-----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, PsM7fy/9OYBgHaSF6eHL9RjXPmciA4oiWP9v43/CiGZnOSbbQLOwuast9uXSogtp 2rasZtm9vp2oJoKowAAlwQ== 0000927016-98-002747.txt : 19980728 0000927016-98-002747.hdr.sgml : 19980728 ACCESSION NUMBER: 0000927016-98-002747 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980724 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTRUST TECHNOLOGIES INC CENTRAL INDEX KEY: 0001031283 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-57275 FILM NUMBER: 98671406 BUSINESS ADDRESS: STREET 1: 2323 NORTH CENTRAL EXPRESSWAY CITY: RICHARDSON STATE: TX ZIP: 75080 BUSINESS PHONE: 9729948000 MAIL ADDRESS: STREET 2: 2323 NORTH CENTR4AL EXPWY CITY: RICHARDSON STATE: TX ZIP: 75080 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998 REGISTRATION NO. 333-57275 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ENTRUST TECHNOLOGIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- MARYLAND 7371 62-1670648 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) --------------- 2323 NORTH CENTRAL EXPRESSWAY RICHARDSON, TEXAS 75080 (972) 994-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- JOHN A. RYAN PRESIDENT AND CHIEF EXECUTIVE OFFICER ENTRUST TECHNOLOGIES INC. 2323 NORTH CENTRAL EXPRESSWAY RICHARDSON, TEXAS 75080 (972) 994-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: JOHN A. BURGESS, ESQ. KEITH F. HIGGINS, ESQ. HALE AND DORR LLP ROPES & GRAY 60 STATE STREET ONE INTERNATIONAL PLACE BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110 TELEPHONE: (617) 526-6000 TELEPHONE: (617) 951-7000 TELECOPY: (617) 526-5000 TELECOPY: (617) 951-7050 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] 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. [_] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE (2) - ------------------------------------------------------------------------------- Common Stock, $.01 par value per share................................. $130,026,672 $38,358
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) $33,925 of such fee has been previously paid by the Registrant. --------------- - ------------------------------------------------------------------------------- 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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with a United States offering of shares (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering of shares (the "International Prospectus"). The U.S. Prospectus and the International Prospectus are identical except that they contain different front and back cover pages and different descriptions of the plan of distribution (contained under the caption "Underwriting" in each of the U.S. and International Prospectuses). The form of U.S. Prospectus is included herein and is followed by those pages to be used in the International Prospectus which differ from, or are in addition to, those in the U.S. Prospectus. Each of the pages for the International Prospectus included herein is labeled "Alternate Page for International Prospectus". ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JULY 24, 1998 7,066,667 SHARES [ENTRUST TECHNOLOGIES LOGO APPEARS HERE] COMMON STOCK (PAR VALUE $.01 PER SHARE) ----------- Of the 7,066,667 shares of Common Stock offered, 5,653,334 shares are being offered hereby in the United States and 1,413,333 shares are being offered in a concurrent international offering outside the United States. The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. See "Underwriting". Of the 7,066,667 shares of Common Stock offered, 5,400,000 shares are being sold by the Company and 1,666,667 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders". The Company will not receive any of the proceeds from the sale of the shares being sold by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. For factors to be considered in determining the initial public offering price, see "Underwriting". SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "ENTU". ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -----------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS -------------- ------------ ----------- ------------------- Per Share.......... $ $ $ $ Total(3)........... $ $ $ $
- ----- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $900,000 payable by the Company. (3) The Selling Stockholders have granted the U.S. Underwriters an option for 30 days to purchase up to an additional 848,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Selling Stockholders have granted the International Underwriters a similar option with respect to an additional 212,000 shares as part of the concurrent international offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting". ----------- The shares offered hereby are offered severally by the U.S. Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York on or about , 1998, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY SECURITIES LLC WARBURG DILLON READ LLC ----------- The date of this Prospectus is , 1998. [Inside front cover] On the left half of the page is a circular photo montage showing a globe and various computer-related images. On the right-hand side of the page is the caption "Enterprise Security with Real-World PKI Solutions". In the middle of the page on the left side is the Company's name. [Inside front cover fold-out, left page] In the top half of the page is a photograph of the boxed versions of the Company's Entrust PKI and Entrust Enterprise Desktop Suite Products. The lower half of the page contains the following text: Entrust Products ENTRUST/DIRECT (TM) ENTRUST/AUTHORITY(TM) Provides Entrust automated key Provides comprehensive and certificate management Certification Authority and features to secure Web sessions key recovery capabilities ENTRUST/EXPRESS(TM) ENTRUST/ADMIN(TM) Provides security for popular Performs PKI e-mail applications administrative tasks ENTRUST-READY(TM) ENTRUST/DIRECTORY(TM) NETSCAPE(R) SOLUTION Scalable directory system for Enables Entrust product storage of key information features to be used with Netscape Communicator ENTRUST/TOOLKIT(TM) A family of standards-based ENTRUST/ICE(TM) RELEASE 2.0 security APIs Provides security for files and folders ENTRUST/COMMERCECA(TM) Comprehensive security for ENTRUST ENTERPRISE credit card transactions DESKTOP SUITE(TM) Provides for a comprehensive solution for desktop security in a single software package
[Inside front cover fold-out, right-hand page] The following text is in the top half of the page: "The Entrust Public-Key Infrastructure. The Entrust PKI is an integrated, open and scalable software framework that operates across multiple platforms, network devices and applications." In the lower half of the page, a cartoon figure of a computer with keys next to it is identified by the caption "Entrust PKI". This cartoon is connected by arrows to four additional cartoon diagrams surrounding it and labeled as follows: "SET Certs--Credit Card Transactions; Enterprise Certs--E- mail, Desktop, Remote access, E-forms; Web Certs--E-commerce, Internet banking and brokerage; VPN certs (expected to become available in late 1998)--Router, Gateways, Firewalls, Access devices". CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Company's Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus: (i) reflects the filing upon the closing of the Offerings of the Company's Amended and Restated Articles of Incorporation, which redesignates the Company's Series A Common Stock as Common Stock (the "Common Stock"); (ii) gives effect to the conversion upon the closing of the Offerings of all outstanding shares of the Company's Series B Common Stock and Series B Non-Voting Common Stock into an aggregate of 13,063,836 shares of Common Stock; (iii) assumes the issuance of 7,700,000 shares of Common Stock to Northern Telecom Limited upon the surrender of shares of the Company's Special Voting Stock and the concurrent exchange of Exchangeable Shares of Entrust Technologies Limited, a majority-owned subsidiary of the Company (the "Canadian Subsidiary"); (iv) gives effect to a four-for-one stock split in the form of a stock dividend effected in July 1998; and (v) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting". Unless otherwise specified herein, references to the "Company" or "Entrust" mean Entrust Technologies Inc. and its subsidiaries. THE COMPANY Entrust Technologies Inc. ("Entrust" or the "Company") develops, markets and sells products and services that allow enterprises to manage trusted, secure electronic communications and transactions over today's advanced networks, including the Internet, extranets and intranets. The Entrust solution automates the management of digital certificates, which are similar to electronic passports, through public key infrastructure ("PKI") technology designed to assure the privacy and authenticity of internal and external electronic communications. The Entrust PKI is an integrated, open and scalable software framework that operates across multiple platforms, network devices and applications, including e-mail, browsers, electronic commerce, electronic forms, remote access and other product offerings from leading vendors. The Company's product suite was first released in 1994, and has since been licensed for use in global enterprises and government entities such as the Canadian government, Citibank, the FDIC, J.P. Morgan, NASA, the Republic of Singapore and the United Kingdom Post. In addition, over three million Entrust certificates have been issued to date for use by the Company's customers. The widespread adoption in recent years of public and private networks has revolutionized the manner in which organizations communicate and conduct business. These advanced networks provide an attractive medium for communications and commerce because of their global reach, accessibility, use of open standards and ability to permit interactions on a real-time basis. At the same time, they have afforded businesses a user-friendly, low-cost way to conduct a wide variety of commercial functions electronically. Today, organizations are increasingly utilizing these networks to access new markets, improve customer service and streamline business processes through applications such as e-mail, messaging, remote access, intranet-based applications, on-line customer support and supply chain applications. The very openness and accessibility that has stimulated the use of public and private networks has also driven the need for solutions that address the five critical network security needs: access control, confidentiality, integrity, authentication and non-repudiation. To address these needs, enterprises have increasingly adopted the public key authentication and verification technology offered by digital certificates. However, the mere issuance of digital certificates does not ensure that a user's access is properly monitored, that privileges associated with access are accurately and currently defined, or that the certificates in question have not been withdrawn or replaced. The proliferation of users and certificates greatly complicates management of these issues, which are 3 critical to maintaining an effective security environment across and between enterprises. Moreover, unless digital certificates can be easily utilized on a consistent and reliable basis across multiple applications, organizations face the challenge and cost of maintaining a separate security infrastructure for each application, requiring separate keys and certificates, multiple passwords and inconsistent or incomplete security implementations. The Company's PKI solution provides highly functional and flexible management of network security features across an enterprise and between organizations. The Entrust PKI solution offers enterprises all of the functionality necessary for full life cycle management of public keys and digital certificates, including enterprise certificates for use across multiple applications, Web certificates for secure Web transactions and electronic commerce certificates for secure credit card transactions. Entrust products can support multiple applications and large numbers of simultaneous users, while seamlessly effecting complex certification and key recovery functions, enabling enterprises to significantly reduce their overall costs for addressing security requirements. The Company's objective is to maintain and enhance its position as the leading provider of comprehensive PKI solutions, building on its four years of product deployment experience and its 140-person research and development team that includes researchers with international reputations in their fields. The Company's marketing strategy is to target Global 2000 organizations and large government entities that have significant requirements for comprehensive PKI solutions and the resources to deploy them broadly. The Company also has an Entrust Partner Program to achieve widespread adoption of its PKI solution. This program includes VAR and OEM partners that create bundled solutions which allow customers to purchase total desktop applications incorporating Entrust functionality. These VAR and OEM partners include Digital Equipment Corporation, EDS, Hewlett-Packard, IBM and Tandem, which resell the Company's products with their hardware and networking solutions, as well as Check Point Software and Symantec, which plan to bundle the Company's PKI solutions with their own software products. The program also includes consultant and systems integration partners that recommend and implement Entrust-Ready security solutions as part of their overall service offerings to customers. These partners, which include Coopers & Lybrand, Deloitte & Touche and KPMG Peat Marwick, differentiate their offerings through the inclusion of PKI functionality to broaden the Company's sales channels. In order to promote the interoperability of the Company's PKI solution with a wide range of third party product offerings, the Company has developed relationships with leading technology providers such as Cisco, Lotus Development. Netscape and Shiva. The Company was originally established in January 1994 as the Secure Networks group of Northern Telecom Limited and its subsidiary, Northern Telecom Inc., to pursue the development and sale of PKI products and services, and was incorporated as a Maryland corporation in December 1996. The Company's principal executive offices are located at 2323 North Central Expressway, Richardson, Texas 75080, and its telephone number at that location is (972) 994-8000. ---------------- Entrust is a registered trademark, and Entrust-Ready, the Entrust design (Elmer), Entrust/Authority, Entrust/Admin, Entrust/Directory, Entrust/Entelligence, Entrust/Web Connector, Entrust/CommerceCA, Entrust/Lite, Entrust/Solo, Entrust/ICE, Entrust/Express, Entrust/Direct, Entrust/True Delete, Entrust/Toolkit, Entrust PKI, Entrust InSource, Entrust Partner and Entrust SecureSummit are trademarks or service marks, of Entrust Technologies Limited, a majority-owned subsidiary of Entrust Technologies Inc. Other trademarks and service marks used in this Prospectus are the property of their respective owners. 4 THE OFFERINGS The offering of 5,653,334 shares of Common Stock initially being offered in the United States (the "U.S. Offering") and the concurrent offering of 1,413,333 shares of Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to herein as the "Offerings". The closing of the International Offering is conditioned upon the closing of the U.S. Offering and vice versa. See "Underwriting". Common Stock offered: By the Company: U.S. Offering.......................... 4,320,000 shares International Offering................. 1,080,000 shares 5,400,000 By the Selling Stockholders: U.S. Offering ......................... 1,333,334 shares International Offering ................ 333,333 shares 1,666,667 Total ............................... 7,066,667
------ ---------- Common Stock to be outstanding after the Offerings............................... 47,643,164 shares(1) Proposed Nasdaq National Market symbol..... ENTU Use of proceeds by the Company............. For working capital and other general corporate purposes, including product development and potential acquisitions of complementary businesses, products or technologies. See "Use of Proceeds".
- ------- (1) Includes 6,549,480 shares of Special Voting Stock and excludes (i) an aggregate of 9,587,960 shares of Common Stock reserved for issuance under the Company's Amended and Restated 1996 Stock Incentive Plan, of which 7,385,764 shares were subject to outstanding options as of June 30, 1998 at a weighted average exercise price of $2.96 per share, and (ii) an aggregate of 400,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- ---------------- 1994 1995 1996 1997 1997 1998 ------ ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DA- TA: Total revenues.............. $3,881 $ 3,973 $12,802 $25,006 $ 9,891 $20,938 Gross profit................ 2,696 2,989 9,252 20,090 7,551 17,037 Income (loss) from opera- tions...................... 27 (2,424) 56 (490) (4) (21,765) Net income (loss)........... 138 (2,123) 387 514 396 (21,388) Net income (loss) per basic share(1) .................. $ 0.02 $ 0.01 $ (0.69) Net income (loss) per di- luted share(1)............. $ 0.01 $ 0.01 $ (0.69) Shares used to compute net income (loss) per basic share(1)......... 30,700 30,700 30,849 Shares used to compute net income (loss) per diluted share(1)....... 41,743 41,064 46,686
JUNE 30, 1998 ----------------------- ACTUAL AS ADJUSTED(2) ------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $ 4,369 $78,799 Working capital........................................ 3,138 77,568 Total assets........................................... 24,152 98,582 Shareholders' equity (deficit)......................... (6,733) 84,710
- ------- (1) See Note 2 of Notes to the Company's Consolidated Financial Statements for the calculation of basic and diluted net income (loss) per share. (2) Gives effect to the sale of the 5,400,000 shares of Common Stock offered by the Company pursuant to the Offerings at an assumed initial public offering price of $15.00 per share, after deducting the estimated underwriting discount and offering expenses. See "Use of Proceeds". 5 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered by this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The cautionary statements contained in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Prospectus. POTENTIAL FLUCTUATION AND UNCERTAINTY OF QUARTERLY OPERATING RESULTS The Company's quarterly revenues and operating results have varied substantially and may continue to fluctuate due to a number of factors, including the timing, size and nature of the Company's licensing transactions; the market acceptance of new products or product enhancements by the Company or its competitors; product and price competition; the relative proportions of revenues derived from licenses and services and maintenance; changes in the Company's operating expenses; personnel changes; foreign currency exchange rates; and fluctuations in economic and financial market conditions. The timing, size and nature of individual licensing transactions are important factors in the Company's quarterly results of operations. Transactions for the Company's PKI solution often involve large expenditures, and the sales cycles for these transactions are often lengthy and unpredictable. In addition, the sales cycle associated with these transactions is subject to a number of uncertainties, including customers' budgetary constraints, the timing of customers' budget cycles and customers' internal approval processes. There can be no assurance that the Company will be successful in closing such large transactions on a timely basis or at all. Estimating future revenues is difficult because the Company ships its products soon after an order is received and as such does not have a significant backlog. Thus, quarterly license revenues are heavily dependent upon orders received and shipped within the same quarter. Moreover, the Company has generally recorded 70% to 80% of its total quarterly revenues in the third month of the quarter, with a concentration of revenues in the second half of that month. The Company expects that this concentration of revenues which is, in part, attributable to the tendency of certain customers to make significant capital expenditures at the end of a fiscal quarter and to sales patterns within the software industry, will continue for the foreseeable future. The Company's expense levels are based, in significant part, on its expectations as to future revenues and are largely fixed in the short term. As a result, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues. Accordingly, any significant shortfall of revenues in relation to the Company's expectations would have an immediate and material adverse effect on the Company's financial condition and results of operations for that quarter. In addition, the Company plans to increase operating expenses to expand its research and development, managerial, finance, sales and marketing and service and support organizations. The timing of such expansion and the rate at which new personnel become productive could cause material fluctuations in quarterly and annual results of operations. Due to all of the foregoing factors, the Company believes that period-to- period comparisons of its results of operations are not necessarily meaningful and that results in any particular quarter are not necessarily indicative of future performance. Future revenues and results of operations may vary substantially from quarter to quarter. In future quarters the Company's results of operations may be below the expectations of public market analysts and investors. In either case, the price of the Company's Common Stock could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 6 LENGTHY SALES CYCLE; DELAYS IN DEPLOYMENT Implementing the Company's PKI solution is complex and often requires customers to make significant commitments of time and capital. During a potential customer's evaluation of available network security products, the Company spends substantial time, effort and resources educating the customer about the value of the Company's PKI solution. Sales of the Company's products require an extensive education and marketing effort throughout a customer's organization because decisions to acquire such products generally involve a significant number of customer personnel in various functional and geographic areas, each having specific and often conflicting requirements. A variety of factors, including factors over which the Company has little or no control, may cause potential customers to favor a competing vendor or to delay or forego a purchase. As a result, the sales cycle for the Company's products is long, often ranging between six and nine months, and subject to significant risks, including customers' budgetary constraints and internal acceptance procedures, over which the Company has little or no control. Due to the lengthy sales cycle for its products, the Company's ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more large licensing transactions could have a material adverse effect on the Company's business, financial condition or results of operations. Achievement of the Company's financial and other strategic goals is also dependent upon the broad deployment of its PKI solution within enterprises once an initial sale has been made. Because the Company's products are deployed throughout the enterprise, the Company's customers have, from time to time, and may in the future, delay deployment of the Entrust PKI solution for a range of reasons, including delays in definition of applicable security policies and procedures, integration of the solution with other IT components or initiatives, coordination of the Entrust solution with business reengineering or other organizational changes and training of systems administrators and users. Delays in deployment, in turn, may limit the number of additional customer purchases and discourage the widespread adoption of the Company's products by other organizations. RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT AND SERVICE INTRODUCTIONS The emerging market for network security products and related services is characterized by rapid technological developments, frequent new product introductions and evolving industry standards. The emerging nature of this market and its rapid evolution will require the Company to improve the performance, features and reliability of its products and services, particularly in response to competitive offerings, and to be first to market with new products and services or enhancements to existing products and services. The success of new product introductions is dependent on several factors, including proper new product definition and differentiation, timely completion and introduction of new products, and market acceptance of the Company's new products and services. The Company may not be successful in developing and marketing new products and services that respond to competitive and technological developments and changing customer needs. The failure of the Company to develop and introduce new products and services successfully on a timely basis and to achieve market acceptance for such products and services could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the introduction of new technologies or advances in techniques for gaining unauthorized network access could render the Company's existing products obsolete or unmarketable. For example, any slowdown in the adoption of digital certificates, or the introduction of any alternative security infrastructures, because of the introduction of new technologies or otherwise, could have a material adverse effect on the Company's business, financial condition and long-term prospects. Advances in techniques by individuals and entities seeking to gain unauthorized access to networks could expose the Company's existing products to new and unexpected attacks and require accelerated development of new products or require the Company to invest resources in products that may not become profitable. The adoption of new formal standards, or the evolution of new de facto standards, could require the reconfiguration of the Company's products, reduce their technical competitiveness or 7 impede their adoption and deployment. Failure to counter challenges to current products or introduce product offerings that keep pace with the technological changes introduced by competitors or persons seeking to breach information security could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Products and Product Development". COMPETITION The Company's products are targeted at the new and rapidly evolving market for PKI solutions. Although the competitive environment in this market has yet to develop fully, the Company anticipates that it will be intensely competitive, subject to rapid change and significantly affected by new product and service introductions and other market activities of industry participants. Because of the broad functionality of its PKI solution, the Company competes with vendors offering a wide range of security products and services. The Company competes with companies offering commercial certification authority products and services, such as VeriSign, GTE Cybertrust Solutions, XCert and IBM in the market for issuing and maintaining digital certificates for use on public and private networks. Certain of these companies are primarily service providers rather than software solution vendors. The Company also competes with companies such as Baltimore Technologies of Ireland, which offer PKI product solutions for enterprises. In addition, the Company expects to compete with established companies, such as Security Dynamics and Network Associates, which have each announced their intention to introduce PKI products that would be integrated with their other security offerings, as well as Microsoft Corporation, which has announced its intention to offer a certificate server product building on its existing security framework in the near future. In addition, other major networking vendors could, in the future, bundle digital certificates with their product offerings. The Company also competes with most major networking device companies and firewall vendors in the emerging market for providing security across virtual private networks ("VPNs"). The Company expects that competition from established and emerging companies in the financial and telecommunications industries will also increase in the near term, and that certain of the Company's primary long-term competitors may not yet have entered the market. Increased competition could result in pricing pressures, reduced margins or the failure of the Company's products and services to achieve or maintain market acceptance, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom the Company has strategic relationships, to increase the ability of their products to address the security needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. If this were to occur, the Company's business, financial condition or results of operation could be materially adversely affected. The Company may also compete for sales of its Entrust products against its original equipment manufacturer ("OEM") licensees, who resell Entrust products under their own brand names. The Company contemplates offering other OEMs licenses to sell Entrust products provided under the licensee's own brand name and therefore may face further competition for sales revenues. See "Business--Sales, Marketing and Business Development". The Company's current and potential competitors may also develop network security products that are more effective than the Company's current or future products and the Company's technologies and products may be rendered obsolete by such developments. See "Business--Competition". 8 DEPENDENCE ON LARGE CUSTOMERS Historically, a limited number of customers has accounted for a significant percentage of the Company's revenues. In 1995, two customers accounted for 53% and 18% of revenues, respectively. In 1996, three customers accounted for an aggregate of 64% of revenues, and 29%, 20% and 15% of revenues, respectively. In 1997, three customers accounted for 19%, 12% and 11% of revenues, respectively. The Company anticipates that its results of operations in any given period will continue to depend to a significant extent upon revenues from a small number of customers. In addition, the Company anticipates that such customers will continue to vary over time, so that the achievement of the Company's long-term goals will require the Company to obtain additional significant customers on an ongoing basis. The failure of the Company to enter into a sufficient number of large licensing agreements during a particular period could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview". MANAGEMENT OF GROWTH The Company is currently experiencing rapid growth that is placing a significant strain on its management and other resources. The Company's business has grown significantly in size and complexity over the past three years. Total revenues increased from $4.0 million in 1995 to $25.0 million in 1997. In addition, the number of employees increased from 41 to 248 during the same period. During 1997, the number of sales and marketing personnel increased from 23 to 87, and the Company expects to hire additional sales and marketing and other personnel during 1998. The growth in the size and complexity of the Company's business as well as its customer base has placed and is expected to continue to place a significant strain on the Company's management and operations. In addition, certain of the Company's senior management have had limited experience in managing publicly traded companies. The Company anticipates that continued growth, if any, will require it to recruit and hire a substantial number of new development, managerial, finance, sales and marketing and support personnel. The Company may not be successful at hiring or retaining such personnel. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage its work force. The Company's personnel, systems, procedures and controls may not be adequate to support its operations. The geographic dispersal of the Company's operations, including the separation of its headquarters in Richardson, Texas, from its research and development facility in Ottawa, Canada, may make it more difficult to manage the Company's growth. CHALLENGES OF R/3/ INTEGRATION On June 8, 1998, the Company completed the acquisition of r/3/ Security Engineering AG ("r/3/"), a company based in Zurich, Switzerland that provides consulting, applied research and product development services related to commercial security and encryption solutions. The combination of the two companies will require, among other things, integration and coordination of the companies, their respective research and development efforts, and other business operations. There can be no assurance that such integration will be accomplished smoothly or successfully. The difficulties of such integration may also be affected by linguistic and cultural differences, as well as the necessity of coordinating geographically separated organizations within differing regulatory environments. The integration of certain operations will require the dedication of management resources which may temporarily distract attention from the day-to-day business of the combined company. The inability of management to successfully integrate the operations of the two companies could have a material adverse effect on the Company's business, financial condition and results of operations. 9 INDUSTRY REGULATION The Company's products are subject to export controls under laws of the U.S., Canada and other countries, and the Company believes that it has obtained all necessary export approvals. There can be no assurance, however, that the countries for which exports are restricted, and the regulatory policies with respect thereto, will not be revised from time to time. The inability of the Company to obtain required government approvals under these regulations could materially adversely affect the ability of the Company to sell products abroad or make products available for sale via international computer networks such as the Internet. Furthermore, U.S. governmental controls on the exportation of encryption products and technology may in the future restrict the ability of the Company to freely export some of its products with the most powerful information security encryption technology. The Company is currently authorized under exemptions contained in an interim U.S. export procedure to export products with encryption technology that is more powerful than would be permitted in the absence of such authorization or interim procedure. There can be no assurance that the interim procedure, which expires on December 31, 1998, will be extended or that, if extended, the Company will continue to meet the qualifications for exemption thereunder. Furthermore, there can be no assurance that export versions of the Company's products will be sought by foreign customers. As a result, foreign competitors subject to less stringent export controls on their products may be able to compete more effectively than the Company in the global information security market. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Regulatory Matters". Due to the increasing popularity of the Internet and other computer networks, it is possible that laws and regulations may be enacted covering issues such as user privacy, pricing, content and quality of products and services. For example, the Telecommunications Act of 1996 prohibits the transmission over the Internet of certain types of information and content. The increased attention focused upon these issues as a result of the adoption of other laws or regulations may reduce the rate of growth of the Internet and other computer networks, which in turn could result in decreased demand for the Company's products or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the imposition of governmental regulations requiring the escrow and governmental recovery of private encryption keys, as has been proposed from time to time by various law enforcement agencies within the United States government, could have a substantial chilling effect on the acceptance and use of encryption products and public networks for secure communications, which, in turn, could result in decreased demand for the Company's products or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Under the current U.S. government policy, U.S. encryption export controls do not apply to encryption products which meet all of the following criteria: (i) are produced and exported from outside of the U.S.; (ii) do not contain U.S.- origin encryption technologies, unless such technologies are "publicly available"; (iii) do not contain U.S.-origin encryption source code, unless such source code is obtained in printed (i.e., "hard copy") form; (iv) are developed and produced without technical assistance from any U.S. person or entity; and (v) contain no more than a de minimis amount of U.S.-origin non- encryption software or technology. The Company believes, and has informed the U.S. government, that certain of the Company's products are exempt from U.S. encryption export restrictions under these criteria. The Company, however, has not obtained any formal U.S. government ruling that any of its products produced and shipped from outside the U.S. may be exempt from U.S. encryption export controls, and there can be no assurance that the U.S. government will refrain from asserting jurisdiction over one or more of the Company's products. Such a decision by the U.S. government to assert jurisdiction could result in penalties for past shipments and could restrict future sales of the Company's products outside the U.S. and Canada, having a 10 potentially material adverse effect on the Company's business, financial condition and results of operations. COMPETITIVE MARKET FOR TECHNICAL PERSONNEL The Company's future performance depends, in significant part, upon the continued service of its key scientific, technical, sales and management personnel. The loss of the services of one or more of the Company's key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not maintain key person life insurance policies on any of its employees. The Company's future success also depends on its continuing ability to attract and retain highly qualified scientific, technical, sales and managerial personnel. Competition for such personnel is intense, particularly in the field of cryptography, and there can be no assurance that the Company can retain its key scientific, technical, sales and managerial employees or that it can attract, motivate or retain other highly qualified scientific, technical, sales and managerial personnel in the future. If the Company cannot retain or is unable to hire such key personnel, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business--Employees". RISKS REGARDING SALES STRATEGY; RELIANCE ON EVOLVING DISTRIBUTION CHANNELS To sell to its targeted markets, the Company has established, and intends to expand, a direct sales force. Unless the Company's direct sales force is able to generate significant additional revenues as it is expanded, the Company's operating results may be adversely affected while the Company incurs expenditures in hiring and training additional sales personnel. In addition, because the Company's products and target market require relatively experienced sales personnel, the Company may be unable to achieve its sales goals if it cannot identify and hire sufficient numbers of sales personnel with requisite industry experience, or train such personnel on a timely basis. Although direct sales have to date accounted for a majority of the Company's revenues, the Company has established, and intends to expand, a dedicated partnership program including technology partners, VARs, OEMs, service providers, development partners, distributors and other technology, marketing and sales partners. The Company's relationships with many of these partners have only been established recently. The Company therefore cannot yet evaluate the degree to which its partnership programs will facilitate the broad adoption of its PKI solution or provide alternate marketing and selling channels for the Company's products. In addition, the Company may not be able to manage potential conflicts among channel partners effectively, economic conditions or industry demand may adversely affect these or other indirect channels and one or more of its partners may devote greater resources to marketing and supporting the products of other companies. RISKS ASSOCIATED WITH THE INFORMATION SECURITY MARKET The market for the Company's PKI solution is at an early stage of development. A decline in demand for the Company's products, whether as a result of competition, technology change, the public's perception of the need for security products, developments in the hardware and software environments in which these products operate, general economic conditions or other factors, could have a material adverse effect on the Company's business, financial condition or results of operations. Continued growth of this market will depend, in large part, upon the continued expansion of Internet usage and in the number of organizations adopting or expanding intranets and extranets, the ability of their respective infrastructures to support an increasing number of users and services, the public recognition of the potential threat posed by computer hackers and other unauthorized users and the continued development of new and improved services for implementation across private and public networks. If the network systems or complementary products and services are not developed in a timely manner and, consequently, the market for the Company's products fails to grow 11 or grows more slowly than the Company currently anticipates, its business, operating results and financial condition would be materially and adversely affected. A well-publicized actual or perceived breach of network or computer security at one of the Company's customers, regardless of whether such breach is attributable to the Company's products, could adversely affect the market's perception of the Company and the Company's products, and could have an adverse effect on the Company's business, financial condition or results of operations. In addition, although the effectiveness of the Company's products is not dependent upon the secrecy of its proprietary technology or licensed technology, the public disclosure of its proprietary technology could result in a perception of breached security and reduced effectiveness of the Company's products, which could have a material adverse effect on the Company's business, financial condition or results of operations. Any significant advance in techniques for decoding or "cracking" encrypted information could render some or all of the Company's existing products obsolete or unmarketable. The Company's PKI solution depends in part on the application of certain mathematical principles. The security afforded by the Company's encryption technology is predicated on the assumption that "factoring" of the composite of large prime numbers is difficult. If an "easy factoring" method is developed, the security afforded by the Company's encryption technology would be reduced or eliminated. There can be no assurance that such a development will not occur. Moreover, even if no breakthrough in factoring is discovered, factoring problems can theoretically be solved by computer systems having sufficient speed and power. If such improved techniques for decrypting encrypted information are developed or rendered possible by the increased availability of powerful computing resources, a material adverse effect on the Company's business, financial condition and results of operations could result. RISKS OF ERROR OR FAILURES Products as complex as those offered by the Company may contain undetected errors, failures or bugs when first introduced or when new versions are released; such errors and failures may be detected at any point during the product life cycle. Many companies offering software products have in the past discovered failures and bugs in certain of their product offerings and have experienced delays or lost revenues during the period required to correct these errors. The computer technology environment is characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time- consuming, especially with the many configurations and variations of equipment and operating systems in computer networks. Furthermore, despite testing by the Company and by others, products may contain errors, failures or bugs that are discovered only after commencement of commercial shipments by the Company. Errors, failure or bugs in the Company's products could result in adverse publicity, product returns, loss of or delay in market acceptance of the Company's products or claims by the customer or others against the Company. Alleviating such problems could require the Company to make significant expenditures of capital and resources and could cause interruptions, delays or cessation of service to the Company's customers. The Company attempts to limit its liability to customers, including liability arising from a failure of the security features contained in the Company's products, through contractual limitations of warranties and remedies. However, some courts have held similar contractual limitations of liability, or the "shrink-wrap licenses" in which they sometimes are embodied, to be unenforceable. Accordingly, there can be no assurance that such limitations will be enforced. The Company does not currently carry product liability insurance. The processes and methodologies used by computer hackers to access or sabotage networks and intranets are rapidly evolving and are generally not recognized until launched against one or more systems. Therefore, the Company, in most cases, is unable to anticipate the methodologies or tactics of hackers prior to their implementation. Any compromise of the security offered by the Company's products, in a single incident or a series of incidents, could have a material adverse effect on its business, operating results and financial condition. The publicity surrounding any security breaches 12 could adversely affect the public perception of the security offered by the Company's PKI solution, which in turn could also have a material adverse effect on its business, financial condition and results of operations. INTERNATIONAL SALES RISKS Although the Company has had limited sales outside of the U.S. and Canada, the Company expects to increase its sales in international markets. In order to expand international sales, the Company must establish additional foreign operations, hire additional personnel and establish relationships with additional partners. This expansion will require significant management attention and financial resources and could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for the Company's products and services. Although the Company's international sales are primarily denominated in U.S. dollars, the Company has significant payroll and other obligations that are denominated in Canadian dollars, and expects to incur an increasing percentage of obligations denominated in foreign currencies. A change in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets and could otherwise adversely affect the Company's ability to meet its foreign-currency-denominated obligations. Currently, the Company does not employ currency hedging strategies to reduce this risk. In addition, the Company's international business may be subject to a variety of risks, including difficulties in collecting international accounts receivable or obtaining U.S. export licenses, potentially longer payment cycles, increased costs associated with maintaining international marketing efforts, the introduction of non-tariff barriers and higher duty rates and difficulties in enforcement of contractual obligations and intellectual property rights. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition or results of operations. LIMITED PROTECTION OF PROPRIETARY RIGHTS AND DEPENDENCE ON LICENSED RIGHTS The Company relies on a combination of patent, trade secret, copyright and trademark laws, non-disclosure agreements and contractual provisions to establish and protect its proprietary rights. The Company also uses a printed "shrink-wrap" license for users of its products in order to protect certain of its copyrights and trade secrets. The Company attempts to protect its trade secrets and other proprietary information through agreements with suppliers, non-disclosure and non-competition agreements with employees and consultants and other security measures. There can be no assurance that the Company will seek patents on aspects of its technology relating to its information security products, that any such patents will be issued or that any such additional patents will be sufficiently broad to protect the Company's technology relating to its information security products. The status of computer-related patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, there can be no assurance that patent applications filed by the Company will result in patents being issued or that its existing patents, and any patents that may be issued to it in the future, will afford protection against competitors with similar technology, nor can there be any assurance that patents issued to the Company will not be infringed upon or designed around by others or that others will not obtain patents that the Company would need to license or design around. If existing or future patents containing broad claims are upheld by the courts, the holders of such patents might be in a position to require the Company to obtain licenses to continue to use such technology. There can be no assurance that any such licenses that might be required for the Company's products would be available on reasonable terms, if at all. 13 The Company relies on outside licensors, including RSA Data Security, Inc. ("RSA"), for patent and/or software license rights in encryption technology that is incorporated into and is necessary for the operation of the Company's products. The Company's success will depend in part on its continued ability to have access to such technologies that are or may become important to the functionality of its products. See "Business--Intellectual Property" and "Certain Transactions". Any inability to continue to procure or use such technology on terms similar to existing licenses could have a material adverse effect on the Company's business, financial condition and results of operations. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, such piracy can be expected to be a persistent problem, particularly in international markets and as a result of the growing use of the Internet. Some courts have held that shrink-wrap licenses, because they are not signed by the licensee, are not enforceable. The Company's trade secrets or confidentiality agreements may not provide meaningful protection of the Company's proprietary information. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that the Company's technology will not infringe upon patents of other rights owned by others. The Company's inability to protect its proprietary rights could have a material adverse effect on the Company's business, financial condition or results of operations. Further, the Company may be subject to additional risk as it enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in such countries, and technology developed in such countries may not be protectable in jurisdictions where protection is ordinarily available. As the number of information security products in the industry increases and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to claims of infringement or misappropriation of the intellectual property or proprietary rights of others. There can be no assurance that third parties will not assert infringement or misappropriation claims against the Company in the future with respect to current or future products. Any claims or litigation, with or without merit, to defend or enforce the Company's intellectual property could be costly and could result in a diversion of management's attention, which could have a material adverse effect on the Company's business, financial condition or results of operations. Adverse determinations in such claims or litigation could also have a material adverse effect on the Company's business, financial condition or results of operations. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. Although the Company believes that its products and systems are Year 2000 compliant, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Failure of such third-party equipment or software to be Year 2000 compliant could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds being available to implement the infrastructure 14 needed to conduct trusted and secure communications and commerce over public and private networks or to purchase products and services such as those offered by the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. BENEFITS OF THE OFFERINGS TO CURRENT STOCKHOLDERS After the Offerings, it is expected that a public market will exist for the Common Stock. At an initial public offering price of $15.00 per share, there will be a substantial increase in the market value of the Common Stock held by the Company's current stockholders over their original purchase price. Following the closing of the Offerings, such stockholders will hold an aggregate of 40,576,497 shares of Common Stock (39,516,497 shares if the Underwriters' over-allotment option is exercised in full). In addition, the Selling Stockholders are selling an aggregate of 1,666,667 shares of Common Stock in the Offerings (2,726,667 shares if the Underwriters' over-allotment option is exercised in full), resulting in aggregate proceeds to the Selling Stockholders of approximately $25.0 million (approximately $40.9 million if the Underwriter's over-allotment option is exercised in full). See "Dilution", "Management" and "Principal and Selling Stockholders". CONCENTRATION OF OWNERSHIP; CONFLICTS OF INTEREST Upon completion of the Offerings, Northern Telecom Limited ("NTL") and its subsidiary, Northern Telecom Inc. ("NTI", and, together with NTL and its affiliates, "Nortel") will beneficially own approximately 56.4% of the Company's outstanding Common Stock, and three of the Company's five directors, David D. Archibald, F. William Conner and Frank A. Dunn, will be representatives of Nortel. Accordingly, Nortel will continue to have the ability to exert significant control over the Company's affairs, including without limitation control over the election of the Company's directors and control over the Company's strategic and operating activities. This concentration of ownership and Board representation may have the effect of delaying or preventing a change in control of the Company. In addition, under a strategic alliance agreement NTL and the Company entered in 1996 (the "Strategic Alliance Agreement"), NTL may restrict the Company, for so long as NTL maintains beneficial ownership of a majority of the voting power of the Company, from any act which may reasonably be anticipated to contravene any material instrument binding on NTL, any order of any governmental body which has jurisdiction over NTL or any of its assets, or any applicable law or regulation. See "Management", "Principal and Selling Stockholders" and "Certain Transactions". Conflicts of interest may arise between the Company and Nortel in a number of areas relating to their past and ongoing relationships. Under the Strategic Alliance Agreement, the Company has granted to NTL for three years, or for as long as the Company is controlled by NTL, whichever is longer, the right to distribute Entrust products on terms no less favorable to NTL than the terms of the agreements then in effect with other resellers of the Company's products. The Company also granted to NTL a royalty-bearing license to use and modify the Company's source code in NTL products on terms no less favorable to NTL than those offered to other source code licensees. Although NTL has informed the Company that it does not currently intend to compete against the Company, there are no contractual or other restrictions on NTL's ability to engage in competitive activities. The directors of the Company who are officers of Nortel may also have conflicts of interest with respect to matters potentially or actually affecting both companies, such as acquisitions, financings and other corporate opportunities that may be suitable for either one. To the extent that these opportunities arise, the directors must consider such factors as whether the opportunity is presented to the directors in their capacities as directors of the Company, whether the opportunity is within the Company's line of business consistent with its strategic objectives and whether the Company would be able to undertake or benefit from such opportunity. There can be no assurance that conflicts will be resolved in favor of the Company. 15 BROAD DISCRETION AS TO USE OF PROCEEDS The Company intends to use the net proceeds, as determined by management in its sole discretion, for working capital and general corporate purposes, including product development and the possible acquisition of additional businesses and technologies that are complementary to the current or future business of the Company. The Company has not determined the specific allocation of the net proceeds among the various uses described above and, accordingly, investors in the Offerings will rely upon the judgment of the Company's management with respect to the use of proceeds. See "Use of Proceeds". NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offerings, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after the Offerings or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiations among the Company and the Representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The trading price of the Common Stock is likely to be highly volatile and may be significantly and adversely affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcements of technological innovations, new products or new contracts by the Company or its competitors, developments with respect to patents, copyrights or propriety rights, conditions and trends in the software industry, changes in financial estimates by securities analysts, general market conditions and other factors. The public equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stock of technology companies as a group but have been unrelated to the performance of particular companies. These broad market fluctuations, as well as shortfalls in sales or earnings as compared with securities analysts' expectations, changes in such analysts' recommendations or projections and general economic and market conditions, may materially and adversely affect the market price of the Common Stock. See "Underwriting". DIVIDENDS No cash dividends have been paid on the Common Stock to date, and the Company does not anticipate paying dividends in the foreseeable future. See "Dividend Policy". DILUTION Purchasers of shares of Common Stock in the Offerings will suffer an immediate and substantial dilution in the net tangible book value of the Common Stock from the initial public offering price. In addition, if the average closing price of the Company's Common Stock for the first 10 trading days following the Company's initial public offering (the "Market Price") is less than $12.08, then the Company will be required to pay the former r/3/ shareholders the difference between the Market Price and $12.08 on their 1,167,288 shares of Common Stock. The Company has the option to make this payment in cash or shares of Common Stock, and, if the Market Price is substantially less than $12.08, the payment would further dilute new investors in the Offerings. See "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of substantial amounts of shares of Common Stock in the public market following the Offerings could adversely affect the market price of the Common Stock. All of the Company's directors, officers and stockholders, as well as all holders of options to purchase Common Stock, have agreed, pursuant to lock-up agreements with the Representatives of the Underwriters or, in the case of the option holders, pursuant to stock option agreements with the Company (collectively, the 16 "Lock-Up Agreements"), not to offer, sell, contract to sell or otherwise dispose of their shares of Common Stock for 180 days after the date of the Prospectus. Goldman, Sachs & Co. may release all or any part of the shares subject to the Lock-Up Agreements at any time in its sole discretion and without notice. Upon expiration of such 180-day period, in addition to the shares of Common Stock offered hereby (and assuming no exercise of outstanding options), approximately 39,397,169 additional shares of Common Stock will be available for sale in the public market in accordance with Rules 144 or 701 under the Securities Act of 1933, as amended (the "Securities Act"). Promptly following the consummation of the Offerings, the Company intends to register an aggregate of 9,987,960 shares of Common Stock issuable under its stock plans. The Company is unable to predict the effect that sales made under Rule 144, or otherwise, may have on the then prevailing market price of the Common Stock. Following the Offerings, the holders of approximately 39,397,169 shares of Common Stock are entitled to certain piggyback and demand registration rights with respect to such shares. By exercising their registration rights, such holders could cause a large number of shares to be registered and sold in the public market. Sales pursuant to Rule 144 or other exemptions from registration, or pursuant to registration rights, may have an adverse effect on the market price for the Common Stock and could impair the Company's ability to raise capital through an offering of its equity securities. See "Description of Capital Stock", "Shares Eligible for Future Sale" and "Underwriting". POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK The Company's Articles of Incorporation and Bylaws contain provisions, including a staggered board of directors, that may make it more difficult for a third party to acquire, or may discourage acquisition bids for, the Company. These provisions could limit the price that certain investors might be willing to pay for shares of the Common Stock and could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a majority of the outstanding voting stock of the Company. See "Description of Capital Stock". The Company's Board of Directors also has the authority to issue up to 5,000,000 shares of preferred stock, $.01 par value per share ("Preferred Stock"), and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. See "Description of Capital Stock--Preferred Stock". The issuance of Preferred Stock could make it more difficult for a third party to acquire, or may discourage a third party from acquiring, a majority of the outstanding voting stock of the Company. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company pursuant to the Offerings are estimated to be $74,430,000 after deducting the estimated underwriting discount and offering expenses and assuming an initial public offering price of $15.00 per share. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders hereunder. See "Principal and Selling Stockholders". The principal purposes of the Offerings are to establish a public market for the Common Stock, to facilitate future access by the Company to public equity markets and to obtain additional working capital. The Company intends to use the net proceeds of the Offerings for working capital and other general corporate purposes, including product development. The Company may also use a portion of the net proceeds of the Offerings to fund acquisitions of complementary businesses, products or technologies, although there are currently no commitments or agreements with respect to any such acquisitions. See "Risk Factors--Broad Discretion as to Use of Proceeds". Pending such use, the Company intends to invest the net proceeds of the Offerings in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its shares of Common Stock. The Company currently intends to retain all of its earnings, if any, to finance future growth and therefore does not anticipate paying cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1998 (i) on an actual basis, (ii) on a pro forma basis as described in Note 2 below, and (iii) as further adjusted reflecting the issuance and sale of the 5,400,000 shares of Common Stock offered hereby by the Company pursuant to the Offerings, at an assumed initial public offering price of $15.00 per share and after deducting the estimated underwriting discount and offering expenses. See "Use of Proceeds". The capitalization information set forth in the table below is qualified by reference to the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1998 ------------------------------------- PRO FORMA ACTUAL(1) PRO FORMA(2) AS ADJUSTED(2) --------- ------------ -------------- (IN THOUSANDS) Long-term debt (including current portion of long-term debt)...................... $ 30 $ 30 $ 30 ------- ------- ------- Redeemable Series A common stock(3)...... 17,013 -- -- ------- ------- ------- Shareholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued or outstanding (actual); no shares issued or outstanding (pro forma and pro forma as adjusted)............. -- -- -- Common stock, $.01 par value; no shares authorized, issued or outstanding (actual); 100,000,000 shares authorized (pro forma and pro forma as adjusted); 35,693,684 shares issued and outstanding (pro forma); 41,093,684 shares issued and outstanding (pro forma as adjusted)(4)........................... -- 357 411 Series A common stock, $.01 par value; 100,000,000 shares authorized; 20,312,040 shares issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)....... 203 -- -- Series B common stock, $.01 par value; 260,000 shares authorized; 221,052 shares issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted).............................. 2 -- -- Series B non-voting common stock, $.01 par value; 260,000 shares authorized; 38,948 shares issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)........................... -- -- -- Special voting stock, $.01 par value; 15,000,000 shares authorized; 7,700,000 shares issued and outstanding (actual); 6,549,480 shares issued and outstanding (pro forma and pro forma as adjusted).. 77 65 65 Additional paid-in capital............... 15,770 32,643 107,019 Accumulated other comprehensive income (loss).................................. (48) (48) (48) Accumulated deficit...................... (22,737) (22,737) (22,737) ------- ------- ------- Total shareholders' equity (deficit)..... (6,733) 10,280 84,710 ------- ------- ------- Total capitalization..................... $10,310 $10,310 $84,740 ======= ======= =======
- -------- (1) Assumes (i) the filing in July 1998 of Articles of Amendment to the Company's Articles of Incorporation increasing the authorized number of shares of Preferred Stock, Series A Common Stock and Special Voting Stock and (ii) the Company's four-for-one stock split in the form of a stock dividend, effective as of July 1998. (2) Gives effect to (i) the conversion of all outstanding shares of the Company's Series B Common Stock and Series B Non-Voting Common Stock into an aggregate of 13,063,836 shares of Common Stock upon the closing of the Offerings, (ii) the expiration of the repurchase rights of the Redeemable Series A Common Stock upon the closing of the Offerings, (iii) the issuance of an aggregate of 1,150,520 shares of Common Stock upon the surrender of a like number of shares of the Company's Special Voting Stock and the concurrent exchange of a like number of shares of Exchangeable Shares of Entrust Technologies Limited by NTL upon the closing of the Offerings, and (iv) the filing upon the closing of the Offerings of the Company's Amended and Restated Articles of Incorporation eliminating the Company's Series B Common Stock and Series B Non-Voting Common Stock, redesignating the Company's Series A Common Stock as Common Stock and authorizing 100,000,000 shares of Common Stock. (3) The holders of the Redeemable Series A Common Stock are entitled to the same rights and privileges as the Series A Common Stock, except for additional special provisions as described in Note 12 of Notes to the Company's Consolidated Financial Statements. At June 30, 1998, there were 1,167,288 shares of Redeemable Series A Common Stock issued and outstanding. (4) Excludes (i) an aggregate of 9,587,960 shares of Common Stock reserved for issuance under the Company's Amended and Restated 1996 Stock Incentive Plan, of which 7,385,764 shares were subject to outstanding options as of June 30, 1998 at a weighted average exercise price of $2.96 per share, and (ii) an aggregate of 400,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan, which Plan will not become effective until the closing of the Offerings. See "Management-- Stock Plans" and Note 8 of Notes to the Company's Consolidated Financial Statements. 19 DILUTION The pro forma net tangible book value of the Company as of June 30, 1998 was $6.7 million, or $0.16 per share of Common Stock. Pro forma net tangible book value per share is determined by dividing the Company's tangible net worth (tangible assets less liabilities) by the number of shares of Common Stock outstanding, after giving effect to the expiration of the repurchase rights of the Redeemable Series A Common Stock, the conversion of the Company's Series B Common Stock and Series B Non-Voting Common Stock into an aggregate of 13,063,836 shares of Common Stock upon the closing of the Offerings and assuming the issuance of 7,700,000 shares of Common Stock to NTL upon the surrender of shares of the Company's Special Voting Stock and the concurrent exchange of Exchangeable Shares of the Canadian Subsidiary. After giving effect to the sale of the shares of Common Stock offered by the Company pursuant to the Offerings at an assumed initial public offering price of $15.00 per share and after deducting the estimated underwriting discount and offering expenses, the pro forma net tangible book value of the Company as of June 30, 1998 would have been $81.1 million, or $1.70 per share. This represents an immediate increase in such pro forma net tangible book value of $1.54 per share to existing stockholders and an immediate dilution of $13.30 per share to new investors purchasing shares in the Offerings. If the initial public offering price is higher or lower, the dilution to the new investors will be greater or less, respectively. The following table illustrates the per share dilution: Assumed initial public offering price per share................ $15.00 Pro forma net tangible book value per share prior to the Offerings................................................... $0.16 Increase per share attributable to the Offerings............. 1.54 Pro forma net tangible book value per share after the Offer- ings.......................................................... 1.70 ------ Dilution per share to new investors............................ $13.30 ======
The following table summarizes, as of June 30, 1998, the total number of shares of Common Stock purchased from the Company, the total consideration paid and the average consideration paid per share by the existing stockholders and by the new investors based (for new investors) upon an assumed initial public offering price of $15.00 per share (before deducting the estimated underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION ------------------ ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders (1) ........................ 42,243,164 88.7% $35,054,233 30.2% $ 2.44 New investors (1) ....... 5,400,000 11.3 81,000,000 69.8 $15.00 ---------- ----- ----------- ----- Total.................. 47,643,164 100.0% $16,054,233 100.0% ========== ===== =========== =====
