<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998
REGISTRATION NO. 333-57275
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ENTRUST TECHNOLOGIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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. [_]
---------------
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.
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<PAGE>
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".
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 1, 1998
SHARES
[ENTRUST TECHNOLOGIES LOGO APPEARS HERE]
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
Of the shares of Common Stock offered, shares are being offered
hereby in the United States and 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 shares of Common Stock offered, shares are being sold by the
Company and 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 $ and $ . 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.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total(3)........... $ $ $ $
</TABLE>
- -----
(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 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 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
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
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES
-----------
The date of this Prospectus is , 1998.
<PAGE>
Inside Front Cover:
[TO BE ADDED]
Entrust(R) is a registered trademark, and Entrust-Ready(TM), the Entrust
design (Elmer) and WebCA(TM) are trademarks, 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.
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".
<PAGE>
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; (iv) gives effect to a four-for-one stock split in
the form of a stock dividend to be 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
<PAGE>
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 112-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, 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 strategic relationships with
leading technology providers such as Cisco, Shiva, Netscape and Lotus
Development.
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.
4
<PAGE>
THE OFFERINGS
The offering of shares of Common Stock initially being offered in the
United States (the "U.S. Offering") and the concurrent offering of 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:
<TABLE>
<S> <C>
By the Company:
U.S. Offering.......................... shares
International Offering................. shares
----
----
By the Selling Stockholders:
U.S. Offering ......................... shares
International Offering ................ shares
----
----
Total ............................... ====
Common Stock to be outstanding after the
Offerings............................... 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".
</TABLE>
- -------
(1) Excludes an aggregate of 9,987,960 shares of Common Stock reserved for
issuance under the Company's Amended and Restated 1996 Stock Incentive
Plan, of which 7,412,380 shares were subject to outstanding options as of
June 18, 1998 at a weighted average exercise price of $2.97 per share. See
"Management--Amended and Restated 1996 Stock Incentive Plan" and Note 8 of
Notes to the Company's Consolidated Financial Statements.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- ---------------
1994 1995 1996 1997 1997 1998
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............... $3,881 $ 3,973 $12,802 $25,006 $ 4,103 $ 9,924
Gross profit................. 2,696 2,989 9,252 20,090 3,371 8,106
Income (loss) from opera-
tions....................... 27 (2,424) 56 (490) 35 (171)
Net income (loss)............ 138 (2,123) 387 514 224 135
Net income per basic share(1)
............................ $ 0.02 $ 0.01 $ --
Net income per diluted
share(1).................... $ 0.01 $ 0.01 $ --
Shares used to compute net
income
per basic share(1).......... 30,700 30,700 30,700
Shares used to compute net
income
per diluted share(1)........ 41,743 41,064 45,231
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $11,015
Working capital......................................... 13,069
Total assets............................................ 25,917
Shareholders' equity.................................... 14,765
</TABLE>
- -------
(1) See Note 2 of Notes to the Company's Consolidated Financial Statements for
the calculation of basic and diluted net income per share.
(2) Gives 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 $ per share, after deducting the estimated underwriting
discount and offering expenses. See "Use of Proceeds".
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
INDUSTRY REGULATION
Certain of 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 list of products and 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 potentially material
adverse effect on the Company's business, financial condition and results of
operations.
10
<PAGE>
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 or grows more slowly than the Company
currently anticipates, its business, operating results and financial condition
would be materially and adversely affected.
11
<PAGE>
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 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.
12
<PAGE>
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.
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
13
<PAGE>
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 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.
14
<PAGE>
CONCENTRATION OF OWNERSHIP
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 % of the Company's
outstanding Common Stock, and three of the Company's five directors will be
representatives of Nortel. Accordingly, Nortel will continue to have the
ability to exercise significant control over the Company's affairs, including
without limitation control over the election of the Company's directors. 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
an agreement with the Company, Nortel may restrict the Company, for so long as
Nortel 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. See "Management", "Principal and Selling Stockholders" and
"Certain Transactions".
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. See "Dilution".
15
<PAGE>
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 "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 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 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 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.
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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 $
million, after deducting the estimated underwriting discount and offering
expenses and assuming an initial public offering price of $ 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".
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 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 shares of Common Stock offered hereby by the Company pursuant to
the Offerings, at an assumed initial public offering price of $ 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.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
PRO FORMA
ACTUAL(1) PRO FORMA(2) AS ADJUSTED(2)
--------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt (including current portion
of long-term debt)...................... $ 1,446 $ $
------- --- ---
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;
100,000,000 shares authorized (pro
forma and pro forma as adjusted);
33,363,836 shares issued and
outstanding (pro forma); shares
issued and outstanding (pro forma as
adjusted)(3)........................... --
Series A common stock, $.01 par value;
100,000,000 shares authorized;
20,300,000 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.......... 77
Additional paid-in capital............... 15,744
Accumulated other comprehensive income... (47)
Accumulated deficit...................... (1,214)
------- --- ---
Total shareholders' equity............... 14,765
------- --- ---
Total capitalization..................... $16,211 $ $
======= === ===
</TABLE>
- --------
(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 and (ii) 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) Excludes an aggregate of 7,228,920 shares of Common Stock reserved for
issuance under the Company's Amended and Restated 1996 Stock Incentive
Plan, of which 6,912,636 shares were subject to outstanding options as of
March 31, 1998 at a weighted average exercise price of $2.45 per share.
See "Management--Amended and Restated 1996 Stock Incentive Plan" and Note
8 of Notes to the Company's Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was $14.8 million, or $ 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 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 Entrust Technologies Limited (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 $ per share and after deducting the estimated
underwriting discount and offering expenses, the pro forma net tangible book
value of the Company as of March 31, 1998 would have been $ million, or
$ per share. This represents an immediate increase in such pro forma net
tangible book value of $ per share to existing stockholders and an
immediate dilution of $ 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:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book value per share prior to the
Offerings...................................................... $
----
Increase per share attributable to the Offerings................
Pro forma net tangible book value per share after the Offerings...
----
Dilution per share to new investors............................... $
====
</TABLE>
The following table summarizes, as of March 31, 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 $ per share (before deducting the estimated
underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ---------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1) ................... % $ % $
New investors (1) ......
------- --------- --------- ----------
Total................. 100.0% $ 100.0%
======= ========= ========= ==========
</TABLE>
- --------
(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
shares, or % of the total number of shares of Common Stock outstanding
after the Offerings (or shares and % if the Underwriters' over-
allotment option is exercised in full), and to increase the number of
shares held by new investors to shares, or % of the total number of
shares of Common Stock outstanding after the Offerings ( or shares and
% if the Underwriters' over-allotment option is exercised in full).
As of March 31, 1998, there were also outstanding options to purchase an
additional 6,912,636 shares of Common Stock at a weighted average exercise
price of $2.45 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.
19
<PAGE>
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 three months
ended March 31, 1997 and 1998 and as of March 31, 1998 are derived from
unaudited financial statements of the Company which appear elsewhere in this
Prospectus. 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 three
months ended March 31, 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.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ---------------
1994 1995 1996 1997 1997 1998
------ ------- ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Revenues:
License.................... $1,194 $ 1,845 $8,689 $16,486 $ 2,632 $ 7,681
Services and maintenance... 2,687 2,128 4,113 8,520 1,471 2,243
------ ------- ------ ------- ------- -------
Total revenues........... 3,881 3,973 12,802 25,006 4,103 9,924
------ ------- ------ ------- ------- -------
Cost of revenues:
License.................... 6 34 393 502 104 342
Services and maintenance... 1,179 950 3,157 4,414 628 1,476
------ ------- ------ ------- ------- -------
Total cost of revenues... 1,185 984 3,550 4,916 732 1,818
------ ------- ------ ------- ------- -------
Gross profit................ 2,696 2,989 9,252 20,090 3,371 8,106
------ ------- ------ ------- ------- -------
Operating expenses:
Sales and marketing........ 1,083 1,914 3,858 11,193 1,698 4,931
Research and development... 898 2,287 2,874 5,692 952 2,283
General and administra-
tive...................... 688 1,212 2,464 3,695 686 1,063
------ ------- ------ ------- ------- -------
Total operating ex-
penses.................. 2,669 5,413 9,196 20,580 3,336 8,277
------ ------- ------ ------- ------- -------
Income (loss) from opera-
tions...................... 27 (2,424) 56 (490) 35 (171)
Interest income............. -- -- -- 723 209 146
------ ------- ------ ------- ------- -------
Income (loss) before (provi-
sion) benefit for income
taxes...................... 27 (2,424) 56 233 244 (25)
(Provision) benefit for in-
come taxes................. 111 301 331 281 (20) 160
------ ------- ------ ------- ------- -------
Net income (loss)........... $ 138 $(2,123) $ 387 $ 514 $ 224 $ 135
====== ======= ====== ======= ======= =======
Net income per basic
share(1)................... $ 0.02 $ 0.01 $ --
Net income per diluted
share(1)................... $ 0.01 $ 0.01 $ --
Shares used in basic per
share computation(1)....... 30,700 30,700 30,700
Shares used in diluted per
share computation(1)....... 41,743 41,064 45,231
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1994 1995 1996 1997 1998
------ ------ ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ -- $ -- $ -- $12,638 $11,015
Working capital (deficit)............ 1,831 1,016 (1,186) 13,707 13,069
Total assets......................... 2,231 2,190 3,687 24,757 25,917
Shareholders' equity (deficit)....... 2,095 1,672 (60) 14,662 14,765
</TABLE>
- -------
(1) See Note 2 of Notes to the Company's Consolidated Financial Statements for
the calculation of basic and diluted net income per share.
20
<PAGE>
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 $4.1 million for the three months
ended March 31, 1997 to $9.9 million for the three months ended March 31,
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.
21
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License................ 46.4% 67.9% 65.9% 64.1% 77.4%
Services and mainte-
nance................. 53.6 32.1 34.1 35.9 22.6
------- ------- ------- --------- ---------
Total revenues....... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- --------- ---------
Cost of revenues:
License................ 0.9 3.0 2.0 2.5 3.4
Services and mainte-
nance................. 23.9 24.7 17.7 15.3 14.9
------- ------- ------- --------- ---------
Total cost of reve-
nues................ 24.8 27.7 19.7 17.8 18.3
------- ------- ------- --------- ---------
Gross profit............. 75.2 72.3 80.3 82.2 81.7
------- ------- ------- --------- ---------
Operating expenses:
Sales and marketing.... 48.2 30.1 44.8 41.4 49.7
Research and develop-
ment.................. 57.6 22.4 22.7 23.2 23.0
General and administra-
tive.................. 30.5 19.3 14.7 16.7 10.7
------- ------- ------- --------- ---------
Total operating ex-
penses.............. 136.3 71.8 82.2 81.3 83.4
------- ------- ------- --------- ---------
Income (loss) from opera-
tions................... (61.1) 0.5 (1.9) 0.9 (1.7)
Interest income.......... -- -- 2.9 5.1 1.5
------- ------- ------- --------- ---------
Income (loss) before
(provision) benefit for
income taxes............ (61.1) 0.5 1.0 6.0 (0.2)
(Provision) benefit for
income taxes............ 7.6 2.5 1.1 (0.5) 1.6
------- ------- ------- --------- ---------
Net income (loss)........ (53.5)% 3.0% 2.1% 5.5% 1.4%
======= ======= ======= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
REVENUES
Total revenues increased 142% from $4.1 million for the three months ended
March 31, 1997 to $9.9 million for the three months ended March 31, 1998.
Revenues derived from sales outside North America, primarily Europe, accounted
for 1% and 18% of total revenues for the three months ended March 31, 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 192% from $2.6 million for the
three months ended March 31, 1997 to $7.7 million for the three months ended
March 31, 1998, representing 64%
22
<PAGE>
and 77% 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 52% from $1.5 million for the three months ended March 31, 1997 to
$2.2 million for the three months ended March 31, 1998, representing 36% and
23% 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.
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 $104,000
for the three months ended March 31, 1997 to $342,000 for the three months
ended March 31, 1998, representing 4% of license revenues for each period.
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 $628,000 for the three months ended March 31, 1997 to
$1.5 million for the three months ended March 31, 1998, representing 43% and
66% of services and maintenance revenues for each respective period. The
increase in absolute dollars reflects the increased costs associated with the
higher levels of services and maintenance revenues during the three months
ended March 31, 1998. The increase as a percentage of revenues during the
three months ended March 31, 1998 reflects the hiring of additional service
personnel to provide consulting and other services to the Company's customers
and partners.
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 $1.7
million for the three months ended March 31, 1997 to $4.9 million for the
three months ended March 31, 1998, representing 41% and 50% 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
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 and marketing from 37 at March 31,
1997 to 107 at March 31, 1998. The Company also launched a new seminar series
and participated in a major trade show during the three months ended March 31,
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 and as a percentage of
revenues over the year.
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
23
<PAGE>
$952,000 for the three months ended March 31, 1997 to $2.3 million for the
three months ended March 31, 1998, representing 23% of total revenues for both
periods. The increase in research and development expenses in absolute dollars
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 $686,000 for the three months ended March 31, 1997 to
$1.1 million for the three months ended March 31, 1998, representing 17% 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.
INTEREST INCOME
Interest income of $209,000 and $146,000 for the three months ended March
31, 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.
PROVISION FOR INCOME TAXES
The Company recorded a provision for income taxes of $20,000 for the three
months ended March 31, 1997 and a benefit of $160,000 for the three months
ended March 31, 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.
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.
24
<PAGE>
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 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.
25
<PAGE>
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 five quarters in the period ended March 31, 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.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
-------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License......................... $2,632 $3,045 $4,949 $5,860 $7,681
Services and maintenance........ 1,471 2,743 2,137 2,169 2,243
------ ------ ------ ------ ------
Total revenues................ 4,103 5,788 7,086 8,029 9,924
------ ------ ------ ------ ------
Cost of revenues:
License......................... 104 125 131 142 342
Services and maintenance........ 628 1,483 1,174 1,129 1,476
------ ------ ------ ------ ------
Total cost of revenues........ 732 1,608 1,305 1,271 1,818
------ ------ ------ ------ ------
Gross profit..................... 3,371 4,180 5,781 6,758 8,106
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing............. 1,698 2,301 3,528 3,666 4,931
Research and development........ 952 1,125 1,700 1,915 2,283
General and administrative...... 686 793 1,026 1,190 1,063
------ ------ ------ ------ ------
Total operating expenses...... 3,336 4,219 6,254 6,771 8,277
------ ------ ------ ------ ------
Income (loss) from operations.... 35 (39) (473) (13) (171)
Interest income.................. 209 206 164 144 146
------ ------ ------ ------ ------
Income (loss) before (provision)
benefit for income taxes........ 244 167 (309) 131 (25)
(Provision) benefit for income
taxes........................... (20) 5 226 70 160
------ ------ ------ ------ ------
Net income (loss)................ $ 224 $ 172 $ (83) $ 201 $ 135
====== ====== ====== ====== ======
Net income (loss) per share
Basic........................... $ 0.01 $ 0.01 $ -- $ 0.01 $ --
====== ====== ====== ====== ======
Diluted......................... $ 0.01 $ -- $ -- $ -- $ --
====== ====== ====== ====== ======
Shares used in per share computa-
tion
Basic........................... 30,700 30,700 30,700 30,700 30,700
====== ====== ====== ====== ======
Diluted......................... 41,064 41,064 41,869 41,908 45,231
====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License......................... 64.1% 52.6% 69.8% 73.0% 77.4%
Services and maintenance........ 35.9 47.4 30.2 27.0 22.6
------ ------ ------ ------ ------
Total revenues................ 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost of revenues:
License......................... 2.5 2.2 1.8 1.8 3.4
Services and maintenance........ 15.3 25.6 16.6 14.0 14.9
------ ------ ------ ------ ------
Total cost of revenues........ 17.8 27.8 18.4 15.8 18.3
------ ------ ------ ------ ------
Gross profit..................... 82.2 72.2 81.6 84.2 81.7
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing............. 41.4 39.8 49.8 45.7 49.7
Research and development........ 23.2 19.4 24.0 23.9 23.0
General and administrative...... 16.7 13.7 14.5 14.8 10.7
------ ------ ------ ------ ------
Total operating expenses...... 81.3 72.9 88.3 84.4 83.4
------ ------ ------ ------ ------
Income (loss) from operations.... 0.9 (0.7) (6.7) (0.2) (1.7)
Interest income.................. 5.1 3.6 2.3 1.8 1.5
------ ------ ------ ------ ------
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%
====== ====== ====== ====== ======
</TABLE>
27
<PAGE>
License revenues have increased in each of the five quarters in the period
ended March 31, 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 five quarters, license revenues as a percentage of total
revenues increased from 70% for the quarter ended September 30, 1997 to 73%
and 77% for the quarters ended December 31, 1997 and March 31, 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 quarter ended June 30, 1997. 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. 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 for each quarter from $3.3 million for the quarter ended
March 31, 1997 to $8.3 million for the quarter ended March 31, 1998 reflected
the Company's investment in growing the organization. The number of employees
has increased each quarter for the last five 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.
R/3/ ACQUISITION
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 after
the first 10 days of trading 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. In the event the Market Price is
less than $12.08, the Company intends to pay the r/3/ shareholders in cash.
This acquisition was recorded under the purchase method of accounting, and,
therefore, the results of operations of r/3/ and the fair value of the
acquired assets and liabilities will be 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 is in the process of obtaining an
appraisal of the intangible assets, which is expected to result in a
significant portion of the purchase price being allocated to in-process
research and development, which will be expensed in the quarter ending June
30, 1998.
28
<PAGE>
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 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 $4.0 million from operating activities for the three
months ended March 31, 1997 and used cash of $1.2 million for operating
activities for the same period in 1998. The cash generated for the three
months ended March 31, 1998 resulted from increases in amounts due to Nortel
for expenses incurred by Nortel on behalf of the Company and increases in
accrued payables. The increase in cash used for operating activities for the
three months ended March 31, 1998 was related primarily to an increase in
accounts receivable of $3.2 million. The average days sales outstanding
increased from 59 days at December 31, 1996 to 80 and 94 days at December 31,
1997 and March 31, 1998, respectively. 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 $389,000 for the
years ended December 31, 1995, 1996 and 1997 and for the three months ended
March 31, 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 three months
ended March 31, 1998 included $3.0 million from dispositions of short-term
investments, net of purchases of $3.9 million of short-term investments.
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 March 31, 1998, the Company's principal sources of liquidity were its
cash and cash investments of $11.0 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.
29
<PAGE>
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 1997 industry survey, 70% of consumers and businesses surveyed
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.
30
<PAGE>
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
31
<PAGE>
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.
32
<PAGE>
. 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 112-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
33
<PAGE>
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 Secure Summit 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, 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, Shiva, Netscape and Lotus Development, 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 65 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
34
<PAGE>
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/Manager 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.
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.
35
<PAGE>
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 next major release of the core
PKI, version 4.0, is expected to occur 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.
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION INTRODUCTION DATE
<S> <C> <C>
ENTRUST/MANAGER 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/Client and Enables use of enterprise December 1994
Entrust/Engine certificates with multiple
enterprise applications
------------------------------------------------------------
. Entrust/WebCA 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
</TABLE>
The Company licenses its Entrust/Manager 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/MANAGER. Entrust/Manager 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/Manager also
36
<PAGE>
provides a secure enterprise key recovery system, issues certificate
revocation information, and establishes cross-certification relationships with
other trusted certificate authorities. Because Entrust/Manager automates these
functions, users typically need to communicate with Entrust/Manager 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/Manager 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 any other LDAP-compliant directory.
ENTRUST ELECTRONIC IDENTITIES. An Entrust Electronic Identity is an
individual user's "account" or profile within the PKI. Entrust offers
Electronic Identities for full enterprise use, or for more limited Web or
electronic commerce use. Each enterprise 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. A Web 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. Electronic Commerce Identities enable secure electronic commerce
through the issuance and management of certificates for SET wallets, merchant
servers and payment gateways. Entrust's 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.
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.
37
<PAGE>
The following table lists applications offered by the Company, including a
brief description, product pricing and the introduction date for the product.
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION PRICING INTRODUCTION
DATE
<C> <S> <C> <C>
ENTRUST/ICE RELEASE 2.0 Provides $39 per user March 1997
security for
files and
folders
- -------------------------------------------------------------------------------
ENTRUST/EXPRESS Provides $39 per user June 1997
RELEASE 2.0 security for
popular e-mail
applications,
such as
Microsoft's
Exchange and
Outlook
products
- -------------------------------------------------------------------------------
ENTRUST/DIRECT Provides $15 per user September 1997
Entrust's
automated key
and certificate
management
features to
secure Web
sessions
- -------------------------------------------------------------------------------
ENTRUST-READY Provides $15 per user March 1998
NETSCAPE SOLUTION Entrust's
RELEASE 1.0 automated key
and certificate
management
features to
Netscape's
Communicator
Pro 4.0 and
Enterprise
Server
- -------------------------------------------------------------------------------
ENTRUST/TRUE DELETE Securely Bundled with other April 1998
deletes files Entrust applications
</TABLE>
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, 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
38
<PAGE>
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 May 31, 1998, consisted of 66 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 May 31, 1998, the Company's research and development staff consisted
of 112 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 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
39
<PAGE>
organizations. As of May 31, 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
Canadian Dept. of National Defense J.P. Morgan
Citibank Royal Canadian Mounted Police
Columbia Information Systems S.W.I.F.T.
FDIC Science Applications International
Industry Canada United Kingdom Post
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 May 31, 1998, the Company had 122 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.
40
<PAGE>
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,
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, Shiva, Netscape and Lotus
Development, 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 to be 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
41
<PAGE>
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
42
<PAGE>
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.
43
<PAGE>
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".
44
<PAGE>
EMPLOYEES
As of May 31, 1998, the Company had 350 full-time employees, 283 of whom
were employed by the Canadian Subsidiary. Of the Company's employees, 112 were
involved in research and development, 122 in sales, marketing and business
development, 66 in professional and customer support services and 50 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.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages and
positions as of June 15, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -------------------------------------------
<S> <C> <C>
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
</TABLE>
- --------
(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.
46
<PAGE>
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. He is also a director and member
of the Executive Committee of Electro-Federation Canada Inc. 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.
47
<PAGE>
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 "--Amended and Restated 1996 Stock
Incentive Plan".
48
<PAGE>
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
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(1)
- ------------------------------------------ ---------- --------- ------------
<S> <C> <C> <C>
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
</TABLE>
- --------
(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
<TABLE>
<CAPTION>
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%
- ------------------------ --------------- ---------------- ------------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------
(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.
49
<PAGE>
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
<TABLE>
<CAPTION>
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
- ------------------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John A. Ryan............. 578,320 867,480
Brian O'Higgins.......... 240,960 361,440
Bradley N. Ross.......... 240,960 361,440
Richard D. Spurr......... 88,000 352,000
</TABLE>
- --------
(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 $ 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.
50
<PAGE>
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.
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. Up to 10,000,000 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
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.
51
<PAGE>
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.
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.
52
<PAGE>
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 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. In arriving at the purchase price, management of Nortel compared
comparable transactions within the industry and conducted its own analysis of
the value of the assets.
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). In arriving at
the purchase price, management of Nortel compared comparable transactions
within the industry and conducted its own analysis of the value of the assets.
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 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.
In connection with the Financing, the Company and NTL also entered into a
strategic alliance agreement (the "Strategic Alliance Agreement") which
acknowledges the Company's continued rights to the benefits of a license from
RSA. The Company 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 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 % of the Company's Common Stock. See "Risk Factors --
Concentration of Ownership".
53
<PAGE>
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.
54
<PAGE>
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 15, 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.
<TABLE>
<CAPTION>
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
- ------------------------ ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Northern Telecom
Limited(3)............. 28,000,000 66.3%
8200 Dixie Road, Suite
100
Brampton, Ontario L6T
5P6
Olympus Partners(4)..... 5,034,553 11.9
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
522 Fifth Avenue
New York, NY 10036
Societe Generale
Investment
Corporation............ 2,512,276 5.9 2,512,276
1221 Avenue of the
Americas
New York, NY 10020
Orchid & Co., nominee
for T. Rowe Price
Threshold Fund III,
L.P.(6)................ 1,507,366 3.6
John A. Ryan(7)......... 578,320 1.4 578,320
Brian O'Higgins(8)...... 240,960 * 240,960
Bradley N. Ross(9)...... 240,960 * 240,960
Richard D. Spurr(10).... 176,000 * 176,000
David D. Archibald...... -- * --
F. William Conner....... -- * --
Frank A. Dunn........... -- * --
Robert S. Morris(11).... 5,034,553 11.9
All executive officers
and directors as a
group (10
persons)(12)........... 6,310,793 14.5
</TABLE>
- --------
* 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 15,
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 15, 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
55
<PAGE>
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 15, 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) 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. 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, Northern
Telecom Limited has granted the Underwriters the right to purchase up to
an additional shares pursuant to the Underwriters' over-allotment
option.
(4) 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) 10,000 shares subject to
Presently Exercisable Options granted to Robert S. Morris. 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, has granted the Underwriters the
right to purchase up to an additional shares pursuant to the
Underwriters' over-allotment option.
(5) 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, (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 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. In
addition to the number of shares shown as offered for sale in the table,
has granted the Underwriters the right to purchase up to an
additional shares pursuant to the Underwriters' over-allotment
option.
(6) 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 shares pursuant to the Underwriters' over-allotment
option.
(7) Consists of 578,320 shares subject to Presently Exercisable Options.
(8) Consists of 240,960 shares subject to Presently Exercisable Options.
(9) Consists of 240,960 shares subject to Presently Exercisable Options.
