THE SECURITIES REPRESENTED BY
THIS NOTE AND ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE “1933 ACT”), OR UNDER THE PROVISIONS OF
ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED BY THE
REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE
ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES AND THE
SECURITIES ISSUED UPON EXERCISE HEREOF MAY NOT BE SOLD, PLEDGED,
TRANSFERRED OR ASSIGNED, NOR MAY THIS NOTE BE EXERCISED, EXCEPT IN
A TRANSACTION WHICH IS EXEMPT UNDER THE PROVISIONS OF THE 1933 ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT.
SECOND AMENDED AND RESTATED
CONVERTIBLE PROMISSORY NOTE
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Denver,
Colorado
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As of May 26, 2004
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WHEREAS, on December 31, 2002, Entrust Financial
Services, Inc., a Colorado corporation (the “ Company
”), executed and delivered to BBSB, LLC, a Colorado limited
liability company (the “ Holder ”), a
Convertible Promissory Note (the “ Original Note
”) in the principal amount of $2,000,000 (the “
Original Principal Amount ”). A copy of the Original
Note is attached hereto as Exhibit A ;
WHEREAS, on April 1, 2004, the Company and the
Holder agreed to amend and restate the Original Note and, in
accordance therewith, the Company executed and delivered to the
Holder an Amended and Restated Convertible Promissory Note (the
“ Restated Note ”). A copy of the Restated Note
is attached hereto as Exhibit B ;
WHEREAS, pursuant to Section 2.2 of the Restated
Note, the Holder agreed to cancel the unaccrued portion of the
final interest payment (the “ Final Interest Payment
”) described in the Original Note amounting to $700,000 (33%
per annum payable on the Original Principal Amount from April 1,
2004 through the maturity date of the Original Note (March 27,
2005)) subject to certain conditions;
WHEREAS, the Company has recently filed a proxy
statement (the “ Proxy Statement ”) with the
Securities and Exchange Commission pursuant to the Stock Purchase
Agreement dated as of March 24, 2005, between the Company, the
Holder and the Company’s wholly-owned subsidiary, Entrust
Mortgage, Inc. (“ Mortgage ”), wherein, among
other things, the Company has requested that its shareholders
approve the sale of all of the capital stock of Mortgage to the
Holder (the “ Mortgage Sale ”);
WHEREAS, the Company has advised the Holder that
the Company will be unable to make the payment of $100,000 due to
the Holder on June 1, 2005 pursuant to the terms of the Restated
Note as a result of the significant legal and other costs incurred
by the Company in connection with the Proxy Statement;
WHEREAS, the Company has requested that the
Holder waive the requirement that the Company make the $100,000
payment to the Holder on June 1, 2005 and that the Holder loan to
the Company an additional $300,000 (the “ New Loan
”) in order to enable the Company to pay its obligations and
liabilities as they become due prior to the Mortgage
Sale;
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WHEREAS, the Company acknowledges and agrees
that the failure to make the $100,000 payment to the Holder on June
1, 2005 shall constitute a default of the Company under the
Restated Note;
WHEREAS, the Holder has agreed to waive its
right to exercise the remedies arising from such default, and
instead require the $100,000 payment due to the Holder from the
Company on June 1, 2005 be paid to the Holder on the Maturity Date
(as defined below);
WHEREAS, the Company has agreed to provide the
Company with the Additional Loan pursuant to the terms and
conditions set forth herein (this “ Note ”);
and
WHEREAS, this Note shall amend, restate and
replace the Restated Note in its entirety.
NOW, THEREFORE, the Restated Note is hereby
amended and restated as follows:
1. Principal Amount .
The remaining balance of the Principal Amount on the date hereof
($1,200,000) and the New Loan ($300,000) shall hereinafter be
referred to as the Principal Amount. The Company hereby promises to
pay to the order of the Holder, in lawful money of the United
States at the address of the Holder set forth below, the Principal
Amount, together with Interest (as hereinafter defined), which
shall accrue from the date hereof until the date of payment in full
of the aggregate Principal Amount or the conversion of this Note
pursuant to the terms hereof. The Principal Amount shall be paid by
the Company as follows: (i) $100,000 shall be paid on the first day
of each month commencing on July 1, 2005 and ending on the Maturity
Date (for aggregate payments under this Section 1(i) of
$1,100,000), and (ii) $400,000 shall be paid on the Maturity
Date.
2. Interest
.