- -------- (1) The net effect of sales by the Selling Stockholders in the Offerings will be to reduce the number of shares held by existing stockholders to 40,576,497 shares, or 85.2% of the total number of shares of Common Stock outstanding after the Offerings (or 39,516,497 shares and 82.9% if the Underwriters' over-allotment option is exercised in full), and to increase the number of shares held by new investors to 7,066,667 shares, or 14.8% of the total number of shares of Common Stock outstanding after the Offerings ( or 8,126,667 shares and 17.1% if the Underwriters' over- allotment option is exercised in full). As of June 30, 1998, there were also outstanding options to purchase an additional 7,385,764 shares of Common Stock at a weighted average exercise price of $2.96 per share. To the extent the foregoing options are exercised, there will be further dilution to new investors in the pro forma net tangible book value of their shares. See "Capitalization", "Management--Amended and Restated 1996 Stock Incentive Plan" and Note 8 of Notes to the Company's Consolidated Financial Statements. 20 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the years ended December 31, 1995, 1996 and 1997 and at December 31, 1996 and 1997 are derived from the Company's Consolidated Financial Statements, which appear elsewhere in this Prospectus, and which have been audited by Deloitte & Touche Chartered Accountants. The selected consolidated financial data set forth below for the year ended December 31, 1994 and as of December 31, 1994 and 1995 are derived from the Company's audited financial statements, which are not included in this Prospectus. The selected consolidated financial data for the six months ended June 30, 1997 and 1998 and as of June 30, 1998 are derived from unaudited financial statements of the Company which appear elsewhere in this Prospectus. Consolidated financial data is unavailable for periods prior to 1994, because the Company had no revenues and did not exist as a separate business unit. In the opinion of management, the unaudited financial statements have been prepared on a basis consistent with the Company's Consolidated Financial Statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's results of operations for those periods. The operating results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year ending December 31, 1998. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------ -------------- 1994 1995 1996 1997 1997 1998 ------ ------- ------ ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DA- TA: Revenues: License................... $1,194 $ 1,845 $8,689 $16,486 $ 5,677 $ 15,845 Services and maintenance.. 2,687 2,128 4,113 8,520 4,214 5,093 ------ ------- ------ ------- ------- -------- Total revenues.......... 3,881 3,973 12,802 25,006 9,891 20,938 ------ ------- ------ ------- ------- -------- Cost of revenues: License................... 6 34 393 502 229 812 Services and maintenance.. 1,179 950 3,157 4,414 2,111 3,089 ------ ------- ------ ------- ------- -------- Total cost of revenues.. 1,185 984 3,550 4,916 2,340 3,901 ------ ------- ------ ------- ------- -------- Gross profit............... 2,696 2,989 9,252 20,090 7,551 17,037 ------ ------- ------ ------- ------- -------- Operating expenses: Sales and marketing....... 1,083 1,914 3,858 11,193 3,999 10,982 Research and development.. 898 2,287 2,874 5,692 2,077 5,346 General and administra- tive..................... 688 1,212 2,464 3,695 1,479 2,266 Acquired in-process re- search and development... -- -- -- -- -- 20,208 ------ ------- ------ ------- ------- -------- Total operating ex- penses................. 2,669 5,413 9,196 20,580 7,555 38,802 ------ ------- ------ ------- ------- -------- Income (loss) from opera- tions..................... 27 (2,424) 56 (490) (4) (21,765) Interest income............ -- -- -- 723 415 217 ------ ------- ------ ------- ------- -------- Income (loss) before (pro- vision) benefit for income taxes..................... 27 (2,424) 56 233 411 (21,548) (Provision) benefit for in- come taxes................ 111 301 331 281 (15) 160 ------ ------- ------ ------- ------- -------- Net income (loss).......... $ 138 $(2,123) $ 387 $ 514 $ 396 $(21,388) ====== ======= ====== ======= ======= ======== Net income (loss) per basic share(1).................. $ 0.02 $ 0.01 $ (0.69) Net income (loss) per di- luted share(1)............ $ 0.01 $ 0.01 $ (0.69) Shares used in basic per share computation(1)...... 30,700 30,700 30,849 Shares used in diluted per share computation(1)...... 41,743 41,064 46,686
DECEMBER 31, ------------------------------ JUNE 30, 1994 1995 1996 1997 1998 ------ ------ ------- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.......................... $ -- $ -- $ -- $12,638 $4,369 Working capital (deficit)............. 1,831 1,016 (1,186) 13,707 3,138 Total assets.......................... 2,231 2,190 3,687 24,757 24,152 Shareholders' equity (deficit)........ 2,095 1,672 (60) 14,662 (6,733)
- ------- (1) See Note 2 of Notes to the Company's Consolidated Financial Statements for the calculation of basic and diluted net income per share. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, markets and sells products and services that allow enterprises to manage trusted, secure electronic communications and transactions over today's advanced networks, including the Internet, extranets and intranets. The Entrust solution automates the management of digital certificates, which are similar to electronic passports, through PKI technology designed to assure the privacy and authenticity of internal and external electronic communications. The Entrust PKI is an integrated, open and scalable software framework that operates across multiple platforms, network devices and applications, including e-mail, browsers, electronic commerce, electronic forms, remote access and other product offerings from leading vendors. The Company was originally established in January 1994 as the Secure Networks group of NTL and its subsidiary, NTI, to pursue the development and sale of PKI products. During December 1996, Nortel restructured its Secure Networks group by incorporating Entrust Technologies Inc. in Maryland and Entrust Technologies Limited in Ontario, Canada. The assets and business of the Secure Networks group within NTI and NTL were then transferred to Entrust Technologies Inc. and Entrust Technologies Limited, respectively. As a result of the restructuring and concurrent private placement described below, Entrust Technologies Inc. became a majority-owned subsidiary of NTI, and Entrust Technologies Limited became a majority-owned subsidiary of Entrust Technologies Inc., with NTL possessing a minority interest in such subsidiary. The Company's revenues consist of license revenues and services and maintenance revenues. License revenues consist of fees for the license of the Company's products; services revenues consist of fees for consulting and training and maintenance revenues are fees for post-contract support ("maintenance"). The Company's revenues have increased from $4.0 million in 1995 to $25.0 million in 1997, and from $9.9 million for the six months ended June 30, 1997 to $20.9 million for the six months ended June 30, 1998. The Company generates revenues primarily from licensing the rights to its software products to enterprise customers and from sublicense fees from resellers. In October 1997, the American Institute of Certified Public Accountants issued a Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition", which the Company adopted, effective January 1, 1998, which has had no effect on the Company's method of recognizing revenues. Prior to 1997, the Company's revenue recognition policy was in accordance with the provisions of the previous authoritative guidance provided by SOP 91-1, "Software Revenue Recognition". Revenues from perpetual software license agreements are recognized as revenues upon receipt of an executed license agreement (or an unconditional order under an existing license agreement), and shipment of the software, if there are no significant remaining vendor obligations and collection of the receivable is probable. Consulting and training revenues are generally recognized as the services are performed. Consulting services are typically performed under separate service agreements and are usually performed on a time and material basis. Such services primarily consist of implementation services related to the installation and deployment of the Company's products and do not include significant customization or development of the underlying software code. Revenues from maintenance are recognized ratably over the term of the maintenance period, which is typically one year. If maintenance services are included free of charge or discounted in a license agreement, such amounts are unbundled from the license fee at their fair market value based upon the value established by independent sales of such maintenance to customers. 22 In any period a significant portion of the Company's revenues may be derived from large sales to a limited number of customers. In 1995, two customers accounted for 53% and 18% of revenues, respectively. In 1996, three customers accounted for an aggregate of 64% of revenues, and 29%, 20% and 15% of revenues, respectively. In 1997, three customers accounted for 19%, 12% and 11% of revenues, respectively. The customer that accounted for 29% of 1996 revenues accounted for 19% of 1997 revenues. See "Risk Factors--Dependence on Large Customers". RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain consolidated statement of operations data expressed as a percentage of revenues:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------- ---------------- 1995 1996 1997 1997 1998 ------- ------- ------- -------- -------- STATEMENT OF OPERATIONS DA- TA: Revenues: License.................. 46.4% 67.9% 65.9% 57.4% 75.7% Services and mainte- nance................... 53.6 32.1 34.1 42.6 24.3 ------- ------- ------- ------- -------- Total revenues......... 100.0 100.0 100.0 100.0 100.0 ------- ------- ------- ------- -------- Cost of revenues: License.................. 0.9 3.0 2.0 2.3 3.9 Services and mainte- nance................... 23.9 24.7 17.7 21.3 14.7 ------- ------- ------- ------- -------- Total cost of reve- nues.................. 24.8 27.7 19.7 23.6 18.6 ------- ------- ------- ------- -------- Gross profit............... 75.2 72.3 80.3 76.4 81.4 ------- ------- ------- ------- -------- Operating expenses: Sales and marketing...... 48.2 30.1 44.8 40.4 52.5 Research and develop- ment.................... 57.6 22.4 22.7 21.0 25.5 General and administra- tive.................... 30.5 19.3 14.7 15.0 10.8 Acquired in-process re- search and development............. -- -- -- -- 96.5 ------- ------- ------- ------- -------- Total operating ex- penses................ 136.3 71.8 82.2 76.4 185.3 ------- ------- ------- ------- -------- Income (loss) from opera- tions..................... (61.1) 0.5 (1.9) -- (103.9) Interest income............ -- -- 2.9 4.2 1.0 ------- ------- ------- ------- -------- Income (loss) before (pro- vision) benefit for income taxes..................... (61.1) 0.5 1.0 4.2 (102.9) (Provision) benefit for in- come taxes................ 7.6 2.5 1.1 (0.2) 0.8 ------- ------- ------- ------- -------- Net income (loss).......... (53.5)% 3.0% 2.1% 4.0% (102.1)% ======= ======= ======= ======= ========
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 REVENUES Total revenues increased 112% from $9.9 million for the six months ended June 30, 1997 to $20.9 million for the six months ended June 30, 1998. Revenues derived from sales outside North America, primarily Europe and Japan, accounted for 6% and 18% of total revenues for the six months ended June 30, 1997 and 1998, respectively. The Company plans to expand its international operations by hiring additional personnel, recruiting international resellers and establishing additional operations abroad, and, accordingly, the Company anticipates that international revenues will increase in absolute dollars and as a percentage of total revenues during 1998. LICENSE REVENUES. License revenues increased 179% from $5.7 million for the six months ended June 30, 1997 to $15.8 million for the six months ended June 30, 1998, representing 57% 23 and 76% of total revenues in the respective periods. The increase in license revenues in absolute dollars was primarily attributable to increased market awareness and acceptance of the Company's products, continued enhancement and development of the Company's product offerings and increased sales and marketing activities. The increase in license revenues as a percentage of total revenues reflected the Company's continued focus on the product side of its business and the increased use of third-party consulting firms and systems integrators to provide implementation services to its customers. SERVICES AND MAINTENANCE REVENUES. Services and maintenance revenues increased 21% from $4.2 million for the six months ended June 30, 1997 to $5.1 million for the six months ended June 30, 1998, representing 43% and 24% of total revenues in the respective periods. The increase in services and maintenance revenues was primarily the result of an increase in demand for consulting services and customer support and, to a lesser extent, training services associated with increased sales of the Company's applications. The higher percentage of services and maintenance revenues as a percentage of total revenues for the six months ended June 30, 1997 was related to higher levels of revenues associated with a significant custom development software agreement with the Canadian government and two system integration arrangements in which the Company provided turnkey solutions that included system hardware components in addition to software installation and implementation services. Services and maintenance revenues for the six months ended June 30, 1998 did not include revenues from such turnkey arrangements and included a lesser amount of revenues related to the custom development agreement with the Canadian government than was recorded for the same period in 1997. COST OF REVENUES COST OF LICENSE REVENUES. Cost of license revenues consists primarily of costs associated with product media, documentation, packaging and royalties to third-party software vendors. Cost of license revenues increased from $229,000 for the six months ended June 30, 1997 to $812,000 for the six months ended June 30, 1998, representing 4% and 5% of license revenues for the respective periods. COST OF SERVICES AND MAINTENANCE REVENUES. Cost of services and maintenance revenues consists primarily of personnel costs associated with customer support, training and consulting services, as well as costs paid to third- party consulting firms for those services. Cost of services and maintenance revenues increased from $2.1 million for the six months ended June 30, 1997 to $3.1 million for the six months ended June 30, 1998, representing 21% and 15% of total revenues for the respective periods. The increase in absolute dollars reflected the increased costs associated with the higher levels of services and maintenance revenues during the six months ended June 30, 1998. The higher percentage of cost of services and maintenance revenues as a percentage of total revenues for the six months ended June 30, 1997 reflected the cost of the system hardware components related to the system integration arrangements described above. The Company does not anticipate any arrangements in the future that would include such hardware components as part of the solution provided to its customers. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses consist primarily of personnel costs associated with the selling and marketing of the Company's products, including salaries, commissions and travel and entertainment. Such expenses also include the cost of advertising, trade shows and marketing and promotional materials. Sales and marketing expenses increased from $4.0 million for the six months ended June 30, 1997 to $11.0 million for the six months ended June 30, 1998, representing 40% and 53% of total revenues in the respective periods. The increase in sales and marketing expenses in absolute dollars and as a percentage of revenues reflected the Company's 24 continued focus on increasing direct sales and marketing expenditures to address certain international and vertical markets. In addition, the Company increased the number of employees in sales, marketing and business development from 49 at June 30, 1997 to 133 at June 30, 1998. The Company also launched a new seminar series and participated in a major trade show during the six months ended June 30, 1998. The Company is in the process of significantly expanding its direct sales force in North America and Europe and anticipates that sales and marketing expenses will increase in absolute dollars. RESEARCH AND DEVELOPMENT. Research and development expenses include software development costs and consist primarily of personnel costs associated with the Company's engineers, cryptographers and contractors. Research and development expenses increased from $2.1 million for the six months ended June 30, 1997 to $5.3 million for the six months ended June 30, 1998, representing 21% and 26% of total revenues for the respective periods. The increase in research and development expenses in absolute dollars and as a percentage of total revenues was primarily the result of increased staffing and the associated support cost of software engineers, cryptographers and contractors in connection with the expansion and enhancement of the Company's product line and for quality assurance and testing. The Company believes that it must continue to invest in research and development in order to maintain its technological leadership position and, accordingly, expects research and development expenses to continue to increase in absolute dollars as it hires additional experienced security experts and software engineers. In accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, the Company has evaluated the establishment of technological feasibility of its various products during the development phase. The time period during which costs could be capitalized from the point of reaching technological feasibility, which has been defined as development of a beta model, until the time of general product release is very short, and, consequently, the amounts that could be capitalized are not material to the Company's financial position or results of operations. Therefore, the Company charges all product development expenses to operations in the period incurred. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of personnel costs related to management, accounting and human resources, and the associated overhead costs. General and administrative expenses increased from $1.5 million for the six months ended June 30, 1997 to $2.3 million for the six months ended June 30, 1998, representing 15% and 11% of total revenues in the respective periods. This increase in absolute dollars was primarily due to increased staffing and related expenditures required to enhance the infrastructure to support the Company's growth. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. On June 8, 1998, the Company completed the acquisition of r/3/, a company based in Zurich, Switzerland that provides consulting, applied research and product development services related to commercial security and encryption solutions. Pursuant to the Share Purchase Agreements dated May 30, 1998, entered into between the Company and the shareholders of r/3/, the Company agreed to acquire all the outstanding shares of r/3/ in exchange for an aggregate of 1,167,288 shares of the Company's Common Stock and cash consideration of approximately $4.4 million. In the event the Common Stock is not listed on a national securities market or exchange within one year after the closing of the acquisition, the r/3/ shareholders have the right to require the Company to repurchase the Common Stock at $14.58 per share. Additionally, if the average closing price of the Company's Common Stock for the first 10 trading days following the Company's initial public offering (the "Market Price") is less than $12.08, then the Company will be required to pay the difference between the Market Price and $12.08 to the r/3/ shareholders in cash or in additional stock. This acquisition was recorded under the 25 purchase method of accounting, and, therefore, the results of operations of r/3/ and the fair value of the acquired assets and liabilities are included in the Company's financial statements beginning on the acquisition date. Upon consummation of the acquisition, r/3/ became a wholly owned subsidiary of the Company. In connection with the acquisition, the Company obtained an appraisal of the intangible assets, which resulted in $20.2 million of the purchase price being allocated to in-process research and development that has not yet reached technological feasibility and has no alternative future use, which was expensed in the six months ended June 30, 1998. The value assigned to purchased in-process technology was determined by identifying research and development projects in areas for which technological feasibility has not yet been established. This relates primarily to the completion of a suite of encryption and security applications (the "r3 Suite"). The value was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The nature of the efforts to develop the purchased in-process technology into commercially viable products relate to the completion of all planning, designing, prototyping, security testing and verification activities that are necessary to ensure that the r3 Suite is produced to meet design specifications, including functions, features and technical performance requirements. The efforts to develop the purchased in-process technology also include verifying the technology's compatibility and interoperability with other applications. The estimated cost for completion of this activity through the year 2001 is approximately $12.0 million, although by its nature such estimate is subject to change, given the uncertainties of the development process. The estimated total revenues for the r3 Suite begin in 1999 and peak in 2002, and decline rapidly after 2003 as other new products are expected to enter the market. These forecasts are based on management's estimates of market size and growth, expected trends in technology (such as new encryption and security algorithms) and the nature and expected timing of new product introductions. Net cash flows are discounted to the present value at venture capital rates of return. Because of the rapid growth in the forecast and the high risks associated with the developmental projects, such a discount rate was utilized for the acquired business enterprise and the in-process projects. If these projects are not successfully developed, the sales and profitability of the Company could be adversely affected in future periods. Additionally, the value of the other intangible assets acquired may become impaired. INTEREST INCOME Interest income of $415,000 and $217,000 for the six months ended June 30, 1997 and 1998, respectively, reflected investment income earned on the proceeds from the Company's private placement of Series B Common Stock in January 1997. The decrease in investment income for the six months ended June 30, 1998 as compared to the same period in 1997 reflected a reduction of interest earned during the period as a result of lower amounts of cash, cash equivalents and short-term investments in 1998 compared to 1997. PROVISION FOR INCOME TAXES The Company recorded a provision for income taxes of $15,000 for the six months ended June 30, 1997 and a benefit of $160,000 for the six months ended June 30, 1998. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109. The effective income tax rate differed from the statutory income tax rate in both periods primarily due to the impact of the Canadian research and development tax credits claimed. 26 YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 REVENUES Total revenues increased 222% from $4.0 million in 1995 to $12.8 million in 1996 and increased 95% from $12.8 million in 1996 to $25.0 million in 1997. Revenues derived from sales outside North America, primarily Europe, accounted for less than 1% of total revenues in 1995 and 4% and 5% of total revenues in 1996 and 1997, respectively. LICENSE REVENUES. License revenues increased from $1.8 million in 1995 to $8.7 million in 1996 and $16.5 million in 1997, representing 46%, 68% and 66% of total revenues in the respective periods. The increase in license revenues in absolute dollars was primarily attributable to increased market awareness and acceptance of the Company's products, continued enhancement and development of the Company's product offerings and increased sales and marketing activities. SERVICES AND MAINTENANCE REVENUES. Services and maintenance revenues increased from $2.1 million in 1995 to $4.1 million in 1996 and $8.5 million in 1997, representing 54%, 32% and 34% of total revenues in the respective periods. The increase in services and maintenance revenues in absolute dollars was primarily the result of an increase in demand for consulting and systems implementation services from customers purchasing the Company's products for enterprise-wide implementations, and an increase in maintenance revenues from a larger installed product base. Services and maintenance revenues in 1996 and 1997 included revenues from a significant custom development software agreement with the Canadian government, which is being recognized on the percentage-of-completion basis through 1999. The Company did not enter into any significant custom development software arrangements during 1997 and does not expect such arrangements to be significant to services and maintenance revenues in the future. As the Company continues to implement its strategy of encouraging third-party organizations such as systems integrators to become proficient in implementing the Company's products, consulting revenues as a percentage of services and maintenance revenues may decrease. COST OF REVENUES COST OF LICENSE REVENUES. Cost of license revenues increased from $34,000 in 1995 to $393,000 in 1996 and $502,000 in 1997, representing 2%, 5% and 3% of license revenues in the respective periods. COST OF SERVICE AND MAINTENANCE REVENUES. Cost of services and maintenance revenues increased from $950,000 in 1995 to $3.2 million in 1996 and $4.4 million in 1997, representing 45%, 77% and 52% of services and maintenance revenues in the respective periods. The increase in cost of services and maintenance revenues as a percentage of services and maintenance revenues in 1996 resulted primarily from several system integration arrangements in which the Company provided customers with turnkey solutions that included system hardware components in addition to software installation and implementation services. The Company does not anticipate any arrangements in the future that would include such hardware components as part of the solution provided to its customers. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses increased from $1.9 million in 1995 to $3.9 million in 1996 and $11.2 million in 1997, representing 48%, 30% and 45% of total revenues in the respective periods. The increase in absolute dollars was primarily related to the expansion of the Company's sales and marketing resources, increased commission expenses as a result of higher sales levels and increased marketing activities, including trade show, direct mail and other promotional expenses. RESEARCH AND DEVELOPMENT. Research and development expenses increased from $2.3 million in 1995 to $2.9 million in 1996 and $5.7 million in 1997. As a percentage of total revenues, research 27 and development expenses were 58%, 22% and 23%, in 1995, 1996 and 1997, respectively. The increase in research and development expenses in absolute dollars was primarily the result of increased staffing and associated support costs of software engineers, cryptographers and contractors in connection with the expansion and enhancement of the Company's product line and for quality assurance and testing. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from $1.2 million in fiscal 1995 to $2.5 million in 1996 and $3.7 million in 1997, representing 31%, 19% and 15% of total revenues in the respective periods. The increase in general and administrative expense in absolute dollars was primarily due to increased staffing and related expenditures required to enhance the infrastructure to support the Company's growth. INTEREST INCOME Interest income of $723,000 in 1997 reflected investment income earned on the proceeds from the Company's private placement of Series B Common Stock in January 1997. PROVISION FOR INCOME TAXES The Company recorded income tax benefits of $301,000 in 1995 and $331,000 in 1996 and recorded a provision for income taxes of $281,000 for 1997. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109. The effective income tax rates differed from the statutory income tax rates primarily due to the impact of the Canadian research and development tax credits claimed. SELECTED QUARTERLY OPERATING RESULTS The Company's quarterly operating results have varied substantially in the past and are likely to vary substantially from quarter to quarter in the future due to a variety of factors. Estimating future revenues is difficult because the Company ships its products soon after an order is received and as such does not have a significant backlog. Thus, quarterly license revenues are heavily dependent upon orders received and shipped within the same quarter. Moreover, the Company has generally recorded 70% to 80% of its total quarterly revenues in the third month of the quarter, with a concentration of revenues in the second half of that month. This concentration of revenues is, in part, attributable to the tendency of certain customers to make significant capital expenditures at the end of a fiscal quarter and to sales patterns within the software industry. The Company expects these revenue patterns to continue for the foreseeable future. In addition, quarterly license revenues are dependent on the timing of revenue recognition, which can be affected by many factors, including the timing of customer installations and the fulfillment of acceptance criteria. In this regard, the Company has from time to time experienced delays in recognizing revenues with respect to certain orders. Despite the uncertainties in its revenue patterns, the Company's operating expenses are based upon anticipated revenue levels and such expenses are incurred on an approximately ratable basis throughout the quarter. As a result, if expected revenues are deferred or otherwise not realized in a quarter for any reason, the Company's business, operating results and financial condition would be materially adversely affected. The following tables set forth the Company's statement of operations data for each of the six quarters in the period ended June 30, 1998, as well as the percentage of the Company's total revenues represented by each item. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere in this Prospectus and, in management's opinion, reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of results for any future period. 28
THREE MONTHS ENDED ------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1997 1997 1997 1997 1998 1998 -------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: License................ $2,632 $3,045 $4,949 $5,860 $7,681 $ 8,164 Services and mainte- nance................. 1,471 2,743 2,137 2,169 2,243 2,850 ------ ------ ------ ------ ------ -------- Total revenues....... 4,103 5,788 7,086 8,029 9,924 11,014 ------ ------ ------ ------ ------ -------- Cost of revenues: License................ 104 125 131 142 342 470 Services and mainte- nance................. 628 1,483 1,174 1,129 1,476 1,613 ------ ------ ------ ------ ------ -------- Total cost of reve- nues................ 732 1,608 1,305 1,271 1,818 2,083 ------ ------ ------ ------ ------ -------- Gross profit............ 3,371 4,180 5,781 6,758 8,106 8,931 ------ ------ ------ ------ ------ -------- Operating expenses: Sales and marketing.... 1,698 2,301 3,528 3,666 4,931 6,051 Research and develop- ment.................. 952 1,125 1,700 1,915 2,283 3,063 General and administra- tive.................. 686 793 1,026 1,190 1,063 1,203 Acquired in-process re- search and development....... -- -- -- -- -- 20,208 ------ ------ ------ ------ ------ -------- Total operating ex- penses.............. 3,336 4,219 6,254 6,771 8,277 30,525 ------ ------ ------ ------ ------ -------- Income (loss) from oper- ations................. 35 (39) (473) (13) (171) (21,594) Interest income......... 209 206 164 144 146 71 ------ ------ ------ ------ ------ -------- Income (loss) before (provision) benefit for income taxes........... 244 167 (309) 131 (25) (21,523) (Provision) benefit for income taxes........... (20) 5 226 70 160 -- ------ ------ ------ ------ ------ -------- Net income (loss)....... $ 224 $ 172 $ (83) $ 201 $ 135 $(21,523) ====== ====== ====== ====== ====== ======== Net income (loss) per share Basic.................. $ 0.01 $ 0.01 $ -- $ 0.01 $ -- $ (0.69) ====== ====== ====== ====== ====== ======== Diluted................ $ 0.01 $ -- $ -- $ -- $ -- $ (0.69) ====== ====== ====== ====== ====== ======== Shares used in per share computation Basic.................. 30,700 30,700 30,700 30,700 30,700 30,997 ====== ====== ====== ====== ====== ======== Diluted................ 41,064 41,064 41,869 41,908 45,231 46,919 ====== ====== ====== ====== ====== ======== THREE MONTHS ENDED ------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1997 1997 1997 1997 1998 1998 -------- -------- --------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: License................ 64.1% 52.6% 69.8% 73.0% 77.4% 74.1% Services and mainte- nance................. 35.9 47.4 30.2 27.0 22.6 25.9 ------ ------ ------ ------ ------ -------- Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ ------ ------ -------- Cost of revenues: License................ 2.5 2.2 1.8 1.8 3.4 4.3 Services and mainte- nance................. 15.3 25.6 16.6 14.0 14.9 14.6 ------ ------ ------ ------ ------ -------- Total cost of reve- nues................ 17.8 27.8 18.4 15.8 18.3 18.9 ------ ------ ------ ------ ------ -------- Gross profit............ 82.2 72.2 81.6 84.2 81.7 81.1 ------ ------ ------ ------ ------ -------- Operating expenses: Sales and marketing.... 41.4 39.8 49.8 45.7 49.7 54.9 Research and develop- ment.................. 23.2 19.4 24.0 23.9 23.0 27.8 General and administra- tive.................. 16.7 13.7 14.5 14.8 10.7 10.9 Acquired in-process re- search and development....... -- -- -- -- -- 183.5 ------ ------ ------ ------ ------ -------- Total operating ex- penses.............. 81.3 72.9 88.3 84.4 83.4 277.1 ------ ------ ------ ------ ------ -------- Income (loss) from oper- ations................. 0.9 (0.7) (6.7) (0.2) (1.7) * Interest income......... 5.1 3.6 2.3 1.8 1.5 0.6 ------ ------ ------ ------ ------ -------- Income (loss) before (provision) benefit for income taxes........... 6.0 2.9 (4.4) 1.6 (0.2) * (Provision) benefit for income taxes........... (0.5) 0.1 3.2 0.9 1.6 * ------ ------ ------ ------ ------ -------- Net income (loss)....... 5.5% 3.0% (1.2)% 2.5% 1.4% * ====== ====== ====== ====== ====== ========
- -------- *Not meaningful 29 License revenues have increased in each of the six quarters in the period ended June 30, 1998. As a result of the increased acceptance of the Company's product offerings and expansion of the Company's sales and marketing efforts during the past six quarters, license revenues as a percentage of total revenues increased from 70% for the quarter ended September 30, 1997 to 73% and 74% for the quarters ended December 31, 1997 and June 30, 1998, respectively. Cost of license revenues varies from period to period primarily due to the amount of royalties payable by the Company to third-party software suppliers. Services and maintenance revenues have decreased as a percentage of total revenues since the quarter ended March 31, 1997, except for the higher percentage in the quarters ended June 30, 1997 and 1998. Services and maintenance revenues for the quarter ended June 30, 1997 included revenues from the hardware components of two system integration projects, which contributed to the increase in services and maintenance revenues in absolute dollars and as a percentage of total revenues compared to the other three- month periods. Services and maintenance revenues for the six months ended June 30, 1998 increased as a percentage of total revenues from 23% in the first three months of 1998 to 26% in the second three months of 1998. This increase reflected an increase in maintenance renewals from the Company's increasing customer base. Cost of services and maintenance revenues has been comparable for all periods other than the quarter ended June 30, 1997, which included the higher costs of the hardware components previously discussed. The increase in operating expenses in absolute dollars from $7.6 million for the six months ended June 30, 1997 to $38.8 million for the six months ended June 30, 1998 reflected the Company's expenses of $20.2 million for in-process research and development and investment in growing the organization. The number of employees has increased each quarter for the last six quarters and such increases are expected to continue for the foreseeable future. The Company intends to continue to increase its research and development expenditures in order to pursue its strategy of maintaining technological leadership in the PKI market. The Company also intends to increase sales and marketing expenditures significantly as it expands its domestic and international sales and marketing staff and develops indirect sales and distribution channels. In addition, general and administrative expenses have increased each quarter since the quarter ended March 31, 1997 as the Company invested in the infrastructure needed to support its growing operations. Accordingly, to the extent that continued increases in such expenses are not accompanied by increased revenues, the Company's operating results and financial condition may be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES The Company operated as a division of Nortel from its inception in 1994 until December 1996, when it was separately incorporated as part of the financing described below. See Note 1 of Notes to the Company's Consolidated Financial Statements. As such, all of the Company's investing and financing activities were handled through Nortel's centrally managed treasury function. Therefore, the Company did not maintain separate cash balances until December 31, 1996. At the close of business on December 31, 1996, Nortel transferred to the Company certain assets, liabilities, intellectual property rights, licenses and contracts of the Secure Networks group of Nortel. In exchange, Nortel received 20,300,000 shares of the Company's Common Stock and 7,700,000 shares of the Company's Special Voting Stock. See "Certain Transactions". In January 1997, the Company issued an aggregate of 260,000 shares of its Series B Common Stock and Series B Non-Voting Common Stock in a private placement for an aggregate consideration of $24.0 million, net of the costs and expenses of the private placement. The Company used approximately $8.0 million of the net proceeds of the private placement to repay certain intercompany debt. The Company used cash of $1.2 million and $2.1 million for operating activities in 1995 and 1997 and generated cash of $2.8 million from operating activities in 1996. The use of cash in 1995 was primarily a result of the net loss for the period of $2.1 million, offset in part by a decrease in accounts receivable and an increase in accounts payable. In 1997, the $2.1 million use of cash for operating activities was due primarily to increases in accounts receivable of $4.7 million and other receivables 30 of $2.1 million, which were offset in part by the net income, and increases in current liabilities for the same period. The increase in accounts receivable resulted from the growth in revenues during the same period and the timing of revenue recognition during the quarters within the period. The cash generated from operating activities in 1996 resulted primarily from the generation of net income for the year of $387,000 and increases in deferred revenues and accrued liabilities. The Company generated cash of $2.1 million from operating activities for the six months ended June 30, 1997 and used cash of $1.5 million for operating activities for the same period in 1998. The cash generated for the six months ended June 30, 1997 resulted from increases in amounts due to Nortel for expenses incurred by Nortel on behalf of the Company and increases in accrued liabilities. The increase in cash used for operating activities for the six months ended June 30, 1998 was related primarily to an increase in accounts receivable of $2.8 million and in the net loss of $1.2 million, before the non-cash charge for acquired in-process research and development, which were offset in part by an increase in accounts payable of $1.7 million. The average days sales outstanding increased from 59 days at December 31, 1996 to 80 and 87 days at December 31, 1997 and June 30, 1998, respectively. For purpose of calculating average days sales outstanding, the Company divides ending accounts receivable by the current quarter's revenues and multiplies this amount by 90 days. The increase in days sales outstanding was primarily attributable to an increase in the number of license transactions closing at quarter end. The level of accounts receivable at each quarter end will be affected by the concentration of revenues in the final weeks of each quarter and may be negatively affected by the expanded international revenues in relation to total revenues as licenses to international customers often have longer payment terms. The Company's uses of cash for investing activities were for the purchase of fixed assets and totaled $536,000, $693,000, $895,000 and $995,000 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. In 1997, the Company invested $8.6 million in short- term investments, net of $3.7 million of dispositions of short-term investments. Cash provided from investing activities for the six months ended June 30, 1998 included $11.9 million from dispositions of short-term investments, net of purchases of $5.1 million of short-term investments and $4.4 million of cash related to the acquisition of r/3/. During 1995, 1996 and 1997, the Company's financing activities were primarily transfers of cash to and from Nortel, except for the net proceeds of $16.0 million from the sale of Series B Common Stock in 1997. As of June 30, 1998, the Company's principal sources of liquidity were its cash and cash investments of $4.4 million. The Company believes that the net proceeds from the sale of Common Stock offered by the Company together with cash from operations and existing cash and cash equivalent balances will be sufficient to meet its cash needs for at least the next 12 months. 31 BUSINESS Entrust develops, markets and sells products and services that allow enterprises to manage trusted, secure electronic communications and transactions over today's advanced networks, including the Internet, extranets and intranets. The Entrust solution automates the management of digital certificates, which are similar to electronic passports, through PKI technology designed to assure the privacy and authenticity of internal and external electronic communications. The Entrust PKI is an integrated, open and scalable software framework that operates across multiple platforms, network devices and applications, including e-mail, browsers, electronic commerce, electronic forms, remote access and other product offerings from leading vendors. The Company's product suite was first released in 1994, and has since been licensed for use in global enterprises and government entities such as the Canadian government, Citibank, the FDIC, J.P. Morgan, NASA, the Republic of Singapore and the United Kingdom Post. In addition, over three million Entrust certificates have been issued to date for use by the Company's customers. INDUSTRY BACKGROUND The widespread adoption in recent years of public and private networks has revolutionized the manner in which organizations communicate and conduct business. These advanced networks provide an attractive medium for communications and commerce because of their global reach, accessibility, use of open standards and ability to permit interactions on a real-time basis. Proliferation of these networks has facilitated the storage, analysis and communication of critical information within and between organizations. At the same time, they have afforded businesses a user-friendly, low-cost way to conduct a wide variety of commercial functions electronically. Today, organizations are increasingly utilizing these networks to access new markets, improve customer service and streamline business processes through applications such as e-mail, messaging, remote access, intranet-based applications, on-line customer support and supply chain applications. NEED FOR SECURE TRANSACTIONS The very openness and accessibility that have stimulated the adoption and growth of public and private networks create threats to the privacy and integrity of information that is transmitted across or stored on them. According to a survey taken at a 1997 industry conference, 70% of respondents cited security concerns as the principal impediments to a broader use of the Internet for commercial applications. Key consumer security concerns include merchant impersonation, fraud and the risk that third parties may intercept and use personal information such as credit card numbers, all of which may inhibit the broader adoption of electronic commerce. Businesses relying on public and private networks for internal communications risk the theft, loss, alteration or dissemination of confidential data, loss of reputation and economic loss through fraud. Threats to corporate data security arise both from external sources such as competitors and computer hackers, as well as internal sources, such as curious or disgruntled employees and contractors. According to a recent FBI report, among U.S. enterprises reporting that they had experienced computer security breaches, the average financial losses from internal breaches were significantly higher than the losses sustained from external breaches. These business risks have driven the demand for effective and robust network and information security products. 32 The security risks associated with communications and commerce over public and private networks have accentuated the need for information security solutions that address the five critical network security needs: . ACCESS CONTROL--Only authorized users should access, view or modify certain data . CONFIDENTIALITY--Data in transit over the network or in storage should not be disclosed to unauthorized persons . INTEGRITY--Data should not be altered or compromised by unauthorized manipulation . AUTHENTICATION--The identity of the data sender should be verified . NON-REPUDIATION--The sender of a transmission should not be able to deny or repudiate the transmission A wide range of products and services has been introduced to address one or more of these five critical network security needs. For example, access control is provided by products such as firewalls and password tokens, which limit network access only to users having recognized addresses or entering recognized passwords, but are limited in their flexibility and do not address such requirements as confidentiality, integrity, authentication and non- repudiation. Encryption devices and programs provide confidentiality, but are device-dependent and do not address issues of access control, integrity, authentication and non-repudiation. The lack of flexibility and scalability inherent in these solutions has led to the development of public key encryption and digital certification systems combined in a public key infrastructure, which can address all five critical network security needs. PUBLIC KEY SECURITY A public key infrastructure uses encryption algorithms in combination with authentication and verification technology offered by digital certificates to provide the user with a secure and reliable means of communicating and effecting transactions over public and private networks. PUBLIC KEY ENCRYPTION. Digital messages are encrypted and decrypted using a cipher or key. Public key encryption systems assign each user a pair of linked keys: a "public" key, which the user provides to others, and a "private" key, which the user keeps secret. A user wishing to send a secure transmission encrypts the transmission using the recipient's public key. To decode the transmission, the recipient uses a private key that is uniquely able to decode messages encoded with his or her corresponding public key. Thus, the successful exchange of encrypted messages using a public key system requires that message senders have the public keys for all recipients to whom they desire to send messages, and that the recipients decode messages with their own private keys. Public key encryption provides a high level of data security, and thus addresses an enterprise's need for confidentiality of electronic transmissions. However, because encryption alone does not give the recipient of a message any information about the sender or ensure that a message is not altered en route, the requirements for access control, integrity, authentication and non-repudiation are not satisfied. DIGITAL CERTIFICATION. The ability to ensure access control, authentication and non-repudiation of digital transmissions can be achieved with digital certification systems, which enable a recipient to verify that a message originates from the expected sender. These systems use public and private keys to create a special file called a digital signature. This signature is encoded using the sender's private key. Upon receipt of the message, the recipient obtains a copy of the sender's public key from a directory established by a trusted administrator (a "Certification Authority" or "CA"), which verifies that the message originated from the expected sender. Digital certificates thus function as electronic passports that not only authenticate their owners' identities and verify their owners' membership in certain organizations, but also establish their owners' authority to engage in a given transaction. Digital signature and certification technology can also be used to ensure the integrity of a message by enclosing an encrypted summary or "hash" of the message with the sender's digital 33 signature. When the signature and hash are decrypted using the sender's public key supplied by the CA, the system can automatically detect whether the message was altered since it was signed. MARKET ACCEPTANCE OF DIGITAL CERTIFICATION. Because of its security benefits, digital certification has gained significant market acceptance, particularly in sectors in which information security is critical, such as government, finance, health care and telecommunications. Industry sources believe that by 2000 digital certificates will be nearly as widely adopted by the general public as e-mail is today. At least 40 U.S. states, as well as the U.S. and Canadian governments and the European Union, have adopted or are considering digital signature statutes that recognize the legal validity of digitally signed documents. In addition, the banking industry's Secure Electronic Transaction (SET) standard for Internet credit card purchases, as well as the Internet secure packet transmission standard (IPsec) adopted by most firewall, routing and access vendors, depend on digital certification. NEED FOR A PUBLIC KEY INFRASTRUCTURE The increasing acceptance of digital certificates has given rise to numerous products and services that issue digital certificates or that are digital certificate-ready. However, the mere issuance of digital certificates does not ensure that a user's access is properly monitored, that privileges associated with access are accurately and currently defined, or that the certificates in question have not been withdrawn or replaced. Indeed, the proliferation of users and certificates greatly complicates management of these issues, which are critical to maintaining an effective security environment across and between enterprises. To address these needs, enterprises must have a robust public key infrastructure that supplements certificate issuance functions with full life cycle management of public keys, including issuance, authentication, storage, retrieval, backup, recovery, updating and revocation, in an easy-to- use, cost-effective manner. Moreover, unless digital certificates can be easily utilized on a consistent and reliable basis across multiple applications (such as e-mail, browser, electronic commerce, electronic forms and remote access), organizations will face the challenge and cost of maintaining a separate security infrastructure for each application, requiring separate keys and certificates, multiple passwords and inconsistent or incomplete security implementations. Furthermore, any PKI must be able to support an enterprise's security requirements as the enterprise grows, business functions are altered and underlying IT technologies evolve. To be effective, a public key infrastructure must be able to accommodate a large number of users and integrate diverse computing resources into a consolidated, reliable and secure computing environment that meets the five critical network security needs of access control, confidentiality, authentication, integrity and non- repudiation. Achievement of these goals requires a highly functional and flexible public key infrastructure for the management of network security features across an enterprise and between organizations. THE ENTRUST SOLUTION Entrust develops, markets and distributes a comprehensive public key infrastructure solution that enables enterprises to effect and manage secure communications and transactions across a wide range of applications. The Entrust PKI solution addresses the five critical network security needs of enterprises and allows for consistent enterprise-wide security policy management, enabling any enterprise to establish its own flexible, highly reliable CA. It also offers users encryption functionality and full digital signature and certification management in a single, easy-to-use, integrated and automated solution. Among the benefits offered by Entrust's PKI solution are: . COMPREHENSIVE FUNCTIONALITY. The Company believes that it is the only provider of a consolidated PKI solution offering the functionality necessary for the full life cycle management of public keys and digital certificates including: certificate issuance, certificate authentication, key storage and backup, key retrieval and recovery, certificate updating, certificate revocation and cross-certification of CAs. 34 . MULTIPLE CERTIFICATE TYPES. The Entrust PKI supports multiple certificate types and configurations, including enterprise certificates that can be used across multiple applications, Web certificates for secure Web transactions, electronic commerce certificates supporting secure credit card transactions using the SET standard and certificates for evolving communications technologies such as VPNs. . VERSATILE, OPEN PLATFORM. The Entrust PKI enables secure transmissions across a wide range of computing platforms (including Windows NT and UNIX servers and Windows, UNIX, Macintosh and JAVA clients), enterprise applications (including e-mail, browser, electronic commerce, electronic forms and remote access), network infrastructure (including firewalls, network operating systems and directories), and open industry standards (such as the lightweight directory access protocol ("LDAP") and PKCS 11). . HIGHLY SCALABLE ARCHITECTURE. Entrust products employ a distributed computing architecture and directory management techniques that make them highly scalable. The Company believes that its PKI solution, with appropriate directory additions, can be configured to handle millions of simultaneous users. . EASE OF USE. Entrust products automatically effect complex certification and key recovery functions without user interaction; most functions are initiated using simple point and click graphical interfaces and are accessed via a single user login. . REDUCED COST OF OWNERSHIP. Because the Entrust PKI's comprehensive functionality reduces duplication of personnel, its ease of use simplifies training, and its ability to interact with a wide variety of platforms and applications avoids the need to purchase multiple security systems, the Entrust PKI enables enterprises to significantly reduce overall costs for addressing security requirements. STRATEGY The Company's objective is to maintain and enhance its position as the leading provider of comprehensive PKI solutions. Key elements of the Company's strategy to achieve this objective include the following: . MAINTAIN PRODUCT LEADERSHIP. The Company's PKI solution has been deployed commercially through multiple versions for approximately four years. The Company's technological leadership is attributable in large part to its 140-person research and development team, which includes researchers with international reputations in their fields. The Company intends to maintain and enhance its technological leadership in the PKI solutions market by continuing to invest in product research and development, to extend the functionality and interoperability of its products, and to participate actively in industry standards-setting organizations. . TARGET LARGE CUSTOMERS. The Company targets its sales and marketing activities at Global 2000 organizations and large governmental entities having significant requirements for comprehensive PKI solutions and the resources to deploy them broadly. To address this market, the Company maintains an experienced direct sales force and an active marketing program targeted at large organizations. The Company is expanding its sales force to address its target market more fully, and is supplementing its sales force with a services capability to facilitate implementation and deployment of products by large organizations. . TARGET VERTICAL MARKETS OFFERING BROAD DEPLOYMENT OPPORTUNITIES. The Company targets organizations in the government, finance, health care, telecommunications and large manufacturing sectors, which have thousands of customers, subscribers and service recipients who will, directly or indirectly, benefit from the secure communications and transactions enabled by the Company's PKI solution. The Company believes that the successful implementation of its PKI solution within these selected vertical markets will 35 enable it to leverage the adoption of its products by such organizations to include their customers, subscribers and service recipients. . PROMOTE BRAND AWARENESS. The Company's goal is to equate its brand name with trusted enterprise security. The Company undertakes a variety of activities to promote the recognition of its brand identity and products, including the promotion and sponsorship of industry groups and conferences such as the Entrust SecureSummit in June 1998. The Company also promotes its product standards and architecture by participating actively in numerous industry standards-setting bodies. . EXPAND STRATEGIC RELATIONSHIPS. In order to encourage widespread acceptance of its PKI solution, the Company has established an Entrust Partner Program which currently includes: (i) VAR and OEM partners, such as Digital Equipment Corporation, EDS, Hewlett-Packard, IBM and Tandem, which resell the Company's products with their hardware and networking solutions, as well as Check Point Software and Symantec, which plan to bundle the Company's PKI solution with their own software products; (ii) consultant and system integration partners, such as Coopers & Lybrand, Deloitte & Touche and KPMG Peat Marwick, which recommend and implement Entrust-Ready security solutions as part of their overall service offerings; (iii) development partners, which have introduced more than 50 off-the-shelf Entrust-Ready applications and (iv) interoperability partners such as Cisco, Lotus Development, Netscape and Shiva, which offer products that utilize the security features of the Entrust PKI solution. The Company intends to continue to invest in and enhance the Entrust Partner Program both to offer complete end-to-end security solutions to its customers and to broaden adoption of its PKI solution across markets and geographic areas. . EXPAND GLOBAL PRESENCE. The Company intends to expand its global operations and currently has more than 55 employees based in Europe, which it believes to be the largest European presence of any firm in the PKI industry. With its acquisition of r/3/ in June 1998, the Company obtained substantial European research and development expertise for the development of its PKI solution targeted at the European market. The Company has supplemented its established direct sales and distribution channels through the addition of distribution partners in central and eastern Europe and Japan. PRODUCTS AND PRODUCT DEVELOPMENT The Entrust PKI solution provides an integrated, open and scalable security framework that addresses an enterprise's data security needs across multiple platforms and applications, including e-mail, browsers, electronic forms, remote access and other product offerings from leading vendors. It also includes robust features (such as support of dual key pairs) that make it well suited for secure electronic commerce applications. The Entrust solution includes: (i) a core PKI solution, which centrally manages and administers an enterprise's security infrastructure, (ii) desktop applications that tightly integrate features with Entrust's core PKI and common third-party desktop applications, and (iii) application developer toolkits that provide open application programmer interfaces (APIs) for the rapid development of Entrust- Ready applications. The Entrust core PKI solution comprises server software that manages and administers life cycle digital certificates throughout an enterprise, an LDAP- compliant directory for the storage and retrieval of keys, and workstation/client software that enables users to utilize the functions provided by the PKI. The core PKI solution is a powerful and flexible platform for the generation and management of digital certificates, including enterprise certificates supporting single or multiple applications within an organization, Web certificates embedded on individual user browsers for transaction authentication or electronic commerce certificates supporting secure credit card transactions using the SET 36 standard. The core solution is also configured to support the generation of certificates for evolving communications technologies, such as VPNs, and multiple hardware devices, such as smart cards, PC cards, biometric devices and third-party key storage systems. [ENTRUST PKI SOLUTION OVERVIEW FLOW CHART APPEARS HERE] The graphic is entitled "Entrust PKI Solution Overview" and is structured as follows: There is a large rectangular box that contains the names of the products constituting the Company's core PKI solution: (i) Entrust/Authority and Entrust/Admin and (ii) Entrust Electronic Identities (Enterprise, Web, E- Commerce and VPN (expected to become available in late 1998) Certificates). Arrows emanate from the large box toward smaller boxes representing the following: (a) applications (Entrust, Entrust-Ready (through the Entrust Toolkit) and Third-Party (through Entrust Plug-Ins)), (b) the Entrust/Directory, (c) network and firewalls and (d) hardware, smart cards and other add-ons. The boxes representing Third-Party applications and the items described in clauses (c) and (d) are shaded in gray. /1/Expected to become available in late 1998. ENTRUST CORE PKI SOLUTION The Company's core PKI solution is designed with an open and flexible software architecture that operates on a wide range of client/server enterprise operating system platforms, including Windows NT, HP-UX, Solaris and AIX servers, and Windows, HP-UX, Solaris, AIX, JAVA and Macintosh clients. Its security kernel supports a wide variety of encryption algorithms, including RSA, as well as symmetric and hashing algorithms, allowing customers to select those algorithms best suited for their requirements. In addition to its own directory system, the core system uses the industry LDAP standard to interoperate with most other major certificate directory systems, allowing customers to utilize existing directory systems and facilitating access to other directories as required. The system architecture enables the Company to add functionality as customer needs evolve and grow and allows the core system to support the generation and maintenance of new certificate types easily, responding to technology developments and market pressures. The system's distributed computing architecture and directory management techniques also enable the PKI to be scaled up as an enterprise's public key security needs increase or as users are added to existing infrastructures. The Company believes that, with appropriate directory additions, its core PKI solution will be able to handle millions of simultaneous users. 37 The initial version of the Entrust PKI was released in 1994, with major upgrades in 1996 and 1997; historically, the core solution has generated a major portion of the Company's revenues. The last major release of the core PKI, version 4.0, occurred in July 1998. The following table lists the products that constitute Entrust's core PKI solution, as well as a brief description and the introduction date of each product.
PRODUCT NAME DESCRIPTION INTRODUCTION DATE ENTRUST/AUTHORITY Provides comprehensive December 1994 certification authority and key recovery capabilities, among numerous other functions - -------------------------------------------------------------------------------------- ENTRUST/ADMIN Performs PKI administrative tasks December 1994 - -------------------------------------------------------------------------------------- ENTRUST/DIRECTORY Scalable directory system for the June 1995 storage of key information - -------------------------------------------------------------------------------------- ENTRUST ELECTRONIC Enterprise user "accounts" that December 1994 IDENTITIES authorize use of different types of certificates, including: ------------------------------------------------------------ . Entrust/Entelligence Enables use of enterprise December 1994 certificates with multiple enterprise applications ------------------------------------------------------------ . Entrust/Web Connector Enables use of digital March 1997 certificates with popular browsers, such as those offered by Microsoft and Netscape ------------------------------------------------------------ . Entrust/CommerceCA Enables use of digital March 1998 certificates with standards-based SET wallets, merchant servers and payment gateways
The Company licenses its Entrust/Authority and Entrust/Admin products at a combined list price of $15,000 per server. Entrust offers its Entrust/Directory to enterprises for a list price of $3,000 for installations of up to 5,000 users and $3,000 plus a per-user fee for installations of more than 5,000 users. Enterprise Electronic Identities have a list price of $159 per licensed user, which allows the issuance of multiple certificates across all Entrust-Ready applications in the enterprise. As a part of its core PKI solution, the enterprise Electronic Identities are offered on a registered- user basis. If an enterprise solution is not required, the Company also offers customers with specialized security needs the ability to issue Web and electronic commerce certificates at a charge of $2 per certificate. The actual license fees paid by customers vary widely, based on the number of products licensed, registered users, enabled platforms and volume discounts, if any. ENTRUST/AUTHORITY. Entrust/Authority is the central component of the Entrust PKI solution. Entrust/Manager provides the CA function for the Entrust core PKI, and enables an enterprise to create, issue, manage, back-up, update and revoke electronic identities. Entrust/Authority also 38 provides a secure enterprise key recovery system, issues certificate revocation information, and establishes cross-certification relationships with other trusted certification authorities. Because Entrust/Authority automates these functions, users typically need to communicate with Entrust/Authority only when they are initialized on the system; key update operations are performed automatically and transparently, minimizing the need for on-going user involvement. A sophisticated audit reporting system monitors all security aspects of Entrust/Authority operations. ENTRUST/ADMIN. Entrust/Admin provides administrative capabilities to three types of personnel: security officers, Entrust administrators and directory administrators. Through an easy-to-use graphical interface, security officers can define the high-level security policies governing the operation of an Entrust system, such as default lifetimes for encryption and signature key pairs and the frequency with which certificate revocation lists (CRLs) are automatically distributed. Entrust/Admin allows Entrust administrators to perform the system's day-to-day administrative duties, including creating and deleting user identities, changing users' names, helping users recover lost keys and forgotten passwords, and revoking users' certificates when necessary. Entrust/Admin also allows directory administrators to perform administrative tasks associated with the directory on an automated, high-volume basis. ENTRUST/DIRECTORY. As a convenience for its PKI customers, Entrust offers a scalable LDAP-compliant directory for the storage of key information. The core PKI solution will also operate with many other LDAP-compliant directories. ENTRUST ELECTRONIC IDENTITIES. An Entrust Electronic Identity is an individual user's "account" within the PKI. Entrust offers Electronic Identities for full enterprise use, or for more limited Web or electronic commerce use. An Entrust/Entelligence Electronic Identity can support numerous key pairs and certificates over its lifetime, which may be utilized across multiple Entrust-Ready and other third party applications. Updating of key pairs and certificates is performed automatically and transparently and, therefore, administrative overhead is reduced. These Electronic Identities are implemented on client-side software that provides an easy-to-use interface enabling users within an Entrust PKI to secure and unsecure files. This software also allows users to specify options (such as file compression) and select cryptographic algorithms while making the complexities of key and certificate management transparent. An Entrust/Web Connector Electronic Identity enables a user to use certificates with popular Web browsers and Web servers, such as those offered by Netscape and Microsoft. These Web certificates can have lifetimes that span multiple years and do not require renewal on a yearly basis. Entrust/Commerce CA Electronic Identities enable secure electronic commerce through the issuance and management of certificates for SET wallets, merchant servers and payment gateways. In addition to its enterprise core PKI solution, the Company also offers two introductory PKI products: Entrust/Lite, which provides a PKI for workgroups of up to 200 users, and Entrust/Solo, which provides individual users with public key encryption and digital certificate capabilities. Entrust/Lite is licensed for $50 per user and Entrust/Solo, which may be downloaded from the Internet, is licensed for $49 for commercial use and for free for non- commercial use. ENTRUST APPLICATIONS The Company's core PKI solution has been configured to support a wide variety of applications from multiple vendors to enhance its flexibility and usefulness. The Company has also developed a number of applications in order to meet specific customer demands and facilitate the implementation of the Entrust core PKI solution. These products either complement and interact with the core PKI to offer the user enhanced functionality and increased interoperability with third-party applications, or operate as independent products, offering distinct functionality. 39 The following table lists applications offered by the Company, including a brief description, product pricing and the introduction date for the product.
