------------------------------- Labor Hours for Assembly *** *** - -------------------------------------------------------------------------------- Hourly Labor Cost *** *** - -------------------------------------------------------------------------------- Adjustment for Labor Inefficiency *** *** - -------------------------------------------------------------------------------- Material Shrinkage Adjustment *** *** - -------------------------------------------------------------------------------- Total Manufacturing Cost *** *** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shipping Cost - -------------------------------------------------------------------------------- Unallocated Inbound Freight *** *** - -------------------------------------------------------------------------------- Outbound Freight *** *** - -------------------------------------------------------------------------------- Total Shipping Cost *** *** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Commission *** *** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FULLY BURDENED COST *** *** - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION S-2 EXHIBIT T FORM OF CONFIDENTIALITY AGREEMENT THIS AGREEMENT is made and entered into as of the _____ day of ______________, 2000, by and among eRoom System Technologies, Inc. ("eRoom"), RoomSystems Inc. ("RSi") and eRoom System SPE, Inc. (the "BORROWER"; and collectively with eRoom and RSi, the "eROOM PARTIES," and AMRESCO Leasing Corporation, a Nevada corporation (hereinafter referred to as "ALC"). WHEREAS, the eRoom Parties and ALC intend to engage in a loan program in which ALC will make Lease Financing Loans to the Borrower, during the course of which ALC may have access to, receive or inspect, certain documents from the eRoom Parties that contain information including, but not limited to, information relating to eRoom Parties and their business, assets, strategies or plans, operations, trade secrets, processes, research, innovations, intellectual property, pricing policies, prospects, customer information, trademarks, products, administration, marketing methods or plans, financial condition or manufacturing activities. All such information that is in written form and marked "Confidential" shall be considered by ALC to be proprietary and confidential (the "Confidential Information"). Confidential Information shall not include and this Agreement shall not apply to any information which (a) is or becomes generally available to the public without violation of any obligation of confidentiality by ALC or its representatives or, (b) was available to ALC on a non-confidential basis prior to its disclosure by the eRoom Parties. NOW, THEREFORE, based upon the mutual covenants herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Confidential Information obtained from the eRoom Parties shall not be disclosed by ALC without prior permission of the eRoom Parties, except on a confidential basis to those directors, officers, representatives (including its accountants, attorneys and agents) and employees of ALC or any of its affiliates who are engaged or involved in the Program or to other parties which are or may be involved in a securitization or whole loan sale of the potential financing which is the subject of such program, including but not limited to rating agencies, investors, monoline insurance providers, investment bankers, equipment leasing or finance companies, conduit purchasers, warehouse credit providers and other potential sources of capital (any and all such parties referred to in this sentence shall hereinafter be referred to as "Permitted Recipients"). In furtherance of such undertaking, ALC agrees that it will not distribute any Confidential Information to anyone, other than Permitted Recipients. ALC further agrees not to exploit or make use of the Confidential Information in any manner that will compete with the current business of the eRoom Parties. 2. Notwithstanding any other provision of this Agreement, ALC may disclose such information as may be required (a) by court order, subpoena or similar process issued by a court of competent jurisdiction or by a governmental body, (b) in any report, statement or testimony submitted to any municipal state, federal or other regulatory body having T-1 jurisdiction over ALC or (c) in order to comply with any law, order, regulation or ruling applicable to ALC. 3. ALC specifically acknowledges that the eRoom Parties shall be entitled to injunctive relief in the event ALC violates the terms of Section 1 of this Agreement. 4. ALC shall cause the Permitted Recipients, to observe the terms of this Agreement to the same extent that ALC is required to do so. 5. Upon request of the eRoom Parties, ALC shall within fifteen (15) days, destroy or return to the eRoom Parties all original Confidential Information it has in its possession with the exception of (i) retaining one copy of such information solely for legal and regulatory purposes and (ii) retaining that portion of the Confidential Information which consists of analyses, compilations, forecasts, studies, or other documents prepared by ALC or the Permitted Recipients. 