(10) Consists of 176,000 shares subject to Presently Exercisable Options.
(11) Consists of (i) 5,024,553 shares held of record by the Olympus Funds and
(ii) 10,000 shares subject to Presently Exercisable Options. 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.
(12) Consists of (i) 5,024,553 shares held of record by the Olympus Funds and
(ii) 1,286,240 shares subject to Presently Exercisable Options. See
footnotes (7)--(11) above.
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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 15, 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.
The following summary of certain provisions of the Company's Common Stock,
Special Voting Stock, Preferred Stock, Articles of Incorporation and Bylaws is
not intended to be complete and 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".
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
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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 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.
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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 a Registration Rights Agreement (the "Registration Rights
Agreement"), dated as of December 31, 1996, as amended, among the Company and
certain of its 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 shares of Common Stock (the
"Registrable Shares").
Rightsholders holding in the aggregate at least 35% of the Registrable
Shares may 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
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at least $5.0 million. The Rightsholders are entitled to two demand
registration requests. 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 .
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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 shares of
Common Stock of the Company outstanding (assuming no exercise of the
outstanding options of the Company). Of these shares, the 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 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
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 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, have agreed 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 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. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statements will be
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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 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".
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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 encouraged to consult with
their own tax advisors with respect to the application of the New Withholding
Regulations.
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A non-U.S. holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock unless (i) the
gain is effectively connected with a trade or business of the non-U.S. holder
in the United States or, if a tax treaty applies, is attributable to a
permanent establishment maintained by the non-U.S. holder in the United
States, (ii) in the case of a non-U.S. holder who is an individual and holds
the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale and certain other
conditions are met, or (iii) the Company is or has been a "U.S. real property
holding corporation" for federal income tax purposes at any time during the
five-year period ending on the date of the disposition and the non-U.S. holder
owned more than 5% of the Company's Common Stock at any time during such
period. The Company believes that it has not been and it is not a "U.S. real
property holding corporation" for U.S. federal income tax purposes and does
not currently anticipate becoming a "U.S. real property holding corporation".
Different tax consequences would apply to certain non-U.S. holders if the
Company were to become a "U.S. real property holding corporation." If an
individual non-U.S. holder falls under clause (i) above, he or she will be
taxed on his or her net gain derived from the sale at regular graduated U.S.
federal income tax rates. If an individual non-U.S. holder falls under clause
(ii) above, he or she will be subject to a flat 30% tax on the net gain
derived from the sale which gain may be offset by U.S. capital losses
recognized within the same taxable year of such sale. If a non-U.S. holder
that is a foreign corporation falls under clause (i) above, it will be taxed
on its gain at regular graduated U.S. federal income tax rates and, in
addition, may be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits" within the meaning of the Code
for the taxable year, as adjusted for certain items, or at such lower rate as
may be specified by an applicable income tax treaty.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by a non-U.S. holder at the time of
death, or Common Stock of which the non-U.S. holder made certain lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company must report annually to the U.S. Internal Revenue Service and to
each non-U.S. holder the amount of dividends paid to such holder (including
the name and address of such holder) and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the U.S. information reporting requirements) will
generally not apply to dividends paid to a non-U.S. holder at an address
outside the United States unless such non-U.S. holder is engaged in a trade or
business in the United States or unless the payer has knowledge that the payee
is a U.S. person. However, under the New Withholding Regulations (which are
generally effective for dividends paid after December 31, 1999), dividend
payments may be subject to backup withholding unless applicable certification
requirements are satisfied. See the discussion above with respect to rules
applicable to foreign partnerships under the New Withholding Regulations.
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In general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of Common Stock to or through a foreign
office of a broker. If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, a foreign person
that derives 50% of more of its gross income for certain periods from the
conduct of a trade or business in the United States or, effective for payments
after December 31, 1999, a foreign partnership (i) more than 50% of the income
or capital interests of which are owned by U.S. persons or (ii) that is
engaged in a United States trade or business, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (1) such broker has documentary evidence in its records that the
beneficial owner is a non-U.S. holder and certain other conditions are met or
(2) the beneficial owner otherwise establishes an exemption.
Payment to or through a U.S. office of a broker of the proceeds of a sale of
Common Stock is generally subject to both backup withholding and information
reporting unless the beneficial owner certifies on a Form W-8 (or a suitable
substitute form) under penalties of perjury that it is a non-U.S. holder, or
otherwise establishes an exemption.
Effective for payments after December 31, 1999 (and subject to certain
transition rules), the New Withholding Regulations unify certain certification
procedures and forms and the reliance standards relating to information
reporting and backup withholding.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the U.S. Internal Revenue
Service.
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LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hale and Dorr LLP, Boston, Massachusetts, and for the
Underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The Company's financial statements as of December 31, 1996 and 1997 and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Deloitte &
Touche Chartered Accountants, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of r/3/ as of December 31, 1996 and 1997 and for
each of the two years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Willi & Partner
AG, given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby (the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, the Company is required to file electronic versions to these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders reports containing interim unaudited
financial information for each of the first three quarters of each fiscal
year.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and the three months ended March
31, 1998 (unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
R/3/ SECURITY ENGINEERING AG FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of the Statutory Auditors........................................... F-20
Balance Sheets as of December 31, 1996 and 1997............................ F-21
Income Statements for the years ended December 31, 1996 and 1997........... F-22
Notes to Financial Statements.............................................. F-23
</TABLE>
ENTRUST TECHNOLOGIES INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pro Forma Combined Condensed Consolidated Balance Sheet (unaudited)...... F-28
Pro Forma Combined Condensed Consolidated Statement of Operations
(unaudited)............................................................. F-29
Notes to Pro Forma Combined Condensed Consolidated Financial Statements
(unaudited)............................................................. F-31
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
The accompanying consolidated financial statements give effect to the
consummation of the stock split that is expected to take place prior to the
commencement of the proposed offering of securities. The following report is
in the form that will be furnished by Deloitte & Touche upon the consummation
of the stock split described in Note 7 to the financial statements assuming
that from June 5, 1998 to the date of such stock split no other material
events have occurred that would affect the accompanying financial statements
or require disclosure therein.
"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.
Ottawa, Canada
June 5, 1998"
/s/ DELOITTE & TOUCHE
July 1, 1998
Ottawa, Canada
F-2
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------ ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ -- $ 4,025 $ 5,409
Short-term investments................... -- 8,613 5,606
Accounts receivable (net of allowance
for doubtful accounts at December 31,
1996--$129, December 31, 1997--$416,
and March 31, 1998--$435)............... 2,487 7,152 10,327
Other receivables........................ -- 2,089 948
Prepaid expenses......................... 55 455 637
------ ------- ------- ---
Total current assets................... 2,542 22,334 22,927
Property and equipment, net............... 1,145 1,680 1,939
Deferred income tax benefit............... -- 743 1,051
------ ------- ------- ---
Total assets........................... $3,687 $24,757 $25,917
====== ======= ======= ===
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable......................... $ 901 $ 1,236 $ 2,495
Accrued liabilities...................... 945 2,066 2,521
Deferred income.......................... 1,882 3,068 3,730
Current portion of long-term debt........ -- -- 171
Due to related party..................... -- 2,257 941
------ ------- ------- ---
Total current liabilities.............. 3,728 8,627 9,858
Long-term debt............................ -- 1,449 1,275
Deferred income tax liabilities........... 19 19 19
------ ------- ------- ---
Total liabilities...................... 3,747 10,095 11,152
------ ------- ------- ---
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 March 31, 1998
outstanding on a pro forma basis at
, 1998.............................. -- -- --
Series A common, par value $.01 per
share; 100,000,000 authorized;
20,300,000 issued and outstanding
shares at December 31, 1997 and March
31, 1998, and none at December 31,
1996.................................. -- 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 March 31, 1998, and none at
December 31, 1996 and on a pro forma
basis at , 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 March 31, 1998, and none at
December 31, 1996 and on a pro forma
basis at , 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 March 31, 1998, and none at
December 31, 1996....................... -- 77 77
Additional paid-in capital............... -- 15,744 15,744
Accumulated other comprehensive income... -- (15) (47)
Accumulated deficit...................... (60) (1,349) (1,214)
------ ------- ------- ---
Total shareholders' equity (deficit)... (60) 14,662 14,765
------ ------- ------- ---
Total liabilities and shareholders'
equity................................ $3,687 $24,757 $25,917
====== ======= ======= ===
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License............... $ 1,845 $ 8,689 $ 16,486 $ 2,632 $ 7,681
Services and
maintenance.......... 2,128 4,113 8,520 1,471 2,243
---------- ---------- ---------- ---------- ----------
Total revenues...... 3,973 12,802 25,006 4,103 9,924
---------- ---------- ---------- ---------- ----------
Cost of revenues:
License............... 34 393 502 104 342
Services and
maintenance.......... 950 3,157 4,414 628 1,476
---------- ---------- ---------- ---------- ----------
Total cost of
revenues........... 984 3,550 4,916 732 1,818
---------- ---------- ---------- ---------- ----------
Gross profit............ 2,989 9,252 20,090 3,371 8,106
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing... 1,914 3,858 11,193 1,698 4,931
Research and
development.......... 2,287 2,874 5,692 952 2,283
General and
administrative....... 1,212 2,464 3,695 686 1,063
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 5,413 9,196 20,580 3,336 8,277
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (2,424) 56 (490) 35 (171)
Interest income......... -- -- 723 209 146
---------- ---------- ---------- ---------- ----------
Income (loss) before
(provision) benefit for
income taxes........... (2,424) 56 233 244 (25)
(Provision) benefit for
income taxes........... 301 331 281 (20) 160
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (2,123) $ 387 $ 514 $ 224 $ 135
========== ========== ========== ========== ==========
Net income per share
Basic................. -- -- $ 0.02 $ 0.01 --
Diluted............... -- -- $ 0.01 $ 0.01 --
Weighted average common
shares outstanding
Basic................. -- -- 30,700,000 30,700,000 30,700,000
Diluted............... -- -- 41,742,972 41,063,840 45,231,404
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
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 (DEFICIT)
---------- ------ ------- ------ ------ ------ --------- ------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Translation
adjustment
(unaudited).... -- -- -- -- -- -- -- -- -- (32) --
Net income
(unaudited).... -- -- -- -- -- -- -- -- -- -- 135
---------- ------ ------- ------ ------ ----- --------- ------ ------- ------ -------
Balances at March
31, 1998
(unaudited)..... 20,300,000 $203 221,052 $ 2 38,948 $ -- 7,700,000 $ 77 $15,744 $(47) $(1,214)
========== ====== ======= ====== ====== ===== ========= ====== ======= ====== =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
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
Translation
adjustment
(unaudited).... (32)
Net income
(unaudited).... 135
-------------
Balances at March
31, 1998
(unaudited)..... $14,765
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------------
1995 1996 1997 1997 1998
------- ------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........... $(2,123) $ 387 $ 514 $ 224 $ 135
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.............. 144 204 360 81 130
Adjustment to cumulative
translation account....... -- -- (15) (10) (32)
Deferred income taxes...... 10 4 (743) (146) (308)
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable...... 398 (967) (4,665) (59) (3,175)
(Increase) decrease in
other receivables........ -- -- (2,089) -- 1,141
(Increase) decrease in
prepaid expenses......... 35 (40) (400) 55 (182)
Increase (decrease) in
accounts payable......... 230 647 335 (739) 1,259
Increase in accrued
liabilities.............. 29 891 1,121 1,989 455
Increase in deferred
income................... 113 1,686 1,186 78 662
Increase (decrease) due to
related party............ -- -- 2,257 2,515 (1,316)
------- ------- -------- --------- ---------
Net cash provided by (used
in) operating activities.. (1,164) 2,812 (2,139) 3,988 (1,231)
------- ------- -------- --------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment.................. (536) (693) (895) (2) (389)
Purchases of short-term
investments................ -- -- (12,308) -- (3,882)
Dispositions of short-term
investments................ -- -- 3,695 -- 6,889
------- ------- -------- --------- ---------
Net cash provided by (used
in) investing activities.. (536) (693) (9,508) (2) 2,618
------- ------- -------- --------- ---------
Cash flows from financing
activities:
Proceeds from (repayment of)
long-term debt............. -- -- 1,449 -- (3)
Transfers (to) from
shareholder................ 1,700 (2,119) (1,803) (1,803) --
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 (3)
------- ------- -------- --------- ---------
Net change in cash and cash
equivalents................. -- -- 4,025 18,209 1,384
Cash and cash equivalents at
beginning of period......... -- -- -- -- 4,025
------- ------- -------- --------- ---------
Cash and cash equivalents at
end of period............... $ -- $ -- $ 4,025 $ 18,209 $ 5,409
======= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
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
March 31, 1998 and the related statements of operations, shareholders' equity
and cash flows for the year ended December 31, 1997 and for the three months
ended March 31, 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
<PAGE>
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 three months ended March 31, 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 on a pro forma basis 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, and its
wholly-owned U.K. subsidiary, Entrust Technologies Limited. 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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of and for the three months ended
March 31, 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 three months ended March 31, 1998 are not necessarily
indicative of results to be expected for the full fiscal year.
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
F-8
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
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.
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.
F-9
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 March 31, 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 March 31, 1998, the amortized cost of the Company's
investments approximated fair value.
The Company's investments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
--------------------- ---------------------
MATURITY OF MATURITY OF
AMORTIZED SECURITIES AMORTIZED SECURITIES
COST WITHIN ONE COST WITHIN ONE
BASIS YEAR BASIS YEAR
--------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Foreign debt securities........ $1,011 $1,011 $ -- $ --
Municipal debt securities...... 3,686 3,686 726 726
U.S. government agency debt se-
curities...................... 3,916 3,916 4,880 4,880
------ ------ ------ ------
$8,613 $8,613 $5,606 $5,606
====== ====== ====== ======
</TABLE>
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
F-10
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net income available to common share-
holders (in thousands)................. $ 514 $ 224 $ 135
========== ========== ==========
Weighted average common shares outstand-
ing:
Basic:
Series A common stock.................. 20,300,000 20,300,000 20,300,000
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 30,700,000
========== ========== ==========
Basic net income per share............. $ 0.02 $ 0.01 $ --
========== ========== ==========
Diluted:
Basic weighted average common shares
outstanding........................... 30,700,000 30,700,000 30,700,000
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 -- 4,167,564
---------- ---------- ----------
Diluted weighted average common shares
outstanding........................... 41,742,968 41,063,836 45,231,400
========== ========== ==========
Diluted net income per share........... $ 0.01 $ 0.01 $ --
========== ========== ==========
</TABLE>
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 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
March 31, 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of
period............................................. $ 73 $ 129 $416
Additional provision................................ 56 287 19
------ ------ ----
Allowance for doubtful accounts, end of period...... $ 129 $ 416 $435
====== ====== ====
</TABLE>
F-11
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and telecom equipment................ $1,305 $1,491 $1,789
Furniture and fixtures........................ -- 86 114
Leasehold improvements........................ -- 639 750
Software distribution rights.................. 225 218 220
------ ------ ------
1,530 2,434 2,873
Less: accumulated depreciation and amortiza-
tion......................................... (385) (754) (934)
------ ------ ------
Total property and equipment, net............. $1,145 $1,680 $1,939
====== ====== ======
</TABLE>
F-12
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related benefits...................... $ 915 $ 1,532 $1,906
Other............................................. 30 534 615
----- ------- ------
$ 945 $ 2,066 $2,521
===== ======= ======
</TABLE>
5. LONG-TERM DEBT
The Company has an installment note with a financial institution. This
obligation is unsecured and bears interest at an effective rate of 6.9% per
annum and the maturities under this note are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
For the three months ended March 31, 1998.......... $ 3 $ --
For the nine months ended December 31, 1998........ -- --
For the year ended December 31, 1999............... 627 627
For the year ended December 31, 2000............... 819 819
------ ------
1,449 1,446
Less: current portion.............................. -- (171)
------ ------
$1,449 $1,275
====== ======
</TABLE>
F-13
<PAGE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
------- ---- -----
<S> <C> <C> <C>
Income (loss) before income taxes
United States...................................... $ (799) $ (8) $ 233
Foreign............................................ (1,625) 64 --
------- ---- -----
$(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:
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
------- ---- -----
<S> <C> <C> <C>
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
======= ==== =====
</TABLE>
F-14
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
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:
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Accounting provisions not deductible for tax
purposes........................................ $ -- $ 147
Research and development tax credits............. -- 596
----- -----
$ -- $ 743
===== =====
</TABLE>
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
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 March 31, 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.
A summary of the activity under the Plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------
SHARES AVAILABLE NUMBER OF
FOR GRANT SHARES EXERCISE PRICE
---------------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996....
Authorized.................... 7,228,920 -- $ 2.13
Granted....................... (6,598,800) 6,598,800 2.13-2.50
Canceled...................... 140,720 (140,720) 2.13-2.50
---------- ---------
Balance at December 31, 1997.... 770,840 6,458,080
Granted (unaudited)........... (493,636) 493,636 6.25
Canceled (unaudited).......... 39,080 (39,080) 2.13-2.50
---------- ---------
Balance at March 31, 1998
(unaudited).................... 316,284 6,912,636 2.13-6.25
========== =========
Exercisable at March 31, 1998
(unaudited).................... -- 1,931,524 $ 2.13
========== =========
</TABLE>
F-16
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996 1997
------- ---- -------
<S> <C> <C> <C>
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)
======= ==== =======
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Expected option life, in years.......................... -- 6
Risk free interest rate................................. -- 6%
Dividend yield.......................................... -- --
</TABLE>
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 three month periods ended
March 31, 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 three months ended March 31,
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 $75 and $125 for the three
months ended March 31, 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 and were
immaterial in all other periods presented.
F-17
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the year ended December 31, 1997, the Company paid Nortel $299 for
services rendered and $51 and $49 for the three months ending March 31, 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 three months ended
March 31, 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
$2,113 and $312 for the three months ended March 31, 1997 and March 31, 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 years ended December 31, 1995, 1996 and
1997 were $35, $100, $956, respectively, and for the three month periods ended
March 31, 1997 and 1998 were $23, and $545, respectively.
At March 31, 1998 (unaudited), the future minimum lease payments under
operating leases were as follows:
<TABLE>
<S> <C>
1998 (nine months)............................................... $1,656
1999............................................................. 2,165
2000............................................................. 2,036
2001............................................................. 1,531
2002............................................................. 842
Thereafter....................................................... 163
------
Total future minimum lease payments.............................. $8,393
======
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Identifiable net assets
United States................................ $(25) $15,012
Europe....................................... -- 30
Canada....................................... (35) (380)
---- -------
Net assets..................................... $(60) $14,662
==== =======
</TABLE>
F-18
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
approximately $4.4 million. 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 will be recorded under the purchase method of accounting
and therefore the results of operations of r/3/ and the fair value of the
acquired assets and liabilities will be 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. The Company
is in the process of obtaining an appraisal of the intangible assets related
to this acquisition, which is expected to result in a significant portion of
the purchase price being allocated to in-process research and development.
Such acquired in-process research and development will be expensed in the
quarter ended June 30, 1998.
F-19
<PAGE>
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 those followed 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 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
Marco Willi
Auditor in charge
Bruno Wust
Auditor in charge
Wetzikon, June 2, 1998
F-20
<PAGE>
R/3/ SECURITY ENGINEERING AG
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CHF CHF
<S> <C> <C>
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
============ ============
</TABLE>
F-21
<PAGE>
R/3/ SECURITY ENGINEERING AG
INCOME STATEMENT
<TABLE>
<CAPTION>
1997 1996
------------ ------------
CHF CHF
<S> <C> <C>
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
============ ============
</TABLE>
F-22
<PAGE>
R/3/ SECURITY ENGINEERING AG
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
CHF CHF
----------------- -----------------
<S> <C> <C>
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 --
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
CHF CHF
-------- -------
<S> <C> <C>
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................. (264,939) (72,000)
Recognition of development costs under US GAAP.......... (330,000) --
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
======== =======
</TABLE>
F-23
<PAGE>
R/3/ SECURITY ENGINEERING AG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
CHF CHF
-------- -------
<S> <C> <C>
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................. (336,939) (72,000)
Shareholder stock....................................... (10,000) --
Recognition of development costs under US GAAP.......... (330,000) --
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
======== =======
</TABLE>
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.
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-24
<PAGE>
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.
<TABLE>
<CAPTION>
1997 1996
CHF CHF
------------ ------------
<S> <C> <C>
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)
Capital expenditures............................. (233,466.00) (315,420.00)
------------ ------------
Net cash used in investing activities........ (133,938.00) (316,084.00)
Cash flows from financing activities
Increase/(decrease) in shareholder loans......... 1,436,516.00 (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
============ ============
</TABLE>
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.
F-25
<PAGE>
R/3/ SECURITY ENGINEERING AG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPOSED APPROPRIATION OF AVAILABLE EARNINGS AND FREE RESERVES
<TABLE>
<CAPTION>
CHF
----------
<S> <C>
Carry forward..................................................... 365.85
Profit current year............................................... 107,916.22
----------
Cumulative profit December 31, 1997 .............................. 108,282.07
</TABLE>
The board of directors proposes the appropriation of the cumulative profit
as follows:
<TABLE>
<CAPTION>
CHF
----------
<S> <C>
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
</TABLE>
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)
<TABLE>
<CAPTION>
CHF
----------
<S> <C>
Free reserves before allocation.................................. 351,000.00
./. allocation to the legal reserve fund......................... (8,250.00)
----------
Free reserves before allocation.................................. 342,750.00
</TABLE>
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)
<TABLE>
<CAPTION>
CHF
-----------
<S> <C>
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
</TABLE>
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-26
<PAGE>
ENTRUST TECHNOLOGIES INC
PRO FORMA COMBINED 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 pro forma combined condensed consolidated balance
sheet has been prepared as if the acquisition was consummated as of March 31,
1998. The unaudited combined condensed consolidated statements of operations
for the three months ended March 31, 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 pro forma combined condensed consolidated balance sheet
included r/3/'s balance sheet as of June 8, 1998 which was translated using
the exchange rate at the balance sheet date and the statements of operations
for r/3/ were translated at the average exchange rates for the year ended
December 31, 1997 and for the three months ended March 31, 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 combined 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 $20,150,000 for acquired in-process research and development
costs. (See notes to Pro Forma Combined Condensed Consolidated Financial
Statements.)
The method of combining historical financial statements for preparation of
the pro forma combined 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 combined 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-27
<PAGE>
ENTRUST TECHNOLOGIES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- ----------------------
R/3/ ENTRUST ADJUSTMENTS ENTRUST
------ ------- ----------- -------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............ $ 67 $ 5,409 $ (4,391)(a) $ 1,085
Marketable securities................ -- 5,606 -- 5,606
Accounts receivable.................. 883 10,327 (235)(a) 10,975
Other current assets................. 35 1,585 -- 1,620
------ ------- -------- -------
Total current assets............... 985 22,927 (4,626) 19,286
PROPERTY AND EQUIPMENT--NET............ 376 1,939 (68)(a) 2,247
DEFERRED INCOME TAX BENEFIT............ -- 1,051 -- 1,051
GOODWILL............................... -- -- 3,550 (b) 3,550
OTHER LONG-TERM ASSETS................. 136 -- (136)(a) --
------ ------- -------- -------
Total assets....................... $1,497 $25,917 $ (1,280) $26,134
====== ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................... $ 768 $ 2,495 -- $ 3,263
Accrued liabilities.................. 418 2,521 994 (a) 3,933
Deferred income...................... 150 3,730 -- 3,880
Current portion of long-term debt.... -- 171 -- 171
Due to related party................. 1,099 941 -- 2,040
------ ------- -------- -------
Total current liabilities.......... 2,435 9,858 994 13,287
LONG-TERM LIABILITIES.................. -- 1,294 -- 1,294
------ ------- -------- -------
Total liabilities.................. 2,435 11,152 994 14,581
------ ------- -------- -------
REDEEMABLE SERIES A COMMON STOCK....... -- -- 17,013 (a) 17,013
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock......................... 597 -- (597)(a) --
Series A common stock................ -- 203 -- 203
Series B common stock................ -- 2 -- 2
Series B non-voting common stock..... -- -- -- --
Special voting common stock.......... -- 77 -- 77
Aditional paid-in capital............ -- 15,744 -- 15,744
Accumulated other comprehensive
income.............................. -- (47) -- (47)
Accumulated deficit.................. (1,535) (1,214) (18,690)(a) (21,439)
------ ------- -------- -------
Total shareholders' equity
(deficit)......................... (938) 14,765 (19,287) (5,460)
------ ------- -------- -------
Total liabilities and shareholders'
equity............................ $1,497 $25,917 $ (1,280) $26,134
====== ======= ======== =======
</TABLE>
F-28
<PAGE>
ENTRUST TECHNOLOGIES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- -----------------------
R/3/ ENTRUST ADJUSTMENTS ENTRUST
----- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
License...................... $ 33 $ 7,681 -- $ 7,714
Service and maintenance...... 755 2,243 -- 2,998
----- ---------- ----- ----------
Total revenues............. 788 9,924 -- 10,712
----- ---------- ----- ----------
Cost of revenues:
License...................... 1 342 -- 343
Service and maintenance...... 444 1,476 -- 1,920
----- ---------- ----- ----------
Total cost of revenues..... 445 1,818 -- 2,263
----- ---------- ----- ----------
Gross profit................... 343 8,106 -- 8,449
----- ---------- ----- ----------
Operating expenses:
Sales and marketing.......... 217 4,931 -- 5,148
Research and development..... 253 2,283 -- 2,536
General and administrative... 344 1,063 178 (b) 1,585
----- ---------- ----- ----------
Total operating expenses... 814 8,277 178 9,269
----- ---------- ----- ----------
Loss from operations........... (471) (171) (178) (820)
Interest income................ -- 146 (44)(c) 102
----- ---------- ----- ----------
Loss before benefit for income
taxes......................... (471) (25) (222) (718)
Benefit for income taxes....... -- 160 -- 160
----- ---------- ----- ----------
Net income (loss).............. $(471) $ 135 $(222) $ (558)
===== ========== ===== ==========
Net income (loss) per share
Basic........................ $ 0.00 $ (0.02)(d)
Diluted...................... $ 0.00 $ (0.02)(d)
Weighted average common shares
outstanding
Basic........................ 30,700,000 31,867,288 (e)
Diluted...................... 45,231,404 46,398,692 (e)
</TABLE>
F-29
<PAGE>
ENTRUST TECHNOLOGIES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ -----------------------
R/3/ ENTRUST ADJUSTMENTS ENTRUST
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
License..................... $ 688 $ 16,486 -- $ 17,174
Service and maintenance..... 2,941 8,520 -- 11,461
------ ---------- ----- ----------
Total revenues............ 3,629 25,006 -- 28,635
------ ---------- ----- ----------
Cost of revenues:
License..................... 10 502 -- 512
Service 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 (b) 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)
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)
</TABLE>
F-30
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying combined
condensed consolidated financial statements as described below:
(a) Reflects the acquisition of r/3/ for approximately $23.7 million
($4.4 million in cash, $17.0 million representing 1,167,288 shares of the
Company's Series A common stock, approximately $1 million in assumed
liabilities and acquisition expenses, and $1.3 million of adjustments to
the June 8, 1998 balance sheet of r/3/ to record the assets acquired from
r/3/ at fair value). Also reflects the allocation of $20 million to in-
process research and development costs and $3.6 million to goodwill and the
elimination of the r/3/ equity accounts.