PRODUCT NAME DESCRIPTION PRICING INTRODUCTION DATE ENTRUST/ICE 2.0 Provides security for files $39 per user March 1997 and folders - --------------------------------------------------------------------------------------- ENTRUST/EXPRESS 2.0 Provides security for $39 per user June 1997 popular e-mail applications, such as Microsoft's Exchange and Outlook products - --------------------------------------------------------------------------------------- ENTRUST/DIRECT 3.0 Provides Entrust's $15 per user December 1997 automated key and certificate management features to secure Web sessions - --------------------------------------------------------------------------------------- ENTRUST-READY Provides Entrust's $15 per user March 1998 NETSCAPE SOLUTION 1.0 automated key and certificate management features to Netscape's Communicator 4.0 and Enterprise Server - --------------------------------------------------------------------------------------- ENTRUST/TRUE DELETE 2.0 Securely deletes files Currently bundled April 1998 with other Entrust products - --------------------------------------------------------------------------------------- ENTRUST/ENTERPRISE Provides a variety of $99 per user July 1998 DESKTOP SUITE 1.0 solutions including secure e-mail, desktop encryption, secure Web sessions, secure file deletion and customizable installation in a single software package
APPLICATION DEVELOPER TOOLKIT Because certificate management represents the most difficult aspect of adding security to an application, the Company has provided the Entrust/Toolkit to enable application developers to make third-party applications Entrust-Ready while keeping the complexities of key and certificate management transparent. The Entrust/Toolkit is a family of open, easy-to-integrate security APIs that provide security services, including full key life cycle management, to a broad range of applications. NEW PRODUCT DEVELOPMENT Entrust devotes significant resources to the development of new and enhanced product functionality to maintain its technology and product leadership. The Company employs a number of different methods for identifying product extension opportunities and new product candidates, 40 including user group meetings and direct feedback, an active program of partnership and cooperation with companies developing complementary technologies, and continued participation and leadership in industry standards-setting bodies such as the Internet Engineering Task Force (IETF), the North American Clearinghouse Association (NACHA), the American National Standards Institute (ANSI) and others. Some of the Company's current and planned product development efforts include the use of certificate distribution with new devices (such as cellular telephones, pagers and personal digital assistants), attribute certificates for privilege management, electronic notary services, and monitoring and assessment systems. The Company is also continuing to increase the number of third-party applications and services that the Company's PKI solution can manage, including VPN devices and routers and other popular user applications. Entrust scientists are also actively engaged in the development and improvement of the advanced cryptographic algorithms for use in Entrust products, including exploration of the use of highly efficient algorithms such as elliptical curve encryption. PROFESSIONAL SERVICES AND SUPPORT The Company believes that a high level of service and support is critical to its success, and that a close and active service and support relationship is important to facilitate rapid implementation of its solutions, assure customer satisfaction and provide the Company with important information regarding evolving customer requirements. Toward that end, the Company has made a significant investment in expanding its professional services and support organization, which, as of June 30, 1998, consisted of 68 employees. The Company's professional services providers have a broad range of experience in network security and include mathematicians, cryptographers and system designers. The Company's professional services organization provides consulting and systems integration services to support customers in designing, implementing and running their PKI solutions. Activities of the professional services organization are supplemented with a professional services partner program that includes Coopers & Lybrand, Deloitte & Touche and KPMG Peat Marwick. To facilitate the integration of PKI management into the customer's business operations, the Company also offers its Entrust InSource service, in which the Company provides on-site PKI management for customers on a long-term basis, or while the customer implements and trains personnel. The Company's support offerings also include direct telephone consulting support by experienced technical account representatives, toll-free telephone customer support, 24-hour pager access, e-mail and fax support, Internet access to the Company's knowledge repository, and discussion group access. Payment of an annual maintenance fee also entitles customers to receive software enhancements to their licensed versions of the Company's solution. RESEARCH AND DEVELOPMENT The Company's research and development efforts are focused on developing new products, core technologies and enhancements to existing product lines to maintain and extend its technology and product leadership position. The Company spent approximately $2.3 million, $2.9 million and $5.7 million on research and development in 1995, 1996 and 1997, respectively. As of June 30, 1998, the Company's research and development staff consisted of 140 employees, several of whom have international reputations in their respective disciplines. With the addition of r/3/, the Company has added significant research and development capabilities in Europe, including an internationally recognized cryptographic team. The Company's research and development staff is active in several prominent standards-setting bodies, including IETF, ANSI, the Internet PKIX group and ISO, and has contributed to a number of 41 standards in the Internet and data security areas. The Company believes that it is well-situated to respond to changes in relevant industry standards and to continue to participate in the development of these standards as the requirements of enterprises and users become increasingly complex. CUSTOMERS The Company's customers are generally domestic and foreign government entities and Global 2000 companies, including financial, health care, telecommunications and large manufacturing organizations. As of June 30, 1998, the Company had licensed its software to more than 500 customers. The following is a representative list of the Company's current customers that have accounted for more than $200,000 of revenues each: Banco Nazionale di Lavorno Interpay J.P. Morgan Bell Emergis Canadian Dept. of National Defense Citibank Nortel Royal Canadian Mounted Police Columbia Information Systems S.W.I.F.T. Science Applications International Digital Medical Systems FDIC United Kingdom Post Industry Canada U.S. Coast Guard Historically, a limited number of customers has accounted for a significant percentage of the Company's revenues. In 1995, two customers accounted for 53% and 18% of revenues, respectively. In 1996, three customers accounted for an aggregate of 64% of revenues, and 29%, 20% and 15% of revenues respectively. In 1997, three customers accounted for 19%, 12% and 11% of revenues, respectively. Although the Company's largest customers have varied from period to period, the Company anticipates that its results of operations in any given period will continue to depend to a significant extent upon revenues from a small number of customers. See "Risk Factors--Dependence on Large Customers". SALES, MARKETING AND BUSINESS DEVELOPMENT The Company offers its products and services through a multi-tiered approach reflecting the characteristics and buying behavior of the markets it covers. As of June 30, 1998, the Company had 133 employees in sales, marketing and business development. DIRECT SALES To address its target market of Global 2000 organizations, the Company sells its products and services in North America, the United Kingdom and Germany primarily through a direct sales force. The Company believes that direct coverage by the Company's sales force is necessary in light of the early stage of PKI adoption and the sophisticated requirements of its targeted customer base. The Company also believes that a direct sales force gives it a competitive advantage in responding to customer needs as they evolve. The Company's direct sales force is divided into five North American regions, the United Kingdom and Germany. Within each region, teams are assigned specific accounts as their exclusive responsibility. The Company has also focused its sales efforts on key vertical markets that have a critical need for security and understand the value it creates for their businesses. These markets include government, finance, health care, telecommunications and large manufacturing. The Company has established a General Markets Sales Group responsible for pursuing identified customer opportunities outside the defined responsibilities of the regional sales teams and accelerating the sales cycle. The direct sales organization is also supplemented by targeted direct mail and telemarketing campaigns developed by the Company's marketing organization. 42 INDIRECT SALES To supplement its direct sales force, the Company has established an Entrust Partner Program involving a range of technology, marketing and sales relationships including: . VAR and OEM partners that focus on creating bundled solutions to permit customers to purchase total desktop applications incorporating Entrust functionality. These partners include Digital Equipment Corporation, EDS, Hewlett-Packard, IBM and Tandem, which resell the Company's products with their hardware and networking solutions, as well as Check Point Software and Symantec, which plan to bundle the Company's PKI solutions with their own software products. . Interoperability partners such as Cisco, Lotus Development, Netscape and Shiva, which offer products that utilize the security features of the Entrust PKI solution. . Consultant and systems integration partners that recommend and implement Entrust-Ready security solutions as part of their overall service offerings to customers, thereby differentiating their offerings through the inclusion of PKI functionality. These partners include Coopers & Lybrand, Deloitte & Touche and KPMG Peat Marwick. . Referral partners that refer their consulting and integration customers in designated markets to the Entrust PKI solution. . Distributors and agents that promote and sell the Company's products in defined geographic markets. MARKETING To support its sales force, the Company has a marketing group whose goals are to create a consistent, focused communication strategy that increases awareness of the Company's PKI solution and brand name, and to leverage that awareness in the identification of new sales opportunities. The marketing group conducts marketing programs that include direct mail, trade shows, annual seminar series, executive breakfasts and ongoing customer communication programs. The Company has organized a number of major trade shows, including the Entrust SecureSummit '98 held in Chicago in June 1998. The Company also provides frequent Web updates, search engine registration, online advertising and product downloads. The Company's marketing personnel are dedicated to maximizing brand success and periodically evaluating the Company's brand recognition. BUSINESS DEVELOPMENT To identify and develop strategic relationships with targeted industry partners more effectively, the Company has a business development organization of 21 persons that pursues selected business development activities, including the administration and promotion of the Company's Entrust Partner Program. These activities permit the Company to strengthen relationships with existing strategic partners and identify and encourage new providers of software, network, computing and communications products to make their products Entrust- Ready. COMPETITION The Company's products are targeted at the new and rapidly evolving market for PKI solutions. Although the competitive environment in this market has yet to develop fully, the Company anticipates that it will be intensely competitive, subject to rapid change and significantly affected by new product and service introductions and other market activities by industry participants. Because of the broad functionality of its PKI solution, the Company competes with vendors offering a wide range of security products and services. The Company competes with companies offering commercial certification authority products and services such as VeriSign, GTE Cybertrust Solutions, XCert and IBM in the market for issuing and maintaining digital certificates for use on public 43 and private networks. Certain of these companies, such as IBM and XCert, provide a product-based solution, while others, such as VeriSign and GTE Cybertrust Solutions, are primarily service providers. The Company also competes with companies, such as Baltimore Technologies of Ireland, which offer PKI product solutions for enterprises. In addition, the Company expects to compete with established companies developing new PKI offerings, such as Security Dynamics and Network Associates, which have each announced their intention to introduce PKI products that would be integrated with their other security product offerings, as well as Microsoft Corporation, which has announced its intention to offer a certificate server product based on its existing security framework in the near future. The Company expects that there will be additional entrants to this marketplace. In addition, other major networking vendors could, in the future, bundle digital certificates with their product offerings. The Company typically competes with these vendors and service providers on the basis of its ability to provide a centrally managed, real-time, comprehensive infrastructure with the features and functionality to support enterprise applications. In addition, the Company competes in the emerging market for providing security across VPNs with most major networking device companies, such as Ascend and Cisco, as well as firewall vendors such as AXENT (Raptor) and Check Point Software. The Company believes that the principal competitive factors affecting the market for PKI technology include technical features, ease of use, quality/reliability, level of security, scalability, customer service and support and price. Although the Company believes that its products currently compete favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors. See "Risk Factors--Competition". Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed bases and significantly greater financial, technical, marketing and sales resources than the Company. As a result, they may be able to react more quickly to emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. In addition, certain of the Company's current competitors in particular segments of the security marketplace may in the future broaden or enhance their offerings to provide a more comprehensive solution competing more fully with the Company's functionality. The Company may also compete in the future for sales of Entrust products against its OEM licensees, who resell the Entrust solution under their own brand names. REGULATORY MATTERS The Company's products are subject to special export restrictions administered by the governments of the United States, Canada and other countries. The Company's products are also subject to import restrictions and/or use restrictions imposed by countries such as France. Consequently, the ability of the Company to export its products to destinations outside of the U.S. and Canada is subject to a variety of government approvals or licensing requirements. These export controls may also restrict the ability of the Company to make some products available for sale via international computer networks such as the Internet. Re-export of the products between countries other than the U.S. and Canada may be subject to the export control laws of those countries in addition to those provisions of the U.S. and/or Canadian export control laws which apply to re-exports. In light of these restrictions, the Company's products made available abroad may contain significantly weaker encryption capabilities than those available to customers in the U.S. and Canada, and there can be no assurance that the Company will continue to be able to export its products to any destinations outside of the U.S. and Canada. Such restrictions could potentially have an adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors--Industry Regulation". In October 1996, the U.S. government announced a new export control policy for encryption products. Under the new policy, cryptography of any strength may be authorized for export, after a one-time government review, as long as the product provides for a key recovery method which will enable authorized law enforcement agencies to access the keys required to decrypt lawfully 44 intercepted encrypted data without the knowledge or consent of the user of the encryption product. The U.S. government regulations provide flexibility with respect to what specific key recovery mechanisms will be permitted; the Company's products already provide some built-in key recovery features, and the Company believes that its product architecture will satisfy the government's criteria with few modifications. Under an interim procedure in effect through December 31, 1998, vendors of encryption products may be granted six-month authorizations to export from the U.S. encryption products with key lengths between 40 and 56 bits, provided that the vendor submits a written plan to develop a key recovery feature prior to December 31, 1998, and shows satisfactory progress toward implementing that plan. Each product is still subject to a one-time government review in order to become eligible for this interim authorization. The Company has obtained permission under this provision, which expires on December 31, 1998, to have certain of its products exported without modification from the U.S. by U.S. customers with operations abroad and by third-party distributors. In the absence of a key recovery mechanism or an approved plan for such a mechanism, current U.S. government policy is to prohibit exports (except to Canada) of most encryption products with key lengths of greater than 56 bits, except under individual licenses which may authorize exports of stronger encryption products to financial institutions, subsidiaries of U.S. companies and government agencies. Under the current U.S. government policy, U.S. encryption export controls do not apply to encryption products which meet all of the following criteria: (i) are produced and exported from outside of the U.S.; (ii) do not contain U.S.- origin encryption technologies, unless such technologies are "publicly available"; (iii) do not contain U.S.-origin encryption source code, unless such source code is obtained in printed (i.e., "hard copy") form; (iv) are developed and produced without technical assistance from any U.S. person or entity; and (v) contain no more than a de minimis amount of U.S.-origin non- encryption software or technology. The Company believes, and has informed the U.S. government, that certain of the Company's products are exempt from U.S. encryption export restrictions under these criteria. The Company, however, has not obtained any formal U.S. government ruling that any of its products produced and shipped from outside the U.S. may be exempt from U.S. encryption export controls, and there can be no assurance that the U.S. government will refrain from asserting jurisdiction over one or more of the Company's products. Such a decision by the U.S. government to assert jurisdiction could result in penalties for past shipments and could restrict future sales of the Company's products outside the U.S. and Canada, having a potentially material adverse effect on the Company's business, financial condition and results of operations. INTELLECTUAL PROPERTY The Company relies on a combination of patent, copyright, trademark and trade secret laws, nondisclosure agreements and other contractual provisions to establish, maintain and protect its proprietary rights. The Company owns five issued U.S. patents (along with corresponding, pending foreign patent applications) and 26 pending U.S. patent applications relating to the Entrust products. These patents are and will continue to be subject to certain license grants to others, including Nortel and its cross licensees, under patent cross license agreements. See "Certain Transactions". The Company has copyright and trade secret rights for its products, consisting mainly of source code and product documentation. The Company uses a printed "shrink-wrap" license for users of its products in order to protect certain of its copyrights and trade secrets. The Company attempts to protect its trade secrets and other proprietary information through agreements with suppliers, non-disclosure and non-competition agreements with employees and consultants and other security measures. 45 There can be no assurance that the Company will seek patents on its technology or products, that any such patents will be issued or that any such additional patents will be sufficiently broad to protect the Company's technology or products. The status of computer-related patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, there can be no assurance that patent applications filed by the Company will result in patents being issued or that its existing patents, and any patents that may be issued to it in the future, will afford protection against competitors with similar technology, nor can there by any assurance that patents issued to the Company will not be infringed upon or designed around by others or that others will not obtain patents that the Company would need to license or design around. If existing or future patents containing broad claims are upheld by the courts, the holders of such patents might be in a position to require companies to obtain licenses. There can be no assurance that licenses that might be required for the Company's products would be available on reasonable terms, if at all. The Company relies on outside licensors, including RSA, for patent and/or software license rights in encryption technology that is incorporated into and is necessary for the operation of the Company's products. The Company's success will depend in part on its continued ability to have access to such technologies that are or may become important to the functionality of its products. Any inability to continue to procure or use such technology could have a material adverse effect on the Company's business, financial condition and results of operations. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, such piracy can be expected to be a persistent problem, particularly in international markets and as a result of the growing use of the Internet. Some courts have held that shrink-wrap licenses, because they are not signed by the licensee, are not enforceable. There can also be no assurance that the Company's trade secrets or confidentiality agreements will provide meaningful protection of the Company's proprietary information. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that the Company's technology will not infringe upon patents of other rights owned by others. The Company's inability to protect its proprietary rights could have a material adverse effect on the Company's business, financial condition or results of operations. As the number of information security products in the industry increases and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to claims of infringement or misappropriation of the intellectual property or proprietary right of others. There can be no assurance that third parties will not assert infringement or misappropriation claims against the Company in the future with respect to current or future products. Further, the Company may be subject to additional risk as it enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in such countries, and technology developed in such countries may not be protectable in jurisdictions where protection is ordinarily available. Any claims or litigation, with or without merit, to defend or enforce the Company's intellectual property could be costly and could result in a diversion of management's attention, which could have a material adverse effect on the Company's business, financial condition or results of operations. Adverse determinations in such claims or litigation could also have a material adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors--Limited Protection of Proprietary Rights and Dependence on Licensed Rights". 46 EMPLOYEES As of June 30, 1998, the Company had 398 full-time employees, 289 of whom were employed by the Canadian Subsidiary. Of the Company's employees, 140 were involved in research and development, 133 in sales, marketing and business development, 68 in professional and customer support services and 57 in administration and finance. No employees are covered by any collective bargaining agreements, and the Company believes that its relationships with its employees are good. The future success of the Company, however, will depend upon its ability to attract and retain qualified personnel. Competition for such personnel is often intense, and there can be no assurance that the Company will be able to attract and retain adequate numbers of qualified personnel in the future. See "Risk Factors--Competitive Market for Technical Personnel". FACILITIES The Company's U.S. headquarters, including its executive offices and administrative facilities, is located in Richardson, Texas, where it leases approximately 3,219 square feet of office space. The Company also leases approximately 69,000 square feet of office space at its Canadian headquarters in Ottawa, Ontario, Canada. The Company currently intends to lease additional office space in the Ottawa area to accommodate expected growth in administrative, sales and marketing, research and development and operations personnel. The Company also has offices located in London, England and Zurich, Switzerland. The Company also has sales offices in Washington, D.C. and New York, New York, a sales and business development office in Menlo Park, California and a sales and professional services office in Raleigh, North Carolina. The Company leases a sales and support office in Bad Homburg, Germany. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any of its property are subject. 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, their ages and positions as of June 30, 1998, are as follows:
NAME AGE POSITION - ---- --- -------- John A. Ryan................... 42 President, Chief Executive Officer and Director Brian O'Higgins................ 42 Executive Vice President and Chief Technology Officer Bradley N. Ross................ 39 President of European Operations Michele L. Axelson............. 48 Senior Vice President, Business Development and Finance and Chief Financial Officer Richard D. Spurr............... 44 Senior Vice President, Sales and Marketing Hansen Downer.................. 46 Vice President, Professional Services David D. Archibald(1).......... 56 Director F. William Conner(1)........... 39 Director Frank A. Dunn(2)............... 44 Director Robert S. Morris(1)(2)......... 43 Director
- -------- (1)Member of the Compensation Committee. (2)Member of the Audit Committee. JOHN A. RYAN has served as President and Chief Executive Officer and as a director of the Company since its founding in December 1996. From October 1995 until December 1996 he served as the Vice President and General Manager for the Multimedia and Internet Solutions business unit of Nortel. Prior to that time, from August 1992 until October 1995, he served as Assistant Vice President, Marketing for the Enterprise Network group of Nortel. Since joining Nortel in 1981, he has also served in various senior positions in marketing, customer service and finance. Mr. Ryan holds a Bachelor of Mathematics degree from the University of Waterloo, Waterloo, Ontario, and is a Chartered Accountant. BRIAN O'HIGGINS has served as Executive Vice President and Chief Technology Officer of the Company since its founding in December 1996. Mr. O'Higgins co- founded the Nortel Secure Networks ("NSN") business unit in 1994, which became Entrust Technologies Inc. in December 1996. Previously, he was employed by Bell Northern Research Ltd. ("BNR"), the research and development subsidiary of NTL, which he joined in 1979. Mr. O'Higgins holds a Bachelor of Science degree in Electrical Engineering from Carleton University, Ottawa, Ontario. BRADLEY N. ROSS has served as President of European Operations since March 1998. From December 1996 until March 1998, he served as the Company's Executive Vice President Marketing and Product Line Management. Mr. Ross co- founded NSN in 1994 with Mr. O'Higgins, which became Entrust Technologies Inc. in December 1996. Previously, he was employed by BNR, which he joined in 1982 and held various positions in software design and program management for Nortel's switching products. Mr. Ross holds Bachelor and Master of Science degrees in Engineering from Queen's University, Kingston, Ontario, and a Master of Business Administration degree in Management Science from the Massachusetts Institute of Technology's Sloan School of Management, Cambridge, Massachusetts. 48 MICHELE L. AXELSON has served as Senior Vice President, Business Development and Finance and Chief Financial Officer since joining the Company in May 1998. From June 1996 until May 1998, she served as the Senior Vice President and Chief Financial Officer for Scopus Technologies Inc., an enterprise customer care software company. Prior to that time, from 1979 until June 1996, Ms. Axelson held various positions at Arthur Andersen LLP, an international public accounting firm, and was a partner of that firm from 1989 until June 1996. Ms. Axelson is a Certified Public Accountant and holds a Bachelor of Science degree in Business Administration from San Jose State University, San Jose, California. RICHARD D. SPURR has served as Senior Vice President, Sales and Marketing of the Company since March 1998. Prior to that time, he served as Senior Vice President of Global Sales of the Company since joining the Company in June 1997. Prior to joining the Company, from December 1990 to March 1997, he held numerous executive positions for SEER Technologies, Inc., a developer of component-based software applications, including Vice President of Strategic Alliances from January 1994 to November 1996 and Vice President of Major Accounts from December 1996 to March 1997. From June 1974 until December 1990, Mr. Spurr served in various sales and sales management positions with IBM. Mr. Spurr holds a Bachelor of Arts degree from the University of Notre Dame, South Bend, Indiana. HANSEN DOWNER has served as Vice President, Professional Services of the Company since he joined the Company in December 1997. From February 1997 to November 1997, Mr. Downer served as Vice President of Sales, Marketing and New Product Development at Interpath Communications, Inc., an Internet service provider. From March 1996 until August 1996, Mr. Downer served as Vice President of Customer Service and Telecom Network Design for the Physician's Desktop Company, a network development company and a subsidiary of Imonics Corporation. From May 1995 until March 1996, Mr. Downer served as Vice President of Business Development at Imonics Corporation, a client server systems integration company focused on the health care industry. Prior to that time, from 1979 to December 1994, he worked for Nortel in a number of roles. Mr. Downer holds a Bachelor of Mathematics degree from the University of Waterloo, Waterloo, Ontario. DAVID D. ARCHIBALD has been a director of the Company since its founding in December 1996. Mr. Archibald has served as Vice President and Deputy General Counsel of NTL since March 1995, and has responsibility for legal affairs of several of Nortel's operations and business units. Prior to that time, from April 1979 to March 1995, Mr. Archibald served as Vice President and General Counsel of Northern Telecom Canada Limited. Mr. Archibald holds a Bachelor of Commerce degree and a Bachelor of Common Law from Dalhousie University, Halifax, Nova Scotia. F. WILLIAM CONNER has been a director of the Company since July 1997. He has served as Senior Vice President and President of Nortel's Enterprise Data Networks line of business since February 1998. From August 1995 until February 1998, Mr. Conner served as Executive Vice President, Sales and Marketing for the Enterprise Networks line of business of Nortel. Prior to that time, from 1992 until July 1995, Mr. Conner held a variety of sales and marketing executive positions in Nortel's voice and data enterprise lines of businesses. Mr. Conner holds a Bachelor of Science degree in Mechanical Engineering from Princeton University, Princeton, New Jersey and a Master of Business Administration Degree from the University of Pennsylvania's Wharton School, Philadelphia, Pennsylvania. FRANK A. DUNN has been a director of the Company since July 1997. Mr. Dunn has served as the Senior Vice President of Finance and Planning of Nortel since March 1996. From January 1994 until March 1996, Mr. Dunn served as Vice President of Finance for Nortel's North American lines of business, a management division within NTL. Prior to that time, from March 1993 until January 1994, Mr. Dunn served as NTL's Corporate Controller. Mr. Dunn holds a Bachelor of Commerce degree from McGill University, Montreal, Quebec. 49 ROBERT S. MORRIS has been a director of the Company since January 1997. Mr. Morris founded Olympus Partners, a private investment firm, in 1989 and serves as Managing Partner of Olympus Private Placement Fund, L.P., Olympus Growth Fund II, L.P., Olympus Executive Fund, L.P. and Olympus Growth Fund III, L.P. Mr. Morris serves on the boards of directors of TriNet Corporate Realty Trust, Inc. and Candlewood Hotel Company, Inc. Mr. Morris holds a Bachelor of Arts degree from Hamilton College, Clinton, New York and a Master of Business Administration degree from the Amos Tuck School of Business at Dartmouth College, Hanover, New Hampshire. The Company anticipates adding at least one additional member to the Board of Directors who is unaffiliated with the Company or Nortel. The members of the Board of Directors were elected pursuant to the terms of a Stockholders' Agreement, dated as of December 31, 1996, as amended, among the Company and certain stockholders (the "Stockholders' Agreement"). The Stockholders' Agreement terminates upon the closing of the Offerings. Following the Offerings, the Board of Directors of the Company will be divided into three classes, each of whose members will serve for a staggered three-year term. The Board will consist of two Class I Directors (Messrs. Archibald and Morris), two Class II Directors (Messrs. Conner and Ryan) and one Class III Director (Mr. Dunn). At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The Company's Amended and Restated Bylaws (the "Bylaws") provide that such directors are elected by a plurality of all votes cast at such meeting. The terms of the Class I Directors, Class II Directors and Class III Director expire upon the election and qualification of successor directors at the annual meeting of stockholders held during the calendar years 1999, 2000 and 2001, respectively. The Amended and Restated Articles of Incorporation of the Company provide for a Board of Directors composed of five directors, unless otherwise increased or decreased in the manner provided in the Bylaws. The Bylaws permit the Company's Board of Directors, by a majority vote, to fix the number of directors between three and ten. Each executive officer serves at the discretion of the Board of Directors and holds office until his or her successor is elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of the directors or executive officers of the Company. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has a Compensation Committee composed of Messrs. Archibald, Conner and Morris, which establishes the compensation of, and compensation policies applicable to, the Company's executive officers and administers and grants stock options and other stock awards pursuant to the Company's stock plans. The Board of Directors also has an Audit Committee composed of Messrs. Dunn and Morris, which makes recommendations to the Board of Directors concerning the appointment or replacement of the Company's independent public accountants, confers with such accountants regarding such accountants' audit of the Company and recommends and implements desired changes to the scope of the Company's audit. DIRECTOR COMPENSATION Directors do not receive any cash fees for their services on the Board, but are reimbursed for expenses incurred in connection with their attendance at Board and committee meetings. In addition, non-employee directors of the Company are eligible to receive stock options under the Company's Amended and Restated 1996 Stock Incentive Plan. See "-- Stock Plans -- Amended and Restated 1996 Stock Incentive Plan". 50 EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued for the year ended December 31, 1997 for the Company's Chief Executive Officer and its three other executive officers in the year ended December 31, 1997 whose salary and bonus totaled at least $100,000 for the fiscal year (together, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(1) - ------------------------------------------ ---------- --------- ------------ John A. Ryan ............................. $ 180,874 $ 79,800(2) 1,445,800 President and Chief Executive Officer Brian O'Higgins........................... 94,319 46,123(2) 602,400 Executive Vice President and Chief Tech- nology Officer Bradley N. Ross........................... 94,175 45,298(2) 602,400 President of European Operations Richard D. Spurr(3)....................... 68,217 43,820 440,000 Senior Vice President, Sales and Market- ing
- -------- (1) Represents the number of shares covered by options to purchase shares of Common Stock granted during the year ended December 31, 1997. The Company has never granted any stock appreciation rights. (2)Represents bonuses paid for 1996 performance at Nortel. (3)Represents compensation from June 1997 when Mr. Spurr joined the Company. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth all individual grants of stock options to each of the Named Executive Officers during the year ended December 31, 1997. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM(2) -------------------------------------------------------------- ----------------------- NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS GRANTED UNDERLYING TO EMPLOYEES EXERCISE OR BASE EXPIRATION NAME OPTIONS GRANTED IN FISCAL YEAR PRICE PER SHARE(1) DATE 5% 10% - ------------------------ --------------- ---------------- ------------------ ---------- ----------- ----------- John A. Ryan............ 1,445,800(3) 21.4% $2.13 1/1/07 $ 1,932,169 $ 4,896,495 Brian O'Higgins......... 602,400(3) 8.9 2.13 1/1/07 850,048 2,040,150 Bradley N. Ross......... 602,400(3) 8.9 2.13 1/1/07 850,048 2,040,150 Richard D. Spurr........ 440,000(4) 6.5 2.13 1/1/07 588,016 1,490,149
- -------- (1) The exercise prices represent the fair market value of the Common Stock on the respective dates of grant, as determined by the Board of Directors. (2) Amounts reported in these columns represent amounts that may be realized upon exercise of the options immediately prior to the expiration of their term assuming the specified compound rates of appreciation (5% and 10%) on the market value of the Common Stock on the date of option grant over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the timing of such exercise and the future performance of the Common Stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the individuals. (3) Each of the indicated options cumulatively vests as to one-fifth of the underlying shares on January 1, 1997 and each of the first, second, third and fourth anniversaries of January 1, 1997. (4) The indicated option cumulatively vests as to one-fifth of the underlying shares on July 23, 1997 and each of the first, second, third and fourth anniversaries of July 23, 1997. 51 FISCAL YEAR-END OPTION VALUES The following table sets forth certain information concerning the number and value of unexercised options held by each of the Named Executive Officers on December 31, 1997. None of the Named Executive Officers exercised options during the year ended December 31, 1997. FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT FISCAL YEAR END FISCAL YEAR-END(2) ---------------------------- ------------------------- NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------- -------------- ------------- ----------- ------------- John A. Ryan............. 578,320 867,480 $7,442,978 $11,164,468 Brian O'Higgins.......... 240,960 361,440 3,101,155 4,651,733 Bradley N. Ross.......... 240,960 361,440 3,101,155 4,651,733 Richard D. Spurr......... 88,000 352,000 1,132,560 4,530,240
- -------- (1) Includes shares that became exercisable as of January 1, 1998. (2) There was no public trading market for the Common Stock as of December 31, 1997. Accordingly, these values have been calculated on the basis of the assumed initial public offering price of $15.00 per share, less the applicable exercise price. EMPLOYMENT AGREEMENTS Pursuant to a letter agreement between John A. Ryan and the Company, dated as of April 21, 1997, the Company agreed to employ Mr. Ryan as the Company's President and Chief Executive Officer, with an annual salary of $185,000 and an annual bonus of up to 35% of the base salary. The Company also agreed to reimburse up to $35,000 of expenses related to executive perquisites in Mr. Ryan's first year of employment as President and Chief Executive Officer, and up to $12,000 for such expenses in each subsequent year of employment. Mr. Ryan will receive a relocation assistance payment of up to $100,000 if he is required to relocate his residence due to the relocation of the Company's headquarters. If Mr. Ryan's employment is terminated by the Company within two years of such a relocation, for any reason other than for cause, disability, retirement, resignation or death, then Mr. Ryan is entitled to payment of his base salary for up to 36 weeks. Mr. Ryan's employment is terminable at will. Pursuant to a letter agreement between Brian O'Higgins and NTL, on behalf of the Company, dated as of November 18, 1996, the Company agreed to employ Mr. O'Higgins as the Company's Executive Vice President, Technology, with an annual salary of CDN$130,000. Mr. O'Higgins was appointed as the Company's Executive Vice President and Chief Technology Officer in December 1996, and in September 1997 his annual salary was increased to CDN$160,000. Upon termination of his employment without just cause, Mr. O'Higgins will be entitled to payment of his base salary for 12 months, plus an allowance of CDN$10,000 for benefits. Mr. O'Higgins has agreed not to compete against the Company for 12 months following the termination of his employment with the Company. Pursuant to a letter agreement between Bradley N. Ross and NTL, on behalf of the Company, dated as of November 18, 1996, the Company agreed to employ Mr. Ross as the Company's Executive Vice President, Marketing and Product Line Management, with an annual salary of CDN$130,000. Mr. Ross currently serves as the Company's President of European Operations. In September 1997, Mr. Ross' annual salary was increased to CDN$160,000. Upon termination of his employment without just cause, Mr. Ross will be entitled to payment of his base salary for 12 months, plus an allowance of CDN$10,000 for benefits. Mr. Ross has agreed not to compete against the Company for 12 months following the termination of his employment with the Company. 52 Pursuant to a letter agreement between Richard D. Spurr and the Company, dated as of June 4, 1997, the Company agreed to employ Mr. Spurr as the Company's Vice President of Global Sales, with an annual salary of $125,000. Mr. Spurr currently serves as the Company's Senior Vice President, Sales and Marketing. Mr. Spurr is also eligible to receive up to $125,000 through the Company's sales incentive program. Mr. Spurr's employment is terminable at will. STOCK PLANS AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN The Company's Amended and Restated 1996 Stock Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors and approved by the stockholders of the Company in December 1996. The Incentive Plan was amended and restated by the Board in June 1998, and such amendment and restatement was approved by the stockholders in July 1998. The Incentive Plan was further amended by the Board of Directors in July 1998. Up to 9,600,000 shares of Common Stock (subject to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the Incentive Plan. The Incentive Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), nonstatutory stock options, restricted stock awards and other stock-based awards (collectively, "Awards"). Officers, employees, directors, consultants and advisors of the Company and its subsidiaries (collectively, "Participants") are eligible to receive Awards under the Incentive Plan, provided such consultants render bona fide services not in connection with an offer or sale of securities in a capital raising transaction. Under present law, however, incentive stock options may only be granted to employees of the Company or its subsidiaries. The maximum number of shares with respect to which an Award may be granted to any Participant under the Incentive Plan may not exceed 5,000,000 shares per calendar year. Participants who are granted options under the Incentive Plan receive the right to purchase a specified number of shares of Common Stock at a specified option price and subject to such other terms and conditions as are specified in connection with the option grant. Options may be granted at an exercise price which may be less than, equal to or greater than the fair market value of the Common Stock on the date of grant. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Code may not be granted at an exercise price less than the fair market value of the Common Stock on the date of grant (or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). The Incentive Plan permits the Board of Directors to determine the manner of payment of the exercise price of options, including payment by cash, check or in connection with a "cashless exercise" through a broker, by surrender to the Company of shares of Common Stock, by delivery to the Company of a promissory note or by any combination of the permitted forms of payment. The Incentive Plan is administered by the Board of Directors. The Board of Directors has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the Incentive Plan and to interpret the provisions thereof. Pursuant to the terms of the Incentive Plan, the Board of Directors may delegate authority under the Incentive Plan to one or more committees of the Board of Directors and, subject to certain limitations, to one or more executive officers of the Company. The Board of Directors has authorized the Compensation Committee to administer the Incentive Plan, including the granting of options to executive officers. Subject to any applicable limitations contained in the Incentive Plan, the Board of Directors, the Compensation Committee or any other committee or executive officer to whom the Board of Directors delegates authority, as the 53 case may be, selects the recipients of Awards and determines (i) the number of shares of Common Stock covered by options and the dates upon which such options become exercisable, (ii) the exercise price of options, (iii) the term of options and (iv) the number of shares of Common Stock subject to any restricted stock or other stock-based Awards and the terms and conditions of such Awards, including any conditions for repurchase, the issue price and repurchase price. In the event of a merger, liquidation or other Acquisition Event (as defined in the Incentive Plan), the Incentive Plan authorizes the Board of Directors to provide (i) that outstanding options be assumed or substituted by the succeeding corporation, (ii) that unexercised options become exercisable in full immediately prior to the consummation of the Acquisition Event, (iii) for a cash payment to holders of outstanding options, followed by the termination of such options, in certain circumstances, (iv) that all restricted stock awards become free of all restrictions prior to the consummation of the Acquisition Event or (v) that other stock-based Awards (x) become exercisable, realizable or vested in full immediately prior to the consummation of the Acquisition Event or (y) be assumed or substituted by the succeeding corporation. No Award may be granted under the Incentive Plan after December 2006, but the vesting and effectiveness of Awards previously granted may extend beyond that date. The Board of Directors may at any time amend, suspend or terminate the Incentive Plan, except that no Award granted after an amendment of the Incentive Plan and designated as subject to Section 162(m) of the Code by the Board of Directors shall become exercisable, realizable or vested (to the extent such amendment was required to grant such Award) unless and until such amendment is approved by the Company's stockholders. 1998 EMPLOYEE STOCK PURCHASE PLAN The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in July 1998. The Purchase Plan authorizes the issuance of up to a total of 400,000 shares of Common Stock to participating employees. All employees of the Company, including directors of the Company who are employees, and all employees of any participating subsidiaries whose customary employment is more than 20 hours per week and more than five months in any calendar year are eligible to participate in the Purchase Plan. Employees who would immediately after the grant own 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary are not eligible to participate. As of June 30, 1998, approximately 295 of the Company's employees would have been eligible to participate in the Purchase Plan. On the first day of a designated payroll deduction period (the "Offering Period"), the Company will grant to each eligible employee who has elected to participate in the Purchase Plan an option to purchase shares of Common Stock as follows: the employee may authorize a payroll deduction in any dollar amount up to a maximum of 10% of such employee's base pay to be deducted by the Company from such employee's base pay during the Offering Period. On the last day of the Offering Period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the Purchase Plan, the option exercise price per share is an amount equal to 90%, or such other percentage as may be determined by the Board of Directors consistent with the requirements of the Code, of the fair market value of the Common Stock on either the first day or the last day of the Offering Period, whichever is lower. Such fair market value shall be determined by the Board of Directors in a manner consistent with the requirements of the Code. In no event may an employee purchase in any one Offering Period a number of shares which exceeds the number of shares determined by dividing (i) the product of $2,083 and the number of whole months in such Offering Period by (ii) the closing price on the commencement date of the Offering Period or such other number as may be determined by the Board 54 of DIrectors prior to such commencement date. The Compensation Committee may, in its discretion, choose an Offering Period of 12 months or less for each offering and choose a different offering Period for each Offering. If an employee is not a participant on the last day of the Offering Period, such employee is not entitled to exercise any option, and the amount of such employee's accumulated payroll deductions will be refunded. An employee's rights under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time, or when such employee ceases employment for any reason, except that upon termination of employment because of death, the balance in the employee's account shall be paid to the employee's beneficiary. An employee may at any time prior to the close of business on the last day in an Offering Period withdraw from the offering and draw out the entire balance accumulated in the employee's account. Partial withdrawals are not permitted. The employee may not begin participation again during the remainder of the Offering Period, but may participate in any subsequent offering in accordance with terms and conditions established by the Board or the Compensation Committee. Rights under the Purchase Plan are not transferable by an employee other than by will or the laws of descent and distribution. The Purchase Plan terminates on July 21, 2000 or such earlier date as the Board determines. Upon termination of the Purchase Plan all amounts in the accounts of participating employees will be promptly refunded. Because participation in the Purchase Plan is voluntary, the Company cannot presently determine the number of shares of Common Stock to be purchased by any particular current executive officer, by all current executive officers as a group or by non-executive employees as a group. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Archibald and Morris served during the year ended December 31, 1997 as members of the Compensation Committee of the Board of Directors. No executive officer of the Company has served as director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, any of whose executive officers serve as a director of or member of the Compensation Committee of the Board of Directors. See "Certain Transactions" for a description of transactions between the Company and affiliates of Mr. Archibald. 55 CERTAIN TRANSACTIONS In connection with the incorporation and financing of the Company in December 1996 and January 1997 (the "Financing"), the Company entered into an asset transfer agreement with NTI (the "NTI Transfer Agreement"). In addition, the Canadian Subsidiary entered into an asset transfer agreement with NTL (the "NTL Transfer Agreement"). Messrs. Archibald, Conner and Dunn are officers of Nortel, and, as Mr. Conner's compensation from Nortel is based in part upon the Company's results of operations, Mr. Conner may be deemed to have an indirect material interest in the transactions between the Company and Nortel. Under the NTI Transfer Agreement, NTI received 20,300,000 shares of Common Stock, an unsecured demand note in the amount of $8.0 million and the assumption of certain liabilities by the Company in consideration for the transfer to the Company of an exclusive license to exploit the intellectual property rights transferred to the Canadian Subsidiary within the United States, NTI's interest in executory contracts with distributors and customers licensing Entrust products, equipment used by employees and contractors dedicated to the Company's business and the records relating to the Company's business. Prior to the execution of the NTI Transfer Agreement, the Company was a division of Nortel and all of the officers of the Company were employees of Nortel. Accordingly, the purchase price was not arrived at by an arm's- length negotiation between Nortel and the Company. Rather, as part of the Financing, Nortel valued the transaction according to the net book value of the assets being transferred. Under the NTL Transfer Agreement, NTL received 7,700,000 Exchangeable Special Shares of the Canadian Subsidiary (which stock is convertible into shares of the Common Stock of the Company), one share of common stock of the Canadian Subsidiary and the assumption of certain liabilities by the Company in exchange for NTL's worldwide intellectual property rights underlying the Entrust products (subject to the license of NTI and certain exceptions, see "Business--Intellectual Property"), the inventory of the Company's business, all executory contracts with suppliers, distributors and customers licensing Entrust products (other than NTI's interest therein), and all personal property and fixtures used by its employees and contractors dedicated to the Company's business (other than NTI employees and contractors). Prior to the execution of the NTL Transfer Agreement, the Company was a division of Nortel and all of the officers of the Company were employees of Nortel. Accordingly, the purchase price was not arrived at by an arm's-length negotiation between Nortel and the Company. Rather, as part of the Financing, Nortel valued the transaction according to the net book value of the assets being transferred. The Company also issued 7,700,000 shares of Special Voting Stock to NTL in connection with this transaction. Pursuant to the terms of the Articles of Incorporation of the Canadian Subsidiary, a holder of Exchangeable Special Shares may exchange such shares for Common Stock at any time, on a one-for-one basis, by delivering the certificates representing the Exchangeable Shares together with certificates representing an equal number of shares of Special Voting Stock to the Canadian Subsidiary. NTL received Exchangeable Special Shares from the Canadian Subsidiary and shares of Special Voting Stock from the Company in order to minimize Canadian taxes at the time of NTL's contribution of assets under the NTL Transfer Agreement. The Company entered into a strategic alliance agreement (the "Strategic Alliance Agreement") pursuant to which it granted to NTL for three years, or as long as the Company is controlled by NTL, whichever is longer, the right to distribute Entrust products on terms no less favorable to NTL than the terms of the agreements then in effect with other resellers of the Company. The Company granted to NTL for three years, or as long as the Company is controlled by NTL, whichever is longer, a royalty-bearing license to use and modify the Company's source code in NTL products on terms no less favorable to NTL than those offered to other source code licensees. NTL granted to the Company and the Company granted to NTL world-wide, royalty-free licenses to use, sell or license any of the grantor's products or services, excluding existing exclusive licenses, until the grant expires or NTL 56 ceases to control the Company, whichever comes first. In addition, NTL may restrict the Company, for so long as NTL maintains beneficial ownership of a majority of the voting power of the Company, from any act which may reasonably be anticipated to contravene any material instrument binding on Nortel, any order of any governmental body which has jurisdiction over Nortel or any of its assets, or any applicable law or regulation. Upon the closing of the Offerings, Nortel will beneficially own approximately 56.4% of the Company's Common Stock. See "Risk Factors --Concentration of Ownership". In connection with the Financing, the Company and NTL entered into an intercompany services and operating agreement (the "Services Agreement") with respect to services offered by NTL to the Company. The Services Agreement provides that such services will be provided in exchange for fees (based upon allocation of its current costs for such services not to exceed fair market value), which management of the Company believes are substantially consistent with the allocation of the costs of such services set forth in the historical financial statements of the Company. The Company paid $2.9 million, $3.7 million and $273,000 in the years ended December 31, 1995, 1996 and 1997, respectively, for research and development services provided by Bell Northern Research Ltd., a subsidiary of Nortel. During the year ended December 31, 1997, the Company paid Nortel $299,000 for services rendered and reimbursed Nortel $5.6 million for expenses paid by Nortel on behalf of the Company, net of revenues collected by Nortel on the Company's behalf. In connection with the Financing, in January 1997, the Company sold 257,500 shares of Series B Common Stock to a group of private investors for an aggregate sale price of $25,750,000. In January 1997, the Company also sold 2,500 shares of Series B Non-Voting Common Stock to a private investor for an aggregate sale price of $250,000 and issued an additional 36,448 shares of Series B Non-Voting Common Stock to such investor in exchange for an equivalent number of shares of Series B Common Stock. The Company has adopted a policy providing that all material transactions between the Company and its officers, directors and other affiliates must (i) be approved by a majority of the members of the Company's Board of Directors and by a majority of the disinterested members of the Company's Board of Directors and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 57 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of June 30, 1998, by (i) each person or entity known to the Company to own beneficially more than 5% of the Common Stock, (ii) each of the directors of the Company, (iii) each of the Named Executive Officers, (iv) each of the Selling Stockholders and (v) all directors and executive officers as a group. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity.
SHARES BENEFICIALLY NUMBER OF SHARES TO BE OWNED PRIOR SHARES OFFERED BENEFICIALLY OWNED TO OFFERINGS(1) FOR SALE(2) AFTER OFFERINGS(1)(2) --------------------- -------------- --------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE - ------------------------ ---------- ---------- ---------- ---------- Northern Telecom Limited(3)............. 28,000,000 66.3% 1,150,520 26,849,480 56.4% 8200 Dixie Road, Suite 100 Brampton, Ontario L6T 5P6 Olympus Partners(4)..... 5,032,053 11.9 206,459 4,825,594 10.1 Metro Center, 1 Station Place Stamford, CT 06902 Morgan Guaranty Trust Company of New York as Trustee, and/or Investment Manager and/or Agent(5)............... 3,517,186 8.3 144,521 3,372,665 7.1 522 Fifth Avenue New York, NY 10036 Societe Generale Investment Corporation(6)......... 2,512,276 5.9 103,229 2,409,047 5.1 1221 Avenue of the Americas New York, NY 10020 Orchid & Co., nominee for T. Rowe Price Threshold Fund III, L.P.(7)................ 1,507,366 3.6 61,938 1,445,428 3.0 John A. Ryan(8)......... 578,320 1.4 -- 578,320 1.2 Brian O'Higgins(9)...... 240,960 * -- 240,960 * Bradley N. Ross(10)..... 240,960 * -- 240,960 * Richard D. Spurr(11).... 176,000 * -- 176,000 * David D. Archibald...... -- * -- -- * F. William Conner....... -- * -- -- * Frank A. Dunn........... -- * -- -- * Robert S. Morris(12).... 5,032,053 11.9 206,459 4,825,594 10.1 All executive officers and directors as a group (10 persons)(13)........... 6,308,293 14.5 206,459 6,101,834 12.5
- -------- * Less than 1% (1) The number of shares of Common Stock outstanding prior to the Offerings includes (i) 42,243,164 shares of Common Stock outstanding as of June 30, 1998 and (ii) with respect to each person, the shares issuable by the Company pursuant to options held by such persons which may be exercised within 60 days following June 30, 1998 ("Presently Exercisable Options"). The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting 58 power or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after June 30, 1998 through the exercise of any stock option, warrant or other right. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) The number of shares of Common Stock deemed outstanding prior to the Offerings consists of (i) 20,300,000 shares held of record by NTI and (ii) 7,700,000 shares of Common Stock issuable upon the exchange of Exchangeable Shares of the Canadian Subsidiary. The number of shares of Common Stock offered for sale consists of 1,150,520 shares of Common Stock issuable upon the exchange of Exchangeable Shares of the Canadian Subsidiary offered for sale by NTL. NTL beneficially owns, and has sole voting and investment power with respect to, the shares of Common Stock held of record by NTI. Exchangeable Shares may be exchanged at any time for Common Stock. See "Certain Transactions". In addition to the number of shares shown as offered for sale in the table, NTL has granted the Underwriters the right to purchase up to an additional 799,916 shares pursuant to the Underwriters' over-allotment option. (4) The number of shares of Common Stock deemed outstanding prior to the Offerings consists of (i) 50,245 shares held of record by Olympus Executive Fund, L.P., a Delaware limited partnership ("Olympus Executive"), (ii) 4,974,308 shares held of record by Olympus Growth Fund II, L.P., a Delaware limited partnership ("Olympus Growth", and with Olympus Executive, the "Olympus Funds"), and (iii) 7,500 shares subject to Presently Exercisable Options granted to Robert S. Morris. The number of shares of Common Stock offered for sale consists of (i) 2,065 shares offered for sale by Olympus Executive and (ii) 204,394 shares offered for sale by Olympus Growth. Olympus Partners may be deemed to have or share voting and investment power with respect to all shares of Common Stock held of record by the Olympus Funds. Shares subject to Presently Exercisable Options held of record by Robert S. Morris, the managing partner of Olympus Partners, are assignable to Olympus Growth. In addition to the number of shares shown as offered for sale in the table, Olympus Executive and Olympus Growth have granted the Underwriters the right to purchase up to an additional 447 shares and 44,322 shares, respectively, pursuant to the Underwriters' over-allotment option. (5) The number of shares of Common Stock deemed outstanding prior to the Offerings consists of (i) 2,743,406 shares held of record by Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust Fund (Multi-Market Special Investment Fund II) of Morgan Guaranty Trust Company of New York ("Morgan Trust I"), (ii) 386,890 shares held of record by Morgan Guaranty Trust Company of New York as Trustee of the Multi-Market Special Investment Trust Fund of Morgan Guaranty Trust Company of New York ("Morgan Trust II") and (iii) 386,890 shares held of record by Morgan Guaranty Trust Company of New York, as Investment Manager and Agent for a private client ("Morgan Trust III"). The number of shares of Common Stock offered for sale consists of (i) 112,727 shares offered for sale by Morgan Trust I, (ii) 15,897 shares offered for sale by Morgan Trust II and (iii) 15,897 shares offered for sale by Morgan Trust III. In addition to the number of shares shown as offered for sale in the table, Morgan Trust I, Morgan Trust II and Morgan Trust III have granted the Underwriters the right to purchase up to an additional 78,374 shares, 11,053 shares and 11,053 shares, respectively, pursuant to the Underwriters' over-allotment option. (6) In addition to the number of shares shown as offered for sale in the table, Societe Generale Investment Corporation has granted the Underwriters the right to purchase up to an additional 71,772 shares pursuant to the Underwriters' over-allotment option. (7) In addition to the number of shares shown as offered for sale in the table, Orchid & Co. has granted the Underwriters the right to purchase up to an additional 43,063 shares pursuant to the Underwriters' over- allotment option. 59 (8) Consists of 578,320 shares subject to Presently Exercisable Options. (9) Consists of 240,960 shares subject to Presently Exercisable Options. (10) Consists of 240,960 shares subject to Presently Exercisable Options. (11) Consists of 176,000 shares subject to Presently Exercisable Options. (12) The number of shares of Common Stock deemed outstanding prior to the Offerings consists of (i) 5,024,553 shares held of record by the Olympus Funds and (ii) 7,500 shares subject to Presently Exercisable Options. The number of shares of Common Stock offered for sale consists of 206,459 shares offered for sale by the Olympus Funds. Mr. Morris, the managing partner of Olympus Partners, may be deemed to have or share voting and investment power with respect to all shares of Common Stock held of record by the Olympus Funds. Mr. Morris disclaims beneficial ownership of all shares held of record by the Olympus Funds. In addition to the number of shares shown as offered for sale in the table, the Olympus Funds have granted the Underwriters the right to purchase up to an additional 44,769 shares pursuant to the Underwriters' over-allotment option. (13) The number of shares of Common Stock deemed outstanding prior to the Offerings consists of (i) 5,024,553 shares held of record by the Olympus Funds and (ii) 1,283,740 shares subject to Presently Exercisable Options. The number of shares of Common Stock offered for sale consists of 206,459 shares offered for sale by the Olympus Funds. In addition to the number of shares shown as offered for sale in the table, the Olympus Funds have granted the Underwriters the right to purchase up to an additional 44,769 shares pursuant to the Underwriters' over-allotment option. See footnotes (8)--(12) above. 60 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, 15,000,000 shares of special voting stock, $.01 par value per share ("Special Voting Stock"), and 5,000,000 shares of preferred stock, $.01 par value per share ("Preferred Stock"). As of June 30, 1998, there were 34,543,164 shares of Common Stock outstanding held by 22 stockholders and 7,700,000 shares of Special Voting Stock held by one stockholder. Upon the closing of the Offerings there will be 40,259,557 shares of Common Stock, 6,549,480 shares of Special Voting Stock and no shares of Preferred Stock outstanding. The following summary of certain provisions of the Company's Common Stock, Special Voting Stock, Preferred Stock, Articles of Incorporation and Bylaws is materially complete but is qualified by reference to the provisions of applicable law and to the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation"), Amended and Restated Bylaws (the "Bylaws") and other agreements included as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information". COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the dissolution or liquidation of the Company, subject to the prior rights of any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities. Holders of Common Stock have no preemptive, subscription or redemption rights. The outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company in the Offerings will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. Certain holders of Common Stock have the right to require the Company to effect the registration of their shares of Common Stock in certain circumstances. See "--Registration Rights". At present, there is no established trading market for the Common Stock. Application has been made for the quotation of the Common Stock on the Nasdaq National Market under the symbol "ENTU". SPECIAL VOTING STOCK The holders of Special Voting Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Except for such voting rights, the holders of Special Voting Stock have no other rights in respect of such shares, including without limitation rights to receive dividends or rights to receive assets of the Company upon its dissolution, liquidation or winding up of its affairs. In connection with the incorporation of the Canadian Subsidiary and the Company, NTL was issued Exchangeable Shares of the Canadian Subsidiary. The holder of Exchangeable Shares may exchange such shares for shares of the Company's Common Stock at any time on or prior to December 31, 2006, on a one- for-one basis. In addition, the Company generally has the right to demand such exchange at any time on or prior to December 31, 2006. See "Certain Transactions". 61 PREFERRED STOCK Under the terms of the Articles of Incorporation, the Board of Directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue up to 5,000,000 shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. The purpose of authorizing the Board of Directors to issue Preferred Stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. MARYLAND LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Under Section 3-601 et seq. of the General Corporation Law of Maryland (the "Maryland Law") (the "Business Combination Statute"), to which the Company is subject, certain "business combinations" (including mergers or similar transactions subject to a statutory stockholder vote and additional transactions involving transfers of assets or securities in specific amounts) between a Maryland corporation subject to the Business Combination Statute and (i) any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation's outstanding voting shares after the date on which the corporation had 100 or more beneficial owners of its stock or (ii) any affiliate or associate of the corporation who, at any time within the preceding two years and after the date on which the corporation had 100 or more beneficial owners of its stock, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder"), or an affiliate thereof, are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder unless an exemption is available. Thereafter, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least: (i) 80% of the votes entitled to be cast by all holders of outstanding voting shares of the corporation; and (ii) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Stockholder with whom the business combination is to be effected, unless the corporation's stockholders receive a minimum price (as described in the Business Combination Statute) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. The Business Combination Statute does not apply, however, to business combinations that are (a) exempted in the corporation's charter prior to the time the corporation became subject to the Business Combination Statute or (b) approved or exempted by the board of directors prior to the time that the Interested Stockholder becomes an Interested Stockholder. After a corporation becomes subject to the Business Combination Statute, in order to amend the corporation's charter to elect not to be subject to the foregoing requirements with respect to one or more Interested Stockholders, the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and two-thirds of the votes entitled to be cast by holders of outstanding shares of voting stock who are not Interested Stockholders is required. The Company's Articles of Incorporation provide that business combinations between the Company and any of NTL, NTI, affiliates of NTL or NTI, or the successors or assigns of NTL, NTI or their affiliates are exempt from the provisions of the Business Combination Statute. Section 3-701 et seq. of the Maryland Law (the "Control Share Acquisition Statute") provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror or by officers or directors who are 62 employees of the corporation. The Company's Articles of Incorporation generally exempt the applicability of the Control Share Acquisition Statute to any control share acquisition of any shares of the capital stock of the Company. The Business Combination Statute and the Control Share Acquisition Statute could have the effect of discouraging takeover proposals and delaying or preventing a change of control of the Company not approved by its Board of Directors. The Articles of Incorporation provide for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. See "Management--Executive Officers and Directors". The Articles of Incorporation also provide that directors may be removed only for cause by the affirmative vote of the holders of two-thirds of the shares of capital stock of the Company entitled to vote. Under the Articles of Incorporation, any vacancy on the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board of Directors, may only be filled by vote of a majority of the directors then in office. The limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. Maryland Law provides generally that the affirmative vote of two-thirds or a majority of the shares entitled to vote on any matter is required to amend a corporation's articles of incorporation unless a corporation's articles of incorporation requires a greater percentage. The Company's Articles of Incorporation require the affirmative vote of the holders of at least 75% of the shares of capital stock of the Company issued and outstanding and entitled to vote to amend or repeal any of the provisions described in the previous paragraph. The Articles of Incorporation also provide that any action required or permitted to be taken by the stockholders of the Company at an annual meeting of stockholders may only be taken if it is properly brought before such meeting. The Bylaws further provide that special meetings of the stockholders may only be called by the President, the Board of Directors or the Secretary upon the request of 50% of the shares of capital stock of the Company entitled vote. Under the Bylaws, in order for any matter to be considered "properly brought" before an annual meeting, a stockholder must comply with certain requirements regarding advance notice to the Company. These provisions may discourage another person or entity from making a tender offer for the Common Stock, because such person or entity, unless it acquired at least 50% of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at the annual meeting of stockholders. The Articles of Incorporation contain certain provisions permitted under the Maryland Law relating to the liability of directors and officers. The provisions eliminate a director's or officer's liability for monetary damages to a corporation or its stockholders, except to the extent the director or officer actually received an improper benefit or profit or the director's or officer's action was the result of active and deliberate dishonesty. Further, the Articles of Incorporation contain provisions to indemnify the Company's directors and officers to the fullest extent permitted by the Maryland Law. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. REGISTRATION RIGHTS Pursuant to an Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement") among the Company, NTI, NTL (NTL and NTI collectively referred to as the "Nortel Stockholders") and certain of its stockholders (the "Investors", and with the Nortel Stockholders, the "Rightsholders"), such Rightsholders will be entitled to certain rights with respect to the registration under the Securities Act of a total of approximately 39,397,169 shares of Common Stock (the "Registrable Shares"). 63 The Nortel Stockholders as well as Investors holding in the aggregate at least 35% of the Registrable Shares initially held by all Investors may each require the Company to prepare and file a registration statement under the Securities Act with respect to their Registrable Shares if such registration would result in an offering with an aggregate offering price of at least $5.0 million. The Nortel Stockholders and the Investors are entitled to three and two demand registration requests, respectively. The Company is not required to file a demand registration statement for one year following the effective date of the Offerings or within six months after the effective date of any other registration statement, subject to certain restrictions. If the Company proposes to register any of its securities under the Securities Act, the Rightsholders will be entitled to include Registrable Shares in such offering, subject to the right of the managing underwriter of any underwritten offering to limit for marketing reasons the number of shares of Registrable Shares included in the offering. See "Shares Eligible for Future Sale". TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock will be American Securities Transfer & Trust, Inc. 64 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offerings, there has been no public market for the securities of the Company. Upon completion of the Offerings there will be 47,643,164 shares of Common Stock of the Company outstanding (assuming no exercise of the outstanding options of the Company). Of these shares, the 7,066,667 shares sold in the Offerings will be freely tradeable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 40,576,497 shares of Common Stock are deemed "restricted securities" under Rule 144 and are all subject to the Lock-Up Agreements with the Representatives of the Underwriters. Upon expiration of the Lock-Up Agreements 180 days after the date of this Prospectus (and assuming no exercise of outstanding options or exchange of Exchangeable Shares), approximately 39,397,169 shares of restricted Common Stock will be available for sale in the public market, subject to the provisions of Rule 144 under the Securities Act. The Company and all of its directors, officers, stockholders, who in the aggregate will hold approximately 40,576,497 shares of Common Stock on the date of this Prospectus, as well as holders of options to purchase Company Common Stock, have agreed, pursuant to Lock-Up Agreements with the Representatives of the Underwriters or, in the case of the option holders, pursuant to stock option agreements with the Company, that, without the prior written consent of Goldman, Sachs & Co., for a period of 180 days after the date of this Prospectus, they will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, or any shares convertible into or exchangeable for shares of Common Stock, owned directly by such persons or with respect to which they have the power of disposition. Goldman, Sachs & Co. may release all or part of the shares subject to the Lock-Up Agreements at any time in its sole discretion. In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the Registration Statement of which this Prospectus is a part, a stockholder, including an Affiliate, who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least one year from the later of the date such securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 476,432 shares immediately after the Offerings) or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate of the Company, a stockholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate of the Company for at least three months prior to the sale is entitled to sell the shares immediately without compliance with the foregoing requirements under Rule 144. Securities issued in reliance on Rule 701 (such as shares of Common Stock acquired pursuant to the exercise of certain options granted under the Company's stock plans) are also restricted securities and, subject to the Lock-Up Agreements, beginning 90 days after the effective date of the Registration Statement of which this Prospectus is a part, may be sold by stockholders other than Affiliates of the Company so long as such sales comply with the manner of sale provisions of Rule 144 and by Affiliates under Rule 144 without compliance with its one-year holding period requirement. The Company intends to file registration statements on Form S-8 under the Securities Act to register all shares of Common Stock issuable under the Incentive Plan and the Purchase Plan. Shares 65 issued upon the exercise of stock options after the effective date of the Form S-8 registration statements will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to Affiliates and the Lock-Up Agreements noted above, if applicable. Prior to the Offerings, there has been no public market for the Common Stock, and no prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of significant numbers of shares of the Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. Pursuant to the Registration Rights Agreement, certain holders of Common Stock, holding an aggregate of 39,397,169 shares of Common Stock, will have the ability to require the Company to register their shares of Common Stock, subject to certain restrictions. See "Description of Capital Stock-- Registration Rights". 66 CERTAIN U.S. TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS OF THE COMMON STOCK The following is a general discussion of certain U.S. federal income and estate tax consequences of the ownership and disposition of Common Stock by a person that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust as defined in the U.S. Internal Revenue Code of 1986, as amended (the "Code") (a "non-U.S. holder"). This discussion does not consider specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position and does not deal with all aspects of United States federal income and estate taxation that may be relevant to non-U.S. holders (including special rules applicable to certain United States expatriates), or with U.S. state and local or non-U.S. tax consequences. Furthermore, the following discussion is based on provisions of the Code, existing and proposed regulations promulgated thereunder, and administrative and judicial interpretations thereof as of the date hereof, all of which are subject to change, possibly with retroactive effect. Each prospective non-U.S. holder is urged to consult a tax adviser with respect to the U.S. federal tax consequences of holding and disposing of Common Stock, as well as any tax consequences that may arise under the laws of any U.S. state, municipality or other taxing jurisdiction. An individual may, among other ways, be deemed to be a resident alien (as opposed to a non-resident alien) with respect to any calendar year by virtue of being present in the United States on at least 31 days in such calendar year and for an aggregate of at least 183 days during the current calendar year and the two preceding calendar years (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal tax as if they were U.S. citizens. DIVIDENDS As described above, the Company does not expect to pay dividends. In the event the Company does pay dividends, dividends paid to a non-U.S. holder of Common Stock will be subject to withholding of U.S. federal income tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States. Dividends that are effectively connected with such holder's conduct of a trade or business in the United States are subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates, and are not generally subject to withholding, if the holder complies with certain certification and disclosure requirements. Any such effectively connected dividends received by a foreign corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current law, dividends paid to an address outside the United States are presumed to be paid to a resident of the country of address (unless the payer has knowledge to the contrary) for purposes of the withholdings discussed above and for purposes of determining the applicability of a tax treaty rate. Under certain recently finalized Treasury Regulations (the "New Withholding Regulations"), a non-U.S. holder of Common Stock will be required to satisfy certain certification and other requirements in order to claim the benefit of a reduced withholding tax rate with respect to dividends under an applicable treaty. In addition, under the New Withholding Regulations, in the case of Common Stock held by a foreign partnership, the certification requirement would generally be applied to the partners and the partnership may be required to provide certain information, including a United States taxpayer identification number. The New Withholding Regulations also provide look- through rules for tiered partnerships. The New Withholding Regulations are generally effective for payments made after December 31, 1999, subject to certain transition rules. Non-U.S. holders are 67 INDEX TO FINANCIAL STATEMENTS ENTRUST TECHNOLOGIES INC. CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unaudited)................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 (unaudited).............................................................. F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998 (unaudited)......................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 (unaudited).............................................................. F-6 Notes to Consolidated Financial Statements................................ F-7
R/3/ SECURITY ENGINEERING AG FINANCIAL STATEMENTS Report of the Statutory Auditors......................................... F-21 Balance Sheets as of December 31, 1996 and 1997.......................... F-22 Income Statements for the years ended December 31, 1996 and 1997......... F-23 Notes to Financial Statements............................................ F-24 ENTRUST TECHNOLOGIES INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Condensed Consolidated Financial Statements (unaudited)........ F-28 Unaudited Pro Forma Condensed Consolidated Statement of Operations....... F-29 Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)............................................................. F-31
F-1 AUDITORS' REPORT To the Directors of Entrust Technologies Inc. We have audited the consolidated balance sheets of Entrust Technologies Inc. as at December 31, 1996 and 1997 and the consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1995, 1996 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance 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 our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Entrust Technologies Inc. as at December 31, 1996 and 1997 and the results of its operations and its cash flows for the years ended December 31, 1995, 1996 and 1997 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE June 5, 1998 Ottawa, Canada F-2 ENTRUST TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
PRO DECEMBER 31, FORMA --------------- JUNE 30, JUNE 30, 1996 1997 1998 1998 ------ ------- -------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................. $ -- $ 4,025 $ 2,582 77,012 Short-term investments..................... -- 8,613 1,787 1,787 Accounts receivable (net of allowance for doubtful accounts at December 31, 1996-- $129, December 31, 1997--$416, and June 30, 1998--$460)........................... 2,487 7,152 10,606 10,606 Other receivables.......................... -- 2,089 1,381 1,381 Prepaid expenses........................... 55 455 616 616 ------ ------- ------- ------- Total current assets..................... 2,542 22,334 16,972 91,402 Goodwill.................................... -- -- 3,566 3,566 Property and equipment, net................. 1,145 1,680 2,583 2,583 Deferred income tax benefit................. -- 743 1,031 1,031 ------ ------- ------- ------- Total assets............................. $3,687 $24,757 $24,152 $98,582 ====== ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable........................... $ 901 $ 1,236 $ 4,106 $ 4,106 Accrued liabilities........................ 945 2,066 3,253 3,253 Deferred income............................ 1,882 3,068 4,669 4,669 Current portion of long-term debt.......... -- -- 11 11 Due to related party....................... -- 2,257 1,795 1,795 ------ ------- ------- ------- Total current liabilities................ 3,728 8,627 13,834 13,834 Long-term debt.............................. -- 1,449 19 19 Deferred income tax liabilities............. 19 19 19 19 ------ ------- ------- ------- Total liabilities........................ 3,747 10,095 13,872 13,872 ------ ------- ------- ------- Redeemable Series A common stock............ -- -- 17,013 -- ------ ------- ------- ------- Shareholders' equity (deficit): Preferred, par value $.01 per share; 5,000,000 authorized; none issued and outstanding............................... -- -- -- -- Common stock Common, par value $.01 per share; 100,000,000 authorized; none issued and outstanding at December 31, 1996 and 1997 and June 30, 1998 41,093,684 outstanding on a pro forma basis at June 30, 1998................................ -- -- -- 411 Series A common, par value $.01 per share; 100,000,000 authorized; 20,300,000 issued and outstanding shares at December 31, 1997 and 20,312,040 issued and outstanding shares at June 30, 1998, and none at December 31, 1996; none issued and outstanding on a pro forma basis at June 30, 1998............ -- 203 203 -- Series B common, par value $.01 per share; convertible and exchangeable; 260,000 authorized; 221,052 issued and outstanding shares at December 31, 1997 and June 30, 1998, and none at December 31, 1996 and on a pro forma basis at June 30, 1998........................... -- 2 2 -- Series B, non-voting common, par value $.01 per share; exchangeable; 260,000 authorized; 38,948 issued and outstanding shares at December 31, 1997 and June 30, 1998, and none at December 31, 1996 and on a pro forma basis at June 30, 1998........................... -- -- -- -- Special voting, par value $.01 per share; exchangeable; 15,000,000 authorized; 7,700,000 issued and outstanding shares at December 31, 1997 and June 30, 1998, and none at December 31, 1996; 6,549,480 shares issued and outstanding on a pro forma basis at June 30, 1998 ............. -- 77 77 65 Additional paid-in capital................. -- 15,744 15,770 107,019 Accumulated other comprehensive income (loss).................................... -- (15) (48) (48) Accumulated deficit........................ (60) (1,349) (22,737) (22,737) ------ ------- ------- ------- Total shareholders' equity (deficit)..... (60) 14,662 (6,733) 84,710 ------ ------- ------- ------- Total liabilities and shareholders' equity (deficit)........................ $3,687 $24,757 $24,152 $98,582 ====== ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-3 ENTRUST TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------- ---------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Revenues: License............... $ 1,845 $ 8,689 $ 16,486 $ 5,677 $ 15,845 Services and maintenance.......... 2,128 4,113 8,520 4,214 5,093 ---------- ---------- ---------- ---------- ---------- Total revenues...... 3,973 12,802 25,006 9,891 20,938 ---------- ---------- ---------- ---------- ---------- Cost of revenues: License............... 34 393 502 229 812 Services and maintenance.......... 950 3,157 4,414 2,111 3,089 ---------- ---------- ---------- ---------- ---------- Total cost of revenues........... 984 3,550 4,916 2,340 3,901 ---------- ---------- ---------- ---------- ---------- Gross profit............ 2,989 9,252 20,090 7,551 17,037 ---------- ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing... 1,914 3,858 11,193 3,999 10,982 Research and development.......... 2,287 2,874 5,692 2,077 5,346 General and administrative....... 1,212 2,464 3,695 1,479 2,266 Acquired in-process research and development.......... -- -- -- -- 20,208 ---------- ---------- ---------- ---------- ---------- Total operating expenses........... 5,413 9,196 20,580 7,555 38,802 ---------- ---------- ---------- ---------- ---------- Income (loss) from operations............. (2,424) 56 (490) (4) (21,765) Interest income......... -- -- 723 415 217 ---------- ---------- ---------- ---------- ---------- Income (loss) before (provision) benefit for income taxes........... (2,424) 56 233 411 (21,548) (Provision) benefit for income taxes........... 301 331 281 (15) 160 ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ (2,123) $ 387 $ 514 $ 396 $ (21,388) ========== ========== ========== ========== ========== Net income (loss) per share Basic................. -- -- $ 0.02 $ 0.01 $ (0.69) Diluted............... -- -- $ 0.01 $ 0.01 $ (0.69) Weighted average common shares outstanding Basic................. -- -- 30,700,000 30,700,000 30,848,689 Diluted............... -- -- 41,742,972 41,063,840 46,685,839
The accompanying notes are an integral part of the financial statements. F-4 ENTRUST TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
SERIES B SERIES A SERIES B NON-VOTING SPECIAL COMMON COMMON COMMON VOTING ACCUMULATED STOCK STOCK STOCK STOCK ADDITIONAL OTHER ACCUMULATED ----------------- -------------- ------------- ---------------- PAID-IN COMPREHENSIVE INCOME SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) (DEFICIT) ---------- ------ ------- ------ ------ ------ --------- ------ ---------- ------------- ----------- Balances at December 31, 1994............ -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ -- $ 2,095 Change in shareholder's net investment..... -- -- -- -- -- -- -- -- -- -- 1,700 Net income...... -- -- -- -- -- -- -- -- -- -- (2,123) ---------- ------ ------- ------ ------ ----- --------- ------ ------- ------ -------- Balances at December 31, 1995............ -- -- -- -- -- -- -- -- -- -- 1,672 Change in shareholder's net investment..... -- -- -- -- -- -- -- -- -- -- (2,119) Net income...... -- -- -- -- -- -- -- -- -- -- 387 ---------- ------ ------- ------ ------ ----- --------- ------ ------- ------ -------- Balances at December 31, 1996............ -- -- -- -- -- -- -- -- -- -- (60) Series A common shares issued.. 20,300,000 203 -- -- -- -- -- -- (173) -- -- Special Voting shares issued.. -- -- -- -- -- -- 7,700,000 77 (66) -- -- Series B common shares issued.. -- -- 221,052 2 -- -- -- -- 15,302 -- -- Series B Non- Voting common shares issued.. -- -- -- -- 38,948 -- -- -- 2,696 -- -- Share capital issuance costs.......... -- -- -- -- -- -- -- -- (2,015) -- -- Translation adjustment..... -- -- -- -- -- -- -- -- -- (15) -- Change in shareholder's net investment..... -- -- -- -- -- -- -- -- -- -- (1,803) Net income...... -- -- -- -- -- -- -- -- -- -- 514 ---------- ------ ------- ------ ------ ----- --------- ------ ------- ------ -------- Balances at December 31, 1997............ 20,300,000 203 221,052 2 38,948 -- 7,700,000 77 15,744 (15) (1,349) Series A common shares issued (unaudited).... 12,040 -- -- -- -- -- -- -- 26 -- -- Translation adjustment (unaudited).... -- -- -- -- -- -- -- -- -- (33) -- Net income (unaudited).... -- -- -- -- -- -- -- -- -- -- (21,388) ---------- ------ ------- ------ ------ ----- --------- ------ ------- ------ -------- Balances at June 30, 1998 (unaudited)..... 20,312,040 $203 221,052 $ 2 38,948 $ -- 7,700,000 $ 77 $15,770 $ (48) $(22,737) ========== ====== ======= ====== ====== ===== ========= ====== ======= ====== ======== TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ------------- Balances at December 31, 1994............ $ 2,095 Change in shareholder's net investment..... 1,700 Net income...... (2,123) ------------- Balances at December 31, 1995............ 1,672 Change in shareholder's net investment..... (2,119) Net income...... 387 ------------- Balances at December 31, 1996............ (60) Series A common shares issued.. 30 Special Voting shares issued.. 11 Series B common shares issued.. 15,304 Series B Non- Voting common shares issued.. 2,696 Share capital issuance costs.......... (2,015) Translation adjustment..... (15) Change in shareholder's net investment..... (1,803) Net income...... 514 ------------- Balances at December 31, 1997............ 14,662 Series A common shares issued (unaudited).... 26 Translation adjustment (unaudited).... (33) Net income (unaudited).... (21,388) ------------- Balances at June 30, 1998 (unaudited)..... $ (6,733) =============
The accompanying notes are an integral part of the financial statements. F-5 ENTRUST TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- -------- ------- -------- (UNAUDITED) Cash flows from operating activities: Net income (loss).............. $(2,123) $ 387 $ 514 $ 396 $(21,388) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................. 144 204 360 177 400 Adjustment to cumulative translation account.......... -- -- (15) (2) (33) Deferred income taxes......... 10 4 (743) (229) (288) Acquired in-process research and development.............. -- -- -- -- 20,208 Changes in assets and liabilities: (Increase) decrease in accounts receivable......... 398 (967) (4,665) (2,517) (2,805) (Increase) decrease in other receivables................. -- -- (2,089) (1,072) 708 (Increase) decrease in prepaid expenses............ 35 (40) (400) 55 (126) Increase (decrease) in accounts payable............ 230 647 335 350 1,674 Increase in accrued liabilities................. 29 891 1,121 2,963 270 Increase in deferred income.. 113 1,686 1,186 464 1,451 Increase (decrease) due to related party............... -- -- 2,257 1,531 (1,561) ------- ------- -------- ------- -------- Net cash provided by (used in) operating activities......... (1,164) 2,812 (2,139) 2,116 (1,490) ------- ------- -------- ------- -------- Cash flows from investing activities: Purchases of property and equipment..................... (536) (693) (895) (438) (995) Purchases of short-term investments................... -- -- (12,308) (2,477) (5,052) Dispositions of short-term investments................... -- -- 3,695 -- 11,878 Payment on purchase of r/3/ Security Engineering AG................ -- -- -- -- (4,391) ------- ------- -------- ------- -------- Net cash provided by (used in) investing activities......... (536) (693) (9,508) (2,915) 1,440 ------- ------- -------- ------- -------- Cash flows from financing activities: Proceeds from long-term debt... -- -- 1,449 -- -- Repayment of long-term debt.... -- -- -- -- (1,419) Transfers from Nortel.......... 6,070 9,716 -- -- -- Transfers to Nortel............ (4,370) (11,835) (1,803) (1,803) -- Proceeds from exercise of stock options....................... -- -- -- -- 26 Proceeds from issuance of common and special voting stock, net of issuance costs of $2,015..................... -- -- 16,026 16,026 -- ------- ------- -------- ------- -------- Net cash provided by (used in) financing activities......... 1,700 (2,119) 15,672 14,223 (1,393) ------- ------- -------- ------- -------- Net change in cash and cash equivalents.................... -- -- 4,025 13,424 (1,443) Cash and cash equivalents at beginning of period............ -- -- -- -- 4,025 ------- ------- -------- ------- -------- Cash and cash equivalents at end of period...................... $ -- $ -- $ 4,025 $13,424 $ 2,582 ======= ======= ======== ======= ======== Non-cash investing activities: Issuance of redeemable Series A common stock for property and equipment, current assets, and technology, net of current li- abilities and related party note.......................... -- -- -- -- 17,013 ======= ======= ======== ======= ========
The accompanying notes are an integral part of the financial statements. F-6 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) 1. BACKGROUND AND BASIS OF PRESENTATION BACKGROUND In January of 1994, Northern Telecom Limited, and its subsidiary Northern Telecom Inc. (collectively "Nortel"), established the Secure Networks group (the "Division") to pursue the development and sales of public key infrastructure ("PKI") products. PKI products combine powerful public key data encryption technology with transparent, life cycle digital certificate management to enable users to communicate securely over public and private networks. During 1996, Nortel announced its intention to create a separate company, Entrust Technologies Inc. (the "Company") consisting of the operations of the Division (the "Separation"). The Company was incorporated in December 1996 with nominal share capital, all of which was contributed by Nortel. At the close of business on December 31, 1996, Nortel transferred to the Company certain of the assets and liabilities, intellectual property, rights, licenses and contracts of the Division of Nortel. In exchange Nortel received 20,300,000 shares of the Company's Series A common stock, 7,700,000 shares of the Company's Special Voting stock, and cash consideration. At the close of business on December 31, 1996, the Company issued 260,000 shares of its Series B common stock in a private placement for $100 per share less underwriting costs and commissions of $7.75 per share. After the completion of the private placement, Nortel owned approximately 73.0% of the outstanding shares of the Company's common stock assuming conversion of the Series B common stock and Series B Non-Voting common stock into an aggregate of 13,063,836 shares of Series A common stock. BASIS OF PRESENTATION These consolidated financial statements have been prepared for the purpose of presenting the balance sheets of the Company as at December 31, 1997 and June 30, 1998 and the related statements of operations, shareholders' equity and cash flows for the year ended December 31, 1997 and for the six months ended June 30, 1997 and 1998. The historical comparative year results, including the balance sheet as at December 31, 1996 and the related statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996, represent the operations of the Division transferred to the Company from Nortel in the Separation (the "Company Business"). These historical results of the Division present the financial position of the Division as a separate reporting entity independent of Nortel and its subsidiaries, as if the Division were a stand-alone entity for these periods. The 1995 and 1996 consolidated financial statements have been prepared using the historical basis in the assets and liabilities and historical results of operations related to the Company Business. Changes in shareholder's net investment in 1995 and 1996 represent Nortel's contribution of its net investment after giving effect to the net income (loss) of the Division and net cash transfers to or from the Division. The shareholder's net investment was not transferred to the Company as part of the Separation. The 1995 and 1996 consolidated financial statements, presented here for comparison purposes, include certain Nortel corporate costs that were allocated to the Division using procedures deemed appropriate for the nature of the expenses involved. The procedures utilized various allocation bases such as invested net assets, number of employees and related payroll costs, and direct effort expended. Management believes that the allocations reflected in the 1995 and 1996 consolidated financial statements are reasonable, but they were not necessarily indicative of the costs that would F-7 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) have been incurred had the Division functioned as a stand-alone company. No corporate costs were allocated to the Company, in this way, in the year ended December 31, 1997 or the six months ended June 30, 1998. After the Separation, Nortel continued to provide certain "corporate" services to the Company. Fees charged for such services are based on Nortel's internal usage-based fee structures where applicable or Nortel's direct cost of services, including total compensation and out-of-pocket expenses. INCOME TAX PROVISION As the Company operated as a division of Nortel in fiscal years 1995 and 1996, it did not file separate income tax returns. Income tax expense has been estimated based upon an application of Nortel's effective tax rate for those periods. CASH BALANCES Prior to January 1, 1997, the Company, as a division of Nortel, participated in the Nortel cash management system and, accordingly, did not maintain cash balances other than minimal amounts. 2. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements of the Company include the accounts of its majority-owned Canadian subsidiary, Entrust Technologies Limited, its wholly-owned U.K. subsidiary, Entrust Technologies Limited, its wholly-owned Swiss subsidiary, r/3/ Security Engineering AG, and its wholly-owned German subsidiary, Entrust Technologies GmbH. The minority interest in the Canadian subsidiary has been insignificant to date. All significant intercompany transactions and accounts are eliminated in consolidation. TRANSLATION OF FOREIGN CURRENCIES The accounts of the Company's subsidiaries have been translated into U.S. dollars. Assets and liabilities have been translated at the exchange rates in effect at the balance sheet date. Revenues, expenses and cash flow amounts are translated at average rates for the period. The resultant translation adjustments are included in comprehensive income as a separate component of shareholders' equity. Gains and losses from foreign currency transactions are included in the determination of net income and are not material. The Company does not use hedging or derivatives and, as a result, may be exposed to currency translation adjustments in the future. However, the Company transacts the majority of its international sales in U.S. dollars, except for Canada where the Company has both significant costs and revenues, which the Company believes mitigates the potential impact of currency fluctuations. UNAUDITED INTERIM FINANCIAL INFORMATION The consolidated financial statements as of and for the six months ended June 30, 1997 and 1998 are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for such periods. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of results to be expected for the full fiscal year. F-8 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) REVENUE RECOGNITION The Company generates revenues primarily from licensing the rights to its software products to end-users and from sublicense fees from resellers. The Company also generates revenues from consulting, training and post-contract support ("maintenance"). In October 1997, the AICPA issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition", which the Company adopted, effective January 1, 1998. Such adoption had no effect on the Company's method of recognizing revenues. Prior to 1998, the Company's revenue recognition policy was in accordance with the provisions of the preceding authoritative guidance provided by SOP 91-1 "Software Revenue Recognition". Revenues from perpetual software license agreements are recognized as revenue upon receipt of an executed license agreement, or an unconditional order under an existing license agreement, and shipment of the software, if there are no significant remaining vendor obligations and collection of the receivable is probable. Consulting and training revenues are generally recognized as the services are performed. Consulting services are typically performed under separate service agreements and are usually performed on a time and material basis. Such services primarily consist of implementation services related to the installation and deployment of the Company's products and do no include significant customization or development of the underlying software code. The Company uses the percentage of completion method to account for large custom development contracts. Under this method, the Company recognizes revenue and profit as the work on the contract progresses. Revenue is recognized by applying the percentage of the total estimated contract cost incurred to date to the total contract value. The total project cost estimates are reviewed on a regular basis. Revenues from maintenance are recognized ratably over the term of the maintenance period, which is typically one year. If maintenance services are included free of charge or discounted in a license agreement, such amounts are unbundled from the license fee at their fair market value based upon the value established by independent sales of such maintenance to customers. COST OF REVENUES Cost of licenses includes the cost of media, product packaging, documentation and other production costs and third-party royalties. Cost of services consists primarily of salaries, benefits and allocated overhead costs related to consulting, training and customer support personnel, including the cost of third-party consultants engaged by the Company. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is calculated generally using the straight-line method over the estimated useful lives of the assets. The expected useful lives of the furniture and fixtures, computer and telecom equipment and software is three to five years and the remaining term of the facility lease for leasehold improvements. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to operations as incurred. F-9 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assets are reviewed for impairment on the basis of undiscounted cash flows. If the cash flows are less than the asset's carrying value, the asset is written down to its fair value. OTHER RECEIVABLES Other receivables include federal income tax and Canadian goods and services tax refunds of $1,644 and $1,156 at December 31, 1997 and June 30, 1998, respectively. RESEARCH AND DEVELOPMENT COSTS To date the Company has not capitalized any development costs under Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". The Company has defined attainment of technological feasibility as completion of a working model. The period of time beginning with the establishment of a working model and ending when a product is offered for sale is typically very short. Accordingly, costs that were eligible for capitalization were insignificant. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company's cash and cash equivalents are maintained with a bank and a brokerage institution. SHORT-TERM INVESTMENTS At December 31, 1997 and June 30, 1998, the Company's investments consisted of investments in a strategic cash management account which consists primarily of securities guaranteed by the U.S. government or its agencies and highly rated municipal bonds with a remaining maturity of not more than 12 months. The Company has adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities". This statement requires that securities be classified as "held to maturity", "available for sale" or "trading", and the securities in each classification be accounted for at either amortized cost or fair market value, depending upon their classification. The Company has the intent and ability to hold all investments until maturity. Therefore, all such investments are classified as held to maturity investments and carried at amortized cost in the accompanying consolidated financial statements. At December 31, 1997 and June 30, 1998, the amortized cost of the Company's investments approximated fair value. The Company's investments consisted of the following:
DECEMBER 31, 1997 JUNE 30, 1998 --------------------- --------------------- MATURITY OF MATURITY OF AMORTIZED SECURITIES AMORTIZED SECURITIES COST WITHIN ONE COST WITHIN ONE BASIS YEAR BASIS YEAR --------- ----------- --------- ----------- (UNAUDITED) Foreign debt securities........ $1,011 $1,011 $ -- $ -- Municipal debt securities...... 3,686 3,686 -- -- U.S. government agency debt se- curities...................... 3,916 3,916 1,787 1,787 ------ ------ ------ ------ $8,613 $8,613 $1,787 $1,787 ====== ====== ====== ======
F-10 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES The Company uses the asset and liability method to account for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for accounting purposes, and their respective tax bases. Deferred income tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in statutory tax rates is recognized in net income in the year of change. A valuation allowance is recorded for those deferred income tax assets whose recoverability is not sufficiently likely. INCOME PER SHARE Basic income per share is calculated by dividing the net income by the weighted average number of shares of common stock of all classes outstanding during the year, after reflecting the right of the Series B common stockholders to additional shares as described in Note 7. Diluted income per share is calculated by dividing the net income by the weighted average number of shares of common stock and potential common stock outstanding, and when dilutive, exchangeable special voting stock on an as-if converted basis, additional conversion rights of Series B common shares, and options to purchase common stock using the treasury stock method. Net income per share has been calculated as follows:
JUNE 30, DECEMBER 31, --------------------- 1997 1997 1998 ------------ ---------- ---------- (UNAUDITED) Net income available to common share- holders (in thousands)................ $ 514 $ 396 $ (21,388) ========== ========== ========== Weighted average common shares out- standing: Basic: Series A common stock................. 20,300,000 20,300,000 20,448,689 Series B common stock................. 8,842,080 8,842,080 8,842,080 Series B Non-Voting common stock...... 1,557,920 1,557,920 1,557,920 ---------- ---------- ---------- Basic weighted average common shares outstanding.......................... 30,700,000 30,700,000 30,848,689 ========== ========== ========== Basic net income per share............ $ 0.02 $ 0.01 $ (0.69) ========== ========== ========== Diluted: Basic weighted average common shares outstanding.......................... 30,700,000 30,700,000 30,848,689 Conversion rights on Special Voting stock................................ 7,700,000 7,700,000 7,700,000 Additional conversion rights of Series B Voting and Non-Voting common stock................................ 2,663,836 2,663,836 2,663,836 Net effect of dilutive options using the treasury stock method............ 679,132 -- 5,473,314 ---------- ---------- ---------- Diluted weighted average common shares outstanding.......................... 41,742,968 41,063,836 46,685,839 ========== ========== ========== Diluted net income per share.......... $ 0.01 $ 0.01 $ (0.69) ========== ========== ==========
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to market and credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company has investment policies that limit the amount of credit exposure to any one issuer and restrict placement of these investments to issuers evaluated as credit worthy. The Company maintains its cash and cash equivalents, and short-term investments, with high quality financial F-11 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) institutions and investment managers. The Company performs periodic reviews of the credit standing of its investments and the financial institutions managing those investments. The Company's customer base consists primarily of large, well-established companies or government agencies. Five customers accounted for approximately 88%, 55% and 66% of accounts receivable as of December 31, 1996 and 1997 and June 30, 1998 respectively. The Company performs ongoing credit evaluations of its customers, and generally, does not require collateral from its customers to support accounts receivable. Requests to extend significant credit to customers are reviewed and approved by senior management. The Company maintains an allowance for potential losses due to credit risk, but has not experienced significant write-offs. Management believes that the reserves for losses are adequate. The following table summarizes the changes in the allowance for doubtful accounts:
DECEMBER 31, ------------- JUNE 30, 1996 1997 1998 ------ ------ ----------- (UNAUDITED) Allowance for doubtful accounts, beginning of period............................................. $ 73 $ 129 $416 Additional provision................................ 56 287 44 ------ ------ ---- Allowance for doubtful accounts, end of period...... $ 129 $ 416 $460 ====== ====== ====
In 1995, two customers accounted for an aggregate of 71% of revenues, one of which accounted for 53% while the other customer accounted for 18% of revenues for the year. In 1996, three customers accounted for an aggregate of 64% of revenues for the year, and individually these customers accounted for 29%, 20% and 15% of revenues for that year. In 1997, three customers accounted for an aggregate of 42% of revenues. One of these customers was the same customer who accounted for 29% of 1996 revenues and this customer accounted for 19% of revenues for 1997. The other two major customers in 1997 accounted for 12% and 11% of revenues, respectively. The Company is subject to foreign currency exchange risk in the form of exposures to changes in currency exchange rates between the United States and Canada and the United Kingdom. Management periodically reviews the potential financial impact of this risk and currently believes that the Company is not subject to significant potential losses as a result. RECENT PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") and SFAS No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information regarding those segments. Management believes that the adoption of SFAS No. 131 will not have a material impact on the financial statements. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income, as defined, and its components in financial statements. The Company's adoption of SFAS No. 130 had no impact on the consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments. The Company currently does not use hedging or derivatives and, as a result, does not anticipate any impact on the financial statements. F-12 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) USE OF ESTIMATES The preparation of the consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consist of the following:
DECEMBER 31, -------------- JUNE 30, 1996 1997 1998 ------ ------ ----------- (UNAUDITED) Computer and telecom equipment................ $1,305 $1,491 $2,363 Furniture and fixtures........................ -- 86 469 Leasehold improvements........................ -- 639 808 Software distribution rights.................. 225 218 213 ------ ------ ------ 1,530 2,434 3,853 Less: accumulated depreciation and amortiza- tion......................................... (385) (754) (1,270) ------ ------ ------ Total property and equipment, net............. $1,145 $1,680 $2,583 ====== ====== ======
4. ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ------------- JUNE 30, 1996 1997 1998 ------------- ----------- (UNAUDITED) Payroll and related benefits...................... $ 915 $ 1,532 $1,744 Other............................................. 30 534 1,509 ----- ------- ------ $ 945 $ 2,066 $3,253 ===== ======= ======
5. LONG-TERM DEBT At December 31, 1997, the Company had an installment note with a financial institution. This obligation was unsecured with interest at an effective rate of 6.9% per annum and the maturities under this note are as follows:
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) For the six months ended June 30, 1998............. $ 3 $ -- For the six months ended December 31, 1998......... -- 5 For the year ended December 31, 1999............... 627 12 For the year ended December 31, 2000............... 819 13 ------ ------ 1,449 30 Less: current portion.............................. -- (11) ------ ------ $1,449 $ 19 ====== ======
F-13 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. INCOME TAXES The following table presents the U.S. and foreign components of income (loss) before income taxes and the provision for income taxes. 1995 and 1996 figures are estimated on a pro forma basis for comparative purposes.