6. This Agreement is binding upon all parties, their successors, and assigns, and any amendment or modification must be in writing and signed by both parties. 7. This Agreement may not be assigned by either party without the prior written consent of the other. AMRESCO LEASING CORPORATION eROOM SYSTEM SPE, INC. By: By: ----------------------------- ----------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ----------------------------- ----------------------------- eROOM SYSTEM TECHNOLOGIES, INC. ROOMSYSTEMS, INC. By: By: ----------------------------- ----------------------------- Name: Name: ----------------------------- ----------------------------- Title: Title: ----------------------------- ----------------------------- T-2 EX-10.28 3 ex-10_28.txt EXHIBIT 10.28 EXHIBIT 10.28 EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "AGREEMENT") is by and among Stephen M. Nelson ("EXECUTIVE") and RoomSystems, Inc., a Nevada corporation ("EMPLOYER"). Executive and Employer are collectively referred to herein as the "Parties". R E C I T A L S: WHEREAS, Employer's board of directors (the "BOARD") desires to employ Executive in an executive capacity and the Executive desires to be employed in such capacity. NOW THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: ARTICLE I TERM 1.1 EMPLOYMENT. Employer employs Executive and Executive accepts employment under the terms and conditions of this Agreement. 1.2 TERM. The term of this Agreement shall be for twenty-four (24) months with an open option thereon as set forth herein and shall be effective as of July 1, 2000 and shall terminate on June 30, 2002, unless extended by mutual agreement of the Parties. Upon mutual agreement of the Parties, this Agreement may be extended for an additional period upon written notice given to Executive not less than three (3) months prior to the termination of this Agreement. A. OPTION TERM. Upon mutual agreement of the Parties, and upon the condition that there is no breach of any condition or term of this Agreement at the time of exercise, this Agreement may be extended for an additional twelve (12) months on the same terms and conditions of this Agreement, unless modified or amended upon the written consent of Employer and Executive. ARTICLE II COMPENSATION 2.1 COMPENSATION. For all services rendered by Executive, Employer shall pay Executive the salary of $110,000 per year commencing on July 1, 2000. Salary payments shall be subject to withholding and other applicable taxes. A. SALARY ADJUSTMENT. Employer and Executive recognize that certain "Events" (as defined in the following paragraph) may occur which will cause a salary increase. Upon the occurrence of any one of the Events listed in the following paragraph, Executive's salary shall be increased to $125,000 per year during the term of this 1 Agreement. Such increase shall be automatic upon the occurrence of any one of the Events listed below. B. DEFINITION OF "EVENTS." For purposes of this Agreement and particularly, the salary increase described in the immediately preceding paragraph, any one of the following shall be considered an "Event": i. MERGER. A merger with a third party entity, whereby at least fifty-one percent (51%) of Employer's outstanding common stock is merged with such entity. ii. SALE/ACQUISITION. A sale or acquisition of at least fifty-one percent (51%) of Employer's outstanding common stock or the sale of all or substantially all of Employer's assets to a third party entity. iii. DEBT FACILITY. A debt facility is established providing Employer a debt facility of at least $6 million. iv. INITIAL PUBLIC OFFERING. Employer closes an initial public offering of its common stock. 2.2 EARNED MONETARY BONUSES. Executive shall be entitled to an annual cash bonus in accordance with Exhibit "A" attached hereto and incorporated herein by reference (the "ANNUAL CASH BONUS"). Executive's performance shall be reviewed annually to determine the payment of bonuses, if any, in addition to the Annual Cash Bonus. 2.3 AUTOMOBILE ALLOWANCE. Executive shall be entitled to an automobile allowance of $400 per month, payable in twenty-six (26) bi-weekly payments of $184.62. Employer shall pay Executive's automobile insurance and reasonable maintenance. 2.4 STOCK OPTION CONSIDERATION. Executive, as partial consideration for his services, shall be entitled to receive options to purchase common stock in accordance with Exhibit "B" attached hereto and incorporated herein by reference. 