(b) Reflects the preliminary allocation of purchase price to goodwill
being amortized on a straight line basis over 5 years.
(c) Reflects assumed reduction to interest income earned on $4.4 million
in cash paid to r/3/ shareholders as part of the purchase consideration.
(d) The Company's computation of basic earning per share under Statement
of Financial Accounting Standards No. 128, "Earnings per Share," would have
been $(0.02) and $(0.02) for the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively.
(e) Reflects the impact of Series A common stock issued in the
acquisition as if outstanding from the beginning of each period.
2. PURCHASE PRICE ALLOCATION
In connection with the purchase price allocation, the Company received an
independent appraisal of the intangible assets which indicated a substantial
portion 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. In accordance
with generally accepted accounting principles, the acquired in-process product
development of $20 million is being charged to expense by the Company in its
second quarter ended June 30, 1998 and is reflected as a decrease in retained
earning in the accompanying pro forma combined condensed consolidated balance
sheet and is excluded from the accompanying combined condensed consolidated
statements of operations.
F-31
<PAGE>
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 UBS Securities LLC 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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co................................................
Donaldson, Lufkin & Jenrette Securities Corporation................
NationsBanc Montgomery Securities LLC..............................
UBS Securities LLC.................................................
----
Total............................................................
====
</TABLE>
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 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
representative of the International Underwriters is Goldman Sachs
International.
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 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.
U-1
<PAGE>
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 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 shares of Common Stock offered. The Selling
Stockholders have granted the International Underwriters a similar option to
purchase up to an aggregate of 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.
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.
At the request of the Company, the Underwriters have reserved shares of the
Common Stock offered hereby for sale at the initial public offering price, to
employees and friends of the Company. Such employees and friends will
purchase, in the aggregate, not more than % of the Common Stock offered
hereby, of which approximately % are expected to be purchased by employees.
The number of shares available to the general public will be reduced to the
extent that such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same terms as the other shares offered by this Prospectus.
U-2
<PAGE>
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
<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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
Management............................................................... 46
Certain Transactions..................................................... 53
Principal and Selling Stockholders....................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 61
Certain U.S. Tax Considerations Applicable to Non-U.S. Holders of the
Common Stock............................................................ 63
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
PROSPECTUS
----------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JULY 1, 1998
SHARES
LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
Of the shares of Common Stock offered, shares are being offered
hereby in an international offering outside the United States and 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 shares of Common Stock offered, shares are being sold by the
Company and 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 $ and $ . 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.
----------------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
- --------
(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 payable by the Company.
(3) The Selling Stockholders have granted the International Underwriters an
option for 30 days to purchase up to an additional 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 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
INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS LIMITED
----------------
The date of this Prospectus is , 1998.
<PAGE>
[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 UBS Limited
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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman Sachs International........................................
Donaldson, Lufkin & Jenrette International.........................
NationsBanc Montgomery Securities LLC..............................
UBS Limited........................................................
---
Total............................................................
===
</TABLE>
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 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 UBS Securities LLC.
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
<PAGE>
[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 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 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 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.
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 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.
U-2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
At the request of the Company, the Underwriters have reserved shares of the
Common Stock offered hereby for sale at the initial public offering price, to
employees and friends of the Company. Such employees and friends will
purchase, in the aggregate, not more than % of the Common Stock offered
hereby, of which approximately % are expected to be purchased by employees.
The number of shares available to the general public will be reduced to the
extent that such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same terms as the other shares offered by this Prospectus.
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.
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
<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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
Management............................................................... 46
Certain Transactions..................................................... 53
Principal and Selling Stockholders....................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 61
Certain U.S. Tax Considerations Applicable to Non-U.S. Holders of the
Common Stock............................................................ 63
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------
PROSPECTUS
---------------
GOLDMAN SACHS INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS LIMITED
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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.
<TABLE>
<S> <C>
SEC registration fee................................................ $33,925
NASD filing fee..................................................... 12,000
Nasdaq National Market listing fee.................................. *
Blue Sky fees and expenses.......................................... *
Transfer Agent and Registrar fees................................... *
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Printing and mailing expenses....................................... *
Miscellaneous....................................................... *
-------
Total........................................................... $
=======
</TABLE>
- --------
* 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
<PAGE>
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 and stockholders in June 1998. As of June 18, 1998, options
to purchase 7,412,380 shares of Common Stock had been granted under such plan,
at exercise prices ranging from $2.13 to $12.08 per share.
The Registrant has reserved an aggregate of 10,000,000 shares of Common
Stock for issuance under the Incentive 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
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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** Registration Rights Agreement, dated as of December 31, 1996, by and
among the Registrant 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.
10.4* 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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.
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.
</TABLE>
- --------
* 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
<PAGE>
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
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RICHARDSON, TEXAS
ON THIS 1ST 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. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
DATE
/s/ John A. Ryan President and Chief July 1, 1998
- ------------------------------------- Executive Officer
JOHN A. RYAN (Principal
Executive Officer)
* Senior Vice July 1, 1998
- ------------------------------------- President, Business
MICHELE L. AXELSON Development and
Finance and Chief
Financial Officer
(Principal
Financial and
Accounting Officer)
*
- ------------------------------------- Director July 1, 1998
DAVID D. ARCHIBALD
*
- ------------------------------------- Director July 1, 1998
FRANK A. DUNN
*
- ------------------------------------- Director July 1, 1998
F. WILLIAM CONNER
* Director July 1, 1998
- -------------------------------------
ROBERT S. MORRIS
*By: /s/ John A. Ryan
- -------------------------------------
JOHN A. RYAN
Attorney-in-Fact
<S> <C>
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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** Registration Rights Agreement, dated as of December 31, 1996, by and
among the Registrant 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.
10.4* 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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.
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.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Superseding exhibit.
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
ENTRUST TECHNOLOGIES INC.
FIRST: I, John A. Ryan, whose post office address is c/o Northern Telecom
Inc., 2221 Lakeside Blvd., Richardson, Texas 75093, being at least eighteen (18)
years of age hereby form a corporation under and by virtue of the General Laws
of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is Entrust Technologies Inc.
THIRD: The purpose for which the Corporation is organized is transacting
any and all lawful business for which a corporation may be incorporated under
the laws of the State of Maryland and to do every other act that is incident and
necessary or appropriate to the foregoing.
FOURTH: The post office address of the principal office of the Corporation
in this State is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name and post office address of the resident
agent of the Corporation in the State of Maryland is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. Said resident agent is
a Maryland corporation.
FIFTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 6,000,000 shares, consisting of (i)
5,000,000 shares of Series A Common Stock, $.01 par value per share (the "Series
A Common Stock"), (ii) 500,000 shares of Special Voting Stock, $.01 par value
per share (the "Special Voting Stock"), and (iii) 500,000 shares of Preferred
Stock, $.01 par value per share (the "Preferred Stock"). The aggregate par value
of all shares of all classes of stock is $60,000.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. SERIES A COMMON STOCK
---------------------
1. General. The voting, dividend and liquidation rights of the holders of
-------
the Series A Common Stock are subject to and qualified by any preferential
rights of any then outstanding shares of capital stock.
<PAGE>
2. Voting. The holders of the Series A Common Stock are entitled to one
------
vote for each share held at all meetings of stockholders (and written actions in
lieu of meetings). There shall be no cumulative voting.
3. Dividends. Dividends may be declared and paid on the Series A Common
---------
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding shares of capital stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Series A Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
shares of capital stock.
B. SPECIAL VOTING STOCK
--------------------
1. Voting Rights. The holders of the Special Voting Stock are entitled to
-------------
one vote for each share held at all meetings of stockholders (and written
actions in lieu of meetings). There shall be no cumulative voting. In all
matters concerning the voting of shares, the Common Stock and the Special Voting
Stock shall vote as a single class and such voting rights shall be identical in
all respects.
2. No Other Rights. Except for the voting rights referred to above, holders
---------------
of Special Voting Stock shall have no other rights in respect of such shares,
including without limitation, rights to receive dividends or rights to receive
assets of the Corporation upon its dissolution, liquidation or winding up of its
affairs.
C. PREFERRED STOCK
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including
2
<PAGE>
without limitation thereof, dividend rights, special voting rights, conversion
rights, redemption privileges and liquidation preferences, as shall be stated
and expressed in such resolutions, all to the full extent now or hereafter
permitted by the Maryland General Corporation Law. Without limiting the
generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock or any other series to the extent
permitted by law. Except as otherwise specifically provided in these Articles of
Incorporation, no vote of the holders of the Preferred Stock, Common Stock or
Special Voting Stock shall be a prerequisite to the issuance of any shares of
any series of the Preferred Stock authorized by and complying with the
conditions of these Articles of Incorporation, the right to have such vote being
expressly waived by all present and future holders of the capital stock of the
Corporation.
SIXTH: The number of directors of the Corporation shall be two, which may
be changed in accordance with the By-laws of the Corporation. The names of the
persons who will serve as directors until the first annual meeting of the
stockholders of the Corporation and until their successors are elected and
qualified are:
David D. Archibald
John A. Ryan
SEVENTH: To the maximum extent that Maryland law in effect from time to
time permits limitation of the liability of directors and officers, no director
or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither amendment nor repeal of this Article,
nor the adoption or amendment of any other provision of these Articles or the
By-laws of the Corporation inconsistent with this Article, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption.
EIGHTH: The Corporation shall, to the fullest extent permitted by Section
2-418 of the Maryland General Corporation Law, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was, or has agreed to become, a director or officer of the Corporation, or
is or was serving, or has agreed to serve, at the request of the Corporation, as
a director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom. The indemnification right provided in this Article (i) shall
3
<PAGE>
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and (ii) shall inure to the benefit of the heirs,
executors and administrators of such persons. The Corporation may, to the extent
authorized from time to time by its Board of Directors, grant indemnification
rights to other employees or agents of the Corporation or other persons serving
the Corporation and such rights may be equivalent to, or greater or less than,
those set forth in this Article. The Corporation's obligation to provide
indemnification under this Article shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
To assure indemnification under this Article of all such persons who are
determined by the Corporation or otherwise to be or to have been "fiduciaries"
of any employee benefit plan of the Corporation which may exist from time to
time, such Section 2-418 shall, for the purposes of this Article, be interpreted
as follows: an "employee benefit plan" shall be deemed to include, without
limitation, any plan of the Corporation which is governed by the Act of Congress
entitled "Employee Retirement Income Security Act of 1974," as amended from time
to time.
NINTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, including any
amendment which alters the contract rights, as expressly set forth in its
charter, of any outstanding stock, in the manner now or hereafter prescribed by
statute and these Articles of Incorporation, and all rights conferred upon
stockholders are granted subject to this reservation.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation on this
16th day of December, 1996, I acknowledge the same to be my act and I further
acknowledge that, to the best of my knowledge, the matters and facts set forth
herein are true in all material respects under the penalties of perjury.
WITNESS:
/s/ Shirley Upchurch /s/ John A. Ryan
- -------------------------- ------------------------------
Name: John A. Ryan
Incorporator
4
<PAGE>
ENTRUST TECHNOLOGIES INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
OF CHARTER
(under section 2-609 of the Corporation
and Association Article of Maryland General Corporation Law)
Entrust Technologies Inc., a Maryland corporation, having its principal
office in this State in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The charter of the corporation is hereby amended by deleting in its
entirety Articles IV and V and by adding to the Articles of Incorporation new
Articles IV and V which shall be as follows:
"IV. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 6,200,000 shares, consisting of (i) 5,000,000
shares of Series A Common Stock, $.01 par value per share (the "Series A Common
Stock"), (ii) 257,500 shares of Series B Common Stock, $.01 par value per share
(the "Series B Common Stock"), (iii) 192,500 shares of Special Voting Stock,
$.01 par value per share (the "Special Voting Stock"), and (iv) 500,000 shares
of Preferred Stock, $.01 par value per share (the "Preferred Stock"). The
aggregate par value of all shares of all classes of stock is $59,500.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. SERIES A COMMON STOCK
---------------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Series A Common Stock are subject to and qualified by any preferential
rights of any then outstanding shares of capital stock.
2. Voting. The holders of the Series A Common Stock are entitled to
------
one vote for each share held at all meetings of stockholders (and written
actions in lieu of meetings). There shall be no cumulative voting.
5
<PAGE>
3. Dividends. Dividends may be declared and paid on the Series A
---------
Common Stock from funds lawfully available therefor as and when determined by
the Board of Directors and subject to any preferential dividend rights of any
then outstanding shares of capital stock.
4. Liquidation. Upon the dissolution or liquidation of the
-----------
Corporation, whether voluntary or involuntary, holders of Series A Common Stock
will be entitled to receive all assets of the Corporation available for
distribution to its stockholders, subject to any preferential rights of any then
outstanding shares of capital stock.
B. SERIES B COMMON STOCK
---------------------
1. Dividends.
---------
(a) In the event the Corporation declares or pay any distributions
(as defined below) on shares of Series A Common Stock or any other shares of
capital stock of the Corporation, the holders of the Series B Common Stock then
outstanding shall receive, at the same time, a distribution on each outstanding
share of Series B Common Stock in an amount equal to the product of (i) the per
share amount, if any, of the distributions to be declared, paid or set aside for
the Series A Common Stock, multiplied by (ii) the number of shares of Series A
Common Stock into which such share of Series B Common Stock is then convertible.
(b) For purposes of this Section 1, unless the context requires
otherwise, "distribution" shall mean the transfer of cash, securities or
property without consideration, whether by way of dividend or otherwise, payable
other than in Series A Common Stock of the Corporation, or the purchase or
redemption of shares of the Corporation (other than (i) repurchases of Series A
Common Stock held by employees or directors of, or consultants to, the
Corporation upon termination of their employment or services pursuant to
agreements providing for such repurchase at a price equal to the original issue
price, and (ii) redemptions in liquidation or dissolution of the Corporation)
for cash, securities or property, including any such transfer, purchase or
redemption by a subsidiary of this Corporation.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
-------------------------------------------------------
Consolidations and Asset Sales. In the event of any voluntary or involuntary
- ------------------------------
liquidation, dissolution or winding up of the Corporation, the holders of shares
of Series B Common Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
after and subject to the payment in full of all amounts required to be
distributed to the holders of any other class or series of stock of the
Corporation ranking on liquidation prior and in preference to the Series B
Common Stock, such amount per share as would have been
6
<PAGE>
payable had each such share been converted into Series A Common Stock pursuant
to Section 4 immediately prior to such liquidation, dissolution or winding up.
3. Voting.
------
(a) Except as provided by Subsection 3(b) below, each holder of
outstanding shares of Series B Common Stock shall be entitled to the number of
votes equal to the number of whole shares of Series A Common Stock into which
the aggregate number of shares of Series B Common Stock held by such holder are
then convertible (as adjusted from time to time pursuant to Section 4 hereof),
at each meeting of stockholders of the Corporation (and written actions of
stockholders in lieu of meetings) with respect to any and all matters presented
to the stockholders of the Corporation for their action or consideration. Except
as provided by law or by the provisions of Subsection 3(b) below, holders of
Series B Common Stock shall vote together with the holders of Series A Common
Stock and the Special Voting Stock, as a single class.
(b) Additional Voting Rights Upon Exercise of Triggering Event
----------------------------------------------------------
Option.
------
(i) For the purposes of these Articles, the following definitions
shall apply:
(A) "Triggering Event" shall be deemed to occur (I) during an
----------------
Insolvency or a Bankruptcy Event of the Corporation, or (II) at any time on or
after January 1, 2002, if the Corporation has not (x) consummated a Qualified
Initial Public Offering or (y) developed a Qualified Public Market; provided,
however, that, in the case of clauses (I) or (II) above, a Triggering Event
shall not be deemed to be in existence if, prior to the exercise of the
Triggering Event Option by the holders of Series B Common Stock, an Insolvency
or Bankruptcy Event has ceased to exist or the Corporation has consummated a
Qualified Initial Public Offering or developed a Qualified Public Market.
(B) "Insolvency or Bankruptcy Event" shall be deemed to occur
------------------------------
upon (I) the institution against the Corporation of any proceedings under the
United States Bankruptcy Code or any other federal or state bankruptcy,
reorganization, receivership, insolvency or other similar law affecting the
rights of creditors generally, which proceedings are not dismissed within 30
days of filing, or (II) the institution by the Corporation of any proceedings
under the United States Bankruptcy Code or any other federal or state
bankruptcy, reorganization, receivership, insolvency or other similar law
affecting the rights of creditors generally, or (III) the making of any
assignment for the benefit of the Company's creditors.
7
<PAGE>
(C) "Qualified Initial Public Offering" shall mean the
---------------------------------
closing of an underwritten initial public offering of Series A Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), in which the aggregate proceeds to the Company
are at least $35,000,000 and the per share price to the public (the "Threshold
Price") is equal to or greater than a percentage (the "Multiplier") of the
Conversion Price, as defined in Section 4 hereof; such Multiplier being 150%
until January 1, 1999 and thereafter annually increasing by 10% of the then
current Multiplier.
(D) A "Qualified Public Market" shall be deemed to exist on
-----------------------
the date on which (I) the closing sale price for the Series A Common Stock on a
national securities exchange or the Nasdaq National Market, as published in The
--
Wall Street Journal, is equal to or greater than the Threshold Price for 20
- -------------------
trading days in any 30 consecutive trading-day period, (II) the Aggregate Market
Value of the Series A Common Stock held by Non-Affiliates of the Corporation is
$35,000,000 or more, and (III) the actual average trading volume per day of the
Series A Common Stock in aggregate value per such trading date on a national
securities exchange or the Nasdaq National Market, as published in The Wall
--------
Street Journal, for such 20 trading days is U.S. $1,000,000 or more.
- --------------
(E) "Aggregate Market Value" shall mean the average of the
----------------------
closing sale prices of the Series A Common Stock on a national securities
exchange or the Nasdaq National Market, as published in The Wall Street Journal,
-----------------------
for a period of 30 consecutive trading days multiplied by the average of the
outstanding shares of Series A Common Stock held by Non-Affiliates of the
Corporation, as determined from the records of the Corporation, for such 30-day
period.
(F) "Affiliate" shall have the meaning set forth in Rule 405
---------
under the Securities Act.
(ii) Upon the occurrence of a Triggering Event, the Corporation
shall promptly, but in no event later than five business days, give written
notice thereof to each holder of Series B Common Stock. If the holders of at
least two-thirds of the then outstanding shares of Series B Common Stock, voting
as a separate class (or acting by written consent), notify the Corporation that
such holders are exercising their option (the "Triggering Event Option") to
receive additional voting rights pursuant to this Subsection 3(b)(ii) and the
Triggering Event has not otherwise been cured prior to such notice pursuant to
Subsection 3(b)(i)(A) hereof, then, immediately upon such notice to the
Corporation, (A) each holder of Series B Common Stock shall be entitled to such
number of votes, at each meeting of stockholders of the Corporation (and written
actions of stockholders in lieu of meetings) with respect to any and all matters
presented to the stockholders of the Corporation for their action or
consideration, such that the aggregate number of votes
8
<PAGE>
represented by the outstanding shares of Series B Common Stock would represent
that percentage of the total combined voting power of the Corporation's
outstanding shares of capital stock as would be sufficient to approve any
merger, consolidation, sale of all or substantially all of the assets of, or
liquidation of the Corporation and to approve all other actions submitted to the
stockholders for approval under the Maryland General Corporation Law, as may be
amended from time to time (rounded up to the nearest whole share for purposes of
calculating voting rights, provided that such rounding shall not contravene the
intention of this clause), (B) the holders of Series B Common Stock, exclusively
and as a separate class, will be entitled to elect the minimum number of
directors as shall constitute a majority of the total number of directors of the
Corporation, and (C) the holders of shares of Series A Common Stock, Special
Voting Stock and any other class or series of voting stock (excluding the Series
B Common Stock), exclusively and as a separate class, shall be entitled to elect
the balance of the total number of directors of the Corporation.
(iii) At any meeting of stockholders held while the holders of
the outstanding shares of Series B Common Stock shall have the voting power
provided in subsection (ii) above, (A) the holders of a majority of the then
outstanding shares of Series B Common Stock, present in person or by proxy,
shall be sufficient to constitute a quorum for the election of directors as
therein provided and (B) the holders of a majority of the then outstanding
shares of Series A Common Stock, Special Voting Stock and any other class or
series of voting stock (excluding the Series B Common Stock), present in person
or by proxy, shall be sufficient to constitute a quorum for the election of the
balance of the total number of directors as therein provided. Upon the election
of the directors at such meeting, the terms of office of all persons who were
previously directors of the Corporation shall immediately terminate.
(iv) In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of the shares of Series B
Common Stock as a class, pursuant to the foregoing provisions of subsections
(ii) and (iii) hereof, the remaining directors elected by the holders of the
Series B Common Stock, by affirmative vote of a majority thereof, or the
remaining director so elected if there be but one, may, if permitted by law,
elect a successor or successors to hold office for the unexpired terms of the
director or directors whose place or places shall be vacant. In case of any
vacancy in the office of a director occurring among the directors designated by
the holders of Series A Common Stock, Special Voting Stock and of any other
class or series of voting stock as a class (excluding the Series B Common
Stock), the remaining directors designated by the holders of Series A Common
Stock, Special Voting Stock and of any other class or series of voting stock
(excluding the Series B Common Stock), voting as a class, by affirmative vote of
a majority thereof, or the remaining director so elected if there be but one,
may, if permitted by law, elect a successor or successors to hold office for the
unexpired term of the director or directors whose place or places shall be
vacant. Any director who
9
<PAGE>
shall have been elected by the holders of the Series B Common Stock may be
removed during his term of office, either with or without cause, by, and only
by, the affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series B Common Stock. Any director who shall have been
elected by the holders of the Series A Common Stock, Special Voting Stock and of
any other class or series of voting stock (excluding the Series B Common Stock)
may be removed during his term of office, either with or without cause, by, and
only by, the affirmative vote of the holders of two-thirds of the then
outstanding shares of Series A Common Stock, Special Voting Stock and any other
class or series of voting stock (excluding the Series B Common Stock), voting as
a class.
(c) Issuance of Stock. The whole or any part of any unissued
-----------------
balance of the authorized capital stock of the Corporation or the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
held in its treasury may be issued, sold, transferred or otherwise disposed of
by vote of the Board of Directors in such manner, for such consideration and on
such terms as the Board of Directors may determine, subject to the provisions of
Article 7 below.
4. Optional Conversion. The holders of the Series B Common Stock shall
-------------------
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series B Common Stock shall be
----------------
convertible, at the option of the holder thereof, at any time and from time to
time, and without the payment of additional consideration by the holder thereof,
into such number of fully paid and nonassessable shares of Series A Common Stock
as is determined by dividing $100 by the Conversion Price (as defined below) in
effect at the time of conversion. The "Conversion Price" shall initially be
$100. Such initial Conversion Price, and the rate at which shares of Series B
Common Stock may be converted into shares of Series A Common Stock, shall be
subject to adjustment as provided below.
In the event of a notice of redemption of any shares of Series B
Common Stock pursuant to Section 6 hereof, the Conversion Rights of the shares
designated for redemption shall terminate at the close of business of the fifth
full day preceding the date fixed for redemption, unless the redemption price is
not paid when due, in which case the Conversion Rights for such shares shall
continue until such price is paid in full. In the event of a liquidation of the
Corporation, the Conversion Rights shall terminate at the close of business on
the first full day preceding the date fixed for the payment of any amounts
distributable on liquidation to the holders of Series B Common Stock.
(b) Fractional Shares. No fractional shares of Series A Common
-----------------
Stock shall be issued upon conversion of the Series B Common Stock based on the
aggregate number of such Series B Common Stock then held by each holder.