DECEMBER 31, -------------------- 1995 1996 1997 ------- ---- ----- Income (loss) before income taxes United States...................................... $ (799) $ (8) $ 2 Foreign............................................ (1,625) 64 231 ------- ---- ----- $(2,424) $ 56 $ 233 ======= ==== ===== (Provision) benefit for income taxes Current: Federal.......................................... $ -- $-- $(337) State and local.................................. -- -- (76) Foreign.......................................... 301 331 (49) ------- ---- ----- 301 331 (462) ------- ---- ----- Deferred: Federal.......................................... -- -- 119 State and local.................................. -- -- 28 Foreign.......................................... -- -- 596 ------- ---- ----- -- -- 743 ------- ---- ----- Total benefit for income taxes....................... $ 301 $331 $ 281 ======= ==== ===== The difference between the actual income tax provision and the tax provision computed by applying the statutory Federal income tax rate to income (loss) before income taxes is attributable to the following: DECEMBER 31, -------------------- 1995 1996 1997 ------- ---- ----- Income tax (provision) benefit at 34%................ $ 824 $(19) $ (79) State and local taxes, net of Federal benefits....... -- -- (48) Foreign earnings taxed at different rate............. 257 (6) 15 Unrecorded benefit of tax losses..................... (1,081) -- -- Canadian research and development tax credits utilized............................................ 301 331 393 Utilization of tax losses carry forward.............. -- 25 -- ------- ---- ----- Total benefit for income taxes....................... $ 301 $331 $ 281 ======= ==== =====
F-14 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the deferred income tax liability classified by the source of the cumulative temporary differences that gave rise to the credit are as follows:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Tax depreciation in excess of accounting depreciation.................................... $ 19 $ 7 Amortization of Sec. 197 assets not deductible for accounting purposes......................... -- 212 Accounting provisions not deductible for tax purposes........................................ -- (200) ----- ----- $ 19 $ 19 ===== ===== The components of the deferred income tax benefit classified by source of the cumulative temporary differences that gave rise to the debit are as follows: DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Accounting provisions not deductible for tax purposes........................................ $ -- $ 147 Research and development tax credits............. -- 596 ----- ----- $ -- $ 743 ===== =====
As at December 31, 1997, the Company has available for carry-forward to reduce future Canadian federal income taxes, scientific research and experimental development investment tax credits of approximately $404. These tax credits expire in the year 2007. 7. CAPITAL STOCK On January 24, 1997, the Board of Directors declared a 10-for-1 stock split effected in the form of a stock dividend, payable to the shareholders of Series A common stock and Special Voting stock. On June 18, 1998, the Board of Directors approved an increase in the authorized number of shares of Series A common stock from 15,000,000 to 100,000,000, Preferred stock from 500,000 to 5,000,000 and Special Voting stock from 2,500,000 to 15,000,000. The Board of Directors also approved on June 18, 1998 a 4-for-1 stock split, effected in the form of a stock dividend payable to the shareholders of Series A common stock and Special Voting stock. In addition, the Board of Directors approved an amendment to the Company's Articles of Incorporation, which redesignated the Series A common stock as Common stock effective upon the completion of a public offering of the Company's Common stock. The consolidated financial statements have been restated to reflect the increase in the number of authorized shares and these stock splits. SERIES A AND SERIES B COMMON STOCK The holders of Series A and Series B common stock are entitled to one vote per share and are entitled to dividends when and if declared by the Board of Directors of the Company. The Series B Non-Voting common stock has the same rights and privileges as the Series B common stock except for the non-voting nature of the stock and it is exchangeable at the option of the holder into Series B common stock. The Company's Series B common stock and Series B Non- Voting common stock will automatically convert into 13,063,836 shares of Common stock upon completion of a public offering of the Company's Common stock. F-15 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) REDEEMABLE SERIES A COMMON STOCK The holders of the Redeemable Series A common stock are entitled to the same rights and privileges as the Series A common stock, except for the special provisions described in Note 12. At June 30, 1998, there were 1,167, 288 of these shares issued and outstanding. SPECIAL VOTING STOCK The Special Voting stock has a par value of $0.01 per share. The holders of the Special Voting stock also hold 7,700,000 Exchangeable shares in the Company's majority owned subsidiary Entrust Technologies Limited. At any time prior to December 31, 2006, the holders of the Special Voting stock have the right to exchange their shares of Special Voting stock and their Exchangeable Shares in Entrust Technologies Limited into 7,700,000 shares of Series A common stock. The Company generally also has the right to demand such exchange on or before December 31, 2006. PREFERRED STOCK The Company is authorized to issue up to 5,000,000 shares of Preferred stock in one or more series. Each such series of Preferred stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights and liquidation preferences, as shall be determined by the Board of Directors. As of June 30, 1998, the Company has not issued any shares of Preferred stock. 8. STOCK OPTIONS EMPLOYEE STOCK OPTION PLAN During the year ended December 31, 1997, the Company's shareholders approved the 1996 Stock Incentive Plan (the "Plan") applicable to the Company's full- time employees, officers, and consultants and authorized 7,228,920 shares of Series A common stock for issuance thereunder. In May 1998, the Company's shareholder's increased the authorized number of Series A common stock available for issuance under this plan to 7,630,920. On June 18, 1998, the Company's Board of Directors approved an increase of 2,369,080 in the number of shares available under the Plan, subject to shareholder approval. The options under the Plan are granted at the then-current fair market value of the Series A common stock of the Company and generally may be exercised in equal proportions during the years following the first and second anniversary of the date of grant, and expire on the tenth anniversary or upon termination of employment. With respect to options granted to the key management team, 20% of the options become exercisable upon grant date, with an additional 20% of the options exercisable at each successive anniversary of the grant date until the fourth anniversary of the grant date. F-16 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the activity under the Plan is set forth below:
OPTIONS OUTSTANDING --------------------------- SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE FOR GRANT SHARES EXERCISE PRICE ---------- --------- ---------------- Balance at December 31, 1996....... -- -- Authorized....................... 7,228,920 -- Granted.......................... (6,628,800) 6,628,800 $2.16 Forfeited........................ 140,720 (140,720) 2.13 ---------- --------- Balance at December 31, 1997....... 740,840 6,488,080 2.16 Authorized....................... 2,771,080 -- Granted.......................... (985,516) 985,516 8.19 Forfeited........................ 75,792 (75,792) 2.81 Exercised........................ -- (12,040) 2.13 ---------- --------- Balance at June 30, 1998 (unaudited)....................... 2,602,196 7,385,764 2.96 ---------- --------- Exercisable at December 31, 1997... -- 658,120 2.15 ========== ========= Exercisable at June 30, 1998 (unaudited)....................... -- 2,201,220 2.29 ========== =========
The following table summarizes information concerning currently outstanding options as at June 30, 1998 (unaudited):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - ------------------------ ----------- ---------------- -------- ----------- -------- $2.13 to $2.50.......... 6,411,360 8.7 years $2.17 2,141,220 $ 2.13 $6.25 to $12.08......... 974,404 9.7 years $8.22 60,000 $12.08 --------- --------- 7,385,764 2,201,220 ========= =========
STOCK BASED COMPENSATION The Company applies APB Opinion No. 25 and related interpretations in accounting for its employee stock-based compensation plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans because the exercise price of each option equals or exceeds the fair value of the underlying stock as of the grant date for each stock option. Had compensation costs for the Company's Employee Stock Option Plan been determined based on the fair value at the grant date for awards under the Plan, consistent with the methodology prescribed under SFAS 123, the Company's net income and income per share would have been decreased to the following pro forma amounts.
DECEMBER 31, --------------------- 1995 1996 1997 ------- ---- ------- Net income (loss), as reported....................... $(2,123) $387 $ 514 Estimated stock based compensation costs............. -- -- (1,535) ------- ---- ------- Pro forma net income (loss).......................... $(2,123) $387 $(1,021) ======= ==== ======= Basic and diluted net (loss) per share............... -- -- $ (0.03) ======= ==== =======
F-17 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average fair value of all options granted during fiscal 1997 was estimated as of the date of grant using the minimum value model and the Black-Scholes option pricing model with the following weighted average assumptions.
DECEMBER 31, -------------- 1996 1997 ------ ------ Expected option life, in years.......................... -- 6 Risk free interest rate................................. -- 6% Dividend yield.......................................... -- --
The weighted average fair value for stock options granted during 1997 was $0.66 per option. 9. RELATED PARTY TRANSACTIONS Significant related party transactions with the Company's parent, Nortel, and affiliated companies, not otherwise disclosed in the financial statements, include the following (information related to the six month periods ended June 30, 1997 and 1998 is unaudited). The Company paid $2,872, $3,656 and $273 in the years ended December 31, 1995, 1996, and 1997, respectively, $273 for the six months ended June 30, 1997, and none for the same period in 1998, for research and development services provided by Bell Northern Research Ltd. ("BNR"), a subsidiary of Nortel. The research and development services and other costs of revenue were purchased at cost from BNR. Purchases from BNR are settled through the intercompany accounting system of Nortel. Revenues include sales to Nortel for the years ended December 31, 1995, 1996 and 1997 of $323, $300 and $495, respectively and $176 and $172 for the six months ended June 30, 1997 and 1998, respectively. Also, revenues for the year ended December 31, 1997 include sales to affiliated companies totaling $332. Sales to affiliated companies were immaterial in 1995 and 1996. Sales to affiliated companies were $255 and $1,795 for the six months ended June 30, 1997 and 1998, respectively. During the year ended December 31, 1997, the Company paid Nortel $299 for services rendered and $137 and $60 for the six months ending June 30, 1997 and 1998, respectively. These transactions are in the normal course of operations, and are measured at their exchange amounts, which is the amount of consideration established and agreed to by the related parties. Also, during the year ended December 31, 1997, and the six months ended June 30, 1998, the Company reimbursed Nortel for expenses paid by Nortel on behalf of the Company, net of revenues collected by Nortel on behalf of the Company. The net expenses reimbursed amounted to $5,610 for fiscal 1997 and $3,155 and $610 for the six months ended June 30, 1997 and June 30, 1998, respectively. These amounts have been recorded in these financial statements at the carrying amount of the transactions involved. Balances due to/from the related party, arising from the sales of product and receipt of services referred to above, are payable net 30 days from the date of the related intercompany invoice. 10. COMMITMENTS The Company leases administrative and sales offices and certain property and equipment under noncancellable operating leases expiring through 2003. Total rent expense under such leases for the F-18 ENTRUST TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) years ended December 31, 1995, 1996 and 1997 were $35, $100, $956, respectively, and for the six month periods ended June 30, 1997 and 1998 were $272 and $1,206, respectively. At June 30, 1998 (unaudited), the future minimum lease payments under operating leases were as follows: 1998 (six months)................................................ $1,307 1999............................................................. 2,525 2000............................................................. 2,258 2001............................................................. 1,652 2002............................................................. 821 Thereafter....................................................... 158 ------ Total future minimum lease payments.............................. $8,721 ======
11. SEGMENTED INFORMATION BUSINESS SEGMENT The Company operates in one business segment: the design, production and sale of software products for encryption and digital signature. GEOGRAPHIC SEGMENTS Identifiable net assets are those net assets of the Company (1996--the Division) that are identified with the operations in the geographic areas.
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Identifiable net assets United States................................ $(25) $15,012 Europe....................................... -- 30 Canada....................................... (35) (380) ---- ------- Net assets..................................... $(60) $14,662 ==== =======
Transfers between geographic areas are made at prices based on total cost of the product to the supplying segment. Customer revenues and income (loss) before income taxes by destination for the years December 31, 1995, 1996 and 1997 were:
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Revenues: United States.................... $ 1,292 $ 9,758 $14,978 Europe........................... -- 473 1,359 Canada........................... 2,681 2,571 8,669 ------- ------- ------- Total revenues..................... $ 3,973 $12,802 $25,006 ======= ======= ======= Income (loss) before income taxes: United States.................... $ (799) $ (8) $ 2 Europe........................... -- -- 231 Canada........................... (1,625) 64 -- ------- ------- ------- Total income (loss) before income taxes............................. $(2,424) $ 56 $ 233 ======= ======= =======
F-19 ENTRUST TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (UNAUDITED) On June 8, 1998, the Company completed the acquisition of r/3/ Security Engineering AG ("r/3/"), a company based in Zurich, Switzerland which provides consulting, applied research and product development services related to commercial security and encryption solutions. Pursuant to the Share Purchase Agreements dated May 30, 1998, entered into between the Company and the shareholders of r/3/, the Company agreed to acquire all the outstanding shares of r/3/ in exchange for approximately 1,167,288 shares of the Company's Series A common stock, valued at $14.58 per share and cash consideration of $4,391. In the event the Company's Series A common stock (or any common stock into which it would convert) is not listed on a United States Exchange within one year of the closing of the acquisition, the r/3/ shareholders have the right to require the Company to repurchase the Series A common shares at $14.58 per share. Additionally, if the average closing price of the Company's Series A common stock after the first 10 days of trading following an initial public offering of the stock (the "Market Price") is less than $12.08, then the Company will be required to pay the difference between the Market Price and $12.08 to the r/3/ shareholders in cash or in additional stock. This acquisition has been accounted for under the purchase method of accounting. The aggregate purchase price was $23,774, which included approximately $4,391 in cash, $17,013 representing 1,167,288 shares of Redeemable Series A common stock, approximately $994 in assumed liabilities and acquisition expenses, and approximately $1,376 of adjustments to the June 8, 1998 opening balance sheet of r/3/ to record the acquired assets and liabilities at fair value. In connection with the purchase price allocation, the Company obtained an independent appraisal of the intangible assets which indicated approximately $20,200 of the acquired intangible assets consisted of in-process product development. The development of these projects had not reached technological feasibility and the technology has no alternative future use and, accordingly, the $20,200 was included as an expense in the consolidated statements of operations for the six months ended June 30, 1998. F-20 REPORT OF THE STATUTORY AUDITORS To the general meeting of the shareholders of r/3/ Security Engineering AG, Aathal-Seegraben As statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement and notes to the financial statements) of r/3/ Security Engineering AG, Aathal-Seegraben, for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence. Our audit was conducted in accordance with auditing standards recognised by the profession, which are substantially the same as generally accepted auditing standards in the United States, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accounting records, the financial statements and the proposed appropriation of available earnings and free reserves comply with accounting principles generally accepted in Switzerland, the Swiss law and the company's articles of incorporation. Generally accepted accounting principles in Switzerland vary in certain respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of net income for the years ended December 31, 1997 and 1996, to the extent summarized in Note 7 to the financial statements. We recommend that the financial statements submitted to you be approved. WILLI & PARTNER AG /s/ Marco Willi Auditor in charge /s/ Bruno Wust Auditor in charge Wetzikon, June 2, 1998 F-21 R/3/ SECURITY ENGINEERING AG BALANCE SHEET
DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- CHF CHF ASSETS Current assets Cash...................................... 1,653,352.19 1,220,974.97 Securities (incl. treasury stock)......... 10,000.00 49,528.00 Accounts Receivable....................... 1,088,924.20 683,766.40 ./. Value Adjustments (Del credere)....... (87,000.00) (87,000.00) Other Accounts Receivable Third Parties............................. 29,816.37 28,600.36 Shareholders.............................. 9,176.60 -- Prepaid Expenses & Others................. 132,825.00 95,045.95 Inventory Work in Progress................ 63,410.00 67,445.00 ------------ ------------ Total Current Assets.................... 2,900,504.36 2,058,360.68 ------------ ------------ Fixed Assets Financial Investments Investment in Subsidiary.................. 200,000.00 -- Tangible Fixed Assets Office Equipment / Computers / Communication Equipment.................. 316,524.70 374,259.10 Intangible Assets Development Costs......................... 530,000.00 -- ------------ ------------ Total Fixed Assets...................... 1,046,524.70 374,259.10 ------------ ------------ Total Assets............................ 3,947,029.06 2,432,619.78 ============ ============ LIABILITIES AND EQUITY Liabilities Accounts Payable Third Parties............................. 126,931.50 122,679.55 Related Companies......................... 19,915.50 -- Banks...................................... -- 9,623.05 Other Accounts Payable (short term) Third Parties............................. 319,721.27 498,187.34 Shareholders.............................. 68,199.05 183,943.08 Accrued Liabilities & Deferred Income...... 717,117.67 368,199.16 Long Term Liabilities Third Parties............................. -- 63,484.00 Shareholders.............................. 1,614,662.00 114,662.00 Provisions Guaranties................................ 55,000.00 55,000.00 Others.................................... 136,000.00 235,275.75 ------------ ------------ Total Liabilities....................... 3,057,546.99 1,651,053.93 ------------ ------------ Shareholders Equity Share Capital.............................. 400,000.00 400,000.00 Legal Reserve Fund......................... 20,200.00 13,500.00 Reserves for Treasury Stock................ 10,000.00 -- Free Reserves.............................. 351,000.00 235,000.00 Cumulative Profit Carry Forward............................. 365.85 946.62 Profit Current Year....................... 107,916.22 132,119.23 ------------ ------------ Total Shareholders Equity............... 889,482.07 781,565.85 ------------ ------------ Total Liabilities & Equity.............. 3,947,029.06 2,432,619.78 ============ ============
F-22 R/3/ SECURITY ENGINEERING AG INCOME STATEMENT
1997 1996 ------------ ------------ CHF CHF EARNINGS Earning Sales...................................... 5,530,705.13 5,213,708.55 ./. Value Adjustments Accounts Receivable........ -- (10,000.00) Adjustments Work in Progress..................... 15,965.00 11,475.00 Activated Development Costs...................... 530,000.00 -- ------------ ------------ Total Earnings................................. 6,076,670.13 5,215,183.55 ------------ ------------ EXPENSES Materials & Services............................... 504,691.22 272,824.45 Personnel Expenses................................. 4,653,153.25 3,726,586.47 Rentals & Leasing.................................. 159,367.60 130,599.50 Financial Expenses................................. 36,336.55 10,033.35 Maintenance & Repair............................... 178,657.05 99,697.70 Insurance on Assets................................ 30,309.30 17,490.40 Professional Literature............................ 12,645.65 11,583.05 Office & Administration............................ 222,241.33 203,308.53 Advertising & Exhibitions.......................... 66,184.45 238,308.40 Other Expenses..................................... 8,458.40 16,598.76 Depreciation / Value Adjustments................... 188,130.00 283,555.55 ------------ ------------ Total Expenses................................. 6,060,174.80 5,010,586.16 ------------ ------------ Operating Result before Taxes...................... 16,495.33 204,597.39 ------------ ------------ NON-OPERATIONAL & EXTRAORDINARY EARNINGS Financial Earnings................................. 5,413.88 1,737.50 Profit on Sales of Assets.......................... 150,000.00 -- ------------ ------------ 155,413.88 1,737.50 NON-OPERATIONAL & EXTRAORDINARY EXPENSES & TAXES Government Taxes................................... 63,992.99 74,215.66 ------------ ------------ Net Profit/Loss--non-operational, extraordinary and tax positions..................................... 91,420.89 (72,478.16) ------------ ------------ Net Profit Enterprise.............................. 107,916.22 132,119.23 ============ ============
F-23 R/3/ SECURITY ENGINEERING AG NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 DECEMBER 31, 1996 CHF CHF ----------------- ----------------- 1.Liabilities "leasing contracts"...... 28,552 49,319 2.Insurance Value Fixed Assets......................... 730,000 730,000 3.Liabilities "Employee Benefits Plan"................................. -- 91,755 4.Investments in Subsidiaries: Swiss Security Service Laboratory, CH-Solothurn Book Value: 200,000 -- Share Capital: 400,000 -- Loss Subsidiary 1997: 102,700 -- Participating Share in %: 50% -- 5.Own Shares\Treasury Stock Purchase as per 06/10/1997 Number of Shares: 10 -- Sold as per: -- Number of Shares: -- -- Inventory as per 12/31/1997: 10 --
6. OTHER REMARKS The foregoing balance sheet and income statement meet the legal requirements of Swiss law as well as the principles of lawful accounting. The depreciations and value adjustments were made adequately and within Swiss tax provisions. 7. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES The financial statements have been prepared in accordance with accounting principles generally accepted in Switzerland ("Swiss GAAP") which, in certain respects, differ from accounting principles generally accepted in the United States ("US GAAP"). The following is a reconciliation of net income and shareholder's equity from Swiss GAAP to US GAAP, followed by a description of the accounting principle differences:
1997 1996 CHF CHF -------- ------- Reconciliation of Net Income Net income per local financial statements............... 107,916 132,119 Description of items having the effect of increasing reported income: Excess provisions not required under US GAAP............ -- 23,000 Deferred income tax provided on a US GAAP basis......... 16,800 -- Income tax provided on a statutory full accruals basis.. 18,485 -- Description of items having the effect of decreasing reported income: Equity method of accounting for investment.............. (1,350) -- Deferral of future license fees revenue................. (64,939) (72,000) Recognition of development costs under US GAAP.......... (530,000) -- Income tax provided on a statutory full accruals basis.. -- (25,744) Deferred income tax provided on a US GAAP basis......... -- (16,800) Accrued liabilities..................................... (50,623) -- -------- ------- Net income according to generally accepted accounting principles in the United States........................ (503,711) 40,575 ======== =======
F-24 R/3/ SECURITY ENGINEERING AG NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 CHF CHF -------- ------- Reconciliation of Shareholders' Equity Shareholders' equity per local financial statements..... 889,482 781,566 Description of items having the effect of increasing re- ported shareholders' equity: Excess provisions not required under US GAAP............ 142,000 142,000 Description of items having the effect of decreasing reported shareholders' equity: Equity method of accounting for investment.............. (1,350) -- Deferral of future license fees revenue................. (136,939) (72,000) Shareholder stock....................................... (10,000) -- Recognition of development costs under US GAAP.......... (530,000) -- Income tax provided on a statutory full accruals basis.. (7,259) (25,744) Deferred income tax provided on a US GAAP basis......... -- (16,800) Accrued liabilities..................................... (50,623) -- -------- ------- Shareholders' equity according to generally accepted accounting principles in the United States............. 295,311 809,022 ======== =======
Excess Provisions Swiss GAAP provides for the recognition of certain provisions (e.g., uncollectable accounts receivable and warranty reserves) based upon income tax planning schemes. These provisions are provided for under US GAAP based upon reasonable estimates as determined by management. The adjustments shown as "excess provisions not required under US GAAP" represent the differences between the two accounting principles. Equity Method of Accounting US GAAP requires that companies record investments in subsidiaries, which it maintains significant influence over management of the business, using the equity method of accounting. The adjustment shown as "equity method of accounting for investment" represents the difference in the accounting for a subsidiary recorded using the cost method of accounting provided by Swiss GAAP versus the equity method of accounting required by US GAAP. Deferral of Future License Fees Revenue US GAAP requires that revenues, which are not earned, be deferred and recognized when the earnings process has been completed. The adjustments shown as "deferral of future license fees revenue" removes from income amounts for which the earnings process is not complete. The Company will recognize such future revenues under U.S. GAAP when the related software is delivered. Development Costs US GAAP requires that when an asset held for production becomes impaired that the carrying value of such asset be adjusted to reflect the impairment. The adjustments shown as "recognition of development costs under US GAAP" represents charges to income for previously deferred product development costs of a product that has been discontinued for future production. F-25 R/3/ SECURITY ENGINEERING AG NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Accrued Liabilities US GAAP requires that expenses be recognized in the period incurred. The adjustment shown as "accrued liabilities" represents costs incurred during the current period but not recorded until the subsequent period under Swiss GAAP. Shareholders' Stock US GAAP requires that investments in stock of the same company be reclassified to shareholders' equity to offset the shareholders' capital stock. The adjustment shown as "shareholder stock" represents the reclassification of an investment in the shareholder stock by the company. Swiss GAAP does not require that a statement of cash flow be presented as a basic financial statement. The following is a statement of cash flows for the years ended December 31, 1997 and 1996 compiled in accordance with US GAAP.
1997 1996 CHF CHF ------------ ------------ Cash flows from operating activities: Net income as reconciled under US GAAP........... (503,711.00) 40,575.00 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 188,130.00 283,556.00 Gain on sale of investment..................... (150,000.00) -- Change in assets and liabilities (Increase)/decrease in accounts receivable... (354,535.00) 25,711.00 (Increase)/decrease in other debtors......... (10,393.00) 28,839.00 (Increase) in work in progress............... (8,010.00) 42,900.00 Increase in prepaid expenses................. (37,779.00) (79,222.00) Increase in accounts payable and accrued expenses.................................... 265,653.00 340,716.00 (Decrease)/increase in interest and income taxes payable................................. (5,863.00) 59,744.00 (Decrease)/increase in deferred taxes.......... (16,800.00) 16,800.00 (Decrease)/increase in other liabilities....... (236,894.00) 141,379.00 ------------ ------------ Total adjustments............................ (366,491.00) 860,423.00 ------------ ------------ Net cash (used in) provided by operating activities.................................. (870,202.00) 900,998.00 Cash flows from investing activities: Proceeds from sale of investment................. 250,000.00 -- Proceeds from sale of securities................. 49,528.00 -- Purchase of investments.......................... (200,000.00) (664.00) Purchase of capital assets....................... (233,466.00) (315,420.00) ------------ ------------ Net cash used in investing activities........ (133,938.00) (316,084.00) Cash flows from financing activities Increase in shareholder loans.................... 1,500,000.00 -- Repayment of third party loans................... (63,484.00) (31,056.00) ------------ ------------ Net cash provided by (used in) financing activities.................................. 1,436,516.00 (31,056.00) Net increase in cash............................... 432,376.00 553,858.00 Cash at beginning of year.......................... 1,220,975.00 667,117.00 ------------ ------------ Cash at end of year................................ 1,653,351.00 1,220,975.00 ============ ============
F-26 R/3/ SECURITY ENGINEERING AG NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: The amounts paid in interest and income taxes for the years ended December 31, 1997 and 1996 approximate such amounts reported as expensed in the Income Statement for such periods. PROPOSED APPROPRIATION OF AVAILABLE EARNINGS AND FREE RESERVES
CHF ---------- Carry forward..................................................... 365.85 Profit current year............................................... 107,916.22 ---------- Cumulative profit December 31, 1997 .............................. 108,282.07
The board of directors proposes the appropriation of the cumulative profit as follows:
CHF ---------- Distribution of profit in form of shares of the Securights AG (subsidiary, in the process of being founded) during 1998....... 102,500.00 Allocation to the legal reserve fund, according to the requirements of Swiss law (article 671 I 1 OR).................. 5,400.00 Carry forward.................................................... 382.07 ---------- 108,282.07
Proposition of the board of directors to allocate funds of the free reserves to the legal reserve fund in order to comply with article 671 II 3 OR (payment of bonus/dividend of CHF 102,500.--out of the current year profit)
CHF ---------- Free reserves before allocation.................................. 351,000.00 ./. allocation to the legal reserve fund......................... (8,250.00) ---------- Free reserves before allocation.................................. 342,750.00
Further a proposition of the board of directors to distribute a dividend of CHF 227,500.--during 1998 from the free reserves, in addition the proposition of the board of directors to allocate funds of the free reserves to the legal reserve fund in order to comply with article 671 II 3 OR (payment of bonus/dividend of CHF 227,500.--from the free reserves)
CHF ----------- Free reserves before allocation............................... 342,750.00 Distribution of a bonus/dividend during 1998 from the free reserves..................................................... (227,500.00) Allocation to the legal reserve fund, according to the requirements of Swiss law (article 671 II 3 OR).............. (22,750.00) ----------- Free reserves after distribution of the bonus/dividend and allocation to the legal reserve fund......................... 92,500.00
Proposition of the board of directors to distribute the above mentioned dividend in form of shares of the Securights AG (subsidiary, in the process of being founded) F-27 ENTRUST TECHNOLOGIES INC PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On June 8, 1998 the Company completed the acquisition of r/3/ Security Engineering AG ("r/3/"), a company based in Zurich, Switzerland which provides consulting, applied research and product development services related to commercial security and encryption solutions. The accompanying unaudited condensed consolidated statements of operations for the six months ended June 30, 1998 and the year ended December 31, 1997 assume the acquisition took place as of the beginning of the periods presented, and combine the Company's and r/3/'s statements of operations. Adjustments have been made to r/3/'s statements to conform to the Company's presentation. The statements of operations for r/3/ were translated at the average exchange rates for the year ended December 31, 1997 and for the six months ended June 30, 1998. Adjustments were also made to conform to U.S. generally accepted accounting principles. The acquisition has been accounted for as a purchase. The purchase price allocation reflected in the accompanying pro forma condensed consolidated financial statements has been prepared on a preliminary basis. The purchase price allocation will be adjusted based on final valuations of assets acquired. The purchase price allocation includes a write-off of approximately $20,208,000 for acquired in-process research and development costs. (See notes to Pro Forma Condensed Consolidated Financial Statements.) The method of combining historical financial statements for preparation of the pro forma condensed consolidated financial statements is for presentation only. Actual statements of operations of the companies will be combined commencing on the effective date. The unaudited pro forma information does not purport to represent what the Company's operations or financial position actually would have been had the acquisition occurred on the dates specified, or to project the Company's results of operation or financial position for any future period or date. The accompanying pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and related notes thereto for both the Company and r/3/. F-28 ENTRUST TECHNOLOGIES INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL PRO FORMA ----------------- ------------------------ R/3/ ENTRUST ADJUSTMENTS ENTRUST ----- ---------- ----------- ---------- Revenues: License...................... $ 83 $ 15,845 -- $ 15,928 Services and maintenance..... 1,518 5,093 -- 6,611 ----- ---------- ------- ---------- Total revenues............. 1,601 20,938 -- 22,539 ----- ---------- ------- ---------- Cost of revenues: License...................... 3 812 -- 815 Services and maintenance..... 883 3,089 -- 3,972 ----- ---------- ------- ---------- Total cost of revenues..... 886 3,901 -- 4,787 ----- ---------- ------- ---------- Gross profit................... 715 17,037 -- 17,752 ----- ---------- ------- ---------- Operating expenses: Sales and marketing.......... 415 10,982 -- 11,397 Research and development..... 501 5,346 -- 5,847 General and administrative... 674 2,266 356 (a) 3,296 Acquired in-process research and development............. -- 20,208 (20,208)(b) -- ----- ---------- ------- ---------- Total operating expenses... 1,590 38,802 (19,852) 20,540 ----- ---------- ------- ---------- Loss from operations........... (875) (21,765) 19,852 (2,788) Interest income................ 1 217 (73)(c) 145 ----- ---------- ------- ---------- Loss before benefit for income taxes......................... (874) (21,548) 19,779 (2,643) Benefit for income taxes....... -- 160 -- 160 ----- ---------- ------- ---------- Net income (loss).............. $(874) $ (21,388) $19,779 $ (2,483) ===== ========== ======= ========== Net income (loss) per share Basic........................ $ (0.69) $ (0.08)(d) Diluted...................... $ (0.69) $ (0.08)(d) Weighted average common shares outstanding Basic........................ 30,848,689 31,873,308 (e) Diluted...................... 46,685,839 47,710,458 (e)
F-29 ENTRUST TECHNOLOGIES INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL PRO FORMA ------------------ ----------------------- R/3/ ENTRUST ADJUSTMENTS ENTRUST ------ ---------- ----------- ---------- Revenues: License..................... $ 688 $ 16,486 -- $ 17,174 Services and maintenance.... 2,941 8,520 -- 11,461 ------ ---------- ----- ---------- Total revenues............ 3,629 25,006 -- 28,635 ------ ---------- ----- ---------- Cost of revenues: License..................... 10 502 -- 512 Services and maintenance.... 1,581 4,414 -- 5,995 ------ ---------- ----- ---------- Total cost of revenues.... 1,591 4,916 -- 6,507 ------ ---------- ----- ---------- Gross profit.................. 2,038 20,090 -- 22,128 ------ ---------- ----- ---------- Operating expenses: Sales and marketing......... 582 11,193 -- 11,775 Research and development.... 866 5,692 -- 6,558 General and administrative.. 1,024 3,695 710 (a) 5,429 ------ ---------- ----- ---------- Total operating expenses.. 2,472 20,580 710 23,762 ------ ---------- ----- ---------- Loss from operations.......... (434) (490) (710) (1,634) Interest income (expense)..... 2 723 (176)(c) 549 Gain on sale of assets........ 99 -- -- 99 ------ ---------- ----- ---------- Income (loss) before benefit for income taxes............. (333) 233 (886) (986) Benefit for income taxes...... -- 281 -- 281 ------ ---------- ----- ---------- Net income (loss)............. $ (333) $ 514 $(886) $ (705) ====== ========== ===== ========== Net income (loss) per share Basic....................... $ 0.02 $ (0.02)(d) Diluted..................... $ 0.01 $ (0.02)(d) Weighted average common shares outstanding Basic....................... 30,700,000 31,867,288 (e) Diluted..................... 41,742,972 42,910,260 (e)
F-30 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company and the Selling Stockholders have agreed to sell to each of the U.S. Underwriters named below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, NationsBanc Montgomery Securities LLC and Warburg Dillon Read LLC, a subsidiary of UBS AG,are acting as representatives, has severally agreed to purchase from the Company and the Selling Stockholders, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF COMMON UNDERWRITER STOCK ----------- --------- Goldman, Sachs & Co................................................ Donaldson, Lufkin & Jenrette Securities Corporation................ NationsBanc Montgomery Securities LLC.............................. Warburg Dillon Read LLC, a subsidiary of UBS AG.................... --------- Total............................................................ 5,653,334 =========
Under the terms and conditions of the Underwriting Agreement, the U.S. Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The U.S. Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The U.S. Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company and the Selling Stockholders have entered into an underwriting agreement (the "International Underwriting Agreement") with the underwriters of the international offering (the "International Underwriters") providing for the concurrent offer and sale of 1,413,333 shares of Common Stock in an international offering outside the United States. The offering price and aggregate underwriting discounts and commissions per share for the two offerings are identical. The closing of the offering made hereby is a condition to the closing of the international offering, and vice versa. The representatives of the International Underwriters are Goldman Sachs International, Donaldson, Lufkin & Jenrette International, NationsBanc Montgomery Securities LLC and Warburg Dillon Read, a division of UBS AG. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two offerings, each of the U.S. Underwriters named herein has agreed that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will offer, sell or deliver the shares of Common Stock, directly or indirectly, only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as part of the distribution of the shares offered as a part of the international offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the United States or to any U.S. persons or (b) to any person U-1 whom it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons, and (ii) cause any dealer to who it may sell such shares at any concession to agree to observe a similar restriction. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Selling Stockholders have granted the U.S. Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 848,000 additional shares of Common Stock solely to cover over- allotments, if any. If the U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 5,653,334 shares of Common Stock offered. The Selling Stockholders have granted the International Underwriters a similar option to purchase up to an aggregate of 212,000 additional shares of Common Stock. The Company, its directors, officers, stockholders, including the Selling Stockholders, and optionholders have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, they will not offer, sell, contract to sell or otherwise dispose of any securities of the Company (other than pursuant to employee stock option plans existing, or on the conversion or exchange of convertible or exchangeable securities outstanding, on the date of this Prospectus) which are substantially similar to the shares of the Common Stock or which are convertible into or exchangeable for securities which are substantially similar to the shares of the Common Stock without the prior written consent of the representatives, except for the shares of Common Stock offered in connection with the Offerings. In addition, the Company may issue shares of Common Stock in connection with any acquisition of another company if the terms of such issuance provide that such Common Stock shall not be resold prior to the expiration of the 180-day period referenced in the preceding sentence. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price and subject to local laws for any international sales, up to approximately 353,333 shares of Common Stock for certain funds affiliated with the Company's Japanese distributor (the "Distributor Funds"). The Distributor Funds have expressed an interest in purchasing such shares in the Offerings and their willingness to enter into lock-up agreements with the Representatives of the Underwriters under which they will agree not to sell shares for 180 days after the date of the Prospectus. In addition, at the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, 346,267 shares of Common Stock for certain employees and associates of the Company. There can be no assurance that any of the reserved shares will be purchased. The number of shares available for sale to the general public in the Offerings will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered to the general public on the same basis as the other shares offered hereby. The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Common Stock offered by them. In connection with the Offerings, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions in connection with the Offerings. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock; and syndicate short positions involve the sale by the Underwriters of a U-2 greater number of shares of Common Stock than they are required to purchase from the Company in the Offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker- dealers in respect of the securities sold in the Offerings for their account may be reclaimed by the syndicate if such shares of Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. An affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, a representative of the Underwriters, is the beneficial owner of approximately 500,000 shares of the Company's Common Stock. J.P. Morgan Securities, Inc., which is expected to be an Underwriter in the Offerings, is an affiliate of a customer of the Company and an affiliate of the Morgan Guaranty Trust Company of New York, which serves as the trustee, and/or investment manager and/or agent for certain beneficial owners of the Company's Common Stock. Scotia McLeod Inc., expected to be an Underwriter in the Offerings, is an affiliate of a customer of the Company. Prior to the Offerings, there has been no public market for the Shares. The initial public offering price will be negotiated among the Company and the representatives of the U.S. Underwriters and the International Underwriters. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "ENTU". The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-3 [Inside back cover] Centered at the top of the page is the caption "Enterprise Security with Real-World PKI Solutions." Filling the bottom two-thirds of the page is a photo montage containing various computer-related images and a globe. The Company's logo is in the lower right-hand corner of the page. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR- MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Capitalization........................................................... 19 Dilution................................................................. 20 Selected Consolidated Financial Data..................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 32 Management............................................................... 48 Certain Transactions..................................................... 56 Principal and Selling Stockholders....................................... 58 Description of Capital Stock............................................. 61 Shares Eligible for Future Sale.......................................... 65 Certain U.S. Tax Considerations Applicable to Non-U.S. Holders of the Common Stock............................................................ 67 Legal Matters............................................................ 70 Experts.................................................................. 70 Additional Information................................................... 70 Index to Financial Statements............................................ F-1 Underwriting............................................................. U-1
---------------- THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO- SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC- TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 7,066,667 SHARES ENTRUST TECHNOLOGIES INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) ---------------- LOGO ---------------- GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY SECURITIES LLC WARBURG DILLON READ LLC REPRESENTATIVES OF THE UNDERWRITERS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION, DATED JULY 24, 1998 7,066,667 SHARES LOGO COMMON STOCK (PAR VALUE $.01 PER SHARE) ---------------- Of the 7,066,667 shares of Common Stock offered, 1,413,333 shares are being offered hereby in an international offering outside the United States and 5,653,334 shares are being offered in a concurrent United States offering. The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. See "Underwriting". Of the 7,066,667 shares of Common Stock offered, 5,400,000 shares are being sold by the Company and 1,666,667 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders". The Company will not receive any of the proceeds from the sale of the shares being sold by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. For factors to be considered in determining the initial public offering price, see "Underwriting". SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "ENTU". ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------
PROCEEDS TO INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS -------------- ------------ ----------- ------------ Per Share.................. $ $ $ $ Total(3)................... $ $ $ $
- -------- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $900,000 payable by the Company. (3) The Selling Stockholders have granted the International Underwriters an option for 30 days to purchase up to an additional 212,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Selling Stockholders have granted the U.S. Underwriters a similar option with respect to an additional 848,000 shares as part of the concurrent U.S. offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting". ---------------- The shares offered hereby are offered severally by the International Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York on or about , 1998, against payment therefor in immediately available funds. GOLDMAN SACHS INTERNATIONAL DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY SECURITIES LLC WARBURG DILLON READ ---------------- The date of this Prospectus is , 1998. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company and the Selling Stockholders have agreed to sell to each of the International Underwriters named below, and each of such International Underwriters for whom Goldman Sachs International, Donaldson, Lufkin & Jenrette International, NationsBanc Montgomery Securities LLC and Warburg Dillon Read, a division of UBS AG, are acting as representatives, has severally agreed to purchase from the Company and the Selling Stockholders, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF COMMON UNDERWRITER STOCK ----------- --------- Goldman Sachs International........................................ Donaldson, Lufkin & Jenrette International......................... NationsBanc Montgomery Securities LLC.............................. Warburg Dillon Read, a division of UBS AG.......................... --------- Total............................................................ 1,413,333 =========
Under the terms and conditions of the Underwriting Agreement, the International Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The International Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The International Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company and the Selling Stockholders have entered into an underwriting agreement (the "U.S. Underwriting Agreement") with the underwriters of the U.S. offering (the "U.S. Underwriters") providing for the concurrent offer and sale of 5,653,334 shares of Common Stock in an offering in the United States. The offering price and aggregate underwriting discounts and commissions per share for the two offerings are identical. The closing of the offering made hereby is a condition to the closing of the U.S. offering, and vice versa. The representatives of the U.S. Underwriters are Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, NationsBanc Montgomery Securities LLC and Warburg Dillon Read LLC, a subsidiary of UBS AG. Pursuant to an Agreement between the International and U.S. Underwriting Syndicates (the "Agreement Between") relating to the two offerings, each of the U.S. Underwriters has agreed that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will offer, sell or deliver the shares of Common Stock, directly or indirectly, only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as part of the distribution of the shares offered as a part of the international offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the United States or to any U.S. persons or (b) to any person who it believes intends to reoffer, sell or deliver the shares in the United States or to any U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. U-1 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Selling Stockholders have granted the International Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 212,000 additional shares of Common Stock solely to cover over-allotments, if any. If the International Underwriters exercise their over-allotment option, the International Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 1,413,333 shares of Common Stock offered hereby. The Selling Stockholders have granted the U.S. Underwriters a similar option to purchase up to an aggregate of 848,000 additional shares of Common Stock. The Company, its directors, officers, stockholders, including the Selling Stockholders, and optionholders have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, they will not offer, sell, contract to sell or otherwise dispose of any securities of the Company (other than pursuant to employee stock option plans existing, or on the conversion or exchange of convertible or exchangeable securities outstanding, on the date of this Prospectus) which are substantially similar to the shares of the Common Stock or which are convertible into or exchangeable for securities which are substantially similar to the shares of Common Stock, without the prior written consent of the representatives, except for the shares of Common Stock offered in connection with the Offerings. In addition, the Company may issue shares of Common Stock in connection with any acquisition of another company if the terms of such issuance provide that such Common Stock shall not be resold prior to the expiration of the 180-day period referenced in the preceding sentence. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price and subject to local laws for any international sales, up to approximately 353,333 shares of Common Stock for certain funds affiliated with the Company's Japanese distributor (the "Distributor Funds"). The Distributor Funds have expressed an interest in purchasing such shares in the Offerings, and their willingness to enter into lock-up agreements with the Representatives of the Underwriters under which they will agree not to sell shares for 180 days after the date of the Prospectus. In addition, at the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, 346,267 shares of Common Stock for certain employees and associates of the Company. There can be no assurance that any of the reserved shares will be so purchased. The number of shares available for sale to the general public in the Offerings will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered to the general public on the same basis as the other shares offered hereby. Each International Underwriter has also agreed that (a) it has not offered or sold and prior to the date six months after the date of issue of the shares of Common Stock will not offer or sell any shares of Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (b) it has complied, and will comply, with all applicable provisions of the Financial Services Act of 1986 of Great Britain with respect to anything done by it in relation to the U-2 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] shares of Common Stock in, from or otherwise involving the United Kingdom, and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the shares of Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. Buyers of shares of Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the initial public offering price. The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Common Stock offered by them. In connection with the Offerings, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions in connection with the Offerings. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock; and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Common Stock than they are required to purchase from the Company in the Offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the securities sold in the Offerings for their account may be reclaimed by the syndicate if such shares of Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. An affiliate of Donaldson, Lufkin & Jenrette International, a representative of the Underwriters, is the beneficial owner of approximately 500,000 shares of the Company's Common Stock. J.P. Morgan Securities, Inc., which is expected to be an Underwriter in the Offerings, is an affiliate of a customer of the Company and an affiliate of the Morgan Guaranty Trust Company of New York, which serves as the trustee, and/or investment manager and/or agent for certain beneficial owners of the Company's Common Stock. Scotia McLeod Inc., expected to be an Underwriter in the Offerings, is an affiliate of a customer of the Company. Prior to the Offerings, there has been no public market for the shares. The initial public offering price will be negotiated among the Company and the representatives of the U.S. Underwriters and the International Underwriters. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "ENTU". The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-3 [Inside back cover] Centered at the top of the page is the caption "Enterprise Security with Real-World PKI Solutions." Filling the bottom two-thirds of the page is a photo montage containing various computer-related images and a globe. The Company's logo is in the lower right-hand corner of the page. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR- MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Capitalization........................................................... 19 Dilution................................................................. 20 Selected Consolidated Financial Data..................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 32 Management............................................................... 48 Certain Transactions..................................................... 56 Principal and Selling Stockholders....................................... 58 Description of Capital Stock............................................. 61 Shares Eligible for Future Sale.......................................... 65 Certain U.S. Tax Considerations Applicable to Non-U.S. Holders of the Common Stock............................................................ 67 Legal Matters............................................................ 70 Experts.................................................................. 70 Additional Information................................................... 70 Index to Financial Statements............................................ F-1 Underwriting............................................................. U-1
--------------- THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO- SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC- TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 7,066,667 SHARES ENTRUST TECHNOLOGIES INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) --------------- LOGO --------------- GOLDMAN SACHS INTERNATIONAL DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY SECURITIES LLC WARBURG DILLON READ REPRESENTATIVES OF THE UNDERWRITERS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses, all of which will be borne by the Registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC registration fee............................................... $ 38,358 NASD filing fee.................................................... 13,503 Nasdaq National Market listing fee................................. 95,000 Blue Sky fees and expenses......................................... 15,000 Transfer Agent and Registrar fees.................................. 10,000 Accounting fees and expenses....................................... 150,000 Legal fees and expenses............................................ 400,000 Printing and mailing expenses...................................... 100,000 Miscellaneous...................................................... 78,139 -------- Total.......................................................... $900,000 ========
- -------- * To be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 2-418 of the General Corporation Law of Maryland (the "Maryland Law") provides that, unless a corporation's charter includes a provision which restricts or limits the corporation's right to indemnify its officers and directors, the corporation may indemnify a director or officer with respect to proceedings instituted against such officer or director by reason of his or her service in that capacity, unless the act or omission in question was material and was committed in bad faith or was the result of active and deliberate dishonesty, unless the director or officer received an improper personal benefit or unless the director or officer had reasonable cause to believe that the act or omission was unlawful. The Registrant's Articles of Incorporation and Bylaws provide that the Registrant shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent permitted by the Maryland Law and that the Registrant shall indemnify and advance expenses to its officers to the same extent as its directors and to such further extent as is consistent with law. However, nothing in the Articles of Incorporation or Bylaws of the Registrant protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. To the extent that a director has been successful in defense of a proceeding, unless limited by charter, the Maryland Law provides that he shall be indemnified against reasonable expenses incurred in connection therewith. The U.S. Underwriting Agreement and the International Underwriting Agreement, forms of which are filed at Exhibits 1.1 and 1.2 to this Registration Statement on Form S-1 (the "Underwriting Agreements"), provide that the Underwriters are obligated under certain circumstances to indemnify directors, officers and controlling persons of the Registrant against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Reference is made to the form of Underwriting Agreements. Three of the directors of the Registrant are also officers of Northern Telecom Limited ("NTL"), a shareholder of the Registrant, and are serving on the Registrant's Board of Directors at the request II-1 of NTL. Pursuant to NTL's Bylaws, NTL will indemnify its officers when they are acting at NTL's request as directors of a corporation of which NTL is a shareholder, provided that such officers acted honestly, in good faith and had reasonable grounds to believe their conduct was lawful. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is information regarding shares of capital stock issued and options granted by the Registrant since December 30, 1996, the date of its incorporation (after giving effect to the Company's ten-for-one and four-for- one stock splits effective as of February 1997 and July 1998, respectively): (a) Issuances of Capital Stock In January 1997, in connection with the incorporation of the Registrant, the Registrant (i) sold 257,500 shares of Series B Common Stock to a group of private investors for an aggregate sale price of $25,750,000, (ii) issued 20,300,000 shares of Common Stock to Northern Telecom Inc. in exchange for the issuance of a promissory note in the principal amount of $8,000,000 and the transfer of certain contracts and intellectual property rights and (iii) issued 7,700,000 shares of Special Voting Stock to Northern Telecom Limited in exchange for $891,542 of property and the transfer of certain contracts and intellectual property rights. In January 1997, the Registrant sold 2,500 shares of Series B Non-Voting Common Stock to a private investor for an aggregate sale price of $250,000 and issued an additional 36,448 shares of Series B Non-Voting Common Stock to such investor in exchange for an equivalent number of shares of Series B Common Stock. In June 1998, the Registrant issued an aggregate of 1,167,288 shares of Common Stock to the former stockholders of r/3/ Security Engineering AG, a Swiss company ("r/3/"), as partial consideration in connection with the acquisition of r/3/. (b) Grants of Stock Options The Registrant's Amended and Restated 1996 Stock Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors and approved by the stockholders of the Company in December 1996 and amended and restated by the Board of Directors in June 1988, and such amendment and restatement was approved by the stockholders in July 1998. The Incentive Plan was further amended by the Board of Directors in July 1998. As of June 30, 1998, options to purchase 7,397,804 shares of Common Stock had been granted under such plan, at exercise prices ranging from $2.13 to $12.08 per share. The Registrant's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in July 1998. The Purchase Plan will not become effective until the closing of the Offering. The Registrant has reserved (i) an aggregate of 9,600,000 shares of Common Stock for issuance under the Incentive Plan and (ii) an aggregate of 400,000 shares of Common Stock for issuance under the Purchase Plan. The securities issued in the foregoing transactions were either (i) offered and sold in reliance upon exemptions from Securities Act registration set forth in Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated thereunder, relating to sales by an issuer not involving any public offering, (ii) offered and sold in reliance upon an exemption from Securities Act registration set forth in Regulation S relating to sales to non-U.S. persons or (iii) in the case of certain options to purchase shares of Common Stock and shares of Common Stock issued upon the exercise of such options, such offers and sales were made in reliance upon an exemption from registration under Rule 701 of the Securities Act. No underwriters were involved in the foregoing sales of securities. II-2 JITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of U.S. Underwriting Agreement. 1.2 Form of International Underwriting Agreement. 2.1* Asset Transfer Agreement, dated as of December 31, 1996, between the Registrant and Northern Telecom Inc. 2.2* Asset Transfer Agreement, dated as of December 31, 1996, between Entrust Technologies Limited and Northern Telecom Limited. 2.3+ Share Purchase Agreement, dated as of May 30, 1998, as amended, between the Registrant and Rainer A. Rueppel. 2.4* Share Purchase Agreement, dated as of May 30, 1998, as amended, between the Registrant and Invision AG. 2.5+ Form of Share Purchase Agreement between the Registrant and the minority stockholders of r/3/ Security Engineering AG. 3.1* Articles of Incorporation of the Registrant, as amended. 3.2* Amended and Restated Articles of Incorporation of the Registrant (to be effective upon the closing of the offering). 3.3* Bylaws of the Registrant. 3.4* Amended and Restated Bylaws of the Registrant (to be effective upon the closing of the offering). 4.1 Specimen certificate for shares of Common Stock. 5 Opinion of Hale and Dorr LLP. 10.1* Series B Common Stock Purchase Agreement, dated as of December 31, 1996, by and among the Registrant, Northern Telecom Limited and certain stockholders. 10.2* Series B Non-Voting Common Stock Purchase Agreement, dated as of January 31, 1997, by and among the Registrant and Societe Generale Investment Corporation. 10.3** Amended and Restated Registration Rights Agreement, dated as of July , 1998, by and among the Registrant and certain stockholders. 10.4* Stockholders' Agreement, dated as of December 31, 1996, by and among the Registrant, Northern Telecom Inc., Northern Telecom Limited and certain stockholders, as amended by the Stockholder Agreement and Waiver, dated as of January 31, 1997, by and among the Registrant and certain stockholders. 10.5 Strategic Alliance Agreement, dated as of December 31, 1996, between the Registrant and Northern Telecom Limited. 10.6* Services Agreement, dated as of December 31, 1996, between the Registrant and Northern Telecom Limited. 10.7* Support Agreement, dated as of December 31, 1996, between the Registrant and Entrust Technologies Limited. 10.8* Share Exchange Agreement, dated as of December 31, 1996, among the Registrant, Entrust Technologies Limited and Northern Telecom Limited.