2.1 Monthly
Interest Payments . The outstanding Principal Amount shall bear
interest (“Interest ”) at the rate of 12% per
annum (calculated on the basis of the actual number of days elapsed
in a 365-day year) payable monthly in arrears on the first day of
the month.
2.2 Maximum
Lawful Rate . Notwithstanding anything to the contrary set
forth in this Section 2 or Section 13, if a court of competent
jurisdiction determines in a final order that the rate of Interest
payable in connection with this Note exceeds the highest rate of
interest permissible under law (the “Maximum Lawful
Rate ”), then so long as the Maximum Lawful Rate would be
so exceeded, the rate of Interest payable hereunder shall be equal
to the Maximum Lawful Rate, and to the extent permitted by law any
amount paid in excess of the Maximum Lawful Rate shall be deemed to
have been a repayment of principal.
3. Maturity . Unless
this Note is earlier accelerated, prepaid or converted as set forth
below, the outstanding Principal Amount and all unpaid Interest
thereon shall be paid in full on May 1, 2006 (the
“Maturity Date ”).
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4. Application of
Payments .
4.1 Except as
otherwise expressly provided herein, each payment under this Note
shall be applied (i) first to the repayment of any sums incurred by
the Holder for the payment of any expenses in enforcing the terms
of this Note, (ii) then to the payment of Interest, and (iii) then
to the reduction of the Principal Amount.
4.2 Upon payment
in full of the Principal Amount and applicable accrued and unpaid
Interest thereon or the conversion of such amount pursuant to
Section 6, this Note shall be marked “Paid in Full” and
returned to the Company.
5. Prepayment . This
Note (including the Principal Amount and all Interest thereon) may
be prepaid in full or in part at any time upon five business
days’ written notice (the “ Prepayment Notice
”) to the Holder. The Prepayment Notice shall contain the
Principal Amount to be prepaid and applicable Interest due thereon
pursuant to the next sentence. In the event the Holder does not
first convert the prepayment amount in accordance with Section 6,
on the date that is five business days following the Holder’s
receipt of the Prepayment Notice (“ Prepayment Date
”), the Company shall pay to the Holder the portion of the
Principal Amount to be prepaid and the accrued and unpaid portion
of the Interest thereon.
6. Note Conversion
.
6.1
Conversion . On the Maturity Date, the Holder may elect to
convert all, or any part, of the outstanding Principal Amount of
this Note into shares of the Company’s common stock,
$.0000001 par value per share (“ Common Stock
”), at a conversion price per share of Common Stock of $0.50,
as adjusted and readjusted from time to time in accordance with
Sections 6.3 and 6.6 (such conversion price, as so adjusted and
readjusted and in effect at any time, being herein called the
“ Conversion Price ”). In addition, on the
Prepayment Date, the Holder may elect to convert all, or any part,
of the Principal Amount set forth in the Prepayment Notice into
Common Stock at the Conversion Price. In either such event, on the
conversion date (the “ Conversion Date ”), the
Company shall pay to the Holder the accrued and unpaid portion of
the Interest due and payable on any Principal Amount converted to
Common Stock pursuant to this Section.
6.2 Conversion
Procedure .
6.2.1 Notice of
Conversion . If the Holder elects to convert this Note pursuant
to Section 6.1, the Holder shall deliver to the Company written
notice of its conversion (“ Conversion Notice
”). Such Conversion Notice shall set forth (i) the Principal
Amount of this Note and the amount of accrued Interest that the
Holder intends to convert, (ii) the date on which such conversion
will occur and (iii) the name or names to appear on the
certificate(s) representing the shares and the number of shares for
each certificate if more than one is to be issued. All amounts
converted shall be applied first to any accrued and unpaid Interest
and then to the reduction of the Principal Amount.
6.2.2 Delivery
of Stock Certificates . As promptly as practicable after the
conversion of this Note, the Company, at its expense, will issue
and deliver to the Holder a certificate(s) for the number of full
shares of Common Stock issuable upon such conversion.
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6.2.3 Delivery
of Replacement Note . Upon the conversion of this Note, the
Holder shall surrender this Note, duly endorsed, at the principal
office of the Company. If the Holder only converts part of the
Principal Amount of this Note, as promptly as practicable after the
conversion of that portion of this Note, the Company, at its
expense, will issue and deliver to the Holder a new Note with a new
Principal Amount, and the Company shall be forever released from
all its obligations and liabilities under this Note.
