<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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)
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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)
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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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE
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<S> <C> <C>
Common Stock, $.01 par value per share............... $115,000,000 $33,925
</TABLE>
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
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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 JUNE 19, 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".
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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.
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<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>
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(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
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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
13,063,840 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>
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(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 1 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);
33,363,840 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 13,063,840 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 13,063,840 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 vested 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 and
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, as amended by a letter agreement between Mr. Ryan and
the Company, dated as of April 24, 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)..... 5,034,554 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)............... 3,517,188 8.3
522 Fifth Avenue
New York, NY 10036
Societe Generale
Investment
Corporation............ 2,512,277 5.9 2,512,277
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).... 5,034,554 11.9
All executive officers
and directors as a
group (10
persons)(12)........... 6,310,794 14.5
</TABLE>
- --------
* Less than 1%
(1) The number of shares of Common Stock outstanding prior to the Offerings
includes (i)42,243,168 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
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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) 50,246 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) 386,891 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) 386,891 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) 5,024,554 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) 5,024,554 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
34,543,168 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.
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 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>
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
DELOITTE & TOUCHE
June 19, 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 13,063,840 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.. 2,663,840 2,663,840 2,663,840
Net effect of dilutive options using
the treasury stock method............. 679,132 -- 4,167,564
---------- ---------- ----------
Diluted weighted average common shares
outstanding........................... 41,742,972 41,063,840 45,231,404
========== ========== ==========
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 13,063,840 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>
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]
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, as amended by a letter agreement dated as of April
24, 1997.
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.
24 Power of Attorney (included on page II-6).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RICHARDSON, TEXAS ON THIS 19TH DAY
OF JUNE, 1998.
Entrust Technologies Inc.
By: /s/ John A. Ryan
----------------------------------
JOHN A. RYAN
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Entrust Technologies Inc.,
hereby severally constitute and appoint John A. Ryan, Michele L. Axelson,
James D. Kendry and John A. Burgess, and each of them singly, our true and
lawful attorneys with full power to them, and each of them singly, to sign for
us and in our names in the capacities indicated below, the Registration
Statement on Form S-1 filed herewith and any and all pre-effective and post-
effective amendments to said Registration Statement, and any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b), and generally to do all such things in our names and on our behalf in
our capacities as officers and directors to enable Entrust Technologies Inc.
to comply with the provisions of the Securities Act of 1933, as amended, and
all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys, or
any of them, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).
II-6
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ John A. Ryan President and Chief June 19, 1998
- ------------------------------------- Executive Officer
JOHN A. RYAN (Principal
Executive Officer)
/s/ Michele L. Axelson Senior Vice June 19, 1998
- ------------------------------------- President, Business
MICHELE L. AXELSON Development and
Finance and Chief
Financial Officer
(Principal
Financial and
Accounting Officer)
/s/ David D. Archibald
- ------------------------------------- Director June 19, 1998
DAVID D. ARCHIBALD
/s/ Frank A. Dunn
- ------------------------------------- Director June 19, 1998
FRANK A. DUNN
/s/ F. William Conner
- ------------------------------------- Director June 19, 1998
F. WILLIAM CONNER
/s/ Robert S. Morris
- ------------------------------------- Director June 19, 1998
ROBERT S. MORRIS
II-7
<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, as amended by a letter agreement dated as of April
24, 1997.
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.
24 Power of Attorney (included on page II-6).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 2.1
NTI - ETI TRANSFER AGREEMENT
THIS ASSET TRANSFER AGREEMENT (this "Agreement"), dated as of 31 December 1996
---------
is made between Northern Telecom Inc., a Delaware corporation ("NTI"), and
---
Entrust Technologies Inc., a Maryland corporation ("Entrust").
-------
WHEREAS, NTI has acquired from NTL a paid up, perpetual exclusive right to
commercially exploit the technology incorporated in Entrust Products (as defined
herein) within the United States of America and Puerto Rico (the "Nortel Entrust
--------------
License") subject to certain limitations which are set forth in an asset
- -------
transfer agreement between NTL and Entrust Technologies Limited ("ETL") of even
date (the "NTL Transfer Agreement"); and
----------------------
WHEREAS, NTI has employed employees and hired contractors to commercially
exploit the Entrust Products within the U.S.A. and Puerto Rico and has entered
into a number of contracts concerning the distribution and licensing to
customers of the Entrust Products in the U.S.A.and Puerto Rico and, on behalf of
NTL and its subsidiaries (other than NTI) in other countries; and
WHEREAS, Entrust desires to acquire from NTI, all of NTI's rights in and to the
Nortel Entrust License, NTI's executory contracts for distributing and licensing
to customers the Entrust Products and other related assets and to obtain the
services of the NTI employees and contractors involved in the Entrust Business
(as defined herein), all as more specifically provided for herein;
NOW, THEREFORE, NTI and Entrust, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
-----------
Capitalized terms used in this Agreement are used as defined in this Article I
or elsewhere in this Agreement. As used herein:
"Additional Agreements" means the service agreement and the strategic alliance
---------------------
agreement of even date entered into between NTL and ETI.
"Agreement" has the meaning specified in the preamble hereof.
---------
"Assumed Contracts" has the meaning specified in Section 2.01(a).
-----------------
"Assumed Liabilities" has the meaning specified in Section 3.01.
-------------------
"Effective Date" means the close of business on the date specified in the
--------------
preamble hereof.
"Entrust" has the meaning specified in the preamble hereof.
-------
"Entrust Assets" has the meaning specified in Section 2.01.
--------------
1
<PAGE>
"Entrust Business" means all the business carried on within the U.S.A. related
----------------
to (i) the design, research, development (by individuals including, but not
limited to, the Entrust Personnel) of automated public key infrastructure
software and encryption hardware products (including, but not limited to, the
Entrust Products) by the business unit of NTL and its subsidiaries known as the
Secure Networks Division ("SDN") and (ii) the marketing, distribution and
licensing of Entrust Products by SDN.
"Entrust Personnel" means the employees and contractors of the Entrust Business
-----------------
specified in Exhibit B.
"Entrust Products" has the meaning specified in the NTL Transfer Agreement.
----------------
"Entrust Technology" has the meaning specified in the NTL Transfer Agreement.
------------------
"ETL" has the meaning specified in the first recital hereof.
---
"Excluded Assets" has the meaning specified in Section 2.02.
---------------
"Excluded IPR" has the meaning specified in Section 7.01(g)(ii).
------------
"Excluded Trade Secrets" has the meaning specified in Section 7.01(g)(ii).
----------------------
"Global Entrust Assets" means the "Entrust Assets" as defined in the NTL
---------------------
Transfer Agreement and the Entrust Assets.
"Global Entrust Business" means the "Entrust Business" as defined in the NTL
-----------------------
Transfer Agreement and the Entrust Business.
"Intellectual Property" has the meaning specified in Section 2.01(c).
---------------------
"IPR" has the meaning specified in Section 7.01(g)(i).
---
"Non-material IPR" has the meaning specified in Section 7.01(g)(iv).
----------------
"Nortel Entrust License" has the meaning specified in the first recital hereof.
----------------------
"NTI" has the meaning specified in the preamble hereof.
---
"NTL" has the meaning specified in the first recital hereof.
---
"NTL Excluded Assets" means the "Excluded Assets' as defined in the NTL Transfer
-------------------
Agreement.
"NTL Transfer Agreement" has the meaning specified in the first recital hereof.
----------------------
"Retained Liabilities" has the meaning specified in Section 3.02.
--------------------
"Statement of Net Assets" has the meaning specified in Section 7.01(b).
-----------------------
2
<PAGE>
"Trade Secrets" has the meaning specified in Section 7.01(g)(ii).
-------------
ARTICLE II
ENTRUST ASSETS
--------------
Section 2.01. Transfers to Entrust. Subject to the terms and conditions hereof,
--------------------
NTI hereby transfers, conveys and assigns to Entrust, and Entrust acquires,
NTI's entire right, title and interest in, to and under all of the assets and
properties (excluding, however, the Excluded Assets) described below (such
assets, collectively, the "Entrust Assets"):
--------------
(a) Assumed Contracts. Subject to Section 2.03, (i) the Nortel Entrust License,
-----------------
(ii) all the contracts and subcontracts for the sale, purchase, support,
distribution or licensing of Entrust Products or related services
(including services of independent contractors), or both, entered into in
the course of the Entrust Business including those contracts listed in
Exhibit C; and (iii) all other commitments or other understandings entered
into in the ordinary course of the Entrust Business and existing on the
Effective Date (collectively, the "Assumed Contracts").
-----------------
(b) Records. Customer and prospective customer lists, business records,
-------
reports, plans, records, product specifications, training manuals,
correspondence, regulatory reports and documents, maintenance schedules,
operating and productions records, business plans, copies of personnel
records of employees, marketing or other studies and other documents and
data which relate to the Entrust Business existing as of the Effective
Date.
(c) Intellectual Property. The copyrights (including software), trade mark
---------------------
applications, trade names and trade marks of NTI (and associated goodwill)
and trade secrets of NTI (including inventions, formulae and research and
development) which arose from the Entrust Business prior to the Effective
Date that are primarily related to the Entrust Assets described in Sections
2.01(b) and 2.01(c) to the extent such can be reasonably transferred to
Entrust and is listed in Exhibit E (the "Intellectual Property").
---------------------
Section 2.02. Excluded Assets. The following assets (the "Excluded Assets") are
--------------- ---------------
specifically excluded from any contribution or acceptance pursuant to this
Agreement, whether or not they would otherwise be included in the Entrust
Assets:
(a) Excluded Contracts. Any and all agreements between NTI and its employees
------------------
comprising Entrust Personnel and any agreements primarily of general
application to NTI and its affiliates from which the Entrust Business has
benefited. (For greater certainty, none of the agreements listed in Exhibit
C is an Excluded Asset);
(b) Accounts Receivable. Accounts receivable arising out of the Entrust
-------------------
Business in the ordinary course which became due and payable prior to the
Effective Date; and
(c) Cash. All cash and marketable securities currently used in connection with
----
the Entrust
3
<PAGE>
Business.
Section 2.03. Assignment of Contracts.
-----------------------
(a) Required Consents. Nothing in this Agreement shall be construed as an
-----------------
attempt to assign to Entrust any Assumed Contract that, as a matter of law
or by the terms thereof, is not assignable without the consent of the other
party or parties to such assignment or to the change of control of the
Entrust Business resulting from a consummation of the transactions provided
for in this Agreement unless such consent has been given. NTI shall make
all commercially reasonable efforts to obtain (including by the provision
of such reasonable payments and assurances as may be required), where
required, consents of all requisite parties to the assignment by NTI to
Entrust of the Assumed Contracts.
(b) Interim Provisions. Until assigned to Entrust with the requisite consent,
------------------
NTI shall hold each Assumed Contract in trust for the benefit of Entrust as
of the Effective Date. NTI shall, at the request and expense (but only to
the extent such expenses are reasonable) and under the direction of
Entrust, take all such commercially reasonable actions and do or cause to
be done all such commercially reasonable things as are necessary or proper
in order that the obligations of NTI thereunder may be performed in such
manner that the value of the Assumed Contract so held in trust is preserved
and enures to the benefit of Entrust, and that the collection of any moneys
to become due and payable after the Effective Date in and under the Assumed
Contract are received by Entrust; and NTI shall pay over to Entrust all
moneys collected by or paid to NTI in respect of every such Assumed
Contract once a month. Entrust shall save NTI harmless from any claim or
liability under or in respect of each Assumed Contract arising because of
any action of NTI taken pursuant to the foregoing sentence.
(c) With respect to Assumed Contracts entered into by Nortel Federal Systems
Inc. (which have since been assigned to Nortel Communications Systems Inc.
("NCSI")), NTI shall cause its subsidiary, Nortel Communication Systems
Inc., to assign those contracts to Entrust. For greater certainty, NTI
represents that immediately prior to the Effective Date, the Assumed
Contracts referred to in this Section 2.03(c) constitute the only assets of
NCSI relating to the Entrust Business.
4
<PAGE>
ARTICLE III
ASSUMED LIABILITIES
-------------------
Section 3.01. Assumption of Future Liabilities by Entrust. Except for NTI's
-------------------------------------------
ongoing obligations under Section 2.03 and Article IX, Entrust hereby agrees to
assume, pay and discharge all liabilities, costs or obligations related to or
arising under the Entrust Assets or the Entrust Business (collectively, the
"Assumed Liabilities") after the Effective Date as and when the same become due
-------------------
and payable and performance is required thereunder. Entrust shall also assume,
pay and discharge the following liabilities relating to or arising under the
Entrust Assets or the Entrust Business prior to the Effective Date:
(a) warranty and service work relating to Assumed Contracts; and
(b) accumulated employee vacation and leave entitlements of Entrust Personnel
who have accepted employment with Entrust.
Section 3.02. Liabilities Not Assumed. Except for the liabilities and
-----------------------
obligations expressly assumed in Sections 2.03, 3.01 and 4.01, Entrust does not
and shall not assume or otherwise be responsible for any liability or obligation
of NTI (the "Retained Liabilities"), regardless of whether or not such
--------------------
liabilities or obligations are recognized as liabilities on any books of
account, are absolute or contingent or are measurable, including, but not
limited to, the following:
(a) any litigation or claim arising out of the ownership of the Entrust Assets
on or prior to the Effective Date, including, but not limited to, product
liability and warranty claims with respect to Entrust Products sold or
services rendered on or prior to the Effective Date, tort liability and any
liability for violations of statutes or breach of contract (except any
breach of warranty or service work relating to Assumed Contracts);
(b) tax liabilities of any and all kinds including those related to the Entrust
Business and the ownership of the Entrust Assets on or before the Effective
Date;
(c) any liability of NTI as an employer including payment of commissions and
bonuses accruing prior to or on the Effective Date (except for accumulated
vacation and leave entitlements of Entrust Personnel who have accepted
employment by Entrust);
(d) any indebtedness of NTI, whether incurred under any loan agreement,
indenture, stock or asset acquisition agreement or otherwise including
accounts payable arising from the Entrust Business prior to or on the
Effective Date; and
(e) any liability with respect to insurance of the Entrust Assets with respect
to any period prior to the Effective Date.
ARTICLE IV
EMPLOYEES
---------
Section 4.01. Entrust Employees. Entrust and Nortel acknowledge that NTI
-----------------
employees that are Entrust
5
<PAGE>
Personnel set forth in Exhibit B have agreed from the Effective Date to accept
employment by Entrust as of the Effective Date. Entrust shall assume liability
for all salaries, bonuses, accumulated leave and vacation pay and all other
amounts which may become payable to or receivable by such employees for services
performed after the Effective Date. Unless Entrust expressly agrees otherwise,
Entrust shall not assume any liability for all amounts payable to or receivable
by such employees relating to services performed on or before the Effective
Date, except for accumulated leave and vacation pay accruing prior to the
Effective Date.
Section 4.02. Refusal of Employment. Entrust is not obligated to any person who
---------------------
was an employee of the Entrust Business immediately prior to or on the Effective
Date that has refused employment with Entrust.
ARTICLE V
CONSIDERATION
-------------
Section 5.01. Calculation of the Consideration. The consideration payable by
--------------------------------
Entrust for the Entrust Assets is set forth in Section 5.02. Any sales, transfer
and/or documentary taxes, if any, payable in connection with the transaction
contemplated hereunder shall be paid by NTI.
Section 5.02. Fulfillment of the Consideration. The consideration for the
--------------------------------
Entrust Assets shall be paid and satisfied in full by:
(a) assumption by Entrust of the Assumed Liabilities;
(b) the immediate issuance by Entrust to NTI of a demand promissory note for
U.S.$8,000,000 (eight million U.S. dollars) in the form specified in
Exhibit A to be paid by way of intra-company transfer, cashier's check or
wire transfer, at NTI's option; and
(c) the immediate issuance by Entrust to NTI of 507,500 (five hundred and seven
thousand five hundred) shares of Series A Common Stock of Entrust.
ARTICLE VI
DELIVERY
Section 6.01. Delivery of Entrust Assets. The transfer of the Entrust Assets
--------------------------
shall take place on the Effective Date.
6
<PAGE>
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF NTI
-------------------------------------
Section 7.01 Representations and Warranties. NTI hereby represents and warrants
------------------------------
to Entrust as follows:
(a) Due Authorization. The transfer, conveyance and assignment herein provided
-----------------
for has been duly authorized and approved by NTI and this Agreement has
been duly executed and delivered by NTI.
(b) Statement of Net Assets. The statement of net assets set out in Exhibit D
-----------------------
("Statement of Net Assets") has been prepared by NTI and NTL in good faith
-----------------------
and represents NTI's best estimate on the date it was prepared of the book
value of the assets and amount of the liabilities specified therein for the
Global Entrust Business.
(c) Assumed Contracts in Good Standing. NTI has, to its knowledge, performed in
----------------------------------
all material respects the obligations required to be performed by it under
each Assumed Contract relating to the Entrust Business contributed by NTI
and has complied in all material respects with the provisions thereof.
(d) Material Consents. NTI has acquired all required consents as of the
-----------------
Effective Date for the assignment of NTI's interest in all Assumed
Contracts with a price for goods and/or services in excess of $50,000.00.
(e) Title to Intellectual Property. NTI is transferring to Entrust good,
------------------------------
exclusive and valid title to the copyrights, trade secrets and confidential
information comprising Intellectual Property, free and clear of all title
defects or other encumbrances. NTI has taken all commercially reasonable
steps to preserve the trade secrets and confidential information comprising
Intellectual Property and none of such Intellectual Property has been
misappropriated from others. NTI represents as of the Effective Date that
it has no knowledge or reason to know that the trade names and common law
trade marks used by NTI and NTL infringe the rights of others.
(f) Transfer Sales and Use Taxes, etc. NTI will pay or cause to be paid all
---------------------------------
sales and use taxes, privilege or other excise taxes, if any, which are
based either on the circumstance of transfer or on the value of any Entrust
Asset that is to be sold or contributed by NTI pursuant hereto that may be
imposed on or in connection with the contributions, conveyances,
assignments, transfers and deliveries to be made hereunder by NTI.
(g) Completeness of IPRs.
--------------------
(i) The Entrust Technology and the Intellectual Property constitute all
the patents, patent applications, trademarks, service marks, trademark
applications, service mark applications, trade names, trade secrets,
and confidential information, copyrights, copyright registrations and
intellectual property licenses
7
<PAGE>
(collectively "IPR") presently used by Global Entrust Business
---
(collectively "IPR") save for Excluded Assets and NTL Excluded Assets
---
(collectively "Excluded IPR").
------------
(ii) The Assumed Contracts and the NTL Assumed Contracts include all
agreements under which ETI or ETL have access to third-party
confidential information used by ETI or ETL to conduct the Global
Entrust Business (collectively "Trade Secrets") save for contracts
-------------
constituting Excluded Assets and NTL Excluded Assets (collectively
"Excluded Trade Secrets").
----------------------
(iii) The IPR and Trade Secrets include in all material respects the rights
necessary for the conduct of the Global Entrust Business as presently
conducted, provided, however, no representation is made by the
-------- -------
provisions of this Section 7.01(g)(iii) with respect to infringement
of third party rights. For greater certainty, the provisions of this
/Section 7.01(g)(iii) shall in no way limit the indemnity of NTI set
forth in Section 8.01 of this Agreement.
(iv) Except for the NTL Excluded Assets identified as
"Freeware/Non-significant licences" and "Runtime libraries and compile
environments" in Exhibit B to the NTL Transfer Agreement
(collectively, the "Non-material IPR"), ETL and ETI will after the
----------------
Effective Date have the right to use the Excluded IPR and Excluded
Trade Secrets pursuant to and subject to the provisions of the
Additional Agreements.
(v) The Non-Material IPR is not material to the Global Entrust Business
and is available at commercially reasonable rates that, collectively,
shall not exceed U.S.$75,000 (seventy five thousand U.S. dollars).
(vi) NTI and NTL have taken all commercially reasonable efforts necessary
to protect the IPR and Trade Secrets.
(h) No Notice of Infringement. To NTI's knowledge, NTI has received no notice
-------------------------
that the use by the Global Entrust Business of the IPR or Trade Secrets
infringes the intellectual property rights or misappropriates the trade
secrets of third parties.