10
<PAGE>
In lieu of any fractional shares to which the holder would otherwise be
entitled, the Corporation shall pay cash equal to such fraction multiplied by
the then effective Conversion Price.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of Series B Common Stock to
convert shares of Series B Common Stock into shares of Series A Common Stock,
such holder shall surrender the certificate or certificates for such shares of
Series B Common Stock, at the office of the transfer agent for the Series B
Common Stock (or at the principal office of the Corporation if the Corporation
serves as its own transfer agent), together with written notice that such holder
elects to convert all or any number of the shares of the Series B Common Stock
represented by such certificate or certificates. Such notice shall state such
holder's name or the names of the nominees in which such holder wishes the
certificate or certificates for shares of Series A Common Stock to be issued. If
required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by a written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
his or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series B
Common Stock, or to his or its nominees, a certificate or certificates for the
number of shares of Series A Common Stock to which such holder shall be
entitled, together with cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the Series B
Common Stock shall be outstanding, reserve and keep available out of its
authorized but unissued stock, for the purpose of effecting the conversion of
the Series B Common Stock, such number of its duly authorized shares of Series A
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Series B Common Stock. Before taking any action which would
cause an adjustment reducing the Conversion Price below the then par value of
the shares of Series A Common Stock issuable upon conversion of the Series B
Common Stock, the Corporation will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and nonassessable shares of Series A Common Stock
at such adjusted Conversion Price.
(iii) Upon any such conversion, no adjustment to the
Conversion Price shall be made for any declared or accrued but unpaid dividends
on the Series B Common Stock surrendered for conversion or on the Series A
Common Stock delivered upon conversion.
11
<PAGE>
(iv) All shares of Series B Common Stock which shall have
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Series A Common Stock in exchange therefor and payment of any
dividends declared or accrued but unpaid thereon. Any shares of Series B Common
Stock so converted shall be retired and cancelled and shall not be reissued, and
the Corporation (without the need for stockholder action) may from time to time
take such appropriate action as may be necessary to reduce the authorized Series
B Common Stock accordingly.
(v) The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issuance or delivery of shares of
Series A Common Stock upon conversion of shares of Series B Common Stock
pursuant to this Section 4. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of shares of Series A Common Stock in a name other than
that in which the shares of Series B Common Stock so converted were registered,
and no such issuance or delivery shall be made unless and until the person or
entity requesting such issuance has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid.
(d) Adjustments to Conversion Price for Diluting Issues:
---------------------------------------------------
(i) Special Definitions. For purposes of this Subsection 4(d), the
-------------------
following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to
------
subscribe for, purchase or otherwise acquire Series A Common Stock or
Convertible Securities, excluding options described in subsection 4(d)(i)(D)(IV)
below.
(B) "Original Issue Date" shall mean the date on which a
-------------------
share of Series B Common Stock was first issued.
(C) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Series A Common Stock.
(D) "Additional Shares of Series A Common Stock" shall mean
------------------------------------------
all shares of Series A Common Stock issued (or, pursuant to Subsection 4(d)(iii)
below, deemed to be issued) by the Corporation after the Original Issue Date,
other than shares of Series A Common Stock issued or issuable:
12
<PAGE>
(I) upon conversion of any Convertible
Securities outstanding on the Original
Issue Date, or upon exercise of any
Options outstanding on the Original
Issue Date;
(II) as a dividend or distribution on Series
B Common Stock;
(III) by reason of a dividend, stock split,
split-up or other distribution on shares
of Series A Common Stock that is covered
by Subsection 4(e) or 4(f) below; or
(IV) to employees of the Corporation pursuant
to an employee stock option plan adopted
by the Board of Directors, including
without limitation the Corporation's
1996 Stock Incentive Plan (the "1996
Plan").
(ii) No Adjustment of Conversion Price. No adjustment in the number of
---------------------------------
shares of Series A Common Stock into which the Series B Common Stock is
convertible shall be made, by adjustment in the applicable Conversion Price
thereof: (a) unless the consideration per share (determined pursuant to
Subsection 4(d)(vi)) for an Additional Share of Series A Common Stock issued or
deemed to be issued by the Corporation is less than the applicable Conversion
Price in effect on the date of, and immediately prior to, the issue of such
Additional Shares of Series A Common Stock, or (b) if prior to such issuance,
the Corporation receives written notice from the holders of at least two-thirds
of the then outstanding shares of Series B Common Stock agreeing that no such
adjustment shall be made as the result of the issuance of Additional Shares of
Series A Common Stock.
(iii) Issue of Securities Deemed Issue of Additional Shares of Series
---------------------------------------------------------------
A Common Stock. If the Corporation at any time or from time to time after the
- --------------
Original Issue Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum
number of shares of Series A Common Stock (as set forth in the instrument
relating thereto without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Series A
13
<PAGE>
Common Stock issued as of the time of such issue of such Options or Convertible
Securities or, in case such a record date shall have been fixed, as of the close
of business on such record date, provided that Additional Shares of Series A
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Subsection 4(d)(vi) hereof) of such Additional
Shares of Series A Common Stock would be less than the applicable Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any such case in
which Additional Shares of Series A Common Stock are deemed to be issued:
(A) No further adjustment in the Conversion
Price shall be made upon the subsequent issue of Convertible Securities or
shares of Series A Common Stock upon the exercise of such Options or conversion
or exchange of such Convertible Securities;
(B) If such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) Upon the expiration or termination of any unexercised Option,
the Conversion Price shall not be readjusted, but the Additional Shares of
Series A Common Stock deemed issued as the result of the original issue of such
Option shall not be deemed issued for the purposes of any subsequent adjustment
of the Conversion Price;
(D) In the event of any change in the number of shares of Series A
Common Stock issuable upon the exercise, conversion or exchange of any Option or
Convertible Security, including, but not limited to, a change resulting from the
anti-dilution provisions thereof, the Conversion Price then in effect shall
forthwith be readjusted to such Conversion Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security not exercised or converted prior to such change been made upon the
basis of such change; and
(E) No readjustment pursuant to clause (B) or (D) above shall have
the effect of increasing the Conversion Price to an amount which exceeds the
lower of (i) the Conversion Price on the original adjustment date, or (ii) the
Conversion Price that would have resulted from any issuances of Additional
14
<PAGE>
Shares of Series A Common Stock between the original adjustment date and such
readjustment date.
In the event the Corporation, after the Original Issue Date, amends
the terms of any Options or Convertible Securities (whether such Options or
Convertible Securities were outstanding on the Original Issue Date or were
issued after the Original Issue Date), then such Options or Convertible
Securities, as so amended, shall be deemed to have been issued after the
Original Issue Date and the provisions of this Subsection 4(d)(iii) shall apply.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Series A Common Stock. In the event the Corporation shall at any time
- -------------------------------
after the Original Issue Date issue Additional Shares of Series A Common Stock
(including Additional Shares of Series A Common Stock deemed to be issued
pursuant to Subsection 4(d)(iii), but excluding shares issued upon the exercise
of options granted under the 1996 Plan as provided in Subsection 4(d)(v), as a
stock split or combination as provided in Subsection 4(e) or upon a dividend or
distribution as provided in Subsection 4(f)), without consideration or for a
consideration per share less than the applicable Conversion Price in effect on
the date of and immediately prior to such issue, then and in such event, such
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Conversion Price
by a fraction, (A) the numerator of which shall be (1) the number of shares of
Series A Common Stock outstanding immediately prior to such issue plus (2) the
number of shares of Series A Common Stock which the aggregate consideration
received or to be received by the Corporation for the total number of Additional
Shares of Series A Common Stock so issued would purchase at such Conversion
Price; and (B) the denominator of which shall be the number of shares of Series
A Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Series A Common Stock so issued; provided that, (i)
for the purpose of this Subsection 4(d)(iv), all shares of Series A Common Stock
issuable upon exercise or conversion of Options or Convertible Securities
outstanding immediately prior to such issue shall be deemed to be outstanding,
and (ii) the number of shares of Series A Common Stock deemed issuable upon
exercise or conversion of such outstanding Options and Convertible Securities
shall not give effect to any adjustments to the conversion price or conversion
rate of such Options or Convertible Securities resulting from the issuance of
Additional Shares of Series A Common Stock that is the subject of this
calculation.
(v) Special Adjustment upon Certain Events Attributable to 1996 Plan.
----------------------------------------------------------------
Upon the earlier of (A) any Automatic Conversion Event or (B) any initial public
offering of securities by the Corporation, the then applicable Conversion Price
shall, without any further action on the part of any party, be adjusted, such
that upon conversion of outstanding shares of Class B Common Stock, the holders
thereof shall be entitled to receive in the aggregate an additional 66,596
15
<PAGE>
shares of Series A Common Stock (subject to appropriate adjustment for stock
splits, stock dividends, combinations or other similar recapitalizations
affecting the Series A Common Stock).
(vi) Determination of Consideration. For purposes of this Subsection
------------------------------
4(d), the consideration received by the Corporation for the issue of any
Additional Shares of Series A Common Stock or 1996 Option Shares shall be
computed as follows:
(A) Cash and Property: Such consideration shall:
-----------------
(I) insofar as it consists of cash, be computed at the
aggregate of cash received by the Corporation, excluding amounts paid or payable
for accrued interest;
(II) insofar as it consists of property other than cash, be
computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Series A Common Stock
or 1996 Option Shares are issued together with other shares or securities or
other assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(I) and (II) above, as determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of Series A Common
Stock deemed to have been issued pursuant to Subsections 4(d)(iii), relating
to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Series A Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such
16
<PAGE>
number) issuable upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.
(vii) Multiple Closing Dates. In the event the Corporation shall
----------------------
issue on more than one date Additional Shares of Series A Common Stock which
comprise shares of the same series or class of capital stock of the Corporation
as part of a series of related transactions, and such issuance dates occur
within a period of no more than 120 days, then the Conversion Price shall be
adjusted only once on account of such issuances, with such adjustment to occur
upon the final such issuance and to give effect to all such issuances as if they
occurred on the date of the final such issuance.
(e) Adjustment for Stock Splits and Combinations. If the Corporation
--------------------------------------------
shall at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Series A Common Stock, the Conversion Price then
in effect immediately before that subdivision shall be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Original Issue Date effect a subdivision of the Series B Common Stock, the
Conversion Price then in effect immediately before that subdivision shall be
proportionately increased. If the Corporation shall at any time or from time to
time after the Original Issue Date combine the outstanding shares of Series A
Common Stock, the Conversion Price then in effect immediately before the
combination shall be proportionately increased. If the Corporation shall at any
time or from time to time after the Original Issue Date combine the outstanding
shares of Series B Common Stock, the Conversion Price then in effect immediately
before the combination shall be proportionately decreased. Any adjustment under
this paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
--------------------------------------------------
the Corporation at any time, or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Series A Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Series A Common Stock, then and in each such
event the Conversion Price for the Series B Common Stock then in effect shall be
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date, by
multiplying the Conversion Price for the Series B Common Stock then in effect by
a fraction:
(1) the numerator of which shall be the total number of shares of
Series A Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares
of Series A Common Stock issued and outstanding immediately prior to the
17
<PAGE>
time of such issuance or the close of business on such record date plus the
number of shares of Series A Common Stock issuable in payment of such dividend
or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price for the Series B Common Stock shall be recompute
accordingly as of the close of business on such record date and thereafter the
Conversion Price for the Series B Common Stock shall be adjusted pursuant to
this paragraph as of the time of actual payment of such dividends or
distributions; and provided further, however, that no such adjustment shall be
made if the holders of Series B Common Stock simultaneously receive a dividend
or other distribution of shares of Series A Common Stock in a number equal to
the number of shares of Series A Common Stock as they would have received if all
outstanding shares of Series B Common Stock had been converted into Series A
Common Stock on the date of such event.
(g) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Original Issue Date
for the Series B Common Stock shall make or issue, or fix a record date for the
determination of holders of Series A Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Corporation other
than shares of Series A Common Stock, then and in each such event provision
shall be made so that the holders of the Series B Common Stock shall receive
upon conversion thereof in addition to the number of shares of Series A Common
Stock receivable thereupon, the amount of securities of the Corporation that
they would have received had the Series B Common Stock been converted into
Series A Common Stock on the date of such event and had they thereafter, during
the period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
giving application to all adjustments called for during such period under this
paragraph with respect to the rights of the holders of the Series B Common
Stock; and provided further, however, that no such adjustment shall be made if
the holders of Series B Common Stock simultaneously receive a dividend or other
distribution of such securities in an amount equal to the amount of such
securities as they would have received if all outstanding shares of Series B
Common Stock had been converted into Series A Common Stock on the date of such
event.
(h) Adjustment for Reclassification, Exchange, or Substitution. If the
----------------------------------------------------------
Series A Common Stock issuable upon the conversion of the Series B Common Stock
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Series B Common Stock shall
18
<PAGE>
have the right thereafter to convert such share into the kind and amount of
shares of stock and other securities and property receivable upon such
reorganization, reclassification, or other change, by holders of the number of
shares of Series A Common Stock into which such shares of Series B Common Stock
might have been converted immediately prior to such reorganization,
reclassification, or change, all subject to further adjustment as provided
herein.
(i) Adjustment for Merger or Reorganization, etc. In case of any
---------------------------------------------
consolidation or merger of the Corporation with or into another corporation or
the sale of all or substantially all of the assets of the Corporation to another
corporation, each share of Series B Common Stock shall thereafter be convertible
(or shall be converted into a security which shall be convertible) into the kind
and amount of shares of stock or other securities or property to which a holder
of the number of shares of Series A Common Stock of the Corporation deliverable
upon conversion of such Series B Common Stock would have been entitled upon such
consolidation, merger or sale; and, in such case, appropriate adjustment (as
determined in good faith by the Board of Directors) shall be made in the
application of the provisions in this Section 4 set forth with respect to the
rights and interest thereafter of the holders of the Series B Common Stock, to
the end that the provisions set forth in this Section 4 (including provisions
with respect to changes in and other adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the conversion of
the Series B Common Stock.
(j) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Common Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series B Common Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Common Stock, furnish or cause to be furnished to
such holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price then in effect, and (iii) the number of
shares of Series A Common Stock and the amount, if
19
<PAGE>
any, of other property which then would be received upon the conversion of
Series B Common Stock.
(l) Notice of Record Date. In the event:
---------------------
(i) that the Corporation declares a dividend (or any other
distribution) on its Series A Common Stock payable in Series A Common Stock or
other securities of the Corporation;
(ii) that the Corporation subdivides or combines its outstanding
shares of Series A Common Stock; or
(iii) of any reclassification of the Series A Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Series A Common Stock or a stock dividend or stock distribution thereon), or
of any consolidation or merger of the Corporation into or with another
corporation, or of the sale of all or substantially all of the assets of the
Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series B Common Stock, and shall cause to be
mailed to the holders of the Series B Common Stock at their last addresses as
shown on the records of the Corporation or such transfer agent, at least ten
days prior to the date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the date as of
which the holders of Series A Common Stock of record to be entitled to such
dividend, distribution, subdivision or combination are to be determined; or
(B) the date on which such reclassification, consolidation,
merger or sale is expected to become effective, and the date as of which it is
expected that holders of Series A Common Stock of record shall be entitled to
exchange their shares of Series A Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger or sale.
5. Automatic Conversion.
--------------------
(a) All outstanding shares of Series B Common Stock shall
automatically be converted into shares of Series A Common Stock, at the then
effective conversion rate, upon the earliest to occur of the following events
(the "Automatic Conversion Events"):
(i) the closing of a Qualified Initial Public Offering;
20
<PAGE>
(ii) a Change in Control (as defined below), provided the
consideration to be received by the holders of Series B Common Stock in such
Change in Control is at a price per share of at least the Threshold Price;
(iii) the occurrence of a Qualified Public Market; or
(iv) the consent of the holders of at least two-thirds of the
then outstanding shares of Series B Common Stock.
(b) For purposes of this Section 5, a "Change in Control" shall occur
or be deemed to have occurred upon (i) any merger or consolidation which would
result in the voting securities of the Corporation 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
50% of the combined voting power of the voting securities of the Corporation or
such surviving or acquiring entity outstanding immediately after such merger or
consolidation; (ii) any sale of all or substantially all of the assets of the
Corporation, (iii) the complete liquidation of the Corporation, or (iv) the
acquisition of "beneficial ownership" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), of securities
of the Corporation representing 50% or more of the combined voting power of the
Corporation's then outstanding securities (other than through an acquisition of
securities directly from the Corporation) by any "person", as such term is used
in Sections 13(d) and 14(d) of the Exchange Act, other than the Corporation, any
trustee or other fiduciary holding securities under an employee benefit plan of
the Corporation. Notwithstanding the foregoing, neither (i) the exercise of the
Triggering Event Option by the holders of the Corporation's Series B Common
Stock nor (ii) any acquisition of beneficial ownership by an Affiliate of a
stockholder of record on the Original Issue Date shall be deemed to be a Change
in Control.
(c) All holders of record of shares of Series B Common Stock will be
given written notice of the Automatic Conversion Event and the place designated
for automatic conversion of all such shares of Series B Common Stock pursuant to
this Section 5. Such notice shall be sent by first class or registered mail,
postage prepaid, to each record holder of Series B Common Stock at such holder's
address last shown on the records of the transfer agent for the Series B Common
Stock (or the records of the Corporation, if it serves as its own transfer
agent). Upon receipt of such notice, each holder of shares of Series B Common
Stock shall surrender his or its certificate or certificates for all such shares
to the Corporation at the place designated in such notice, and shall thereafter
receive certificates for the number of shares of Series A Common Stock to which
such holder is entitled pursuant to this Section 5. On the occurrence of the
Automatic Conversion Event, all rights with respect to the Series B Common Stock
so converted, including the rights, if any, to receive notices and vote (other
than as a holder of Series A Common Stock),
21
<PAGE>
will terminate, except only the rights of the holders thereof, upon surrender of
their certificate or certificates therefor, to receive certificates for the
number of shares of Series A Common Stock into which such Series B Common Stock
has been converted, and payment of any declared or accrued but unpaid dividends
thereon (all of which shall be deemed to be declared by the Board of Directors
on the occurrence of the Automatic Conversion Event). If so required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or by
his or its attorney duly authorized in writing. As soon as practicable after the
occurrence of the Automatic Conversion Event and the surrender of the
certificate or certificates for Series B Common Stock, the Corporation shall
cause to be issued and delivered to such holder, or on his or its written order,
a certificate or certificates for the number of full shares of Series A Common
Stock issuable on such conversion in accordance with the provisions hereof and
cash as provided in Subsection 4(b) in respect of any fraction of a share of
Series A Common Stock otherwise issuable upon such conversion.
(d) All certificates evidencing shares of Series B Common Stock which
are required to be surrendered for conversion in accordance with the provisions
hereof shall, from and after the occurrence of the Automatic Conversion Event,
be deemed to have been retired and cancelled and the shares of Series B Common
Stock represented thereby converted into Series A Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. The Corporation may thereafter take such
appropriate action (without the need for stockholder action) as may be necessary
to reduce the authorized Series B Common Stock accordingly.
6. Optional Redemption.
-------------------
(a) If the holders of Series B Common Stock exercise the Triggering
Event Option pursuant to Subsection 3(c) hereof, the Corporation may, at any
time, by vote of a majority of the directors who are not then appointed by
holders of the Series B Common Stock (the "Minority Directors") pursuant to
written notice within thirty (30) days of the exercise of such Triggering Event
Option, redeem the Series B Common Stock, in whole by paying the greater of (i)
200% of the Offering Price or (ii) fair market value, as determined in good
faith by the entire Board of Directors (or, if no such determination can be made
by the Board of Directors, by a nationally recognized independent appraiser
appointed by a majority of the directors appointed by the Class B Stockholders
and by a majority of the Minority Directors), in cash for each share of Series B
Common Stock then redeemed (hereinafter referred to as the "Redemption Price")
on a date no later than sixty (60) days of such notice. For purposes of this
Section 6, the "Offering Price" is the Conversion Price.
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<PAGE>
(b) At least 15 days prior to the date fixed for any redemption of
Series B Common Stock (hereinafter referred to as the "Redemption Date"),
written notice shall be mailed, by first class or registered mail, postage
prepaid, to each holder of record of Series B Common Stock to be redeemed, at
his or its address last shown on the records of the transfer agent of the Series
B Common Stock (or the records of the Corporation, if it serves as its own
transfer agent), notifying such holder of the election of the Corporation to
redeem such shares, specifying the Redemption Date and the time at which such
holder's conversion rights (pursuant to Section 4 hereof) as to such shares
terminate (which shall be the close of business on the fifth full day preceding
the Redemption Date) and calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, his or its certificate
or certificates representing the shares to be redeemed (such notice is
hereinafter referred to as the "Redemption Notice"). On or prior to the
Redemption Date, each holder of Series B Common Stock to be redeemed shall
surrender his or its certificate or certificates representing such shares to the
Corporation, in the manner and at the place designated in the Redemption Notice,
and thereupon the Redemption Price of such shares shall be payable to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be cancelled. In the event
less than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares. From and after
the Redemption Date, unless there shall have been a default in payment of the
Redemption Price, all rights of the holders of the Series B Common Stock
designated for redemption in the Redemption Notice as holders of Series B Common
Stock of the Corporation (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever.
(c) On or prior to the Redemption Date, the Corporation shall deposit
the Redemption Price of all shares of Series B Common Stock designated for
redemption in the Redemption Notice and not yet redeemed with a bank or trust
company having aggregate capital and surplus in excess of $100,000,000 as a
trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet redeemed, with irrevocable instructions and authority
to the bank or trust company to pay the Redemption Price for such shares to
their respective holders on or after the Redemption Date upon receipt of
notification from the Corporation that such holder has surrendered his or its
share certificate to the Corporation. Such instructions shall also provide that
any monies deposited by the Corporation pursuant to this Subsection 6(d) for the
redemption of shares thereafter converted into shares of the Corporation's
Series A Common Stock pursuant to Section 4 hereof no later than the close of
business on the fifth full day preceding the Redemption Date shall be returned
to the Corporation on the Redemption Date. The balance of any monies deposited
by the Corporation pursuant to this Subsection 6(d) remaining
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<PAGE>
unclaimed at the expiration of one year following the Redemption Date shall
thereafter be returned to the Corporation upon its request expressed in a
resolution of its Board of Directors.
(d) Any shares of Series B Common Stock so redeemed shall permanently
be retired, shall no longer be deemed outstanding and shall not under any
circumstances be reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized Series B Common
Stock accordingly.
7. Restrictive Covenants
---------------------
In addition to other rights provided by law, so long as any shares of
Series B Common Stock shall be outstanding, the Corporation shall not, without
first obtaining the written consent or affirmative vote of the holders of a
majority of the then outstanding shares of Series B Common Stock, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
together as a single class:
(a) amend or repeal any provision of, or add any provision to, the
Corporation's Articles of Incorporation or By-laws, if such action would change
or alter the preferences, special rights or other powers of the Series B Common
Stock;
(b) engage in any business materially different from its business as
conducted or reasonably proposed to be conducted as of December 1996;
(c) authorize any increase or decrease in the number of shares of
Series B Common Stock of the Corporation;
(d) authorize or issue any new or existing class or classes or series
of capital stock having any preference or priority as to dividends or assets
superior to any such preference or priority of the Series B Common Stock, or
authorize or issue shares of stock of any class or any bonds, debentures, notes
or other obligations convertible into or exchangeable for, or having rights to
purchase, any shares of stock of the Corporation having any preference or
priority as to dividends or assets superior to any such preference or priority
of the Series B Common Stock; or
(e) merge or consolidate into or with any other corporation or other
entity or sell all or substantially all of the Corporation's assets in each case
for consideration other than cash (except any merger or consolidation intended
solely to effect a change in the Corporation's domicile of incorporation).
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<PAGE>
C. SPECIAL VOTING STOCK
--------------------
1. Voting Rights. The holders of the Special Voting Stock are
-------------
entitled to one vote for each share held at all meetings of stockholders (and
written actions in lieu of meetings). There shall be no cumulative voting.
Except as otherwise required by law or these Articles of Incorporation, in all
matters concerting the voting of shares, the Series A Common Stock, Series B
Common Stock and Special Voting Stock shall vote as a single class and such
voting rights shall be identical in all respects.
2. No Other Rights. Except for the voting rights referred to above,
---------------
holders of Special Voting Stock shall have no other rights in respect of such
shares, including without limitation, rights to receive dividends or rights to
receive assets of the Corporation upon its dissolution, liquidation or winding
up of its affairs.
3. Retirement and Cancellation. In the event that any shares of
---------------------------
Special Voting Stock are from time to time redeemed, reacquired, purchased,
exchanged or otherwise acquired by the Corporation, all such shares shall be
retired and cancelled, and the Corporation shall not, under any circumstances,
reissue such retired and cancelled shares.
D. PREFERRED STOCK
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, special voting rights, conversion rights,
redemption privileges and liquidation preferences, as shall be stated and
expressed in such resolutions, all to the full extent now or hereafter permitted
by the Maryland General Corporation Law. Without limiting the generality of the
foregoing, the resolutions providing for issuance of any series of Preferred
Stock may provide that such series shall be superior or rank equally or be
junior to the Preferred Stock
25
<PAGE>
or any other series to the extent permitted by law. Except as otherwise
specifically provided in these Articles of Incorporation (the "Articles"), no
vote of the holders of the Preferred Stock, Series A Common Stock, Series B
Common Stock or Special Voting Stock shall be a prerequisite to the issuance of
any shares of any series of the Preferred Stock authorized by and complying with
the conditions of these Articles, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation.