II-3
EXHIBIT NO. DESCRIPTION ------- ----------- 10.9 Letter Agreement, dated as of April 21, 1997, between the Registrant and John A. Ryan. 10.10* Letter Agreement, dated as of November 18, 1996, between Northern Telecom Limited, on behalf of the Registrant, and Brian O'Higgins. 10.11* Letter Agreement, dated as of November 18, 1996, between Northern Telecom Limited, on behalf of the Registrant, and Bradley N. Ross. 10.12* Letter Agreement, dated as of June 4, 1997, between the Registrant and Richard D. Spurr. 10.13* Letter Agreement, dated as of November 14, 1997, between the Registrant and Hansen Downer. 10.14+ Amended and Restated 1996 Stock Incentive Plan. 10.15* Standard Office Building Lease Agreement, dated as of July 11, 1997, between G&F International, Inc. and the Registrant. 10.16* Lease Agreement, dated as of January 28, 1998, between Colonnade Development Incorporated and Entrust Technologies Limited. 10.17 1998 Employee Stock Purchase Plan. 21* Subsidiaries of the Registrant. 23.1 Consent of Hale and Dorr LLP (included in Exhibit 5). 23.2 Consent of Deloitte & Touche Chartered Accountants. 23.3 Consent of Willi & Partner AG. 24* Power of Attorney. 27* Financial Data Schedule.
- -------- * Previously filed. ** To be filed by amendment. + Superseding exhibit. (B) Financial Statement Schedules All schedules have been omitted because they are not required or because the required information is given in the Registrant's Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions contained in the Articles of Incorporation of the Registrant, the laws of the State of Maryland and the Bylaws of NTL, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange 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 such director, officer or controlling person in connection with the securities being registered, 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. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 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. II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RICHARDSON, TEXAS ON THIS 24 DAY OF JULY, 1998. Entrust Technologies Inc. By: /s/ John A. Ryan ---------------------------------- JOHN A. RYAN President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE /s/ John A. Ryan President and Chief July 24, 1998 - ------------------------------------- Executive Officer JOHN A. RYAN (Principal Executive Officer) * - ------------------------------------- Senior Vice July 24, 1998 MICHELE L. AXELSON President, Business Development and Finance and Chief Financial Officer (Principal Financial and Accounting Officer) * - ------------------------------------- Director July 24, 1998 DAVID D. ARCHIBALD * - ------------------------------------- Director July 24, 1998 FRANK A. DUNN * Director July 24, 1998 - ------------------------------------- F. WILLIAM CONNER * - ------------------------------------- Director July 24, 1998 ROBERT S. MORRIS *By: /s/ John A. Ryan - ------------------------------------- JOHN A. RYAN Attorney-in-Fact
II-6
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of U.S. Underwriting Agreement. 1.2 Form of International Underwriting Agreement. 2.1* Asset Transfer Agreement, dated as of December 31, 1996, between the Registrant and Northern Telecom Inc. 2.2* Asset Transfer Agreement, dated as of December 31, 1996, between Entrust Technologies Limited and Northern Telecom Limited. 2.3+ Share Purchase Agreement, dated as of May 30, 1998, as amended, between the Registrant and Rainer A. Rueppel. 2.4* Share Purchase Agreement, dated as of May 30, 1998, as amended, between the Registrant and Invision AG. 2.5+ Form of Share Purchase Agreement between the Registrant and the minority stockholders of r/3/ Security Engineering AG. 3.1* Articles of Incorporation of the Registrant, as amended. 3.2* Amended and Restated Articles of Incorporation of the Registrant (to be effective upon the closing of the offerings). 3.3* Bylaws of the Registrant. 3.4* Amended and Restated Bylaws of the Registrant (to be effective upon the closing of the offerings). 4.1 Specimen certificate for shares of Common Stock. 5 Opinion of Hale and Dorr LLP. 10.1* Series B Common Stock Purchase Agreement, dated as of December 31, 1996, by and among the Registrant, Northern Telecom Limited and certain stockholders. 10.2* Series B Non-Voting Common Stock Purchase Agreement, dated as of January 31, 1997, by and among the Registrant and Societe Generale Investment Corporation. 10.3** Amended and Restated Registration Rights Agreement, dated as of July , 1998, by and among the Registrant and certain stockholders. 10.4* Stockholders' Agreement, dated as of December 31, 1996, by and among the Registrant, Northern Telecom Inc., Northern Telecom Limited and certain stockholders, as amended by the Stockholder Agreement and Waiver, dated as of January 31, 1997, by and among the Registrant and certain stockholders. 10.5 Strategic Alliance Agreement, dated as of December 31, 1996, between the Registrant and Northern Telecom Limited. 10.6* Services Agreement, dated as of December 31, 1996, between the Registrant and Northern Telecom Limited. 10.7* Support Agreement, dated as of December 31, 1996, between the Registrant and Entrust Technologies Limited. 10.8* Share Exchange Agreement, dated as of December 31, 1996, among the Registrant, Entrust Technologies Limited and Northern Telecom Limited.
EXHIBIT NO. DESCRIPTION ------- ----------- 10.9 Letter Agreement, dated as of April 21, 1997, between the Registrant and John A. Ryan. 10.10* Letter Agreement, dated as of November 18, 1996, between Northern Telecom Limited, on behalf of the Registrant, and Brian O'Higgins. 10.11* Letter Agreement, dated as of November 18, 1996, between Northern Telecom Limited, on behalf of the Registrant, and Bradley N. Ross. 10.12* Letter Agreement, dated as of June 4, 1997, between the Registrant and Richard D. Spurr. 10.13* Letter Agreement, dated as of November 14, 1997, between the Registrant and Hansen Downer. 10.14+ Amended and Restated 1996 Stock Incentive Plan. 10.15* Standard Office Building Lease Agreement, dated as of July 11, 1997, between G&F International, Inc. and the Registrant. 10.16* Lease Agreement, dated as of January 28, 1998, between Colonnade Development Incorporated and Entrust Technologies Limited. 10.17 1998 Employee Stock Purchase Plan. 21* Subsidiaries of the Registrant. 23.1 Consent of Hale and Dorr LLP (included in Exhibit 5). 23.2 Consent of Deloitte & Touche Chartered Accountants. 23.3 Consent of Willi & Partner AG. 24* Power of Attorney. 27* Financial Data Schedule.
- -------- * Previously filed. ** To be filed by amendment. + Superseding exhibit. EX-1.1 2 U.S. UNDERWRITING AGREEMENT EXHIBIT 1.1 ENTRUST TECHNOLOGIES INC. COMMON STOCK ($0.01 PAR VALUE PER SHARE) UNDERWRITING AGREEMENT (U.S. VERSION) --------------------------- , 1998. Goldman, Sachs & Co. Donaldson, Lufkin & Jenrette Securities Corporation NationsBanc Montgomery Securities LLC Warburg Dillon Read LLC, a subsidiary of UBS AG As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 Ladies and Gentlemen: Entrust Technologies Inc., a Maryland corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 4,320,000 shares of Common Stock, $0.01 par value ("Stock"), of the Company, and the Stockholders of the Company named in Schedule II hereto (the "Selling Stockholders") propose, subject to the terms and conditions stated herein, to sell the Underwriters an aggregate of 1,333,334 shares and, at the election of the Underwriters, up to an additional 848,000 shares of Stock. The aggregate of 5,653,334 shares to be sold by the Company and the Selling Stockholders is herein called the "Firm Shares" and the aggregate of 848,000 additional shares to be sold by the Selling Stockholders is herein called the "Optional Shares". The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares". It is understood and agreed to by all parties that the Company and the Selling Stockholders are concurrently entering into an agreement (the "International Underwriting Agreement") providing for the sale by the Company and the Selling Stockholders of up to a total of 1,625,333 shares of Stock (the "International Shares"), including the overallotment option thereunder, through arrangements with certain underwriters outside the United States (the "International Underwriters"), for whom Goldman Sachs International, Donaldson, Lufkin & Jenrette International, NationsBanc Montgomery Securities LLC and Warburg Dillon Read, a division of UBS AG, are acting as lead managers. Anything herein or therein to the contrary notwithstanding, the respective closings under this Agreement and the International Agreement are hereby expressly made conditional on one another. The Underwriters hereunder and the International Underwriters are simultaneously entering into an Agreement between U.S. and International Underwriting Syndicates (the "Agreement between Syndicates") which provides, among other things, for the transfer of shares of Stock between the two syndicates. Two forms of prospectus are to be used in connection with the offering and sale of shares of Stock contemplated by the foregoing, one relating to the Shares hereunder and the other relating to the International Shares. The latter form of prospectus will be identical to the former except for certain substitute pages as included in the registration statement and amendments thereto as mentioned below. Except as used in Sections 2, 3, 4, 9 and 11 herein, and except as the context may otherwise require, references hereinafter to the Shares shall include all the shares of Stock which may be sold pursuant to either this Agreement or the International Underwriting Agreement, and references herein to any prospectus whether in preliminary or final form, and whether as amended or supplemented, shall include both the U.S. and the international versions thereof. 1. (a) The Company and Entrust Technologies Limited, a Canadian corporation and the Company's majority-owned subsidiary ("Entrust Limited"), jointly and severally represent and warrant to, and agree with, each of the Underwriters that: (i) A registration statement on Form S-1 (File No. 333-57275) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post- effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post- effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, each as amended at the time such part of the Initial Registration Statement became effective, are hereinafter collectively called the "Registration Statement"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"). (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder expressly for use in the preparation of the answers therein to Items 7 and 11(m) of Form S-1; -2- (iii) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects, to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder expressly for use in the preparation of the answers therein to Items 7 and 11(m) of Form S-1; (iv) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than as a result of the grant or exercise of stock options pursuant to the Company's employee stock option plans described in the Prospectus) or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, business, properties, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Prospectus; (v) The Company and its subsidiaries have good and valid title in fee simple to all real property and good and valid title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (vi) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction; and each subsidiary of the -3- Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (vii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares and except as set forth in the Prospectus) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (viii) The Shares to be issued and sold by the Company to the Underwriters hereunder and under the International Underwriting Agreement have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein and in the International Underwriting Agreement, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus; (ix) The issue and sale of the Shares by the Company hereunder and under the International Underwriting Agreement and the compliance by the Company with all of the provisions of this Agreement and the International Underwriting Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-laws of the Company, any statute or any rule or regulation of any governmental agency or regulatory body having jurisdiction over the Company or any of its subsidiaries or any of their properties or any order or decree of any court that specifically names the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or regulatory body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement and the International Underwriting Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under foreign or state securities or Blue Sky laws and the approval by the National Association of Securities Dealers, Inc. of the underwriting terms and arrangements in connection with the purchase and distribution of the Shares by the Underwriters and the International Underwriters; (x) Neither the Company nor any of its subsidiaries is (i) in violation of its charter or By-laws or (ii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound, except for such defaults which, individually or in the aggregate, have not had, and are not -4- reasonably likely to result in, any material adverse effect on the business, properties, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). (xi) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, under the caption "Certain U.S. Tax Considerations Applicable to Non-U.S. Holders of the Common Stock", insofar as they purport to describe the provisions of the laws referred to therein, and under the caption "Underwriting", insofar as they purport to describe the provisions of the documents referred to therein, are accurate summaries and descriptions of such terms and provisions in all material respects; (xii) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (xiii) Other than as set forth in the Prospectus, the Company and its subsidiaries have sufficient interests in all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes ("Intellectual Property") necessary for their business as described in the Prospectus and, to the Company's knowledge, necessary in connection with the products and services under development, without any conflict with or infringement of the interests of others, except for such conflicts which, individually or in the aggregate, have not had and are not reasonably likely to result in, a Material Adverse Effect, and have taken all reasonable steps necessary to secure interests in such Intellectual Property from their contractors; except as set forth in the Prospectus, the Company is not aware of outstanding options, licenses or agreements of any kind relating to the Intellectual Property of the Company which are required to be set forth in the Prospectus, and, except as set forth in the Prospectus, neither the Company nor any of its subsidiaries is a party to or bound by any options, licenses or agreements with respect to the Intellectual Property of any other person or entity which are required to be set forth in the Prospectus; none of the technology employed by the Company has been obtained or is being used by the Company or its subsidiaries in violation of any contractual fiduciary obligation binding on the Company or any of its subsidiaries or any of its directors or executive officers or, to the Company's knowledge, any of its employees or otherwise in violation of the rights of any persons; except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries has received any written or, to the Company's knowledge, oral communications alleging that the Company or any of its subsidiaries has violated, infringed or conflicted with, or, by conducting its business as set forth in the Prospectus, would violate, infringe or conflict with any of the Intellectual Property of any other person or entity other than any such violations, infringements or conflicts which, individually or in the aggregate, have not had, and are not reasonably likely to result in a Material Adverse Effect; and the Company and its subsidiaries have taken and will maintain reasonable measures to prevent the unauthorized dissemination or publication of their confidential -5- information and, to the extent contractually required to do so, the confidential information of third parties in their possession; (xiv) The Company maintains insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, business interruption insurance, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; (xv) There are no contracts, other documents or other agreements required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the rules and regulations thereunder which have not been described or filed as required; the contracts so described in the Prospectus are in full force and effect on the date hereof; and neither the Company nor, to the Company's knowledge, any other party is in breach of or default under any of such contracts other than such breaches or defaults which, individually or in the aggregate, have not had, and are not reasonably likely to result in, a Material Adverse Effect; (xvi) Except as described in or contemplated by the Prospectus, the Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of, or failure to obtain, any such certificate, authorization or permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect; (xvii) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (xviii) Each of Deloitte & Touche Chartered Accountants, who have certified certain financial statements of the Company and its subsidiaries, and Willi and Partner AG, who has certified financial statements of r/3/ Security Engineering AG ("r/3/"), the Company's Swiss subsidiary, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; (xix) The Shares have been approved for listing on the Nasdaq National Market, subject to official notice of issuance; and (xx) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement, and the right of each person who is a party to any contract, agreement or understanding so described to include such securities pursuant to the Registration Statement has been effectively satisfied or waived. -6- (b) Each of the Selling Stockholders severally represents and warrants to, and agrees with, each of the Underwriters and the Company that: (i) All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Stockholder of this Agreement, the International Underwriting Agreement and, for the Selling Stockholders listed in Part B of Schedule II, the Power of Attorney and the Custody Agreement hereinafter referred to, and for the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder and under the International Underwriting Agreement, have been obtained; and such Selling Stockholder has full right, power and authority to enter into this Agreement, the International Underwriting Agreement, the Power of Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder and under the International Underwriting Agreement; (ii) The sale of the Shares to be sold by such Selling Stockholder hereunder and under the International Underwriting Agreement and the compliance by such Selling Stockholder with all of the provisions of this Agreement and the International Underwriting Agreement, and, for the Selling Stockholders listed in Part B of Schedule II, the Power of Attorney and the Custody Agreement, and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such action result in any violation of the provisions of any statute, rule or regulation of any governmental agency or regulatory body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder or any order or decree of any court that specifically names such Selling Stockholder or any of its subsidiaries or any of their properties, except in each case as would not adversely affect the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement and the International Underwriting Agreement; (iii) Such Selling Stockholder has, and immediately prior to each Time of Delivery (as defined in Section 4 hereof) such Selling Stockholder will have, good and valid title to the Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities or claims; and, assuming that the Underwriters purchase the Shares to be sold by such Selling Stockholder for value, in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters; (iv) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, such Selling Stockholder will not, without your prior written consent (A) offer, sell, contract to sell or otherwise dispose of, except as provided hereunder and under the International Underwriting Agreement, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such -7- substantially similar securities (other than upon the conversion or exchange of convertible or exchangeable securities outstanding as of the date of this Agreement), other than transfers to such Selling Stockholder's affiliates, as such term is defined in Rule 405 promulgated under the Securities Act, provided that each transferee agrees in writing to be bound by the terms of this clause or (B) engage directly or indirectly in any transaction the likely result of which would involve a transaction prohibited by subclause (A) of this clause (iv); (v) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (vi) To the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein, such Preliminary Prospectus and the Registration Statement did not, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus, when they become effective or are filed with the Commission, as the case may be, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, such Selling Stockholder will deliver to you prior to or at the First Time of Delivery (as hereinafter defined) a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof) if such Selling Stockholder is a corporation, partnership or other entity organized in the United States, or a properly completed and executed United States Treasury Department Form W-8 and Form 1001, if such Selling Stockholder is a corporation organized outside the United States; and (viii) For each Selling Stockholder listed on Part B of Schedule II hereof, (A) certificates in negotiable form representing all of the Shares to be sold by such Selling Stockholder hereunder have been placed in custody under a Custody Agreement, in the form heretofore furnished to you (the "Custody Agreement"), duly executed and delivered by such Selling Stockholder to the Company, as custodian (the "Custodian"), and such Selling Stockholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you (the "Power of Attorney"), appointing the persons indicated in Schedule II hereto, and each of them, as such Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver this Agreement and the International Underwriting Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholders as provided in Section 2 hereof, to authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement, the International Underwriting Agreement and the Custody Agreement; and -8- (B) The Shares represented by the certificates held in custody for such Selling Stockholder under the Custody Agreement, as a result of the obligations of such Selling Stockholder under this Agreement, are subject to the interests of the Underwriters hereunder and the International Underwriters under the International Underwriting Agreement; the arrangements made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable; the obligations of the Selling Stockholders hereunder and under the International Underwriting Agreement shall not be terminated by operation of law, whether by the dissolution of any Selling Stockholder that is a partnership, limited liability company or corporation, or by the occurrence of any other event; if any such Selling Stockholder should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of the Selling Stockholders in accordance with the terms and conditions of this Agreement, of the International Underwriting Agreement and of the Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if such dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such dissolution or other event. 2. Subject to the terms and conditions herein set forth, (a) the Company and each of the Selling Stockholders agree, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and each of the Selling Stockholders, at a purchase price per share of $___, the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Firm Shares to be sold by the Company and each of the Selling Stockholders as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and all of the Selling Stockholders hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, each of the Selling Stockholders agrees, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from each of the Selling Stockholders, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Selling Stockholders, as and to the extent indicated in Schedule II hereto, hereby grant, severally and not jointly, to the Underwriters the right to purchase at their election up to 848,000 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares shall be made in proportion to the maximum number of Optional Shares to be sold by each Selling Stockholder as set forth in Schedule II hereto. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company and the Attorneys-in-Fact, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such -9- Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company and the Attorneys-in-Fact otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company and the Selling Stockholders, shall be delivered by or on behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company and each Selling Stockholder to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company and each Selling Stockholder will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on ___________, 1998 or such other time and date as Goldman, Sachs & Co., the Company and the Selling Stockholders may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(o) hereof, will be delivered at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at ______ p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company and Entrust Limited jointly and severally agree with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus which shall be disapproved by you promptly after reasonable notice thereof; -10- to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 12:00 Noon, New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, (A) not to offer, sell, contract -11- to sell or otherwise dispose of, except as provided hereunder and under the International Underwriting Agreement, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities; provided, however, that the Company may (i) issue shares upon the exercise of options granted pursuant to its Amended and Restated 1996 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, (ii) issue shares upon the conversion or exchange of convertible or exchangeable securities outstanding as of the date of this Agreement, (iii) issue shares in connection with a merger or the acquisition by the Company of the assets or capital stock of another person or entity so long as the shares so issued by the Company may not be resold for a period of 180 days after the date of the Prospectus and (iv) grant options and offer to sell shares of Common Stock to its employees, consultants and directors pursuant to the plans listed in clause (i) and (B) not to amend or waive compliance with Section 5 under each Stock Option Agreement entered into by the Company and a holder of options granted under the Company's employee stock option plans); (f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants); (g) During a period of five years from the effective date of the Registration Statement, to furnish to you at your request copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement and the International Underwriting Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) To use its best efforts to list for quotation the Shares on the Nasdaq National Market ("NASDAQ"); (j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act; and (k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company and each of the Selling Stockholders covenant and agree with one another and with the several Underwriters that (a) the Company will pay or cause to be paid the -12- following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the International Underwriting Agreement, the Agreement between Syndicates, the Selling Agreement, the Blue Sky Memorandum, closing documents (including compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section; and (b) such Selling Stockholder will pay or cause to be paid all costs and expenses incident to the performance of such Selling Stockholder's obligations hereunder and under the International Underwriting Agreement which are not otherwise specifically provided for in this Section, including (i) any fees and expenses of counsel for such Selling Stockholder, (ii) for each Selling Stockholder listed in Part B of Schedule II, such Selling Stockholder's pro rata share of fees and expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses and taxes incident to the sale and delivery of the Shares to be sold by such Selling Stockholders to the Underwriters hereunder. It is understood, however, that the Company shall bear, and the Selling Stockholders shall not be required to pay or to reimburse the Company for, the cost of any other matters not directly relating to the sale and purchase of the Shares pursuant to this Agreement and the International Underwriting Agreement, and that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company and the Selling Stockholders herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and the Selling Stockholders shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Ropes & Gray, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of such opinion is attached as Annex II(a) hereto), dated -13- as of such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii) (as to the Shares being delivered at such Time of Delivery), (v), (viii) and (x) of subsection (c) below as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Hale and Dorr LLP, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(b) hereto), dated as of such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland, with corporate power and authority to own its properties and conduct its business, as such properties and business are described in the Prospectus; (ii) The Company has the authorized, issued and outstanding capital stock as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and are fully paid and nonassessable; and the Shares conform, or when issued, delivered and paid for in accordance with the terms of this Agreement and the International Underwriting Agreement will conform, in all material respects, to the description of the Stock contained in the Prospectus; (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing in each of the jurisdictions listed in Schedule III hereto, which are the only jurisdictions in the United States in which the Company owns or leases real property or maintains an office; (iv) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which are required to be described in the Prospectus which are not described in the Prospectus; (v) This Agreement and the International Underwriting Agreement have been duly authorized, executed and delivered by the Company; (vi) The issue and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the International Underwriting Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument binding upon the Company or any of its subsidiaries that is an exhibit to the Registration Statement, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-laws of the Company or (assuming compliance with all applicable foreign and state securities and Blue Sky laws) any statute, rule or regulation known to such counsel of any governmental agency or regulatory body having jurisdiction over the Company or any of its subsidiaries or any of their properties or any order or decree -14- known to such counsel of any court specifically naming the Company or any of its subsidiaries or any of their properties; (vii) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or regulatory body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement and the International Underwriting Agreement, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under foreign or state securities or Blue Sky laws and the approval by the National Association of Securities Dealers, Inc. of the underwriting terms and arrangements in connection with the purchase and distribution of the Shares by the Underwriters and the International Underwriters; (viii) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock, under the caption "Certain U.S. Tax Considerations Applicable to Non-U.S. Holders of the Common Stock", insofar as they purport to describe the provisions of the laws referred to therein, and under the caption "Underwriting", insofar as they purport to describe the documents referred to therein, are accurate summaries and descriptions of such terms and provisions in all material respects; (ix) The Company is not an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act; and (x) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements, including the notes and schedules thereto, and other financial and accounting data, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder, although they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus; they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements, including the notes and schedules thereto, and other financial and accounting data, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements, including the notes and schedules thereto, and other financial and accounting data, as to which such counsel need express no opinion) contained an untrue statement of a material fact -15- or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, the Prospectus or any further supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements, including the notes and schedules thereto, and other financial and accounting data, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required; (d) Davies, Ward & Beck and Bar and Karrer, counsel to the Company, shall have furnished to you its written opinion, dated as of such Time of Delivery, in form and substance satisfactory to you, to the effect that Entrust Limited and r/3/, respectively, has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares and except as otherwise set forth in the Prospectus) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect to matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (e) Jay Kendry, Esq., general counsel to the Company, shall have furnished to you his written opinion, dated as of such Time of Delivery, in form and substance satisfactory to you, to the effect that the issue and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the International Underwriting Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; (f) _________, intellectual property counsel for the Company, shall have furnished to you their written opinion (a draft of each such opinion is attached as Annex II(c) hereto), dated as of such Time of Delivery, in form and substance reasonably satisfactory to you, with respect to such matters as you may reasonably request; (g) The respective counsel for each of the Selling Stockholders, as indicated in Schedule II hereto, each shall have furnished to you their written opinion with respect to each of the Selling Stockholders for whom they are acting as counsel, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) For each Selling Stockholder listed in Part B of Schedule II, a Power-of-Attorney and a Custody Agreement dated as of the date of this Agreement have been duly executed and delivered by such Selling Stockholder and constitute valid and binding agreements of such Selling Stockholder in accordance with their terms; (ii) Each of this Agreement and the International Underwriting Agreement has been duly executed and delivered by or on behalf of such Selling Stockholder; -16- and the sale of the Shares to be sold by such Selling Stockholder hereunder and thereunder and the compliance by such Selling Stockholder with all of the provisions of this Agreement, the International Underwriting Agreement, and, for each Selling Stockholder listed in Part B of Schedule II, the Power-of-Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such action result in any violation of the provisions of any rule or regulation known to such counsel of any governmental agency or regulatory body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder or of an order or decree known to such counsel of any court specifically naming such Selling Stockholder or any of its properties, except in each case as would not adversely affect the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement and the International Underwriting Agreement; (iii) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement and the International Underwriting Agreement in connection with the Shares to be sold by such Selling Stockholder hereunder and thereunder, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under foreign or state securities or Blue Sky laws and the approval by the National Association of Securities Dealers, Inc. of the underwriting terms and arrangements in connection with the purchase and distribution of such Shares by the Underwriters and International Underwriters; (iv) Immediately prior to any Time of Delivery, such Selling Stockholder (A) is the owner of record and, to such counsel's knowledge, the beneficial owner of the Shares to be sold at such Time of Delivery by such Selling Stockholder under this Agreement and the International Underwriting Agreement, and (B) has the full corporate right, power and authority to sell, assign, transfer and deliver valid and unencumbered title to the Shares to be sold by such Selling Stockholder hereunder; and (v) Assuming that the Underwriters purchase the Shares to be sold by such Selling Stockholder for value, in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, upon delivery and payment for the Shares to be sold by such Selling Stockholder, the Underwriters will receive valid title to such Shares, free and clear of all liens, encumbrances, equities or claims. In rendering the opinion in paragraph (iv), such counsel may rely upon a certificate of such Selling Stockholder in respect of matters of fact as to ownership of, and liens, encumbrances, equities or claims on, the Shares sold by such Selling Stockholder, provided that such counsel shall state that they believe that both you and they are justified in relying upon such certificate and that an original of such certificate is delivered to you; -17- (h) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Deloitte & Touche Chartered Accountants shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto; (i) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock (other than as a result of the grant or exercise of stock options pursuant to the Company's employee stock option plans described in the Prospectus) or long- term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, business, properties, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in Clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (j) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (k) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York or Massachusetts State authorities; or (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this Clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (l) The Shares to be sold at the such Time of Delivery shall have been duly listed for quotation on NASDAQ, subject to official notice of issuance; (m) The Company has obtained and delivered to the Underwriters (A) executed copies of an agreement from each director, officer and stockholder of the Company, substantially to the effect set forth in Subsection 5(e) hereof in form and substance satisfactory to you and (B) executed copies of a Stock Option Agreement from each holder -18- of options granted under the Company's employee stock option plans, which agreement shall contain a provision substantially to the effect set forth in Subsection 5(e) hereof; (n) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (o) The Company and the Selling Stockholders shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company and the Selling Stockholders, respectively, satisfactory to you as to the accuracy of the representations and warranties of the Company and the Selling Stockholders, respectively herein at and as of such Time of Delivery, as to the performance by the Company and the Selling Stockholders, of all of their respective obligations hereunder and under the International Underwriting Agreement to be performed at or prior to such Time of Delivery and as to such other matters as you may reasonably request and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a) and (i) of this Section. 8. (a) The Company, Entrust Limited and Northern Telecom Limited (the "Indemnifying Person"), jointly and severally, will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company and the Indemnifying Person shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein; provided, further that the liability of the Indemnifying Person pursuant to this subsection (a) shall not exceed the product of the number of Shares sold by such Indemnifying Person and the initial public offering price less underwriting discount of the Shares, as set forth in the Prospectus. (b) Each of the Selling Stockholders other than the Indemnifying Person severally and not jointly agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission in reliance upon and conformity with written information relating to such Selling Stockholder furnished to the Company or the Underwriters in writing by such Selling -19- Stockholder expressly for use therein, and such Selling Stockholder will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the liability of a Selling Stockholder pursuant to this subsection (b) shall not exceed the product of the number of Shares sold by such Selling Stockholder and the initial public offering price less the underwriting discount of the Shares, as set forth in the Prospectus. (c) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company and each Selling Stockholder for any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such action or claim as such expenses are incurred. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion -20- as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Selling Stockholder shall be required to contribute any amount in excess of the product of the number of Shares sold by such Selling Stockholder and the initial public offering price less underwriting discount of the Shares as set forth in the Prospectus. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company, Entrust Limited and the Selling Stockholders under this Section 8 shall be in addition to any liability which the Company and the respective Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and the Selling Stockholders (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company) and to each person, if any, who controls the Company or the Selling Stockholders within the meaning of the Act. -21- 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Stockholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Stockholders notify you that they have so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company and the Selling Stockholders shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Selling Stockholders to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non- defaulting Underwriter, the Company or the Selling Stockholders, except for the expenses to be borne by the Company and the Selling Stockholders and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the Selling Stockholders and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or the Selling Stockholders or any officer or director or controlling person of the Company or the Selling Stockholders, and shall survive delivery of and payment for the Shares. -22- 11. If this Agreement shall be terminated pursuant to Section 9 hereof, neither the Company nor Entrust Limited nor the Selling Stockholders shall then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are not delivered by or on behalf of the Company and the Selling Stockholders as provided herein, the Company and each of the Selling Stockholders (pro rata based on the number of Shares to be sold by the Company and such Selling Stockholders hereunder) will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company, Entrust Limited and the Selling Stockholders shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives and in all dealings with any Selling Stockholder hereunder, you and the Company shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of such Selling Stockholder made or given by any or all of the Attorneys-in-Fact for such Selling Stockholder. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 9/th/ Floor, New York, New York 10004, Attention: Registration Department; and if to any Selling Stockholders shall be delivered or sent by mail, telex or facsimile transmission to counsel for such Selling Stockholder at its address set forth in Schedule II hereto; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company, Entrust Limited and the Selling Stockholders and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and Selling Stockholder and each person who controls the Company, any Selling Stockholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. -23- If the foregoing is in accordance with your understanding, please sign and return to us eight counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and each of the Selling Stockholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters (U.S. Version), the form of which shall be submitted to the Company and the Selling Stockholders for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, Entrust Technologies Inc. By:__________________________ Name: Title: ENTRUST TECHNOLOGIES LIMITED By:__________________________ Name: Title: NORTHERN TELECOM LIMITED By:__________________________ Name: Title: By:__________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS TRUSTEE OF THE MULTI-MARKET SPECIAL INVESTMENT TRUST FUND OF MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ____________________________ Name: -24- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS TRUSTEE OF THE COMMINGLED PENSION TRUST FUND (MULTI-MARKET SPECIAL INVESTMENT FUND II) OF MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ___________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS INVESTMENT MANAGER AND AGENT FOR THE ALFRED P. SLOAN FOUNDATION (MULTI-MARKET ACCOUNT) By:__________________________ Name: Title: Olympus Growth Fund II, L.P. Olmpus Executive Fund, L.P. Orchid & Co., nominee for T. Rowe Price Threshold Fund III, L.P. Societe Generale Investment Corporation By:__________________________ Name: As Attorney-in-Fact acting on behalf of each of the Selling Stockholders named in Part B of Schedule II to this Agreement. -25- Accepted as of the date hereof: Goldman, Sachs & Co. Donaldson, Lufkin & Jenrette Securities Corporation NationsBanc Montgomery Securities LLC; a subsidiary of UBS AG Warburg Dillon Read LLC By: ............................ (Goldman, Sachs & Co.) On behalf of each of the Underwriters -26- SCHEDULE I
NUMBER OF OPTIONAL SHARES TO BE TOTAL NUMBER OF PURCHASED IF FIRM SHARES MAXIMUM OPTION UNDERWRITER TO BE PURCHASED EXERCISED ----------- --------------- --------- Goldman, Sachs & Co.................................. Donaldson Lufkin & Jenrette Securities Corporation... NationsBanc Montgomery Securities LLC................ Warburg Dillon Read LLC, a subsidiary of UBS AG...... --------- ------- Total 5,653,334 848,000
-27- SCHEDULE II
NUMBER OF OPTIONAL SHARES TO BE TOTAL NUMBER OF SOLD IF FIRM SHARES MAXIMUM OPTION TO BE SOLD EXERCISED The Company ............................... 4,320,000 -- The Selling Stockholder(s): Part A: Northern Telecom Inc. Northern Telecom Limited Morgan Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment Trust Fund of Morgan Guaranty Trust Company of New York Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust Fund (Multi-Market Special Investment Fund II) Of Morgan Guaranty Trust Company of New York Morgan Guaranty Trust Company of New York, As Investment Manager and Agent for the Alfred P. Sloan Foundation (Multi-Market Account) Part B Olympus Growth Fund II, L.P. Olympus Executive Fund, L.P. Orchid & Co. Societe Generale Investment Corporation Total
Northern Telecom Limited is represented by its general counsel; Each of Morgan Guaranty Trust Company of New York, Olympus Growth Fund II, L.P. and Olympus Executive Fund, L.P. are represented by Dewey Ballantine LLP; and Orchid & Co. is represented by Testa, Hurwitz & Thibeaut, LLP. Each of the Selling Stockholders listed under Part B above has appointed John Ryan and Michelle Axelson, and each of them, as the Attorneys-in-Fact for such Selling Stockholder. -28- SCHEDULE III JURISDICTIONS OF FOREIGN QUALIFICATIONS -29- ANNEX I Pursuant to Section 7(h) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and any supplementary financial information and schedules (and, if applicable, financial forecasts and/or pro forma financial information) examined by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder; and they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, selected financial data, pro forma financial information, financial forecasts and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been furnished to the representatives of the Underwriters (the "Representatives") and are attached hereto; (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus as indicated in their reports thereon copies of which have been separately furnished to the Representatives and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus agrees with the corresponding amounts (after restatements where applicable) in the audited consolidated financial statements for such five fiscal years which were included in the Prospectus; (v) They have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K; (vi) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) the unaudited consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus for them to be in conformity with generally accepted accounting principles; (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included in the Prospectus; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited condensed financial statements referred to in Clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in Clause (B) were not determined on a basis substantially consistent with the basis for the audited consolidated financial statements included in the Prospectus; (D) any unaudited pro forma consolidated condensed financial statements included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest financial statements included in the Prospectus) or any increase in the consolidated long- term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or stockholders' equity or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except 2 in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (F) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in Clause (E) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vii) In addition to the examination referred to in their report(s) included in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus, or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. 3 EX-1.2 3 INTERNATIONAL UNDERWRITING AGREEMENT EXHIBIT 1.2 ENTRUST TECHNOLOGIES INC. COMMON STOCK ($0.01 PAR VALUE PER SHARE) ---------------------------------------- UNDERWRITING AGREEMENT (INTERNATIONAL VERSION) ----------------------- , 1998 Goldman Sachs International, Donaldson, Lufkin & Jenrette International NationsBanc Montgomery Securities LLC Warburg Dillon Read, a division of UBS AG As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman Sachs International Peterborough Court, 133 Fleet Street, London EC4A 2BB, England. Ladies and Gentlemen: Entrust Technologies Inc., a Maryland corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of ........ shares of Common Stock, $0.01 par value ("Stock"), of the Company, and the Stockholders of the Company named in Schedule II hereto (the "Selling Stockholders") propose, subject to the terms and conditions stated herein, to sell the Underwriters an aggregate of 1,413,333 shares and, at the election of the Underwriters, up to an additional 212,000 shares of Stock. The aggregate of 1,413,333 shares to be sold by the Company and the Selling Stockholders is herein called the "Firm Shares" and the aggregate of 212,000 additional shares to be sold by the Selling Stockholders is herein called the "Optional Shares". The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares". It is understood and agreed to by all parties that the Company and the Selling Stockholders are concurrently entering into an agreement, a copy of which is attached hereto (the "U.S. Underwriting Agreement"), providing for the offering by the Company and the Selling Stockholders of up to a total of 6,501,334 shares of Stock (the "U.S. Shares") including the overallotment option thereunder through arrangements with certain underwriters in the United States (the "U.S. Underwriters"), for whom Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, NationsBank Montgomery Securities LLC and Warburg Dillon Read LLC, a subsidiary of UBS AG are acting as representatives. Anything herein and therein to the contrary notwithstanding, the respective closings under this Agreement and the U.S. Underwriting Agreement are hereby expressly made conditional on one another. The Underwriters hereunder and the U.S. Underwriters are simultaneously entering into an Agreement between U.S. and International Underwriting Syndicates (the "Agreement between Syndicates") which provides, among other things, for the transfer of shares of Stock between the two syndicates and for consultation by the Lead Managers hereunder with Goldman, Sachs & Co. prior to exercising the rights of the Underwriters under Section 7 hereof. Two forms of prospectus are to be used in connection with the offering and sale of shares of Stock contemplated by the foregoing, one relating to the Shares hereunder and the other relating to the U.S. Shares. The latter form of prospectus will be identical to the former except for certain substitute pages as included in the registration statement and amendments thereto as mentioned below. Except as used in Sections 2, 3, 4, 9 and 11 herein, and except as the context may otherwise require, references hereinafter to the Shares shall include all of the shares of Stock which may be sold pursuant to either this Agreement or the U.S. Underwriting Agreement, and references herein to any prospectus whether in preliminary or final form, and whether as amended or supplemented, shall include both of the U.S. and the international versions thereof. In addition, this Agreement incorporates by reference certain provisions from the U.S. Underwriting Agreement (including the related definitions of terms, which are also used elsewhere herein) and, for purposes of applying the same, references (whether in these precise words or their equivalent) in the incorporated provisions to the "Underwriters" shall be to the Underwriters hereunder, to the "Shares" shall be to the Shares hereunder as just defined, to "this Agreement" (meaning therein the U.S. Underwriting Agreement) shall be to this Agreement (except where this Agreement is already referred to or as the context may otherwise require) and to the representatives of the Underwriters or to Goldman, Sachs & Co. shall be to the addressees of this Agreement and to Goldman Sachs International ("GSI"), and, in general, all such provisions and defined terms shall be applied mutatis mutandis as if the incorporated provisions were set forth in full herein having regard to their context in this Agreement as opposed to the U.S. Underwriting Agreement. 1. (a) The Company and Entrust Technologies Limited, a Canadian corporation and the Company's majority-owned Subsidiary ("Entrust Limited"), jointly and severally, hereby make with the Underwriters the same representations, warranties and agreements as are set forth in Section 1 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. (b) Each of the Selling Stockholders severally hereby makes with the Underwriters and the Company the same representations, warranties and agreements as are set forth in Section 1(b) of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 2. Subject to the terms and conditions herein set forth, (a) the Company and each of the Selling Stockholders agree, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and each of the Selling Stockholders, at a purchase price per share of $___, the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Firm Shares to be sold by the Company and each of the Selling Stockholders as set -2- forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and all of the Selling Stockholders hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, each of the Selling Stockholders agrees, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from each of the Selling Stockholders, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Selling Stockholders, as and to the extent indicated in Schedule II hereto, hereby grant, severally and not jointly, to the Underwriters the right to purchase at their election up to 212,000 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares shall be made in proportion to the maximum number of Optional Shares to be sold by each Selling Stockholder as set forth in Schedule II hereto. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company and the Attorneys-in-Fact, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company and the Attorneys-in-Fact otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by GSI of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus and in the forms of Agreement among Underwriters (International Version) and Selling Agreements, which have been previously submitted to the Company by you. Each Underwriter hereby makes to and with the Company the representations and agreements of such Underwriter as a member of the selling group contained in Sections 3(d) and 3(e) of the form of Selling Agreements. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as GSI may request upon at least forty-eight hours' prior notice to the Company and the Selling Stockholders shall be delivered by or on behalf of the Company and the Selling Stockholders to GSI, through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company and each Selling Stockholder to Goldman, Sachs -3- & Co. at least forty-eight hours in advance. The Company and each Selling Stockholder will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on ............., 1998 or such other time and date as GSI, the Company and the Selling Stockholders may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York City time, on the date specified by GSI in the written notice given by GSI of the Underwriters' election to purchase such Optional Shares, or such other time and date as GSI and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 of the U.S. Underwriting Agreement, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(o) of the U.S. Underwriting Agreement hereof, will be delivered at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at .......p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company and Entrust Limited jointly and severally hereby make to the Underwriters the same agreements as are set forth in Section 5 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 6. The Company and each of the Selling Stockholders covenant and agree with one another and with the several Underwriters with respect to certain expenses on the same terms as are set forth in Section 6 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 7. Subject to the provisions of the Agreement between Syndicates, the obligations of the Underwriters hereunder shall be subject, in their discretion, at each Time of Delivery, to the condition that all representations and warranties and other statements of the Company and the Selling Stockholders herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and the Selling Stockholders shall have performed all of its obligations hereunder theretofore to be performed, and additional conditions identical to those set forth in Section 7 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 8. (a) The Company, Entrust Limited and Northern Telecom Limited (the "Indemnifying Person"), jointly and severally, will indemnify and hold harmless each Underwriter against any -4- losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company and the Indemnifying Person shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through GSI expressly for use therein; provided, further that the liability of the Indemnifying Person pursuant to this subsection (a) shall not exceed the product of the number of Shares sold by such Indemnifying Person and the initial public offering price less underwriting discount of the Shares, as set forth in the Prospectus. (b) Each of the Selling Stockholders other than the Indemnifying Person severally and not jointly agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission in reliance upon and conformity with written information relating to such Selling Stockholder furnished to the Company or the Underwriters in writing by such Selling Stockholder expressly for use therein, and such Selling Stockholder will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the liability of a Selling Stockholder pursuant to this subsection (b) shall not exceed the product of the number of Shares sold by such Selling Stockholder and the initial public offering price less the underwriting discount of the Shares, as set forth in the Prospectus. (c) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise -5- out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through GSI expressly for use therein; and will reimburse the Company and each Selling Stockholder for any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such action or claim as such expenses are incurred. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but -6- also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Selling Stockholder shall be required to contribute any amount in excess of the product of the number of Shares sold by such Selling Stockholder and the initial public offering price less underwriting discount of the Shares as set forth in the Prospectus. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company, Entrust Limited and the Selling Stockholders under this Section 8 shall be in addition to any liability which the Company and the respective Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and the Selling Stockholders (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company) and to each person, if any, who controls the Company or the Selling Stockholders within the meaning of the Act. -7- 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Stockholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Stockholders notify you that they have so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company and the Selling Stockholders shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Selling Stockholders to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non- defaulting Underwriter, the Company or the Selling Stockholders, except for the expenses to be borne by the Company and the Selling Stockholders and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other -8- statements of the Company and the Selling Stockholders and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company or the Selling Stockholders or any officer or director or controlling person of the Company or the Selling Stockholders, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, neither the Company nor Entrust Limited nor the Selling Stockholders shall then be under any liability to any Underwriter except as provided in Section 6 and Section 8 hereof, but, if for any other reason any Shares are not delivered by or on behalf of the Company and the Selling Stockholders as provided herein, the Company and each of the Selling Stockholders (pro rata based on the number of Shares to be sold by the Company and such Selling Stockholders hereunder) will reimburse the Underwriters through GSI for all out-of-pocket expenses approved in writing by GSI, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company, Entrust Limited and the Selling Stockholders shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by GSI on behalf of you as the representatives and in all dealings with any Selling Stockholder hereunder, you and the Company shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of such Selling Stockholder made or given by any or all of the Attorneys- in-Fact for such Selling Stockholder. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to the Underwriters in care of GSI, Peterborough Court, 133 Fleet Street, London EC4A 2BB, England, Attention: Equity Capital Markets, Telex No. 94012165, facsimile transmission No. (071) 774-1550; and if to the Company shall be delivered or sent by registered mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by GSI upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company, Entrust Limited and the Selling Stockholders and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and Selling Stockholder and each person who controls the Company, any Selling Stockholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser -9- of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. -10- If the foregoing is in accordance with your understanding, please sign and return to us eight counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and each of the Selling Stockholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters (International Version), the form of which shall be submitted to the Company and the Selling Stockholders for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, Entrust Technologies Inc. By:__________________________ Name: Title: ENTRUST TECHNOLOGIES LIMITED By:__________________________ Name: Title: NORTHERN TELECOM LIMITED By:__________________________ Name: Title: By:__________________________ Name: Title: -11- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS TRUSTEE OF THE MULTI-MARKET SPECIAL INVESTMENT TRUST FUND OF MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ____________________________ Name: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS TRUSTEE OF THE COMMINGLED PENSION TRUST FUND (MULTI-MARKET SPECIAL INVESTMENT FUND II) OF MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ___________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS INVESTMENT MANAGER AND AGENT FOR THE ALFRED P. SLOAN FOUNDATION (MULTI-MARKET ACCOUNT) By: ___________________________ Name: Title: Olympus Growth Fund II, L.P. Olmpus Executive Fund, L.P. Orchid & Co., nominee for T. Rowe Price Threshold Fund III, L.P. Societe Generale Investment Corporation -12- By:__________________________ Name: As Attorney-in-Fact acting on behalf of each of the Selling Stockholders named in Part B of Schedule II to this Agreement. Accepted as of the date hereof: Goldman Sachs International Donaldson, Lufkin & Jenrette International NationsBanc Montgomery Securities LLC Warburg Dillon Read, a division of UBS AG By: Goldman Sachs International By:.............................. (Attorney-in-fact) On behalf of each of the Underwriters -13-
SCHEDULE I NUMBER OF OPTIONAL SHARES TO BE TOTAL NUMBER OF PURCHASED IF FIRM SHARES MAXIMUM OPTION UNDERWRITER TO BE PURCHASED EXERCISED ----------- Goldman Sachs International.................. Donaldson, Lufkin & Jenrette International... NationsBanc Montgomery Securities LLC........ Warburg Dillon Read, a division of UBS AG.... --------- --------- Total 1,413,333 212,000
-14- SCHEDULE II
NUMBER OF OPTIONAL TOTAL NUMBER OF SHARES TO BE SOLD FIRM SHARES IF MAXIMUM OPTION TO BE SOLD EXERCISED The Company............................. 1,080,000 -- The Selling Stockholder(s): Part A: Northern Telecom Inc. ....... Northern Telecom Limited..... Morgan Guaranty Trust Company of New York, as Trustee of the Multi-Market Special Investment Trust Fund of Morgan Guaranty Trust Company of New York.... Morgan Guaranty Trust Company of New York, as Trustee of the Commingled Pension Trust Fund (Multi-Market Special Investment Fund II) Of Morgan Guaranty Trust Company of New York.......... Morgan Guaranty Trust Company of New York, As Investment Manager and Agent for the Alfred P. Sloan Foundation.............
-15- SCHEDULE II (Continued)
NUMBER OF OPTIONAL TOTAL NUMBER OF SHARES TO BE SOLD FIRM SHARES IF MAXIMUM OPTION (Multi-Market Account) TO BE SOLD EXERCISED Part B Olympus Growth Fund II, L.P. ........... Olympus Executive Fund, L.P. ........... Orchid & Co. ........................... Societe Generale Investment Corporation ........................... Total...................................