(i) Nortel License. NTI represents that it has the exclusive rights under the
--------------
Nortel Entrust License as specified in the first recital to this Agreement.
(j) Completeness of Assets.
----------------------
(i) The Global Entrust Assets include all material leases (other than
leases of real property), contracts, inventory and equipment (other
than some telecommunication equipment), intellectual property rights
and other items and rights used by Nortel in the operation on the
Global Entrust Business prior to the Effective Date save forsave for
Excluded Assets and NTL Excluded Assets.
8
<PAGE>
(ii) The Global Entrust Assets constitute all the material assets owned or
leased by Nortel or NTI (other than real property) on the Effective
Date from which revenues are included within the Financial Statements
referred to in the Class B Common Stock Purchase Agreement among,
inter alia, NTL and ETI of even date save for Excluded Assets and NTL
----- ----
Excluded Assets.
(iii) Except for the NTL Excluded Assets identified as
"Freeware/Non-significant licences" and "Runtime libraries and compile
environments" in Exhibit B to this Agreement (collectively, the
"Non-material IPR"), ETL and ETI will after the Effective Date have
----------------
the right to use the Excluded Assets or NTL Excluded Assets or
substitiute therefore (acceptable to Entrust) and Excluded Trade
Secrets pursuant to and subject to the provisions of the Additional
Agreements and NTL has the necessary rights to comply with its
obligations under the Additional Agreements.
Section 7.02. Limitation of Warranties. The representations and warranties of
------------------------
NTI in Section 7.01 shall continue in full force and effect for the benefit of
Entrust for a period of three (3) years following the Effective Date, after
which time NTI is released from all obligations and liabilities hereunder in
respect of such representations and warranties except with respect to any claims
made by Entrust in writing prior to the expiration of such period.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 8.01. Indemnification by NTI. From and after the Effective Date and
----------------------
subject to the provisions of this Article VIII, NTI hereby agrees to pay and to
indemnify fully, hold harmless and defend Entrust and its agents, directors,
officers, partners, employees, servants, consultants, representatives,
successors and assigns, from and against any and all claims and/or damages
(whether based on negligent acts or omissions, statutory liability, strict
liability or otherwise) arising out of, relating to or based upon allegations
of:
(a) any inaccuracy or breach of any representation or warranty, or any
nonfulfillment of any covenant or agreement of NTI contained in this
Agreement or any other related document delivered by NTI on the Effective
Date or pursuant to the transactions contemplated hereunder;
(b) any liability whatsoever (whether known, unknown, accrued, absolute,
contingent or otherwise) of NTI and/or its Affiliates prior to the
Effective Date, other than Assumed Liabilities;
(c) any Retained Liabilities of NTI;
(d) any liability for infringement of any patent, trade secret, trademark or
copyright of any person that arises out of NTI's business as conducted on
the Effective Date relating to
9
<PAGE>
the Entrust Assets transferred by NTI;
(e) severance claims by employees of the Entrust Business immediately prior to
the Effective Date who have refused employment with Entrust, if any;
(f) any claim relating to failure by NTI to comply with any applicable bulk
sales legislation concerning the transfer, assignment and conveyance of
Entrust Assets provided for in this Agreement; or
(g) any and all actions, suits, proceedings, claims, demands, judgments,
assessments, reasonable costs and expenses, incurred in investigating or
attempting to avoid the foregoing or in enforcing this indemnity.
Section 8.02. Indemnification by Entrust. From and after the Effective Date,
--------------------------
subject to the provisions of this Article VIII, Entrust agrees to pay and to
indemnify fully, hold harmless and defend NTI and its affiliates, agents,
directors, officers, partners, employees, servants, consultants,
representatives, successors and assigns, from and against any and all claims
and/or damages arising out of, relating to or based upon allegations of:
(a) any breach of any covenant or agreement of Entrust contained in this
Agreement;
(b) any liability arising out of the Entrust Assets subsequent to the Effective
Date, other than Retained Liabilities and any other obligation of NTI
hereunder;
(c) any failure to discharge any Assumed Liability: or
(d) any and all actions, suits, proceedings, claims, demands, judgments,
assessments, reasonable costs and expenses, incurred in investigating or
attempting to avoid the foregoing or in enforcing this indemnity.
Section 8.03. Method of Asserting Claims. The indemnified party ("Indemnitee")
-------------------------- ----------
shall provide the indemnifying party ("Indemnitor") prompt notice in writing
----------
upon becoming aware of any action, suit, proceeding, claim, demand, judgment or
assessment (the "Claim"). Indemnitee shall provide to Indemnitor sole control in
-----
the defense or settlement of the Claim. Indemnitee shall cooperate with
Indemnitor, at Indemnitor's expense, in the defense or settlement of the Claim.
Indemnitee shall not compromise or settle a Claim without the Indemnitor's prior
written consent. Indemnitee may participate in the defence of a claim at its own
expense.
10
<PAGE>
Section 8.04. Coordination of Indemnification Rights.
--------------------------------------
(a) Indemnification Independent Right. Each right of a person to be
---------------------------------
indemnified, defended and/or held harmless pursuant to this Article VIII is
independent of such person's rights pursuant to any other Section of this
Agreement and shall not be affected or limited in any way by any event or
circumstance unless this Article VIII expressly provides that such event or
circumstance shall affect or limit such right of such person, regardless of
whether or not such event or circumstance affects or limits any other right
of such person or any right of any other person under this Article VIII.
(b) Right of Subrogation. In the event that an Indemnitee has a right of
--------------------
recovery against any third party with respect to any damages in connection
with which a payment is made to such Indemnitee by an Indemnitor, then (i)
such Indemnitor shall, to the extent of such payment, be subrogated to all
of the rights of recovery of Indemnitee against such third party with
respect to such damages and (ii) Indemnitee shall execute all papers
required and take all action necessary to secure such rights, including,
but not limited to, the execution of such documents as are necessary to
enable such Indemnitor to bring suit to enforce such rights.
Section 8.05. Right to Cure. An Indemnitor under any provision of this Article
-------------
VIII shall have the right to cure, within a reasonable time and in a manner
reasonably satisfactory to Indemnitee and any affected parties, any matter
giving rise to such obligation that is susceptible of being cured; provided,
--------
however, that any such cure shall not relieve or reduce any such obligations
- -------
arising prior to, during or because of such cure or to the extent that such cure
is inadequate.
Section 8.06. Limitation of Indemnification.
-----------------------------
(a) Limitations. NTI assumes no liability for, and Entrust shall indemnify NTI
-----------
for infringement claims arising from:
(i) combination of Entrust Products or any part thereof with other
hardware or software not constituting Entrust Assets under this
Agreement or the NTL Transfer Agreement where such infringement would
not have arisen from the use of such Entrust Products or portion
thereof standing alone;
(ii) modification of the Entrust Products after the Effective Date where
such infringement would not have occurred but for such modifications;
or
(iii) use by Entrust in a manner or for a purpose not contemplated as of
the Effective Date.
(b) Entrust to Mitigate. If NTI receives notice of an alleged infringement and
-------------------
NTI reasonably believes the Entrust Products infringe, NTI may require
Entrust, at Entrust's expense, to take all commercially reasonable efforts
to: (i) modify the infringing Entrust Products to perform the intended
function without infringing any third-party
11
<PAGE>
rights; or (ii) substitute software of comparable functionality and
performance.
(c) Global Limit. For all indemnities by NTI for Claims relating to Section
------------
8.01(d) of this Agreement, by NTL from claims relating to Section 8.01(d)
of the NTL Transfer Agreement and by NTL and NTI arising from and relating
to the Nortel Entrust License, the combined liability of NTI, NTL and its
Affiliates shall be limited to a maximum of U.S. $26,000,000 (twenty six
million U.S. dollars) for all occurrences. For all indemnities by Entrust
for Claims relating to Section 8.06(a) of this Agreement, the combined
liability of Entrust, and its subsidiaries, including Entrust Technologies
Inc. shall be limited to a maximum of U.S. $26,000,000 (twenty six million
U.S. dollars) for all occurrences.
Section 8.07. Remedies Exclusive. The remedies set forth in Section 8.01 as
------------------
limited by Section 8.06 and the rights arising under the Series B Stock Purchase
Agreement of even date among, inter alia, NTL and Entrust ("SPA") establish the
----- ----
entire liability of NTI (including its Affiliates) in respect of any claims
relating to intellectual property infringement and/or breach of warranty in
respect of title to Intellectual Property. Except as set forth in the SPA and
the indemnity pursuant to Section 8.01, in no event shall NTI be liable for any
incidental, punitive or other economic losses arising from such infringements or
breaches.
ARTICLE IX
CONTINUING COVENANTS
--------------------
Section 9.01. Further Assurance and Cooperation. The parties shall from time to
---------------------------------
time and at all times hereafter make, do and execute or cause and procure to be
made, done and executed all such further acts, deeds, conveyances, consents and
assurances as may be required to carry out the transfer of the Entrust Assets
and assumption of Assumed Liabilities contemplated under this Agreement,
including without limitation appropriate assignments (notarized if required) for
filing with any relevant government body or agency.
Section 9.02. Adjustment of Statement of Net Assets. NTI shall deliver to
-------------------------------------
Entrust a revised Statement of Net Assets to reflect any adjustment that may be
appropriate after the relevant NTI and NTL year end financial statements have
been prepared which Entrust shall use in its opening financial statements.
Subject to Section 7.01(b), no adjustment shall be made to the consideration
arising from any reasonable adjustment to the Statement of Net Assets. NTI
represents that such revised Statement of Net Assets will on the date of
delivery be true and accurate.
Section 9.03. Future Advertising and Sales Activities. Entrust shall identify
---------------------------------------
itself as the owner of the Entrust Assets, and as soon as possible but no later
than sixty (60) days after the Effective Date, shall cease using the names of
Nortel from all business cards and other employee identification materials, as
well as from and all business records, brochures and other sales or
advertising-related material (including materials used for the packaging of any
product) received by it hereunder. Notwithstanding the foregoing, Entrust may
refer to itself as a "Nortel affiliated company".
Section 9.04. Supplier and Customer Communication. NTI shall cooperate with
-----------------------------------
Entrust to give notice to all suppliers and customers of NTI which Entrust
wishes to inform of the transfer of the Entrust Assets.
12
<PAGE>
Section 9.05 Nortel Documents. Subject to the confidentiality provsions of the
strategic alliance agreement of even date between NTL and ETI, NTL shall, at the
request of ETL, to the extent legally permitted, make available for inspection
by ETL and its professional advisors copies of relevant document which would
assist ETL in acertaining the extent of and limitation to the rights acquired by
ETL hereunderincluding, but not limited to:
(a) the Amended Research and Development Cost Sharing Agreement dated as of
January 1, 1992 between Northern Telecom Limited;
(b) the agreements referred to in Section 7.02 (ii) hereof; and
(c) the agreement among NTL Bell Northern Research Limited and Bell Canada
which is the basis for the provisions of Section 7.03(iii).
ARTICLE X
MISCELLANEOUS
-------------
Section 10.01. Notices. All notices authorized or required to be given pursuant
-------
to this Agreement shall be given in writing and either personally delivered to
the party to whom it is given or delivered by an established delivery service by
which receipts are given or mailed by registered or certified mail, postage
prepaid, or sent by telex or telegram or electronic telecopier, addressed to the
party at the following addresses. Any party may change its address for the
receipt of notices at any time by giving notice thereof to the other parties, in
which event this Agreement shall be amended accordingly.
(a) If to NTI: Northern Telecom Inc.
220 Athens Way
Nashville, Tennessee 37228
Attention: Assistant General Counsel and Assistant Secretary
Fax No.: 615 734 4067
(b) If to Entrust: Entrust Technologies Inc.
2 Constellation Court
Nepean, Ontario
Attention: President
Copy: Secretary
Section 10.02. Entire Agreement. This Agreement embodies the complete Agreement
----------------
and understanding of Entrust and NTI with respect to the subject matter hereof.
This Agreement supersedes all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof.
Section 10.03. Modification. No change or modification of this Agreement shall
------------
be of any force unless such change or modification is in writing and has been
signed by the duly authorized representatives of the parties hereto.
Section 10.04. Waivers. No waiver of any breach of any of the terms of this
-------
Agreement shall be effective
13
<PAGE>
unless such waiver is in writing and signed by the party against which such
waiver is claimed. No waiver of any breach shall be deemed to be a waiver of any
other or subsequent breach.
Section 10.05. Severability. If any provision of this Agreement shall be held to
------------
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
Section 10.06. Governing Law. This Agreement shall be governed by and be
-------------
construed in accordance with the laws of the State of Maryland, without regard
to principles of conflict of laws.
Section 10.07. Waiver of Jury Trial. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE
--------------------
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 10.08. Limitation on Rights of Others. No person other than a party
------------------------------
hereto shall have any legal or equitable right, remedy or claim under or in
respect of this Agreement.
Section 10.09. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
Section 10.10. Expenses. Entrust shall pay all commissions and fees related to
--------
the transactions contemplated by this Agreement and the related private
placement concluded on the Effective Date, including 70 % (seventy percent) of
the fees of Hale and Dorr, and the fees of Davies, Ward & Beck; Deloitte and
Touche; Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), DLJ's legal
counsel and special counsel to the purchasers of Entrust's Series B Common
Stock. Notwithstanding the foregoing, NTI and NTL shall pay all fees of their
professional advisors, (including 30% (thirty percent of the fees of Messrs Hale
and Dorr) in
14
<PAGE>
respect of this transaction and the related private placement.
IN WITNESS HEREOF, the parties hereto have duly executed this Agreement as of
the Effective Date.
NORTHERN TELECOM INC. ENTRUST TECHNOLOGIES INC.
By /s/ Peter Currie By /s/ John A. Ryan
Name Peter Currie Name John A. Ryan
Title Senior Vice President Title President
and Chief Financial Officer
Northern Telecom Limited hereby consents to the assignment of the Nortel Entrust
License by NTI to Entrust pursuant to the terms and conditions of this Agreement
as of the Effective Date.
NORTHERN TELECOM LIMITED
By /s/ Peter Currie By /s/ David D. Archibald
Name Peter Currie Name David D. Archibald
Title Senior Vice President Title Vice President and
Deputy General Counsel
15
<PAGE>
Exhibit 2.2
NTL - ETL TRANSFER AGREEMENT
THIS ASSET TRANSFER AGREEMENT (this "Agreement"), dated as of 31 December 1996
---------
is made between Northern Telecom Limited, a Canadian corporation ("NTL"), and
---
Entrust Technologies Limited, an Ontario corporation ("Entrust").
-------
WHEREAS, NTL and the business entities controlled, directly or indirectly by NTL
(the "Affiliates"), have created a business that designs, develops, markets and
----------
licenses the automated public key infrastructure ("PKI") software and encryption
---
hardware products specified in Exhibit G ("Entrust Products"); and
----------------
WHEREAS, NTL has granted to its wholly owned subsidiary, Northern Telecom Inc.,
a Delaware corporation ("NTI"), the exclusive rights to commercially exploit the
---
technology incorporate in Entrust Products within the United States of America
and Puerto Rico (the "Nortel Entrust License"); and
----------------------
WHEREAS, pursuant to an agreement between NTI and Entrust Technologies Inc., a
Maryland corporation ("ETI"), of even date (the "NTI Transfer Agreement"), ETI
--- ----------------------
acquired from NTI, all of NTI's rights in and to the Nortel Entrust License,
NTI's executory contracts for distributing and licensing to customers in the
U.S.A. and Puerto Rico the Entrust Products and other related assets and
obtained the services of the NTI employees and contractors involved in the
Global Entrust Business (as defined in the NTI Transfer Agreement) carried on in
the U.S.A.; and
WHEREAS, Entrust desires to acquire from NTL, the intellectual property created
by or used in the Entrust Business (as defined herein) subject to the Nortel
Entrust License and other encumbrances, the contracts arising from or related to
the Entrust Business, the employees and contractors of NTL and its Affiliates
engaged in the Entrust Business (other than those employed by NTI), the
equipment used in the Entrust Business, the inventory of the Entrust Business
and other related assets of the Entrust Business, all as more specifically
provided for herein;
NOW, THEREFORE, NTL and Entrust, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
-----------
Capitalized terms used in this Agreement are used as defined in this Article I
or elsewhere in this Agreement. As used herein:
"Additional Agreements" means the service agreement and the strategic alliance
---------------------
agreement of even date entered into between NTL and ETI.
"Agreement" has the meaning specified in the preamble hereof.
---------
"Affiliates" has the meaning specified in the first recital hereof.
----------
"Assumed Contracts" has the meaning specified in Section 2.01(b).
-----------------
1
<PAGE>
"Assumed Liabilities" has the meaning specified in Section 3.01.
-------------------
"Effective Date" means the close of business on the date specified in the
--------------
preamble hereof.
"Entrust" has the meaning specified in the preamble hereof.
-------
"Entrust Assets" has the meaning specified in Section 2.01.
--------------
"Entrust Business" means the business carried on outside the U.S.A. related to
----------------
the design, research, development (by individuals including, but not limited to,
the Entrust Personnel) of automated public key infrastructure software and
encryption hardware products (including, but not limited to, the Entrust
Products) by the business unit of NTL and its subsidiaries known as Secure
Networks Division ("SDN") and to marketing, distribution and licensing of
Entrust Products by SDN.
"Entrust Personnel" means the employees and contractors of the Entrust Business
-----------------
specified in Exhibit D and excludes any employees and contractors located in the
U.S.A.
"Entrust Products" has the meaning specified in the first recital hereof.
----------------
"Entrust Technology" has the meaning specified in Section 2.01(a) hereof.
------------------
"Equipment" has the meaning specified in Section 2.01(d).
---------
"ETI" has the meaning specified in the third recital hereof.
---
"Excluded Assets" has the meaning specified in Section 2.02.
---------------
"Excluded IPR" has the meaning specified in Section 7.01(d)(ii).
------------
"Excluded Technology" has the meaning specified in Section 2.02(a).
-------------------
"Excluded Trade Secrets" has the meaning specified in Section 7.01(d)(ii).
----------------------
"Global Entrust Assets" means the "Entrust Assets" as defined in the NTI
---------------------
Transfer Agreement and the Entrust Assets.
"Global Entrust Business" means the "Entrust Business" as defined in the NTI
-----------------------
Transfer Agreement and the Entrust Business.
"Intellectual Property" has the meaning specified in the NTI Transfer Agreement.
---------------------
"Inventory" has the meaning specified in Section 2.01(e).
---------
"IPR" has the meaning specified in Section 7.01(d)(i).
---
2
<PAGE>
"Non-material IPR" has the meaning specified in Section 7.01(d)(iv).
----------------
"Nortel" means NTL and its Affiliates other than NTI and Nortel Communication
------
Systems Inc.
"Nortel Entrust License" has the meaning specified in the second recital hereof.
----------------------
"NTI" has the meaning specified in the second recital hereof.
---
"NTI Excluded Assets" means the "Excluded Assets' as defined in the NTI Transfer
-------------------
Agreement.
"NTI Transfer Agreement" has the meaning specified in the third recital hereof.
----------------------
"NTL" has the meaning specified in the preamble hereof.
---
"PKI" has the meaning specified in the first recital hereof.
---
"Retained Liabilities" has the meaning specified in Section 3.02.
--------------------
"Statement of Net Assets" has the meaning specified in Section 7.01(b).
-----------------------
"Trade Secrets" has the meaning specified in Section 7.01(d)(ii).
-------------
ARTICLE II
ENTRUST ASSETS
--------------
Section 2.01. Transfer to Entrust. Subject to the terms and conditions hereof,
-------------------
NTL, on behalf of Nortel, hereby transfers, conveys and assigns to Entrust, and
Entrust acquires, Nortel's entire right, title and interest in, to and under all
of the assets and properties (excluding, however, the Excluded Assets) described
below (such assets, collectively, the "Entrust Assets"):
--------------
(a) Entrust Technology. All the patents (including foreign equivalents) and
------------------
patent applications specified in Exhibit A and all inventions that have
arisen from the Entrust Business, all copyrights created by Entrust
Personnel used in the Entrust Products and all copyrights acquired or
licensed by Nortel primarily for use in Entrust Products (including object
code, source code, product documentation and marketing materials), all
trade secrets and confidential information (including formulae and research
and development) relating primarily to Entrust Products or arising from the
Entrust Business and the trademarks, trademark applications, service marks
and trade names (and related goodwill) used by the Entrust Business
specified in Exhibit A, all as of the Effective Date ("Entrust
-------
Technology").