V. The number of directors of the Corporation shall be seven (7). The names of
the persons who currently serve as directors of the Corporation are as follows:
David D. Archibald
John A. Ryan
SECOND: The Charter of the Corporation is hereby restated to read as
follows:
I. The name of the corporation is Entrust Technologies Inc.
II. The purpose for which the Corporation is organized is transacting any and
all lawful business for which a corporation may be incorporated under the laws
of the State of Maryland that is incident and necessary or appropriate to the
foregoing.
III. The post office address of the principal office of the Corporation in this
State is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. The name and post office address of the resident agent of the
Corporation in the State of Maryland is The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.
IV. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 6,200,000 shares, consisting of (i) 5,000,000
shares of Series A Common Stock, $.01 par value per share (the "Series A Common
Stock"), (ii) 257,500 shares of Series B Common Stock, $.01 par value per share
(the "Series B Common Stock"), (iii) 192,500 shares of Special Voting Stock,
$.01 par value per share (the "Special Voting Stock"), and (iv) 500,000 shares
of Preferred Stock, $.01 par value per share (the "Preferred Stock"). The
aggregate par value of all shares of all classes of stock is $59,500.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
26
<PAGE>
A. SERIES A COMMON STOCK
---------------------
1. General. The voting, dividend and liquidation rights of the
-------
holders of the Series A Common Stock are subject to and qualified by any
preferential rights of any then outstanding shares of capital stock.
2. Voting. The holders of the Series A Common Stock are entitled to
------
one vote for each share held at all meetings of stockholders (and written
actions in lieu of meetings). There shall be no cumulative voting.
3. Dividends. Dividends may be declared and paid on the Series A
---------
Common Stock from funds lawfully available therefor as and when determined by
the Board of Directors and subject to any preferential dividend rights of any
then outstanding shares of capital stock.
4. Liquidation. Upon the dissolution or liquidation of the
-----------
Corporation, whether voluntary or involuntary, holders of Series A Common Stock
will be entitled to receive all assets of the Corporation available for
distribution to its stockholders, subject to any preferential rights of any then
outstanding shares of capital stock.
B. SERIES B COMMON STOCK
---------------------
1. Dividends.
---------
(a) In the event the Corporation declares or pay any
distributions (as defined below) on shares of Series A Common Stock or any other
shares of capital stock of the Corporation, the holders of the Series B Common
Stock then outstanding shall receive, at the same time, a distribution on each
outstanding share of Series B Common Stock in an amount equal to the product of
(i) the per share amount, if any, of the distributions to be declared, paid or
set aside for the Series A Common Stock, multiplied by (ii) the number of shares
of Series A Common Stock into which such share of Series B Common Stock is then
convertible.
(b) For purposes of this Section 1, unless the context requires
otherwise, "distribution" shall mean the transfer of cash, securities or
property without consideration, whether by way of dividend or otherwise, payable
other than in Series A Common Stock of the Corporation, or the purchase or
redemption of shares of the Corporation (other than (i) repurchases of Series A
Common Stock held by employees or directors of, or consultants to, the
Corporation upon termination of their employment or services pursuant to
agreements providing for such repurchase at a price equal to the original issue
price, and (ii) redemptions in liquidation or dissolution of the Corporation)
for cash, securities or property, including any such transfer, purchase or
redemption by a subsidiary of this Corporation.
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<PAGE>
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
-------------------------------------------------------
Consolidations and Asset Sales. In the event of any voluntary or involuntary
- ------------------------------
liquidation, dissolution or winding up of the Corporation, the holders of shares
of Series B Common Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
after and subject to the payment in full of all amounts required to be
distributed to the holders of any other class or series of stock of the
Corporation ranking on liquidation prior and in preference to the Series B
Common Stock, such amount per share as would have been payable had each such
share been converted into Series A Common Stock pursuant to Section 4
immediately prior to such liquidation, dissolution or winding up.
3. Voting.
------
(a) Except as provided by Subsection 3(b) below, each holder of
outstanding shares of Series B Common Stock shall be entitled to the number of
votes equal to the number of whole shares of Series A Common Stock into which
the aggregate number of shares of Series B Common Stock held by such holder are
then convertible (as adjusted from time to time pursuant to Section 4 hereof),
at each meeting of stockholders of the Corporation (and written actions of
stockholders in lieu of meetings) with respect to any and all matters presented
to the stockholders of the Corporation for their action or consideration. Except
as provided by law or by the provisions of Subsection 3(b) below, holders of
Series B Common Stock shall vote together with the holders of Series A Common
Stock and the Special Voting Stock as a single class.
(b) Additional Voting Rights Upon Exercise of Triggering Event
----------------------------------------------------------
Option.
------
(i) For the purposes of these Articles, the following
definitions shall apply:
(A) "Triggering Event" shall be deemed to occur (I)
----------------
during an Insolvency or a Bankruptcy Event of the Corporation, or (II) at any
time on or after January 1, 2002, if the Corporation has not (x) consummated a
Qualified Initial Public Offering or (y) developed a Qualified Public Market;
provided, however, that, in the case of clauses (I) or (II) above, a Triggering
Event shall not be deemed to be in existence if, prior to the exercise of the
Triggering Event Option by the holders of Series B Common Stock, an Insolvency
or Bankruptcy Event has ceased to exist or the Corporation has consummated a
Qualified Initial Public Offering or developed a Qualified Public Market.
(B) "Insolvency or Bankruptcy Event" shall be deemed
------------------------------
to occur upon (I) the institution against the Corporation of any proceedings
under the United States Bankruptcy Code or any other federal or state
bankruptcy,
28
<PAGE>
reorganization, receivership, insolvency or other similar law affecting the
rights of creditors generally, which proceedings are not dismissed within 30
days of filing, or (II) the institution by the Corporation of any proceedings
under the United States Bankruptcy Code or any other federal or state
bankruptcy, reorganization, receivership, insolvency or other similar law
affecting the rights of creditors generally, or (III) the making of any
assignment for the benefit of the Company's creditors.
(C) "Qualified Initial Public Offering" shall mean
---------------------------------
the closing of an underwritten initial public offering of Series A Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), in which the aggregate proceeds to the Company
are at least $35,000,000 and the per share price to the public (the "Threshold
Price") is equal to or greater than a percentage (the "Multiplier") of the
Conversion Price, as defined in Section 4 hereof; such Multiplier being 150%
until January 1, 1999 and thereafter annually increasing by 10% of the then
current Multiplier.
(D) A "Qualified Public Market" shall be deemed to
-----------------------
exist on the date on which (I) the closing sale price for the Series A Common
Stock on a national securities exchange or the Nasdaq National Market, as
published in The Wall Street Journal, is equal to or greater than the Threshold
-----------------------
Price for 20 trading days in any 30 consecutive trading-day period, (II) the
Aggregate Market Value of the Series A Common Stock held by Non-Affiliates of
the Corporation is $35,000,000 or more, and (III) the actual average trading
volume per day of the Series A Common Stock in aggregate value per such trading
date on a national securities exchange or the Nasdaq National Market, as
published in The Wall Street Journal, for such 20 trading days is U.S.
-----------------------
$1,000,000 or more.
(E) "Aggregate Market Value" shall mean the average
----------------------
of the closing sale prices of the Series A Common Stock on a national securities
exchange or the Nasdaq National Market, as published in The Wall Street Journal,
-----------------------
for a period of 30 consecutive trading days multiplied by the average of the
outstanding shares of Series A Common Stock held by Non-Affiliates of the
Corporation, as determined from the records of the Corporation, for such 30-day
period.
(F) "Affiliate" shall have the meaning set forth in
---------
Rule 405 under the Securities Act.
(ii) Upon the occurrence of a Triggering Event, the
Corporation shall promptly, but in no event later than five business days, give
written notice thereof to each holder of Series B Common Stock. If the holders
of at least two-thirds of the then outstanding shares of Series B Common Stock,
voting as a separate class (or acting by written consent), notify the
Corporation that such holders are exercising their option (the "Triggering Event
Option") to receive additional
29
<PAGE>
voting rights pursuant to this Subsection 3(b)(ii) and the Triggering Event has
not otherwise been cured prior to such notice pursuant to Subsection 3(b)(i)(A)
hereof, then, immediately upon such notice to the Corporation, (A) each holder
of Series B Common Stock shall be entitled to such number of votes, at each
meeting of stockholders of the Corporation (and written actions of stockholders
in lieu of meetings) with respect to any and all matters presented to the
stockholders of the Corporation for their action or consideration, such that the
aggregate number of votes represented by the outstanding shares of Series B
Common Stock would represent that percentage of the total combined voting power
of the Corporation's outstanding shares of capital stock as would be sufficient
to approve any merger, consolidation, sale of all or substantially all of the
assets of, or liquidation of the Corporation and to approve all other actions
submitted to the Stockholders for approval under the Maryland General
Corporation Law, as may be amended from time to time (rounded up to the nearest
whole share for purposes of calculating voting rights, provided that such
rounding shall not contravene the intention of this clause), (B) the holders of
Series B Common Stock, exclusively and as a separate class, will be entitled to
elect the minimum number of directors as shall constitute a majority of the
total number of directors of the Corporation, and (C) the holders of shares of
Series A Common Stock, Special Voting Stock and any other class or series of
voting stock (excluding the Series B Common Stock), exclusively and as a
separate class, shall be entitled to elect the balance of the total number of
directors of the Corporation.
(iii) At any meeting of stockholders held while the holders of
the outstanding shares of Series B Common Stock shall have the voting power
provided in subsection (ii) above, (A) the holders of a majority of the then
outstanding shares of Series B Common Stock, present in person or by proxy,
shall be sufficient to constitute a quorum for the election of directors as
therein provided and (B) the holders of a majority of the then outstanding
shares of Series A Common Stock, Special Voting Stock and any other class or
series of voting stock (excluding the Series B Common Stock), present in person
or by proxy, shall be sufficient to constitute a quorum for the election of the
balance of the total number of directors as therein provided. Upon the election
of the directors at such meeting, the terms of office of all persons who were
previously directors of the Corporation shall immediately terminate.
(iv) In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of the shares of Series B
Common Stock as a class, pursuant to the foregoing provisions of subsections
(ii) and (iii) hereof, the remaining directors elected by the holders of the
Series B Common Stock, by affirmative vote of a majority thereof, or the
remaining director so elected if there be but one, may, if permitted by law,
elect a successor or successors to hold office for the unexpired terms of the
director or directors whose place or places shall be vacant. In case of any
vacancy in the office of a director occurring among the directors designated by
the holders of Series A Common Stock, Special Voting Stock
30
<PAGE>
and of any other class or series of voting stock as a class (excluding the
Series B Common Stock), the remaining directors designated by the holders of
Series A Common Stock, Special Voting Stock and of any other class or series of
voting stock (excluding the Series B Common Stock), voting as a class, by
affirmative vote of a majority thereof, or the remaining director so elected if
there be but one, may, if permitted by law, elect a successor or successors to
hold office for the unexpired term of the director or directors whose place or
places shall be vacant. Any director who shall have been elected by the holders
of the Series B Common Stock may be removed during his term of office, either
with or without cause, by, and only by, the affirmative vote of the holders of
at least two-thirds of the then outstanding shares of Series B Common Stock. Any
director who shall have been elected by the holders of the Series A Common
Stock, Special Voting Stock and of any other class or series of voting stock
(excluding the Series B Common Stock) may be removed during his term of office,
either with or without cause, by, and only by, the affirmative vote of the
holders of two-thirds of the then outstanding shares of Series A Common Stock,
Special Voting Stock and any other class or series of voting stock (excluding
the Series B Common Stock), voting as a class.
(c) Issuance of Stock. The whole or any part of any unissued balance
-----------------
of the authorized capital stock of the Corporation or the whole or any part of
any unissued balance of the authorized capital stock of the Corporation held in
its treasury may be issued, sold, transferred or otherwise disposed of by vote
of the Board of Directors in such manner, for such consideration and on such
terms as the Board of Directors may determine, subject to the provisions of
Article 7 below.
4. Optional Conversion. The holders of the Series B Common Stock shall
-------------------
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series B Common Stock shall be
----------------
convertible, at the option of the holder thereof, at any time and from time to
time, and without the payment of additional consideration by the holder thereof,
into such number of fully paid and nonassessable shares of Series A Common Stock
as is determined by dividing $100 by the Conversion Price (as defined below) in
effect at the time of conversion. The "Conversion Price" shall initially be
$100. Such initial Conversion Price, and the rate at which shares of Series B
Common Stock may be converted into shares of Series A Common Stock, shall be
subject to adjustment as provided below.
In the event of a notice of redemption of any shares of Series B
Common Stock pursuant to Section 6 hereof, the Conversion Rights of the shares
designated for redemption shall terminate at the close of business of the fifth
full day preceding the date fixed for redemption, unless the redemption price is
not paid when due, in which case the Conversion Rights for such shares shall
continue until such price is paid in full. In the event of a liquidation of the
Corporation, the
31
<PAGE>
Conversion Rights shall terminate at the close of business on the first full day
preceding the date fixed for the payment of any amounts distributable on
liquidation to the holders of Series B Common Stock.
(b) Fractional Shares. No fractional shares of Series A Common Stock
-----------------
shall be issued upon conversion of the Series B Common Stock based on the
aggregate number of such Series B Common Stock then held by each holder. In lieu
of any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of Series B Common Stock to convert
shares of Series B Common Stock into shares of Series A Common Stock, such
holder shall surrender the certificate or certificates for such shares of Series
B Common Stock, at the office of the transfer agent for the Series B Common
Stock (or at the principal office of the Corporation if the Corporation serves
as its own transfer agent), together with written notice that such holder elects
to convert all or any number of the shares of the Series B Common Stock
represented by such certificate or certificates. Such notice shall state such
holder's name or the names of the nominees in which such holder wishes the
certificate or certificates for shares of Series A Common Stock to be issued. If
required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by a written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
his or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series B
Common Stock, or to his or its nominees, a certificate or certificates for the
number of shares of Series A Common Stock to which such holder shall be
entitled, together with cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the Series B Common
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the conversion of the Series B
Common Stock, such number of its duly authorized shares of Series A Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding Series B Common Stock. Before taking any action which would cause an
adjustment reducing the Conversion Price below the then par value of the shares
of Series A Common Stock issuable upon conversion of the Series B Common Stock,
the Corporation will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid
32
<PAGE>
and nonassessable shares of Series A Common Stock at such adjusted Conversion
Price.
(iii) Upon any such conversion, no adjustment to the Conversion
Price shall be made for any declared or accrued but unpaid dividends on the
Series B Common Stock surrendered for conversion or on the Series A Common Stock
delivered upon conversion.
(iv) All shares of Series B Common Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Series A Common Stock in exchange therefor and payment of any
dividends declared or accrued but unpaid thereon. Any shares of Series B Common
Stock so converted shall be retired and cancelled and shall not be reissued, and
the Corporation (without the need for stockholder action) may from time to time
take such appropriate action as may be necessary to reduce the authorized Series
B Common Stock accordingly.
(v) The Corporation shall pay any and all issue and other taxes
that may be payable in respect of any issuance or delivery of shares of Series A
Common Stock upon conversion of shares of Series B Common Stock pursuant to this
Section 4. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of shares of Series A Common Stock in a name other than that in which the shares
of Series B Common Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person or entity requesting such
issuance has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
(d) Adjustments to Conversion Price for Diluting Issues:
---------------------------------------------------
(i) Special Definitions. For purposes of this Subsection 4(d),
-------------------
the following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to
------
subscribe for, purchase or otherwise acquire Series A Common Stock or
Convertible Securities, excluding options described in subsection 4(d)(i)(D)(IV)
below.
(B) "Original Issue Date" shall mean the date on which a
-------------------
share of Series B Common Stock was first issued.
33
<PAGE>
(C) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Series A Common Stock.
(D) "Additional Shares of Series A Common Stock" shall mean
------------------------------------------
all shares of Series A Common Stock issued (or, pursuant to Subsection 4(d)(iii)
below, deemed to be issued) by the Corporation after the Original Issue Date,
other than shares of Series A Common Stock issued or issuable:
(I) upon conversion of any Convertible Securities
outstanding on the Original Issue Date, or upon
exercise of any Options outstanding on the
Original Issue Date;
(II) as a dividend or distribution on Series B Common
Stock;
(III) by reason of a dividend, stock split, split-up or
other distribution on shares of Series A Common
Stock that is covered by Subsection 4(e) or 4(f)
below; or
(IV) to employees of the Corporation pursuant to an
employee stock option plan adopted by the Board of
Directors, including without limitation the
Corporation's 1996 Stock Incentive Plan (the "1996
Plan").
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
number of shares of Series A Common Stock into which the Series B Common Stock
is convertible shall be made, by adjustment in the applicable Conversion Price
thereof: (a) unless the consideration per share (determined pursuant to
Subsection 4(d)(vi)) for an Additional Share of Series A Common Stock issued or
deemed to be issued by the Corporation is less than the applicable Conversion
Price in effect on the date of, and immediately prior to, the issue of such
Additional Shares of Series A Common Stock, or (b) if prior to such issuance,
the Corporation receives written notice from the holders of at least two-thirds
of the then outstanding shares of Series B Common Stock agreeing that no such
adjustment shall be made as the result of the issuance of Additional Shares of
Series A Common Stock.
34
<PAGE>
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Series A Common Stock. If the Corporation at any time or from time to time after
- ---------------------
the Original Issue Date shall issue any Options or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the maximum number of shares of Series A Common Stock (as set forth in the
instrument relating thereto without regard to any provision contained therein
for a subsequent adjustment of such number) issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Series A Common Stock issued as of the time of such issue
of such Options or Convertible Securities or, in case such a record date shall
have been fixed, as of the close of business on such record date, provided that
Additional Shares of Series A Common Stock shall not be deemed to have been
issued unless the consideration per share (determined pursuant to Subsection
4(d)(vi) hereof) of such Additional Shares of Series A Common Stock would be
less than the applicable Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Series A
Common Stock are deemed to be issued:
(A) No further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Series A
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) If such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) Upon the expiration or termination of any unexercised
Option, the Conversion Price shall not be readjusted, but the Additional Shares
of Series A Common Stock deemed issued as the result of the original issue of
such Option shall not be deemed issued for the purposes of any subsequent
adjustment of the Conversion Price;
(D) In the event of any change in the number of shares of
Series A Common Stock issuable upon the exercise, conversion or exchange of any
Option or Convertible Security, including, but not limited to, a change
35
<PAGE>
resulting from the anti-dilution provisions thereof, the Conversion Price then
in effect shall forthwith be readjusted to such Conversion Price as would have
obtained had the adjustment which was made upon the issuance of such Option or
Convertible Security not exercised or converted prior to such change been made
upon the basis of such change; and
(E) No readjustment pursuant to clause (B) or (D) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (i) the Conversion Price on the original adjustment date,
or (ii) the Conversion Price that would have resulted from any issuances of
Additional Shares of Series A Common Stock between the original adjustment date
and such readjustment date.
In the event the Corporation, after the Original Issue Date, amends the
terms of any Options or Convertible Securities (whether such Options or
Convertible Securities were outstanding on the Original Issue Date or were
issued after the Original Issue Date), then such Options or Convertible
Securities, as so amended, shall be deemed to have been issued after the
Original Issue Date and the provisions of this Subsection 4(d)(iii) shall apply.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Series A Common Stock. In the event the Corporation shall at any time
- -------------------------------
after the Original Issue Date issue Additional Shares of Series A Common Stock
(including Additional Shares of Series A Common Stock deemed to be issued
pursuant to Subsection 4(d)(iii), but excluding shares issued upon the exercise
of options granted under the 1996 Plan as provided in Subsection 4(d)(v), as a
stock split or combination as provided in Subsection 4(e) or upon a dividend or
distribution as provided in Subsection 4(f)), without consideration or for a
consideration per share less than the applicable Conversion Price in effect on
the date of and immediately prior to such issue, then and in such event, such
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Conversion Price
by a fraction, (A) the numerator of which shall be (1) the number of shares of
Series A Common Stock outstanding immediately prior to such issue plus (2) the
number of shares of Series A Common Stock which the aggregate consideration
received or to be received by the Corporation for the total number of Additional
Shares of Series A Common Stock so issued would purchase at such Conversion
Price; and (B) the denominator of which shall be the number of shares of Series
A Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Series A Common Stock so issued; provided that, (i)
-------- ----
for the purpose of this Subsection 4(d)(iv), all shares of Series A Common Stock
issuable upon exercise or conversion of Options or Convertible Securities
outstanding immediately prior to such issue shall be deemed to be outstanding,
and (ii) the number of shares of Series A Common Stock deemed issuable upon
exercise or conversion of such outstanding Options and Convertible
36
<PAGE>
Securities shall not give effect to any adjustments to the conversion price or
conversion rate of such Options or Convertible Securities resulting from the
issuance of Additional Shares of Series A Common Stock that is the subject of
this calculation.
(v) Special Adjustment Upon Certain Events Attributable to 1996
-----------------------------------------------------------
Plan. Upon the earlier of (A) any Automatic Conversion Event or (B) any initial
- ----
public offering of securities by the Corporation, the then applicable Conversion
Price shall, without any further action on the part of any party, be adjusted,
such that upon conversion of outstanding shares of Class B Common Stock, the
holders thereof shall be entitled to receive in the aggregate an additional
66,596 shares of Series A Common Stock (subject to appropriate adjustment for
stock splits, stock dividends, combinations or other similar recapitalizations
affecting the Series A Common Stock).
(vi) Determination of Consideration. For purposes of this
------------------------------
Subsection 4(d), the consideration received by the Corporation for the issue of
any Additional Shares of Series A Common Stock or 1996 Option Shares shall be
computed as follows:
(A) Cash and Property: Such consideration shall:
-----------------
(I) insofar as it consists of cash, be computed at the
aggregate of cash received by the Corporation, excluding amounts paid or payable
for accrued interest;
(II) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Series A Common
Stock or 1996 Option Shares are issued together with other shares or securities
or other assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(I) and (II) above, as determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Series A Common
Stock deemed to have been issued pursuant to Subsections 4(d)(iii), relating to
Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any
37
<PAGE>
provision contained therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Series A Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(vii) Multiple Closing Dates. In the event the Corporation shall
----------------------
issue on more than one date Additional Shares of Series A Common Stock which
comprise shares of the same series or class of capital stock of the Corporation
as part of a series of related transactions, and such issuance dates occur
within a period of no more than 120 days, then the Conversion Price shall be
adjusted only once on account of such issuances, with such adjustment to occur
upon the final such issuance and to give effect to all such issuances as if they
occurred on the date of the final such issuance.
(e) Adjustment for Stock Splits and Combinations. If the Corporation
--------------------------------------------
shall at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Series A Common Stock, the Conversion Price then
in effect immediately before that subdivision shall be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Original Issue Date effect a subdivision of the Series B Common Stock, the
Conversion Price then in effect immediately before that subdivision shall be
proportionately increased. If the Corporation shall at any time or from time to
time after the Original Issue Date combine the outstanding shares of Series A
Common Stock, the Conversion Price then in effect immediately before the
combination shall be proportionately increased. If the Corporation shall at any
time or from time to time after the Original Issue Date combine the outstanding
shares of Series B Common Stock, the Conversion Price then in effect immediately
before the combination shall be proportionately decreased. Any adjustment under
this paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
--------------------------------------------------
the Corporation at any time, or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Series A Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Series A Common Stock, then and in each such
event the Conversion Price for the Series B Common Stock then in effect shall be
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed,
38
<PAGE>
as of the close of business on such record date, by multiplying the Conversion
Price for the Series B Common Stock then in effect by a fraction:
(1) the numerator of which shall be the total number of shares
of Series A Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares
of Series A Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date plus the number of
shares of Series A Common Stock issuable in payment of such dividend or
distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price for the Series B Common Stock shall be recompute
accordingly as of the close of business on such record date and thereafter the
Conversion Price for the Series B Common Stock shall be adjusted pursuant to
this paragraph as of the time of actual payment of such dividends or
distributions; and provided further, however, that no such adjustment shall be
made if the holders of Series B Common Stock simultaneously receive a dividend
or other distribution of shares of Series A Common Stock in a number equal to
the number of shares of Series A Common Stock as they would have received if all
outstanding shares of Series B Common Stock had been converted into Series A
Common Stock on the date of such event.
(g) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Original Issue Date
for the Series B Common Stock shall make or issue, or fix a record date for the
determination of holders of Series A Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Corporation other
than shares of Series A Common Stock, then and in each such event provision
shall be made so that the holders of the Series B Common Stock shall receive
upon conversion thereof in addition to the number of shares of Series A Common
Stock receivable thereupon, the amount of securities of the Corporation that
they would have received had the Series B Common Stock been converted into
Series A Common Stock on the date of such event and had they thereafter, during
the period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
giving application to all adjustments called for during such period under this
paragraph with respect to the rights of the holders of the Series B Common
Stock; and provided further, however, that no such adjustment shall be made if
the holders of Series B Common Stock simultaneously receive a dividend or other
distribution of such securities in an amount equal to the amount of such
securities as they would have received if all outstanding shares of Series B
39
<PAGE>
Common Stock had been converted into Series A Common Stock on the date of such
event.
(h) Adjustment for Reclassification, Exchange, or Substitution. If the
----------------------------------------------------------
Series A Common Stock issuable upon the conversion of the Series B Common Stock
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Series B Common Stock shall have the right thereafter to convert such
share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other change,
by holders of the number of shares of Series A Common Stock into which such
shares of Series B Common Stock might have been converted immediately prior to
such reorganization, reclassification, or change, all subject to further
adjustment as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of any
--------------------------------------------
consolidation or merger of the Corporation with or into another corporation or
the sale of all or substantially all of the assets of the Corporation to another
corporation, each share of Series B Common Stock shall thereafter be convertible
(or shall be converted into a security which shall be convertible) into the kind
and amount of shares of stock or other securities or property to which a holder
of the number of shares of Series A Common Stock of the Corporation deliverable
upon conversion of such Series B Common Stock would have been entitled upon such
consolidation, merger or sale; and, in such case, appropriate adjustment (as
determined in good faith by the Board of Directors) shall be made in the
application of the provisions in this Section 4 set forth with respect to the
rights and interest thereafter of the holders of the Series B Common Stock, to
the end that the provisions set forth in this Section 4 (including provisions
with respect to changes in and other adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the conversion of
the Series B Common Stock.