6.2.4
Fractional Shares . No fractional shares of the Company's
Common Stock shall be issued upon conversion of this Note. In lieu
of the Company issuing any fractional shares to the Holder upon the
conversion of this Note, the number of shares of Common Stock to be
issued shall be rounded up to the next whole number of
shares.
6.3 Adjustment
of Conversion Price . The Conversion Price shall be subject to
adjustment from time to time as follows:
6.3.1 If the
Company shall issue any Additional Stock (as hereinafter defined),
or rights to acquire Additional Stock, for a consideration per
share less than the Fair Market Value (as hereinafter defined) of
the Company’s Common Stock in effect immediately prior to
such issuance (the “ Lower Price ”), the
Conversion Price shall be reduced to the Lower Price.
6.3.2 In the case
of the issuance of Common Stock for cash, the consideration shall
be deemed to be the amount of cash paid therefor before deducting
any reasonable discounts, commissions or other expenses allowed,
paid or incurred by the Company for any underwriting or otherwise
in connection with the issuance and sale thereof.
6.3.3 In the case
of the issuance of Common Stock for a consideration in whole or in
part other than cash, the consideration other than cash shall be
deemed to be the fair value thereof as determined in good faith by
the Company’s board of directors (the “ Board of
Directors ”).
6.4 “
Additional Stock ” shall mean any shares of Common
Stock issued by the Company after the Effective Date hereof
except:
6.4.1 150,000
shares of Common Stock issuable to consultants, advisors and
employees of the Company pursuant to stock options outstanding and
reserved for issuance on the Effective Date under the
Company’s 2002 Stock Compensation Plan I under cover of Form
S-8 and 250,000 shares of Common Stock issuable to consultants,
advisors and employees of the Company pursuant to stock options
outstanding and reserved for issuance on the Effective Date under
the Company’s Equity Incentive Plan; and
6.4.2 530,000
shares of Common Stock issuable pursuant to warrants outstanding on
the Effective Date.
6.5 “
Fair Market Value ” means the Closing Price of the
Common Stock of the Company for which a Closing Price is available;
provided, however, that if a Closing Price is unavailable, the fair
market value shall be determined in good faith by the Board of
Directors of the Company based upon recent sales of the
Company’s Common Stock.
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“ Closing Price ”
means, with respect to the Company's Common Stock, (i) if the
shares are listed or admitted for trading on any United States
national securities exchange, the Closing Price will be equal to
the average of the last reported per share sale price on such
exchange for the five days immediately preceding the date of
determination, as reported in any newspaper of general circulation;
(ii) if the shares are quoted on the Nasdaq National Market, or any
similar system of automated dissemination of quotations of
securities prices in common use, the average closing bid quotation
for such shares for the five days immediately preceding the date of
determination on such system; (iii) if neither clause (i) or (ii)
is applicable, the average bid quotation for such shares for the
five days immediately preceding the date of determination as
reported by the National Daily Quotation Service if at least two
securities dealers have inserted both bid and asked quotations for
the shares on at least five of the ten preceding days; (iv) in lieu
of the above, if actual transactions in the shares are reported on
a consolidated transaction reporting system, that average sale
price for such shares for the five days immediately preceding the
date of determination on such system.
6.6 In the event
the Company should at any time or from time to time after the
Effective Date fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock, declare a
dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive, directly or indirectly,
additional shares of Common Stock (hereinafter referred to as
“ Common Stock Equivalents ”), combine its
outstanding shares of Common Stock into a lesser number of shares
or issue by reclassification of its shares of Common Stock any
shares of its capital stock, without payment of any consideration
by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common
Stock issuable upon conversion or exercise thereof), then, as of
such record date (or the date of such dividend, distribution,
split, subdivision, combination or reclassification if no record
date is fixed), the Conversion Price shall be appropriately
adjusted so that the number of shares of Common Stock issuable on
conversion of this Note shall be adjusted in proportion to such
change in the number of outstanding shares.
7. Guaranteed and Secured
Indebtedness; Ancillary Agreements . The indebtedness
represented by this Note is guaranteed and secured pursuant to (i)
the Guaranty executed by Mortgage as of the Effective Date of the
Original Note for the benefit of the Holder, (ii) the Security
Agreement dated as of the Effective Date of the Original Note
between Mortgage and the Holder, (iii) the Pledge Agreement dated
as of the Effective Date of the Original Note executed by the
Company in favor of the Holder, and (