----------
(b) Assumed Contracts. Subject to Section 2.03, (i) the Nortel Entrust License,
-----------------
(ii) all contracts and subcontracts for the sale, purchase, distribution or
licensing of Entrust Products or related services (including services of
independent contractors), or both, entered into in the course of the
Entrust Business by Nortel including those contracts
3
<PAGE>
listed in Exhibit C; and (iii) all other commitments or other
understandings entered into in the ordinary course of the Entrust Business
prior to or on the Effective Date (collectively, the "Assumed Contracts").
-----------------
(c) Records. All customer and prospective customer lists, business records,
-------
reports, plans, records, product specifications, training manuals,
correspondence, regulatory reports and documents, maintenance schedules,
operating and productions records, business plans, copies of personnel
records of employees (other than medical records), marketing or other
studies and other documents and data which relate to the Entrust Business
as of the Effective Date.
(d) Equipment. All office equipment owned by Nortel used primarily in the
---------
Entrust Business including the equipment listed in Exhibit E whether or not
portable or removable and all similar equipment recently acquired that is
used solely by Entrust Personnel as of the Effective Date (collectively,
the "Equipment"). ALL EQUIPMENT SHALL BE TRANSFERRED "AS IS" AND "WHERE IS"
---------
IN ITS CONDITION ON THE EFFECTIVE DATE. NO REPRESENTATIONS, CONDITIONS AND
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THOSE OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, EXTEND TO SUCH
EQUIPMENT, EXCEPT FOR THE WARRANTY OF TITLE AND OTHER WARRANTIES SET FORTH
IN ARTICLE VI HEREOF AND OTHER MATTERS SPECIFICALLY SET FORTH IN THIS
AGREEMENT; provided, however, that nothing herein shall be deemed to negate
-------- -------
any existing warranties or guarantees of the manufacturers of such
Equipment and, to the extent permitted by the terms of such warranties or
guarantees, NTL hereby assigns all of its rights with respect thereto to
Entrust.
(e) Inventory. All inventories of Entrust Products which listed in Exhibit F,
---------
related parts and all similar inventory acquired for the Entrust Business
as of the Effective Date (collectively, the "Inventory"). ALL INVENTORY
---------
SHALL BE TRANSFERRED "AS IS" AND "WHERE IS" IN ITS CONDITION ON THE
EFFECTIVE DATE. NO REPRESENTATIONS, CONDITIONS OR WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, THOSE OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, EXTEND TO SUCH INVENTORY, EXCEPT FOR THE WARRANTY
OF TITLE AND OTHER WARRANTIES SET FORTH IN ARTICLE VII HEREOF AND OTHER
MATTERS SPECIFICALLY SET FORTH IN THIS AGREEMENT; provided, however, that
-------- -------
nothing herein shall be deemed to negate any existing warranties or
guarantees of the manufacturers of such Inventory and, to the extent
permitted by the terms of such warranties or guarantees, NTL hereby assigns
all of its rights with respect thereto to Entrust.
Section 2.02. Excluded Assets. The following assets (the "Excluded Assets") are
---------------
specifically excluded from any conveyance, transfer or assignment pursuant to
this Agreement, whether or not they would otherwise be included in the Entrust
Assets:
4
<PAGE>
(a) Excluded Technology. The technology specified in Exhibit B and all trade
-------------------
names and trademarks of NTL and its Affiliates other than those specified
in Exhibit A ("Excluded Technology");
-------------------
(b) Excluded Contracts. Any and all agreements between Nortel and its employees
------------------
comprising Entrust Personnel and any agreements primarily of general
application to Nortel and its affiliates from which the Entrust Business
has benefited. (For greater certainty, none of the agreements listed in
Exhibit C is an Excluded Asset.);
(c) Accounts Receivable. Accounts receivable arising out of the Entrust
-------------------
Business in the ordinary course which became due and payable prior to the
Effective Date; and
(d) Cash. All cash and marketable securities currently used in connection with
----
the Entrust Business.
Section 2.03. Assignment of Contracts.
-----------------------
(a) Consents. Nothing in this Agreement shall be construed as an attempt to
--------
assign to Entrust any Assumed Contract that, as a matter of law or by the
terms thereof, is not assignable without the consent of the other party or
parties to such assignment or to the change of control of the Entrust
Business resulting from a consummation of the transactions provided for in
this Agreement unless such consent has been given. NTL shall make all
commercially reasonable efforts to obtain (including the provision of such
reasonable payments and assurances as may be required), where required,
consents of all requisite parties to the assignment by NTL to Entrust of
the Assumed Contracts.
(b) Interim Provisions. Until assigned to Entrust with the requisite consent,
------------------
NTL shall hold each Assumed Contract in trust for the benefit of Entrust as
of the Effective Date. NTL shall, at the request and expense (but only to
the extent that such expenses are reasonable) and under the direction of
Entrust, take all such commercially reasonable actions and do or cause to
be done all such commercially reasonable things as are necessary or proper
in order that the obligations of NTL thereunder may be performed in such
manner that the value of an Assumed Contract so held in trust is preserved
and enures to the benefit of Entrust, and that the collection of any moneys
to become due and payable after the Effective Date in and under the Assumed
Contract are received by Entrust; and NTL shall pay over to Entrust all
moneys collected by or paid to Nortel in respect of every such Assumed
Contract once a month. Entrust shall save NTL harmless from any claim or
liability under or in respect of each Assumed Contract arising because of
any action of Nortel taken pursuant to the foregoing sentence.
ARTICLE III
ASSUMED LIABILITIES
-------------------
5
<PAGE>
Section 3.01. Assumption of Future Liabilities by Entrust. Except for NTL's
-------------------------------------------
ongoing obligations under Section 2.03 and Article IX, Entrust hereby agrees to
assume, pay and discharge all liabilities, costs or obligations related to or
arising under the Entrust Assets or the Entrust Business (collectively, the
"Assumed Liabilities") after the Effective Date as and when the same become due
-------------------
and payable and performance is required thereunder. Entrust shall also assume,
pay and discharge the following liabilities relating to or arising under the
Entrust Assets or the Entrust Business prior to the Effective Date:
(a) deferred income taxes;
(b) warranty and service work relating to Assumed Contracts; and
(c) accumulated employee vacation and leave entitlements of Entrust Personnel
who have accepted employment with Entrust.
Section 3.02. Liabilities Not Assumed. Except for the liabilities and
-----------------------
obligations expressly assumed in Sections 2.03, 3.01 and 4.01, Entrust does not
and shall not assume or otherwise be responsible for any liability or obligation
of Nortel (the "Retained Liabilities"), regardless of whether or not such
--------------------
liabilities or obligations are recognized as liabilities on any books of
account, are absolute or contingent or are measurable, including, but not
limited to, the following:
(a) any litigation or claim arising out of the ownership of the Entrust Assets,
subject to limits of Article VII, on or prior to the Effective Date,
including, but not limited to, product liability and warranty claims with
respect to Entrust Products sold or services rendered on or prior to the
Effective Date, tort liability and any liability for violations of statutes
or breach of contract (except any breach of warranty or service work
relating to Assumed Contracts);
(b) tax liabilities of any and all kinds including those related to the Entrust
Business and the ownership of the Entrust Assets on or before the Effective
Date (except deferred income taxes);
(c) any liability of Nortel as an employer including payment of commissions and
bonuses accruing prior to or on the Effective Date (except for accumulated
vacation and leave entitlements of Entrust Personnel who have accepted
employment by Entrust);
(d) any indebtedness of Nortel, whether incurred under any loan agreement,
indenture, stock or asset acquisition agreement or otherwise including
accounts payable arising from the Entrust Business prior to or on the
Effective Date; and
(e) any liability with respect to insurance of the Entrust Assets with respect
to any period prior to or on the Effective Date.
ARTICLE IV
EMPLOYEES
---------
6
<PAGE>
Section 4.01. Entrust Employees. Entrust and Nortel acknowledge that: (i) all
-----------------
Nortel employees that are Entrust Personnel set forth in Exhibit D have agreed
to accept employment with Entrust after the Effective Date, and (ii) all
employees offered key employment agreements by ETL have agreed to accept
employment with Entrust after the Effective Date pursuant to such agreements.
With respect to employees who are Entrust Personnel, Entrust shall do the
following:
(a) except as provided in Section 4.02, assume responsibility for all
liabilities statutory or otherwise, and costs associated with salary,
bonuses, incentives, commissions, vacation and leave entitlements and any
and all other amounts which may become payable to or receivable by those
Entrust Personnel, relating to their employment with Entrust after the
Effective Date. (Unless Entrust expressly agrees otherwise, Entrust shall
not assume any liability for all amounts payable to or receivable by such
employees relating to their employment on or before the Effective Date,
except for accumulated leave and vacation pay accruing prior to the
Effective Date.)
(b) register with the Workers' Compensation Board of Ontario ("WCB") as an
employer of workers in the Province of Ontario, and establish its own
account with the WCB.
(c) pay and be liable for any and all worker's compensation assessments,
penalties, fines, levies, charges, surcharges or other amounts which may be
assessed after the Effective Date which are entirely attributable to the
period following the Effective Date.
Section 4.02. NTL Liability to Employees. With respect employees who are Entrust
--------------------------
Personnel, NTL shall do the following:
(a) retain responsability for and all liabilities, statutory or otherwise,
except for accumulated vacation and leave entitlements, existing at or
accrued to and including the Effective Date, including timely employee
benefit claims filed after the Effective Date but which relate to
circumstances arising prior to the Effective Date, under any and all of the
NTL's employee benefit plans, including but not limited to pension plans,
business accident plan, dental care plan, group life insurance plan,
medical care plan, vision care plan, salary continuance plan, weekly
indemnity plan, long-term disability plan, retirement allowance plan, and
group registered retirement savings plan, as may cover such Entrust
Personnel.
(b) retain responsability for all liability for claims under the Workers'
Compensation Act of Ontario ("WCA") existing as at, or accrued to and
including the Effective Date, including claims filed after the Effective
Date but which are (a) based on accidents or injuries to the extent
incurred prior to the Effective Date, or (b) determined by the WCB to
relate to the period prior to the Effective Date, but excluding any
liabilities with respect to re-employment obligations pursuant to the WCA.
(c) retain responsability for all Worker's Compensation assessments, penalties,
fines, levies, charges, surcharges and other amounts which may be assessed
before or after the Effective Date which are attributable to the period
prior to and including the
7
<PAGE>
Effective Date.
Section 4.03. Refusal of Employment. Entrust assumes no liability to any person
---------------------
who was an employee of the Entrust Business who has not accepted an offer of
employment from Entrust as of the Effective Date. NTL shall remain responsible
for all liabilities and costs associated with each such employee.
ARTICLE V
CONSIDERATION
-------------
Section 5.01. Calculation of the Consideration. The consideration payable by
--------------------------------
Entrust for the Entrust Assets is set forth in Section 5.02 which shall be
allocated as follows:
(a) to the Equipment, the net book value of the Equipment specified in the
Statement of Net Assets;
(b) to the Inventory, the net book value of the Inventory specified in the
Statement of Net Assets; and
(c) to the remaining Entrust Assets, the remainder of the purchase price.
Entrust and NTL acknowledge that the amounts so attributed are the respective
fair market values thereof and shall file mutually agreeable form of all
elections required or desirable to the relevant tax authorities. Any sales,
transfer and/or documentary taxes, if any, payable in connection with the
transaction contemplated hereunder shall be paid by NTL.
Section 5.02. Fulfillment of the Consideration. The consideration for the
--------------------------------
Entrust Assets shall be paid and satisfied in full by:
(a) assumption by Entrust of the Assumed Liabilities;
(b) the immediate issuance by Entrust to NTL of 192,500 (one hundred and
ninety-two thousand) Exchangeable Shares of Entrust; and
(c) the immediate issuance by Entrust to NTL of one Common Share of Entrust.
Section 5.03 Allocation of Purchase Consideration. The consideration for the
------------------------------------
Entrust Assets shall be allocated among the Entrust Assets as follows:
(a) Assumed Liabilities shall be allocated to the extent of their value, to the
Equipment, and as to the value of the Equipment in excess of the value of
the Assumed Liabilities referred to above, such number of Exchangeable
Shares of Entrust as have a fair market value equal to the fair market
value of such excess value shall be allocated to such Equipment; and
b) the balance of the Exchangeable Shares shall be allocated among all of the
assets
8
<PAGE>
comprising the Entrust Assets in proportion to their respective fair market
values on the Effective Date.
Section 5.04 Adjustment to Consideration. If Revenue Canada determines that the
- ------------ ---------------------------
fair market value of the Entrust Assets is greater than or less than the amount
determined as the fair market value of such property hereunder, the
consideration therefor shall be adjusted in such a manner as may be agreed upon
with Revenue Canada. All settlements, adjustments, refunds, payments, or
repayments as may be required in order to give effect to such adjustment in
consideration shall be effective as of the Effective Date.
Section 5.05 GST Matters. NTL represents to Entrust that NTL is a registrant for
- ------------ -----------
GST purposes. Entrust shall register for GST purposes. For the purposes of this
Section 5.05, "GST" means any tax imposed pursuant to Part IX of the Excise Tax
Act (Canada) (the "ETA") or pursuant to any similar applicable provincial
legislation. NTL and Entrust shall, promptly after the Effective Date, elect
jointly under subsection 167(1) of the ETA and under any similar applicable
provincial legislation, in the form prescribed for the purposes of that
provision, in respects of the transfer and assignment of the Entrust Assets
hereunder, and Entrust shall file such election with revenue Canada, forthwith
after the Effective Date and provide NTL with a copy of the written
acknowledgement by Revenue Canada ( and by the provincial taxing authority where
applicable) of the receipt of such election.
ARTICLE VI
DELIVERY
Section 6.01. Delivery of Entrust Assets. The transfer of the Entrust Assets
--------------------------
shall take place on the Effective Date.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF NTL
-------------------------------------
Section 7.01 Representations and Warranties. NTL hereby represents and warrants
------------------------------
9
<PAGE>
to Entrust as follows:
(a) Due Authorization. The sale and purchase herein provided for has been duly
-----------------
authorized and approved by NTL and this Agreement has been duly executed
and delivered by NTL.
(b) Statement of Net Assets. The statement of net assets set out in Exhibit H
-----------------------
("Statement of Net Assets") has been prepared by NTL and NTI in good faith
-----------------------
and represents NTL's best estimate on the date it was prepared of the book
value of the assets and the amount of the liabilities specified therein for
the Global Entrust Business.
(c) Good Title to Entrust Technology. NTL is transferring to Entrust good,
--------------------------------
exclusive and valid title to the patents, patent applications, trade
secrets and confidential information, registered trademarks and copyrights
and other items comprising Entrust Technology, free and clear of all title
defect and other encumbrances save as set forth below. NTL has taken and
has caused its Affiliates to take, all commercially reasonable steps to
preserve the trade secrets and confidential information (including formulae
and inventions) comprising Entrust Technology and none of such Entrust
Technology has been misappropriated from others. The Entrust Technology is
being transferred subject to the following:
(i) the rights and interests granted to others under the Assumed
Contracts;
(ii) the rights granted by NTL pursuant to patent cross-licenses entered
into between NTL and others, including Bell Canada, prior to or on
the Effective Date;
(iii) the rights of Bell Canada to evaluate Entrust Products to the extent
created prior to the Effective Date, to obtain general technical
information about Entrust Products, and to use confidential
information created prior to the Effective Date about Entrust
Products for its internal purposes (which rights of Bell Canada do
not materially impair the value to Entrust of the Entrust
Technology);
(iv) a perpetual, royalty-free right of NTL and NTL Affiliates to use code
fragments incorporated into products prior to the Effective Date
other than Entrust Products to the extent that such products do not
implement PKI technology;
(v) minor imperfections of title, if any, none of which is substantial in
amount or materially impairs the use of the property subject thereto,
which have arisen in the ordinary course of business consistent with
past practice; and
(vi) with respect to common law trade marks and trade names comprising
Entrust Technology, NTL represents only that it has no knowledge or
reason to know that the use of such trade marks and trade names by
Nortel and NTI infringes
10
<PAGE>
the rights of third parties.
(d) Completeness of IPRs.
--------------------
(i) The Entrust Technology and the Intellectual Property constitute all
the patents, patent applications, trademarks, service marks,
trademark applications, service mark applications, trade names, trade
secrets and confidential information, copyrights, copyright
registrations and intellectual property rights and licenses
(collectively "IPR") presently used by Global Entrust Business
---
(collectively "IPR") save for Excluded Assets and NTI Excluded Assets
---
(collectively "Excluded IPR").
------------
(ii) The Assumed Contracts and the NTL Assumed Contracts include all
agreements under which ETI or ETL have access to third-party
confidential information used by ETI or ETL to conduct the Global
Entrust Business (collectively "Trade Secrets") save for contracts
-------------
constituting Excluded Assets and NTI Excluded Assets (collectively
"Excluded Trade Secrets").
----------------------
(iii) The IPR and Trade Secrets include in all material respects the rights
necessary for the conduct of the Global Entrust Business as presently
conducted, provided, however, no representation is made by the
-------- -------
provisions of this Section 7.01(d)(iii) with respect to infringement
of third party rights. For greater certainty, the provisions of this
Section 7.01(d)(iii) shall in no way limit the indemnity of NTL set
forth in Section 8.01 of this Agreement.
(iv) Except for the NTL Excluded Assets identified as "Freeware/Non-
significant licences" and "Runtime libraries and compile
environments" in Exhibit B to this Agreement (collectively, the
"Non-material IPR"), ETL and ETI will after the Effective Date have
----------------
the right to use the Excluded IPR and Excluded Trade Secrets pursuant
to and subject to the provisions of the Additional Agreements.
(v) The Non-Material IPR is not material to the Global Entrust Business
and is available at commercially reasonable rates that, collectively,
shall not exceed U.S.$75,000 (seventy five thousand U.S. dollars).
(vi) NTI and NTL have taken all commercially reasonable efforts necessary
to protect the IPR and Trade Secrets.
(e) Assumed Contracts in Good Standing. Nortel has performed in all material
----------------------------------
respects the obligations required to be performed by it under each Assumed
Contract relating to the Entrust Business contributed by NTL and has
complied in all material respects with the provisions thereof except for
the PDSO contract with the Government of Canada for which a reserve has
been provided for in the Statement of Net Assets.
(f) Material Contracts. Each Assumed Contract (i) for technology used in
------------------
Entrust Products
11
<PAGE>
worth more than U.S. $50,000 (ii) which requires future expenditures of
more than U.S. $50,000 and (iii) which might result in payment to Entrust
in excess of $50,000, for which Nortel requires the consent of the other
party to the relevant Assumed Contract for the assignment of NORTEL's
interest in that Assumed is listed in Exhibit I, each a "Material
Contract". Notwithstanding any other provisions of this Agreement, NTL
warrants that such Material Contracts will be assigned to Entrust.
(g) Good Title to Equipment. Nortel is transferring to Entrust good and valid
-----------------------
title to the Equipment, free and clear of all title defects, objections or
other encumbrances, except (i) minor imperfections of title, if any, none
of which is substantial in amount or materially impairs the use of the
property subject thereto, which have arisen in the ordinary course of
business consistent with past practice, (ii) liens for current taxes not
yet due, and (iii) software incorporated therein.
(h) Good Title to Inventory. Nortel is transferring to Entrust good and valid
-----------------------
title to the Inventory, free and clear of all title defects, objections or
other encumbrances, except (i) minor imperfections of title, if any, none
of which is substantial in amount or materially impairs the use of the
property subject thereto, which have arisen in the ordinary course of
business consistent with past practice, (ii) liens for current taxes not
yet due, and (iii) software incorporated therein.