Northern Telecom Limited is represented by its general counsel; Each of Morgan Guaranty Trust Company of New York, Olympus Growth Fund II, L.P., Olympus Executive Fund, L.P. and Societe Generale Investment Corporation are represented by Dewey Ballantine LLP; and Orchid & Co. is represented by Testa, Hurwitz & Thibeaut, LLP. Each of the Selling Stockholders listed under Part B above has appointed John Ryan and Michele Axelson, and each of them, as the Attorneys-in- Fact for such Selling Stockholder. -16- EX-2.3 4 SHARE PURCHASE AGREEMENT Exhibit 2.3 Share Purchase Agreement between ENTRUST Technologies Inc., a Maryland corporation (hereinafter referred to as "ENTRUST") on the one part and Rainer A. Rueppel, Bahnhofstrasse 242, 8620 Wetzikon (hereinafter referred to as the "SELLER"), on the other part (hereinafter collectively referred to as "the PARTIES") concerning the acquisition of shares of R/3/ Security Engineering AG Seegraben (the "COMPANY") -2- Share Purchase Agreement - -------------------------------------------------------------------------------- CONTENTS: Definitions.................................................................. 4 1. Sale and Purchase........................................................ 7 1.1. Object of the Sale................................................. 7 1.2. Amount of Purchase Price........................................... 7 1.3. Basis Price........................................................ 7 1.4. Price Adjustment................................................... 7 1.5. Escrow............................................................. 8 2. Consideration Shares..................................................... 9 2.1. Value of Consideration Shares...................................... 9 2.2. Restrictions on Transfer........................................... 9 2.3. Right of First Refusal............................................. 10 2.4. Put Option and Make Whole Payment.................................. 11 3. Closing.................................................................. 13 3.1. Conditions Precedent............................................... 13 3.2. Completion of the sale............................................. 13 3.3. Transfer of Risks.................................................. 14 4. Representations of Seller................................................ 14 4.1. With Respect to US Securities Regulations.......................... 14 4.2. With Respect to the SHARES and the COMPANY's Capital............... 17 4.3. With Respect to the COMPANY........................................ 18 4.3.1 Existence, Good Standing, and Records................... 18 4.3.2. Accounts................................................ 18 4.3.3. Financing............................................... 19 4.3.4. Technical characteristics............................... 20 4.3.5. Intellectual property................................... 20 4.3.6. Insurances.............................................. 23 4.3.7. Customers and Suppliers................................. 23 4.3.8. Employees............................................... 24 4.3.9. Pensions and social security contributions.............. 24 4.3.10. Litigation.............................................. 24 4.3.11. Taxes................................................... 25 4.3.12. Events since Accounting Date and since end of Q1........ 25 4.3.13. Effect of the transaction............................... 26 4.3.14. Other material items.................................... 27 -3- Share Purchase Agreement - -------------------------------------------------------------------------------- 5. Warranty Claims Against Seller.......................................... 27 6. Representations of Entrust.............................................. 28 6.1. Good Standing and Authority........................................ 28 6.2. Consideration Shares............................................... 29 6.3. Capitalization..................................................... 29 6.4. Governmental Consents.............................................. 29 6.5. Warranty Claims Against Entrust.................................... 30 7. Covenants............................................................... 30 7.1. Management of the Company.......................................... 30 7.2. Product Liability.................................................. 31 7.3. Consideration Shares............................................... 31 7.4. Watermark Business................................................. 34 7.5. Offer to other Sellers............................................. 35 8. Miscellaneous........................................................... 35 8.1. Costs.............................................................. 35 8.2. Confidentiality.................................................... 35 8.3. Assignment......................................................... 36 8.4. Announcements...................................................... 36 8.5. Notices............................................................ 36 8.6. Severability....................................................... 36 8.7. Construction, amendments........................................... 37 8.8. Governing law...................................................... 37 8.9. Arbitration........................................................ 37 List of Exhibits............................................................ 38 ---------------- Entrust Technologies Inc. has omitted the following schedules, which will be provided supplementally to the Securities and Exchange Commission upon request: - - Exhibit DIL (List of Documents Submitted to Entrust) - - Exhibit CAP (Capital Structure of Entrust) - - Exhibit IPR (Intellectual Property) - - Exhibit OTH (Offer to Other Sellers) -4- Share Purchase Agreement - -------------------------------------------------------------------------------- Definitions "AGREEMENT" this share purchase agreement, including the exhibits; "BASIS PRICE" the BASIS PRICE as defined in Sec. 1.3.; "CLOSING" the CLOSING of this AGREEMENT pursuant to Sec. 3; "CO" the Swiss Code of Obligations; "COMPANY SHARES" the common or preferred registered shares of the COMPANY with a par value of CHF 10 each; "COMPANY" r/3/ Security Engineering AG, Seegraben, as defined on the first page; "CONSIDERATION SHARES" Series A Common Stock of ENTRUST with p.v. of USD 0.01 each; "DEFECT" a DEFECT as defined in Sec. 5.1; "DISTRIBUTION COMPLIANCE PERIOD" the DISTRIBUTION COMPLIANCE PERIOD defined in Sec. 7.3.; "ENTRUST" ENTRUST Technologies Inc., a Maryland corporation, as defined on the first page; "ESCROW AGENT" Thouvenin Stutzer Eggimann & Partner, Limmatquai 4, 8001 Zurich; "ESCROW AGREEMENT" the escrow agreement entered into between ENTRUST, the SELLER and the ESCROW AGENT, and signed by the SELLER on the same date as this AGREEMENT; "ESCROW" the escrow established pursuant to the ESCROW AGREEMENT and referred to in Sec. 1.5; -5- Share Purchase Agreement - -------------------------------------------------------------------------------- "FIRST ANNIVERSARY" the FIRST ANNIVERSARY defined in Sec. 2.4.1.; "GOVERNMENTAL AUTHORITY" any government, state, municipality or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government "INTELLECTUAL PROPERTY" the INTELLECTUAL PROPERTY defined in Sec. 4.3.5.2; "INVISION" INVISION AG, Neuhofstrasse 4, 6341 Baar; "IPO PUT PRICE" the IPO PUT PRICE defined in Sec. 2.4.2; "MAKE WHOLE PAYMENT" the MAKE WHOLE PAYMENT defined in Sec. 2.4.2; "MARKET PRICE" the MARKET PRICE defined in Sec. 2.4.3; "NOTICE" the NOTICE defined in Sec. 2.3.3; "OFFERED CONSIDERATION SHARES" the OFFERED CONSIDERATION SHARES defined in Sec. 2.3.3; "OFFEROR" the OFFEROR defined in Sec. 2.3.3; "outstanding" in respect of COMPANY SHARES, the issued COMPANY SHARES less the COMPANY SHARES held in treasury; "PARTY" ENTRUST and/or the SELLER, as defined on the first page; "PRICE ADJUSTMENT" the PRICE ADJUSTMENT, as defined in Sec. 1.4.; -6- Share Purchase Agreement - -------------------------------------------------------------------------------- "PRINCIPAL MARKET" the PRINCIPAL MARKET defined in Sec. 2.4.3; "PUBLIC OFFERING" the PUBLIC OFFERING defined in Sec. 2.3.6; "PURCHASE PRICE" the total consideration paid by ENTRUST for the SHARES, as defined in Sec. 1.2.; "PUT RIGHT" the PUT RIGHT defined in Sec. 2.4.1; "PUT SHARES" the PUT SHARES defined in Sec. 2.4.1; "REGULATION S" the REGULATION S defined in Sec. 4.1.1.; "SECURITIES ACT" the U.S. Securities Act of 1933, as amended; "SELLER" Rainer A. Rueppel, Bahnhofstrasse 242, 8620 Wetzikon, as defined on the first page; "SHARES" the COMPANY SHARES sold by the SELLER pursuant to Sec. 1.1.; "SIGNING" the SIGNING of this AGREEMENT; "STANDARD PUT PRICE" the STANDARD PUT PRICE defined in Sec. 2.4.1; "WATERMARK COMPANY" the WATERMARK COMPANY defined in Sec. 7.4.; -7- Share Purchase Agreement - -------------------------------------------------------------------------------- 1. Sale and Purchase 1.1. Object of the Sale ENTRUST purchases from the SELLER, and the SELLER sells to ENTRUST 24,000 COMPANY SHARES ("the SHARES") pursuant to the terms and conditions of this AGREEMENT. 1.2. Amount of Purchase Price The PURCHASE PRICE shall be composed of (i) the BASIS PRICE and, if any, the PRICE ADJUSTMENT, provided, however, that such PRICE ADJUSTMENT shall be due only if, within 90 days after CLOSING, ENTRUST obtains directly or through the COMPANY 100% of the COMPANY SHARES. The right of the SELLER to the PRICE ADJUSTMENT expires at midnight on the 90th day after CLOSING. 1.3. Basis Price 1.3.1. The BASIS PRICE shall be paid to the Seller at CLOSING in (i) USD 1,725,024 -- and (ii) 180,821 CONSIDERATION SHARES, valued at USD 58.30 each pursuant to Sec. 2.1.1. 1.3.2. Notwithstanding the previous Sec. 1.3.1., 22,369 out of the 180,821 CONSIDERATION SHARES shall be placed into ESCROW pursuant to Sec 1.5. 506 CONSIDERATION SHARES out of the 180,821 CONSIDERATION SHARES (being the CONSIDERATION SHARES to be placed into escrow by Markus Kroll) shall furthermore be placed into a separate escrow, pursuant to terms and conditions still to be negotiated, but substantially in accordance with the principles applying to the CONSIDERATION SHARES held in ESCROW pursuant to Sec. 1.5.2.(b). 1.4. Price Adjustment 1.4.1. The PRICE ADJUSTMENT, if any, shall be composed of 12,884 CONSIDERATION SHARES. 1.4.2. The PRICE ADJUSTMENT, if any, shall be paid to the SELLER within 10 business days after ENTRUST obtains directly or through the COMPANY 100% of the COMPANY SHARES. The CONSIDERATION SHARES composing the PRICE -8- Share Purchase Agreement - -------------------------------------------------------------------------------- ADJUSTMENT shall be paid to the SELLER in accordance with the SELLER's instructions. If the conditions for the payment of the PRICE ADJUSTMENT are already fulfilled at CLOSING, the payment of the PRICE ADJUSTMENT shall take place at the later (i) of CLOSING or (ii) five business days following the receipt by ENTRUST of the share purchase AGREEMENTS for all outstanding COMPANY SHARES. 1.5. Escrow 1.5.1. The 22,369 CONSIDERATION SHARES held in ESCROW pursuant to Section 1.3.1. shall be delivered to, kept and/or released by the ESCROW AGENT pursuant to the ESCROW AGREEMENT. The CONSIDERATION SHARES and any cash proceeds from the sale of such CONSIDERATION SHARES whilst held in ESCROW pursuant to Sec. 1.5.4 hereof shall be deposited by the ESCROW AGENT in a Swiss bank of international standing and reputation. 1.5.2. [Intentionally omitted pursuant to waiver letter of ENTRUST] (a) [Intentionally omitted pursuant to waiver letter of ENTRUST] (b) during a period of 24 months after CLOSING, the number of CONSIDERATION SHARES held in escrow shall not be reduced to less than 22,369 CONSIDERATION SHARES, or to such amount as adjusted to account for a MAKE WHOLE PAYMENT pursuant to Sec. 2.4.2 hereof. 1.5.3. The CONSIDERATION SHARES held in escrow pursuant to Sec. 1.5.2(b) shall be kept for a period of 24 months following CLOSING as a security for claims of ENTRUST in connection with claims based on the representations and warranties of Sec. 4 and 5 and on the covenants of Sec. 7.1.1 and 7.1.2. -9- Share Purchase Agreement - -------------------------------------------------------------------------------- 1.5.4. CONSIDERATION SHARES held in ESCROW may not be sold. Notwithstanding the previous sentence, CONSIDERATION SHARES held in ESCROW only on the basis of Sec. 1.5.2(b) can be sold, provided, however, that during the 24-months period following CLOSING, or thereafter if the duration of the ESCROW is extended in connection with any warranty claim of ENTRUST, the transfer of such CONSIDERATION SHARES to the acquirer shall be valid and shall take place only if the cash consideration to be received by the SELLER is placed into escrow in lieu of the CONSIDERATION SHARES. 1.5.5. Variations in the price of the CONSIDERATION SHARES shall not cause any variation in the number of CONSIDERATION SHARES to be put in ESCROW. 1.5.6. The specific terms and conditions of the ESCROW AGREEMENT are reserved. 2. Consideration Shares 2.1. Value of Consideration Shares 2.1.1. For the purpose of the conversion of any amount expressed in USD into a certain number of CONSIDERATION SHARES or vice-versa, each CONSIDERATION SHARE shall be deemed to be worth USD 58.30 (or, after CLOSING, such other amount as adjusted for stock splits, stock dividends and other recapitalizations taking place after CLOSING). Fractions of CONSIDERATION SHARES shall be rounded to the nearest whole number, and the difference paid or deducted from amounts otherwise payable in cash, as the case may be. 2.1.2. If ENTRUST calls upon the ESCROW as a security in connection with a DEFECT, the actual market value of the CONSIDERATION SHARES, and not the value set pursuant to the previous Sec. 2.1.1. shall determine the number of CONSIDERATION SHARES to be attributed to ENTRUST. 2.2. Restrictions on Transfer 2.2.1. The CONSIDERATION SHARES are restricted securities. They are the object of the representations and warranties of Sec. 4.2 and of the covenants of Sec. 6.3. -10- Share Purchase Agreement - -------------------------------------------------------------------------------- 2.2.2. Notwithstanding the SELLER's ability to resell CONSIDERATION SHARES under United States or other securities laws, any sale or other disposition of any of the CONSIDERATION SHARES by the SELLER, other than according to the provisions of Sections 2.2.3, 2.3 or 2.4 below, shall be void and transfer no right, title, or interest in or to any of such CONSIDERATION SHARES to the purported transferee. 2.2.3. The SELLER may sell, assign or transfer CONSIDERATION SHARES to his spouse or children or to a trust established for the benefit of his spouse, children or himself, or dispose of them under his will, without compliance with Section 2.3, provided, however, that such transferee will be subject to the same contractual transfer restrictions as the SELLER. 2.3. Right of First Refusal 2.3.1. If the SELLER desires to sell, transfer or otherwise dispose of any of his CONSIDERATION SHARES, or of any interest in such CONSIDERATION SHARES, whether voluntarily or by operation of law, in any transaction other than pursuant to Section 2.2.3. or 2.4 of this Agreement, the SELLER shall first deliver written notice of his desire to do so (the "NOTICE") to ENTRUST in the manner prescribed in Section 8.5 of this Agreement. The NOTICE must specify: (i) the name and address of the party to which the SELLER proposes to sell or otherwise dispose of the CONSIDERATION SHARES or an interest in the CONSIDERATION SHARES (the "OFFEROR"), (ii) the number of CONSIDERATION SHARES the SELLER proposes to sell or otherwise dispose of (the "OFFERED CONSIDERATION SHARES"), (iii) the consideration per SHARE to be delivered to the SELLER for the proposed sale, transfer or disposition, and (iv) all other material terms and conditions of the proposed transaction. 2.3.2. ENTRUST shall have the first option to purchase all but not less than all of the OFFERED CONSIDERATION SHARES for the consideration per SHARE and on the terms and conditions specified in the NOTICE. ENTRUST must exercise such option, no later than 15 days after such NOTICE is deemed to have been delivered to it under Section 8.5, by written NOTICE to the SELLER, provided, however, that such deadline will be extended to 30 days if the number of OFFERED CONSIDERATION SHARES exceeds 50,000. 2.3.3. In the event ENTRUST duly exercises its option to purchase the OFFERED CONSIDERATION SHARES, the closing of such purchase shall take place at the offices of the COMPANY, or at any other place mutually agreed between the -11- Share Purchase Agreement - -------------------------------------------------------------------------------- PARTIES five (Swiss) business days after the expiration of deadline for the exercise of the right of first refusal pursuant to Section 2.3.2. above. If ENTRUST does not exercise its option to purchase the CONSIDERATION SHARES, the closing of the sale must take place in accordance with the terms and conditions specified in the NOTICE no later than 60 days after the expiration of the option of ENTRUST. 2.3.4. To the extent that the consideration proposed to be paid by the OFFEROR for the OFFERED CONSIDERATION SHARES consists of property other than cash or a promissory note, the consideration required to be paid by ENTRUST may consist of cash equal to the value of such property, as determined in good faith by agreement of the SELLER and ENTRUST. 2.3.6 The right of first refusal of ENTRUST set forth in this Section 2.3 shall terminate upon the closing of ENTRUST's initial public offering of Series A Common Stock pursuant to an effective registration statement under the SECURITIES ACT (a "PUBLIC OFFERING"). 2.4. Put Option and Make Whole Payment 2.4.1. If ENTRUST's Series A Common Stock is not listed on a United States national securities exchange, the Nasdaq Stock Market or another U.S. nationally recognized exchange or trading system on the first anniversary of CLOSING (the "FIRST ANNIVERSARY"), and the SELLER is the beneficial owner of CONSIDERATION SHARES as of the FIRST ANNIVERSARY, then the SELLER shall have 15 days to give written notice to ENTRUST of its intention, if any, to sell to ENTRUST (the "PUT RIGHT"), all, but not less than all, of the CONSIDERATION SHARES owned by the SELLER (including any CONSIDERATION SHARES to be released from escrow on the FIRST ANNIVERSARY but excluding any CONSIDERATION SHARES remaining in escrow after the FIRST ANNIVERSARY) (the "PUT SHARES"). If the SELLER exercises its PUT RIGHT, the SELLER agrees to sell the PUT SHARES to ENTRUST, and ENTRUST agrees to purchase the PUT SHARES from the SELLER, at a price of USD $58.30 (subject to adjustment for stock dividends, stock splits and other recapitalizations) (the "STANDARD PUT PRICE"). The PUT RIGHT is subject to the following: (a) [Intentionally omitted pursuant to waiver letter of ENTRUST] -12- Share Purchase Agreement - -------------------------------------------------------------------------------- (b) the payment of the STANDARD PUT PRICE against the delivery of the PUT SHARES shall be made in three equal quarterly installments beginning within 5 (Swiss) business days after ENTRUST has received notice of exercise of the PUT RIGHT. 2.4.2. If ENTRUST's Series A Common Stock is listed on a United States national securities exchange, the Nasdaq Stock Market or another U.S. nationally recognized exchange or trading system prior to the FIRST ANNIVERSARY, and the MARKET PRICE is less than USD $48.30 (subject to adjustment for stock dividends, stock splits and other recapitalizations) (the "IPO PUT PRICE"), then ENTRUST shall make an additional payment per CONSIDERATION SHARE, in cash or in shares of its Series A Common Stock (the choice of either form being at the sole discretion of ENTRUST), to the SELLER equal to the difference between the IPO PUT PRICE and the MARKET PRICE (the "MAKE WHOLE PAYMENT"), subject to the following provisions: (a) [Intentionally omitted pursuant to waiver letter of ENTRUST] (b) ENTRUST agrees to deliver the MAKE WHOLE PAYMENT pursuant to the instructions of the SELLER within 10 Swiss business days after the end of the relevant period for the determination of the MARKET PRICE pursuant to Sec. 2.4.3 hereinafter. (c) Notwhithstanding the previous paragraph and Sec. 1.5.5, any MAKE WHOLE PAYMENT made in connection with any CONSIDERATION SHARES held in escrow pursuant to Sec. 1.5 shall be placed by ENTRUST into ESCROW and shall be held and released like the CONSIDERATION SHARES it relates to. 2.4.3. MARKET PRICE means the average of the closing sale price of ENTRUST's Series A Common Stock on the principal United States securities exchange or trading market for such stock (the "PRINCIPAL MARKET") for the ten (10) trading days beginning on the first day of trading of such stock on the PRINCIPAL MARKET. -13- Share Purchase Agreement - -------------------------------------------------------------------------------- 3. Closing 3.1. Conditions Precedent CLOSING is subject to the following conditions precedent: (a) the approval of the AGREEMENT by the board of directors of the COMPANY; (b) the approval of the AGREEMENT by the stockholders and the board of directors of ENTRUST; (c) the holding of outstanding COMPANY SHARES at CLOSING by no more than two minority shareholders; and (d) the Watermark intellectual property has been transferred to the WATERMARK COMPANY pursuant to Sec. 7.4. prior to CLOSING. 3.2. Completion of the sale 3.2.1. The sale and purchase of the SHARES will be completed at the offices of Bar & Karrer, Seefeldstrasse 19, 8008 Zurich, at the latest on 8 June 1998 ("CLOSING"). 3.2.2. At CLOSING, the SELLER shall produce and deliver to ENTRUST: (a) share certificates endorsed to ENTRUST representing the SHARES; (b) share certificates endorsed to the COMPANY representing the COMPANY SHARES held in treasury by the COMPANY as of CLOSING; (c) the original of the minutes of the board of the COMPANY authorizing the transfer of the SHARES to ENTRUST; (d) the original share register of the Company (Art. 686 CO), duly signed by the board of directors, and bearing ENTRUST as shareholder for the SHARES, without any restriction or limitation; and (e) the resignation letter of Dr. Markus Kroll and of Mr. Peter Titz. 3.2.3. At CLOSING, ENTRUST shall, on its part, deliver to the SELLER: -14- Share Purchase Agreement - -------------------------------------------------------------------------------- (a) a certificate of the Secretary evidencing the decision of the BOARD of ENTRUST approving this AGREEMENT; (b) an original and irrevocable promise by a bank of international standing and reputation to pay the BASIS PRICE, and, if due at CLOSING, the PRICE ADJUSTMENT or, at the election of ENTRUST, a bank check drawn on a bank of international standing and reputation and issued for the same amount; (c) stock certificates registered in the name of the SELLER for the number of CONSIDERATION SHARES; (d) a receipt issued by the ESCROW AGENT as proof that the CONSIDERATION SHARES to be delivered to the ESCROW AGENT at CLOSING pursuant to Sec. 1.5.1 have been placed into ESCROW. 3.3. Transfer of Risks The risks and profits relating to the SHARES and to the COMPANY shall pass to ENTRUST at CLOSING. 4. Representations of Seller Subject to the disclosure made in the Disclosure Letter (Exhibit DIL) and to the provisions of Sec. 5 below, the SELLER makes the following representations, which truly and accurately reflect the factual and legal situation as of the date of this AGREEMENT. 4.1. With Respect to US Securities Regulations 4.1.1. With respect to the CONSIDERATION SHARES issued to and acquired by the SELLER hereunder, the SELLER represents and warrants as follows: (a) The SELLER will be acquiring the CONSIDERATION SHARES for his own account for investment only, and not with a view to, or for sale in connection with, any distribution of such CONSIDERATION SHARES in violation of the SECURITIES ACT or any rule or regulation under the SECURITIES ACT. (b) The SELLER has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the acquisition of the -15- Share Purchase Agreement - -------------------------------------------------------------------------------- CONSIDERATION SHARES and to make an informed investment decision with respect to such investment. (c) The SELLER is not a "U.S. person" (as defined in Regulation S under the SECURITIES ACT ("REGULATION S"). (d) The SELLER understands and acknowledges that (i) the CONSIDERATION SHARES, if and when issued, will be "restricted securities" under Rule 144 of the SECURITIES ACT and may not be offered or sold in the United States or to, or for the account or benefit of, any U.S. person unless such securities are registered under the SECURITIES ACT or such offer or sale is made pursuant to an exemption from the registration requirements of the SECURITIES ACT, (ii) the CONSIDERATION SHARES are being distributed by ENTRUST pursuant to the terms of REGULATION S, which permits securities to be sold to non-U.S. persons in "offshore transactions" (as defined in REGULATION S), subject to certain terms and conditions, and (iii) hedging transactions involving the CONSIDERATION SHARES may not be conducted unless in compliance with the SECURITIES ACT. (e) The SELLER has signed this AGREEMENT outside the United States. 4.1.2. The following are definitions contained in REGULATION S as in effect on the date of this Agreement: (a) "U.S. person" means: (i) Any natural person resident in the United States; (ii) Any partnership or corporation organized or incorporated under the laws of the United States; (iii) Any estate of which any executor or administrator is a U.S. person; (iv) Any trust of which any trustee is a U.S. person; (v) Any agency or branch of a foreign entity located in the United States; (vi) Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; -16- Share Purchase Agreement - -------------------------------------------------------------------------------- (vii) Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) Any partnership or corporation if: - Organized or incorporated under the laws of any foreign jurisdiction; and - Formed by a U.S. person principally for the purpose of investing in securities not registered under the SECURITIES ACT, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) of the SECURITIES ACT) who are not natural persons, estates or trusts. (b) The following are not "U.S. persons": (i) Any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States; (ii) Any estate of which any professional fiduciary acting as executor or administrator is a U.S. person if: An executor or administrator of the estate who is not a U.S. person has sole or shared investment discretion with respect to the assets of the estate; and The estate is governed by foreign law; (iii) Any trust of which any professional fiduciary acting as trustee is a U.S. person, if a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person; (iv) An employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country; (v) Any agency or branch of a U.S. person located outside the United States if: - The agency or branch operates for valid business reasons; and -17- Share Purchase Agreement - -------------------------------------------------------------------------------- - The agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located; and (vi) The International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans. (c) "United States" means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia. 4.2. With Respect to the SHARES and the COMPANY's Capital 4.2.1. The SHARES have been duly issued and are fully paid in. They are free of any pledge, charge, encumbrances, or restrictions of any kind or nature. 4.2.2. The SELLER has good and valid title to the SHARES and he may freely dispose of such SHARES without any limitation or restriction of any kind or nature. 4.2.3. The COMPANY has a an issued share capital of CHF 400,000.-- composed of 40,000.--fully paid in registered shares with a nominal value of CHF 10.-- each. 8,000 of said registered shares are preferred shares. In addition to the issued share capital, the COMPANY has a conditional capital of CHF 50,000.-- for 5,000 registered shares with a par value of CHF 10.-- each. The COMPANY has no other issued, authorized or conditional equity. 4.2.4. There are no subscription rights, options, warrants, offers or other commitments outstanding, which would oblige the COMPANY to issue any new COMPANY SHARES or to transfer such COMPANY SHARES. Any such rights, options or offers disclosed to ENTRUST in the due diligence have extinguished without affecting the representation made under Sec. 4.2.3 above. 4.2.5. No prior issue, payment, contribution, sale, redemption, or transfer in respect of the SHARES, has given or may give rise to any right, claim or action against the COMPANY or ENTRUST. 4.2.6. The SELLER has granted 500 options to Peter Titz and 1,200 options to Markus Kroll in relation to his SHARES. SELLER represents and warrants that, despite of these -18- Share Purchase Agreement - -------------------------------------------------------------------------------- options, he is entitled to sell all his SHARES to ENTRUST, provided that the following CONSIDERATION SHARES (forming part of the SELLERS' PURCHASE PRICE) are delivered to the SELLER at CLOSING: (i) 2015 CONSIDERATION SHARES registered in the name of Peter Titz, and (ii) 4,837 CONSIDERATION SHARES registered in the name of Markus Kroll, of which 506 shall be put into escrow pursuant to Sec. 1.3.2. 4.3. With Respect to the COMPANY 4.3.1. Existence, Good Standing, and Records 4.3.1.1. The excerpt from the Commercial Register and the articles of association in Exhibit DIL are current, true, and complete. 4.3.1.2. The minutes of the shareholders' and of the board of directors' meetings listed in Exhibit DIL contain a complete, true and accurate record of all such meetings over the period mentioned therein. 4.3.1.3. To the extent that the COMPANY carries business outside of Switzerland, it is presently in good standing and having the necessary licences and permits to carry on its business in these jurisdictions. 4.3.1.4. The COMPANY has no subsidiary, and has no participation in any other entity, except for its participation in Swiss Security Service Laboratory AG, Solothurn. 4.3.2. Accounts 4.3.2.1. The accounts attached in Exhibit DIL, including the first quarter results submitted to ENTRUST, comply with the requirement of the Swiss Code of Obligations, and have been prepared in accordance with accounting principles and practices generally accepted in Switzerland. 4.3.2.2. Subject to the applicable accounting principles, the audited accounts as of 31 December 1997 (the "Accounts"), as well as the first quarter results, as per the date they were established: (a) set forth without overestimation the capital, reserves, assets, and profits of the COMPANY; (b) fully provide for all bad or doubtful claims and receivables; -19- Share Purchase Agreement - -------------------------------------------------------------------------------- (c) fully provide for all liabilities, including contingent liabilities, or disclose them in the notes; and (d) are not affected (except as disclosed in the Accounts) by any extraordinary or exceptional event, circumstance or item. 4.3.2.3. The accounts of the COMPANY for each financial year since its creation have been consistently approved, without any qualification or restriction of any kind, by the statutory auditors of the COMPANY. 4.3.2.4. The accounting records of the COMPANY are up to date and contain complete and accurate details of all transactions of the COMPANY in compliance with Art. 662 et seq. and 957 et seq. CO. 4.3.2.5. The COMPANY's records' systems and information, and the means of access to them, are under the COMPANY's direct control. 4.3.2.6. There was no distribution of, nor any decision or committment to distribute any dividend in whatever form for the financial year ending on 31 December 1997. The spin-off of the WATERMARK BUSINESS pursuant to Sec. 7.4. is reserved. 4.3.2.7. ENTRUST is aware that the first quarter results do not contain the accrued bonus payments for the first quarter of 1998, since the bonus payment, if any, shall be decided at the end of the year. Said bonus payments are to be made pursuant to the provisions of the employment agreements disclosed to ENTRUST. 4.3.2.8. The issue prospectus dated 22 May 1998, including the financial statements contained therein, constitutes full, true and plain disclosure of all material facts relating to the COMPANY as of such date. The issue prospectus contains no untrue statement of material facts, and the financial figures contained in the issue prospectus are based on the same principle as those applied for the establishement of the Accounts, as represented above in this Sec. 4.3.2. 4.3.3. Financing 4.3.3.1. The COMPANY has not made nor entered into any contract to make any loan to any person or other arrangement whereby it is or may be owed any money other than trade debts incurred in the ordinary course of business. 4.3.3.2. The COMPANY is not entitled to the benefit of any debt otherwise than as the original creditor and has not factored or discounted any debt or agreed to do so. -20- Share Purchase Agreement - -------------------------------------------------------------------------------- 4.3.3.3. All of the accounts receivable which are reflected in the Accounts as owed to the COMPANY (apart from bad and doubtful debts to the extent to which they have been provided for in the Accounts) or which have subsequently been recorded in the books of COMPANY have realised or are reasonably expected to realise in the normal course of collection and within three months of CLOSING their full value as included in the Accounts, after deduction of any provision for bad debts. 4.3.3.4. ENTRUST is aware that some employees may have an overdraft with the COMPANY, such overdraft being in aggregate of no more than CHF 50,000.--. 4.3.4. Technical characteristics 4.3.4.1. The quality of the COMPANY'S source code base in terms of security design, documentation, performance, stability and reliability including year 2000 compliance is sufficient to carry on the business of the COMPANY as currently contemplated, subject, however, to (i) the ongoing improvements and developments made in the ordinary course of the COMPANY's business, and (ii) unforseen external market and technology developments. 4.3.5. Intellectual property 4.3.5.1. The COMPANY owns, or is licensed or otherwise possesses a right to use, all INTELLECTUAL PROPERTY (as defined below) used in the operation of its business or necessary for the operation of its business as currently conducted, except as otherwise disclosed in Exhibit IPR. The COMPANY has taken reasonable measures to protect the proprietary nature of trade secrets and confidential information (as defined below) that it owns or uses. Except as disclosed in Exhibit IPR, the Company has not granted any rights to any of the INTELLECTUAL PROPERTY owned by the COMPANY (other than any rights in any INTELLECTUAL PROPERTY not owned by the COMPANY that constitutes commercially available software generally available to the public) to any person or business entity. To the SELLER's knowledge, no other person or business entity is infringing, violating or misappropriating any of the INTELLECTUAL PROPERTY that the COMPANY owns. The COMPANY has acquired all rights to INTELLECTUAL PROPERTY developed or held by any employees (within the scope and term of his employment or otherwise relating to the current or proposed business of the COMPANY) or third parties who developed INTELLECTUAL PROPERTY for the COMPANY and no outstanding claims for the payment of any purchase price or indemnity in respect of such INTELLECTUAL PROPERTY is threatened or outstanding, except as disclosed in Exhibit IPR. -21- Share Purchase Agreement - -------------------------------------------------------------------------------- 4.3.5.2. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means all (A) patents, patent applications, patent disclosures and all related continuation, continuation in part, divisional, reissue, reexamination, utility model, certificate of invention and design patents, patent applications, registrations and applications for registrations; (B) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof; (C) copyrights and registrations and applications for registration thereof; (D) computer software, data and documentation; (E) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information; (F) other proprietary rights relating to any of the foregoing and (G) copies and tangible embodiments thereof. 4.3.5.3. None of the activities or business conducted by the COMPANY infringes, violates or constitutes a misappropriation of (or in the past infringed, violated or constituted a misappropriation of) any INTELLECTUAL PROPERTY rights of any other person or business entity, except as disclosed in Exhibit IPR. The COMPANY has not received any complaint, claim or notice alleging any such infringement, violation or misappropriation, and, to SELLER's knowledge, there is no basis for any such complaint, claim or notice. 4.3.5.4. Exhibit IPR identifies each (a) patent or registration that has been issued to the COMPANY with respect to any of its INTELLECTUAL PROPERTY, (b) pending patent application or application for registration that the COMPANY has made with respect to any of its INTELLECTUAL PROPERTY and (c) license or other agreement pursuant to which the COMPANY has granted any rights to any third party with respect to any of its INTELLECTUAL PROPERTY. The COMPANY has delivered to ENTRUST or its advisors correct and complete copies of all such patents, registrations, applications, licenses and agreements (as amended to date) and has specifically identified and made available to ENTRUST or its advisors correct and complete copies of all other written documentation evidencing ownership of, and any claims or disputes relating to, each such item. With respect to each item of INTELLECTUAL PROPERTY that the COMPANY owns, except as provided in Exhibit IPR: (a) the COMPANY possesses all right, title and interest in and to such item; (b) such item is not subject to any outstanding judgment, order, decree, stipulation or injunction; and -22- Share Purchase Agreement - -------------------------------------------------------------------------------- (c) the COMPANY has not agreed to indemnify any person or business entity for or against any infringement, misappropriation or other conflict with respect to such item. 4.3.5.5. The COMPANY has supplied ENTRUST or its advisors with correct and complete copies of all licenses, sublicenses or other agreements (as amended to date) pursuant to which the COMPANY uses such INTELLECTUAL PROPERTY, all of which are annexed in Exhibit IPR. To the SELLER's knowledge and with respect to each such item of INTELLECTUAL PROPERTY, except as otherwise disclosed in Exhibit IPR: (a) the license, sublicense or other agreement covering such item is legal, valid, binding, enforceable and in full force and effect with respect to the COMPANY, and is legal, valid, binding, enforceable and in full force and effect with respect to each other party thereto; (b) neither the COMPANY nor any other party to such license, sublicense or other agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default by the COMPANY or by any such other party, or permit termination, modification or acceleration thereunder; (c) the underlying item of INTELLECTUAL PROPERTY is not subject to any outstanding judgment, order, decree, stipulation or injunction to which the COMPANY is a party or has been specifically named, nor subject to any other outstanding judgment, order, decree, stipulation or injunction; 4.3.5.6. With respect to each such item of INTELLECTUAL PROPERTY except as otherwise disclosed in Exhibit IPR: (a) the COMPANY has not agreed to indemnify any person or business entity for or against any interference, infringement, misappropriation or other conflict with respect to such item; and (b) no license or other fee is payable upon any transfer or assignment of such license, sublicense or other agreement by the terms thereof or the terms of any other agreement or arrangement with the other party or parties thereto. 4.3.5.7. The SELLER warrants to the best of its knowledge that the COMPANY has taken and plans to take up to the year 2000 all reasonable measures up to then known as state of the art to ensure that its software products are designed to perform, and will perform correctly at all times prior to, during and after the calendar year 2000, all functions, calculations, sequencing, displays and other processing of calendar dates and date-related data without error or degradations in performance, specifically including -23- Share Purchase Agreement - -------------------------------------------------------------------------------- any error relating to, or the product of, date data which represent different centuries or more than one century. 4.3.6. Insurances 4.3.6.1. Exhibit DIL lists all private insurance contracts concluded by the COMPANY. 4.3.6.2. All premiums due in relation to the COMPANY's insurances have been paid, and nothing has been done or omitted to be done which would make any policy of insurance of the COMPANY void or voidable or which is likely to result in an increase in premium or which would release any insurer from any of its obligations under any policy of insurance of the COMPANY. 4.3.6.3. There is no insurance claim pending or outstanding and there are no circumstances likely to give rise to any such claim. 4.3.7. Customers and Suppliers 4.3.7.1. To the SELLER's best knowledge, none of the current COMPANY's customers or suppliers intends or has threatened to cease or alter their business with the COMPANY. The SELLER is not aware of the existence of any formal change of control clause in any material contract with any customer or supplier of the COMPANY, other than as might be contained in the contracts listed in Exhibit DIL and provided to ENTRUST. The SELLER has not made and is not expected to make any investigations as to the intents of the COMPANY's suppliers and customers. 4.3.7.2. Neither the COMPANY nor the SELLER has made extraordinary promises, commitments or assurances, whether oral or written, express or implied, to the effect that the COMPANY will or may: (a) offer future price reductions, concessions or other special terms to any customer of the COMPANY; (b) accept future price increases or additional charges or other special terms to any supplier of the COMPANY; or (c) be liable to the payment of any liquidated damages, penalties or similar liabilities. -24- Share Purchase Agreement - -------------------------------------------------------------------------------- 4.3.7.3. There is no assumed contract which the SELLER can reasonably forsee that will result in any material loss upon performance thereof by the COMPANY after CLOSING. 4.3.8. Employees 4.3.8.1. Exhibit DIL accurately lists the name, position, and current annual compensation of each employee of the COMPANY. The employment agreements with the key-employees enclosed in Exhibit DIL are true and correct and fully in force. 4.3.8.2. None of the key-employees has notified the COMPANY of its intent to terminate employment or is expected to terminate employment. With the exception of military service and regular vacations, no such key-employee is absent from work on disability or other leave or has notified the COMPANY of intent to take any such leave. ENTRUST is aware of a possible termination of the contract with Mr. Herrigel as well as of the absence of Mr Wildhaber for education purposes (for an aggregate amount of about 15 days). 4.3.8.3. All salaries, bonuses or other compensation of any kind and nature have been timely paid to the COMPANY's employees. 4.3.9. Pensions and social security contributions 4.3.9.1. The COMPANY has paid all contributions it is required to make by law or by agreement with its employees, with any labour organization, or with any insurance company with respect to pensions and social security, and especially all contributions to the AHV / IV, ALV and SUVA. 4.3.9.2. The COMPANY complies with all legal obligations with respect to its employees' pensions and social security. 4.3.10. Litigation 4.3.10.1. To the knowledge of the SELLER, there are no suits, arbitrations, administrative or other proceedings (including debt collection proceeding or other insolvency proceedings) in any matter subject to private or to public law, pending, threatened against or otherwise affecting the COMPANY. 4.3.10.2. The COMPANY is not subject to any judgement, order or decree which has affected or may affect its business. -25- Share Purchase Agreement - -------------------------------------------------------------------------------- 4.3.11. Taxes 4.3.11.1. The COMPANY has filed all tax returns and withheld and paid or discharged all taxes, assessments and penalties due and payable , and there is no further liability for any such taxes and no interests or penalties accrued or accruing with respect thereto. 4.3.11.2. All tax returns of the COMPANY are accurate and complete. To the SELLER's best knowledge, no audit of any tax return of the COMPANY is pending or proposed. There is no fact, circumstance, organizational structure, act or event which could give rise to any claim of tax underpayments, penalties, or disqualifications of any tax status of the COMPANY for prior years, which have not been discharged of or provisioned for. 4.3.11.3. For the tax period ending on 31 December 1997, the tax returns can be filed on the basis of the accounts for the business year 1997 as attached in Exhibit DIL. There are no outstanding agreements or waivers extending any period of limitation applicable to any tax return of the COMPANY. Notwithstanding the previous sentence, the COMPANY has received an extension of the filing of the tax return for 1997, since the COMPANY has just received the audit report in relation to the 1997 figures. 4.3.11.4. There are no disputes as to taxes nor any tax liens, whether existing or threatened, on any assets as well as on any income or expense item of the profit and loss statement of the COMPANY. 4.3.11.5. The words "tax" and "taxes" in this AGREEMENT mean all taxes, however denominated, including interest, penalties, and other additions to taxes that may become payable in respect thereof, imposed by the state, the cantons, the municipalities or by any other agency or political subdivision, such as income taxes and capital taxes due on the basis of taxable profit and taxable capital as declared in the tax returns, or other taxes (for example VAT) due on the basis of a filed tax return, as well as all other taxes, including but not limited to taxes due on the basis of an adjustment of figures as declared in tax returns filed with the tax authorities or due on the basis of an adjustment of a provisional or final assessment from whatever authority and for whatever reason. 4.3.12. Events since Accounting Date and since end of Q1 4.3.12.1. Since 31 December 1997, respectively since 31 March 1998: -26- Share Purchase Agreement - -------------------------------------------------------------------------------- (a) the business of the COMPANY has been carried on in the ordinary and normal course; (b) there has been no material adverse change in the financial or market position of the COMPANY, including any such change in respect of turnover, profits, margins of profitability, liabilities (actual or contingent) or expenses of the COMPANY; and (c) there has been no substantial and abnormal change in the basis or terms on which clients or suppliers are prepared to do business with the COMPANY. 4.3.12.2. The spin-off of the Watermark business pursuant to Sec. 7.4 is excluded from the representations made in this Sec. 4.3.12. 4.3.13. Effect of the transaction 4.3.13.1. To the SELLERS' best knowledge the customers and suppliers of the COMPANY have not been informed that the control over the COMPANY may be sold to ENTRUST. The SELLER is not aware of any formal notification that the execution or CLOSING of this AGREEMENT and of the change of control will lead to the termination of the relationship between the COMPANY and its normal customers or suppliers. ENTRUST has been made aware that it might be preferable to maintain the name of the COMPANY and the Swiss character of the COMPANY to avoid negative impacts on the relationship with the COMPANY's customers and suppliers. 4.3.13.2. The execution of the AGREEMENT and the observance and performance of its provisions by the SELLER, including the spin-off of the WATERMARK business, will not: (a) result in a breach of any contract, law, regulation, order, judgement, injunction, undertaking, decree or other like imposition to or by which the COMPANY is a party or is bound, or entitle any person to terminate or avoid any contract to which the COMPANY is a party, or have any material effect on any such contract; (b) result in the loss or impairment of or any default under any licence, authorization or consent required by the COMPANY for the purposes of its business; (c) result in the creation, imposition, crystallisation or enforcement of any encumbrance whatsoever on any of the assets of the COMPANY; -27- Share Purchase Agreement - -------------------------------------------------------------------------------- (d) result in any present indebtedness of the COMPANY becoming due and payable, or capable of being declared due and payable, prior to its stated maturity date or in any financial facility of the COMPANY being withdrawn; or (e) result in any grant or subvention to the COMPANY, in connection with any research, developement, or consulting project being cancelled or claimed back; 4.3.13.3. There is no contract to which the COMPANY is party which formally depends on the continuation of the connection (whether as an officer of the COMPANY or otherwise) of any person with the COMPANY. 4.3.13.4. Notwithstanding the intended generality of the above, the representations made in this Sec. 4.3.13 are limited by the specific qualifications made in this agreement (e.g. in Sec. 4.3.7.1) and by the general principles governing the liability of the SELLER and laid down in Sec. 5.4. 4.3.14. Other material items To the SELLER's best knowledge there is no fact, contractual or legal obligations, which has or may have a material adverse effect on the value of the COMPANY, and which, if known to ENTRUST prior to the date of this AGREEMENT, could have caused ENTRUST not to enter into this AGREEMENT. 5. Warranty Claims Against Seller 5.1. Subject to the provisions of this AGREEMENT, the SELLER shall be liable to ENTRUST for any breach of the representations made in Sec. 4 above (a "DEFECT"), and shall indemnify and hold ENTRUST (or at the option of ENTRUST, the COMPANY) harmless against any damage incurred by ENTRUST or by the COMPANY, unless ENTRUST was aware of the DEFECT at SIGNING. 5.2. In order to account for the effective participation of the SELLER in the COMPANY's capital, the liability of the SELLER for the damage caused by the DEFECT shall be reduced to 59.274 % of the damage, unless such damage affects directly the SHARES. 5.3. For the purpose of any claim for the reduction of the PURCHASE PRICE in connection with any DEFECT, such DEFECT shall be deemed to affect pro rata the value of the SHARES in the same manner as it affects the value of the COMPANY. The hypothetical value of the SHARES without the DEFECT shall be deemed to be equal to -28- Share Purchase Agreement - -------------------------------------------------------------------------------- the PURCHASE PRICE, or, if no PRICE ADJUSTMENT was payable, to the BASIS PRICE. 5.4. ENTRUST shall notify the SELLER in writing of any DEFECT no later than 45 days after ENTRUST has become aware of such DEFECT. ENTRUST shall not be deemed to have been aware of, or to have accepted any DEFECT, unless such DEFECT has been clearly disclosed by the COMPANY (i) in the course of the due diligence or (ii) in the documents and information provided to ENTRUST and listed in the answers to the due diligence questionnaire dated 10 May 1998, as attached in Exhibit DIL. The requirement that ENTRUST examine the object of the sale after CLOSING pursuant to Art. 201 CO is waived. 5.5. The claims of ENTRUST in connection with any DEFECT shall be subject to a statute of limitation of 24 months after CLOSING and of one year after the notification of the DEFECT by ENTRUST pursuant to Sec. 5.2., provided, however, that claims raised in connection with taxes for any given tax period shall expire one year after the final assessment for such tax period. 5.6. No claim may be raised against the SELLER in connection with any DEFECT, unless the aggregate amount of the damage claimed by ENTRUST against the SELLER and/or any other person in connection with DEFECTS exceeds CHF 100,000.--. The maximum aggregate amount of warranty claims against the SELLER shall be limited to 59.274% of CHF 15,000,000. If a DEFECT affects only the value of the SHARES, without any damage for the COMPANY, the claim of ENTRUST shall be limited to the PURCHASE PRICE paid. 5.7. A rescission of the sale of the SHARES is excluded. 6. Representations of Entrust 6.1. Good Standing and Authority 6.1.1. ENTRUST is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, United States of America, and has requisite power and authority (corporate and other) to own its properties, to carry on its business as now being conducted, to execute and deliver this AGREEMENT and to consummate the transactions contemplated hereby. -29- Share Purchase Agreement - -------------------------------------------------------------------------------- 6.1.2. The execution and delivery of this AGREEMENT by ENTRUST, and the consummation by ENTRUST of all transactions contemplated hereby, have been duly authorized by all requisite corporate action on the part of ENTRUST. 6.2. Consideration Shares All CONSIDERATION SHARES will be, when issued in accordance with this AGREEMENT, duly authorized, validly issued, fully paid and nonassessable. 6.3. Capitalization 6.3.1. As of the date of this AGREEMENT, the authorized capital stock of ENTRUST consists of (a) 15,000,000 shares of Series A Common Stock, USD .01 par value per share, of which approximately 5,078,010 shares are issued and outstanding, (b) 260,000 shares of Series B Common Stock, USD .01 par value per share, of which 221,052 shares are issued and outstanding, (c) 260,000 shares of Series B Non-Voting Common Stock, of which 38,948 shares are issued and outstanding, (d) 2,500,000 shares of Special Voting Stock, USD .01 par value per share, of which 1,925,000 shares are issued and outstanding, and (e) 500,000 shares of Preferred Stock, USD .01 par value per share, none of which shares are issued or outstanding. ENTRUST's Series A Common Stock. 6.3.2. In addition to the issued stock of ENTRUST, as of the date of this AGREEMENT, ENTRUST has reserved 1,857,230 shares of Series A Common Stock for issuance pursuant to the 1996 Stock Incentive Plan. ENTRUST anticipates reserving additional Series A Common Stock for issuance pursuant to the 1996 Stock Incentive Plan or similar plan. 6.3.3. The capital stock table of ENTRUST attached hereto as Exhibit CAP shows the approximate fully diluted capital structure of ENTRUST at CLOSING. 6.3.4. As a holder of CONSIDERATION SHARES, the SELLER shall have the same rights, preferences and privileges as the other holders of ENTRUST's Series A Common Stock. 6.4. Governmental Consents No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any US GOVERNMENTAL AUTHORITY is required on the part of ENTRUST in connection with the execution and delivery of this -30- Share Purchase Agreement - -------------------------------------------------------------------------------- AGREEMENT, the offer, issuance, sale and delivery of the CONSIDERATION SHARES, or the other transactions to be consummated at the CLOSING, as contemplated by this AGREEMENT. 6.5. Warranty Claims Against Entrust 6.5.1. Warranty claims in connection with a breach of the representations of ENTRUST made under Sec. 6.1 to 6.3 are subject to the following limitations: (a) The claims shall be capped at USD 10.-- per CONSIDERATION SHARE, i.e. the difference between the agreed upon price per CONSIDERATION SHARE of USD 58.30 and the price of USD 48.30 guaranteed by Sec. 2.4.2. (b) If the conditions for the exercise of PUT RIGHT pursuant to Sec. 2.4.1. are fulfilled, any warranty claim shall be excluded altogether. 6.5.2. If the breach of Sec. 6.4.3 impairs the enforceability of the PUT RIGHT of Sec. 2.4.1. and 2.4.3, the claim shall be capped at 58.30 per CONSIDERATION SHARE 6.5.3. Without prejudice to the foregoing, Warranty Claims shall be subject to a time-bar of 24 months following CLOSING. 7. Covenants 7.1. Management of the Company 7.1.1. Starting on the date of this AGREEMENT and until the earlier of (i) three months following CLOSING or (ii) the issuance by the COMPANY of new organizational by-laws under the control of ENTRUST, the SELLER shall not, alone or acting with others, without the prior consent of ENTRUST: (a) cause the business of the COMPANY to be conducted in any manner inconsistent with the ordinary and usual course of the COMPANY's business; (b) cause the COMPANY to enter into any contract or into any commitment which is likely to have a material adverse effect upon the operations or activities of the COMPANY or the value of the COMPANY for ENTRUST; -31- Share Purchase Agreement - -------------------------------------------------------------------------------- (c) cause the COMPANY to terminate any of the employment agreements with any person employed by the COMPANY at the date of this AGREEMENT or to transfer the title to any of the INTELLECTUAL PROPERTY listed in Exhibit IPR; (d) take any other action which is inconsistent with the provisions of this AGREEMENT; or (e) cause the COMPANY to sell any COMPANY SHARES held in treasury, or to issue any new COMPANY SHARE or options, or to take any action which would change the situation with respect to the COMPANY SHARES and, generally, the COMPANY's capital, as represented in Sec.4.2. 7.1.2. The expenses incurred by the COMPANY in connection with the current venture capital round shall not be charged to the COMPANY. No fees shall be paid in connection with any work performed by or on behalf of INVISION. 7.2. Product Liability 7.2.1. The SELLER undertakes to hold the COMPANY free of any harm caused by warranty claims in connection with defects affecting the products of the COMPANY existing at CLOSING, provided, however, that ENTRUST cannot call upon this covenant in connection with any product of the COMPANY if (i) ENTRUST or the COMPANY fails to show reasonable care in maintaining such product or in responding to customers' requests with respect to such product, or (ii) if ENTRUST or the COMPANY made any modification to such product. The claim of ENTRUST may only be raised if the warranty claims against the COMPANY exceed in aggregate an amount of CHF 250,000, and if such claims are notified to the COMPANY within 12 months following CLOSING. The claim of ENTRUST against the SELLER shall be limited to 59.274 % of the excess of the aggregate warranty claims raised against the COMPANY over CHF 250,000.--. 7.2.2. The claim of ENTRUST against the SELLER pursuant to this Sec. 7.2 is subject to and shall be covered by the cap of Sec. 5.6. 7.3. Consideration Shares 7.3.1. The SELLER acknowledges that for a period of one year following the CLOSING (the "DISTRIBUTION COMPLIANCE PERIOD"), the SELLER shall not (a) engage in any activity for the purpose of, or which may reasonably be expected to have the effect of, conditioning the market in the United States for the CONSIDERATION SHARES or (b) -32- Share Purchase Agreement - -------------------------------------------------------------------------------- unless such CONSIDERATION SHARES are registered under the SECURITIES ACT or an exemption from the registration requirements of the SECURITIES ACT is available, offer, sell or transfer the CONSIDERATION SHARES in the United States or to, or for the account or benefit of, a U.S. person. The SELLER understands that the CONSIDERATION SHARES or any interest therein are only transferable on the books and records of the transfer agent and registrar of ENTRUST. The SELLER further understands that neither ENTRUST nor its transfer agent and registrar will register any transfer of the CONSIDERATION SHARES except in accordance with the provisions of REGULATION S, pursuant to registration under the SECURITIES ACT or pursuant to an available exemption from registration, and that ENTRUST may place stop transfer orders with its transfer agent with respect to certificates representing CONSIDERATION SHARES. 7.3.2. Unless the CONSIDERATION SHARES shall first have been registered under the SECURITIES ACT, any proposed offer, sale or transfer during the DISTRIBUTION COMPLIANCE PERIOD of any of the CONSIDERATION SHARES shall be subject to the condition that the SELLER must deliver to ENTRUST; (a) a written certification that neither record nor beneficial ownership of the CONSIDERATION SHARES has been offered or sold in the United States or to, or for the account or benefit of, any U.S. person; (b) a written certification of the proposed transferee that such transferee (or any account for which such transferee is acquiring such CONSIDERATION SHARES) is not a U.S. person, that such transferee is acquiring such CONSIDERATION SHARES for such transferee's own account (or an account over which he or she has investment discretion) and that such transferee is knowledgeable of and agrees to be bound by the restrictions on re-sale set forth in this Agreement and REGULATION S during the DISTRIBUTION COMPLIANCE PERIOD, and (c) a written opinion of United States counsel, in form and substance reasonably satisfactory to ENTRUST, to the effect that the offer, sale and transfer of such CONSIDERATION SHARES are exempt from registration under the SECURITIES ACT. Any CONSIDERATION SHARES offered, sold or transferred during the DISTRIBUTION COMPLIANCE PERIOD in accordance with the foregoing restrictions will continue to be deemed "restricted securities" under Rule 144 of the SECURITIES ACT, notwithstanding that they were acquired in a resale transaction made pursuant to Rules 901 or 904 of REGULATION S. 7.3.3. Rule 144. The SELLER understands that "restricted securities" may be resold in the United States or to, or for the benefit of, U.S. persons in accordance with Rule 144 -33- Share Purchase Agreement - -------------------------------------------------------------------------------- of the SECURITIES ACT. The SELLER acknowledges that the following is a summary of the resale requirements of Rule 144, and such summary is qualified in its entirety by reference to such rule, a copy of which was previously provided to the SELLER. 7.3.4. Rule 144, as currently in effect, imposes the following requirements on any holder of restricted securities: (a) at the time of resale, ENTRUST must have been a public company for at least 90 days (i.e., ENTRUST must have securities registered pursuant to Section 12 of the United States Securities Exchange Act of 1934, as amended, and have filed all reports required to be field thereunder during the 12 months preceding the sale (or for such shorter period as ENTRUST is a public company); (b) the holder of restricted securities must have held such securities for at least one year; (c) the number of shares of Series A Common Stock sold by the holder within any three-month period may not exceed the greater of (a) 1% of the number of outstanding shares of Series A Common Stock or (b) the average weekly trading volume of the Series A Common Stock during the four calendar weeks preceding the filing of the Form 144; (d) the holder must sell the securities only in "brokers' transactions" or in transactions directly with a "market maker," which transactions may not involve any solicitations of orders to buy the securities or any payments to any person other than the broker executing the sale order; and (e) the holder must mail three copies of a Form 144 to the United States Securities and Exchange Commission at the same time as he or she places the sale order with the broker. 7.3.5. After the holder of CONSIDERATION SHARES has held the CONSIDERATION SHARES for two years, and assuming the holder has not been an affiliate of ENTRUST (such as an officer, director or principal stockholder) during the preceding three months, ENTRUST shall, to the extent permitted by law, at the request of SELLER remove the restrictive legend from the CONSIDERATION SHARES under Rule 144(k). Thereafter, and in respect of the transfers made in accordance with Rule 144, the holder need not comply with the restrictions on resale noted above. 7.3.6. A legend substantially in the following form will be placed on the certificates representing the CONSIDERATION SHARES which may be issued to the SELLER. -34- Share Purchase Agreement - -------------------------------------------------------------------------------- "The shares represented by this certificate have not been registered under the United States Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated (i) unless and until such shares are registered under such Act or an opinion of counsel satisfactory to Entrust Technologies Inc. is obtained to the effect that such registration is not required or (ii) except in accordance with Regulation S of such Act. Hedging transactions involving the shares represented by this certificate may not be conducted except in compliance with the Securities Act of 1933, as amended. The sale or other disposition of any of the shares represented by this certificate is restricted by a Share Purchase Agreement entered into by the holder of this certificate and Entrust Technologies Inc. A copy of the Share Purchase Agreement is available for inspection during normal business hours at the principal executive office of the corporation." 7.3.7. The SELLER, if requested by ENTRUST or the managing underwriter of a public offering of ENTRUST's Series A Common Stock or other securities pursuant to a registration statement under the SECURITIES ACT (a "REGISTRATION STATEMENT"), shall agree not to sell publicly or otherwise transfer or dispose of any CONSIDERATION SHARES or other securities of ENTRUST held by the SELLER for a specified period of time (not to exceed 180 days) following the effective date of such REGISTRATION STATEMENT; provided, however, that. (a) such agreement shall only apply to the first REGISTRATION STATEMENT covering Series A Common Stock or other securities to be sold to the public in an underwritten offering, and (b) all stockholders of ENTRUST holding not less than the number of shares of Series A Common Stock held by the SELLER and all officers and directors of ENTRUST enter into similar agreements. 7.3.8. ENTRUST represents that it has only made offers to sell the CONSIDERATION SHARES outside the U.S.A. and that it did not generally advertise in the U.S.A. in respect to the offering for sale or sale of the CONSIDERATION SHARES. 7.4. Watermark Business 7.4.1. The Watermark intellectual property (watermark specific software and filed patents) shall be transferred to a separate entity (the "WATERMARK COMPANY") prior to CLOSING in consultation with ENTRUST. The Company shall be indemnified for any claims arising from or relating to the Watermark intellectual property, either before or after CLOSING. To the extent that the COMPANY is under any obligation to perform -35- Share Purchase Agreement - -------------------------------------------------------------------------------- any work on behalf of the WATERMARK COMPANY or in connection with the Watermark intellectual property, such obligation will be taken over by the WATERMARK COMPANY at no cost for the COMPANY. If such transfer is not possible, the WATERMARK COMPANY will pay an arm's length consideration to the COMPANY and grant to the COMPANY at no charge all licenses necessary for the performance of such work. 7.4.2. Any costs (including legal costs) or taxes imposed on the COMPANY or on ENTRUST in connection with the transfer of the watermark intellectual property to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as determined by Sec. 5.2 in respect of the representations and warranties. 7.4.3. The SELLER undertakes to hold his participation in the WATERMARK COMPANY at arm's length, and, especially, not to engage in any kind of work for the WATERMARK COMPANY as a director, consultant, employee, agent or in any other position whatsoever, whether remunerated or not. 7.5. Offer to other Sellers Provided that this AGREEMENT closes pursuant to Sec. 3.1 above, ENTRUST undertakes to purchase during a period of 90 days after CLOSING any and all outstanding COMPANY SHARES offered to it pursuant to any share purchase agreement established in the form of Exhibit OTH, and completed in accordance with the principles applied for the calculation of the figures contained in the share purchase agreements entered into with the other sellers excluding INVISION. 8. Miscellaneous 8.1. Costs 8.1.1. Each Party shall bear its own costs, taxes and expenses relating to the preparation, CLOSING and implementation of this AGREEMENT. 8.2. Confidentiality Effective as of CLOSING, ENTRUSTS' obligation to the keep confidential the information received on the COMPANY shall terminate. -36- Share Purchase Agreement - -------------------------------------------------------------------------------- 8.3. Assignment 8.3.1. The rights and obligations of the PARTIES out of this AGREEMENT may not be assigned, provided, however, that ENTRUST is authorized to assign such rights and obligations to any of its affiliates. 8.3.2. In case of such an assignment of the contract by ENTRUST to any of its affiliates pursuant Sec. 8.3.1, a letter of comfort or a guarantee of ENTRUST shall be delivered to the SELLERS. 8.4. Announcements No announcement concerning the transaction contemplated by this AGREEMENT or any matter ancillary to it and no disclosure of the terms of this AGREEMENT (save as required by law, by any market regulations or as expressly provided in this AGREEMENT) shall be made by the SELLER to any person or entity, except with the prior written approval of ENTRUST. 8.5. Notices 8.5.1. Any notice or other communication to be given under this letter shall be in writing and shall be delivered by hand or sent by registered post or by courier to the address specified below, or sent by facsimile to the number specified below; (a) ENTRUST: General Counsel, Entrust Technologies Inc. 2323 North Central Expressway, Richardson, Texas, 75080, phone: 001 972 994 8020, fax 001 972 994 8005 (b) SELLER: Rainer A. Rueppel c/o Dr. Markus Kroll, Altenburger & Partners, Alte Landstrasse 128, 8702 Zollikon, Switzerland, Phone: + 41 1 392 00 07; Fax: + 41 1 392 00 86 8.5.2. Either Party hereto may change the address, facsimile number or name of the person for whose attention notices are to be addressed by serving a notice on the other party hereto in accordance with Sec. 8.5.1. 8.5.3. Each such notice or other communication shall be effective: -37- Share Purchase Agreement - -------------------------------------------------------------------------------- (a) if given by facsimile when the facsimile is transmitted to the facsimile number specified in para. 8.5.1 or (b) if given by any other means, when received at the address specified in para. 8.5.1. 8.6. Severability Whenever possible, each provision of this AGREEMENT shall be interpreted in such manner as to be effective and valid under the applicable law, but if any provision of this AGREEMENT shall be unenforceable or invalid under applicable law, such provision shall be ineffective only to the extent of such unenforceability or invalidity and be replaced by such valid and enforceable provision which bona fides parties would consider to match as closely as possible the invalid or unenforceable provision, attaining the same or a similar economic effect. The remaining provisions of this AGREEMENT shall under all circumstances continue to be binding and in full force and effect. 8.7. Construction, amendments 8.7.1. This AGREEMENT constitutes the entire agreement among the parties and, except as otherwise provided, supersedes any prior understandings or agreements, written or oral, that relate to the acquisition of COMPANY SHARES by ENTRUST. 8.7.2. This AGREEMENT may not be amended except in writing, including communications by letter, facsimile, or E-mail. 8.7.3. The PARTIES agree that the AGREEMENT shall not be construed against any PARTY on the ground that such PARTY drafted or prepared the AGREEMENT. 8.8. Governing law This AGREEMENT shall be governed by the internal law of Switzerland; the application of the Vienna (United Nations) Convention on Contracts for the International Sale of Goods is excluded. 