2.5 EXECUTIVE BENEFITS. In addition to the foregoing, Executive shall be entitled to the following benefits: A. HEALTH INSURANCE. Employer shall provide and pay for health, dental and life insurance for Executive and his family with an insurance carrier of Employer's choice. The benefits offered under this paragraph shall include a standard executive health and life insurance program. B. EXPENSES. Executive may incur reasonable expenses for promoting Employer's business, including expenses for entertainment, travel and similar items. Employer will reimburse Executive for all such reasonable expenses upon Executive's presentation of an itemized account of such expenditures. Employer shall provide Executive with a Diner's Club, American Express or other credit card for his use in promoting and representing Employer. 2 C. VACATIONS. Executive shall be entitled each year to "Flexible Time Off" ("FTO") commensurate with a "Grade I" Executive, as described in Employer's EXECUTIVE HANDBOOK. 2.6 MOVING ALLOWANCE. Executive shall receive a moving allowance in the amount of $5,000 consisting of (a) $1,500 of temporary living expenses, and (b) $3,500 of moving expenses. ARTICLE III DUTIES OF EXECUTIVE 3.1 DUTIES. Executive is engaged as Chief Operating Officer. Executive shall have authority over the research and development, manufacturing and field operation departments, and shall supervise and direct all employees in these departments according to business plans and strategies provided by Employer, reporting only to the Chief Executive Officer. The precise services of Executive may be extended or curtailed by mutual agreement of Employer and Executive from time to time. 3.2 EXTENT OF SERVICES. Executive shall devote his full-time (not less than 40 hours per week), ability and attention to the business of the Company as is necessary to fulfill his duties, and shall perform all such duties in a professional, ethical and businesslike manner. Executive will not, either during the term of this Agreement and for a period of twelve (12) months thereafter, directly or indirectly engage in any other business, either as an Executive, employer, consultant, principal, officer, director, advisor, or in any other business capacity, which is competitive with the business of the Company, without the express written consent of the Company. Furthermore, the Board may require that Executive account for his time spent performing his duties hereunder at any time. Upon such notice, Executive shall account for his time and deliver such accounting to the Board until further notified. Based upon such records, the Board, in its sole discretion, may adjust Executive's FTO and/or salary during such period accordingly. 3.3 ENGAGING IN OTHER EMPLOYMENT. Executive hereby agrees to undertake the responsibilities for and devote his productive time, abilities, and attention to the business of Employer during the term of this Agreement. 3.4 REGULATIONS. Executive agrees to comply with all federal, state and local laws, ordinances, and regulations in the conduct of his business on behalf of Employer. 3.5 EXECUTIVE AS A SHAREHOLDER OF EMPLOYER. Employer recognizes that Executive is an option holder of Employer. Executive may be issued shares of common stock of Employer in the future as a result of a purchase or bonus ("EXECUTIVE'S SHARES"). 3.6 ACCOUNTABILITY. Executive shall be directly responsible solely to the Board. ARTICLE IV DUTIES OF EMPLOYER 4.1 PAYMENT OF COMPENSATION AND PROVISION OF BENEFITS. During the term hereof, Employer agrees to pay all compensation, benefits, allowances and FTO due Executive as set forth herein. 3 4.2 WORKING FACILITIES. Employer shall provide offices, stenographic help and such other facilities and services as are suitable to his position and appropriate for the performance of his duties. ARTICLE V DISABILITY; DEATH DURING EMPLOYMENT 5.1 DISABILITY. If Executive is unable to perform his services by reason of illness or incapacity for a period of more than one (1) month, the compensation thereafter payable to him during the continued period of such illness or incapacity for a period not to exceed twelve (12) months shall be sixty percent (60%) of Executive's then existing salary. Executive's full compensation shall be reinstated upon his recovery. Notwithstanding anything to the contrary, Employer may terminate this Agreement at any time after Executive shall be absent from his employment, for whatever cause, for a continuous period of more than twelve (12) months, and the obligations of Employer shall thereupon terminate. If it is determined, pursuant to the terms of this Agreement, that Executive is disabled or incapacitated and cannot discharge the duties and responsibilities contemplated hereunder, Employer shall have the right to hire an Executive to replace him in whatever position he may have at that time. A. DISABILITY INSURANCE. In lieu of the foregoing, Employer may obtain disability insurance for Executive. Should this occur, paragraph 5.1 above shall be null and void and the terms of said disability insurance shall govern, so long as the terms in such policy are equal to or greater than the terms outlined in Section 5.1 above. 