(j) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Common Stock against impairment.
40
<PAGE>
(k) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series B Common Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Common Stock, furnish or cause to be furnished to
such holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price then in effect, and (iii) the number of
shares of Series A Common Stock and the amount, if any, of other property which
then would be received upon the conversion of Series B Common Stock.
(l) Notice of Record Date. In the event:
---------------------
(i) that the Corporation declares a dividend (or any other
distribution) on its Series A Common Stock payable in Series A Common Stock or
other securities of the Corporation;
(ii) that the Corporation subdivides or combines its outstanding
shares of Series A Common Stock; or
(iii) of any reclassification of the Series A Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Series A Common Stock or a stock dividend or stock distribution thereon), or
of any consolidation or merger of the Corporation into or with another
corporation, or of the sale of all or substantially all of the assets of the
Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series B Common Stock, and shall cause to be
mailed to the holders of the Series B Common Stock at their last addresses as
shown on the records of the Corporation or such transfer agent, at least ten
days prior to the date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution, subdivision
or combination, or, if a record is not to be taken, the date as of which the
holders of Series A Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be determined; or
(B) the date on which such reclassification, consolidation,
merger or sale is expected to become effective, and the date as of which it is
expected that holders of Series A Common Stock of record shall be entitled to
exchange their shares of Series A Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger or sale.
41
<PAGE>
5. Automatic Conversion.
--------------------
(a) All outstanding shares of Series B Common Stock shall
automatically be converted into shares of Series A Common Stock, at the then
effective conversion rate, upon the earliest to occur of the following events
(the "Automatic Conversion Events"):
(i) the closing of a Qualified Initial Public Offering;
(ii) a Change in Control (as defined below), provided the
consideration to be received by the holders of Series B Common Stock in such
Change in Control is at a price per share of at least the Threshold Price;
(iii) the occurrence of a Qualified Public Market; or
(iv) the consent of the holders of at least two-thirds of the
then outstanding shares of Series B Common Stock.
(b) For purposes of this Section 5, a "Change in Control" shall occur
or be deemed to have occurred upon (i) any merger or consolidation which would
result in the voting securities of the Corporation 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
[50%] of the combined voting power of the voting securities of the Corporation
or such surviving or acquiring entity outstanding immediately after such merger
or consolidation; (ii) any sale of all or substantially all of the assets of the
Corporation, (iii) the complete liquidation of the Corporation, or (iv) the
acquisition of "beneficial ownership" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), of securities
of the Corporation representing [50%] or more of the combined voting power of
the Corporation's then outstanding securities (other than through an acquisition
of securities directly from the Corporation) by any "person", as such term is
used in Sections 13(d) and 14(d) of the Exchange Act, other than the
Corporation, any trustee or other fiduciary holding securities under an employee
benefit plan of the Corporation. Notwithstanding the foregoing neither (i) the
exercise of the Triggering Event Option by the holders of the Corporation's
Series B Common Stock nor (ii) any acquisition of beneficial interest by an
Affiliate of a stockholder of record on the Original Issue Date shall not be
deemed to be a Change in Control.
(c) All holders of record of shares of Series B Common Stock will be
given written notice of the Automatic Conversion Event and the place designated
for automatic conversion of all such shares of Series B Common Stock pursuant to
this Section 5. Such notice shall be sent by first class or registered mail,
postage prepaid, to each record holder of Series B Common Stock at such holder's
42
<PAGE>
address last shown on the records of the transfer agent for the Series B Common
Stock (or the records of the Corporation, if it serves as its own transfer
agent). Upon receipt of such notice, each holder of shares of Series B Common
Stock shall surrender his or its certificate or certificates for all such shares
to the Corporation at the place designated in such notice, and shall thereafter
receive certificates for the number of shares of Series A Common Stock to which
such holder is entitled pursuant to this Section 5. On the occurrence of the
Automatic Conversion Event, all rights with respect to the Series B Common Stock
so converted, including the rights, if any, to receive notices and vote (other
than as a holder of Series A Common Stock), will terminate, except only the
rights of the holders thereof, upon surrender of their certificate or
certificates therefor, to receive certificates for the number of shares of
Series A Common Stock into which such Series B Common Stock has been converted,
and payment of any declared or accrued but unpaid dividends thereon (all of
which shall be deemed to be declared by the Board of Directors on the occurrence
of the Automatic Conversion Event). If so required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or by his or its attorney
duly authorized in writing. As soon as practicable after the occurrence of the
Automatic Conversion Event and the surrender of the certificate or certificates
for Series B Common Stock, the Corporation shall cause to be issued and
delivered to such holder, or on his or its written order, a certificate or
certificates for the number of full shares of Series A Common Stock issuable on
such conversion in accordance with the provisions hereof and cash as provided in
Subsection 4(b) in respect of any fraction of a share of Series A Common Stock
otherwise issuable upon such conversion.
(d) All certificates evidencing shares of Series B Common Stock which
are required to be surrendered for conversion in accordance with the provisions
hereof shall, from and after the occurrence of the Automatic Conversion Event,
be deemed to have been retired and cancelled and the shares of Series B Common
Stock represented thereby converted into Series A Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. The Corporation may thereafter take such
appropriate action (without the need for stockholder action) as may be necessary
to reduce the authorized Series B Common Stock accordingly.
6. Optional Redemption.
-------------------
(a) If the holders of Series B Common Stock exercise the Triggering
Event Option pursuant to Subsection 3(c) hereof, the Corporation may, at any
time, by vote of a majority of the directors who are not then appointed by
holders of the Series B Common Stock (the "Minority Directors") pursuant to
written notice within thirty (30) days of the exercise of such Triggering Event
Option, redeem the Series B Common Stock in whole by paying the greater of (i)
200% of the Offering
43
<PAGE>
Price or (ii) fair market value, as determined in good faith by the entire Board
of Directors (or, if no such determination can be made by the Board of
Directors, by a nationally recognized independent appraiser appointed by a
majority of the directors appointed by the Class B Stockholders and by a
majority of the Minority Directors), in cash for each share of Series B Common
Stock then redeemed (hereinafter referred to as the "Redemption Price") on a
date no later than sixty (60) days of such notice. For purposes of this Section
6, the "Offering Price" is the Conversion Price.
(b) At least 15 days prior to the date fixed for any redemption of
Series B Common Stock (hereinafter referred to as the "Redemption Date"),
written notice shall be mailed, by first class or registered mail, postage
prepaid, to each holder of record of Series B Common Stock to be redeemed, at
his or its address last shown on the records of the transfer agent of the Series
B Common Stock (or the records of the Corporation, if it serves as its own
transfer agent), notifying such holder of the election of the Corporation to
redeem such shares, specifying the Redemption Date and the time at which such
holder's conversion rights (pursuant to Section 4 hereof) as to such shares
terminate (which shall be the close of business on the fifth full day preceding
the Redemption Date) and calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, his or its certificate
or certificates representing the shares to be redeemed (such notice is
hereinafter referred to as the "Redemption Notice"). On or prior to the
Redemption Date, each holder of Series B Common Stock to be redeemed shall
surrender his or its certificate or certificates representing such shares to the
Corporation, in the manner and at the place designated in the Redemption Notice,
and thereupon the Redemption Price of such shares shall be payable to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be cancelled. In the event
less than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares. From and after
the Redemption Date, unless there shall have been a default in payment of the
Redemption Price, all rights of the holders of the Series B Common Stock
designated for redemption in the Redemption Notice as holders of Series B Common
Stock of the Corporation (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever.
(c) On or prior to the Redemption Date, the Corporation shall deposit
the Redemption Price of all shares of Series B Common Stock designated for
redemption in the Redemption Notice and not yet redeemed with a bank or trust
company having aggregate capital and surplus in excess of $100,000,000 as a
trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet redeemed, with irrevocable instructions and authority
to the bank or trust company to pay the Redemption Price for such shares to
their respective holders on
44
<PAGE>
or after the Redemption Date upon receipt of notification from the Corporation
that such holder has surrendered his or its share certificate to the
Corporation. Such instructions shall also provide that any monies deposited by
the Corporation pursuant to this Subsection 6(d) for the redemption of shares
thereafter converted into shares of the Corporation's Series A Common Stock
pursuant to Section 4 hereof no later than the close of business on the fifth
full day preceding the Redemption Date shall be returned to the Corporation on
the Redemption Date. The balance of any monies deposited by the Corporation
pursuant to this Subsection 6(d) remaining unclaimed at the expiration of one
year following the Redemption Date shall thereafter be returned to the
Corporation upon its request expressed in a resolution of its Board of
Directors.
(e) Any shares of Series B Common Stock so redeemed shall permanently
be retired, shall no longer be deemed outstanding and shall not under any
circumstances be reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized Series B Common
Stock accordingly.
7. Restrictive Covenants
---------------------
In addition to other rights provided by law, so long as any shares
of Series B Common Stock shall be outstanding, the Corporation shall not,
without first obtaining the written consent or affirmative vote of the holders
of a majority of the then outstanding shares of Series B Common Stock, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
together as a single class:
(a) amend or repeal any provision of, or add any provision to, the
Corporation's Articles of Incorporation or By-laws, if such action would change
or alter the preferences, special rights or other powers of the Series B Common
Stock;
(b) engage in any business materially different from its business as
conducted or reasonably proposed to be conducted as of December 1996;
(c) authorize any increase or decrease in the number of shares of
Series B Common Stock of the Corporation;
(d) authorize or issue any new or existing class or classes or series
of capital stock having any preference or priority as to dividends or assets
superior to any such preference or priority of the Series B Common Stock or
authorize or issue shares of stock of any class or any bonds, debentures, notes
or other obligations convertible into or exchangeable for, or having rights to
purchase, any shares of stock of the Corporation having an preference or
priority as to dividends or assets superior to any such preference or priority
of the Series B Common Stock; or
45
<PAGE>
(e) merge or consolidate into or with any other corporation or other
entity or sell all or substantially all of the Corporation's assets in each case
for consideration other than cash (except any merger or consolidation intended
solely to effect a change in the Corporation's domicile of incorporation).
C. SPECIAL VOTING STOCK
--------------------
1. Voting Rights. The holders of the Special Voting Stock are entitled
-------------
to one vote for each share held at all meetings of stockholders (and written
actions in lieu of meetings). There shall be no cumulative voting. Except as
otherwise required by law or these Articles of Incorporation, in all matters
concerting the voting of shares, the Series A Common Stock, Series B Common
Stock and Special Voting Stock shall vote as a single class and such voting
rights shall be identical in all respects.
2. No Other Rights. Except for the voting rights referred to above,
---------------
holders of Special Voting Stock shall have no other rights in respect of such
shares, including without limitation, rights to receive dividends or rights to
receive assets of the Corporation upon its dissolution, liquidation or winding
up of its affairs.
3. Retirement and Cancellation. In the event that any shares of
---------------------------
Special Voting Stock are from time to time redeemed, reacquired, purchased,
exchanged or otherwise acquired by the Corporation, all such shares shall be
retired and cancelled, and the Corporation shall not, under any circumstances,
reissue such retired and cancelled shares.
D. PREFERRED STOCK
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, special voting rights, conversion
46
<PAGE>
rights, redemption privileges and liquidation preferences, as shall be stated
and expressed in such resolutions, all to the full extent now or hereafter
permitted by the Maryland General Corporation Law. Without limiting the
generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock or any other series to the extent
permitted by law. Except as otherwise specifically provided in these Articles of
Incorporation (the "Articles"), no vote of the holders of the Preferred Stock,
Series A Common Stock, Series B Common Stock or Special Voting Stock shall be a
prerequisite to the issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of these Articles, the right to
have such vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
V. The number of directors of the Corporation shall be seven (7). The names of
the persons who currently serve as directors of the Corporation are as follows:
David D. Archibald
John A. Ryan.
VI. To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers, no director or officer of
the Corporation shall be liable to the Corporation or its stockholders for money
damages. Neither amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of these Articles or the By-laws of the
Corporation inconsistent with this Article, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption.
VII. The Corporation shall, to the fullest extent permitted by Section 2-418 of
the Maryland General Corporation Law, as amended from time to time, indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was, or has agreed to become, a director or officer of the Corporation, or is or
was serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom. The indemnification right provided in this Article (i) shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators
47
<PAGE>
of such persons. The Corporation may, to the extent authorized from time to time
by its Board of Directors, grant indemnification rights to other employees or
agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article. The Corporation's obligation to provide indemnification under this
Article shall be offset to the extent of any other source of indemnification or
any otherwise applicable insurance coverage under a policy maintained by the
corporation or any other person.
To assure indemnification under this Article of all such persons who are
determined by the Corporation or otherwise to be or to have been "fiduciaries"
of any employee benefit plan of the Corporation which may exist from time to
time, such Section 2-418 shall, for the purposes of this Article, be interpreted
as follows: an "employee benefit plan" shall be deemed to include, without
limitation, any plan of the Corporation which is governed by the Act of Congress
entitled "Employee Retirement Income Security Act of 1974," as amended from time
to time.
VIII. The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by statute and these Articles of Incorporation, and all
rights conferred upon stockholders are granted subject to this reservation.
THIRD: The number of directors of the corporation is two.
The names of the directors are: David D. Archibald
John A. Ryan.
The Board of Directors of the Corporation, by unanimous written consent
dated as of December 31, 1996, adopted a resolution in which was set forth the
foregoing amendment to the charter, declaring that the said amendment and
restatement of the charter was advisable and directing that it be submitted for
action thereon by the stockholders.
FOURTH: The amendment and restatement of the charter of the
Corporation as hereinabove set forth were approved by a consent in writing
setting forth said amendment and restatement of the charter, signed by all the
stockholders entitled to vote on said amendment and restatement, and all the
other stockholders entitled to
48
<PAGE>
notice of a meeting of stockholders but not to vote thereat having waived in
writing any rights which they may have to dissent from such amendment and
restatement, such consent and waiver having been filed with the records of
stockholders' meetings.
FIFTH: (a) The total number of shares of all classes of stock
heretofore authorized is 6,000,000 shares, consisting of (i) 5,000,000 shares of
Series A Common Stock, $.01 par value per share, of the aggregate par value of
$50,000, (ii) 500,000 shares of Special Voting Stock, $.01 par value per share,
of aggregate par value of $5,000, and (iii) 500,000 shares of Preferred Stock,
$.01 par value per share, of the aggregate par value of $5,000. The aggregate
par value of all shares of all classes heretofore authorized is $60,000.
(b) The total number of shares of all classes of stock
as increased is 6,200,000 shares, consisting of (i) 5,000,000 shares of Series A
Common Stock, $.01 par value per share, of the aggregate par value of $50,000,
(ii) 257,500 shares of Series B Common Stock, $.01 par value per share, of the
aggregate par value of $2,570, (iii) 192,500 shares of Special Voting Stock,
$.01 par value per share, of the aggregate par value of $1,925, and (iv) 500,000
shares of Preferred Stock, $.01 par value per share, of the aggregate par value
of $5,000. The aggregate par value of all shares of all classes as increased is
$59,495.
(c) A description as amended of each class with the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to
49
<PAGE>
dividends, qualifications and terms and conditions of redemption of each class
of stock, is as set forth in Article IV hereof.
50
<PAGE>
IN WITNESS WHEREOF, Entrust Technologies Inc. has caused these presents to
be signed in its name and on its behalf by its President and attested (or
witnessed) by its Secretary on December 31, 1996.
ENTRUST TECHNOLOGIES INC.
BY: /s/ John A. Ryan
----------------------------------
President
Attested: (Witnessed:)
/s/ James Kendry
- -------------------------------
Secretary
THE UNDERSIGNED, President of Entrust Technologies Inc., who executed on
behalf of said Corporation the foregoing Articles of Amendment and Restatement
of Charter, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the foregoing Articles of Amendment
and Restatement of Charter to be the corporate act of said Corporation and
further certifies that, to the best of his knowledge, information and belief,
the matters and facts set forth therein with respect to the approval thereof are
true in all material respects, under the penalties of perjury.
/s/ John A. Ryan
-----------------------------
51
<PAGE>
ENTRUST TECHNOLOGIES INC.
ARTICLES OF AMENDMENT
OF CHARTER
Entrust Technologies Inc., a Maryland corporation, having its principal
office in this State in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by deleting the
first paragraph of Article IV and by adding to the Articles of Incorporation a
new first paragraph of Article IV which shall be as follows:
"IV. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 18,520,000 shares, consisting of (i) 15,000,000
shares of Series A Common Stock, $.01 par value per share (the "Series A Common
Stock"), (ii) 260,000 shares of Series B Common Stock, $.01 par value per share
(the "Series B Common Stock"), (iii) 2,500,000 shares of Special Voting Stock,
$.01 par value per share (the "Special Voting Stock"), (iv) 500,000 shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock"), and (v)
260,000 shares of Series B Non-Voting Common Stock, $.01 par value per share
(the "Series B Non-Voting Common Stock"). The aggregate par value of all shares
of all classes of stock is $185,200."
SECOND: The Charter of the Corporation is hereby further amended by
deleting Article IV.B.6.(a) in its entirety and adding to the Articles of
Incorporation a new Article IV.B.6(a) which shall be as follows:
"(a) If the holders of Series B Common Stock exercise the Triggering
Event Option pursuant to Subsection 3(b)(ii) hereof, the Corporation may, at any
time, by vote of a majority of the directors who are not then appointed by
holders of the Series B Common Stock (the "Minority Directors") pursuant to
written notice within thirty (30) days of the exercise of such Triggering Event
Option, redeem the Series B Common Stock, in whole by paying the greater of (i)
200% of the Offering Price or (ii) fair market value, as determined in good
faith by the entire Board of
52
<PAGE>
Directors (or, if no such determination can be made by the Board of Directors,
by a nationally recognized independent appraiser appointed by a majority of the
directors appointed by the Series B Stockholders and by a majority of the
Minority Directors), in cash for each share of Series B Common Stock then
redeemed (hereinafter referred to as the ""Redemption Price") on a date no later
than sixty (60) days after such notice. For purposes of this Section 6, the
"Offering Price" is the Conversion Price (as may be adjusted from time to
time)."
THIRD: The Charter of the Corporation is hereby further amended by
deleting Article IV.B.7. in its entirety and adding to the Articles of
Incorporation a new Article IV.B.7. which shall be as follows:
"7. Exchange. The holders of the Series B Common Stock shall have
--------
exchange rights as follows (the "Series B Exchange Rights"):
(a) Period of Exchange; Exchange Ratio. Subject to and upon
----------------------------------
compliance with the provisions of this Section 7, each share of Series B Common
Stock shall be exchangeable, at the option of the holder thereof, at any time
and from time to time, and without the payment of additional consideration by
the holder thereof, into fully paid and nonassessable shares of Series B Non-
Voting Common Stock at the rate of one (1) share of Series B Non-Voting Common
Stock for each share of Series B Common Stock (the "Series B Exchange Ratio").
(b) Exercise of the Series B Exchange Rights. Subject to the
----------------------------------------
requirements of Subsection 7(a) above, the holder of any shares of the Series B
Common Stock may exercise the Series B Exchange Rights as to any part thereof by
surrendering to the Corporation at the office of any transfer agent of the
Corporation for the Series B Common Stock or at the principal office of the
Corporation, the certificate or certificates for the shares to be exchanged,
accompanied by written notice stating that the holder elects to exchange all or
a specified portion of the shares represented thereby and stating the name or
names (with addresses) in which the certificate or certificates for the shares
of Series B Non-Voting Common Stock are to be issued. Subject to the
requirements of Subsection 7(a) above, the Corporation shall issue and deliver
to or upon the written order of such holder, a certificate or certificates for
the number of full shares of Series B Non-Voting Common Stock to which such
holder is entitled. Upon exchange of only a portion of the number of shares
covered by a certificate representing shares of the Series B Common Stock
surrendered for exchange, the Corporation shall issue and deliver to or upon the
written order of the holder of the certificate so surrendered for exchange, at
the expense of the Corporation, a new certificate covering the number of shares
of the Series B Common Stock representing the unexchanged portion of the
certificate so surrendered.
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<PAGE>
(c) Fractional Shares. No fractional shares of Series B Non- Voting
-----------------
Common Stock shall be issued upon exchange of shares of the Series B Common
Stock. Series B Non-Voting Common Stock issuable upon the exchange will be
rounded to the nearest whole share. If more than one share of the Series B
Common Stock shall be surrendered for exchange at any one time by the same
holder, the number of full shares of Series B Non-Voting Common Stock issuable
upon exchange thereof shall be computed on the basis of the aggregate number of
shares of Series B Common Stock so surrendered.
(d) Series B Exchange Ratio Adjustments. The Series B Exchange Ratio
-----------------------------------
shall be subject to adjustment from time to time as follows:
(i) If the number of shares of Series B Non-Voting Common Stock
outstanding at any time after the date of issuance of the Series B Common Stock
is increased or decreased by a stock dividend payable in shares of Series B Non-
Voting Common Stock or by a subdivision, split-up, combination or "reverse"
split-up of shares of Series B Non-Voting Common Stock, then immediately after
the record date fixed for the determination of holders of Series B Non-Voting
Common Stock entitled to receive such stock dividend or the effective date of
such subdivision, split-up, combination or "reverse" split-up, as the case may
be, the Series B Exchange Ratio shall be appropriately adjusted so that the
holder of any shares of the Series B Common Stock thereafter exchanged shall be
entitled to receive the number of shares of Series B Non-Voting Common Stock
which he would have owned immediately following such action had such shares of
the Series B Common Stock been exchanged immediately prior thereto.
(ii) If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with another corporation (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result in any
change in the Series B Non-Voting Common Stock), or the sale of all or
substantially all of its assets to another corporation, or a share exchange in
which the Corporation participates as the corporation the stock of which (or any
class or series thereof) is to be acquired, shall be effected in such a way that
holders of the Series B Non-Voting Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Series B Non-
Voting Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger, sale or share exchange, the Corporation
or such successor or purchasing corporation, as the case may be, shall provide
to the holders of the Series B Common Stock, as part of the terms of such
transaction, the right to convert the Series B Common Stock (or, in the case of
a consolidation or merger in which the Corporation does not survive, the
security issued by the successor corporation in conversion of the Series B
Common Stock, which security shall possess preferences and relative,
participating, optional and other special rights, qualifications and limitations
which are substantially equivalent to those of the Series
54
<PAGE>
B Common Stock) into the kind and amount of stock, securities or assets
receivable upon such reorganization, reclassification, consolidation, merger,
sale or share exchange by a holder of the number of shares of Series B Non-
Voting Common Stock into which the Series B Common Stock might have been
exchanged immediately prior to such reorganization, reclassification,
consolidation, merger, sale or share exchange, subject to adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Subsection 7(d).
(iii) All calculations under this Subsection 7(d) shall be made to
the nearest one hundredth (1/100) of a share, as the case may be. Any provision
of this Subsection 7(d) to the contrary notwithstanding, no adjustment in the
Series B Exchange Ratio shall be made if such adjustment would increase or
decrease the number of shares of Series B Non-Voting Common Stock issuable upon
exchange of each share of Series B Common Stock by less than one-tenth (1/10) of
a share of Series B Non-Voting Common Stock, but any such amount shall be
carried forward and an adjustment with respect thereto shall be made at the time
of and together with any subsequent adjustment which, together with such amount
and any other amount or amounts so carried forward, shall aggregate one-tenth
(1/10) of a share of Series B Non-Voting Common Stock.
(e) Transfer Tax. The Corporation shall pay any tax in respect of the
------------
issue of stock certificates on exchange of shares of Series B Common Stock. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of stock in a name
other than that of the holder of the shares exchanged and the Corporation shall
not be required to issue or deliver any such stock certificate unless and until
the person or persons requesting the issuance thereof shall have paid to the
Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
(f) Reservation of Shares. The Corporation shall at all times reserve
---------------------
and keep available out of its authorized Series B Non-Voting Common Stock the
full number of shares of Series B Non-Voting Common Stock deliverable upon the
exchange of all outstanding shares of Series B Common Stock and shall take all
such action as may be required from time to time in order that it may validly
and legally issue fully paid and nonassessable shares of Series B Non-Voting
Common Stock upon exchange of the Series B Common Stock. Any shares of Series B
Common Stock so exchanged shall be deemed to be authorized but unissued shares
of the Corporation.
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to
55
<PAGE>
be observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 7
and in the taking of all such action as may be necessary or appropriate in order
to protect the Series B Exchange Rights of the holders of the Series B Common
Stock against impairment.
(h) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series B Exchange Ratio pursuant to this
Section 7, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of Series B Common Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Common Stock, furnish or cause to be furnished to
such holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Series B Exchange Ratio then in effect, and (iii) the
number of shares of Series B Non-Voting Common Stock which then would be
received upon the exchange of Series B Common Stock.
(i) Miscellaneous. In the event of a notice of redemption of any
-------------
shares of Series B Common Stock pursuant to Section 6 hereof, the Series B
Exchange Rights of the shares designated for redemption shall terminate at the
close of business of the fifth full day preceding the date fixed for redemption,
unless the redemption price is not paid when due, in which case the Series B
Exchange Rights for such shares shall continue until such price is paid in full.