(i) Transfer, Sales and Use Taxes etc. NTL shall pay or cause to be paid all
---------------------------------
sales and use taxes, privilege or other excise taxes, if any, which are
based either on the circumstance of transfer or on the value of any Entrust
Asset that is to be sold or contributed by NTL pursuant hereto that may be
imposed on or in connection with the contributions, conveyances,
assignments, transfers and deliveries to be made hereunder by Nortel.
(j) Excluded Technology. The Excluded Technology identified in Exhibit B under
-------------------
the headings "Freeware/Non-significant licences" and "Run-time libraries
and compile environments" are not material to the Entrust Business and are
available at commercially reasonable rates.
(k) Tax Representations. The compliance by Entrust with the provisions of
-------------------
Section 5.03 and Section 5.05 shall not have a materially adverse effect on
Entrust.
(l) No Notice of Infringement. To NTL's knowledge, NTL has received no notice
-------------------------
that the use by the Global Entrust Business of the IPR or Trade Secrets
infringes the intellectual property rights or misappropriates the trade
secrets of third parties.
(m) Nortel License. NTL represents that it granted to NTI prior to the
--------------
Effective Date the exclusive rights to the U.S.A. and Puerto Rico under the
Nortel Entrust License as specified in the first recital to this Agreement.
(n) Completeness of Assets.
----------------------
12
<PAGE>
(i) The Global Entrust Assets include all material leases (other than
leases of real property), contracts, inventory and equipment (other
than some telecommunication equipment), intellectual property rights
and other items and rights used by Nortel in the operation of the
Global Entrust Business prior to the Effective Date save forsave for
Excluded Assets and NTI Excluded Assets.
(ii) The Global Entrust Assets constitute all the material assets owned or
leased by Nortel or NTI (other than real property) on the Effective
Date from which revenues are included within the Financial Statements
referred to in the Class B Common Stock Purchase Agreement among,
inter alia, NTL and ETI of even date save for Excluded Assets and NTI
Excluded Assets.
(iii) Except for the NTL Excluded Assets identified as "Freeware/Non-
significant licences" and "Runtime libraries and compile
environments" in Exhibit B to this Agreement (collectively, the
"Non-material IPR"), ETL and ETI will after the Effective Date have
----------------
the right to use the Excluded Assets or NTI Excluded Assets or
substitute therefore (acceptable to Entrust) and Excluded Trade
Secrets pursuant to and subject to the provisions of the Additional
Agreements and Nortel has the necessary rights to comply with its
obligations under the Additional Agreements.
Section 7.02. Limitation of Warranties. The representations, warranties and
------------------------
conditions of NTL in Section 7.01 shall continue in full force and effect for
the benefit of Entrust for a period of three (3) years following the Effective
Date, after which time NTL is released from all obligations and liabilities
hereunder in respect of such representations and warranties except with respect
to any claims made by Entrust in writing prior to the expiration of such period.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 8.01. Indemnification by NTL. From and after the Effective Date and
----------------------
subject to the provisions of this Article VIII, NTL hereby agrees to pay and to
indemnify fully, hold harmless and defend Entrust and its agents, directors,
officers, partners, employees, servants, consultants, representatives,
successors and assigns, from and against any and all claims and/or damages
(whether based on negligent acts or omissions, statutory liability, strict
liability or otherwise) arising out of, relating to or
13
<PAGE>
based upon allegations of:
(a) any inaccuracy or breach of any representation or warranty, or any
nonfulfillment of any covenant or agreement of NTL contained in this
Agreement or any other related document delivered by NTL on the Effective
Date or pursuant to the transactions contemplated hereunder;
(b) any liability whatsoever (whether known, unknown, accrued, absolute,
contingent or otherwise) of NTL and/or its Affiliates prior to the
Effective Date, other than Assumed Liabilities;
(c) any Retained Liabilities of NTL;
(d) any liability for infringement of any patent, trade secret, trademark or
copyright rights of any person that arise out of Nortel's business as
conducted on or before the Effective Date relating to the Entrust Assets
transferred by NTL;
(e) severance claims by employees of the Entrust Business immediately prior to
the Effective Date who have refused employment with Entrust, if any;
(f) any claim relating to failure by Nortel to comply with any applicable bulk
sales legislation concerning the purchase and sale of Entrust Assets
provided for in this Agreement; or
(g) any and all actions, suits, proceedings, claims, demands, judgments,
assessments, reasonable costs and expenses, incurred in investigating or
attempting to avoid the foregoing or in enforcing this indemnity.
Section 8.02. Indemnification by Entrust. From and after the Effective Date,
--------------------------
subject to the provisions of this Article VIII, Entrust agrees to pay and to
indemnify fully, hold harmless and defend NTL and its Affiliates, agents,
directors, officers, partners, employees, servants, consultants,
representatives, successors and assigns, from and against any and all claims
and/or damages (whether based on negligent acts or omissions, statutory
liability, strict liability or otherwise) arising out of, relating to or based
upon allegations of:
(a) any breach of any covenant or agreement of Entrust contained in this
Agreement;
(b) any liability arising out of the Entrust Assets subsequent to the Effective
Date, other than Retained Liabilities and any other obligation of NTL
hereunder;
(c) any failure to discharge any Assumed Liability; or
(d) any and all actions, suits, proceedings, claims, demands, judgments,
assessments, reasonable costs and expenses, incurred in investigating or
attempting to avoid the foregoing or in enforcing this indemnity.
14
<PAGE>
Section 8.03. Method of Asserting Claims. The indemnified party ("Indemnitee")
-------------------------- ----------
shall provide the indemnifying party ("Indemnitor") prompt notice in writing
----------
upon becoming aware of any action, suit, proceeding, claim, demand, judgment or
assessment (the "Claim"). Indemnitee shall provide to Indemnitor sole control of
-----
the defense or settlement of the Claim. Indemnitee shall cooperate with
Indemnitor, at Indemnitor's expense, in the defense or settlement of the Claim.
The Indemnitee shall not compromise or settle a Claim without the Indemnitor's
prior written consent. Indemnitee may participate in the defence of a Claim at
its own expense.
Section 8.04. Coordination of Indemnification Rights.
--------------------------------------
(a) Rights Cumulative. Each right of a person to be indemnified, defended
-----------------
and/or held harmless pursuant to this Article VIII is independent of such
person's rights pursuant to any other Section of this Agreement and shall
not be affected or limited in any way by any event or circumstance unless
this Article VIII expressly provides that such event or circumstance shall
affect or limit such right of such person, regardless of whether or not
such event or circumstance affects or limits any other right of such person
or any right of any other person under this Article VIII.
(b) Right of Subrogation. In the event that an Indemnitee has a right of
--------------------
recovery against any third party with respect to any damages in connection
with which a payment is made to such Indemnitee by an Indemnitor, then (i)
such Indemnitor shall, to the extent of such payment, be subrogated to all
of the rights of recovery of Indemnitee against such third party with
respect to such damages and (ii) Indemnitee shall execute all papers
required and take all action necessary to secure such rights, including,
but not limited to, the execution of such documents as are necessary to
enable such Indemnitor to bring suit to enforce such rights.
Section 8.05. Right to Cure. An Indemnitor under any provision of this Article
-------------
VIII shall have the right to cure, within a reasonable time and in a manner
reasonably satisfactory to Indemnitee and any affected parties, any matter
giving rise to such obligation that is susceptible of being cured; provided,
--------
however, that any such cure shall not relieve or reduce any such obligations
- -------
arising prior to, during or because of such cure or to the extent that such cure
is inadequate.
Section 8.06. Limitation of Indemnification.
-----------------------------
(a) ETL Indemnification in Certain Circumstances. NTL assumes no liability, and
--------------------------------------------
Entrust shall indemnify NTL for infringement claims arising from: (i)
combination of Entrust Products or any part thereof with other hardware or
software not constituting Entrust Assets under this Agreement or the NTI
Transfer Agreement where such infringement would not have arisen from the
use of such Entrust Products or portion thereof standing alone; (ii)
modification of the Entrust Products after the Effective Date where such
infringement would not have occurred but for such modifications; or (iii)
use by Entrust of the Entrust Products in a manner or for a purpose not
contemplated as of the Effective Date.
15
<PAGE>
(b) Entrust to Mitigate. If NTL receives notice of an alleged infringement and
-------------------
NTL reasonably believes the Entrust Products infringe NTL may require,
Entrust, at Entrust's expense, to take all commercially reasonable efforts
to: (i) modify the infringing Entrust Products to perform the intended
function without infringing any third-party rights; or (ii) substitute
software of comparable functionality and performance.
(c) Global Limit. For all indemnities by NTL for Claims relating to Section
------------
8.01(d) of this Agreement, by NTI from claims relating to Section 8.01(d)
of the NTI Transfer Agreement and by NTL and NTI arising from and relating
to the Nortel Entrust License, the combined liability of NTI, NTL and its
Affiliates shall be limited to a maximum of U.S. $26,000,000 (twenty six
million U.S. dollars) for all occurrences. For all indemnities by Entrust
for Claims relating to Section 8.06(a) of this Agreement, the combined
liability of Entrust, its parent, Entrust Technologies Inc., and the
subsidiaries of its parent shall be limited to a maximum of U.S.
$26,000,000 (twenty six million U.S. dollars) for all occurrences.
Section 8.07. Remedies Exclusive. The remedies set forth in Section 8.01 as
------------------
limited by Section 8.06 and the rights arising under the Series B Stock Purchase
Agreement of even date among, inter alia, NTL and Entrust (the "SPA") establish
the entire liability of NTL (including its Affiliates) in respect of any claims
relating to intellectual property infringement and/or breach of warranty in
respect of title to Intellectual Property. Except as set forth in the SPA and
the indemnity pursuant to the provisions of Section 8.01, in no event shall NTL
be liable for any incidental, punitive or other economic losses arising from
such infringements or breaches.
ARTICLE IX
CONTINUING COVENANTS
--------------------
Section 9.01. Further Assurance and Cooperation. The parties shall from time to
---------------------------------
time and at all times hereafter make, do and execute or cause and procure to be
made, done and executed all such further acts, deeds, conveyances, consents and
assurances as may be required to carry out the transfer of the Entrust Assets
and assumption of Assumed Liabilities contemplated under this Agreement,
including without limitation appropriate assignments (notarized if required) for
filing with any relevant government body or agency.
Section 9.02. Adjustment of Statement of Net Assets. NTL shall deliver to
-------------------------------------
Entrust a revised Statement of Net Assets to reflect any adjustment that may be
appropriate after the relevant NTL year end financial statements have been
prepared which Entrust shall use in its opening financial statements. Subject to
Section 7.01(b), no adjustment shall be made to the consideration arising from
any reasonable adjustment to the Statement of Net Assets. NTI represents that
such revised Statement of Net Assets will on the date of delivery be true and
accurate.
Section 9.03. Future Advertising and Sales Activities. Entrust shall identify
---------------------------------------
itself as the owner of the Entrust Assets, and as soon as possible but no later
than sixty (60) days after the Effective Date, shall cease using
16
<PAGE>
the names of Nortel from all business cards and other employee identification
materials as well as from and all business records, brochures and other sales or
advertising-related material (including materials used for the packaging of any
product) received by it hereunder. Notwithstanding the foregoing, Entrust may
refer to Entrust as a "Nortel affiliated company".
Section 9.04. Supplier and Customer Communication. NTL shall cooperate with
-----------------------------------
Entrust to give notice to all suppliers and customers of Nortel which Entrust
wishes to inform of the transfer of the Entrust Assets.
ARTICLE X
MISCELLANEOUS
-------------
Section 10.01. Notices. All notices authorized or required to be given pursuant
-------
to this Agreement shall be given in writing and either personally delivered to
the party to whom it is given or delivered by an established delivery service by
which receipts are given or mailed by registered or certified mail, postage
prepaid, or sent by telex or telegram or electronic telecopier, addressed to the
party at the following addresses. Any party may change its address for the
receipt of notices at any time by giving notice thereof to the other parties, in
which event this Agreement shall be amended accordingly.
(a) If to NTL: Northern Telecom Limited
8200 Dixie Road, Suite 100
Brampton, Ontario
L6T 5P6
Attention: Corporate Secretary
Fax No.: 905 863 8425
(b) If to Entrust: Entrust Technologies Limited
2 Constellation Court
Ottawa, Ontario
Attention: President
Copy: Secretary
Section 10.02. Entire Agreement. This Agreement embodies the complete Agreement
----------------
and understanding of Entrust and NTL with respect to the subject matter hereof.
This Agreement supersedes all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof.
Section 10.03. Modification. No change or modification of this Agreement shall
------------
be of any force unless such change or modification is in writing and has been
signed by the duly authorized representatives of the parties hereto.
Section 10.04. Waivers. No waiver of any breach of any of the terms of this
-------
Agreement shall be effective unless such waiver is in writing and signed by the
party against which such waiver is claimed. No waiver of any breach shall be
deemed to be a waiver of any other or subsequent breach.
Section 10.05. Severability. If any provision of this Agreement shall be held to
------------
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be
17
<PAGE>
affected or impaired thereby.
Section 10.06. Governing Law. This Agreement shall be governed by and be
-------------
construed in accordance with the laws of the Province of Ontario, without regard
to the principles of conflict of laws.
Section 10.07. Waiver of Jury Trial. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE
--------------------
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 10.08. Limitation on Rights of Others. No Person other than a party
------------------------------
hereto shall have any legal or equitable right, remedy or claim under or in
respect of this Agreement.
Section 10.09. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
18
<PAGE>
permitted assigns.
IN WITNESS HEREOF, the parties hereto have duly executed this Agreement as of
the Effective Date.
NORTHERN TELECOM LIMITED ENTRUST TECHNOLOGIES LIMITED
By /s/ Peter Currie By /s/ John A. Ryan
Name Peter Currie Name John A. Ryan
Title Senior Vice President and Title President
Chief Financial Officer
By /s/ David D. Archibald
Name David D. Archibald
Title Vice President and
Deputy General Counsel
19
<PAGE>
Exhibit 2.3
Share Purchase Agreement
between
ENTRUST Technologies Inc., a Maryland corporation (hereinafter referred to as
"ENTRUST")
on the one part
and
Rainer A. Rueppel, Bahnhofstrasse 242, 8620 Wetzikon (hereinafter referred to
as the "SELLER"),
on the other part
(hereinafter collectively referred to as "the PARTIES")
concerning the acquisition of shares of
R/3/ Security Engineering AG
Seegraben
(the "COMPANY")
<PAGE>
-2-
Share Purchase Agreement
- --------------------------------------------------------------------------------
CONTENTS:
Definitions.................................................................. 4
1. Sale and Purchase........................................................ 7
1.1. Object of the Sale................................................. 7
1.2. Amount of Purchase Price........................................... 7
1.3. Basis Price........................................................ 7
1.4. Price Adjustment................................................... 7
1.5. Escrow............................................................. 8
2. Consideration Shares..................................................... 9
2.1. Value of Consideration Shares...................................... 9
2.2. Restrictions on Transfer........................................... 9
2.3. Right of First Refusal............................................. 10
2.4. Put Option and Make Whole Payment.................................. 11
3. Closing.................................................................. 13
3.1. Conditions Precedent............................................... 13
3.2. Completion of the sale............................................. 13
3.3. Transfer of Risks.................................................. 14
4. Representations of Seller................................................ 14
4.1. With Respect to US Securities Regulations.......................... 14
4.2. With Respect to the SHARES and the COMPANY's Capital............... 17
4.3. With Respect to the COMPANY........................................ 18
4.3.1 Existence, Good Standing, and Records................... 18
4.3.2. Accounts................................................ 18
4.3.3. Financing............................................... 19
4.3.4. Technical characteristics............................... 20
4.3.5. Intellectual property................................... 20
4.3.6. Insurances.............................................. 23
4.3.7. Customers and Suppliers................................. 23
4.3.8. Employees............................................... 24
4.3.9. Pensions and social security contributions.............. 24
4.3.10. Litigation.............................................. 24
4.3.11. Taxes................................................... 25
4.3.12. Events since Accounting Date and since end of Q1........ 25
4.3.13. Effect of the transaction............................... 26
4.3.14. Other material items.................................... 27
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5. Warranty Claims Against Seller.......................................... 27
6. Representations of Entrust.............................................. 28
6.1. Good Standing and Authority........................................ 28
6.2. Consideration Shares............................................... 29
6.3. Capitalization..................................................... 29
6.4. Governmental Consents.............................................. 29
6.5. Warranty Claims Against Entrust.................................... 30
7. Covenants............................................................... 30
7.1. Management of the Company.......................................... 30
7.2. Product Liability.................................................. 31
7.3. Consideration Shares............................................... 31
7.4. Watermark Business................................................. 34
7.5. Offer to other Sellers............................................. 35
8. Miscellaneous........................................................... 35
8.1. Costs.............................................................. 35
8.2. Confidentiality.................................................... 35
8.3. Assignment......................................................... 36
8.4. Announcements...................................................... 36
8.5. Notices............................................................ 36
8.6. Severability....................................................... 36
8.7. Construction, amendments........................................... 37
8.8. Governing law...................................................... 37
8.9. Arbitration........................................................ 37
List of Exhibits............................................................ 38
----------------
Entrust Technologies Inc. has omitted the following schedules, which will be
provided supplementally to the Securities and Exchange Commission upon request:
- - Exhibit DIL (List of Documents Submitted to Entrust)
- - Exhibit CAP (Capital Structure of Entrust)
- - Exhibit IPR (Intellectual Property)
- - Exhibit OTH (Offer to Other Sellers)
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Definitions
"AGREEMENT" this share purchase agreement, including the
exhibits;
"BASIS PRICE" the BASIS PRICE as defined in Sec. 1.3.;
"CLOSING" the CLOSING of this AGREEMENT pursuant
to Sec. 3;
"CO" the Swiss Code of Obligations;
"COMPANY SHARES" the common or preferred registered shares of
the COMPANY with a par value of CHF 10
each;
"COMPANY" r/3/ Security Engineering AG, Seegraben, as
defined on the first page;
"CONSIDERATION SHARES" Series A Common Stock of ENTRUST with
p.v. of USD 0.01 each;
"DEFECT" a DEFECT as defined in Sec. 5.1;
"DISTRIBUTION
COMPLIANCE PERIOD" the DISTRIBUTION COMPLIANCE PERIOD
defined in Sec. 7.3.;
"ENTRUST" ENTRUST Technologies Inc., a Maryland
corporation, as defined on the first page;
"ESCROW AGENT" Thouvenin Stutzer Eggimann & Partner,
Limmatquai 4, 8001 Zurich;
"ESCROW AGREEMENT" the escrow agreement entered into between
ENTRUST, the SELLER and the ESCROW AGENT, and
signed by the SELLER on the same date as this
AGREEMENT;
"ESCROW" the escrow established pursuant to the
ESCROW AGREEMENT and referred to in
Sec. 1.5;
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"FIRST ANNIVERSARY" the FIRST ANNIVERSARY defined in Sec.
2.4.1.;
"GOVERNMENTAL
AUTHORITY" any government, state,
municipality or other
political subdivision
thereof and any entity
exercising executive,
legislative, judicial,
regulatory or
administrative functions of
or pertaining to government
"INTELLECTUAL PROPERTY" the INTELLECTUAL PROPERTY defined in
Sec. 4.3.5.2;
"INVISION" INVISION AG, Neuhofstrasse 4, 6341 Baar;
"IPO PUT PRICE" the IPO PUT PRICE defined in Sec. 2.4.2;
"MAKE WHOLE PAYMENT" the MAKE WHOLE PAYMENT defined in
Sec. 2.4.2;
"MARKET PRICE" the MARKET PRICE defined in Sec. 2.4.3;
"NOTICE" the NOTICE defined in Sec. 2.3.3;
"OFFERED CONSIDERATION
SHARES" the OFFERED CONSIDERATION SHARES
defined in Sec. 2.3.3;
"OFFEROR" the OFFEROR defined in Sec. 2.3.3;
"outstanding" in respect of COMPANY SHARES, the issued
COMPANY SHARES less the COMPANY
SHARES held in treasury;
"PARTY" ENTRUST and/or the SELLER, as defined on
the first page;
"PRICE ADJUSTMENT" the PRICE ADJUSTMENT, as defined in
Sec. 1.4.;
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"PRINCIPAL MARKET" the PRINCIPAL MARKET defined in Sec.