5.2 DEATH DURING EMPLOYMENT. If Executive dies during the term of employment, Employer shall pay to the estate of Executive the compensation which would otherwise be payable to Executive up to the end of the month in which death occurs. In addition, Employer shall pay a sum equal to two (2) years salary payable in three (3) equal monthly installments after the death of Executive to the spouse of Executive or if he is not survived by his spouse, then to Executive's heirs in equal shares, or if there are no such surviving heirs, to the estate of Executive. ARTICLE VI CONFIDENTIAL INFORMATION; TRADE SECRETS; PROPRIETARY RIGHTS 6.1 CONFIDENTIALITY. Executive hereby acknowledges that he has received information regarding the business of Employer, including but not limited to customer lists, product information, business strategy, executive agreements, all of which is confidential information (the "CONFIDENTIAL INFORMATION"). The Parties hereto recognize and acknowledge that the Confidential Information is proprietary and integral to Employer's business and Executive agrees to keep such Confidential Information confidential and not disclose the same to any third person, corporation and/or entity for a period of three (3) years subsequent to the termination of this Agreement or termination of Executive as an Executive of Employer, whether such termination is with or without cause. 6.2 PRODUCTS. All products relating to Employer's business, designed, improved or enhanced by Executive, will be the sole property of Employer and Executive will not be allowed to possess or use them unless Employer agrees in writing thereto. Whenever requested to do so by Employer, Executive will execute any and all applications, 4 assignments or other instruments that Employer deems necessary to protect Employer's interests therein. Executive's obligations hereunder shall survive the termination of Executive's employment with respect to inventions, discoveries and improvements conceived or made by Executive during the term of Executive's employment described in this Agreement. ARTICLE VII NON-COMPETITION 7.1 NON-COMPETITION. During Executive's term of employment set forth in this Agreement, and for a period of one (1) year thereafter, Executive will not directly or indirectly be an owner, partner, director, manager, officer or Executive or otherwise render services or be associated with any business that competes with Employer. ARTICLE VIII TERMINATION 8.1 TERMINATION WITH CAUSE. Employer may terminate Executive with cause upon providing thirty (30) days' advance written notice to Executive. Upon termination with cause, Executive shall be entitled to cash compensation equal to the greater of the following: (i) twelve (12) months of his then existing salary, or (ii) the remainder of the salary due under this Agreement. For purposes of this Agreement, termination "with cause" shall be for any of the following: A. Any breach of any material obligations owed to Employer; B. Failure to follow the directive of the Company's board of directors; or C. Conviction of a felony or any act involving moral turpitude. In the event of termination with cause, all cash compensation, as referred to above, shall be paid to Executive on a bimonthly basis. 8.2 TERMINATION WITHOUT CAUSE. Employer may terminate Executive without cause upon providing thirty (30) days advance written notice to Executive. Upon termination without cause by Employer, Executive shall be entitled to cash compensation equal to the greater of the following: (A) the remainder of the salary due under this Agreement; or (B) the then existing base salary of Executive for a period of thirty-six (36) months from the date of termination without cause. In the event of termination without cause, all cash compensation, as referred to above, shall be paid to Executive on a bimonthly basis. 8.3 PURCHASE OF THE EXECUTIVE'S SHARES. Upon termination, Executive's Shares shall be dealt with as follows: A. TERMINATION WITH CAUSE. Upon termination with cause, Employer shall purchase Executive's Shares for one hundred twenty percent (120%) of the average closing price, as quoted on the NASDAQ SmallCap, National Market or any other national securities exchange, for the ninety (90) day period preceding the date of termination; or if Employer's common stock is not quoted or otherwise traded on a national securities exchange, then Employer shall purchase the Executive's Shares for one hundred twenty 5 percent (120%) of the average price of all private sales of common stock by Employer to third Parties for the ninety (90) day period preceding the date of termination with cause (referred to herein as the "STOCK PURCHASE PRICE"). The Stock Purchase Price shall be paid to Executive in twenty-four (24) equal monthly payments, commencing thirty (30) days after the date of termination with cause. B. TERMINATION WITHOUT CAUSE. If Executive is terminated without cause, Executive shall have the sole discretion to either (i) sell the Executive's Shares to Employer at the Stock Purchase Price; or (ii) retain ownership of the Executive's Shares. Executive shall notify Employer within thirty (30) days of termination without cause of his election hereunder. Should Executive elect to sell the Executive's Shares to Employer for the Stock Purchase Price, Executive shall so notify Employer and Employer shall remit the entire amount of the Stock Purchase Price to Executive within ninety (90) days of the date of notification hereunder. 