In the event of a liquidation of the Corporation, the Series B Exchange Rights
shall terminate at the close of business on the first full day preceding the
date fixed for the payment of any amounts distributable on liquidation to the
holders of Series B Common Stock."
FOURTH: The Charter of the Corporation is hereby further amended by
adding to the Articles of Incorporation a new Article IV.E. which shall be as
follows:
"E. SERIES B NON-VOTING COMMON STOCK
--------------------------------
1. Rights Generally. Except as otherwise expressly provided herein or
----------------
as otherwise required by applicable law, all shares of Series B Non-Voting
Common Stock and Series B Common Stock will be identical and will entitle the
holders thereof to the same rights and privileges.
2. Dividends.
---------
(a) In the event the Corporation declares or pays any distributions
(as defined below) on shares of Series A Common Stock or any other shares of
capital stock of the Corporation, the holders of the Series B Non-Voting
56
<PAGE>
Common Stock then outstanding shall receive, at the same time, a distribution on
each outstanding share of Series B Non-Voting Common Stock in an amount equal to
the product of (i) the per share amount, if any, of the distributions to be
declared, paid or set aside for the Series A Common Stock, multiplied by (ii)
the number of shares of Series A Common Stock into which such share of Series B
Non-Voting Common Stock is then convertible had each such share been exchanged
for Series B Common Stock pursuant to Section 5 immediately prior to the
declaration or payment of any such distribution.
(b) For purposes of this Section 2, unless the context
requires otherwise, "distribution" shall mean the transfer of cash, securities
or property without consideration, whether by way of dividend or otherwise,
payable other than in Series A Common Stock of the Corporation, or the purchase
or redemption of shares of the Corporation (other than (i) repurchases of Series
A Common Stock held by employees or directors of, or consultants to, the
Corporation upon termination of their employment or services pursuant to
agreements providing for such repurchase at a price equal to the original issue
price, and (ii) redemptions in liquidation or dissolution of the Corporation)
for cash, securities or property, including any such transfer, purchase or
redemption by a subsidiary of this Corporation.
3. Liquidation, Dissolution or Winding Up; Certain Mergers,
-------------------------------------------------------
Consolidations and Asset Sales. In the event of any voluntary or involuntary
- ------------------------------
liquidation, dissolution or winding up of the Corporation, the holders of shares
of Series B Non-Voting Common Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to its
stockholders, after and subject to the payment in full of all amounts required
to be distributed to the holders of any other class or series of stock of the
Corporation ranking on liquidation prior and in preference to the Series B Non-
Voting Common Stock, such amount per share as would have been payable had each
such share been exchanged for Series B Common Stock pursuant to Section 5
immediately prior to such liquidation, dissolution or winding up.
4. Voting. The holders of the outstanding shares of Series B
------
Non-Voting Common Stock shall have no voting rights whatsoever, except as
provided in Article IV.F. hereto.
5. Exchange. The holders of the Series B Non-Voting Common Stock
--------
shall have exchange rights as follows (the "Series B Non-Voting Exchange
Rights"):
(a) Period of Exchange; Exchange Ratio. Subject to and upon
----------------------------------
compliance with the provisions of this Section 5, each share of Series B Non-
Voting Common Stock shall be exchangeable, at the option of the holder thereof,
at any time and from time to time, and without the payment of additional
consideration by the
57
<PAGE>
holder thereof, into fully paid and nonassessable shares of Series B Common
Stock at the rate of one (1) share of Series B Common Stock for each share of
Series B NonVoting Common Stock (the "Series B Non-Voting Exchange Ratio"), as
provided below.
(i) Public Offering. If the holder of any shares of Series B
---------------
Non-Voting Common Stock intends to sell the Series B Non-Voting Common Stock in
a Public Offering (as defined below) such holder may require the Corporation to
exchange the Series B Non-Voting Common Stock into Series B Common Stock by
providing to the Corporation a written notice in accordance with Subsection 5(b)
below, which notice shall, in addition to the other requirements of Subsection
5(b) below, contain a certification by the holder that:
The undersigned hereby represents and warrants that each of the shares
of Series B Common Stock to be received by the undersigned in exchange
for the Series B Non-Voting Common Stock is intended to be converted
into shares of Series A Common Stock and sold in a Public Offering (as
defined in the Articles of Incorporation of the Corporation) and the
undersigned agrees that, if for any reason the Public Offering does
not occur within twenty (20) business days after the exchange of the
Series B Non-Voting Common Stock into Series B Common Stock, or if not
all of the Series B Common Stock so received in exchange for Series B
Non-Voting Common Stock is sold, the undersigned will promptly deliver
the Series B Common Stock received in exchange for the Series B
Non-Voting Common Stock, or the shares not sold, as applicable, to the
Corporation and the Corporation shall reissue to the undersigned the
applicable number of shares of Series B Non-Voting Common Stock.
For purposes of this Section 5, a "Public Offering" is the public offering of
shares of Series A Common Stock pursuant to a registration statement under the
Securities Act of 1933, as amended (the "Securities Act").
(ii) Transfer. In the event the original holder of Series B
--------
Non-Voting Common Stock sells such Series B Non-Voting Common Stock in a private
transaction, the holder or the transferee may require the Corporation to
exchange the Series B Non-Voting Common Stock for Series B Common Stock. This
right of exchange is subject to either the original holder of the Series B Non-
Voting Common Stock or the transferee providing written notice to the
Corporation one year prior to the actual exchange of the shares (even with
respect to the original holder, if given prior to the sale of such shares)
informing the Corporation that the
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<PAGE>
holder intends to exchange such shares upon expiration of such one-year period
and naming the transferee; provided, the original holder or the transferee may
rescind such notice at any time prior to the actual exchange of such shares.
(b) Exercise of the Series B Non-Voting Exchange Rights. Subject to
---------------------------------------------------
the requirements of Subsection 5(a) above, the holder of any shares of the
Series B Non-Voting Common Stock may exercise the Series B Non-Voting Exchange
Rights as to any part thereof by surrendering to the Corporation at the office
of any transfer agent of the Corporation for the Series B Non-Voting Common
Stock or at the principal office of the Corporation, the certificate or
certificates for the shares to be exchanged, accompanied by written notice
stating that the holder elects to exchange all or a specified portion of the
shares represented thereby and stating the name or names (with addresses) in
which the certificate or certificates for the shares of Series B Common Stock
are to be issued. Subject to the requirements of Subsection 5(a) above, the
Corporation shall issue and deliver to or upon the written order of such holder,
a certificate or certificates for the number of full shares of Series B Common
Stock to which such holder is entitled. Upon exchange of only a portion of the
number of shares covered by a certificate representing shares of the Series B
Non-Voting Common Stock surrendered for exchange, the Corporation shall issue
and deliver to or upon the written order of the holder of the certificate so
surrendered for exchange, at the expense of the Corporation, a new certificate
covering the number of shares of the Series B Non-Voting Common Stock
representing the unexchanged portion of the certificate so surrendered.
(c) Fractional Shares. No fractional shares of Series B Common Stock
-----------------
shall be issued upon exchange of shares of the Series B Non-Voting Common Stock.
Series B Common Stock issuable upon the exchange will be rounded to the nearest
whole share. If more than one share of the Series B NonVoting Common Stock shall
be surrendered for exchange at any one time by the same holder, the number of
full shares of Series B Common Stock issuable upon exchange thereof shall be
computed on the basis of the aggregate number of shares of Series B Non-Voting
Common Stock so surrendered.
(d) Series B Non-Voting Exchange Ratio Adjustments. The Series B
----------------------------------------------
Non-Voting Exchange Ratio shall be subject to adjustment from time to time as
follows:
(i) If the number of shares of Series B Common Stock outstanding
at any time after the date of issuance of the Series B Non-Voting Common Stock
is increased or decreased by a stock dividend payable in shares of Series B
Common Stock or by a subdivision, split-up, combination or "reverse" split-up of
shares of Series B Common Stock, then immediately after the record date fixed
for the determination of holders of Series B Common Stock entitled to receive
such stock dividend or the effective date of such subdivision, split-up,
combination or
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"reverse" split-up, as the case may be, the Series B Non-Voting Exchange Ratio
shall be appropriately adjusted so that the holder of any shares of the Series
B NonVoting Common Stock thereafter exchanged shall be entitled to receive the
number of shares of Series B Common Stock which he would have owned immediately
following such action had such shares of the Series B Non-Voting Common Stock
been exchanged immediately prior thereto.
(ii) If any capital reorganization or reclassification of the capital
stock of the Corporation, or consolidation or merger of the Corporation with
another corporation (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result in any
change in the Series B Common Stock), or the sale of all or substantially all of
its assets to another corporation, or a share exchange in which the Corporation
participates as the corporation the stock of which (or any class or series
thereof) is to be acquired, shall be effected in such a way that holders of the
Series B Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Series B Common Stock, then, as a condition
of such reorganization, reclassification, consolidation, merger, sale or share
exchange, the Corporation or such successor or purchasing corporation, as the
case may be, shall provide to the holders of the Series B Non-Voting Common
Stock, as part of the terms of such transaction, the right to convert the Series
B Non-Voting Common Stock (or, in the case of a consolidation or merger in which
the Corporation does not survive, the security issued by the successor
corporation in conversion of the Series B Non-Voting Common Stock, which
security shall possess preferences and relative, participating, optional and
other special rights, qualifications and limitations which are substantially
equivalent to those of the Series B Non-Voting Common Stock) into the kind and
amount of stock, securities or assets receivable upon such reorganization,
reclassification, consolidation, merger, sale or share exchange by a holder of
the number of shares of Series B Common Stock into which the Series B Non-Voting
Common Stock might have been exchanged immediately prior to such reorganization,
reclassification, consolidation, merger, sale or share exchange, subject to
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Subsection 5(d).
(iii) All calculations under this Subsection 5(d) shall be made to the
nearest one hundredth (1/100) of a share, as the case may be. Any provision of
this Subsection 5(d) to the contrary notwithstanding, no adjustment in the
Series B Non-Voting Exchange Ratio shall be made if such adjustment would
increase or decrease the number of shares of Series B Common Stock issuable upon
exchange of each share of Series B Non-Voting Common Stock by less than
one-tenth (1/10) of a share of Series B Common Stock, but any such amount shall
be carried forward and an adjustment with respect thereto shall be made at the
time of and together with any subsequent adjustment which, together with such
amount
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and any other amount or amounts so carried forward, shall aggregate one-tenth
(1/10) of a share of Series B Common Stock.
(e) Transfer Tax. The Corporation shall pay any tax in respect of the
------------
issue of stock certificates on exchange of shares of Series B NonVoting Common
Stock. The Corporation shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of
stock in a name other than that of the holder of the shares exchanged and the
Corporation shall not be required to issue or deliver any such stock certificate
unless and until the person or persons requesting the issuance thereof shall
have paid to the Corporation the amount of any such tax or shall have
established to the satisfaction of the Corporation that such tax has been paid.
(f) Reservation of Shares. The Corporation shall at all times reserve
---------------------
and keep available out of its authorized Series B Common Stock the full number
of shares of Series B Common Stock deliverable upon the exchange of all
outstanding shares of Series B Non-Voting Common Stock and shall take all such
action as may be required from time to time in order that it may validly and
legally issue fully paid and nonassessable shares of Series B Common Stock upon
exchange of the Series B Non-Voting Common Stock. Any shares of Series B
Non-Voting Common Stock so exchanged shall be deemed to be authorized but
unissued shares of the Corporation.
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Series B Non-Voting Exchange Rights of the
holders of the Series B Common Stock against impairment.
(h) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series B Non-Voting Exchange Ratio pursuant to
this Section 5, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series B Non-Voting Common Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series B Non-Voting Common Stock, furnish
or cause to be furnished to such holder a similar certificate setting forth (i)
such adjustments and readjustments, (ii) the Series B Non-Voting Exchange Ratio
then in
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effect, and (iii) the number of shares of Series B Common Stock which then would
be received upon the exchange of Series B Non-Voting Common Stock.
(i) Miscellaneous. In the event of a notice of redemption of any
-------------
shares of Series B Non-Voting Common Stock pursuant to Section 6 hereof, the
Series B Non-Voting Exchange Rights of the shares designated for redemption
shall terminate at the close of business of the fifth full day preceding the
date fixed for redemption, unless the redemption price is not paid when due, in
which case the Series B Non-Voting Exchange Rights for such shares shall
continue until such price is paid in full. In the event of a liquidation of the
Corporation, the Series B NonVoting Exchange Rights shall terminate at the close
of business on the first full day preceding the date fixed for the payment of
any amounts distributable on liquidation to the holders of Series B Non-Voting
Common Stock.
6. Optional Redemption.
-------------------
(a) If the holders of Series B Common Stock exercise the Triggering
Event Option pursuant to Article IV.B.3(b)(ii) of these Articles of
Incorporation, the Corporation may, at any time, by vote of a majority of the
Minority Directors pursuant to written notice within thirty (30) days of the
exercise of such Triggering Event Option, redeem the Series B Non-Voting Common
Stock in whole by paying the greater of (i) 200% of the Series B Non-Voting
Common Stock Offering Price or (ii) fair market value, as determined in good
faith by the entire Board of Directors (or, if no such determination can be made
by the Board of Directors, by a nationally recognized independent appraiser
appointed by a majority of the directors appointed by the holders of Series B
Common Stock and by a majority of the Minority Directors), in cash for each
share of Series B Non-Voting Common Stock then redeemed (hereinafter referred to
as the "Series B Non-Voting Common Stock Redemption Price") on a date no later
than sixty (60) days after such notice. For purposes of this Section 6, the
"Series B Non-Voting Common Stock Offering Price" shall initially be $100. Such
Series B Non-Voting Common Stock Offering Price shall be proportionally adjusted
to reflect changes in the Series B Non-Voting Exchange Ratio.
(b) At least 15 days prior to the date fixed for any redemption of
Series B Non-Voting Common Stock (hereinafter referred to as the "Series B
Non-Voting Common Stock Redemption Date"), written notice shall be mailed, by
first class or registered mail, postage prepaid, to each holder of record of
Series B Non-Voting Common Stock to be redeemed, at his or its address last
shown on the records of the transfer agent of the Series B Non-Voting Common
Stock (or the records of the Corporation, if it serves as its own transfer
agent), notifying such holder of the election of the Corporation to redeem such
shares, specifying the Series B Non-Voting Common Stock Redemption Date and the
time at which such holder's Series B Non-Voting Exchange Rights (pursuant to
Section 5 hereof) as to
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such shares terminate (which shall be the close of business on the fifth full
day preceding the Series B Non-Voting Common Stock Redemption Date) and calling
upon such holder to surrender to the Corporation, in the manner and at the place
designated, his or its certificate or certificates representing the shares to be
redeemed (such notice is hereinafter referred to as the "Series B Non-Voting
Common Stock Redemption Notice"). On or prior to the Series B Non-Voting Common
Stock Redemption Date, each holder of Series B Non-Voting Common Stock to be
redeemed shall surrender his or its certificate or certificates representing
such shares to the Corporation, in the manner and at the place designated in the
Series B Non-Voting Common Stock Redemption Notice, and thereupon the Series B
Non-Voting Common Stock Redemption Price of such shares shall be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof and each surrendered certificate shall be cancelled. In the
event less than all the shares represented by any such certificate are redeemed,
a new certificate shall be issued representing the unredeemed shares. From and
after the Series B Non-Voting Common Stock Redemption Date, unless there shall
have been a default in payment of the Series B Non-Voting Common Stock
Redemption Price, all rights of the holders of the Series B Non-Voting Common
Stock designated for redemption in the Series B Non-Voting Common Stock
Redemption Notice as holders of Series B Non-Voting Common Stock of the
Corporation (except the right to receive the Series B Non-Voting Common Stock
Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
(c) On or prior to the Series B Non-Voting Common Stock Redemption
Date, the Corporation shall deposit the Series B Non-Voting Common Stock
Redemption Price of all shares of Series B Non-Voting Common Stock designated
for redemption in the Series B Non-Voting Common Stock Redemption Notice and not
yet redeemed with a bank or trust company having aggregate capital and surplus
in excess of $100,000,000 as a trust fund for the benefit of the respective
holders of the shares designated for redemption and not yet redeemed, with
irrevocable instructions and authority to the bank or trust company to pay the
Series B Non-Voting Common Stock Redemption Price for such shares to their
respective holders on or after the Series B Non-Voting Common Stock Redemption
Date upon receipt of notification from the Corporation that such holder has
surrendered his or its share certificate to the Corporation. Such instructions
shall also provide that any monies deposited by the Corporation pursuant to this
Subsection 6(c) for the redemption of shares thereafter exchanged into shares of
the Corporation's Series B Common Stock pursuant to Section 5 hereof no later
than the close of business on the fifth full day preceding the Series B
Non-Voting Common Stock Redemption Date shall be returned to the Corporation on
the Series B Non-Voting Common Stock Redemption Date. The balance of any monies
deposited by the Corporation pursuant to this Subsection 6(c) remaining
unclaimed at the
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expiration of one year following the Series B Non-Voting Common Stock Redemption
Date shall thereafter be returned to the Corporation upon its request expressed
in a resolution of its Board of Directors.
(d) Any shares of Series B Non-Voting Common Stock so redeemed shall
permanently be retired, shall no longer be deemed outstanding and shall not
under any circumstances be reissued, and the Corporation may from time to time
take such appropriate action as may be necessary to reduce the authorized Series
B Non-Voting Common Stock accordingly.
7. Certain Transfer Restrictions. Notwithstanding any other provision
-----------------------------
contained in these Articles of Incorporation, if a holder of the Series B
Non-Voting Common Stock is a Regulated Entity (as defined below), such holder
may transfer the Series B Non-Voting Common Stock only under the following
circumstances: (i) in a widely distributed public offering; (ii) in a transfer
pursuant to Rule 144 under the Securities Act or any similar rule then in force;
(iii) in a transfer constituting two percent or less of the outstanding shares
of the Series B Common Stock (assuming that the Series B Non-Voting Common Stock
held by such purchaser were exchanged into Series B Common Stock); (iv) in a
transfer to a person if such person already owns or has negotiated to purchase
at least a majority of the Series B Common Stock (not including the sale from
the Regulated Entity); (v) in a transfer to the Corporation (whether pursuant to
Subsection 4(i) hereof or otherwise); (vi) in a transfer to an affiliate of such
holder or to any other Regulated Entity; or (vii) in any method of transfer
permitted by the Board of Governors of the Federal Reserve System. "Regulated
Entity" means (i) any entity that is a "bank holding company" (as defined in
Section 2(a) of the Bank Holding Company Act of 1956, as amended (the "BHC
Act")), or any non-bank subsidiary of such an entity or (ii) any entity that,
pursuant to Section 8(a) of the International Banking Act of 1978, as amended,
is subject to the provisions of the BHC Act or any non-bank subsidiary of such
an entity."
FIFTH: The Charter of the Corporation is hereby further amended by adding
to the Articles of Incorporation a new Article IV.F. which shall be as follows:
"F. ADDITIONAL VOTING RIGHTS
------------------------
So long as any shares of Series B Common Stock or Series B Non-Voting
Common Stock shall be outstanding, the Corporation shall not, without first
obtaining the written consent or affirmative vote of the holders of a majority
of the then outstanding shares of Series B Common Stock and Series B Non-Voting
Common Stock, given in writing or by vote at a meeting, consenting or voting (as
the case may be) together as a single class (with each share of Series B
Non-Voting Common Stock having such number of votes per share as shall equal the
number of
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<PAGE>
shares of Series B Common Stock into which each share of Series B Non-Voting
Common Stock is then exchangeable):
1. engage in any business materially different from its business as
conducted or reasonably proposed to be conducted as of December 1996;
2. merge or consolidate into or with any other corporation or other
entity or sell all or substantially all of the Corporation's assets in each case
for consideration other than cash (except any merger or consolidation intended
solely to effect a change in the Corporation's domicile of incorporation);
3. amend or repeal any provision of, or add any provision to, the
Corporation's Articles of Incorporation or By-laws, if such action would change
or alter the preferences, special rights or other powers of the Series B Common
Stock or Series B Non-Voting Common Stock;
4. authorize any increase or decrease in the number of shares of
Series B Common Stock or Series B Non-Voting Common Stock; or
5. authorize or issue any new or existing class or classes or series
of capital stock having any preference or priority as to dividends or assets
superior to any such preference or priority of the Series B Common Stock or
Series B NonVoting Common Stock, or authorize or issue shares of stock of any
class or any bonds, debentures, notes or other obligations convertible into or
exchangeable for, or having rights to purchase, any shares of stock of the
Corporation having any preference or priority as to dividends or assets superior
to any such preference or priority of the Series B Common Stock or Series B
Non-Voting Common Stock.
Notwithstanding any provision of this Article IV.F. to the contrary, the Series
B Non-Voting Common Stock shall not have the right to vote on any matter
described in paragraphs 1 through 5 above if such right would cause the Series B
Non-Voting Common Stock to become voting securities within the meaning of
Section 225.2(p)(2) of the Federal Reserve Board's Regulation Y, as that section
may be amended from time to time."
SIXTH: The Board of Directors of the Corporation, by unanimous written
consent dated as of January 24, 1997, adopted a resolution in which was set
forth the foregoing amendment to the Charter, declaring that the said amendment
of the Charter was advisable and directing that it be submitted for action
thereon by the stockholders.
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SEVENTH: The amendment of the Charter of the Corporation as hereinabove set
forth was approved by a consent in writing setting forth said amendment of the
Charter, signed by all the stockholders entitled to vote on said amendment and
all the other stockholders entitled to notice of a meeting of stockholders but
not to vote thereat having waived in writing any rights which they may have to
dissent from such amendment, such consent and waiver having been filed with the
records of stockholder meetings.
EIGHTH: (a) The total number of shares of all classes of stock heretofore
authorized is 6,200,000 shares, consisting of (i) 5,000,000 shares of Series A
Common Stock, $.01 par value per share, of the aggregate par value of $50,000,
(ii) 257,500 shares of Series B Common Stock, $.01 par value per share, of the
aggregate par value of $2,575, (iii) 192,500 shares of Special Voting Stock,
$.01 par value per share, of the aggregate par value of $1,925, and (iv) 500,000
shares of Preferred Stock, $.01 par value per share, of the aggregate par value
of $5,000. The aggregate par value of all shares of all classes heretofore
authorized is $59,500.
(b) The total number of shares of all classes of stock as increased
is 18,520,000 shares, consisting of (i) 15,000,000 shares of Series A Common
Stock, $.01 par value per share, of the aggregate par value of $150,000, (ii)
260,000 shares of Series B Common Stock, $.01 par value per share, of the
aggregate par value of $2,600, (iii) 2,500,000 shares of Special Voting Stock,
$.01 par value per share, of the aggregate par value of $25,000, (iv) 500,000
shares of Preferred Stock, $.01 par value per share, of the aggregate par value
of $5,000, and
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(v) 260,000 shares of Series B Non-Voting Common Stock, $.01 par value per
share, of the aggregate par value of $2,600. The aggregate par value of all
shares of all classes as increased is $185,200.
(c) The information required by subsection (b)(2)(i) of Section 2-
607 was not changed by the amendment, except that (i) a description of the
exchange rights of the Series B Common Stock is set forth in Article IV.B.7
hereof, (ii) a description, as amended, of the Series B Non-Voting Common Stock
including the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Series B Non-Voting Common Stock is set forth in
Article IV.E. hereof, and (iii) a description of additional voting rights of the
Series B Common Stock and the Series B Non-Voting Common Stock is set forth in
Article IV.F. hereof.
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IN WITNESS WHEREOF, Entrust Technologies Inc. has caused these presents to
be signed in its name and on its behalf by its President and attested (or
witnessed) by its Secretary on January 31, 1997.
ENTRUST TECHNOLOGIES INC.
By: /s/ John A. Ryan
----------------------------
President
Attested: (Witnessed:)
/s/ James Kendry
- --------------------------------
Secretary
THE UNDERSIGNED, President of Entrust Technologies Inc., who executed on
behalf of said Corporation the foregoing Articles of Amendment of Charter, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles of Amendment of Charter to be
the corporate act of said Corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
with respect to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/ John A. Ryan
-----------------------------
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<PAGE>
ENTRUST TECHNOLOGIES INC.
ARTICLES OF AMENDMENT
OF CHARTER
Entrust Technologies Inc., a Maryland corporation, having its principal
office in this State in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by deleting the
first paragraph of Article IV in its entirety and by adding to the Articles of
Incorporation a new first paragraph of Article IV which shall read as follows:
"IV. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 120,520,000 shares, consisting of (i)
100,000,000 shares of Series A Common Stock, $.01 par value per share (the
"Series A Common Stock"), (ii) 260,000 shares of Series B Common Stock, $.01 par
value per share (the "Series B Common Stock"), (iii) 15,000,000 shares of
Special Voting Stock, $.01 par value per share (the "Special Voting Stock"),
(iv) 5,000,000 shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock"), and (v) 260,000 shares of Series B NonVoting Common Stock,
$.01 par value per share (the "Series B Non-Voting Common Stock"). The aggregate
par value of all shares of all classes of stock is $1,205,200."
SECOND: The Charter of the Corporation is hereby amended by deleting the
number "66,596" from Article IV.B.4(d)(v) and inserting in lieu thereof the
number "56,619.9192."
THIRD: The Charter of the Corporation is hereby further amended by
redesignating Article VIII as Article X and adding to the Articles of
Incorporation a new Article VIII and a new Article IX which shall read as
follows:
"VIII. With the exception of any Business Combination (as defined in Section 3-
601 of the Maryland General Corporation Law (the "MGCL")) between the
Corporation and any of Northern Telecom Limited, a Canadian corporation ("NTL"),
Northern Telecom Inc., a Delaware corporation ("NTI"), affiliates of NTL or NTI,
or the successors or assigns of NTL, NTI or their affiliates, the Corporation
shall be subject to the provisions of Sections 3-601 to 3-604 of the MGCL.