2.4.3;
"PUBLIC OFFERING" the PUBLIC OFFERING defined in Sec. 2.3.6;
"PURCHASE PRICE" the total consideration paid by ENTRUST for
the SHARES, as defined in Sec. 1.2.;
"PUT RIGHT" the PUT RIGHT defined in Sec. 2.4.1;
"PUT SHARES" the PUT SHARES defined in Sec. 2.4.1;
"REGULATION S" the REGULATION S defined in Sec. 4.1.1.;
"SECURITIES ACT" the U.S. Securities Act of 1933, as amended;
"SELLER" Rainer A. Rueppel, Bahnhofstrasse 242, 8620
Wetzikon, as defined on the first page;
"SHARES" the COMPANY SHARES sold by the SELLER
pursuant to Sec. 1.1.;
"SIGNING" the SIGNING of this AGREEMENT;
"STANDARD PUT PRICE" the STANDARD PUT PRICE defined in
Sec. 2.4.1;
"WATERMARK COMPANY" the WATERMARK COMPANY defined in
Sec. 7.4.;
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1. Sale and Purchase
1.1. Object of the Sale
ENTRUST purchases from the SELLER, and the SELLER sells to ENTRUST 24,000
COMPANY SHARES ("the SHARES") pursuant to the terms and conditions of this
AGREEMENT.
1.2. Amount of Purchase Price
The PURCHASE PRICE shall be composed of (i) the BASIS PRICE and, if any, the
PRICE ADJUSTMENT, provided, however, that such PRICE ADJUSTMENT shall be due
only if, within 90 days after CLOSING, ENTRUST obtains directly or through the
COMPANY 100% of the COMPANY SHARES. The right of the SELLER to the PRICE
ADJUSTMENT expires at midnight on the 90th day after CLOSING.
1.3. Basis Price
1.3.1. The BASIS PRICE shall be paid to the Seller at CLOSING in (i) USD
1,725,024 -- and (ii) 180,821 CONSIDERATION SHARES, valued at USD 58.30 each
pursuant to Sec. 2.1.1.
1.3.2. Notwithstanding the previous Sec. 1.3.1., 56,055 out of the 180,821
CONSIDERATION SHARES shall be placed into ESCROW pursuant to Sec 1.5. 506
CONSIDERATION SHARES out of the 180,821 CONSIDERATION SHARES (being the
CONSIDERATION SHARES to be placed into escrow by Markus Kroll) shall furthermore
be placed into a separate escrow, pursuant to terms and conditions still to be
negotiated, but substantially in accordance with the principles applying to the
CONSIDERATION SHARES held in ESCROW pursuant to Sec. 1.5.2.(b).
1.4. Price Adjustment
1.4.1. The PRICE ADJUSTMENT, if any, shall be composed of 12,884 CONSIDERATION
SHARES.
1.4.2. The PRICE ADJUSTMENT, if any, shall be paid to the SELLER within 10
business days after ENTRUST obtains directly or through the COMPANY 100% of the
COMPANY SHARES. The CONSIDERATION SHARES composing the PRICE
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ADJUSTMENT shall be paid to the SELLER in accordance with the SELLER's
instructions. If the conditions for the payment of the PRICE ADJUSTMENT are
already fulfilled at CLOSING, the payment of the PRICE ADJUSTMENT shall take
place at the later (i) of CLOSING or (ii) five business days following the
receipt by ENTRUST of the share purchase AGREEMENTS for all outstanding COMPANY
SHARES.
1.5. Escrow
1.5.1. The 56,055 CONSIDERATION SHARES held in ESCROW pursuant to Section 1.3.1.
shall be delivered to, kept and/or released by the ESCROW AGENT pursuant to the
ESCROW AGREEMENT. The CONSIDERATION SHARES and any cash proceeds from the sale
of such CONSIDERATION SHARES whilst held in ESCROW pursuant to Sec. 1.5.4 hereof
shall be deposited by the ESCROW AGENT in a Swiss bank of international standing
and reputation.
1.5.2. The CONSIDERATION SHARES held in ESCROW shall be released to the Seller
at the rate of one third of the 56,055 CONSIDERATION SHARES on each of the first
three anniversary dates of CLOSING provided, however, that
(a) the CONSIDERATION SHARES shall be released to ENTRUST and not to the
SELLER, and the PURCHASE PRICE will be reduced accordingly, if, on such
anniversary date the SELLER (a) has terminated his employment relationship
with the COMPANY or (b) has been terminated by the COMPANY for a cause of
material nature [whereby the death of the SELLER or his incapacity to work
for the COMPANY without fault - Art. 324a CO - shall not fall under lit a
or b hereof], and that
(b) during a period of 24 months after CLOSING, the number of CONSIDERATION
SHARES held in escrow shall not be reduced to less than 22,369
CONSIDERATION SHARES, or to such amount as adjusted to account for a MAKE
WHOLE PAYMENT pursuant to Sec. 2.4.2 hereof.
1.5.3. The CONSIDERATION SHARES held in escrow pursuant to Sec. 1.5.2(b) shall
be kept for a period of 24 months following CLOSING as a security for claims of
ENTRUST in connection with claims based on the representations and warranties of
Sec. 4 and 5 and on the covenants of Sec. 7.1.1 and 7.1.2.
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1.5.4. CONSIDERATION SHARES held in ESCROW may not be sold. Notwithstanding the
previous sentence, CONSIDERATION SHARES held in ESCROW only on the basis of Sec.
1.5.2(b) can be sold, provided, however, that during the 24-months period
following CLOSING, or thereafter if the duration of the ESCROW is extended in
connection with any warranty claim of ENTRUST, the transfer of such
CONSIDERATION SHARES to the acquirer shall be valid and shall take place only if
the cash consideration to be received by the SELLER is placed into escrow in
lieu of the CONSIDERATION SHARES.
1.5.5. Variations in the price of the CONSIDERATION SHARES shall not cause any
variation in the number of CONSIDERATION SHARES to be put in ESCROW.
1.5.6. The specific terms and conditions of the ESCROW AGREEMENT are reserved.
2. Consideration Shares
2.1. Value of Consideration Shares
2.1.1. For the purpose of the conversion of any amount expressed in USD into a
certain number of CONSIDERATION SHARES or vice-versa, each CONSIDERATION SHARE
shall be deemed to be worth USD 58.30 (or, after CLOSING, such other amount as
adjusted for stock splits, stock dividends and other recapitalizations taking
place after CLOSING). Fractions of CONSIDERATION SHARES shall be rounded to the
nearest whole number, and the difference paid or deducted from amounts otherwise
payable in cash, as the case may be.
2.1.2. If ENTRUST calls upon the ESCROW as a security in connection with a
DEFECT, the actual market value of the CONSIDERATION SHARES, and not the value
set pursuant to the previous Sec. 2.1.1. shall determine the number of
CONSIDERATION SHARES to be attributed to ENTRUST.
2.2. Restrictions on Transfer
2.2.1. The CONSIDERATION SHARES are restricted securities. They are the object
of the representations and warranties of Sec. 4.2 and of the covenants of Sec.
6.3.
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2.2.2. Notwithstanding the SELLER's ability to resell CONSIDERATION SHARES under
United States or other securities laws, any sale or other disposition of any of
the CONSIDERATION SHARES by the SELLER, other than according to the provisions
of Sections 2.2.3, 2.3 or 2.4 below, shall be void and transfer no right, title,
or interest in or to any of such CONSIDERATION SHARES to the purported
transferee.
2.2.3. The SELLER may sell, assign or transfer CONSIDERATION SHARES to his
spouse or children or to a trust established for the benefit of his spouse,
children or himself, or dispose of them under his will, without compliance with
Section 2.3, provided, however, that such transferee will be subject to the same
contractual transfer restrictions as the SELLER.
2.3. Right of First Refusal
2.3.1. If the SELLER desires to sell, transfer or otherwise dispose of any of
his CONSIDERATION SHARES, or of any interest in such CONSIDERATION SHARES,
whether voluntarily or by operation of law, in any transaction other than
pursuant to Section 2.2.3. or 2.4 of this Agreement, the SELLER shall first
deliver written notice of his desire to do so (the "NOTICE") to ENTRUST in the
manner prescribed in Section 8.5 of this Agreement. The NOTICE must specify: (i)
the name and address of the party to which the SELLER proposes to sell or
otherwise dispose of the CONSIDERATION SHARES or an interest in the
CONSIDERATION SHARES (the "OFFEROR"), (ii) the number of CONSIDERATION SHARES
the SELLER proposes to sell or otherwise dispose of (the "OFFERED CONSIDERATION
SHARES"), (iii) the consideration per SHARE to be delivered to the SELLER for
the proposed sale, transfer or disposition, and (iv) all other material terms
and conditions of the proposed transaction.
2.3.2. ENTRUST shall have the first option to purchase all but not less than all
of the OFFERED CONSIDERATION SHARES for the consideration per SHARE and on the
terms and conditions specified in the NOTICE. ENTRUST must exercise such option,
no later than 15 days after such NOTICE is deemed to have been delivered to it
under Section 8.5, by written NOTICE to the SELLER, provided, however, that such
deadline will be extended to 30 days if the number of OFFERED CONSIDERATION
SHARES exceeds 50,000.
2.3.3. In the event ENTRUST duly exercises its option to purchase the OFFERED
CONSIDERATION SHARES, the closing of such purchase shall take place at the
offices of the COMPANY, or at any other place mutually agreed between the
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PARTIES five (Swiss) business days after the expiration of deadline for the
exercise of the right of first refusal pursuant to Section 2.3.2. above. If
ENTRUST does not exercise its option to purchase the CONSIDERATION SHARES, the
closing of the sale must take place in accordance with the terms and conditions
specified in the NOTICE no later than 60 days after the expiration of the option
of ENTRUST.
2.3.4. To the extent that the consideration proposed to be paid by the OFFEROR
for the OFFERED CONSIDERATION SHARES consists of property other than cash or a
promissory note, the consideration required to be paid by ENTRUST may consist of
cash equal to the value of such property, as determined in good faith by
agreement of the SELLER and ENTRUST.
2.3.6 The right of first refusal of ENTRUST set forth in this Section 2.3 shall
terminate upon the closing of ENTRUST's initial public offering of Series A
Common Stock pursuant to an effective registration statement under the
SECURITIES ACT (a "PUBLIC OFFERING").
2.4. Put Option and Make Whole Payment
2.4.1. If ENTRUST's Series A Common Stock is not listed on a United States
national securities exchange, the Nasdaq Stock Market or another U.S. nationally
recognized exchange or trading system on the first anniversary of CLOSING (the
"FIRST ANNIVERSARY"), and the SELLER is the beneficial owner of CONSIDERATION
SHARES as of the FIRST ANNIVERSARY, then the SELLER shall have 15 days to give
written notice to ENTRUST of its intention, if any, to sell to ENTRUST (the "PUT
RIGHT"), all, but not less than all, of the CONSIDERATION SHARES owned by the
SELLER (including any CONSIDERATION SHARES to be released from escrow on the
FIRST ANNIVERSARY but excluding any CONSIDERATION SHARES remaining in escrow
after the FIRST ANNIVERSARY) (the "PUT SHARES"). If the SELLER exercises its PUT
RIGHT, the SELLER agrees to sell the PUT SHARES to ENTRUST, and ENTRUST agrees
to purchase the PUT SHARES from the SELLER, at a price of USD $58.30 (subject to
adjustment for stock dividends, stock splits and other recapitalizations) (the
"STANDARD PUT PRICE"). The PUT RIGHT is subject to the following:
(a) The SELLER must not, at the time of giving notice of exercise of its PUT
RIGHT, either (i) have terminated his employment relationship with the
COMPANY or (ii) have been terminated by the COMPANY for a cause of material
nature (whereby the death of the SELLER or his incapacity to work
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for the COMPANY without fault - Art. 324a CO - shall not fall under lit [i]
or [ii] hereof); and
(b) the payment of the STANDARD PUT PRICE against the delivery of the PUT
SHARES shall be made in three equal quarterly installments beginning within
5 (Swiss) business days after ENTRUST has received notice of exercise of
the PUT RIGHT.
2.4.2. If ENTRUST's Series A Common Stock is listed on a United States national
securities exchange, the Nasdaq Stock Market or another U.S. nationally
recognized exchange or trading system prior to the FIRST ANNIVERSARY, and the
MARKET PRICE is less than USD $48.30 (subject to adjustment for stock dividends,
stock splits and other recapitalizations) (the "IPO PUT PRICE"), then ENTRUST
shall make an additional payment per CONSIDERATION SHARE, in cash or in shares
of its Series A Common Stock (the choice of either form being at the sole
discretion of ENTRUST), to the SELLER equal to the difference between the IPO
PUT PRICE and the MARKET PRICE (the "MAKE WHOLE PAYMENT"), subject to the
following provisions:
(a) The SELLER must not, as of the effective date of the registration statement
relating to the PUBLIC OFFERING, either (i) have terminated his employment
relationship with the COMPANY, or (i) have been terminated by the COMPANY
for a cause of material nature (whereby the death of the SELLER or his
incapacity to work for the COMPANY without fault - Art. 324a CO shall not
fall under lit [i] or [ii] hereof); and
(b) ENTRUST agrees to deliver the MAKE WHOLE PAYMENT pursuant to the
instructions of the SELLER within 10 Swiss business days after the end of
the relevant period for the determination of the MARKET PRICE pursuant to
Sec. 2.4.3 hereinafter.
(c) Notwhithstanding the previous paragraph and Sec. 1.5.5, any MAKE WHOLE
PAYMENT made in connection with any CONSIDERATION SHARES held in escrow
pursuant to Sec. 1.5 shall be placed by ENTRUST into ESCROW and shall be
held and released like the CONSIDERATION SHARES it relates to.
2.4.3. MARKET PRICE means the average of the closing sale price of ENTRUST's
Series A Common Stock on the principal United States securities exchange or
trading market for such stock (the "PRINCIPAL MARKET") for the ten (10) trading
days beginning on the first day of trading of such stock on the PRINCIPAL
MARKET.
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3. Closing
3.1. Conditions Precedent
CLOSING is subject to the following conditions precedent:
(a) the approval of the AGREEMENT by the board of directors of the COMPANY;
(b) the approval of the AGREEMENT by the stockholders and the board of
directors of ENTRUST;
(c) the holding of outstanding COMPANY SHARES at CLOSING by no more than two
minority shareholders; and
(d) the Watermark intellectual property has been transferred to the WATERMARK
COMPANY pursuant to Sec. 7.4. prior to CLOSING.
3.2. Completion of the sale
3.2.1. The sale and purchase of the SHARES will be completed at the offices of
Bar & Karrer, Seefeldstrasse 19, 8008 Zurich, at the latest on 8 June 1998
("CLOSING").
3.2.2. At CLOSING, the SELLER shall produce and deliver to ENTRUST:
(a) share certificates endorsed to ENTRUST representing the SHARES;
(b) share certificates endorsed to the COMPANY representing the COMPANY SHARES
held in treasury by the COMPANY as of CLOSING;
(c) the original of the minutes of the board of the COMPANY authorizing the
transfer of the SHARES to ENTRUST;
(d) the original share register of the Company (Art. 686 CO), duly signed by
the board of directors, and bearing ENTRUST as shareholder for the SHARES,
without any restriction or limitation; and
(e) the resignation letter of Dr. Markus Kroll and of Mr. Peter Titz.
3.2.3. At CLOSING, ENTRUST shall, on its part, deliver to the SELLER:
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(a) a certificate of the Secretary evidencing the decision of the BOARD of
ENTRUST approving this AGREEMENT;
(b) an original and irrevocable promise by a bank of international standing and
reputation to pay the BASIS PRICE, and, if due at CLOSING, the PRICE
ADJUSTMENT or, at the election of ENTRUST, a bank check drawn on a bank of
international standing and reputation and issued for the same amount;
(c) stock certificates registered in the name of the SELLER for the number of
CONSIDERATION SHARES;
(d) a receipt issued by the ESCROW AGENT as proof that the CONSIDERATION SHARES
to be delivered to the ESCROW AGENT at CLOSING pursuant to Sec. 1.5.1 have
been placed into ESCROW.
3.3. Transfer of Risks
The risks and profits relating to the SHARES and to the COMPANY shall pass to
ENTRUST at CLOSING.
4. Representations of Seller
Subject to the disclosure made in the Disclosure Letter (Exhibit DIL) and to the
provisions of Sec. 5 below, the SELLER makes the following representations,
which truly and accurately reflect the factual and legal situation as of the
date of this AGREEMENT.
4.1. With Respect to US Securities Regulations
4.1.1. With respect to the CONSIDERATION SHARES issued to and acquired by the
SELLER hereunder, the SELLER represents and warrants as follows:
(a) The SELLER will be acquiring the CONSIDERATION SHARES for his own account
for investment only, and not with a view to, or for sale in connection
with, any distribution of such CONSIDERATION SHARES in violation of the
SECURITIES ACT or any rule or regulation under the SECURITIES ACT.
(b) The SELLER has sufficient experience in business, financial and investment
matters to be able to evaluate the risks involved in the acquisition of the
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CONSIDERATION SHARES and to make an informed investment decision with respect to
such investment.
(c) The SELLER is not a "U.S. person" (as defined in Regulation S under the
SECURITIES ACT ("REGULATION S").
(d) The SELLER understands and acknowledges that (i) the CONSIDERATION SHARES,
if and when issued, will be "restricted securities" under Rule 144 of the
SECURITIES ACT and may not be offered or sold in the United States or to,
or for the account or benefit of, any U.S. person unless such securities
are registered under the SECURITIES ACT or such offer or sale is made
pursuant to an exemption from the registration requirements of the
SECURITIES ACT, (ii) the CONSIDERATION SHARES are being distributed by
ENTRUST pursuant to the terms of REGULATION S, which permits securities to
be sold to non-U.S. persons in "offshore transactions" (as defined in
REGULATION S), subject to certain terms and conditions, and (iii) hedging
transactions involving the CONSIDERATION SHARES may not be conducted unless
in compliance with the SECURITIES ACT.
(e) The SELLER has signed this AGREEMENT outside the United States.
4.1.2. The following are definitions contained in REGULATION S as in effect on
the date of this Agreement:
(a) "U.S. person" means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or incorporated under the
laws of the United States;
(iii) Any estate of which any executor or administrator is a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the United
States;
(vi) Any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit
or account of a U.S. person;
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(vii) Any discretionary account or similar account (other than an estate
or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States;
and
(viii) Any partnership or corporation if:
- Organized or incorporated under the laws of any foreign
jurisdiction; and
- Formed by a U.S. person principally for the purpose of investing in
securities not registered under the SECURITIES ACT, unless it is
organized or incorporated, and owned, by accredited investors (as
defined in Rule 501(a) of the SECURITIES ACT) who are not natural
persons, estates or trusts.
(b) The following are not "U.S. persons":
(i) Any discretionary account or similar account (other than an estate or
trust) held for the benefit or account of a non-U.S. person by a
dealer or other professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
(ii) Any estate of which any professional fiduciary acting as executor or
administrator is a U.S. person if:
An executor or administrator of the estate who is not a U.S. person has
sole or shared investment discretion with respect to the assets of
the estate; and
The estate is governed by foreign law;
(iii) Any trust of which any professional fiduciary acting as trustee is a
U.S. person, if a trustee who is not a U.S. person has sole or shared
investment discretion with respect to the trust assets, and no
beneficiary of the trust (and no settlor if the trust is revocable)
is a U.S. person;
(iv) An employee benefit plan established and administered in accordance
with the law of a country other than the United States and customary
practices and documentation of such country;
(v) Any agency or branch of a U.S. person located outside the United
States if:
- The agency or branch operates for valid business reasons; and
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- The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking
regulation, respectively, in the jurisdiction where located; and
(vi) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans, and any
other similar international organizations, their agencies, affiliates
and pension plans.
(c) "United States" means the United States of America, its territories and
possessions, any State of the United States, and the District of Columbia.
4.2. With Respect to the SHARES and the COMPANY's Capital
4.2.1. The SHARES have been duly issued and are fully paid in. They are free of
any pledge, charge, encumbrances, or restrictions of any kind or nature.