8.4 TERMINATION UPON SALE OF BUSINESS. Notwithstanding anything to the contrary, Employer may terminate this Agreement upon thirty (30) days' written notice upon the occurrence of any of the following events, which any one event will be treated as a termination without cause for purposes of severance allowance pursuant to this Agreement. A. The sale by Employer of substantially all of its assets to a single purchaser or a group of associated purchasers; B. The sale, exchange or other disposition, in one transaction, of more than fifty percent (50%) of the outstanding common stock of the Employer; C. A decision by Employer to terminate its business and liquidate its assets; or the merger or consolidation of Employer in a transaction in which the shareholders of Employer receive more than fifty percent (50%) of the outstanding voting shares of the new or continuing corporation. D. Notwithstanding the foregoing, should Employer agree to sell all or substantially all of its assets, Employer shall purchase Executive's Shares for an amount equal to the greater of the Stock Purchase Price or the same price sold by shareholders of Employer. 8.5 EXERCISE OF OPTIONS TO PURCHASE COMMON STOCK. As of July 12, 2000, Executive holds options to purchase 53,598 shares of common stock of Employer. Executive was issued options to purchase 53,598 shares of common stock of Employer pursuant to Employer's 2000 Stock Option Plan ("2000 STOCK OPTION PLAN"), and will receive additional options to purchase shares of common stock (Executive's options to purchase 53,598 shares of common stock of Employer as well as the additional options to be issued to Executive are collectively referred to hereinafter as the "NELSON OPTIONS") under the 2000 Stock Option Plan as determined by Employer's Compensation Committee. Notwithstanding the terms of the 2000 Stock Option Plan, the Nelson Options are subject to the following terms and conditions: A. TERMINATION WITH CAUSE. Should Employer terminate Executive pursuant to paragraph 8.1 hereof, Executive shall retain the Nelson Options and shall have the irrevocable right to exercise all of the Nelson Options through the final date on 6 which the Nelson Options may be exercised by Executive, as set forth on the written stock option grants evidencing the Nelson Options. B. TERMINATION WITHOUT CAUSE. Should Employer terminate Executive pursuant to paragraph 8.2 hereof, (i) Executive shall retain the Nelson Options and shall have the irrevocable right to exercise all of the Nelson Options through the final date on which the Nelson Options may be exercised by Executive, as set forth on the written stock option grants evidencing the Nelson Options, (ii) the Company shall pay the aggregate exercise price on all Nelson Options exercised by Executive, and (iii) the Company shall pay all applicable state and federal personal income tax incurred by Executive as a result of the Company paying the exercise price on the Nelson Options exercised by Executive. C. TERMINATION UPON SALE OF THE BUSINESS. Should Employer terminate Executive pursuant to paragraph 8.4 hereof, (i) Executive shall retain the Nelson Options and shall have the irrevocable right to exercise all of the Nelson Options through the final date on which the Nelson Options may be exercised by Executive, as set forth on the written stock option grants evidencing the Nelson Options, (ii) the Company shall pay the aggregate exercise price on all Nelson Options exercised by Executive, and (iii) the Company shall pay all applicable state and federal personal income tax incurred by Executive as a result of the Company paying the exercise price on the Nelson Options exercised by Executive. D. PAYMENT OF EXERCISE PRICE AND RELATED INCOME TAX UPON CONCLUSION OF THE AGREEMENT. If Executive is employed by Employer upon the conclusion of this Agreement, (i) Executive shall retain the Nelson Options and shall have the irrevocable right to exercise all of the Nelson Options through the final date on which the Nelson Options may be exercised by Executive, as set forth on the written stock option grants evidencing the Nelson Options, (ii) the Company shall pay the aggregate exercise price on all Nelson Options exercised by Executive, and (iii) the Company shall pay all applicable state and federal personal income tax incurred by Executive as a result of the Company paying the exercise price on the Nelson Options exercised by Executive. E. RESIGNATION BY EXECUTIVE. If Executive resigns prior to the conclusion of this Agreement, Executive shall retain the Nelson Options and shall have the irrevocable right to exercise all of the Nelson Options through the final date on which the Nelson Options may be exercised by Executive, as set forth on the written stock option grants evidencing the Nelson Options. ARTICLE IX GENERAL PROVISIONS 9.1. WAIVER OF BREACH. The waiver by Employer of breach of any provisions of this Agreement by Executive shall not operate or be construed as a waiver of any subsequent breach by Executive. No waiver shall be valid unless in writing and signed by an authorized officer of Employer. 