8.9. Arbitration All disputes arising out of or in connection with the present agreement, including disputes on its conclusion, binding effect, amendment and termination shall be resolved, -38- Share Purchase Agreement - -------------------------------------------------------------------------------- to the exclusion of the ordinary courts by a three-person Arbitral Tribunal in accordance with the International Arbitration Rules of the Zurich Chamber of Commerce. The language of the arbitration shall be English. List of Exhibits - - Exhibit DIL (List of Documents submitted to Entrust) - - Exhibit CAP (Capital Structure of Entrust) - - Exhibit IPR (Intellectual Property) - - Exhibit OTH (Offer to Other Sellers) Zug, this 30 May 1998 Zug, this 30 May 1998 ENTRUST Technologies Inc. The SELLER: /s/ Brad Ross /s/ Rainer A. Rueppel - ------------------------- ------------------------------ Name: Brad Ross Rainer A. Rueppel Title: President ENTRUST TECHNOLOGIES Mr. Rainer A. RUEPPEL Stationsstrasse 30 CH-8621 Wetzikon CONSIDERATION SHARES Dear Mr. RUEPPEL Reference is made to the share purchase agreement between yourself and ourselves for the purchase of shares in R3 Security Engineering AG closed on 8 June 1998 (the "Share Purchase Agreement"). The purpose of this letter is the amendment of the Share Purchase Agreement with respect to its Section 7.3 as follows: Rule 144 Reporting Requirements From and after the time ENTRUST has securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in order to permit the Seller to sell the CONSIDERATION SHARES it holds, if it so desires, from time to time pursuant to Rule 144 or any successor to such rule or any other rule or regulation of the Securities and Exchange Commission (the "Commission") that may at any time permit the SELLER to sell its CONSIDERATION SHARES to the public without registration (the "Resale Rules"), ENTRUST will: a) comply with all rules and regulations of the Commission applicable in connection with use of the Resale Rules; b) make and keep adequate and current public information available, as those terms are understood and defined in the Resale Rules, at all times; c) file with the Commission in a timely manner all reports and other documents required of ENTRUST under the Securities Act and Exchange Act; d) furnish to the SELLER forthwith upon request (i) a written statement by ENTRUST that it has complied with the reporting requirements of the Resale Rules, the Securities Act and Exchange Act, (ii) a copy of the most recent annual or quarterly report of ENTRUST and any other reports and documents filed by ENTRUST under the Securities Act or the Exchange Act, and (iii) such other information as may be reasonably requested in availing the SELLER of any rule or regulation of the Commission which permits the selling of any such CONSIDERATION SHARES without registration; and e) take any action (including cooperation with the SELLER to cause the transfer agent to remove any restrictive legend on certificates evidencing the CONSIDERATION SHARES) which shall be reasonably requested by the SELLER or which shall otherwise facilitate the sale of the CONSIDERATION SHARES from time to time by the SELLER pursuant to the Resale Rules. Rule 144A Information Until such time as ENTRUST is subject to Section 13 or 15(d) of the Exchange Act, ENTRUST will make available, upon request, to the SELLER and prospective purchaser or transferee of the CONSIDERATION SHARES designated by the Seller, the information required to allow the resale or other transfer of such CONSIDERATION SHARES pursuant to Rule 144A under the Securities Act. Sec. 7.3.7 The legend to be placed on the certificates representing CONSIDERATION SHARES shall include the following additional transfer exception: or (iii) except to a "qualified institutional buyer" (as defined in Rule 144A promulgated under the Securities Act) in a transaction which meets the requirements of such Rule 144A. Zurich, 8 June 1998 Entrust Technologies Inc. /s/ Brad Ross - ------------------------ Brad Ross ENTRUST TECHNOLOGIES Mr. Rainer A. RUEPPEL Stationsstrasse 30 CH-8621 Wetzikon Watermark spin-off Dear Mr. RUEPPEL We confirm to you herewith that Entrust will bear up to CHF 30,000.-- of legal fees in connection with the spin-off of the Watermark business. Sec. 7.4.2. of the Share Purchase Agreement should, therefore, read as follows: "Except for an aggregate of up to CHF 30,000.-- of legal fees, any fees, costs or taxes imposed on the COMPANY or on ENTRUST in connection with the transfer of the watermark intellectual property to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as determined by Sec. 5.2 in respect of the representations and warranties." Pursuant to the information received from Dr. Markus Kroll on 6 June 1998, the tax authorities decided to levy against r3 Security Engineering AG a withholding tax of CHF 177,697 in connection with the distribution of the shares in Securights AG as a dividend. Since such taxes are to be borne pro rata by the Sellers, we will in due course, send you an invoice for your portion of the taxes, as determined in Sec. 7.4.2. of the Share Purchase Agreement. Indeed, you may be entitled, to claim back this amount from the tax authorities in accordance with the tax legislation. We thank you for your comprehension. Zurich, 8 June 1998 Entrust Technologies, Inc. /s/ Brad Ross - ----------------------- Brad Ross EX-2.5 5 FORM OF SHARE PURCHASE AGREEMENT Exhibit 2.5 Form of Share Purchase Agreement between ENTRUST Technologies Inc., a Maryland corporation (hereinafter referred to "ENTRUST") on the one part and [Name], [Address] (hereinafter referred to as the "SELLER"), on the other part (hereinafter collectively referred to as "the PARTIES") concerning the acquisition of shares of R/3/ Security Engineering AG Seegraben (the "COMPANY") TABLE OF CONTENTS Definitions.................................................................iii 1. Sale and Purchase.......................................................1 1.1. Object of the Sale...............................................1 1.2. Amount of Purchase Price.........................................1 1.3. Basis Price......................................................1 1.4. Price Adjustment.................................................1 1.5. Escrow...........................................................1 2. Consideration Shares....................................................2 2.1. Value of Consideration Shares....................................2 2.2. Restrictions on Transfer.........................................3 2.3. Right of First Refusal...........................................3 2.4. Put Option and Make Whole Payment................................4 3. Closing.................................................................6 3.1. Conditions Precedent.............................................6 3.2. Completion of the sale...........................................6 3.3. Transfer of Risks................................................7 4. Representations of Seller...............................................7 4.1. With Respect to US Securities Regulations........................7 4.2. With Respect to the SHARES and the COMPANY's Capital............10 4.3. With Respect to the COMPANY.....................................10 5. Warranty Claims Against Seller.........................................19 6. Representations of Entrust.............................................20 6.1. Good Standing and Authority.....................................20 6.2. Consideration Shares............................................20 6.3. Capitalization..................................................20 6.4. Governmental Consents...........................................21 6.5. Warranty Claims Against Entrust.................................21 7. Covenants..............................................................22 (i) 7.1. Management of the Company........................................22 7.2. Product Liability................................................22 7.3. Consideration Shares.............................................23 7.4. Watermark Business...............................................25 8. Miscellaneous...........................................................26 8.1. Costs............................................................26 8.2. Confidentiality..................................................26 8.3. Assignment.......................................................26 8.4. Announcements....................................................26 8.5. Notices..........................................................27 8.6. Severability.....................................................27 8.7. Construction, amendments.........................................27 8.8. Governing law....................................................28 8.9. Arbitration......................................................28 List of Exhibits.............................................................28 ------------------- Entrust Technologies Inc. has omitted the following schedules, which will be provided supplementally to the Securities and Exchange Commission upon request: - - Exhibit DIL (List of Documents Submitted to Entrust) - - Exhibit CAP (Capital Structure of Entrust) - - Exhibit IPR (Intellectual Property) (ii) Definitions "AGREEMENT" this share purchase agreement, including the exhibits; "BASIS PRICE" the BASIS PRICE as defined in Sec. 1.3.; "CLOSING" the CLOSING of this AGREEMENT pursuant to Sec. 3; "CO" the Swiss Code of Obligations; "COMPANY SHARES" the common or preferred registered shares of the COMPANY with a par value of CHF 10 each; "COMPANY" r/3/ Security Engineering AG, Seegraben, as defined on the first page; "CONSIDERATION SHARES" Series A Common Stock of ENTRUST with p.v. of USD 0.01 each; "DEFECT" a DEFECT as defined in Sec. 5.1; "DISTRIBUTION COMPLIANCE PERIOD" the DISTRIBUTION COMPLIANCE PERIOD defined in Sec. 7.3.; "ENTRUST" ENTRUST Technologies Inc., a Maryland corporation, as defined on the first page; "ESCROW AGENT" Thouvenin Stutzer Eggimann & Partner, Limmatquai 4, 8001 Zurich; "ESCROW AGREEMENT" the escrow agreement entered into between ENTRUST, the SELLER and the ESCROW AGENT, and signed by the SELLER on the same date as this AGREEMENT; (iii) "ESCROW" the escrow established pursuant to the ESCROW AGREEMENT and referred to in Sec. 1.5; "FIRST ANNIVERSARY" the FIRST ANNIVERSARY defined in Sec. 2.4.1.; "GOVERNMENTAL AUTHORITY" any government, state, municipality or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government "INTELLECTUAL PROPERTY" the INTELLECTUAL PROPERTY defined in Sec. 4.3.5.2; "INVISION" INVISION AG, Neuhofstrasse 4, 6341 Baar; "IPO PUT PRICE" the IPO PUT PRICE defined in Sec. 2.4.2; "MAKE WHOLE PAYMENT" the MAKE WHOLE PAYMENT defined in Sec. 2.4.2; "MARKET PRICE" the MARKET PRICE defined in Sec. 2.4.3; "NOTICE" the NOTICE defined in Sec. 2.3.3; "OFFERED CONSIDERATION SHARES" the OFFERED CONSIDERATION SHARES defined in Sec. 2.3.3; "OFFEROR" the OFFEROR defined in Sec. 2.3.3; "outstanding" in respect of COMPANY SHARES, the issued COMPANY SHARES less the COMPANY SHARES held in treasury; "PARTY" ENTRUST and/or the SELLER, as defined on the first page; (iv) "PRICE ADJUSTMENT" the PRICE ADJUSTMENT, as defined in Sec. 1.4.; "PRINCIPAL MARKET" the PRINCIPAL MARKET defined in Sec. 2.4.3; "PUBLIC OFFERING" the PUBLIC OFFERING defined in Sec. 2.3.6; "PURCHASE PRICE" the total consideration paid by ENTRUST for the SHARES, as defined in Sec. 1.2.; "PUT RIGHT" the PUT RIGHT defined in Sec. 2.4.1; "PUT SHARES" the PUT SHARES defined in Sec. 2.4.1; "REGULATION S" the REGULATION S defined in Sec. 4.1.1.; "SECURITIES ACT" the U.S. Securities Act of 1933, as amended; "SELLER" [Name], [Address], as defined on the first page; "SHARES" the COMPANY SHARES sold by the SELLER pursuant to Sec. 1.1.; "SIGNING" the SIGNING of this AGREEMENT; "STANDARD PUT PRICE" the STANDARD PUT PRICE defined in Sec. 2.4.1; "WATERMARK COMPANY" the WATERMARK COMPANY defined in Sec. 7.4.; (v) 1. Sale and Purchase 1.1. Object of the Sale ENTRUST purchases from the SELLER, and the SELLER sells to ENTRUST [___] COMPANY SHARES ("the SHARES") pursuant to the terms and conditions of this AGREEMENT. 1.2. Amount of Purchase Price The PURCHASE PRICE shall be composed of (i) the BASIS PRICE and, if any, the PRICE ADJUSTMENT, provided, however, that such PRICE ADJUSTMENT shall be due only if, within 90 days after CLOSING, ENTRUST obtains directly or through the COMPANY 100 % of the COMPANY SHARES. The right of the SELLER to the PRICE ADJUSTMENT expires at midnight on the 90th day after CLOSING. 1.3. Basis Price The BASIS PRICE shall be paid to the Seller at CLOSING in (i) USD [____]-- and (ii) [____] CONSIDERATION SHARES, valued at USD 58.30 each pursuant to Sec. 2.1.1. 1.3.1. Notwithstanding the previous Sec. 1.3.1., [____] out of the [_____] CONSIDERATION SHARES shall be placed into ESCROW pursuant to Sec 1.5. 1.4. Price Adjustment 1.4.1. The PRICE ADJUSTMENT, if any, shall be composed of [___] CONSIDERATION SHARES. 1.4.2. The PRICE ADJUSTMENT, if any, shall be paid to the SELLER within 10 business days after ENTRUST obtains directly or through the COMPANY 100 % of the COMPANY SHARES. The CONSIDERATION SHARES composing the PRICE ADJUSTMENT shall be paid to the SELLER in accordance with the SELLER's instructions. If the conditions for the payment of the PRICE ADJUSTMENT are already fulfilled at CLOSING, the payment of the PRICE ADJUSTMENT shall take place at the later (i) of CLOSING or (ii) five business days following the receipt by ENTRUST of the share purchase AGREEMENTS for all outstanding COMPANY SHARES. 1.5. Escrow 1.5.1. The [____] CONSIDERATION SHARES held in ESCROW pursuant to Section 1.3.1. shall be delivered to, kept and/or released by the ESCROW AGENT pursuant to the ESCROW AGREEMENT. The CONSIDERATION SHARES and any cash proceeds from the sale of such CONSIDERATION SHARES whilst held in ESCROW pursuant to Sec. 1.5.4 hereof shall be deposited by the ESCROW AGENT in a Swiss bank of international standing and reputation. 1.5.2. [Intentionally omitted pursuant to waiver letter of ENTRUST] (a) [Intentionally omitted pursuant to waiver letter of ENTRUST] (b) during a period of 24 months after CLOSING, the number of CONSIDERATION SHARES held in escrow shall not be reduced to less than [___] CONSIDERATION SHARES, or to such amount as adjusted to account for a MAKE WHOLE PAYMENT pursuant to Sec. 2.4.2 hereof. 1.5.3. The CONSIDERATION SHARES held in escrow pursuant to Sec. 1.5.2(b) shall be kept for a period of 24 months following CLOSING as a security for claims of ENTRUST in connection with claims based on the representations and warranties of Sec. 4 and 5 and on the covenants of Sec. 7.1.1 and 7.1.2. 1.5.4. CONSIDERATION SHARES held in ESCROW may not be sold. Notwithstanding the previous sentence, CONSIDERATION SHARES held in ESCROW only on the basis of Sec. 1.5.2(b) can be sold, provided, however, that during the 24-months period following CLOSING, or thereafter if the duration of the ESCROW is extended in connection with any warranty claim of ENTRUST, the transfer of such CONSIDERATION SHARES to the acquirer shall be valid and shall take place only if the cash consideration to be received by the SELLER is placed into escrow in lieu of the CONSIDERATION SHARES. 1.5.5. Variations in the price of the CONSIDERATION SHARES shall not cause any variation in the number of CONSIDERATION SHARES to be put in ESCROW. 1.5.6. The specific terms and conditions of the ESCROW AGREEMENT are reserved. 2. Consideration Shares 2.1. Value of Consideration Shares -2- 2.1.1. For the purpose of the conversion of any amount expressed in USD into a certain number of CONSIDERATION SHARES or vice-versa, each CONSIDERATION SHARE shall be deemed to be worth USD 58.30 (or, after CLOSING, such other amount as adjusted for stock splits, stock dividends and other recapitalizations taking place after CLOSING). Fractions of CONSIDERATION SHARES shall be rounded to the nearest whole number, and the difference paid or deducted from amounts otherwise payable in cash, as the case may be. 2.1.2. If ENTRUST calls upon the ESCROW as a security in connection with a DEFECT, the actual market value of the CONSIDERATION SHARES, and not the value set pursuant to the previous Sec. 2.1.1. shall determine the number of CONSIDERATION SHARES to be attributed to ENTRUST. 2.2. Restrictions on Transfer 2.2.1. The CONSIDERATION SHARES are restricted securities. They are the object of the representations and warranties of Sec. 4.2 and of the covenants of Sec. 6.3. 2.2.2. Notwithstanding the SELLER's ability to resell CONSIDERATION SHARES under United States or other securities laws, any sale or other disposition of any of the CONSIDERATION SHARES by the SELLER, other than according to the provisions of Sections 2.2.3, 2.3 or 2.4 below, shall be void and transfer no right, title, or interest in or to any of such CONSIDERATION SHARES to the purported transferee. 2.2.3. The SELLER may sell, assign or transfer CONSIDERATION SHARES to his spouse or children or to a trust established for the benefit of his spouse, children or himself, or dispose of them under his will, without compliance with Section 2.3, provided, however, that such transferee will be subject to the same contractual transfer restrictions as the SELLER. 2.3. Right of First Refusal 2.3.1. If the SELLER desires to sell, transfer or otherwise dispose of any of his CONSIDERATION SHARES, or of any interest in such CONSIDERATION SHARES, whether voluntarily or by operation of law, in any transaction other than pursuant to Section 2.2.3. or 2.4 of this Agreement, the SELLER shall first deliver written notice of his desire to do so (the "NOTICE") to ENTRUST in the manner prescribed in Section 8.5 of this Agreement. The NOTICE must specify: (i) the name and address of the party to which the SELLER proposes to sell or otherwise dispose of the CONSIDERATION SHARES or an interest in the CONSIDERATION SHARES (the "OFFEROR"), (ii) the number of CONSIDERATION SHARES the SELLER proposes to sell or otherwise dispose of (the "OFFERED CONSIDERATION SHARES"), (iii) the -3- consideration per SHARE to be delivered to the SELLER for the proposed sale, transfer or disposition, and (iv) all other material terms and conditions of the proposed transaction. 2.3.2. ENTRUST shall have the first option to purchase all but not less than all of the OFFERED CONSIDERATION SHARES for the consideration per SHARE and on the terms and conditions specified in the NOTICE. ENTRUST must exercise such option, no later than 15 days after such NOTICE is deemed to have been delivered to it under Section 8.5, by written NOTICE to the SELLER, provided, however, that such deadline will be extended to 30 days if the number of OFFERED CONSIDERATION SHARES exceeds 50'000. 2.3.3. In the event ENTRUST duly exercises its option to purchase the OFFERED CONSIDERATION SHARES, the closing of such purchase shall take place at the offices of the COMPANY, or at any other place mutually agreed between the PARTIES five (Swiss) business days after the expiration of deadline for the exercise of the right of first refusal pursuant to Section 2.3.2. above. If ENTRUST does not exercise its option to purchase the CONSIDERATION SHARES, the closing of the sale must take place in accordance with the terms and conditions specified in the NOTICE no later than 60 days after the expiration of the option of ENTRUST. 2.3.4. To the extent that the consideration proposed to be paid by the OFFEROR for the OFFERED CONSIDERATION SHARES consists of property other than cash or a promissory note, the consideration required to be paid by ENTRUST may consist of cash equal to the value of such property, as determined in good faith by agreement of the SELLER and ENTRUST. 2.3.6. The right of first refusal of ENTRUST set forth in this Section 2.3 shall terminate upon the closing of ENTRUST's initial public offering of Series A Common Stock pursuant to an effective registration statement under the SECURITIES ACT (a "PUBLIC OFFERING"). 2.4. Put Option and Make Whole Payment 2.4.1. If ENTRUST's Series A Common Stock is not listed on a United States national securities exchange, the Nasdaq Stock Market or another U.S. nationally recognized exchange or trading system on the first anniversary of CLOSING (the "FIRST ANNIVERSARY"), and the SELLER is the beneficial owner of CONSIDERATION SHARES as of the FIRST ANNIVERSARY, then the SELLER shall have 15 days to give written notice to ENTRUST of its intention, if any, to sell to ENTRUST (the "PUT RIGHT"), all, but not less than all, of the CONSIDERATION SHARES owned by the SELLER (including any CONSIDERATION SHARES to be released from escrow on the FIRST ANNIVERSARY but excluding any CONSIDERATION SHARES remaining in escrow after the FIRST ANNIVERSARY) (the "PUT SHARES"). If the SELLER -4- exercises its PUT RIGHT, the SELLER agrees to sell the PUT SHARES to ENTRUST, and ENTRUST agrees to purchase the PUT SHARES from the SELLER, at a price of USD $58.30 (subject to adjustment for stock dividends, stock splits and other recapitalizations) (the "STANDARD PUT PRICE"). The PUT RIGHT is subject to the following: (a) [Intentionally omitted pursuant to waiver letter of ENTRUST] (b) the payment of the STANDARD PUT PRICE against the delivery of the PUT SHARES shall be made in three equal quarterly installments beginning within 5 (Swiss) business days after ENTRUST has received notice of exercise of the PUT RIGHT. 2.4.2. If ENTRUST's Series A Common Stock is listed on a United States national securities exchange, the Nasdaq Stock Market or another U.S. nationally recognized exchange or trading system prior to the FIRST ANNIVERSARY, and the MARKET PRICE is less than USD $48.30 (subject to adjustment for stock dividends, stock splits and other recapitalizations) (the "IPO PUT PRICE"), then ENTRUST shall make an additional payment per CONSIDERATION SHARE, in cash or in shares of its Series A Common Stock (the choice of either form being at the sole discretion of ENTRUST), to the SELLER equal to the difference between the IPO PUT PRICE and the MARKET PRICE (the "MAKE WHOLE PAYMENT"), subject to the following provisions: (a) [Intentionally omitted pursuant to waiver letter of ENTRUST] (b) ENTRUST agrees to deliver the MAKE WHOLE PAYMENT pursuant to the instructions of the SELLER within 10 Swiss business days after the end of the relevant period for the determination of the MARKET PRICE pursuant to Sec. 2.4.3 hereinafter. (c) Notwithstanding the previous paragraph and Sec. 1.5.5, any MAKE WHOLE PAYMENT made in connection with any CONSIDERATION SHARES held in -5- escrow pursuant to Sec. 1.5 shall be placed by ENTRUST into ESCROW and shall be held and released like the CONSIDERATION SHARES it relates to. 2.4.3. MARKET PRICE means the average of the closing sale price of ENTRUST's Series A Common Stock on the principal United States securities exchange or trading market for such stock (the "PRINCIPAL MARKET") for the ten (10) trading days beginning on the first day of trading of such stock on the PRINCIPAL MARKET. 3. Closing 3.1. Conditions Precedent CLOSING is subject to the following conditions precedent: (a) the approval of the AGREEMENT by the board of directors of the COMPANY; (b) the approval of the AGREEMENT by the stockholders and the board of directors of ENTRUST; (c) the share purchase agreements with Dr. Rainer Rueppel and Invision AG concerning the sale of all their COMPANY SHARES to ENTRUST have come into force; and (d) the Watermark intellectual property has been transferred to the WATERMARK COMPANY pursuant to Sec. 7.4. prior to CLOSING. 3.2. Completion of the sale 3.2.1. The sale and purchase of the SHARES will be completed at the offices of Bar & Karrer, Seefeldstrasse 19, 8008 Zurich, at the latest on 8 June 1998 ("CLOSING"). 3.2.2. At CLOSING, the SELLER shall produce and deliver to ENTRUST: (a) share certificates endorsed to ENTRUST representing the SHARES; (b) share certificates endorsed to the COMPANY representing the COMPANY SHARES held in treasury by the COMPANY as of CLOSING; (c) the original of the minutes of the board of the COMPANY authorizing the transfer of the SHARES to ENTRUST; (d) the original share register of the Company (Art. 686 CO), duly signed by the board of directors, and bearing ENTRUST as shareholder for the SHARES, without any restriction or limitation; and -6- (e) the resignation letter of Dr. Markus Kroll and of Mr. Peter Titz. 3.2.3. At CLOSING, ENTRUST shall, on its part, deliver to the SELLER: (a) a certificate of the Secretary evidencing the decision of the BOARD of ENTRUST approving this AGREEMENT; (b) an original and irrevocable promise by a bank of international standing and reputation to pay the BASIS PRICE, and, if due at CLOSING, the PRICE ADJUSTMENT or, at the election of ENTRUST, a bank check drawn on a bank of international standing and reputation and issued for the same amount; (c) stock certificates registered in the name of the SELLER for the number of CONSIDERATION SHARES; (d) a receipt issued by the ESCROW AGENT as proof that the CONSIDERATION SHARES to be delivered to the ESCROW AGENT at CLOSING pursuant to Sec. 1.5.1 have been placed into ESCROW. 3.3. Transfer of Risks The risks and profits relating to the SHARES and to the COMPANY shall pass to ENTRUST at CLOSING. 4. Representations of Seller Subject to the disclosure made in the Disclosure Letter (Exhibit DIL) and to the provisions of Sec. 5 below, the SELLER makes the following representations, which truly and accurately reflect the factual and legal situation as of the date of this AGREEMENT. 4.1. With Respect to US Securities Regulations 4.1.1. With respect to the CONSIDERATION SHARES issued to and acquired by the SELLER hereunder, the SELLER represents and warrants as follows: (a) The SELLER will be acquiring the CONSIDERATION SHARES for his own account for investment only, and not with a view to, or for sale in connection with, any distribution of such CONSIDERATION SHARES in violation of the SECURITIES ACT or any rule or regulation under the SECURITIES ACT. (b) The SELLER has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the acquisition of the CONSIDERATION SHARES and to make an informed investment decision with respect to such investment. -7- (c) The SELLER is not a "U.S. person" (as defined in Regulation S under the SECURITIES ACT ("REGULATION S"). (d) The SELLER understands and acknowledges that (i) the CONSIDERATION SHARES, if and when issued, will be "restricted securities" under Rule 144 of the SECURITIES ACT and may not be offered or sold in the United States or to, or for the account or benefit of, any U.S. person unless such securities are registered under the SECURITIES ACT or such offer or sale is made pursuant to an exemption from the registration requirements of the SECURITIES ACT, (ii) the CONSIDERATION SHARES are being distributed by ENTRUST pursuant to the terms of REGULATION S, which permits securities to be sold to non-U.S. persons in "offshore transactions" (as defined in REGULATION S), subject to certain terms and conditions, and (iii) hedging transactions involving the CONSIDERATION SHARES may not be conducted unless in compliance with the SECURITIES ACT. (e) The SELLER has signed this AGREEMENT outside the United States. 4.1.2. The following are definitions contained in REGULATION S as in effect on the date of this Agreement: (a) "U.S. person" means: (i) Any natural person resident in the United States; (ii) Any partnership or corporation organized or incorporated under the laws of the United States; (iii) Any estate of which any executor or administrator is a U.S. person; (iv) Any trust of which any trustee is a U.S. person; (v) Any agency or branch of a foreign entity located in the United States; (vi) Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) Any partnership or corporation if: -8- - Organized or incorporated under the laws of any foreign jurisdiction; and - Formed by a U.S. person principally for the purpose of investing in securities not registered under the SECURITIES ACT, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) of the SECURITIES ACT) who are not natural persons, estates or trusts. (b) The following are not "U.S. persons": (i) Any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States; (ii) Any estate of which any professional fiduciary acting as executor or administrator is a U.S. person if: - An executor or administrator of the estate who is not a U.S. person has sole or shared investment discretion with respect to the assets of the estate; and - The estate is governed by foreign law; (iii) Any trust of which any professional fiduciary acting as trustee is a U.S. person, if a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person; (iv) An employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country; (v) Any agency or branch of a U.S. person located outside the United States if: - The agency or branch operates for valid business reasons; and - The agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located; and (vi) The International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, -9- the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans. (c) "United States" means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia. 4.2. With Respect to the SHARES and the COMPANY's Capital 4.2.1. The SHARES have been duly issued and are fully paid in. They are free of any pledge, charge, encumbrances, or restrictions of any kind or nature. 4.2.2. The SELLER has good and valid title to the SHARES and he may freely dispose of such SHARES without any limitation or restriction of any kind or nature. 4.2.3. The COMPANY has a an issued share capital of CHF 400'000.-- composed of 40'000.--fully paid in registered shares with a nominal value of CHF 10.-- each. 8'000 of said registered shares are preferred shares. In addition to the issued share capital, the COMPANY has a conditional capital of CHF 50'000.-- for 5'000 registered shares with a par value of CHF 10.-- each. The COMPANY has no other issued, authorized or conditional equity. 4.2.4. There are no subscription rights, options, warrants, offers or other commitments outstanding, which would oblige the COMPANY to issue any new COMPANY SHARES or to transfer such COMPANY SHARES. Any such rights, options or offers disclosed to ENTRUST in the due diligence have extinguished without affecting the representation made under Sec. 4.2.3 above. 4.2.5. No prior issue, payment, contribution, sale, redemption, or transfer in respect of the SHARES, has given or may give rise to any right, claim or action against the COMPANY or ENTRUST. 4.3. With Respect to the COMPANY 4.3.1. Existence, Good Standing, and Records 4.3.1.1. The excerpt from the Commercial Register and the articles of association in Exhibit DIL are current, true, and complete. 4.3.1.2. The minutes of the shareholders' and of the board of directors' meetings listed in Exhibit DIL contain a complete, true and accurate record of all such meetings over the period mentioned therein. -10- 4.3.1.3. To the extent that the COMPANY carries business outside of Switzerland, it is presently in good standing and having the necessary licenses and permits to carry on its business in these jurisdictions. 4.3.1.4. The COMPANY has no subsidiary, and has no participation in any other entity, except for its participation in Swiss Security Service Laboratory AG, Solothurn. 4.3.2. Accounts 4.3.2.1. The accounts attached in Exhibit DIL, including the first quarter results submitted to ENTRUST, comply with the requirement of the Swiss Code of Obligations, and have been prepared in accordance with accounting principles and practices generally accepted in Switzerland. 4.3.2.2. Subject to the applicable accounting principles, the audited accounts as of 31 December 1997 (the "Accounts"), as well as the first quarter results, as per the date they were established: (a) set forth without overestimation the capital, reserves, assets, and profits of the COMPANY; (b) fully provide for all bad or doubtful claims and receivables; (c) fully provide for all liabilities, including contingent liabilities, or disclose them in the notes; and (d) are not affected (except as disclosed in the Accounts) by any extraordinary or exceptional event, circumstance or item. 4.3.2.3. The accounts of the COMPANY for each financial year since its creation have been consistently approved, without any qualification or restriction of any kind, by the statutory auditors of the COMPANY. 4.3.2.4. The accounting records of the COMPANY are up to date and contain complete and accurate details of all transactions of the COMPANY in compliance with Art. 662 et seq. and 957 et seq. CO. 4.3.2.5. The COMPANY's records' systems and information, and the means of access to them, are under the COMPANY's direct control. 4.3.2.6. There was no distribution of, nor any decision or commitment to distribute any dividend in whatever form for the financial year ending on 31 December 1997. The spin-off of the WATERMARK BUSINESS pursuant to Sec. 7.4. is reserved. -11- 4.3.2.7. ENTRUST is aware that the first quarter results do not contain the accrued bonus payments for the first quarter of 1998, since the bonus payment, if any, shall be decided at the end of the year. Said bonus payments are to be made pursuant to the provisions of the employment agreements disclosed to ENTRUST. 4.3.2.8. The issue prospectus dated 22 May 1998, including the financial statements contained therein, constitutes full, true and plain disclosure of all material facts relating to the COMPANY as of such date. The issue prospectus contains no untrue statement of material facts, and the financial figures contained in the issue prospectus are based on the same principle as those applied for the establishment of the Accounts, as represented above in this Sec. 4.3.2. 4.3.3. Financing 4.3.3.1. The COMPANY has not made nor entered into any contract to make any loan to any person or other arrangement whereby it is or may be owed any money other than trade debts incurred in the ordinary course of business. 4.3.3.2. The COMPANY is not entitled to the benefit of any debt otherwise than as the original creditor and has not factored or discounted any debt or agreed to do so. 4.3.3.3. All of the accounts receivable which are reflected in the Accounts as owed to the COMPANY (apart from bad and doubtful debts to the extent to which they have been provided for in the Accounts) or which have subsequently been recorded in the books of COMPANY have realized or are reasonably expected to realize in the normal course of collection and within three months of CLOSING their full value as included in the Accounts, after deduction of any provision for bad debts. 4.3.3.4. ENTRUST is aware that some employees may have an overdraft with the COMPANY, such overdraft being in aggregate of no more than CHF 50'000.--. 4.3.4. Technical characteristics 4.3.4.1. The quality of the COMPANY'S source code base in terms of security design, documentation, performance, stability and reliability including year 2000 compliance is sufficient to carry on the business of the COMPANY as currently contemplated, subject, however, to (i) the ongoing improvements and developments made in the ordinary course of the COMPANY's business, and (ii) unforeseen external market and technology developments. 4.3.5. Intellectual property 4.3.5.1. The COMPANY owns, or is licensed or otherwise possesses a right to use, all INTELLECTUAL PROPERTY (as defined below) used in the operation of its business -12- or necessary for the operation of its business as currently conducted, except as otherwise disclosed in Exhibit IPR. The COMPANY has taken reasonable measures to protect the proprietary nature of trade secrets and confidential information (as defined below) that it owns or uses. Except as disclosed in Exhibit IPR, the Company has not granted any rights to any of the INTELLECTUAL PROPERTY owned by the COMPANY (other than any rights in any INTELLECTUAL PROPERTY not owned by the COMPANY that constitutes commercially available software generally available to the public) to any person or business entity. To the SELLER's knowledge, no other person or business entity is infringing, violating or misappropriating any of the INTELLECTUAL PROPERTY that the COMPANY owns. The COMPANY has acquired all rights to INTELLECTUAL PROPERTY developed or held by any employees (within the scope and term of his employment or otherwise relating to the current or proposed business of the COMPANY) or third parties who developed INTELLECTUAL PROPERTY for the COMPANY and no outstanding claims for the payment of any purchase price or indemnity in respect of such INTELLECTUAL PROPERTY is threatened or outstanding, except as disclosed in Exhibit IPR. 4.3.5.2. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means all (A) patents, patent applications, patent disclosures and all related continuation, continuation in part, divisional, reissue, reexamination, utility model, certificate of invention and design patents, patent applications, registrations and applications for registrations; (B) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof; (C) copyrights and registrations and applications for registration thereof; (D) computer software, data and documentation; (E) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information; (F) other proprietary rights relating to any of the foregoing and (G) copies and tangible embodiments thereof. 4.3.5.3. None of the activities or business conducted by the COMPANY infringes, violates or constitutes a misappropriation of (or in the past infringed, violated or constituted a misappropriation of) any INTELLECTUAL PROPERTY rights of any other person or business entity, except as disclosed in Exhibit IPR. The COMPANY has not received any complaint, claim or notice alleging any such infringement, violation or misappropriation, and, to SELLER's knowledge, there is no basis for any such complaint, claim or notice. 4.3.5.4. Exhibit IPR identifies each (a) patent or registration that has been issued to the COMPANY with respect to any of its INTELLECTUAL PROPERTY, (b) pending patent application or application for registration that the COMPANY has made with respect to any of its INTELLECTUAL PROPERTY and (c) license or other agreement -13- pursuant to which the COMPANY has granted any rights to any third party with respect to any of its INTELLECTUAL PROPERTY. The COMPANY has delivered to ENTRUST or its advisors correct and complete copies of all such patents, registrations, applications, licenses and agreements (as amended to date) and has specifically identified and made available to ENTRUST or its advisors correct and complete copies of all other written documentation evidencing ownership of, and any claims or disputes relating to, each such item. With respect to each item of INTELLECTUAL PROPERTY that the COMPANY owns, except as provided in Exhibit IPR: (a) the COMPANY possesses all right, title and interest in and to such item; (b) such item is not subject to any outstanding judgment, order, decree, stipulation or injunction; and (c) the COMPANY has not agreed to indemnify any person or business entity for or against any infringement, misappropriation or other conflict with respect to such item. 4.3.5.5. The COMPANY has supplied ENTRUST or its advisors with correct and complete copies of all licenses, sublicenses or other agreements (as amended to date) pursuant to which the COMPANY uses such INTELLECTUAL PROPERTY, all of which are annexed in Exhibit IPR. To the SELLER's knowledge and with respect to each such item of INTELLECTUAL PROPERTY, except as otherwise disclosed in Exhibit IPR: (a) the license, sublicense or other agreement covering such item is legal, valid, binding, enforceable and in full force and effect with respect to the COMPANY, and is legal, valid, binding, enforceable and in full force and effect with respect to each other party thereto; (b) neither the COMPANY nor any other party to such license, sublicense or other agreement is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default by the COMPANY or by any such other party, or permit termination, modification or acceleration thereunder; (c) the underlying item of INTELLECTUAL PROPERTY is not subject to any outstanding judgment, order, decree, stipulation or injunction to which the COMPANY is a party or has been specifically named, nor subject to any other outstanding judgment, order, decree, stipulation or injunction; 4.3.5.6. With respect to each such item of INTELLECTUAL PROPERTY except as otherwise disclosed in Exhibit IPR: -14- (a) the COMPANY has not agreed to indemnify any person or business entity for or against any interference, infringement, misappropriation or other conflict with respect to such item; and (b) no license or other fee is payable upon any transfer or assignment of such license, sublicense or other agreement by the terms thereof or the terms of any other agreement or arrangement with the other party or parties thereto. 4.3.5.7. The SELLER warrants to the best of its knowledge that the COMPANY has taken and plans to take up to the year 2000 all reasonable measures up to then known as state of the art to ensure that its software products are designed to perform, and will perform correctly at all times prior to, during and after the calendar year 2000, all functions, calculations, sequencing, displays and other processing of calendar dates and date-related data without error or degradations in performance, specifically including any error relating to, or the product of, date data which represent different centuries or more than one century. 4.3.6. Insurances 4.3.6.1. Exhibit DIL lists all private insurance contracts concluded by the COMPANY. 4.3.6.2. All premiums due in relation to the COMPANY's insurances have been paid, and nothing has been done or omitted to be done which would make any policy of insurance of the COMPANY void or voidable or which is likely to result in an increase in premium or which would release any insurer from any of its obligations under any policy of insurance of the COMPANY. 4.3.6.3. There is no insurance claim pending or outstanding and there are no circumstances likely to give rise to any such claim. 4.3.7. Customers and Suppliers 4.3.7.1. To the SELLER's best knowledge, none of the current COMPANY's customers or suppliers intends or has threatened to cease or alter their business with the COMPANY. The SELLER is not aware of the existence of any formal change of control clause in any material contract with any customer or supplier of the COMPANY, other than as might be contained in the contracts listed in Exhibit DIL and provided to ENTRUST. The SELLER has not made and is not expected to make any investigations as to the intents of the COMPANY's suppliers and customers. 4.3.7.2. Neither the COMPANY nor the SELLER has made extraordinary promises, commitments or assurances, whether oral or written, express or implied, to the effect that the COMPANY will or may: -15- (a) offer future price reductions, concessions or other special terms to any customer of the COMPANY; (b) accept future price increases or additional charges or other special terms to any supplier of the COMPANY; or (c) be liable to the payment of any liquidated damages, penalties or similar liabilities. 4.3.7.3. There is no assumed contract which the SELLER can reasonably foresee that will result in any material loss upon performance thereof by the COMPANY after CLOSING. 4.3.8. Employees 4.3.8.1. Exhibit DIL accurately lists the name, position, and current annual compensation of each employee of the COMPANY. The employment agreements with the key-employees enclosed in Exhibit DIL are true and correct and fully in force. 4.3.8.2. None of the key-employees has notified the COMPANY of its intent to terminate employment or is expected to terminate employment. With the exception of military service and regular vacations, no such key-employee is absent from work on disability or other leave or has notified the COMPANY of intent to take any such leave. ENTRUST is aware of a possible termination of the contract with Mr. Herrigel as well as of the absence of Mr Wildhaber for education purposes (for an aggregate amount of about 15 days). 4.3.8.3. All salaries, bonuses or other compensation of any kind and nature have been timely paid to the COMPANY's employees. 4.3.9. Pensions and social security contributions 4.3.9.1. The COMPANY has paid all contributions it is required to make by law or by agreement with its employees, with any labor organization, or with any insurance company with respect to pensions and social security, and especially all contributions to the AHV / IV, ALV and SUVA. 4.3.9.2. The COMPANY complies with all legal obligations with respect to its employees' pensions and social security. 4.3.10. Litigation 4.3.10.1. To the knowledge of the SELLER, there are no suits, arbitrations, administrative or other proceedings (including debt collection proceeding or other -16- insolvency proceedings) in any matter subject to private or to public law, pending, threatened against or otherwise affecting the COMPANY. 4.3.10.2. The COMPANY is not subject to any judgement, order or decree which has affected or may affect its business. 4.3.11. Taxes 4.3.11.1. The COMPANY has filed all tax returns and withheld and paid or discharged all taxes, assessments and penalties due and payable , and there is no further liability for any such taxes and no interests or penalties accrued or accruing with respect thereto. 4.3.11.2. All tax returns of the COMPANY are accurate and complete. To the SELLER's best knowledge, no audit of any tax return of the COMPANY is pending or proposed. There is no fact, circumstance, organizational structure, act or event which could give rise to any claim of tax underpayments, penalties, or disqualifications of any tax status of the COMPANY for prior years, which have not been discharged of or provisioned for. 4.3.11.3. For the tax period ending on 31 December 1997, the tax returns can be filed on the basis of the accounts for the business year 1997 as attached in Exhibit DIL. There are no outstanding agreements or waivers extending any period of limitation applicable to any tax return of the COMPANY. Notwithstanding the previous sentence, the COMPANY has received an extension of the filing of the tax return for 1997, since the COMPANY has just received the audit report in relation to the 1997 figures. 4.3.11.4. There are no disputes as to taxes nor any tax liens, whether existing or threatened, on any assets as well as on any income or expense item of the profit and loss statement of the COMPANY. 4.3.11.5. The words "tax" and "taxes" in this AGREEMENT mean all taxes, however denominated, including interest, penalties, and other additions to taxes that may become payable in respect thereof, imposed by the state, the cantons, the municipalities or by any other agency or political subdivision, such as income taxes and capital taxes due on the basis of taxable profit and taxable capital as declared in the tax returns, or other taxes (for example VAT) due on the basis of a filed tax return, as well as all other taxes, including but not limited to taxes due on the basis of an adjustment of figures as declared in tax returns filed with the tax authorities or due on the basis of an adjustment of a provisional or final assessment from whatever authority and for whatever reason. 4.3.12. Events since Accounting Date and since end of Q1 4.3.12.1. Since 31 December 1997, respectively since 31 March 1998: -17- (a) the business of the COMPANY has been carried on in the ordinary and normal course; (b) there has been no material adverse change in the financial or market position of the COMPANY, including any such change in respect of turnover, profits, margins of profitability, liabilities (actual or contingent) or expenses of the COMPANY; and (c) there has been no substantial and abnormal change in the basis or terms on which clients or suppliers are prepared to do business with the COMPANY. 4.3.12.2. The spin-off of the Watermark business pursuant to Sec. 7.4 is excluded from the representations made in this Sec. 4.3.12. 4.3.13. Effect of the transaction 4.3.13.1. To the SELLERS' best knowledge the customers and suppliers of the COMPANY have not been informed that the control over the COMPANY may be sold to ENTRUST. The SELLER is not aware of any formal notification that the execution or CLOSING of this AGREEMENT and of the change of control will lead to the termination of the relationship between the COMPANY and its normal customers or suppliers. ENTRUST has been made aware that it might be preferable to maintain the name of the COMPANY and the Swiss character of the COMPANY to avoid negative impacts on the relationship with the COMPANY's customers and suppliers. 4.3.13.2. The execution of the AGREEMENT and the observance and performance of its provisions by the SELLER, including the spin-off of the WATERMARK business, will not: (a) result in a breach of any contract, law, regulation, order, judgement, injunction, undertaking, decree or other like imposition to or by which the COMPANY is a party or is bound, or entitle any person to terminate or avoid any contract to which the COMPANY is a party, or have any material effect on any such contract; (b) result in the loss or impairment of or any default under any license, authorization or consent required by the COMPANY for the purposes of its business; (c) result in the creation, imposition, crystallization or enforcement of any encumbrance whatsoever on any of the assets of the COMPANY; (d) result in any present indebtedness of the COMPANY becoming due and payable, or capable of being declared due and payable, prior to its stated maturity date or in any financial facility of the COMPANY being withdrawn; or -18- (e) result in any grant or subvention to the COMPANY, in connection with any research, development, or consulting project being cancelled or claimed back; 4.3.13.3. There is no contract to which the COMPANY is party which formally depends on the continuation of the connection (whether as an officer of the COMPANY or otherwise) of any person with the COMPANY. 4.3.13.4. Notwithstanding the intended generality of the above, the representations made in this Sec. 4.3.13 are limited by the specific qualifications made in this agreement (e.g. in Sec. 4.3.7.1) and by the general principles governing the liability of the SELLER and laid down in Sec. 5.4. 4.3.14. Other material items To the SELLER's best knowledge there is no fact, contractual or legal obligations, which has or may have a material adverse effect on the value of the COMPANY, and which, if known to ENTRUST prior to the date of this AGREEMENT, could have caused ENTRUST not to enter into this AGREEMENT. 5. Warranty Claims Against Seller 5.1. Subject to the provisions of this AGREEMENT, the SELLER shall be liable to ENTRUST for any breach of the representations made in Sec. 4 above (a "DEFECT"), and shall indemnify and hold ENTRUST (or at the option of ENTRUST, the COMPANY) harmless against any damage incurred by ENTRUST or by the COMPANY, unless ENTRUST was aware of the DEFECT at SIGNING. 5.2. In order to account for the effective participation of the SELLER in the COMPANY's capital, the liability of the SELLER for the damage caused by the DEFECT shall be reduced to 0.986 % of the damage, unless such damage affects directly the SHARES. 5.3. For the purpose of any claim for the reduction of the PURCHASE PRICE in connection with any DEFECT, such DEFECT shall be deemed to affect pro rata the value of the SHARES in the same manner as it affects the value of the COMPANY. The hypothetical value of the SHARES without the DEFECT shall be deemed to be equal to the PURCHASE PRICE, or, if no PRICE ADJUSTMENT was payable, to the BASIS PRICE. 5.4. ENTRUST shall notify the SELLER in writing of any DEFECT no later than 45 days after ENTRUST has become aware of such DEFECT. ENTRUST shall not be deemed to have been aware of, or to have accepted any DEFECT, unless such DEFECT has been clearly disclosed by the COMPANY (i) in the course of the due diligence or (ii) -19- in the documents and information provided to ENTRUST and listed in the answers to the due diligence questionnaire dated 10 May 1998, as attached in Exhibit DIL. The requirement that ENTRUST examine the object of the sale after CLOSING pursuant to Art. 201 CO is waived. 5.5. The claims of ENTRUST in connection with any DEFECT shall be subject to a statute of limitation of 24 months after CLOSING and of one year after the notification of the DEFECT by ENTRUST pursuant to Sec. 5.2., provided, however, that claims raised in connection with taxes for any given tax period shall expire one year after the final assessment for such tax period. 5.6. No claim may be raised against the SELLER in connection with any DEFECT, unless the aggregate amount of the damage claimed by ENTRUST against the SELLER and/or any other person in connection with DEFECTS exceeds CHF 100'000.--. The maximum aggregate amount of warranty claims against the SELLER shall be limited to 0.986 % of CHF 15'000'000. If a DEFECT affects only the value of the SHARES, without any damage for the COMPANY, the claim of ENTRUST shall be limited to the PURCHASE PRICE paid. 5.7. A rescission of the sale of the SHARES is excluded. 6. Representations of Entrust 6.1. Good Standing and Authority 6.1.1. ENTRUST is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, United States of America, and has requisite power and authority (corporate and other) to own its properties, to carry on its business as now being conducted, to execute and deliver this AGREEMENT and to consummate the transactions contemplated hereby. 6.1.2. The execution and delivery of this AGREEMENT by ENTRUST, and the consummation by ENTRUST of all transactions contemplated hereby, have been duly authorized by all requisite corporate action on the part of ENTRUST. 6.2. Consideration Shares All CONSIDERATION SHARES will be, when issued in accordance with this AGREEMENT, duly authorized, validly issued, fully paid and nonassessable. 6.3. Capitalization 6.3.1. As of the date of this AGREEMENT, the authorized capital stock of ENTRUST consists of (a) 15'000'000 shares of Series A Common Stock, USD .01 par value per share, of which approximately 5'078'010 shares are issued and outstanding, (b) 260'000 shares -20- of Series B Common Stock, USD .01 par value per share, of which 221'052 shares are issued and outstanding, (c) 260'000 shares of Series B Non-Voting Common Stock, of which 38'948 shares are issued and outstanding, (d) 2'500'000 shares of Special Voting Stock, USD .01 par value per share, of which 1'925'000 shares are issued and outstanding, and (e) 500'000 shares of Preferred Stock, USD .01 par value per share, none of which shares are issued or outstanding. ENTRUST's Series A Common Stock. 6.3.2. In addition to the issued stock of ENTRUST, as of the date of this AGREEMENT, ENTRUST has reserved 1'857'230 shares of Series A Common Stock for issuance pursuant to the 1996 Stock Incentive Plan. ENTRUST anticipates reserving additional Series A Common Stock for issuance pursuant to the 1996 Stock Incentive Plan or similar plan. 6.3.3. The capital stock table of ENTRUST attached hereto as Exhibit CAP shows the approximate fully diluted capital structure of ENTRUST at CLOSING. 6.3.4. As a holder of CONSIDERATION SHARES, the SELLER shall have the same rights, preferences and privileges as the other holders of ENTRUST's Series A Common Stock. 6.4. Governmental Consents No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any US GOVERNMENTAL AUTHORITY is required on the part of ENTRUST in connection with the execution and delivery of this AGREEMENT, the offer, issuance, sale and delivery of the CONSIDERATION SHARES, or the other transactions to be consummated at the CLOSING, as contemplated by this AGREEMENT. 6.5. Warranty Claims Against Entrust 6.5.1. Warranty claims in connection with a breach of the representations of ENTRUST made under Sec. 6.1 to 6.3 are subject to the following limitations: (a) The claims shall be capped at USD 10.-- per CONSIDERATION SHARE, i.e. the difference between the agreed upon price per CONSIDERATION SHARE of USD 58.30 and the price of USD 48.30 guaranteed by Sec. 2.4.2. (b) If the conditions for the exercise of PUT RIGHT pursuant to Sec. 2.4.1. are fulfilled, any warranty claim shall be excluded altogether. 6.5.2. If the breach of Sec. 6.4.3 impairs the enforceability of the PUT RIGHT of Sec. 2.4.1. and 2.4.3, the claim shall be capped at 58.30 per CONSIDERATION SHARE. 6.5.3. Without prejudice to the foregoing, Warranty Claims shall be subject to a time-bar of 24 months following CLOSING. -21- 7. Covenants 7.1. Management of the Company 7.1.1. Starting on the date of this AGREEMENT and until the earlier of (i) three months following CLOSING or (ii) the issuance by the COMPANY of new organizational by-laws under the control of ENTRUST, the SELLER shall not, alone or acting with others, without the prior consent of ENTRUST: (a) cause the business of the COMPANY to be conducted in any manner inconsistent with the ordinary and usual course of the COMPANY's business; (b) cause the COMPANY to enter into any contract or into any commitment which is likely to have a material adverse effect upon the operations or activities of the COMPANY or the value of the COMPANY for ENTRUST; (c) cause the COMPANY to terminate any of the employment agreements with any person employed by the COMPANY at the date of this AGREEMENT or to transfer the title to any of the INTELLECTUAL PROPERTY listed in Exhibit IPR; (d) take any other action which is inconsistent with the provisions of this AGREEMENT; or (e) cause the COMPANY to sell any COMPANY SHARES held in treasury, or to issue any new COMPANY SHARE or options, or to take any action which would change the situation with respect to the COMPANY SHARES and, generally, the COMPANY's capital, as represented in Sec.4.2. 7.1.2. The expenses incurred by the COMPANY in connection with the current venture capital round shall not be charged to the COMPANY. No fees shall be paid in connection with any work performed by or on behalf of INVISION. 7.2. Product Liability 7.2.1. The SELLER undertakes to hold the COMPANY free of any harm caused by warranty claims in connection with defects affecting the products of the COMPANY existing at CLOSING, provided, however, that ENTRUST cannot call upon this covenant in connection with any product of the COMPANY if (i) ENTRUST or the COMPANY fails to show reasonable care in maintaining such product or in responding to customers' requests with respect to such product, or (ii) if ENTRUST or the COMPANY made any modification to such product. The claim of ENTRUST may only be raised if the warranty claims against the COMPANY exceed in aggregate an amount of CHF 250'000, and if such claims are notified to the COMPANY within 12 months following CLOSING. -22- The claim of ENTRUST against the SELLER shall be limited to [ ] % of the excess of the aggregate warranty claims raised against the COMPANY over CHF 250'000.--. 7.2.2. The claim of ENTRUST against the SELLER pursuant to this Sec. 7.2 is subject to and shall be covered by the cap of Sec. 5.6. 7.3. Consideration Shares 7.3.1. The SELLER acknowledges that for a period of one year following the CLOSING (the "DISTRIBUTION COMPLIANCE PERIOD"), the SELLER shall not (a) engage in any activity for the purpose of, or which may reasonably be expected to have the effect of, conditioning the market in the United States for the CONSIDERATION SHARES or (b) unless such CONSIDERATION SHARES are registered under the SECURITIES ACT or an exemption from the registration requirements of the SECURITIES ACT is available, offer, sell or transfer the CONSIDERATION SHARES in the United States or to, or for the account or benefit of, a U.S. person. The SELLER understands that the CONSIDERATION SHARES or any interest therein are only transferable on the books and records of the transfer agent and registrar of ENTRUST. The SELLER further understands that neither ENTRUST nor its transfer agent and registrar will register any transfer of the CONSIDERATION SHARES except in accordance with the provisions of REGULATION S, pursuant to registration under the SECURITIES ACT or pursuant to an available exemption from registration, and that ENTRUST may place stop transfer orders with its transfer agent with respect to certificates representing CONSIDERATION SHARES. 7.3.2. Unless the CONSIDERATION SHARES shall first have been registered under the SECURITIES ACT, any proposed offer, sale or transfer during the DISTRIBUTION COMPLIANCE PERIOD of any of the CONSIDERATION SHARES shall be subject to the condition that the SELLER must deliver to ENTRUST; (a) written certification that neither record nor beneficial ownership of the CONSIDERATION SHARES has been offered or sold in the United States or to, or for the account or benefit of, any U.S. person; (b) a written certification of the proposed transferee that such transferee (or any account for which such transferee is acquiring such CONSIDERATION SHARES) is not a U.S. person, that such transferee is acquiring such CONSIDERATION SHARES for such transferee's own account (or an account over which he or she has investment discretion) and that such transferee is knowledgeable of and agrees to be bound by the restrictions on re-sale set forth in this Agreement and REGULATION S during the DISTRIBUTION COMPLIANCE PERIOD, and (c) a written opinion of United States counsel, in form and substance reasonably satisfactory to ENTRUST, to the effect that the offer, sale and transfer of such -23- CONSIDERATION SHARES are exempt from registration under the SECURITIES ACT. Any CONSIDERATION SHARES offered, sold or transferred during the DISTRIBUTION COMPLIANCE PERIOD in accordance with the foregoing restrictions will continue to be deemed "restricted securities" under Rule 144 of the SECURITIES ACT, notwithstanding that they were acquired in a resale transaction made pursuant to Rules 901 or 904 of REGULATION S. 7.3.3. Rule 144. The SELLER understands that "restricted securities" may be resold in the United States or to, or for the benefit of, U.S. persons in accordance with Rule 144 of the SECURITIES ACT. The SELLER acknowledges that the following is a summary of the resale requirements of Rule 144, and such summary is qualified in its entirety by reference to such rule, a copy of which was previously provided to the SELLER. 7.3.4. Rule 144, as currently in effect, imposes the following requirements on any holder of restricted securities: (a) at the time of resale, ENTRUST must have been a public company for at least 90 days (i.e., ENTRUST must have securities registered pursuant to Section 12 of the United States Securities Exchange Act of 1934, as amended, and have filed all reports required to be field thereunder during the 12 months preceding the sale (or for such shorter period as ENTRUST is a public company); (b) the holder of restricted securities must have held such securities for at least one year; (c) the number of shares of Series A Common Stock sold by the holder within any three-month period may not exceed the greater of (a) 1% of the number of outstanding shares of Series A Common Stock or (b) the average weekly trading volume of the Series A Common Stock during the four calendar weeks preceding the filing of the Form 144; (d) the holder must sell the securities only in "brokers' transactions" or in transactions directly with a "market maker," which transactions may not involve any solicitations of orders to buy the securities or any payments to any person other than the broker executing the sale order; and (e) the holder must mail three copies of a Form 144 to the United States Securities and Exchange Commission at the same time as he or she places the sale order with the broker. 7.3.5. After the holder of CONSIDERATION SHARES has held the CONSIDERATION SHARES for two years, and assuming the holder has not been an affiliate of ENTRUST (such as an officer, director or principal stockholder) during the preceding three months, ENTRUST shall, to the extent permitted by law, at the request of SELLER remove the -24- restrictive legend from the CONSIDERATION SHARES under Rule 144(k). Thereafter, and in respect of the transfers made in accordance with Rule 144, the holder need not comply with the restrictions on resale noted above. 7.3.6. A legend substantially in the following form will be placed on the certificates representing the CONSIDERATION SHARES which may be issued to the SELLER. "The shares represented by this certificate have not been registered under the United States Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated (i) unless and until such shares are registered under such Act or an opinion of counsel satisfactory to Entrust Technologies Inc. is obtained to the effect that such registration is not required or (ii) except in accordance with Regulation S of such Act. Hedging transactions involving the shares represented by this certificate may not be conducted except in compliance with the Securities Act of 1933, as amended. The sale or other disposition of any of the shares represented by this certificate is restricted by a Share Purchase Agreement entered into by the holder of this certificate and Entrust Technologies Inc. A copy of the Share Purchase Agreement is available for inspection during normal business hours at the principal executive office of the corporation." 7.3.7. The SELLER, if requested by ENTRUST or the managing underwriter of a public offering of ENTRUST's Series A Common Stock or other securities pursuant to a registration statement under the SECURITIES ACT (a "REGISTRATION STATEMENT"), shall agree not to sell publicly or otherwise transfer or dispose of any CONSIDERATION SHARES or other securities of ENTRUST held by the SELLER for a specified period of time (not to exceed 180 days) following the effective date of such REGISTRATION STATEMENT; provided, however, that. (a) such agreement shall only apply to the first REGISTRATION STATEMENT covering Series A Common Stock or other securities to be sold to the public in an underwritten offering, and (b) all stockholders of ENTRUST holding not less than the number of shares of Series A Common Stock held by the SELLER and all officers and directors of ENTRUST enter into similar agreements. 7.3.8. ENTRUST represents that it has only made offers to sell the CONSIDERATION SHARES outside the U.S.A. and that it did not generally advertise in the U.S.A. in respect to the offering for sale or sale of the CONSIDERATION SHARES. 7.4. Watermark Business 7.4.1. The Watermark intellectual property (watermark specific software and filed patents) shall be transferred to a separate entity (the "WATERMARK COMPANY") prior to CLOSING in consultation with ENTRUST. The Company shall be indemnified for -25- any claims arising from or relating to the Watermark intellectual property, either before or after CLOSING. To the extent that the COMPANY is under any obligation to perform any work on behalf of the WATERMARK COMPANY or in connection with the Watermark intellectual property, such obligation will be taken over by the WATERMARK COMPANY at no cost for the COMPANY. If such transfer is not possible, the WATERMARK COMPANY will pay an arm's length consideration to the COMPANY and grant to the COMPANY at no charge all licenses necessary for the performance of such work. 7.4.2. Any costs (including legal costs) or taxes imposed on the COMPANY or on ENTRUST in connection with the transfer of the watermark intellectual property to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as determined by Sec. 5.2 in respect of the representations and warranties. 8. Miscellaneous 8.1. Costs 8.1.1. Each Party shall bear its own costs, taxes and expenses relating to the preparation, CLOSING and implementation of this AGREEMENT. 8.2. Confidentiality Effective as of CLOSING, ENTRUSTS' obligation to the keep confidential the information received on the COMPANY shall terminate. 8.3. Assignment 8.3.1. The rights and obligations of the PARTIES out of this AGREEMENT may not be assigned, provided, however, that ENTRUST is authorized to assign such rights and obligations to any of its affiliates. 8.3.2. In case of such an assignment of the contract by ENTRUST to any of its affiliates pursuant Sec. 8.3.1, a letter of comfort or a guarantee of ENTRUST shall be delivered to the SELLERS. 8.4. Announcements No announcement concerning the transaction contemplated by this AGREEMENT or any matter ancillary to it and no disclosure of the terms of this AGREEMENT (save as required by law, by any market regulations or as expressly provided in this AGREEMENT) shall be made by the SELLER to any person or entity, except with the prior written approval of ENTRUST. -26- 8.5. Notices 8.5.1. Any notice or other communication to be given under this letter shall be in writing and shall be delivered by hand or sent by registered post or by courier to the address specified below, or sent by facsimile to the number specified below; (a) ENTRUST: General Counsel, Entrust Technologies Inc. 2323 North Central Expressway, Richardson, Texas, 75080, phone: 001 972 994 8020, fax 001 972 994 8005 (b) SELLER: [Name], [Address] 8.5.2. Either Party hereto may change the address, facsimile number or name of the person for whose attention notices are to be addressed by serving a notice on the other party hereto in accordance with Sec. 8.5.1. 8.5.3. Each such notice or other communication shall be effective: (a) if given by facsimile when the facsimile is transmitted to the facsimile number specified in para. 8.5.1 or (b) if given by any other means, when received at the address specified in para. 8.5.1. 8.6. Severability Whenever possible, each provision of this AGREEMENT shall be interpreted in such manner as to be effective and valid under the applicable law, but if any provision of this AGREEMENT shall be unenforceable or invalid under applicable law, such provision shall be ineffective only to the extent of such unenforceability or invalidity and be replaced by such valid and enforceable provision which bona fides parties would consider to match as closely as possible the invalid or unenforceable provision, attaining the same or a similar economic effect. The remaining provisions of this AGREEMENT shall under all circumstances continue to be binding and in full force and effect. 8.7. Construction, amendments 8.7.1. This AGREEMENT constitutes the entire agreement among the parties and, except as otherwise provided, supersedes any prior understandings or agreements, written or oral, that relate to the acquisition of COMPANY SHARES by ENTRUST. 8.7.2. This AGREEMENT may not be amended except in writing, including communications by letter, facsimile, or E-mail. -27- 8.7.3. The PARTIES agree that the AGREEMENT shall not be construed against any PARTY on the ground that such PARTY drafted or prepared the AGREEMENT. 8.8. Governing law This AGREEMENT shall be governed by the internal law of Switzerland; the application of the Vienna (United Nations) Convention on Contracts for the International Sale of Goods is excluded. 8.9. Arbitration All disputes arising out of or in connection with the present agreement, including disputes on its conclusion, binding effect, amendment and termination shall be resolved, to the exclusion of the ordinary courts by a three-person Arbitral Tribunal in accordance with the International Arbitration Rules of the Zurich Chamber of Commerce. The language of the arbitration shall be English. List of Exhibits - - Exhibit DIL (List of Documents submitted to Entrust) - - Exhibit CAP (Capital Structure of Entrust) - - Exhibit IPR (Intellectual Property) _________________ , this ___________ _________________ , this __________ ENTRUST Technologies Inc. The SELLER: - ---------------------------------- ---------------------------------- Name: [Name] Title: -28- This Form of Share Purchase Agreement (or comparable form) was entered into by the shareholders of R3 Security Engineering AG listed below. The only material differences in the Share Purchase Agreements relate to the consideration paid to such shareholders, which is set forth after their respective names. Price Consideration Escrow Adjusted Shareholder U.S. Dollars Shares Shares Shares - ----------- ------------ ------ ------ ------ Andreas E. Strate $52,573 16,062 3,276 1,073 Claus N. Rasmussen 5,286 1,606 327 107 Bruno Wildhaber 157,747 14,258 2,735 1,073 Jurgen Golz 3,960 357 68 26 Xuejia Lai 26,316 8,031 1,638 536 Fritz Bauspiess 2,614 804 164 53 Wilhelm Niehoff 5,286 1,606 513 107 -29- ENTRUST TECHNOLOGIES [Name] [Address] CONSIDERATION SHARES Dear [___________] Reference is made to the share purchase agreement between yourself and ourselves for the purchase of shares in R3 Security Engineering AG closed on 8 June 1998 (the "Share Purchase Agreement"). The purpose of this letter is the amendment of the Share Purchase Agreement with respect to its Section 7.3 as follows: Rule 144 Reporting Requirements From and after the time ENTRUST has securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in order to permit the Seller to sell the CONSIDERATION SHARES it holds, if it so desires, from time to time pursuant to Rule 144 or any successor to such rule or any other rule or regulation of the Securities and Exchange Commission (the "Commission") that may at any time permit the SELLER to sell its CONSIDERATION SHARES to the public without registration (the "Resale Rules"), ENTRUST will: a) comply with all rules and regulations of the Commission applicable in connection with use of the Resale Rules; b) make and keep adequate and current public information available, as those terms are understood and defined in the Resale Rules, at all times; c) file with the Commission in a timely manner all reports and other documents required of ENTRUST under the Securities Act and Exchange Act; d) furnish to the SELLER forthwith upon request (i) a written statement by ENTRUST that it has complied with the reporting requirements of the Resale Rules, the Securities Act and Exchange Act, (ii) a copy of the most recent annual or quarterly report of ENTRUST and any other reports and documents filed by ENTRUST under the Securities Act or the Exchange Act, and (iii) such other information as may be reasonably requested in availing the SELLER of any rule or regulation of the Commission which permits the selling of any such CONSIDERATION SHARES without registration; and e) take any action (including cooperation with the SELLER to cause the transfer agent to remove any restrictive legend on certificates evidencing the CONSIDERATION SHARES) which shall be reasonably requested by the SELLER or which shall otherwise facilitate the sale of the CONSIDERATION SHARES from time to time by the SELLER pursuant to the Resale Rules. Rule 144A Information Until such time as ENTRUST is subject to Section 13 or 15(d) of the Exchange Act, ENTRUST will make available, upon request, to the SELLER and prospective purchaser or transferee of the CONSIDERATION SHARES designated by the Seller, the information required to allow the resale or other transfer of such CONSIDERATION SHARES pursuant to Rule 144A under the Securities Act. Sec. 7.3.7 The legend to be placed on the certificates representing CONSIDERATION SHARES shall include the following additional transfer exception: or (iii) except to a "qualified institutional buyer" (as defined in Rule 144A promulgated under the Securities Act) in a transaction which meets the requirements of such Rule 144A. Zurich, 8 June 1998 Entrust Technologies Inc. /s/ Brad Ross - ------------- Brad Ross ENTRUST TECHNOLOGIES [Name] [Address] Watermark spin-off Dear [____________] We confirm to you herewith that Entrust will bear up to CHF 30,000.-- of legal fees in connection with the spin-off of the Watermark business. Sec. 7.4.2. of the Share Purchase Agreement should, therefore, read as follows: "Except for an aggregate of up to CHF 30,000.-- of legal fees, any fees, costs or taxes imposed on the COMPANY or on ENTRUST in connection with the transfer of the watermark intellectual property to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as determined by Sec. 5.2 in respect of the representations and warranties." Pursuant to the information received from Dr. Markus Kroll on 6 June 1998, the tax authorities decided to levy against R3 Security Engineering AG a withholding tax of CHF 177,697 in connection with the distribution of the shares in Securights AG as a dividend. Since such taxes are to be borne pro rata by the Sellers, we will in due course, send you an invoice for your portion of the taxes, as determined in Sec. 7.4.2. of the Share Purchase Agreement. Indeed, you may be entitled, to claim back this amount from the tax authorities in accordance with the tax legislation. We thank you for your comprehension. Zurich, 8 June 1998 Entrust Technologies, Inc. /s/ Brad Ross - ------------- Brad Ross EX-4.1 6 SPECIMEN CERTIFICATE 1 Exhibit 4.1 Number SHARES PAR VALUE $.01 PER SHARE [LOGO] Orchestrating Enterprise Security INCORPORATED UNDER THE LAWS CUSIP 293848 10 7 OF THE STATE OF MARYLAND THIS CERTIFICATE IS SEE REVERSE FOR TRANSFERABLE IN DENVER, CO CERTAIN DEFINITIONS THIS CERTIFIES THAT ____________________________________________ is the owner of ________________________________________________________________________________ FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF Entrust Technologies Inc. transferrable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to all of the provisions of the Articles of Incorporation and By-Laws of the Corporation, each as from time to time amended (copies of which are on file with the Transfer Agent and Registrar), to all of which the holder by acceptance hereof assents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated:_________________ /s/ James D. Kendry [CORPORATE /s/ John A. Ryan Secretary SEAL] PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: AMERICAN SECURITIES TRANSFER & TRUST, INC. P.O. Box 1596, Denver, Colorado 80201 BY___________________________ TRANSFER AGENT AND REGISTRAR AUTHORIZED SIGNATURE 2 Entrust Technologies Inc. The Corporation has authority to issue stock of more than one class. The Corporation will furnish without charge to each Stockholder who so requests a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue. The Corporation has authority to issue a preferred or special class of stock in series. The Corporation will furnish without charge to each Stockholder who so requests a full statement of the differences in the relative rights and preferences between the shares of each series to the extent they have been set, and the authority of the board of directors to set the relative rights and preferences of subsequent series. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _________ Custodian________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act__________________________ in common (State)