4.2.2. The SELLER has good and valid title to the SHARES and he may freely
dispose of such SHARES without any limitation or restriction of any kind or
nature.
4.2.3. The COMPANY has a an issued share capital of CHF 400,000.-- composed of
40,000.--fully paid in registered shares with a nominal value of CHF 10.--
each. 8,000 of said registered shares are preferred shares. In addition to the
issued share capital, the COMPANY has a conditional capital of CHF 50,000.-- for
5,000 registered shares with a par value of CHF 10.-- each. The COMPANY has no
other issued, authorized or conditional equity.
4.2.4. There are no subscription rights, options, warrants, offers or other
commitments outstanding, which would oblige the COMPANY to issue any new COMPANY
SHARES or to transfer such COMPANY SHARES. Any such rights, options or offers
disclosed to ENTRUST in the due diligence have extinguished without affecting
the representation made under Sec. 4.2.3 above.
4.2.5. No prior issue, payment, contribution, sale, redemption, or transfer in
respect of the SHARES, has given or may give rise to any right, claim or action
against the COMPANY or ENTRUST.
4.2.6. The SELLER has granted 500 options to Peter Titz and 1,200 options to
Markus Kroll in relation to his SHARES. SELLER represents and warrants that,
despite of these
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options, he is entitled to sell all his SHARES to ENTRUST, provided that the
following CONSIDERATION SHARES (forming part of the SELLERS' PURCHASE PRICE) are
delivered to the SELLER at CLOSING: (i) 2015 CONSIDERATION SHARES registered in
the name of Peter Titz, and (ii) 4,837 CONSIDERATION SHARES registered in the
name of Markus Kroll, of which 506 shall be put into escrow pursuant to Sec.
1.3.2.
4.3. With Respect to the COMPANY
4.3.1. Existence, Good Standing, and Records
4.3.1.1. The excerpt from the Commercial Register and the articles of
association in Exhibit DIL are current, true, and complete.
4.3.1.2. The minutes of the shareholders' and of the board of directors'
meetings listed in Exhibit DIL contain a complete, true and accurate record of
all such meetings over the period mentioned therein.
4.3.1.3. To the extent that the COMPANY carries business outside of Switzerland,
it is presently in good standing and having the necessary licences and permits
to carry on its business in these jurisdictions.
4.3.1.4. The COMPANY has no subsidiary, and has no participation in any other
entity, except for its participation in Swiss Security Service Laboratory AG,
Solothurn.
4.3.2. Accounts
4.3.2.1. The accounts attached in Exhibit DIL, including the first quarter
results submitted to ENTRUST, comply with the requirement of the Swiss Code of
Obligations, and have been prepared in accordance with accounting principles and
practices generally accepted in Switzerland.
4.3.2.2. Subject to the applicable accounting principles, the audited accounts
as of 31 December 1997 (the "Accounts"), as well as the first quarter results,
as per the date they were established:
(a) set forth without overestimation the capital, reserves, assets, and profits
of the COMPANY;
(b) fully provide for all bad or doubtful claims and receivables;
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(c) fully provide for all liabilities, including contingent liabilities, or
disclose them in the notes; and
(d) are not affected (except as disclosed in the Accounts) by any extraordinary
or exceptional event, circumstance or item.
4.3.2.3. The accounts of the COMPANY for each financial year since its creation
have been consistently approved, without any qualification or restriction of any
kind, by the statutory auditors of the COMPANY.
4.3.2.4. The accounting records of the COMPANY are up to date and contain
complete and accurate details of all transactions of the COMPANY in compliance
with Art. 662 et seq. and 957 et seq. CO.
4.3.2.5. The COMPANY's records' systems and information, and the means of access
to them, are under the COMPANY's direct control.
4.3.2.6. There was no distribution of, nor any decision or committment to
distribute any dividend in whatever form for the financial year ending on 31
December 1997. The spin-off of the WATERMARK BUSINESS pursuant to Sec. 7.4. is
reserved.
4.3.2.7. ENTRUST is aware that the first quarter results do not contain the
accrued bonus payments for the first quarter of 1998, since the bonus payment,
if any, shall be decided at the end of the year. Said bonus payments are to be
made pursuant to the provisions of the employment agreements disclosed to
ENTRUST.
4.3.2.8. The issue prospectus dated 22 May 1998, including the financial
statements contained therein, constitutes full, true and plain disclosure of all
material facts relating to the COMPANY as of such date. The issue prospectus
contains no untrue statement of material facts, and the financial figures
contained in the issue prospectus are based on the same principle as those
applied for the establishement of the Accounts, as represented above in this
Sec. 4.3.2.
4.3.3. Financing
4.3.3.1. The COMPANY has not made nor entered into any contract to make any
loan to any person or other arrangement whereby it is or may be owed any money
other than trade debts incurred in the ordinary course of business.
4.3.3.2. The COMPANY is not entitled to the benefit of any debt otherwise than
as the original creditor and has not factored or discounted any debt or agreed
to do so.
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4.3.3.3. All of the accounts receivable which are reflected in the Accounts as
owed to the COMPANY (apart from bad and doubtful debts to the extent to which
they have been provided for in the Accounts) or which have subsequently been
recorded in the books of COMPANY have realised or are reasonably expected to
realise in the normal course of collection and within three months of CLOSING
their full value as included in the Accounts, after deduction of any provision
for bad debts.
4.3.3.4. ENTRUST is aware that some employees may have an overdraft with the
COMPANY, such overdraft being in aggregate of no more than CHF 50,000.--.
4.3.4. Technical characteristics
4.3.4.1. The quality of the COMPANY'S source code base in terms of security
design, documentation, performance, stability and reliability including year
2000 compliance is sufficient to carry on the business of the COMPANY as
currently contemplated, subject, however, to (i) the ongoing improvements and
developments made in the ordinary course of the COMPANY's business, and (ii)
unforseen external market and technology developments.
4.3.5. Intellectual property
4.3.5.1. The COMPANY owns, or is licensed or otherwise possesses a right to use,
all INTELLECTUAL PROPERTY (as defined below) used in the operation of its
business or necessary for the operation of its business as currently conducted,
except as otherwise disclosed in Exhibit IPR. The COMPANY has taken reasonable
measures to protect the proprietary nature of trade secrets and confidential
information (as defined below) that it owns or uses. Except as disclosed in
Exhibit IPR, the Company has not granted any rights to any of the INTELLECTUAL
PROPERTY owned by the COMPANY (other than any rights in any INTELLECTUAL
PROPERTY not owned by the COMPANY that constitutes commercially available
software generally available to the public) to any person or business entity. To
the SELLER's knowledge, no other person or business entity is infringing,
violating or misappropriating any of the INTELLECTUAL PROPERTY that the COMPANY
owns. The COMPANY has acquired all rights to INTELLECTUAL PROPERTY developed or
held by any employees (within the scope and term of his employment or otherwise
relating to the current or proposed business of the COMPANY) or third parties
who developed INTELLECTUAL PROPERTY for the COMPANY and no outstanding claims
for the payment of any purchase price or indemnity in respect of such
INTELLECTUAL PROPERTY is threatened or outstanding, except as disclosed in
Exhibit IPR.
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4.3.5.2. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means all (A)
patents, patent applications, patent disclosures and all related continuation,
continuation in part, divisional, reissue, reexamination, utility model,
certificate of invention and design patents, patent applications, registrations
and applications for registrations; (B) trademarks, service marks, trade dress,
logos, trade names and corporate names and registrations and applications for
registration thereof; (C) copyrights and registrations and applications for
registration thereof; (D) computer software, data and documentation; (E) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, know-how, manufacturing and
production processes and techniques, research and development information,
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information; (F) other proprietary rights relating to any of the foregoing and
(G) copies and tangible embodiments thereof.
4.3.5.3. None of the activities or business conducted by the COMPANY infringes,
violates or constitutes a misappropriation of (or in the past infringed,
violated or constituted a misappropriation of) any INTELLECTUAL PROPERTY rights
of any other person or business entity, except as disclosed in Exhibit IPR. The
COMPANY has not received any complaint, claim or notice alleging any such
infringement, violation or misappropriation, and, to SELLER's knowledge, there
is no basis for any such complaint, claim or notice.
4.3.5.4. Exhibit IPR identifies each (a) patent or registration that has been
issued to the COMPANY with respect to any of its INTELLECTUAL PROPERTY, (b)
pending patent application or application for registration that the COMPANY has
made with respect to any of its INTELLECTUAL PROPERTY and (c) license or other
agreement pursuant to which the COMPANY has granted any rights to any third
party with respect to any of its INTELLECTUAL PROPERTY. The COMPANY has
delivered to ENTRUST or its advisors correct and complete copies of all such
patents, registrations, applications, licenses and agreements (as amended to
date) and has specifically identified and made available to ENTRUST or its
advisors correct and complete copies of all other written documentation
evidencing ownership of, and any claims or disputes relating to, each such item.
With respect to each item of INTELLECTUAL PROPERTY that the COMPANY owns, except
as provided in Exhibit IPR:
(a) the COMPANY possesses all right, title and interest in and to such item;
(b) such item is not subject to any outstanding judgment, order, decree,
stipulation or injunction; and
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(c) the COMPANY has not agreed to indemnify any person or business entity for
or against any infringement, misappropriation or other conflict with
respect to such item.
4.3.5.5. The COMPANY has supplied ENTRUST or its advisors with correct and
complete copies of all licenses, sublicenses or other agreements (as amended to
date) pursuant to which the COMPANY uses such INTELLECTUAL PROPERTY, all of
which are annexed in Exhibit IPR. To the SELLER's knowledge and with respect to
each such item of INTELLECTUAL PROPERTY, except as otherwise disclosed in
Exhibit IPR:
(a) the license, sublicense or other agreement covering such item is legal,
valid, binding, enforceable and in full force and effect with respect to
the COMPANY, and is legal, valid, binding, enforceable and in full force
and effect with respect to each other party thereto;
(b) neither the COMPANY nor any other party to such license, sublicense or
other agreement is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default by the
COMPANY or by any such other party, or permit termination, modification or
acceleration thereunder;
(c) the underlying item of INTELLECTUAL PROPERTY is not subject to any
outstanding judgment, order, decree, stipulation or injunction to which the
COMPANY is a party or has been specifically named, nor subject to any other
outstanding judgment, order, decree, stipulation or injunction;
4.3.5.6. With respect to each such item of INTELLECTUAL PROPERTY except as
otherwise disclosed in Exhibit IPR:
(a) the COMPANY has not agreed to indemnify any person or business entity for
or against any interference, infringement, misappropriation or other
conflict with respect to such item; and
(b) no license or other fee is payable upon any transfer or assignment of such
license, sublicense or other agreement by the terms thereof or the terms of
any other agreement or arrangement with the other party or parties thereto.
4.3.5.7. The SELLER warrants to the best of its knowledge that the COMPANY has
taken and plans to take up to the year 2000 all reasonable measures up to then
known as state of the art to ensure that its software products are designed to
perform, and will perform correctly at all times prior to, during and after the
calendar year 2000, all functions, calculations, sequencing, displays and other
processing of calendar dates and date-related data without error or degradations
in performance, specifically including
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any error relating to, or the product of, date data which represent different
centuries or more than one century.
4.3.6. Insurances
4.3.6.1. Exhibit DIL lists all private insurance contracts concluded by the
COMPANY.
4.3.6.2. All premiums due in relation to the COMPANY's insurances have been
paid, and nothing has been done or omitted to be done which would make any
policy of insurance of the COMPANY void or voidable or which is likely to result
in an increase in premium or which would release any insurer from any of its
obligations under any policy of insurance of the COMPANY.
4.3.6.3. There is no insurance claim pending or outstanding and there are no
circumstances likely to give rise to any such claim.
4.3.7. Customers and Suppliers
4.3.7.1. To the SELLER's best knowledge, none of the current COMPANY's
customers or suppliers intends or has threatened to cease or alter their
business with the COMPANY. The SELLER is not aware of the existence of any
formal change of control clause in any material contract with any customer or
supplier of the COMPANY, other than as might be contained in the contracts
listed in Exhibit DIL and provided to ENTRUST. The SELLER has not made and is
not expected to make any investigations as to the intents of the COMPANY's
suppliers and customers.
4.3.7.2. Neither the COMPANY nor the SELLER has made extraordinary promises,
commitments or assurances, whether oral or written, express or implied, to the
effect that the COMPANY will or may:
(a) offer future price reductions, concessions or other special terms to any
customer of the COMPANY;
(b) accept future price increases or additional charges or other special terms
to any supplier of the COMPANY; or
(c) be liable to the payment of any liquidated damages, penalties or similar
liabilities.
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4.3.7.3. There is no assumed contract which the SELLER can reasonably forsee
that will result in any material loss upon performance thereof by the COMPANY
after CLOSING.
4.3.8. Employees
4.3.8.1. Exhibit DIL accurately lists the name, position, and current annual
compensation of each employee of the COMPANY. The employment agreements with the
key-employees enclosed in Exhibit DIL are true and correct and fully in force.
4.3.8.2. None of the key-employees has notified the COMPANY of its intent to
terminate employment or is expected to terminate employment. With the exception
of military service and regular vacations, no such key-employee is absent from
work on disability or other leave or has notified the COMPANY of intent to take
any such leave. ENTRUST is aware of a possible termination of the contract with
Mr. Herrigel as well as of the absence of Mr Wildhaber for education purposes
(for an aggregate amount of about 15 days).
4.3.8.3. All salaries, bonuses or other compensation of any kind and nature
have been timely paid to the COMPANY's employees.
4.3.9. Pensions and social security contributions
4.3.9.1. The COMPANY has paid all contributions it is required to make by law
or by agreement with its employees, with any labour organization, or with any
insurance company with respect to pensions and social security, and especially
all contributions to the AHV / IV, ALV and SUVA.
4.3.9.2. The COMPANY complies with all legal obligations with respect to its
employees' pensions and social security.
4.3.10. Litigation
4.3.10.1. To the knowledge of the SELLER, there are no suits, arbitrations,
administrative or other proceedings (including debt collection proceeding or
other insolvency proceedings) in any matter subject to private or to public law,
pending, threatened against or otherwise affecting the COMPANY.
4.3.10.2. The COMPANY is not subject to any judgement, order or decree which has
affected or may affect its business.
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4.3.11. Taxes
4.3.11.1. The COMPANY has filed all tax returns and withheld and paid or
discharged all taxes, assessments and penalties due and payable , and there is
no further liability for any such taxes and no interests or penalties accrued or
accruing with respect thereto.
4.3.11.2. All tax returns of the COMPANY are accurate and complete. To the
SELLER's best knowledge, no audit of any tax return of the COMPANY is pending or
proposed. There is no fact, circumstance, organizational structure, act or event
which could give rise to any claim of tax underpayments, penalties, or
disqualifications of any tax status of the COMPANY for prior years, which have
not been discharged of or provisioned for.
4.3.11.3. For the tax period ending on 31 December 1997, the tax returns can be
filed on the basis of the accounts for the business year 1997 as attached in
Exhibit DIL. There are no outstanding agreements or waivers extending any period
of limitation applicable to any tax return of the COMPANY. Notwithstanding the
previous sentence, the COMPANY has received an extension of the filing of the
tax return for 1997, since the COMPANY has just received the audit report in
relation to the 1997 figures.
4.3.11.4. There are no disputes as to taxes nor any tax liens, whether existing
or threatened, on any assets as well as on any income or expense item of the
profit and loss statement of the COMPANY.
4.3.11.5. The words "tax" and "taxes" in this AGREEMENT mean all taxes, however
denominated, including interest, penalties, and other additions to taxes that
may become payable in respect thereof, imposed by the state, the cantons, the
municipalities or by any other agency or political subdivision, such as income
taxes and capital taxes due on the basis of taxable profit and taxable capital
as declared in the tax returns, or other taxes (for example VAT) due on the
basis of a filed tax return, as well as all other taxes, including but not
limited to taxes due on the basis of an adjustment of figures as declared in tax
returns filed with the tax authorities or due on the basis of an adjustment of a
provisional or final assessment from whatever authority and for whatever reason.
4.3.12. Events since Accounting Date and since end of Q1
4.3.12.1. Since 31 December 1997, respectively since 31 March 1998:
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(a) the business of the COMPANY has been carried on in the ordinary and normal
course;
(b) there has been no material adverse change in the financial or market
position of the COMPANY, including any such change in respect of turnover,
profits, margins of profitability, liabilities (actual or contingent) or
expenses of the COMPANY; and
(c) there has been no substantial and abnormal change in the basis or terms on
which clients or suppliers are prepared to do business with the COMPANY.
4.3.12.2. The spin-off of the Watermark business pursuant to Sec. 7.4 is
excluded from the representations made in this Sec. 4.3.12.
4.3.13. Effect of the transaction
4.3.13.1. To the SELLERS' best knowledge the customers and suppliers of the
COMPANY have not been informed that the control over the COMPANY may be sold to
ENTRUST. The SELLER is not aware of any formal notification that the execution
or CLOSING of this AGREEMENT and of the change of control will lead to the
termination of the relationship between the COMPANY and its normal customers or
suppliers. ENTRUST has been made aware that it might be preferable to maintain
the name of the COMPANY and the Swiss character of the COMPANY to avoid negative
impacts on the relationship with the COMPANY's customers and suppliers.
4.3.13.2. The execution of the AGREEMENT and the observance and performance of
its provisions by the SELLER, including the spin-off of the WATERMARK business,
will not:
(a) result in a breach of any contract, law, regulation, order, judgement,
injunction, undertaking, decree or other like imposition to or by which the
COMPANY is a party or is bound, or entitle any person to terminate or avoid
any contract to which the COMPANY is a party, or have any material effect
on any such contract;
(b) result in the loss or impairment of or any default under any licence,
authorization or consent required by the COMPANY for the purposes of its
business;
(c) result in the creation, imposition, crystallisation or enforcement of any
encumbrance whatsoever on any of the assets of the COMPANY;
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(d) result in any present indebtedness of the COMPANY becoming due and payable,
or capable of being declared due and payable, prior to its stated maturity
date or in any financial facility of the COMPANY being withdrawn; or
(e) result in any grant or subvention to the COMPANY, in connection with any
research, developement, or consulting project being cancelled or claimed
back;
4.3.13.3. There is no contract to which the COMPANY is party which formally
depends on the continuation of the connection (whether as an officer of the
COMPANY or otherwise) of any person with the COMPANY.
4.3.13.4. Notwithstanding the intended generality of the above, the
representations made in this Sec. 4.3.13 are limited by the specific
qualifications made in this agreement (e.g. in Sec. 4.3.7.1) and by the general
principles governing the liability of the SELLER and laid down in Sec. 5.4.
4.3.14. Other material items
To the SELLER's best knowledge there is no fact, contractual or legal
obligations, which has or may have a material adverse effect on the value of the
COMPANY, and which, if known to ENTRUST prior to the date of this AGREEMENT,
could have caused ENTRUST not to enter into this AGREEMENT.
5. Warranty Claims Against Seller
5.1. Subject to the provisions of this AGREEMENT, the SELLER shall be liable
to ENTRUST for any breach of the representations made in Sec. 4 above (a
"DEFECT"), and shall indemnify and hold ENTRUST (or at the option of ENTRUST,
the COMPANY) harmless against any damage incurred by ENTRUST or by the COMPANY,
unless ENTRUST was aware of the DEFECT at SIGNING.
5.2. In order to account for the effective participation of the SELLER in the
COMPANY's capital, the liability of the SELLER for the damage caused by the
DEFECT shall be reduced to 59.274 % of the damage, unless such damage affects
directly the SHARES.
5.3. For the purpose of any claim for the reduction of the PURCHASE PRICE in
connection with any DEFECT, such DEFECT shall be deemed to affect pro rata the
value of the SHARES in the same manner as it affects the value of the COMPANY.
The hypothetical value of the SHARES without the DEFECT shall be deemed to be
equal to
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the PURCHASE PRICE, or, if no PRICE ADJUSTMENT was payable, to the BASIS
PRICE.