9.2 ASSIGNMENT. Executive acknowledges that the services to be rendered by him are unique and personal. Accordingly, Executive may not assign any of his rights under 7 this Agreement. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. 9.3 MODIFICATION. This Agreement may not be modified, changed or altered orally but only by an agreement in writing signed by the party against an enforcement of any waiver, change, modification, extension or discharge as sought. 9.4. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Nevada. 9.5 INTEGRATION CLAUSE. This instrument contains the entire agreement between the Parties hereto and supersedes any and all prior written and/or oral agreements. This Agreement may be altered or modified only in writing signed by the Parties hereto. 9.6 NOTICES. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to the Parties at each party's last known address. 9.7 ATTORNEYS' FEES. Should any party seek the enforcement of any term of this Agreement, the prevailing party thereunder shall be entitled to attorneys' fees and costs for the enforcement of such term or provision. 9.8 ARBITRATION. In the event of any dispute arising under this Agreement, including any dispute regarding the nature, scope or quality of services provided by either party hereto, its is hereby agreed that such dispute shall be resolved by binding arbitration to be conducted by the American Arbitration, to be arbitrated in accordance with its rules and regulations and procedures in Las Vegas, Nevada. In the event of any such arbitration, pending resolution of the arbitration and the award of costs by the arbitrator, each party hereto shall advance one-half of the amounts, if any, requested by the arbitrator and/or the sponsoring organization. EMPLOYEE /s/ STEPHEN M. NELSON - ------------------------------------ STEPHEN M. NELSON EMPLOYER BY: /s/ STEVEN L. SUNYICH --------------------------------- STEVEN L. SUNYICH CHIEF EXECUTIVE OFFICER, PRESIDENT 8 EXHIBIT "A" ANNUAL CASH BONUS The formula for determining the annual cash bonus for Executive is as follows: 1. ANNUAL CASH BONUS POOL: The Annual Cash Bonus Pool (the "POOL") for determining the total amount available for the executive officers of the Company is as follows: the Pool shall be comprised of two percent (2%) of Employer's fiscal year gross revenues, and five percent (5%) of Employer's fiscal year net income. 2. EXECUTIVE'S PARTICIPATION: Executive shall be entitled to receive, on an annual basis, not less than seventeen and eighty-one hundred percent (17.81%) of the Pool. 9 EXHIBIT "B" OPTIONS TO PURCHASE COMMON STOCK Executive shall receive, on an annual basis, options to purchase common stock in an amount to be determined by the Company's Compensation Committee. 10 EX-23.01 4 ex-23_01.txt EXHIBIT 23.01 Exhibit 23.01 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors eRoomSystem Technologies, Inc. As independent certified public accountants, we hereby consent to the use of our report dated April 13, 2000, except for the third paragraph of Note 1 to the consolidated financial statements, as to which the date is June 2, 2000, with respect to the consolidated financial statements of eRoomSystem Technologies, Inc. included in this Registration Statement on Form SB-2, and consent to the use of our name in the "Experts" section of this Registration Statement. /s/ HANSEN, BARNETT & MAXWELL ------------------------------ HANSEN, BARNETT & MAXWELL Salt Lake City, Utah July 19, 2000 EX-27.01 5 ex-27_01.txt EXHIBIT 27.01
5 3-MOS YEAR YEAR DEC-31-2000 DEC-31-1999 DEC-31-1998 JAN-01-2000 JAN-01-1999 JAN-01-1998 MAR-31-2000 DEC-31-1999 DEC-31-1998 14,575 113,252 1,850 0 0 0 28,287 55,213 39,655 (15,000) (15,000) (3,900) 999,000 697,033 1,488,354 1,065,560 856,748 1,527,109 525,298 561,080 712,877 (274,365) (268,804) (207,276) 5,042,123 4,350,631 2,520,289 4,337,523 3,507,364 4,885,453 3,061,757 2,372,480 2,884,289 0 0 0 8,271,952 7,504,189 1,332,953 2,110 2,218 3,532 (8,563,875) (7,530,219) (3,764,590) 5,042,123 4,350,631 2,520,289 0 144,282 916,650 49,099 540,517 1,011,462 0 118,010 711,355 14,093 362,523 793,256 541,613 376,325 288,487 0 0 0 303,650 1,444,532 1,922,638 (1,239,969) (3,672,175) (3,738,496) 0 0 0 (1,239,969) (3,672,175) (3,738,496) 0 0 0 0 0 (407,000) 0 0 0 (1,239,969) (3,672,175) (4,145,496) (0.75) (1.33) (1.37) (0.75) (1.33) (1.37)
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