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<PAGE>
IX. The provisions of Sections 3-701 to 3-709 of the MGCL shall not apply
generally to any Control Share Acquisition (as defined in Section 3-701(e) of
the MGCL) of any shares of capital stock of the Corporation."
FOURTH: The Board of Directors of the Corporation, at a meeting duly
held on June 18, 1998, adopted a resolution in which was set forth the foregoing
amendment to the Charter, declaring that the said amendment of the Charter was
advisable and directing that it be submitted for action thereon by the
stockholders.
FIFTH: That the stockholders of the Corporation, at a meeting duly
held on ________, 1998, approved the amendment of the Charter of the Corporation
as hereinabove set forth.
SIXTH: (a) The total number of shares of all classes of stock as
heretofore authorized is 18,520,000 shares, consisting of (i) 15,000,000 shares
of Series A Common Stock, $.01 par value per share, of the aggregate par value
of $150,000; (ii) 260,000 shares of Series B Common Stock, $.01 par value per
share, of the aggregate par value of $2,600; (iii) 2,500,000 shares of Special
Voting Stock, $.01 par value per share, of the aggregate par value of $25,000;
(iv) 500,000 shares of Preferred Stock, $.01 par value per share, of the
aggregate par value of $5,000; and (v) 260,000 shares of Series B Non-Voting
Common Stock, $.01 par value per share, of the aggregate par value of $2,600.
The aggregate par value of all shares of all classes heretofore authorized is
$185,200.
(b) The total number of shares of all classes of stock as
increased is 120,520,000 shares consisting of (i) 100,000,000 shares of
Series A Common Stock, $.01 par value per share, of the aggregate par value of
$1,000,000; (ii)
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260,000 shares of Series B Common Stock, $.01 par value per share, of the
aggregate par value of $2,600; (iii) 15,000,000 shares of Special Voting Stock,
$.01 par value per share, of the aggregate par value of $150,000; (iv)
5,000,000 shares of Preferred Stock, $.01 par value per share, of the aggregate
par value of $50,000; and (v) 260,000 shares of Series B Non-Voting Common
Stock, $.01 par value per share, of the aggregate par value of $2,600. The
aggregate par value of all shares of all classes as increased is $1,205,200.
(c) The information required by subsection (b)(2)(i) of Section
2-607 of the Maryland General Corporation Law was not changed by the amendment,
except that the number of shares of Series A Common Stock issuable to the
holders of Series B Common Stock upon the conversion of the Series B Common
Stock pursuant to Article IV.B.4.(d)(v) is reduced from 66,596 shares to
56,619.9192 shares.
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IN WITNESS WHEREOF, Entrust Technologies Inc. has caused these presents to
be signed in its name and on its behalf by its President and attested (or
witnessed) by its Secretary on _______, 1998.
ENTRUST TECHNOLOGIES INC.
By:
--------------------------
President
Attested: (Witnessed:)
- --------------------------------
Secretary
THE UNDERSIGNED, President of Entrust Technologies Inc., who
executed on behalf of said Corporation the foregoing Articles of Amendment of
Charter, of which this certificate is made a part, hereby acknowledges, in the
name and on behalf of said Corporation, the foregoing Articles of Amendment of
Charter to be the corporate act of said Corporation and further certifies that,
to the best of his knowledge, information and belief, the matters and facts set
forth therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.
--------------------------
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Exhibit 3.2
ENTRUST TECHNOLOGIES INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
OF CHARTER
(under section 2-609 of the Corporations
and Associations Article of Maryland General Corporation Law)
Entrust Technologies Inc., a Maryland corporation, having its principal
office in this State in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Corporation desires to amend its Charter as currently in
effect and, as so amended, restate its Charter as currently in effect. The
provisions set forth in these Articles of Amendment and Restatement are all the
provisions of the Charter of the Corporation as currently in effect, as so
amended.
SECOND: The Charter of the Corporation is hereby amended by striking
each of the Articles of the existing Charter of the Corporation, and by
substituting in lieu thereof the following:
FIRST: The name of the Corporation is:
Entrust Technologies Inc.
SECOND: The purpose for which the Corporation is organized is
transacting any and all lawful business for which a corporation may be
incorporated under the laws of the State of Maryland that is incident and
necessary or appropriate to the foregoing.
THIRD: The post office address of the principal office of the
Corporation in this State is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name and post office address of the
resident agent of the Corporation in the State of Maryland is The Corporation
Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. Said resident
agent is a Maryland corporation.
<PAGE>
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 120,000,000 shares, consisting of
(i) 100,000,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), (ii) 15,000,000 shares of Special Voting Stock, $.01 par value per
share ("Special Voting Stock"), and (iii) 5,000,000 shares of Preferred Stock,
$.01 par value per share ("Preferred Stock"). The aggregate par value of all
shares of all classes of stock is $1,200,000. The Board of Directors may
classify and reclassify any unissued shares of capital stock by setting or
changing in any one or more respects the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock.
At the same time as the filing of these Articles of Amendment and
Restatement with the State Department of Assessments and Taxation of the State
of Maryland becomes effective, the Series A Common Stock, $.01 par value per
share ("Series A Common Stock"), and any shares of such series issued and
outstanding prior to such filing shall be converted into and deemed to represent
Common Stock and the Series B Non-Voting Common Stock, $.01 par value per share
("Series B Non-Voting Common Stock"), and any shares of such series issued and
outstanding prior to such filing shall be converted into and deemed to represent
Common Stock, according to the following: (i) each outstanding share of Series A
Common Stock shall be converted into and deemed to represent one (1) share of
Common Stock and (ii) each outstanding share of Series B Non-Voting Common Stock
shall be converted into and deemed to represent 50.24553846 shares of Common
Stock, with fractional shares of any holder rounded down to the nearest whole
share.
Upon the effectiveness of these Articles of Amendment and Restatement,
the conversion of the issued and outstanding shares of the Series A Common Stock
and the Series B Non-Voting Common Stock into shares of Common Stock shall occur
automatically without further action by the holders of such shares. Upon the
conversion of the Series A Common Stock and Series B Non-Voting Common Stock,
the certificates representing the Series A Common Stock and Series B Non-Voting
Common Stock, respectively, shall be deemed cancelled and shall not be
recognized as outstanding on the books of this Corporation for any purposes.
Thereupon, there shall be issued and delivered to each holder of Series A Common
Stock and Series B Non-Voting Common Stock, as the case may be, promptly in his
name and at his address as shown on the records of this Corporation upon his
surrender of the certificate or certificates representing Series A Common Stock
or Series B Non-Voting Common Stock, a certificate or certificates for the
number of shares of Common Stock into which the shares of Series A Common Stock
or Series B Non-Voting Common Stock have been converted on the date on which
such automatic conversion occurred. Immediately after the conversion of the
Series A Common Stock and Series B Non-Voting Common Stock, the series of
capital stock previously designated as Series A Common Stock and Series B Non-
Voting Common Stock shall be eliminated.
The following is a description of the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of each class of capital stock of the
Corporation.
A. COMMON STOCK.
------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2
<PAGE>
2. Voting. The holders of the Common Stock are entitled to one vote for
------
each share held at all meetings of stockholders. There shall be no cumulative
voting.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the Maryland
General Corporation Law. Without limiting the generality of the foregoing, the
resolutions providing for issuance of any series of Preferred Stock may provide
that such series shall be superior or rank equally or be junior to the Preferred
Stock of any other series to the extent permitted by law. Except as otherwise
provided in these Articles of Incorporation, no vote of the holders of the
Preferred Stock or Common Stock shall be a prerequisite to the designation or
issuance of any shares of any series of the Preferred Stock authorized by and
complying with the conditions of these Articles of Incorporation, the right to
have such vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
3
<PAGE>
C. SPECIAL VOTING STOCK.
--------------------
1. Voting Rights. The holders of the Special Voting Stock are
-------------
entitled to one vote for each share held at all meetings of stockholders (and
written actions in lieu of meetings). There shall be no cumulative voting.
Except as otherwise required by law or these Articles of Incorporation, in all
matters concerning the voting of shares, the Common Stock and Special Voting
Stock shall vote as a single class and such voting rights shall be identical in
all respects.
2. No Other Rights. Except for the voting rights referred to
---------------
above, holders of Special Voting Stock shall have no other rights in respect of
such shares, including without limitation, rights to receive dividends or rights
to receive assets of the Corporation upon its dissolution, liquidation or
winding up of its affairs.
3. Retirement and Cancellation. In the event that any shares
---------------------------
of Special Voting Stock are from time to time redeemed, reacquired, purchased,
exchanged or otherwise acquired by the Corporation, all such shares shall be
retired and cancelled, and the Corporation shall not, under any circumstances,
reissue such retired and cancelled shares.
FIFTH. To the maximum extent that Maryland law in effect from time to
time permits limitation of liability of directors and officers, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages. No amendment to or repeal of this provision
shall apply to or have any effect on the liability or alleged liability of any
director or officer of the Corporation for or with respect to any acts or
omissions of such director or officer occurring prior to such amendment.
Notwithstanding any other provisions of law, these Articles of Incorporation or
the Bylaws of the Corporation, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article FIFTH
at any time after the closing of a firm commitment underwritten public offering
of Common Stock by the Corporation (an "Initial Public Offering").
SIXTH. 1. General. The Corporation shall, to the fullest extent
-------
permitted by the Maryland General Corporation Law, indemnify each person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or officer of
the Corporation, or is or was serving at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken
4
<PAGE>
or omitted in such capacity, against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such action, suit or proceeding and
any appeal therefrom unless it is established that (i) the act or omission of
the Indemnitee was material to the matter giving rise to the proceeding and (a)
was committed in bad faith or (b) was the result of active and deliberate
dishonesty, (ii) the Indemnitee actually received an improper personal benefit
and money, property or services or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. However, if the proceeding was one by or in the right of the
Corporation, indemnification shall not be made in respect of any proceeding in
which the person shall have been judged to be liable to the Corporation. The
termination of any proceeding by judgment, order or settlement shall not create
a presumption that the person did not meet the requisite standard of conduct set
forth in this section. The termination of any proceeding by conviction or a plea
of nolo contendere or its equivalent or an entry of an order of probation prior
---- ----------
to judgment, shall create a rebuttable presumption that the person did not meet
such standard of conduct. Notwithstanding anything to the contrary in this
Article, except as set forth in Section 7 below, the Corporation shall not
indemnify an Indemnitee seeking indemnification in connection with a proceeding
(or part thereof) initiated by the Indemnitee unless the initiation thereof was
approved by the Board of Directors of the Corporation. Notwithstanding anything
to the contrary in this Article, the Corporation shall not indemnify an
Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of
insurance, and in the event the Corporation makes any indemnification payments
to an Indemnitee and such Indemnitee is subsequently reimbursed from the
proceeds of insurance, such Indemnitee shall promptly refund such
indemnification payments to the Corporation to the extent of such insurance
reimbursement.
2. Proceedings Charging Improper Personal Benefit. A person shall not
----------------------------------------------
be indemnified under Section 1 above in respect of any proceeding charging
improper personal benefit to the person, whether or not involving action in the
person's official capacity, in which the person was adjudged to be liable on the
basis that the personal benefit was improperly received.
3. Indemnification for Expenses of Successful Party. Notwithstanding
------------------------------------------------
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Section 1 of this Article, or in defense of any claim,
issue or matter therein, or on appeal from any such action, suit or proceeding,
he shall be indemnified against all expenses (including attorneys' fees)
actually and reasonably incurred by him or on his behalf in connection
therewith.
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as
5
<PAGE>
practicable of any action, suit, proceeding or investigation involving him for
which indemnity will or could be sought. With respect to any action, suit,
proceeding or investigation of which the Corporation is so notified, the
Corporation will be entitled to participate therein at its own expense and/or to
assume the defense thereof at its own expense, with legal counsel reasonably
acceptable to the Indemnitee. After notice from the Corporation to the
Indemnitee of its election to assume such defense, the Corporation shall not be
liable to the Indemnitee for any legal or other expenses subsequently incurred
by the Indemnitee in connection with such claim, other than as provided below in
this Section 4. The Indemnitee shall have the right to employ his own counsel in
connection with such claim, but the fees and expenses of such counsel incurred
after notice from the Corporation of its assumption of the defense thereof shall
be at the expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee has been authorized by the Corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest or position on any significant issue between the Corporation and the
Indemnitee in the conduct of the defense of such action or (iii) the Corporation
shall not in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel for the Indemnitee shall be
at the expense of the Corporation, except as otherwise expressly provided by
this Article. The Corporation shall not be entitled, without the consent of the
Indemnitee, to assume the defense of any claim brought by or in the right of the
Corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6 below,
-------------------
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any reasonable
expenses (including attorneys' fees) incurred by an Indemnitee in defending a
civil or criminal action, suit, proceeding or investigation or any appeal
therefrom shall be paid or reimbursed by the Corporation in advance of the final
disposition of such matter; provided, however, that the payment or reimbursement
of such reasonable expenses incurred by an Indemnitee in advance of the final
disposition of such matter shall be made only upon receipt of a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Corporation as
authorized in Section 1 above has been met and a written undertaking by or on
behalf of the Indemnitee to repay all amounts so advanced in the event that it
shall ultimately be determined that the standard of conduct has not been met.
Such undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Sections 1, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such
6
<PAGE>
documentation and information as is reasonably available to the Indemnitee and
is reasonably necessary to determine whether and to what extent the Indemnitee
is entitled to indemnification or advancement of expenses. Any such
indemnification or advancement of expenses shall not be made by the Corporation
unless authorized for a specific proceeding after a determination has been made
that indemnification of the Indemnitee is permissible in the circumstances
because the Indemnitee has met the standard of conduct set forth in Section 1
above. Such determination shall be made in each instance by (i) a majority vote
of a quorum consisting of the directors of the Corporation who are not at that
time parties to the action, suit or proceeding in question ("disinterested
directors"), or, if such quorum cannot be obtained, then by a majority vote of a
committee of two or more disinterested directors designated by majority vote of
the full board of directors in which directors who are parties may participate,
(ii) a majority vote of a quorum of the outstanding shares of stock of all
classes entitled to vote for directors, voting as a single class, which quorum
shall consist of stockholders who are not at that time parties to the action,
suit or proceeding in question, (iii) special legal counsel selected by the
Board of Directors or a Committee of the Board by vote as set forth in clause
(i) of this Section 6, or if the requisite quorum of the full Board cannot be
obtained therefore, and the committee cannot be established, by a majority vote
of the full Board in which directors who are parties may participate, or (iv) a
court of competent jurisdiction. Authorization of indemnification and
determination as to reasonableness of expenses shall be made in the same manner
as the determination that indemnification is permissible. However, if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to reasonableness
of expenses shall be made in the manner specified in clause (iii) of the third
sentence of Section 6 for selection of such counsel.
7. Remedies. The right to indemnification or advances as granted by
--------
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part,
pursuant to Section 6. Unless otherwise required by law, the burden of proving
that the Indemnitee is not entitled to indemnification or advancement of
expenses under this Article shall be on the Corporation. The actual
determination by the Corporation pursuant to Section 6 that the Indemnitee has
not met the applicable standard of conduct shall not be a defense to the action
or create a presumption that the Indemnitee has not met the applicable standard
of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the Maryland General Corporation Law or
any other applicable laws shall affect or diminish in any way the rights of any
Indemnitee to indemnification under the provisions hereof with respect to any
action, suit,
7
<PAGE>
proceeding or investigation arising out of or relating to any actions,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
9. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or otherwise, both as to action in his official capacity and as to action in any
other capacity while holding office for the Corporation, and shall continue as
to an Indemnitee who has ceased to be a director or officer, and shall inure to
the benefit of the estate, heirs, executors and administrators of the
Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and
the Corporation is specifically authorized to enter into, agreements with
officers and directors providing indemnification rights and procedures different
from those set forth in this Article. In addition, the Corporation may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the Corporation or other
persons serving the Corporation and such rights may be equivalent to, or greater
or less than, those set forth in this Article. This article does not limit the
Corporation's power to pay or reimburse expenses incurred by a person in
connection with an appearance as a witness in a proceeding at a time when the
person has not been made a named defendant or respondent in the proceeding.
10. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or who, while a director, officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) against any liability asserted against and incurred
by him in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under the Maryland General Corporation Law.
12. Indemnification of Directors. Any indemnification of, or advance of
----------------------------
expenses to, a director in accordance with this Article, if arising out of a
proceeding
8
<PAGE>
by or in the right of the Corporation, shall be reported in writing to the
stockholders with the notice of the next stockholders' meeting or prior to the
meeting.
13. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
14. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
15. Definitions. Terms used herein and defined in Section 2-418 of the
-----------
Maryland General Corporation Law shall have the respective meanings assigned to
such terms in such Section 2-418.
16. Subsequent Legislation. If the Maryland General Corporation Law is
----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the Maryland General Corporation Law, as so
amended.
17. Amendments to Article. Notwithstanding any other provisions of law,
---------------------
these Articles of Incorporation or the Bylaws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article SIXTH at any time after the closing of an
Initial Public Offering.
SEVENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation, in the manner
now or hereafter prescribed by statute and these Articles of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
EIGHTH. This Article is inserted for the management of the business and
for the conduct of the affairs of the Corporation.
9
<PAGE>
1. Number of Directors. The number of directors of the Corporation
-------------------
shall be five, which number may be increased or decreased in the manner provided
in the Corporation's Bylaws, but shall never be less than the minimum number
permitted by the Maryland General Corporation Law, as amended from time to time.
The names of the persons who currently serve as director of the Corporation are
as follows:
David A. Archibald
F. William Conner
Frank A. Dunn
Robert S. Morris
John A. Ryan
2. Classes of Directors. Immediately following the closing of an
--------------------
Initial Public Offering, and at all times thereafter, the Board of Directors
shall be divided into three classes: Class I, Class II and Class III. No one
class shall have more than one director more than any other class. If a fraction
is contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the extra director
shall be a member of Class I, and if such fraction is two-thirds, one of the
extra directors shall be a member of Class I and one of the extra directors
shall be a member of Class II, unless otherwise provided from time to time by
resolution adopted by the Board of Directors. The initial members of each class
following the closing of an Initial Public Offering shall be determined by
resolution adopted by the Board of Directors.
3. Election of Directors. Elections of directors need not be by written
---------------------
ballot except as and to the extent provided in the Bylaws of the Corporation.
4. Terms of Office. Prior to the closing of an Initial Public Offering,
---------------
each director shall hold office until the next annual meeting of stockholders
and until his successor is elected and qualified, or until his earlier death,
resignation or removal. Following the closing of an Initial Public Offering,
each director shall serve for a term ending on the date of the third annual
meeting following the annual meeting at which such director was elected;
provided, that each initial director in Class I shall serve for a term ending on
- --------
the date of the first annual meeting held following the closing of the Initial
Public Offering; each initial director in Class II shall serve for a term ending
on the date of the second annual meeting held following the closing of the
Initial Public Offering; and each initial director in Class III shall serve for
a term ending on the date of the third annual meeting held following the closing
of the Initial Public Offering; and provided further, that the term of each
----------------
director shall be subject to the election and qualification of his successor and
to his earlier death, resignation or removal.
10
<PAGE>
5. Allocation of Directors Among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Number of Directors. In the event of any increase or decrease
- ------------------------------------
in the authorized number of directors following the closing of an Initial Public
Offering, (i) each director then serving as such shall nevertheless continue as
a director of the class of which he is a member and (ii) the newly created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three classes of directors so as
to ensure that no one class has more than one director more than any other
class. To the extent possible, consistent with the foregoing rule, any newly
created directorships shall be added to those classes whose terms of office are
to expire at the latest dates following such allocation, and any newly
eliminated directorships shall be subtracted from those classes whose terms of
offices are to expire at the earliest dates following such allocation, unless
otherwise provided from time to time by resolution adopted by the Board of
Directors.
6. Quorum; Action at Meeting. Except as otherwise provided in the
-------------------------
Bylaws of the Corporation, a majority of the directors at any time in office
shall constitute a quorum for the transaction of business. If at any meeting of
the Board of Directors there shall be less than such a quorum, a majority of
those present may adjourn the meeting from time to time. Every act or decision
done or made by a majority of the directors present at a meeting duly held at
which a quorum is present shall be regarded as the act of the Board of Directors
unless a greater number is required by law, by the Bylaws of the Corporation or
these Articles of Incorporation.
7. Removal. Prior to the closing of an Initial Public Offering, except
-------
as otherwise provided by the Maryland General Corporation Law, any one or more
or all of the directors may be removed, with or without cause, by the holders of
a majority of the shares then entitled to vote at an election of directors.
Following the closing of an Initial Public Offering, directors of the
Corporation may be removed only for cause by the affirmative vote of the holders
of at least two-thirds of the combined voting power of all classes of shares of
capital stock entitled to vote in the election for directors.
8. Vacancies. Subject to the rights of the holders of any class of
---------
stock separately entitled to elect one or more directors, the stockholders may
elect a successor to fill a vacancy on the Board of Directors which results from
the removal of a director. A director elected by the stockholders to fill a
vacancy which results from the removal of a director serves for the balance of
the term of the removed director. Subject to the rights of the holders of any
class of stock separately entitled to elect one or more directors, a majority of
the remaining directors, whether or not sufficient to constitute a quorum, may
fill a vacancy on the Board of Directors which results from any cause except an
increase in the number of directors, and a majority of the entire Board of
Directors may fill a vacancy which results from an increase in the number of
directors. A director elected by the Board of Directors to fill a vacancy
11
<PAGE>
serves until the next annual meeting of stockholders and until his successor is
elected and qualifies.
9. Stockholder Nominations and Introduction of Business, Etc. Advance
---------------------------------------------------------
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the Bylaws of the Corporation.
10. Issuance of Stock. The Board of Directors is hereby empowered to
-----------------
authorize the issuance from time to time of shares of the Corporation's stock of
any class, whether now or hereafter authorized, or securities convertible into
shares of its stock of any class or classes, now or hereafter authorized, for
such consideration as may be deemed advisable by the Board of Directors and
without any action by the stockholders. No holder of any stock or any other
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix; and any stock or other securities which the Board of Directors may
determine to offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any class, series or
type of stock or other securities at the time outstanding to the exclusion of
the holders of any or all other classes, series or types of stock or other
securities at the time outstanding.
11. Business Combinations. With the exception of any Business
---------------------
Combination (as defined in Section 3-601 of the Maryland General Corporation Law
(the "MGCL")) between the Corporation and any of Northern Telecom Limited, a
Canadian corporation ("NTL"), Northern Telecom Inc., a Delaware corporation
("NTI"), affiliates of NTL or NTI, or the successors or assigns of NTL, NTI or
their affiliates, the Corporation shall be subject to the provisions of Sections
3-601 to 3-604 of the MGCL.
12. Control Share Acquisitions. The provisions of Sections 3-701 to
--------------------------
3-709 of the MGCL shall not apply generally to any Control Share Acquisition (as
defined in Section 3-701(e) of the MGCL) of any shares of capital stock of the
Corporation.
13. Amendments to Article. Notwithstanding any other provisions of law,
---------------------
these Articles of Incorporation or the Bylaws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article EIGHTH at any time after the closing of an
Initial Public Offering.
12
<PAGE>
THIRD: The number of directors of the Corporation is five.
The names of the directors are:
David D. Archibald
F. William Conner
Frank A. Dunn
Robert S. Morris
John A. Ryan
FOURTH: The current address of the principal office of the Corporation
is as set forth in Article THIRD of the foregoing amendment and restatement of
the Charter.
FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article THIRD of the foregoing amendment and restatement of
the Charter.
SIXTH: The Board of Directors of the Corporation, at a meeting duly
held on June 18, 1998, adopted a resolution in which was set forth the foregoing
amendment to the Charter, declaring that the said amendment and restatement of
the Charter was advisable and directing that it be submitted for action thereon
by the stockholders.
SEVENTH: That the stockholders of the Corporation, at a meeting duly
held on _________, 1998, approved the amendment of the Charter of the
Corporation as hereinabove set forth.
13
<PAGE>
IN WITNESS WHEREOF, Entrust Technologies Inc. has caused these presents
to be signed in its name and on its behalf by its President and attested (or
witnessed) by its Secretary on _______________, 1998.
ENTRUST TECHNOLOGIES INC.
By:
----------------------------
President
Attested: (Witnessed:)
- -------------------------------
Secretary
THE UNDERSIGNED, President of Entrust Technologies Inc., who executed
on behalf of said Corporation the foregoing Articles of Amendment and
Restatement of Charter, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said Corporation, the foregoing
Articles of Amendment and Restatement of Charter to be the corporate act of said
Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
-----------------------------
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<PAGE>
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.
Ottawa, Canada
, 1998
The consolidated financial statements included herein have been adjusted to
give effect to the four-for-one stock split as described in Note 7 to the
consolidated financial statements. The above auditors' consent is in the form
that will be signed by Deloitte & Touche upon the consummation of the stock
split, assuming that no other material events have occurred that would affect
the financial statements.
/s/ DELOITTE & TOUCHE
Chartered Accountants
Ottawa, Canada
July 1, 1998
<PAGE>
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
<TABLE>
<S> <C>
/s/ Marko Willi /s/ Bruno Wust
Marko Willi Bruno Wust
Auditor in charge Auditor in charge
Wetzikon, Switzerland
July 1, 1998
</TABLE>