5.4. ENTRUST shall notify the SELLER in writing of any DEFECT no later than 45
days after ENTRUST has become aware of such DEFECT. ENTRUST shall not be deemed
to have been aware of, or to have accepted any DEFECT, unless such DEFECT has
been clearly disclosed by the COMPANY (i) in the course of the due diligence or
(ii) in the documents and information provided to ENTRUST and listed in the
answers to the due diligence questionnaire dated 10 May 1998, as attached in
Exhibit DIL. The requirement that ENTRUST examine the object of the sale after
CLOSING pursuant to Art. 201 CO is waived.
5.5. The claims of ENTRUST in connection with any DEFECT shall be subject to a
statute of limitation of 24 months after CLOSING and of one year after the
notification of the DEFECT by ENTRUST pursuant to Sec. 5.2., provided, however,
that claims raised in connection with taxes for any given tax period shall
expire one year after the final assessment for such tax period.
5.6. No claim may be raised against the SELLER in connection with any DEFECT,
unless the aggregate amount of the damage claimed by ENTRUST against the SELLER
and/or any other person in connection with DEFECTS exceeds CHF 100,000.--. The
maximum aggregate amount of warranty claims against the SELLER shall be limited
to 59.274% of CHF 15,000,000. If a DEFECT affects only the value of the SHARES,
without any damage for the COMPANY, the claim of ENTRUST shall be limited to the
PURCHASE PRICE paid.
5.7. A rescission of the sale of the SHARES is excluded.
6. Representations of Entrust
6.1. Good Standing and Authority
6.1.1. ENTRUST is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, United States of America, and
has requisite power and authority (corporate and other) to own its properties,
to carry on its business as now being conducted, to execute and deliver this
AGREEMENT and to consummate the transactions contemplated hereby.
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6.1.2. The execution and delivery of this AGREEMENT by ENTRUST, and the
consummation by ENTRUST of all transactions contemplated hereby, have been duly
authorized by all requisite corporate action on the part of ENTRUST.
6.2. Consideration Shares
All CONSIDERATION SHARES will be, when issued in accordance with this AGREEMENT,
duly authorized, validly issued, fully paid and nonassessable.
6.3. Capitalization
6.3.1. As of the date of this AGREEMENT, the authorized capital stock of ENTRUST
consists of (a) 15,000,000 shares of Series A Common Stock, USD .01 par value
per share, of which approximately 5,078,010 shares are issued and outstanding,
(b) 260,000 shares of Series B Common Stock, USD .01 par value per share, of
which 221,052 shares are issued and outstanding, (c) 260,000 shares of Series B
Non-Voting Common Stock, of which 38,948 shares are issued and outstanding, (d)
2,500,000 shares of Special Voting Stock, USD .01 par value per share, of which
1,925,000 shares are issued and outstanding, and (e) 500,000 shares of Preferred
Stock, USD .01 par value per share, none of which shares are issued or
outstanding. ENTRUST's Series A Common Stock.
6.3.2. In addition to the issued stock of ENTRUST, as of the date of this
AGREEMENT, ENTRUST has reserved 1,857,230 shares of Series A Common Stock for
issuance pursuant to the 1996 Stock Incentive Plan. ENTRUST anticipates
reserving additional Series A Common Stock for issuance pursuant to the 1996
Stock Incentive Plan or similar plan.
6.3.3. The capital stock table of ENTRUST attached hereto as Exhibit CAP shows
the approximate fully diluted capital structure of ENTRUST at CLOSING.
6.3.4. As a holder of CONSIDERATION SHARES, the SELLER shall have the same
rights, preferences and privileges as the other holders of ENTRUST's Series A
Common Stock.
6.4. Governmental Consents
No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any US GOVERNMENTAL AUTHORITY is
required on the part of ENTRUST in connection with the execution and delivery of
this
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AGREEMENT, the offer, issuance, sale and delivery of the CONSIDERATION SHARES,
or the other transactions to be consummated at the CLOSING, as contemplated by
this AGREEMENT.
6.5. Warranty Claims Against Entrust
6.5.1. Warranty claims in connection with a breach of the representations of
ENTRUST made under Sec. 6.1 to 6.3 are subject to the following limitations:
(a) The claims shall be capped at USD 10.-- per CONSIDERATION SHARE, i.e. the
difference between the agreed upon price per CONSIDERATION SHARE of USD
58.30 and the price of USD 48.30 guaranteed by Sec. 2.4.2.
(b) If the conditions for the exercise of PUT RIGHT pursuant to Sec. 2.4.1.
are fulfilled, any warranty claim shall be excluded altogether.
6.5.2. If the breach of Sec. 6.4.3 impairs the enforceability of the PUT RIGHT
of Sec. 2.4.1. and 2.4.3, the claim shall be capped at 58.30 per CONSIDERATION
SHARE
6.5.3. Without prejudice to the foregoing, Warranty Claims shall be subject to a
time-bar of 24 months following CLOSING.
7. Covenants
7.1. Management of the Company
7.1.1. Starting on the date of this AGREEMENT and until the earlier of (i) three
months following CLOSING or (ii) the issuance by the COMPANY of new
organizational by-laws under the control of ENTRUST, the SELLER shall not, alone
or acting with others, without the prior consent of ENTRUST:
(a) cause the business of the COMPANY to be conducted in any manner
inconsistent with the ordinary and usual course of the COMPANY's
business;
(b) cause the COMPANY to enter into any contract or into any commitment which
is likely to have a material adverse effect upon the operations or
activities of the COMPANY or the value of the COMPANY for ENTRUST;
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(c) cause the COMPANY to terminate any of the employment agreements with any
person employed by the COMPANY at the date of this AGREEMENT or to
transfer the title to any of the INTELLECTUAL PROPERTY listed in Exhibit
IPR;
(d) take any other action which is inconsistent with the provisions of this
AGREEMENT; or
(e) cause the COMPANY to sell any COMPANY SHARES held in treasury, or to
issue any new COMPANY SHARE or options, or to take any action which would
change the situation with respect to the COMPANY SHARES and, generally,
the COMPANY's capital, as represented in Sec.4.2.
7.1.2. The expenses incurred by the COMPANY in connection with the current
venture capital round shall not be charged to the COMPANY. No fees shall be paid
in connection with any work performed by or on behalf of INVISION.
7.2. Product Liability
7.2.1. The SELLER undertakes to hold the COMPANY free of any harm caused by
warranty claims in connection with defects affecting the products of the COMPANY
existing at CLOSING, provided, however, that ENTRUST cannot call upon this
covenant in connection with any product of the COMPANY if (i) ENTRUST or the
COMPANY fails to show reasonable care in maintaining such product or in
responding to customers' requests with respect to such product, or (ii) if
ENTRUST or the COMPANY made any modification to such product. The claim of
ENTRUST may only be raised if the warranty claims against the COMPANY exceed in
aggregate an amount of CHF 250,000, and if such claims are notified to the
COMPANY within 12 months following CLOSING. The claim of ENTRUST against the
SELLER shall be limited to 59.274 % of the excess of the aggregate warranty
claims raised against the COMPANY over CHF 250,000.--.
7.2.2. The claim of ENTRUST against the SELLER pursuant to this Sec. 7.2 is
subject to and shall be covered by the cap of Sec. 5.6.
7.3. Consideration Shares
7.3.1. The SELLER acknowledges that for a period of one year following the
CLOSING (the "DISTRIBUTION COMPLIANCE PERIOD"), the SELLER shall not (a) engage
in any activity for the purpose of, or which may reasonably be expected to have
the effect of, conditioning the market in the United States for the
CONSIDERATION SHARES or (b)
<PAGE>
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Share Purchase Agreement
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unless such CONSIDERATION SHARES are registered under the SECURITIES ACT or an
exemption from the registration requirements of the SECURITIES ACT is available,
offer, sell or transfer the CONSIDERATION SHARES in the United States or to, or
for the account or benefit of, a U.S. person. The SELLER understands that the
CONSIDERATION SHARES or any interest therein are only transferable on the books
and records of the transfer agent and registrar of ENTRUST. The SELLER further
understands that neither ENTRUST nor its transfer agent and registrar will
register any transfer of the CONSIDERATION SHARES except in accordance with the
provisions of REGULATION S, pursuant to registration under the SECURITIES ACT or
pursuant to an available exemption from registration, and that ENTRUST may place
stop transfer orders with its transfer agent with respect to certificates
representing CONSIDERATION SHARES.
7.3.2. Unless the CONSIDERATION SHARES shall first have been registered under
the SECURITIES ACT, any proposed offer, sale or transfer during the DISTRIBUTION
COMPLIANCE PERIOD of any of the CONSIDERATION SHARES shall be subject to the
condition that the SELLER must deliver to ENTRUST;
(a) a written certification that neither record nor beneficial ownership of
the CONSIDERATION SHARES has been offered or sold in the United States or
to, or for the account or benefit of, any U.S. person;
(b) a written certification of the proposed transferee that such transferee
(or any account for which such transferee is acquiring such CONSIDERATION
SHARES) is not a U.S. person, that such transferee is acquiring such
CONSIDERATION SHARES for such transferee's own account (or an account
over which he or she has investment discretion) and that such transferee
is knowledgeable of and agrees to be bound by the restrictions on re-sale
set forth in this Agreement and REGULATION S during the DISTRIBUTION
COMPLIANCE PERIOD, and
(c) a written opinion of United States counsel, in form and substance
reasonably satisfactory to ENTRUST, to the effect that the offer, sale
and transfer of such CONSIDERATION SHARES are exempt from registration
under the SECURITIES ACT. Any CONSIDERATION SHARES offered, sold or
transferred during the DISTRIBUTION COMPLIANCE PERIOD in accordance with
the foregoing restrictions will continue to be deemed "restricted
securities" under Rule 144 of the SECURITIES ACT, notwithstanding that
they were acquired in a resale transaction made pursuant to Rules 901 or
904 of REGULATION S.
7.3.3. Rule 144. The SELLER understands that "restricted securities" may be
resold in the United States or to, or for the benefit of, U.S. persons in
accordance with Rule 144
<PAGE>
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Share Purchase Agreement
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of the SECURITIES ACT. The SELLER acknowledges that the following is a summary
of the resale requirements of Rule 144, and such summary is qualified in its
entirety by reference to such rule, a copy of which was previously provided to
the SELLER.
7.3.4. Rule 144, as currently in effect, imposes the following requirements on
any holder of restricted securities:
(a) at the time of resale, ENTRUST must have been a public company for at
least 90 days (i.e., ENTRUST must have securities registered pursuant to
Section 12 of the United States Securities Exchange Act of 1934, as
amended, and have filed all reports required to be field thereunder
during the 12 months preceding the sale (or for such shorter period as
ENTRUST is a public company);
(b) the holder of restricted securities must have held such securities for at
least one year;
(c) the number of shares of Series A Common Stock sold by the holder within
any three-month period may not exceed the greater of (a) 1% of the number
of outstanding shares of Series A Common Stock or (b) the average weekly
trading volume of the Series A Common Stock during the four calendar
weeks preceding the filing of the Form 144;
(d) the holder must sell the securities only in "brokers' transactions" or in
transactions directly with a "market maker," which transactions may not
involve any solicitations of orders to buy the securities or any payments
to any person other than the broker executing the sale order; and
(e) the holder must mail three copies of a Form 144 to the United States
Securities and Exchange Commission at the same time as he or she places
the sale order with the broker.
7.3.5. After the holder of CONSIDERATION SHARES has held the CONSIDERATION
SHARES for two years, and assuming the holder has not been an affiliate of
ENTRUST (such as an officer, director or principal stockholder) during the
preceding three months, ENTRUST shall, to the extent permitted by law, at the
request of SELLER remove the restrictive legend from the CONSIDERATION SHARES
under Rule 144(k). Thereafter, and in respect of the transfers made in
accordance with Rule 144, the holder need not comply with the restrictions on
resale noted above.
7.3.6. A legend substantially in the following form will be placed on the
certificates representing the CONSIDERATION SHARES which may be issued to the
SELLER.
<PAGE>
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Share Purchase Agreement
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"The shares represented by this certificate have not been registered under the
United States Securities Act of 1933, as amended, and may not be offered, sold
or otherwise transferred, pledged or hypothecated (i) unless and until such
shares are registered under such Act or an opinion of counsel satisfactory to
Entrust Technologies Inc. is obtained to the effect that such registration is
not required or (ii) except in accordance with Regulation S of such Act. Hedging
transactions involving the shares represented by this certificate may not be
conducted except in compliance with the Securities Act of 1933, as amended.
The sale or other disposition of any of the shares represented by this
certificate is restricted by a Share Purchase Agreement entered into by the
holder of this certificate and Entrust Technologies Inc. A copy of the Share
Purchase Agreement is available for inspection during normal business hours at
the principal executive office of the corporation."
7.3.7. The SELLER, if requested by ENTRUST or the managing underwriter of a
public offering of ENTRUST's Series A Common Stock or other securities pursuant
to a registration statement under the SECURITIES ACT (a "REGISTRATION
STATEMENT"), shall agree not to sell publicly or otherwise transfer or dispose
of any CONSIDERATION SHARES or other securities of ENTRUST held by the SELLER
for a specified period of time (not to exceed 180 days) following the effective
date of such REGISTRATION STATEMENT; provided, however, that.
(a) such agreement shall only apply to the first REGISTRATION STATEMENT
covering Series A Common Stock or other securities to be sold to the
public in an underwritten offering, and
(b) all stockholders of ENTRUST holding not less than the number of shares of
Series A Common Stock held by the SELLER and all officers and directors
of ENTRUST enter into similar agreements.
7.3.8. ENTRUST represents that it has only made offers to sell the CONSIDERATION
SHARES outside the U.S.A. and that it did not generally advertise in the U.S.A.
in respect to the offering for sale or sale of the CONSIDERATION SHARES.
7.4. Watermark Business
7.4.1. The Watermark intellectual property (watermark specific software and
filed patents) shall be transferred to a separate entity (the "WATERMARK
COMPANY") prior to CLOSING in consultation with ENTRUST. The Company shall be
indemnified for any claims arising from or relating to the Watermark
intellectual property, either before or after CLOSING. To the extent that the
COMPANY is under any obligation to perform
<PAGE>
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Share Purchase Agreement
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any work on behalf of the WATERMARK COMPANY or in connection with the Watermark
intellectual property, such obligation will be taken over by the WATERMARK
COMPANY at no cost for the COMPANY. If such transfer is not possible, the
WATERMARK COMPANY will pay an arm's length consideration to the COMPANY and
grant to the COMPANY at no charge all licenses necessary for the performance of
such work.
7.4.2. Any costs (including legal costs) or taxes imposed on the COMPANY or on
ENTRUST in connection with the transfer of the watermark intellectual property
to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as
determined by Sec. 5.2 in respect of the representations and warranties.
7.4.3. The SELLER undertakes to hold his participation in the WATERMARK COMPANY
at arm's length, and, especially, not to engage in any kind of work for the
WATERMARK COMPANY as a director, consultant, employee, agent or in any other
position whatsoever, whether remunerated or not.
7.5. Offer to other Sellers
Provided that this AGREEMENT closes pursuant to Sec. 3.1 above, ENTRUST
undertakes to purchase during a period of 90 days after CLOSING any and all
outstanding COMPANY SHARES offered to it pursuant to any share purchase
agreement established in the form of Exhibit OTH, and completed in accordance
with the principles applied for the calculation of the figures contained in the
share purchase agreements entered into with the other sellers excluding
INVISION.
8. Miscellaneous
8.1. Costs
8.1.1. Each Party shall bear its own costs, taxes and expenses relating to the
preparation, CLOSING and implementation of this AGREEMENT.
8.2. Confidentiality
Effective as of CLOSING, ENTRUSTS' obligation to the keep confidential the
information received on the COMPANY shall terminate.
<PAGE>
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Share Purchase Agreement
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8.3. Assignment
8.3.1. The rights and obligations of the PARTIES out of this AGREEMENT may not
be assigned, provided, however, that ENTRUST is authorized to assign such rights
and obligations to any of its affiliates.
8.3.2. In case of such an assignment of the contract by ENTRUST to any of its
affiliates pursuant Sec. 8.3.1, a letter of comfort or a guarantee of ENTRUST
shall be delivered to the SELLERS.
8.4. Announcements
No announcement concerning the transaction contemplated by this AGREEMENT or any
matter ancillary to it and no disclosure of the terms of this AGREEMENT (save as
required by law, by any market regulations or as expressly provided in this
AGREEMENT) shall be made by the SELLER to any person or entity, except with the
prior written approval of ENTRUST.
8.5. Notices
8.5.1. Any notice or other communication to be given under this letter shall be
in writing and shall be delivered by hand or sent by registered post or by
courier to the address specified below, or sent by facsimile to the number
specified below;
(a) ENTRUST: General Counsel, Entrust Technologies Inc. 2323 North Central
Expressway, Richardson, Texas, 75080, phone: 001 972 994 8020, fax 001
972 994 8005
(b) SELLER: Rainer A. Rueppel c/o Dr. Markus Kroll, Altenburger & Partners,
Alte Landstrasse 128, 8702 Zollikon, Switzerland, Phone: + 41 1 392 00
07; Fax: + 41 1 392 00 86
8.5.2. Either Party hereto may change the address, facsimile number or name of
the person for whose attention notices are to be addressed by serving a notice
on the other party hereto in accordance with Sec. 8.5.1.
8.5.3. Each such notice or other communication shall be effective:
<PAGE>
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Share Purchase Agreement
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(a) if given by facsimile when the facsimile is transmitted to the facsimile
number specified in para. 8.5.1 or
(b) if given by any other means, when received at the address specified in
para. 8.5.1.
8.6. Severability
Whenever possible, each provision of this AGREEMENT shall be interpreted in such
manner as to be effective and valid under the applicable law, but if any
provision of this AGREEMENT shall be unenforceable or invalid under applicable
law, such provision shall be ineffective only to the extent of such
unenforceability or invalidity and be replaced by such valid and enforceable
provision which bona fides parties would consider to match as closely as
possible the invalid or unenforceable provision, attaining the same or a similar
economic effect. The remaining provisions of this AGREEMENT shall under all
circumstances continue to be binding and in full force and effect.
8.7. Construction, amendments
8.7.1. This AGREEMENT constitutes the entire agreement among the parties and,
except as otherwise provided, supersedes any prior understandings or agreements,
written or oral, that relate to the acquisition of COMPANY SHARES by ENTRUST.
8.7.2. This AGREEMENT may not be amended except in writing, including
communications by letter, facsimile, or E-mail.
8.7.3. The PARTIES agree that the AGREEMENT shall not be construed against any
PARTY on the ground that such PARTY drafted or prepared the AGREEMENT.
8.8. Governing law
This AGREEMENT shall be governed by the internal law of Switzerland; the
application of the Vienna (United Nations) Convention on Contracts for the
International Sale of Goods is excluded.
8.9. Arbitration
All disputes arising out of or in connection with the present agreement,
including disputes on its conclusion, binding effect, amendment and termination
shall be resolved,
<PAGE>
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Share Purchase Agreement
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to the exclusion of the ordinary courts by a three-person Arbitral Tribunal in
accordance with the International Arbitration Rules of the Zurich Chamber of
Commerce. The language of the arbitration shall be English.
List of Exhibits
- - Exhibit DIL (List of Documents submitted to Entrust)
- - Exhibit CAP (Capital Structure of Entrust)
- - Exhibit IPR (Intellectual Property)
- - Exhibit OTH (Offer to Other Sellers)
Zug, this 30 May 1998 Zug, this 30 May 1998
ENTRUST Technologies Inc. The SELLER:
/s/ Brad Ross /s/ Rainer A. Rueppel
- ------------------------- ------------------------------
Name: Brad Ross Rainer A. Rueppel
Title: President
<PAGE>
ENTRUST TECHNOLOGIES
Mr. Rainer A. RUEPPEL
Stationsstrasse 30
CH-8621 Wetzikon
CONSIDERATION SHARES
Dear Mr. RUEPPEL
Reference is made to the share purchase agreement between yourself and ourselves
for the purchase of shares in R3 Security Engineering AG closed on 8 June 1998
(the "Share Purchase Agreement").