Additional abbreviations may also be used though not in the above list. For value received, __________________________________, hereby sell, assign, and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _________________________________________________________________________ _______________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________ ________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. Signature(s) Guaranteed:____________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-5 7 OPINION OF HALE AND DORR LLP Exhibit 5 July 24, 1998 Entrust Technologies Inc. 2323 North Central Expressway Richardson, Texas 75080 Re: Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: This opinion is furnished to you in connection with a Registration Statement on Form S-1 (File No. 333-57275) (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), for the registration of shares of Common Stock, $.01 par value per share (the "Shares"), of Entrust Technologies Inc., a Maryland corporation (the "Company"), with an aggregate offering price of $130,026,672 of which (i) up to 5,400,000 Shares will be issued and sold by the Company and (ii) the remaining 2,726,667 Shares will be sold by certain stockholders of the Company (the "Selling Stockholders") (including 1,060,000 Shares issuable upon exercise of an over-allotment option granted by the Selling Stockholders). The Shares are to be sold by the Company and the Selling Stockholders pursuant to U.S. and international underwriting agreements (the "Underwriting Agreements") to be entered into by and among the Company, the Selling Stockholders and Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, NationsBanc Montgomery Securities LLC and Warburg Dillon Read LLC, and their respective foreign affiliates, as representatives of the several underwriters named in the Underwriting Agreements, the forms of which have been filed as Exhibits 1.1 and 1.2 to the Registration Statement. We are acting as counsel for the Company in connection with the sale by the Company and the Selling Stockholders of the Shares. We have examined signed copies of the Registration Statement as filed with the Commission. We have also examined and relied upon the Underwriting Agreements, minutes of meetings of the stockholders and the Board of Directors of the Company as provided to us by the Company, stock record books of the Company as provided to us by the Company, the Articles of Incorporation and Bylaws of the Company, each as restated and/or amended to date, and such other documents as we have deemed necessary for purposes of rendering the opinions hereinafter set forth. Entrust Technologies Inc. July 24, 1998 Page 2 In our examination of the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, the authenticity of the originals of such latter documents and the legal competence of all signatories to such documents. Our opinion in clause (ii) below, insofar as it relates to the Selling Stockholders' Shares being fully paid, is based solely on a certificate of the Senior Vice President, Business Development and Finance and Chief Financial Officer of the Company. We assume that the appropriate action will be taken, prior to the offer and sale of the Shares in accordance with the Underwriting Agreements, to register and qualify the Shares for sale under all applicable state securities or "blue sky" laws. We express no opinion herein as to the laws of any state or jurisdiction other than the state laws of the Commonwealth of Massachusetts and the federal laws of the United States of America. To the extent that any other laws govern the matters as to which we are opining herein, we have assumed that such laws are identical to the state laws of the Commonwealth of Massachusetts, and we are expressing no opinion herein as to whether such assumption is reasonable or correct. Based upon and subject to the foregoing, we are of the opinion that (i) the Shares to be issued and sold by the Company have been duly authorized for issuance and, when such Shares are issued and paid for in accordance with the terms and conditions of the Underwriting Agreements, such Shares will be validly issued, fully paid and nonassessable and (ii) the Shares to be sold by the Selling Stockholders have been duly authorized and are validly issued, fully paid and nonassessable. It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. Please note that we are opining only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions, and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein. Entrust Technologies Inc. July 24, 1998 Page 3 We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our name therein and in the related Prospectus under the caption "Legal Matters." In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. Very truly yours, /s/ HALE AND DORR LLP EX-10.5 8 STRATEGIC ALLIANCE AGREEMENT Exhibit 10.5 STRATEGIC ALLIANCE AGREEMENT ---------------------------- THIS STRATEGIC ALLIANCE AGREEMENT (this "Agreement") is made as of 31 December, --------- 1996, between NORTHERN TELECOM LIMITED, a Canadian corporation ("NTL"), and --- ENTRUST TECHNOLOGIES INC., a Maryland corporation ("ETI"). --- WHEREAS, pursuant to an asset transfer agreement between NTL and Entrust Technologies Limited of even date (the "NTL Transfer Agreement") and an asset ---------------------- transfer agreement between Northern Telecom Inc. and ETI of even date, the Entrust Technology (as defined herein) has been transferred to ETI and ETI's Canadian subsidiary, Entrust Technologies Limited; and WHEREAS, NTL desires to license from Entrust on behalf of itself and the Nortel Subsidiaries (as defined herein) ongoing rights to the Entrust Technology, ETI desires to license from NTL on behalf of itself and its Subsidiaries some intellectual property rights associated with the Entrust Technology, and NTL and ETI desire to cooperate regarding contracting, patent cross-licensing and the exchange of information, all on the terms and subject to the conditions set forth herein; NOW THEREFORE, NTL and ETI, intending to be legally bound agree as follows: ARTICLE I DEFINITIONS ----------- Capitalized terms used in this Agreement are used as defined in this Article I or elsewhere in this Agreement. As used herein: "Agreement" has the meaning specified in the preamble hereof. --------- "Confidential Information" has the meaning specified in Section 8.02. ------------------------ "Entrust" shall mean ETI and all Subsidiaries thereof. ------- "Entrust Entity" shall mean either ETI or the applicable Entrust Subsidiary, as -------------- the context requires. "ETI" has the meaning specified in the preamble hereof. --- "Effective Date" means the close of business on the date specified in the -------------- preamble hereof. "Enterprise License" has the meaning specified in Section 3.01. ------------------ 1 "Entrust Patents" shall mean all Patents: (i) which are owned or controlled at --------------- any time during the Patent License Term by Entrust or any Entrust Subsidiary; or (ii) with respect to which, and to the extent to which, Entrust or any Entrust Subsidiary shall at any time during the Patent License Term have the right to grant the licenses and rights which are granted herein by Entrust. The Entrust Patents as of the Effective Date are set forth in Exhibit A of the NTL Transfer Agreement. "Entrust Products" has the meaning specified in the NTL Transfer Agreement. ---------------- "Entrust Technology" has the meaning specified in the NTL Transfer Agreement. ------------------ "Field of Activity" shall mean , in respect of each Party, the products and ----------------- services forming the business, at the Effective Date, of that Party or any of its Subsidiaries, including new products and services which normally evolve from such products and services. "Grantee" shall mean either Entrust or Nortel, as the case may be, to which ------- licenses are granted under the Patent License. "Grantor" shall mean the Party granting licenses under the Patent License, as ------- well as its Subsidiaries on behalf of which such licenses are granted. "Licensed Products" shall mean, in respect of each Party, any products which are ----------------- within its Field of Activity. "Licensed Services" shall mean, in respect of each Party, any services which are ----------------- within its Field of Activity. "NTL" has the meaning specified in the preamble hereof. --- "NTL Technology" has the meaning specified in Section 2.01 hereof. -------------- "Nortel" shall mean NTL and all Nortel Subsidiaries. ------ "Nortel Entity" shall mean either NTL or the applicable Nortel Subsidiary, as ------------- the context requires. "Nortel Patents" shall mean all Patents other than Patents included in NTL -------------- Technology: (i) which are owned or controlled at any time during the Patent License Term by Nortel or any Nortel Subsidiary; or (ii) with respect to which, and to the extent to which, Nortel or any Nortel Subsidiary shall at any time during the Patent License Term have the right to grant the licenses and rights which are herein granted by Nortel including through cross licenses or otherwise. "Nortel Subsidiary" shall mean a Subsidiary of Nortel, excluding ETI and Entrust ----------------- Technologies Limited. 2 "Patent" shall mean any patent (other than a design patent or a design ------ registration) and any utility model covering any invention for which a first application was filed in or for any country prior to the termination of the Patent License Term, and shall include any such application in or for a country for which rights under the law of the country are available for compensation for unauthorized use of the invention covered by such application. "Party" shall mean either NTL or the ETI, as the context requires except with ----- respect to Article VIII where "Party" shall refer either to Nortel or Entrust, as the context requires. "Patent License" has the meaning specified in Section 6.03. -------------- "Patent License Term" shall mean that period of time that ETI is a Subsidiary of ------------------- NTL. "Reseller Agreement" has the meaning specified in Section 4.01. ------------------ "Source Code License" has the meaning specified in Section 5.01. ------------------- "Subsidiary" shall mean: (i) a corporation, company or other entity, in which a ---------- Party now or hereafter, owns or controls, directly or indirectly, fifty percent (50%) or more of the outstanding shares or securities (representing the right to vote for the election of directors or other managing authority), provided, however, that such corporation, company, or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists; or (ii) an entity which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but in which a Party now or hereafter, owns or controls, directly or indirectly, fifty percent (50%) or more of the ownership interest representing the right to make the decisions for such entity, provided, however, that such entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. ARTICLE II NTL TECHNOLOGY -------------- Section 2.01 NTL Technology. Entrust shall be entitled to the benefit of the NTL -------------- intellectual property licenses specified in Exhibit A (the "NTL Technology") for -------------- so long as NTL effectively owns or controls more than fifty percent (50%) of the voting stock or interests in ETI. Section 2.02. NTL Obligations. NTL has, to the best of its knowledge, complied ---------------- in all material respects with the provisions of the licenses for NTL Technology. NTL 3 shall make all reasonable efforts to perform in all material respects the obligations required to maintain the licenses for the NTL Technology in good standing for their respective terms. NTL shall not make any material change to the licenses for Nortel Technology without the consent of ETI, which shall not be unreasonably withheld. NTL shall make commercially reasonable efforts to acquire for the benefit of Entrust any renewal or extension of NTL a license for Nortel Technology at Entrust's request provided Entrust agrees to pay all costs associated with obtaining such benefit for Entrust. If NTL renews or extends a license for NTL Technology, NTL may, but shall not be required to obtain rights thereunder for the renewal period or extension provisions for the benefit of Entrust. Section 2.03. ETI Obligations. Entrust shall comply in all material respects ---------------- with the obligations required of it under the licenses for the NTL Technology for so long as Entrust benefits from those licenses. ETI shall pay to NTL the portion of all fees and charges paid by Nortel to obtain continuing rights to the NTL Technology that are reasonably attributable to Entrust's actual use of the NTL Technology. ARTICLE III NORTEL USE OF ENTRUST PRODUCTS ------------------------------ Section 3.01 Right to Use. ETI, on behalf of Entrust, grants to NTL and its ------------ Affiliates (as defined in the Enterprise License) a non-exclusive, fully paid- up, worldwide, perpetual license to use an unlimited number of copies of the Entrust Products subject to the terms and conditions of an agreement to be concluded between NTL and ETI promptly after the Effective Date in substantially the form of the license set forth in Exhibit B (the "Enterprise License") save ------------------ as amended to comply with the provisions of this Article III. NTL represents as of the Effective Date that the terms of the Enterprise License are materially similar to the terms of an existing agreement with a third-party licensee of the Entrust Products, except for the terms relating to price and the provisions of Section 3.02 hereof Section 3.02 Support. NTL may contract for support services under the ------- Enterprise License. Payments to Entrust for the support services identified in the Enterprise License as of the Effective Date shall be three hundred thousand U.S. dollars (U.S. $300,000.00) for the calendar year 1997 and shall not increase by more than inflation as measured by the Canadian CPI for any one-year renewal period. Section 3.03 Indemnification. Notwithstanding any provision of the Enterprise ----------------- License: (a) ETI shall not be required to honour any product warranty or intellectual property indemnity set forth in the Enterprise License, to the extent that such breach of warranty or indemnity relates to a defect in any of the Entrust Products as of the Effective Date or the infringement or misappropriation of any third party rights as incorporated into the Entrust Products as of the Effective Date. 4 (b) ETI's liability to Nortel arising from or relating to the intellectual property indemnity set forth in the Enterprise License shall not exceed 50% (fifty percent) of the monies paid by Nortel thereunder to a maximum of U.S.$1,000,000 (one million U.S. dollars). ARTICLE IV NORTEL RESALE OF ENTRUST PRODUCTS --------------------------------- Section 4.01 Reseller Rights. At NTL's option and upon NTL's request, Entrust --------------- shall promptly enter into a non-exclusive reseller agreement with NTL, on behalf of Nortel, in substantially the form set forth in Exhibit C (the "Reseller -------- Agreement") save as amended to comply with the provisions of this Article IV. - --------- NTL represents as of the Effective Date that the terms of the Reseller Agreement are materially similar to the terms of an agreement recently concluded with a third-party reseller of the Entrust Products, except for the provisions of Section 4.02 hereof. Subject to early termination for material default, such Reseller Agreement shall expire either in three years or when ETI ceases to be a Subsidiary of NTL, whichever event occurs later. Section 4.02 Most Favoured Treatment. During the life of the Reseller Agreement, ----------------------- it is the intention of ETI that the terms of the Reseller Agreement shall be no less favourable to Nortel than the terms in effect with any of Entrust's resellers of Entrust Products at the time the Reseller Agreement is executed. Section 4.03 Indemnification. Notwithstanding any provision of the Reseller ---------------- Agreement, ETI shall not be required to honour intellectual property indemnity set forth in the Reseller Agreement, to the extent that such breach of representation, warranty, condition or indemnity relates to a defect in any of the Entrust Products as of the Effective Date or the infringement or misappropriation of any third party rights incorporated into the Entrust Products as of the Effective Date. ARTICLE V NORTEL RIGHTS FOR ENTRUST PRODUCT SOURCE CODE --------------------------------------------- Section 5.01 Source Code Access. At NTL's option and upon NTL's request, Entrust ------------------ shall promptly enter into a non-exclusive Entrust Products source code license with NTL, on behalf of Nortel, in substantially the form set forth in Exhibit D (the "Source Code License"). NTL represents as of the Effective Date that the ------------------- terms of the Source Code License are materially similar to the terms of an agreement recently concluded with a third-party licensee of the source code for the Entrust Products, except that NTL is not required to pay any lump sum royalty and for the provisions of Section 5.02 hereof. 5 Section 5.02 Most Favoured Treatment. For so long as ETI remains a Subsidiary ----------------------- of NTL, it is the intention of ETI that the terms of the Source Code License be no less favourable to Nortel than the terms then in effect with any of Entrust's source code licensees that receives substantially similar rights taking into account the relative size of the licensee and Entrust's potential benefits. Section 5.03 Indemnification. Notwithstanding any provision of the Source Code ----------------- License, ETI shall not be required to honour any product warranty or intellectual property indemnity set forth in the Source Code License, to the extent that such breach of warranty or indemnity relates to a defect in any of the Entrust Products as of the Effective Date or the infringement or misappropriation of any third party rights incorporated into the Entrust Products as of the Effective Date. ARTICLE VI PATENT CROSS LICENSING ---------------------- Section 6.01. ETI Benefit from Cross Licenses. Subject to the terms and -------------------------------- conditions of this Agreement, NTL, to the extent of its legal right to do so, hereby grants to Entrust under the Nortel Patents, a non-transferable, non- assignable, indivisible, non-exclusive, royalty-free, worldwide license for Licensed Products and Licensed Services. Section 6.02. Nortel Benefit from Cross Licenses. Subject to the terms and ----------------------------------- conditions of this Agreement, Entrust, to the extent of its legal right to do so, hereby grants to Nortel, under the Entrust Patents, an irrevocable, non- transferable, non-assignable, indivisible, non-exclusive, royalty-free, worldwide license for Licensed Products and Licensed Services. Section 6.03. Extent of Cross Licenses. The licenses granted pursuant to ------------------------- Sections 6.01 and 6.02 (each such license being a "Patent License") include the -------------- following rights: (a) to make, use, lease, sell or otherwise dispose of, maintain and repair, Licensed Products, to license the use of Licensed Products made by or for Grantee, to practice any process involved in the manufacture or use of Licensed Products, and to provide Licensed Services; (b) to have made Licensed Products by another manufacturer for the use, lease, sale, disposal or transfer by Grantee, but only when both of the following conditions are met: (i) the designs, specifications and working drawings for the manufacture of such Licensed Products are furnished by Grantee; and (ii) such designs, specifications and working drawings are in sufficient detail that no additional design by the manufacturer is required other than adaptation to the production processes and standards normally used by the manufacturer which change the characteristics of the products only to a negligible extent; 6 (c) to make and have made, to use and have used, and to maintain machines, tools, materials and other manufacturing instrumentalities, and to use and have used methods and processes, insofar as such machines, tools, materials, other manufacturing instrumentalities, methods and processes are involved in or incidental to the development, manufacture, installation, testing, maintenance or repair of Licensed Products, or to the training of personnel in the use of such Licensed Products; provided, however, that the rights granted in this Section 6.03(c) shall not serve to enlarge the scope of the rights granted in Section 6.03(b); Section 6.04. Limitations to Patent Licenses. Nothing contained in a Patent -------------------------------- License shall be construed as: (a) requiring the filing of any application for a Patent or utility model, or the prosecution, maintenance or defense of any such application; (b) the maintenance or defense of any Patent; (c) a warranty or representation by Grantor, or admission by Grantee, as to the validity or scope of any Patent; (d) a warranty or representation that any manufacture, sale, lease, use, or importation of a Licensed Product, or the provision of any Licensed Service, by Grantee shall be free from infringement of any intellectual property right of Grantor other than those Patents under which and to the extent to which licenses are in force under the Patent License; (e) an agreement to bring or prosecute actions or suits against third parties for infringement; (f) an obligation to provide any manufacturing or technical information or any support or technical assistance; (g) conferring any right to use, in advertising, publicity or otherwise, any name, trade name or trademark, or any contraction, abbreviation or simulation thereof, except as expressly provided herein; (h) conferring by implication, estoppel or otherwise upon Grantee any license or other right under any Patent or other intellectual property right, except the licenses and rights expressly granted herein; or 7 (i) an obligation upon grantor to make any determination as to the applicability of any Patent to any product, Licensed Product or Licensed Service of Grantee. Section 6.06 NTL Right to Cross-License. The licenses granted hereunder do not --------------------------- include for the Grantee the right to grant sublicenses to any third party except as expressly provide in Section 6.03. Notwithstanding the foregoing, NTL shall be entitled to sublicense the Entrust Patents to meet its obligations under its existing Patent cross license agreements. For so long as ETI is an NTL Subsidiary, NTL shall also be entitled, as part of its continuing Patent cross licensing program, to sublicense Entrust Patents under new Patent cross license agreements provided that the rights granted in the Entrust Patents pursuant to any such new Patent cross license agreements do not materially exceed those rights customarily granted under NTL's existing Patent cross license agreements (as of the Effective Date) and ETI obtains the benefit of all Nortel Patents involved. Section 6.07. Excluded Patents. ----------------- (a) Assigned Patents. It is recognized that Grantor may have entered into or ----------------- may hereafter enter into a contract with, or a subcontract directly for the benefit of, a third party to undertake development work partially or completely financed by such third party and that Grantor may be required under such contract or subcontract (either unconditionally or by reason of any action or inaction thereunder) to assign to such third party its rights to grant, or may now or hereafter be restrained by such third party from granting, licenses to Grantee under Patents arising out of such work or covered by such contract or subcontract. The resulting inability of Grantor to grant the licenses purported to be granted by it under such Patents shall not be considered to be a breach of the Patent License. In such case, upon request by the Grantee, Grantor shall make reasonable efforts to secure rights and licenses for the Grantee from the third-party equivalent to those provided in the Patent License. (b) Patents Subject to Exclusive Licenses. ETI acknowledges that NTL may have -------------------------------------- entered into exclusive license arrangements with other corporations or legal entities. The Patent License granted hereunder by NTL does not extend the scope of any such exclusive licenses (including any which NTL is negotiating as of the Effective Date). Section 6.08. Jointly Owned Patents. If the grant by Grantor of licenses and ---------------------- rights in accordance with the Patent License in respect of Patents made by its employees jointly with third parties is subject by contract or by operation of law to the consent of such third parties or their assignees, upon request of the Grantee, Grantor shall use reasonable efforts to either secure rights and licenses for the Grantee from such third-party equivalent to those provided in 8 the Patent License, or obtain consent from such third parties to grant rights and licenses equivalent to those provided in the Patent License; however, the inability of Grantor to secure such rights or to obtain such consent in spite of the use of reasonable efforts shall not be considered to be a breach of the Patent License. Notwithstanding that such rights or such consent may be subject to the payment of a royalty or other consideration to any such third party as provided for in Section 6.09, and notwithstanding other conditions agreed with the third party, the grant of such licenses and rights shall otherwise be in accordance with the terms and conditions of the Patent License. Section 6.09. Royalty Obligations. Licenses and rights, the grant of which by -------------------- Grantor or the exercise of which by Grantee would make Grantor liable to third parties for royalties or other payments, shall be granted only upon agreement in writing of the Grantee to pay an appropriate portion of such royalties or make such other payments. Section 6.10. Patent Information. Each Party shall, upon written request from ------------------- the other Party sufficiently identifying any Patent by country, number and date of issuance, inform such other Party of the extent to which any such Patent is available for licensing under the Patent License. If the license or rights under any such Patent are restricted in scope, or are subject to payments according to Section 6.09, a statement of the nature of any such restrictions or payments shall, on request, be provided within a reasonable time. Section 6.11. Duration of Cross Licenses. --------------------------- (a) The Patent License shall commence on the Effective Date hereof (except as provided in Section 6.12) and shall continue for the Patent License Term unless terminated as provided in Article X or Section 6.06. Notwithstanding the expiration of the Patent License Term, the rights and licenses granted hereunder shall continue for the entire terms that the Entrust Patents or the NTL Patents, as the case may be, are in force or for that part of such terms for which the Grantor has the right to grant such rights and licenses. Notwithstanding any other provision in this Agreement, the Patent License shall terminate immediately upon ETI ceasing to be a Subsidiary of NTL. (b) Subject to the other sections of this Article VI, any termination of the licenses and rights granted to one Party and its Subsidiaries under the Patent License shall not affect the licenses and rights granted to the other Party and its Subsidiaries. (c) Notwithstanding the foregoing provisions of this Section 6.11, the Patent Licenses shall, for the patents owned or by a party, terminate as provided for in Section 6.11(a) or ten years from the Effective Date, whichever is later. 9 Section 6.12. Changes to Subsidiaries. ------------------------ (a) New Subsidiaries. Any rights or license granted under this Article VI to a ----------------- corporation or other legal entity which becomes a Subsidiary of a Party at a date later than the Effective Date shall become effective as of the date upon which such corporation or other legal entity becomes a Subsidiary of such Party. (b) Former Subsidiary. When a Subsidiary of either ETI or NTL ceases to be a ------------------ Subsidiary and holds any Patent under which a Grantee is licensed pursuant to the Patent License, such Grantee shall be entitled to exercise such rights and licenses for the full term of the Patent (or for that part of the term that the Grantor has the right to grant such rights and licenses). When a Subsidiary of ETI or NTL ceases to be a Subsidiary of such Party, any license granted to such Subsidiary in or pursuant to the Patent License shall terminate on the date that such Subsidiary ceases to be a Subsidiary. Section 6.12. Restraint on Claims. Each Grantor undertakes not to assert any -------------------- claim for Patent infringement with respect to use and maintenance of Licensed Products against any end user, customer or distributor of Grantee, or any subsequent vendee, lessee, or transferee to the extent the Licensed Products have been acquired from Grantee after the Effective Date and are used for the purpose for which they predominantly have been made (without modification or amendment). Section 6.13. Patent License Limitations. Neither Party makes any -------------------------- representations, extends any conditions or warranties of any kind or assumes any responsibility whatever with respect to the Patent Licenses other than the licenses, rights and representations expressly granted in this Article VI; in particular, unless the Parties or their Subsidiaries have expressly agreed otherwise, neither Grantor warrants that Licensed Products made, used, sold, disposed of, leased or licensed for use by Grantee, or Licensed Services provided by Grantee, do not infringe Patents or other intellectual property rights of third parties. ARTICLE VII COORDINATION OF CONTRACTING --------------------------- Section 7.01 Compliance with Nortel Policies. For so long as ETI remains a -------------------------------- Subsidiary of NTL, Entrust shall not take any action or enter into any commitment or agreement which may reasonably be anticipated based on notice from Nortel to result, with or without notice and with or without lapse of time or otherwise, in a contravention or event of default by any Nortel Entity of (i) any provisions of applicable law or regulation, (ii) any provision of NTL's certificate of incorporation or bylaws, (iii) any credit agreement or other material instrument binding upon Nortel, or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over Nortel or any of its assets. 10 Section 7.02. Nortel Global Agreements. For so long as ETI remains a Subsidiary ------------------------ of NTL, Entrust may purchase goods and services under agreements concluded by Nortel for the benefit of Subsidiaries of NTL. Entrust shall comply in all material respects with the obligations required of it under such agreements for so long as Entrust benefits from those agreements. ARTICLE VIII INFORMATION EXCHANGES --------------------- Section 8.01. Information. Subject to applicable law and privileges, each Party ----------- shall, to the extent legally permitted, provide the other Party with all information regarding itself and transactions under this Agreement that the other Party reasonably believes are required: (a) for the other Party to obtain the benefits provided for herein, and (b) to comply with the provisions of Section 7.01 and all applicable federal, state, county and local laws, ordinances, regulations and codes, including, but not limited to, securities laws and regulations. Section 8.02. Confidential Information. Entrust and Nortel shall hold in trust ------------------------ and maintain confidential all Confidential Information relating to the other Party. "Confidential Information" shall mean all information disclosed by either ------------------------ Party to the other in connection with this Agreement whether orally, visually, in writing or in any other tangible form, and includes, but is not limited to, technical, scientific, economic and business data, business plans, and the like, but shall not include (i) information which becomes generally available other than by release in violation of the provisions of this Section 8.01, (ii) information which becomes available on a non-confidential basis to a Party from a source other than the other Party, provided the Party in question reasonably believes that such source is not or was not bound to hold such information confidential, (iii) information acquired or developed independently by a Party without violating this Section 8.02 or any other confidentiality agreement with the other Party and (iv) information that any Party reasonably believes it is required to disclose by law, provided that it first notifies the other Party of such requirement and allows such Party a reasonable opportunity to seek a protective order or other appropriate remedy to prevent such disclosure. Without prejudice to the rights and remedies of either Party, a Party disclosing any Confidential Information to the other Party in accordance with the provisions of this Agreement shall be entitled to equitable relief by way of an injunction if the other Party breaches or threatens to breach any provision of this Section 8.02. Section 8.03. Information Exchanges. The disclosing Party makes no ---------------------- representations, does not warrant, and shall have no liability whatsoever in respect of any information disclosed by it pursuant to this Agreement. 11 ARTICLE IX OTHER COOPERATION ----------------- Section 9.01. Cogent. NTL acknowledges that the agreement between NTL and -------- Nortel Limited dated 17 March 1995 as set forth in Exhibit E (the "Cogent Agreement") shall be terminated by NTL, without liability to Entrust, except that Entrust shall, for reasonable consideration from Nortel, make all commercially reasonable efforts to assist Nortel to perform, in accordance with the terms of the Cogent Agreement, any agreement made or any bid submitted pursuant to the Cogent Agreement prior to the Effective Date. Section 9.02. PDSO. Entrust acknowledges that NTL will be holding inventory of ----- PDSO as of the Effective Date. Entrust shall, to the extent it requires further PDSO equipment endeavor to acquire such equipment from NTL, subject to the negotiation in good faith of commercially reasonable terms and condition of supply. ARTICLE X TERM AND TERMINATION -------------------- Section 10.01. Term. Except as otherwise provided in this Agreement, this ---- Agreement shall terminate on the later of (i) the third anniversary of the Effective Date or (ii) the date on which ETI ceases to be a Subsidiary of NTL. Section 10.02. Termination. ----------- (a) Termination for Cause. In the event of any material breach of this ---------------------- Agreement by either Nortel or Entrust, the non-breaching Party may terminate this Agreement by giving sixty (60) days' prior written notice to the other Party; provided, however, that this Agreement shall not terminate if the other Party has cured the breach prior to the expiration of such 60-day period, or if such breach can not be cured within such sixty 60-day period, the other Party has initiated actions to cure such breach within such sixty 60-day period, and thereafter cures such breach as soon as reasonably practical. (b) Termination for Insolvency. Either Party may terminate this Agreement in -------------------------- the event the other Party: (i) admits in writing its inability to pay its debts generally as they become due; (ii) commits an act of bankruptcy, (iii) files a notice of intention to make a proposal under the Bankruptcy and Insolvency Act, commences proceedings under the Companies' Creditors Arrangement Act, or otherwise seeks a reorganization, adjustment or composition under applicable bankruptcy laws or any other similar law or statute of any relevant jurisdiction; (iv) enters into an assignment, arrangement or composition for the benefit of its creditors; or (v) consents to the appointment of a receiver or receiver-manger of itself or of the whole or any substantial part of its property. 12 Section 10.03. Effect of Termination. --------------------- When this Agreement expires or terminates, the following provisions shall remain in effect: (a) NTL Technology. the provisions of Article II shall survive until they --------------- expires in accordance with the provisions of Section 2.01 unless this Agreement is terminated for cause pursuant to Section 10.02 arising from breach of Article II; (b) Enterprise License, Reseller Agreement and Source Code License. the --------------------------------------------------------------- Enterprise License, Reseller Agreement and Source Code License shall survive for the term provided therein subject to any right of early termination provided therein; (c) Patent Licenses. the provisions of Article VI shall survive until ---------------- expiration in accordance with the provisions of Article VI, unless this Agreement is terminated for cause pursuant to Section 10.02 arising from breach of Article VI; and (d) Other Provisions. the provisions of Articles VIII, XI and XII shall ----------------- survive any termination. ARTICLE XI LIMITS OF LIABILITY ------------------- Section 11.01. Enterprise License, Reseller Agreement, Source Code License. The ------------------------------------------------------------ liability of either Party arising from breach of either the Enterprise License, the Reseller Agreement or the Source Code License shall be governed exclusively by the terms of the applicable agreement or license. Section 11.02. No Other Obligations. Neither Party makes any representations, -------------------- extends any conditions or warranties of any kind or assumes any responsibility whatever except as expressly provided herein. Section 11.03. Limitation on Types of Damages. Except for breach of Article ------------------------------- VIII and for Article XII, in no event shall either Party be liable to the other Party for any indirect, incidental and/or consequential damages resulting from a breach of this agreement, including without limitation lost business, lost savings, and lost profits even if the breaching Party has been advised of the possibility of the occurrence of such damages. In no event shall either Party be liable for any special or punitive damages arising from breach of this Agreement. Section 11.04. Monetary Limit. For any cause of action arising under this --------------- Agreement, Nortel's liability to Entrust, and Entrust's liability to Nortel shall not exceed U.S.$5,000,000. Notwithstanding the foregoing, each of Nortel's and Entrust's liability to the other Party for breach of Article II shall not exceed U.S.$10,000,000. 13 ARTICLE XII MISCELLANEOUS ------------- Section 12.01. Notices. All notices authorized or required to be given pursuant ------- to this Agreement shall be given in writing and either personally delivered to the Party to whom it is given or delivered by an established delivery service by which receipts are given or mailed by registered or certified mail, postage prepaid, or sent by electronic telecopier, addressed to the Party at the following addresses. Any Party may change its address for the receipt of notices at any time by giving notice thereof to the other Party, in which event this Agreement shall be amended accordingly. (a) If to NTL: Northern Telecom Limited 8200 Dixie Road, Suite 100 Brampton, Ontario L6T 5P6 Attention: Corporate Secretary Fax No.: 905 863 8425 (b) If to ETI: Entrust Technologies Inc. 2 Constellation Court Nepean, Ontario K2G 5J9 Attention: President copy: Secretary Section 12.02. Entire Agreement. This Agreement embodies the complete Agreement ------ --------- and understanding of Entrust and NTL with respect to the subject matter hereof. This Agreement supersedes all prior agreements and understandings among the Parties hereto with respect to the subject matter hereof. Section 12.03. Modification. No change or modification of this Agreement shall ------------- be of any force unless such change or modification is in writing and has been signed by the duly authorized representatives of the Parties hereto. Section 12.04. Waivers. No waiver of any breach of any of the terms of this -------- Agreement shall be effective unless such waiver is in writing and signed by the Party against which such waiver is claimed. No waiver of any breach shall be deemed to be a waiver of any other or subsequent breach. 14 Section 12.05. Severability. If any provision of this Agreement shall be held to ------------ be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 12.06. Governing Law. This Agreement shall be governed by and be --------- ---- construed in accordance with the laws of the Province of Ontario, Canada. Section 12.07. Waiver of Jury Trial. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE ------ -- ---- ----- ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 12.08. Limitation on Rights of Others. No person other than a Party ---------- -- ------ -- ------- shall have any legal or equitable right, remedy or claim under or in respect of this Agreement. Section 12.09. Assignment, etc. Each Party's rights under this Agreement are ---------------- personal to that Party and that Party shall not assign, sublet or otherwise transfer any right or interest under this Agreement to anyone, without the prior written consent of the other Party, which shall not be unreasonably withheld. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of, and be enforceable by, the Parties hereto and their respective heirs, administrators, executors, successors, and permitted assigns. IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their authorized representatives. NORTHERN TELECOM LIMITED ENTRUST TECHNOLOGIES INC. By: /s/ Peter W. Currie By: /s/ John A. Ryan Name: Peter W. Currie Name: John A. Ryan Title: Senior Vice President and Title: President Chief Financial Officer By: /s/ David D. Archibald Name: David D. Archibald Title: Vice President and Deputy General Counsel 15 EX-10.9 9 LETTER AGREEMENT, JOHN A. RYAN Exhibit 10.9 [LETTERHEAD OF ENTRUST TECHNOLOGIES APPEARS HERE] 2 Constellation Crescent, Nepean, ON K2G 5J9 April 21, 1997 John Ryan 2912 Amesbury Dr. Plano, TX 75093 Dear John, On behalf of Entrust Technologies Inc. (Entrust), I am pleased to offer you employment as President and Chief Executive Officer. As long as you remain in this position, you will continue to be a member of the Entrust Board of Directors (Board). The principal terms of your employment are set forth below. Your annual base salary upon commencement of employment will be $185,000 US$ and will be paid biweekly. You will be eligible for an annual bonus of up to 35% of your annual base salary as of December 31, upon achievement of 100% of Bonus Plan factors, which include both personal and corporate performance. Payments under this Plan may consist of cash and/or stock options, in the discretion of the Board. You will also receive an option to purchase 361,450 shares of series A common stock of Entrust, a number which is equal to 3% of the Entrust series A common stock available under the 1996 Stock Incentive Plan. Details of the Stock Incentive Plan, which will govern this option, as well as any options which may be granted as described below, are set out in the attached documents. At this time, Entrust has not yet adopted a benefit plan. Entrust will reimburse you for the documented cost of health coverage for you and your eligible dependents, which you elect to continue in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA) under your present medical election with Nortel's plan until such coverage ends or Entrust adopts a medical plan for its employees, whichever occurs sooner. This position is initially located at 2221 Lakeside Blvd, Richardson, Texas. When Entrust's headquarters is established in a location which requires you to relocate your permanent residence, you will be eligible for relocation assistance of $100,000 to reimburse for your costs of relocation, such payment to be made in the most tax effective manner. You will also be eligible for reimbursement of expenses related to executive perquisites, subject to prior Board approval, not to exceed $35,000 for the first year of employment as President and CEO and $12,000 for each subsequent year as President and CEO. This offer of employment is contingent upon the following: . formal ratification of this offer of employment by the Entrust Board of Directors; and, . your signing the following enclosed agreements: namely, Conflict of Interest and Intellectual Property and Confidentiality. Page 2 We believe that your abilities and our needs are compatible and that your acceptance of this offer will prove mutually beneficial. However, it is understood and agreed that your employment is terminable at the will of either party, at any time and for any reason, and is not an employment agreement for any specified term. This offer is valid and open for acceptance in writing for 7 business days. If you need more time, please call me right away so we can discuss a mutually acceptable validity period. John, we would be delighted to have you lead our management team and look forward to your acceptance. Please indicate your agreement by signing below and returning a copy of this letter to my attention. Sincerely, /s/ David D. Archibald David D. Archibald Director Entrust Technologies Inc. copy: Entrust Board of Directors Agreed & Accepted by: /s/ John A. Ryan ------------------------- April 27, 1997 ------------------------- Date Attachments: Conflict of Interest Agreement Incentive Stock Option Agreement Intellectual Property and Confidentiality Agreements Stock Incentive Plan EX-10.14 10 AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN Exhibit 10.14 ENTRUST TECHNOLOGIES INC. AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN ---------------------------------------------- 1. Purpose ------- The purpose of this Amended and Restated 1996 Stock Incentive Plan (the "Plan") of Entrust Technologies Inc., a Maryland corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of Entrust Technologies Inc. as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. Eligibility ----------- All of the Company's employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock, or other stock- based awards (each, an "Award") under the Plan. Any person who has been granted an Award under the Plan shall be deemed a "Participant." 3. Administration, Delegation -------------------------- a. Administration by Board of Directors. The Plan will be administered ------------------------------------ by the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. b. Delegation to Executive Officers. To the extent permitted by -------------------------------- applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. c. Appointment of Committees. To the extent permitted by applicable law, ------------------------- the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). If and when the Series A Common Stock, $.01 par value per share, of the Company (after giving effect to the redesignation of the Company's Series A Common Stock into Common Stock upon the filing of Articles of Amendment and Restatement, the "Common Stock") is registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint one such Committee of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b- 3 promulgated under the Exchange Act. All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Awards -------------------------- a. Number of Shares. Subject to adjustment under Section 4(c), Awards ---------------- may be made under the Plan for up to 9,600,000 shares of Common Stock (after giving effect to the four-for-one split of the Common Stock in the form of a stock dividend declared by the Board on June 15, 1998 (the "Split")). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. b. Per-Participant Limit. Subject to adjustment under Section 4(c), for --------------------- Awards granted after the Common Stock is registered under the Exchange Act, the maximum number of shares with respect to which an Award may be granted to any Participant under the Plan shall be 5,000,000 per calendar year (after giving effect to the Split). The per-participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. c. Adjustment to Common Stock. In the event of any stock split, stock -------------------------- dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or 2 event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the number and class of security and exercise price per share subject to each outstanding Option, (iii) the repurchase price per security subject to each outstanding Restricted Stock Award and (iv) the terms of each other outstanding stock-based Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(i) also applies to any event, Section 8(e)(i) shall be applicable to such event, and this Section 4(c) shall not be applicable. 5. Stock Options ------------- a. General. The Board may grant options to purchase Common Stock (each, ------- an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option." b. Incentive Stock Options. An Option that the Board intends to be an ----------------------- "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. c. Exercise Price. The Board shall establish the exercise price at the -------------- time each Option is granted and specify it in the applicable option agreement. d. Duration of Options. Each Option shall be exercisable at such times ------------------- and subject to such terms and conditions as the Board may specify in the applicable option agreement. e. Exercise of Option. Options may be exercised only by delivery to the ------------------ Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. f. Payment Upon Exercise. Common Stock purchased upon the exercise of an ---------------------- Option granted under the Plan shall be paid for as follows: 3 i. in cash or by check, payable to the order of the Company; ii. except as the Board may otherwise provide in an Option Agreement, delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; iii. to the extent permitted by the Board and explicitly provided in an Option Agreement (i) by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery, (ii) by delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (iii) by payment of such other lawful consideration as the Board may determine; or iv. any combination of the above permitted forms of payment. 6. Restricted Stock ---------------- a. Grants. The Board may grant Awards entitling recipients to acquire ------ shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, "Restricted Stock Award"). b. Terms and Conditions. The Board shall determine the terms and -------------------- conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 4 7. Other Stock-Based Awards ------------------------ The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. 8. General Provisions Applicable to Awards --------------------------------------- a. Transferability of Awards. Except as the Board may otherwise ------------------------- determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. b. Documentation. Each Award under the Plan shall be evidenced by a ------------- written instrument in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. c. Board Discretion. Except as otherwise provided by the Plan, each type ---------------- of Award may be made alone or in addition or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. d. Termination of Status. The Board shall determine the effect on an --------------------- Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. e. Acquisition Events ------------------ i. Consequences of Acquisition Events. Upon the occurrence of an ----------------------------------- Acquisition Event (as defined below), or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall take any one or more of the following actions with respect to then outstanding Awards: (i) provide that outstanding Options shall be assumed, or equivalent Options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such Options substituted for Incentive Stock Options shall satisfy, in the determination of the Board, the requirements of Section 424(a) of the Code; (ii) upon written notice to the Participants, provide that all then unexercised Options will 5 become exercisable in full and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants within a specified period following the date of such notice; (iii) in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), provide that all outstanding Options shall terminate upon consummation of the Acquisition Event and that Participants shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options; (iv) provide that all Restricted Stock Awards then outstanding shall become free of all restrictions prior to the consummation of the Acquisition Event; and (v) provide that any other stock- based Awards outstanding (A) shall become exercisable, realizable or vested in full, or shall be free of all conditions or restrictions, as applicable to each such Award, prior to the consummation of the Acquisition Event, or (B) shall be assumed, or equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). An "Acquisition Event" shall mean: (a) any merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than 60% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such merger or consolidation; (b) any sale of all or substantially all of the assets of the Company; (c) the complete liquidation of the Company; or (d) the acquisition of "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 60% or more of the combined voting power of the Company's then outstanding securities (other than through an acquisition of securities directly from the Company) by any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company. Notwithstanding the foregoing, the exercise of the Triggering event option (as defined in the Company's Articles of Incorporation) by the holders of the Company's Series B Common Stock shall not be deemed to be an Acquisition Event. ii. Assumption of Options Upon Certain Events. The Board may grant ------------------------------------------ Awards under the Plan in substitution for stock and stock-based awards held by employees of another corporation who become employees of the Company as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances. 6 (f) Withholding. Each Participant shall pay to the Company, or make ----------- provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (g) Amendment of Award. The Board may amend, modify or terminate any ------------------ outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (h) Conditions on Delivery of Stock. The Company will not be obligated to ------------------------------- deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (i) Acceleration. The Board may at any time provide that any Options shall ------------ become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of all restrictions or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 9. Miscellaneous ------------- a. No Right To Employment or Other Status. No person shall have any -------------------------------------- claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. 7 b. No Rights As Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. c. Effective Date and Term of Plan. The Plan shall become effective on ------------------------------- the date on which it is adopted by the Board, but no Award granted to a Participant designated as subject to Section 162(m) by the Board shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. d. Amendment of Plan. The Board may amend, suspend or terminate the Plan ----------------- or any portion thereof at any time, provided that no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders. e. Stockholder Approval. For purposes of this Plan, stockholder approval -------------------- shall mean approval by a vote of the stockholders in accordance with the requirements of Section 162(m) of the Code. f. Governing Law. The provisions of the Plan and all Awards made ------------- hereunder shall be governed by and interpreted in accordance with the laws of the State of Maryland, without regard to any applicable conflicts of law. 8 EX-10.17 11 1998 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.17 ENTRUST TECHNOLOGIES INC. 1998 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- The purpose of this Plan is to provide eligible employees of Entrust Technologies Inc. (the "Company") and certain of its subsidiaries with opportunities to purchase shares of the Company's common stock, $.01 par value (the "Common Stock"). Four hundred thousand (400,000) shares of Common Stock in the aggregate have been approved for this purpose (after giving effect to the four-for-one split of the Common Stock in the form of a stock dividend by the Company's Board of Directors (the "Board") on June 18, 1998). 1. Administration. The Plan will be administered by the Board or by a -------------- Committee appointed by the Board (the "Committee"). The Board or the Committee has authority to make rules and regulations for the administration of the Plan and its interpretation and decisions with regard thereto shall be final and conclusive. 2. Eligibility. Participation in the Plan will neither be permitted nor ----------- denied contrary to the requirements of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations promulgated thereunder. All employees of the Company, including Directors who are employees, and all employees of any subsidiary of the Company (as defined in Section 424(f) of the Code) designated by the Board or the Committee from time to time (a "Designated Subsidiary"), are eligible to participate in any one or more of the offerings of Options (as defined in Section 9) to purchase Common Stock under the Plan provided that: (a) they are customarily employed by the Company or a Designated Subsidiary for more than 20 hours a week and for more than five months in a calendar year; and (b) they have been employed by the Company or a Designated Subsidiary for at least three months prior to enrolling in the Plan; and (c) they are employees of the Company or a Designated Subsidiary on the first day of the applicable Plan Period (as defined below). No employee may be granted an option hereunder if such employee, immediately after the option is granted, owns 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary. For purposes of the preceding sentence, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of an employee, and all stock which the employee has a contractual right to purchase shall be treated as stock owned by the employee. 3. Offerings. The Company will make one or more offerings ("Offerings") --------- to employees to purchase stock under this Plan. Offerings will begin on such date or dates as may be established by the Board from time to time (the "Offering Commencement Dates"). Each Offering Commencement Date will begin a 6-month period (a "Plan Period") during which payroll deductions will be made and held for the purchase of Common Stock at the end of the Plan Period. The Board or the Committee may, at its discretion, choose a different Plan Period of twelve (12) months or less. 4. Participation. An employee eligible on the Offering Commencement Date ------------- of any Offering may participate in such Offering by completing and forwarding a payroll deduction authorization form to the employee's appropriate payroll office at least 14 days prior to the applicable Offering Commencement Date. The form will authorize a regular payroll deduction from the Compensation received by the employee during the Plan Period. Unless an employee files a new form or withdraws from the Plan, his deductions and purchases will continue at the same rate for future Offerings under the Plan as long as the Plan remains in effect. The term "Compensation" means the amount of money reportable on the employee's Federal Income Tax Withholding Statement, excluding overtime, shift premium, incentive or bonus awards, allowances and reimbursements for expenses such as relocation allowances for travel expenses, income or gains on the exercise of Company stock options or stock appreciation rights, and similar items, whether or not shown on the employee's Federal Income Tax Withholding Statement, but including, in the case of salespersons, sales commissions to the extent determined by the Board or the Committee. 5. Deductions. The Company will maintain payroll deduction accounts for ---------- all participating employees. With respect to any Offering made under this Plan, an employee may authorize a payroll deduction in any dollar amount up to a maximum of 10% of the Compensation he or she receives during the Plan Period or such shorter period during which deductions from payroll are made. No employee may be granted an Option which permits his rights to purchase Common Stock under this Plan and any other employee stock purchase plan (as defined in Section 423(b) of the Code) of the Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value of such Common Stock (determined at the Offering Commencement Date of the Plan Period) for each calendar year in which the Option is outstanding at any time. 6. Deduction Changes. An employee may decrease or discontinue his ----------------- payroll deduction once during any Plan Period, by filing a new payroll deduction 2 authorization form. However, an employee may not increase his payroll deduction during a Plan Period. If an employee elects to discontinue his payroll deductions during a Plan Period, but does not elect to withdraw his funds pursuant to Section 8 hereof, funds deducted prior to his election to discontinue will be applied to the purchase of Common Stock on the Exercise Date (as defined below). 7. Interest. Interest will not be paid on any employee accounts, except -------- to the extent that the Board or the Committee, in its sole discretion, elects to credit employee accounts with interest at such per annum rate as it may from time to time determine. 8. Withdrawal of Funds. An employee may at any time prior to the close ------------------- of business on the last business day in a Plan Period and for any reason permanently draw out the balance accumulated in the employee's account and thereby withdraw from participation in an Offering. Partial withdrawals are not permitted. The employee may not begin participation again during the remainder of the Plan Period. The employee may participate in any subsequent Offering in accordance with terms and conditions established by the Board or the Committee. 9. Purchase of Shares. On the Offering Commencement Date of each Plan ------------------ Period, the Company will grant to each eligible employee who is then a participant in the Plan an option ("Option") to purchase on the last business day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter provided for, such number of whole shares of Common Stock of the Company reserved for the purposes of the Plan as does not exceed the number of shares determined by dividing (a) the product of $2,083 and the number of whole months in such Plan Period by (b) the closing price (as defined below) on the Offering Commencement Date of such Plan Period or such other number as may be determined by the Board prior to the Offering Commencement Date. The purchase price for each share purchased will be 90%, or such other percentage as may be determined by the Board consistent with the requirements of the Code, of the fair market value of the Common Stock on (i) the first business day of such Plan Period or (ii) the Exercise Date, whichever fair market value shall be less. Such fair market value shall be determined by the Board of Directors in a manner consistent with the requirements of the Code. Each employee who continues to be a participant in the Plan on the Exercise Date shall be deemed to have exercised his Option at the Option Price on such date and shall be deemed to have purchased from the Company the number of full shares of Common Stock reserved for the purpose of the Plan that his accumulated payroll deductions on such date will pay for pursuant to the formula set forth above, but not in excess of the maximum number determined in the manner set forth above. 3 Any balance remaining in an employee's payroll deduction account at the end of a Plan Period will be automatically refunded to the employee, except that any balance which is less than the purchase price of one share of Common Stock will be carried forward into the employee's payroll deduction account for the following Offering, unless the employee elects not to participate in the following Offering under the Plan, in which case the balance in the employee's account shall be refunded. 10. Issuance of Certificates. Certificates representing shares of Common ------------------------ Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or (in the Company's sole discretion) in the name of a brokerage firm, bank or other nominee holder designated by the employee. The Company may, in its sole discretion and in compliance with applicable laws, authorize the use of book entry registration of shares in lieu of issuing stock certificates. 11. Rights on Retirement, Death or Termination of Employment. In the -------------------------------------------------------- event of a participating employee's termination of employment prior to the last business day of a Plan Period, no payroll deduction shall be taken from any pay due and owing to an employee and the balance in the employee's account shall be paid to the employee or, in the event of the employee's death, (a) to a beneficiary previously designated in a revocable notice signed by the employee (with any spousal consent required under state law) or (b) in the absence of such a designated beneficiary, to the executor or administrator of the employee's estate or (c) if no such executor or administrator has been appointed to the knowledge of the Company, to such other person(s) as the Company may, in its discretion, designate. If, prior to the last business day of the Plan Period, the Designated Subsidiary by which an employee is employed shall cease to be a subsidiary of the Company, or if the employee is transferred to a subsidiary of the Company that is not a Designated Subsidiary, the employee shall be deemed to have terminated employment for the purposes of this Plan. 12. No Right To Employment or Other Status. The granting of an Option to -------------------------------------- a person shall not be construed as giving such person the right to continued employment or any other relationship with the Company. 13. Optionees Not Stockholders. Neither the granting of an Option to an -------------------------- employee nor the deductions from his pay shall constitute such employee a stockholder of the shares of Common Stock covered by an Option under this Plan until such shares have been purchased by and issued to him. 14. Rights Not Transferable. Rights under this Plan are not transferable ----------------------- by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee's lifetime only by the employee. 4 15. Application of Funds. All funds received or held by the Company under -------------------- this Plan may be combined with other corporate funds and may be used for any corporate purpose. 16. Adjustment in Case of Changes Affecting Common Stock. In the event of ---------------------------------------------------- a subdivision of outstanding shares of Common Stock, or the payment of a dividend in Common Stock, the number of shares approved for this Plan, the number of shares subject to any outstanding Option and the purchase price thereof shall be adjusted proportionately, and such other adjustment shall be made as may be deemed equitable by the Board or the Committee. In the event of any other change affecting the Common Stock, such adjustment shall be made as may be deemed equitable by the Board or the Committee to give proper effect to such event. 17. Merger. If the Company shall at any time merge or consolidate with ------ another corporation and the holders of the capital stock of the Company immediately prior to such merger or consolidation continue to hold at least 80% by voting power of the capital stock of the surviving corporation ("Continuity of Control"), the holder of each Option then outstanding will thereafter be entitled to receive at the next Exercise Date upon the exercise of such Option for each share as to which such Option shall be exercised the securities or property which a holder of one share of the Common Stock was entitled to upon and at the time of such merger or consolidation, and the Board or the Committee shall take such steps in connection with such merger or consolidation as the Board or the Committee shall deem necessary to assure that the provisions of Section 16 shall thereafter be applicable, as nearly as reasonably may be, in relation to the said securities or property as to which such holder of such Option might thereafter be entitled to receive thereunder. In the event of a merger or consolidation of the Company with or into another corporation which does not involve Continuity of Control, or of a sale of all or substantially all of the assets of the Company while unexercised Options remain outstanding under the Plan, all outstanding Options shall be cancelled by the Board or the Committee as of the effective date of any such transaction, provided that notice of such cancellation shall be given to each holder of an Option, and each holder of an Option shall have the right to exercise such Option in full based on payroll deductions then credited to his account as of a date determined by the Board or the Committee, which date shall not be less than ten (10) days preceding the effective date of such transaction. 18. Amendment of the Plan. The Board may at any time, and from time to --------------------- time, amend this Plan in any respect, except that (a) if the approval of any such amendment by the stockholders of the Company is required by Section 423 of the Code, such amendment shall not be effected without such approval, and (b) in no event may any amendment be made which would cause the Plan to fail to comply with Section 423 of the Code. 5 19. Insufficient Shares. In the event that the total number of shares of ------------------- Common Stock specified in elections to be purchased under any Offering plus the number of shares purchased under previous Offerings under this Plan exceeds the maximum number of shares issuable under this Plan, the Board or the Committee will allot the shares then available on a pro rata basis. 20. Termination of the Plan. This Plan shall terminate two years after ----------------------- the date on which the Plan was adopted by the Board or such earlier date as the Board shall determine. Upon termination of this Plan all amounts in the accounts of participating employees shall be promptly refunded. 21. Governmental Regulations. The Company's obligation to sell and ------------------------ deliver Common Stock under this Plan is subject to listing on a national stock exchange or quotation on the Nasdaq National Market and the approval of all governmental authorities required in connection with the authorization, issuance or sale of such stock. 22. Governing Law. The Plan shall be governed by Maryland law except to ------------- the extent that such law is preempted by federal law. 23. Issuance of Shares. Shares may be issued upon exercise of an Option ------------------ from authorized but unissued Common Stock, from shares held in the treasury of the Company or from any other proper source. 24. Notification upon Sale of Shares. Each employee agrees, by -------------------------------- participating in the Plan, to promptly give the Company notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option pursuant to which such shares were purchased. 25. Effective Date and Approval of Stockholders. The Plan shall take ------------------------------------------- effect upon the closing of the Company's initial public offering of Common Stock, subject to approval by the stockholders of the Company as required by Section 423 of the Code, which approval must occur within twelve months of the adoption of the Plan by the Board. Adopted by the Board of Directors on July 21, 1998 Approved by the Stockholders on ___________________, 1998 6 EX-23.2 12 CONSENT OF DELOITTE AND TOUCHE EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Entrust Technologies Inc. on Form S-1 of our report dated June 5, 1998, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE Chartered Accountants Ottawa, Canada July 24, 1998 EX-23.3 13 CONSENT OF WILLI & PARTNER EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amended Registration Statement of Entrust Technologies Inc. on Form S-1 of our report dated June 2, 1998, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Willi & Partner AG /s/ Marko Willi /s/ Bruno Wust Marko Willi Bruno Wust Auditor in charge Auditor in charge Wetzikon, Switzerland July 24, 1998
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