The purpose of this letter is the amendment of the Share Purchase Agreement with
respect to its Section 7.3 as follows:
Rule 144 Reporting Requirements
From and after the time ENTRUST has securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
in order to permit the Seller to sell the CONSIDERATION SHARES it holds, if it
so desires, from time to time pursuant to Rule 144 or any successor to such rule
or any other rule or regulation of the Securities and Exchange Commission (the
"Commission") that may at any time permit the SELLER to sell its CONSIDERATION
SHARES to the public without registration (the "Resale Rules"), ENTRUST will:
a) comply with all rules and regulations of the Commission applicable in
connection with use of the Resale Rules;
b) make and keep adequate and current public information available, as
those terms are understood and defined in the Resale Rules, at all
times;
c) file with the Commission in a timely manner all reports and other
documents required of ENTRUST under the Securities Act and Exchange
Act;
d) furnish to the SELLER forthwith upon request (i) a written statement
by ENTRUST that it has complied with the reporting requirements of the
Resale Rules, the Securities Act and Exchange Act, (ii) a copy of the
most recent annual or quarterly report of ENTRUST and any other
reports and
<PAGE>
documents filed by ENTRUST under the Securities Act or the Exchange
Act, and (iii) such other information as may be reasonably requested
in availing the SELLER of any rule or regulation of the Commission
which permits the selling of any such CONSIDERATION SHARES without
registration; and
e) take any action (including cooperation with the SELLER to cause the
transfer agent to remove any restrictive legend on certificates
evidencing the CONSIDERATION SHARES) which shall be reasonably
requested by the SELLER or which shall otherwise facilitate the sale
of the CONSIDERATION SHARES from time to time by the SELLER pursuant
to the Resale Rules.
Rule 144A Information
Until such time as ENTRUST is subject to Section 13 or 15(d) of the Exchange
Act, ENTRUST will make available, upon request, to the SELLER and prospective
purchaser or transferee of the CONSIDERATION SHARES designated by the Seller,
the information required to allow the resale or other transfer of such
CONSIDERATION SHARES pursuant to Rule 144A under the Securities Act.
Sec. 7.3.7
The legend to be placed on the certificates representing CONSIDERATION SHARES
shall include the following additional transfer exception:
or (iii) except to a "qualified institutional buyer" (as defined in Rule 144A
promulgated under the Securities Act) in a transaction which meets the
requirements of such Rule 144A.
Zurich, 8 June 1998
Entrust Technologies Inc.
/s/ Brad Ross
- ------------------------
Brad Ross
<PAGE>
ENTRUST TECHNOLOGIES
Mr. Rainer A. RUEPPEL
Stationsstrasse 30
CH-8621 Wetzikon
Watermark spin-off
Dear Mr. RUEPPEL
We confirm to you herewith that Entrust will bear up to CHF 30,000.-- of legal
fees in connection with the spin-off of the Watermark business. Sec. 7.4.2. of
the Share Purchase Agreement should, therefore, read as follows:
"Except for an aggregate of up to CHF 30,000.-- of legal fees, any fees,
costs or taxes imposed on the COMPANY or on ENTRUST in connection with the
transfer of the watermark intellectual property to the WATERMARK COMPANY
shall be borne by the SELLER in the same proportion as determined by Sec.
5.2 in respect of the representations and warranties."
Pursuant to the information received from Dr. Markus Kroll on 6 June 1998, the
tax authorities decided to levy against r3 Security Engineering AG a withholding
tax of CHF 177,697 in connection with the distribution of the shares in
Securights AG as a dividend. Since such taxes are to be borne pro rata by the
Sellers, we will in due course, send you an invoice for your portion of the
taxes, as determined in Sec. 7.4.2. of the Share Purchase Agreement. Indeed, you
may be entitled, to claim back this amount from the tax authorities in
accordance with the tax legislation.
We thank you for your comprehension.
Zurich, 8 June 1998
Entrust Technologies, Inc.
/s/ Brad Ross
- -----------------------
Brad Ross
<PAGE>
Exhibit 2.4
Share Purchase Agreement
between
ENTRUST Technologies Inc., a Maryland corporation
(hereinafter referred to as "ENTRUST")
on the one part
and
INVISION AG, Neuhofstrasse 4, 6341 Baar
(hereinafter referred to as the "SELLER"),
on the other part
(hereinafter collectively referred to as "the PARTIES")
concerning the acquisition of shares of
R/3/ Security Engineering AG
Seegraben
(the "COMPANY")
<PAGE>
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Share Purchase Agreement
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CONTENTS:
Definitions................................................................ 5
1. Sale and Purchase...................................................... 8
1.1 Object of the Sale.............................................. 8
1.2 Amount of Purchase Price........................................ 8
1.3 Structure of the Purchase Price................................. 8
1.4 Date of Payment................................................. 8
1.5 Escrow.......................................................... 8
2. Consideration Shares................................................... 9
2.1 Value of Consideration Shares................................... 9
2.2 Restrictions on Transfer........................................ 9
2.3 Right of First Refusal.......................................... 9
2.4 Put Option and Make Whole Payment............................... 10
3. Closing................................................................ 12
3.1 Conditions Precedent........................................... 12
3.2 Completion of the sale......................................... 12
3.3 Transfer of Risks.............................................. 13
4. Representations of Seller.............................................. 13
4.1 With Respect to US Securities Regulations...................... 13
4.2 With Respect to the SHARES and the COMPANY's Capital........... 16
4.3 With Respect to the COMPANY.................................... 16
4.3.1 Existence, Good Standing, and Records................. 16
4.3.2 Accounts.............................................. 17
4.3.3 Financing............................................. 18
4.3.4 Technical characteristics............................. 18
4.3.5 Intellectual property................................. 19
4.3.6 Insurances............................................ 21
4.3.7 Customers and Suppliers............................... 21
4.3.8 Employees............................................. 22
4.3.9 Pensions and social security contributions............ 23
4.3.10 Litigation............................................ 23
4.3.11 Taxes................................................. 23
4.3.12 Events since Accounting Date and since end of Q1...... 24
<PAGE>
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Share Purchase Agreement
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4.3.13 Effect of the transaction.............................. 24
4.3.14 Other material items................................... 25
5. Warranty Claims Against Seller.......................................... 26
6. Representations of Entrust.............................................. 27
6.1 Good Standing and Authority..................................... 27
6.2 Consideration Shares............................................ 27
6.3 Capitalization.................................................. 27
6.4 Governmental Consents........................................... 28
6.5 Warranty Claims Against Entrust................................. 28
7. Covenants............................................................... 28
7.1 Management of the Company....................................... 28
7.2 Product Liability............................................... 29
7.3 Consideration Shares............................................ 29
7.4 Watermark Business.............................................. 33
7.5 Offer to other Sellers.......................................... 33
8. Miscellaneous........................................................... 33
8.1 Costs........................................................... 33
8.2 Confidentiality................................................. 33
8.3 Assignment...................................................... 34
8.4 Announcements................................................... 34
8.5 Notices......................................................... 34
8.6 Severability.................................................... 35
8.7 Construction, amendments........................................ 35
8.8 Governing law................................................... 35
8.9 Arbitration..................................................... 35
List of Exhibits............................................................ 36
----------------
Entrust Technologies Inc. has omitted the following schedules, which will be
provided supplementally to the Securities and Exchange Commission upon request:
- - Exhibit DIL (List of Documents Submitted to Entrust)
- - Exhibit CAP (Capital Structure of Entrust)
- - Exhibit IPR (Intellectual Property)
<PAGE>
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Share Purchase Agreement
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- - Exhibit OTH (Offer to Other Sellers)
<PAGE>
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Share Purchase Agreement
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Definitions
"AGREEMENT" this share purchase agreement,
including the exhibits;
"CLOSING" the CLOSING of this AGREEMENT
pursuant to Sec. 3;
"CO" the Swiss Code of Obligations;
"COMPANY SHARES" the common or preferred
registered shares of the COMPANY
with a par value of CHF 10 each;
"COMPANY" r/3/ Security Engineering AG,
Seegraben, as defined on the
first page;
"CONSIDERATION SHARES" Series A Common Stock of ENTRUST
with p.v. of USD 0.01 each;
"DEFECT" a DEFECT as defined in Sec. 5.1;
"DISTRIBUTION COMPLIANCE
PERIOD" the DISTRIBUTION COMPLIANCE
PERIOD defined in Sec. 7.3.;
"ENTRUST" ENTRUST Technologies Inc., a
Maryland corporation, as defined
on the first page;
"ESCROW AGENT" Thouvenin Stutzer Eggimann &
Partner, Limmatquai 4, 8001
Zurich;
"ESCROW AGREEMENT" the escrow agreement entered
into between ENTRUST, the SELLER
and the ESCROW AGENT, and signed
by the SELLER on the same date
as this AGREEMENT;
"ESCROW" the escrow established pursuant
to the ESCROW AGREEMENT and
referred to in Sec. 1.5;
<PAGE>
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Share Purchase Agreement
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"FIRST ANNIVERSARY" the FIRST ANNIVERSARY defined in
Sec. 2.4.1.;
"GOVERNMENTAL AUTHORITY" any government, state,
municipality or other political
subdivision thereof and any entity
exercising executive, legislative,
judicial, regulatory or
administrative functions of or
pertaining to government;
"INTELLECTUAL PROPERTY" the INTELLECTUAL PROPERTY
defined in Sec. 4.3.5.2;
"IPO PUT PRICE" the IPO PUT PRICE defined in Sec.
2.4.2;
"MAKE WHOLE PAYMENT" the MAKE WHOLE PAYMENT
defined in Sec. 2.4.2;
"MARKET PRICE" the MARKET PRICE defined in Sec.
2.4.3;
"NOTICE" the NOTICE defined in Sec. 2.3.3;
"OFFERED CONSIDERATION
SHARES" the OFFERED CONSIDERATION
SHARES defined in Sec. 2.3.3;
"OFFEROR" the OFFEROR defined in Sec. 2.3.3;
"outstanding" in respect of COMPANY SHARES, the
issued COMPANY SHARES less the
COMPANY SHARES held in treasury;
"PARTY" ENTRUST and/or the SELLER, as
defined on the first page;
"PRINCIPAL MARKET" the PRINCIPAL MARKET defined in
Sec. 2.4.3;
"PUBLIC OFFERING" the PUBLIC OFFERING defined in
Sec. 2.3.6;
<PAGE>
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Share Purchase Agreement
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"PURCHASE PRICE" the total consideration paid by
ENTRUST for the SHARES, as defined
in Sec. 1.2.;
"PUT RIGHT" the PUT RIGHT defined in Sec. 2.4.1;
"PUT SHARES" the PUT SHARES defined in Sec.
2.4.1;
"REGULATION S" the REGULATION S defined in Sec.
4.1.1.;
"SECURITIES ACT" the U.S. Securities Act of 1933, as
amended;
"SELLER" Invision AG, Neuhofstrasse 4, 6341
Baar, as defined on the first page;
"SHARES" the COMPANY SHARES sold by the
SELLER pursuant to Sec. 1.1.;
"SIGNING" the SIGNING of this AGREEMENT;
"STANDARD PUT PRICE" the STANDARD PUT PRICE defined in
Sec. 2.4.1;
"WATERMARK COMPANY" the WATERMARK COMPANY defined
in Sec. 7.4.;
<PAGE>
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Share Purchase Agreement
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1. Sale and Purchase
1.1 Object of the Sale
ENTRUST purchases from the SELLER, and the SELLER sells to ENTRUST 8'000 COMPANY
SHARES ("the SHARES") pursuant to the terms and conditions of this AGREEMENT.
1.2 Amount of Purchase Price
The price for the SHARES is USD 4'206'175.-- (the "PURCHASE PRICE").
1.3 Structure of the Purchase Price
The PURCHASE PRICE shall be paid to the SELLER as follows: (i) USD 1'350'000.--
and (ii) 48'991 CONSIDERATION SHARES, valued at USD 58.30 each pursuant to
Sec. 2.1.1.
1.4 Date of Payment
The PURCHASE PRICE shall be paid at CLOSING, provided, however, that 7'456 out
of the 48'991 CONSIDERATION SHARES shall be placed into ESCROW pursuant to Sec
1.5.
1.5 Escrow
1.5.1 The 7'456 CONSIDERATION SHARES placed into ESCROW pursuant to Section 1.4.
shall be delivered to, kept and/or released by the ESCROW AGENT pursuant to the
ESCROW AGREEMENT.
1.5.2 The CONSIDERATION SHARES held in ESCROW shall be kept for a period of 24
months following CLOSING as a security for claims of ENTRUST in connection with
claims based on the representations and warranties of Sec. 4 and 5 and with the
covenants of Sec. 7.1.1 and 7.1.2.
1.5.3 The CONSIDERATION SHARES held in ESCROW may be sold, provided, however,
that the transfer of such CONSIDERATION SHARES to the acquirer shall be valid
and shall take place only if the cash consideration to be received by the SELLER
is placed into ESCROW in lieu of the CONSIDERATION SHARES.
1.5.4 Variations in the price of the CONSIDERATION SHARES shall not cause any
variation in the number of CONSIDERATION SHARES to be put in ESCROW.
<PAGE>
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Share Purchase Agreement
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1.5.5 The specific terms and conditions of the ESCROW AGREEMENT are reserved.
2. Consideration Shares
2.1 Value of Consideration Shares
2.1.1 For the purpose of the conversion of any amount expressed in USD into a
certain number of CONSIDERATION SHARES or vice-versa, each CONSIDERATION SHARE
shall be deemed to be worth USD 58.30 (or, after CLOSING, such other amount as
adjusted for stock splits, stock dividends and other recapitalizations taking
place after CLOSING). Fractions of CONSIDERATION SHARES shall be rounded to the
nearest whole number, and the difference paid or deducted from amounts otherwise
payable in cash, as the case may be.
2.1.2 If ENTRUST calls upon the ESCROW as a security in connection with a
DEFECT, the actual market value of the CONSIDERATION SHARES, and not the value
set pursuant to the previous Sec. 2.1.1. shall determine the number of
CONSIDERATION SHARES to be attributed to ENTRUST.
2.2 Restrictions on Transfer
2.2.1 The CONSIDERATION SHARES are restricted securities. They are the object of
the representations and warranties of Sec. 4.2 and of the covenants of Sec. 6.3.
2.2.2 Notwithstanding the SELLER's ability to resell CONSIDERATION SHARES under
United States or other securities laws, any sale or other disposition of any of
the CONSIDERATION SHARES by the SELLER, other than according to the provisions
of Sections 2.2.3, 2.3 or 2.4 below, shall be void and transfer no right, title,
or interest in or to any of such CONSIDERATION SHARES to the purported
transferee.
2.2.3 The SELLER may sell, assign or transfer CONSIDERATION SHARES to his spouse
or children or to a trust established for the benefit of his spouse, children or
himself, or dispose of them under his will, without compliance with Section 2.3,
provided, however, that such transferee will be subject to the same contractual
transfer restrictions as the SELLER.
2.3 Right of First Refusal
2.3.1 If the SELLER desires to sell, transfer or otherwise dispose of any of his
CONSIDERATION SHARES, or of any interest in such CONSIDERATION SHARES, whether
voluntarily or by operation of law, in any transaction other than pursuant to
Section 2.2.3. or 2.4 of this Agreement, the SELLER shall first deliver written
notice of
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his desire to do so (the "NOTICE") to ENTRUST in the manner prescribed in
Section 8.5 of this Agreement. The NOTICE must specify: (i) the name and address
of the party to which the SELLER proposes to sell or otherwise dispose of the
CONSIDERATION SHARES or an interest in the CONSIDERATION SHARES (the "OFFEROR"),
(ii) the number of CONSIDERATION SHARES the SELLER proposes to sell or otherwise
dispose of (the "OFFERED CONSIDERATION SHARES"), (iii) the consideration per
SHARE to be delivered to the SELLER for the proposed sale, transfer or
disposition, and (iv) all other material terms and conditions of the proposed
transaction.
2.3.2 ENTRUST shall have the first option to purchase all but not less than all
of the OFFERED CONSIDERATION SHARES for the consideration per SHARE and on the
terms and conditions specified in the NOTICE. ENTRUST must exercise such option,
no later than 15 days after such NOTICE is deemed to have been delivered to it
under Section 8.5, by written NOTICE to the SELLER, provided, however, that such
deadline will be extended to 30 days if the number of OFFERED CONSIDERATION
SHARES exceeds 50'000.
2.3.3 In the event ENTRUST duly exercises its option to purchase the OFFERED
CONSIDERATION SHARES, the closing of such purchase shall take place at the
offices of the COMPANY, or at any other place mutually agreed between the
PARTIES five (Swiss) business days after the expiration of deadline for the
exercise of the right of first refusal pursuant to Section 2.3.2. above. If
ENTRUST does not exercise its option to purchase the CONSIDERATION SHARES, the
closing of the sale must take place in accordance with the terms and conditions
specified in the NOTICE no later than 60 days after the expiration of the option
of ENTRUST.
2.3.4 To the extent that the consideration proposed to be paid by the OFFEROR
for the OFFERED CONSIDERATION SHARES consists of property other than cash or a
promissory note, the consideration required to be paid by ENTRUST may consist of
cash equal to the value of such property, as determined in good faith by
agreement of the SELLER and ENTRUST.
2.3.5 The right of first refusal of ENTRUST set forth in this Section 2.3 shall
terminate upon the closing of ENTRUST's initial public offering of Series A
Common Stock pursuant to an effective registration statement under the
SECURITIES ACT (a "PUBLIC OFFERING").
2.4 Put Option and Make Whole Payment
2.4.1 If ENTRUST's Series A Common Stock is not listed on a United States
national securities exchange, the Nasdaq Stock Market or another U.S. nationally
recognized exchange or trading system on the first anniversary of CLOSING (the
"FIRST
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ANNIVERSARY"), and the SELLER is the beneficial owner of CONSIDERATION SHARES as
of the FIRST ANNIVERSARY, then the SELLER shall have 15 days to give written
notice to ENTRUST of its intention, if any, to sell to ENTRUST (the "PUT
RIGHT"), all, but not less than all, of the CONSIDERATION SHARES owned by the
SELLER (the "PUT SHARES"). If the SELLER exercises its PUT RIGHT, the SELLER
agrees to sell the PUT SHARES to ENTRUST, and ENTRUST agrees to purchase the PUT
SHARES from the SELLER, at a price of USD $58.30 (subject to adjustment for
stock dividends, stock splits and other recapitalizations) (the "STANDARD PUT
PRICE"). The payment of the STANDARD PUT PRICE against the delivery of the PUT
SHARES shall be made in three equal quarterly installments beginning within 5
(Swiss) business days after ENTRUST has received notice of exercise of the PUT
RIGHT.
2.4.2 If ENTRUST's Series A Common Stock is listed on a United States national
securities exchange, the Nasdaq Stock Market or another U.S. nationally
recognized exchange or trading system prior to the FIRST ANNIVERSARY, and the
MARKET PRICE is less than USD $48.30 (subject to adjustment for stock dividends,
stock splits and other recapitalizations) (the "IPO PUT PRICE"), then ENTRUST
shall make an additional payment per CONSIDERATION SHARE, in cash or in shares
of its Series A Common Stock (the choice of either form being at the sole
discretion of ENTRUST), to the SELLER equal to the difference between the IPO
PUT PRICE and the MARKET PRICE (the "MAKE WHOLE PAYMENT"), subject to the
following provisions:
(a) ENTRUST agrees to deliver the MAKE WHOLE PAYMENT pursuant to the
instructions of the SELLER within 10 Swiss business days after the end of
the relevant period for the determination of the MARKET PRICE pursuant to
Sec. 2.4.3 hereinafter; and
(b) Notwithstanding the previous paragraph and Sec. 1.5.4, any MAKE WHOLE
PAYMENT made in connection with any CONSIDERATION SHARES held in ESCROW
pursuant to Sec. 1.5 shall be placed by ENTRUST into ESCROW and shall be
held and released like the CONSIDERATION SHARES it relates to.
2.4.3 MARKET PRICE means the average of the closing sale price of ENTRUST's
Series A Common Stock on the principal United States securities exchange or
trading market for such stock (the "PRINCIPAL MARKET") for the ten (10) trading
days beginning on the first day of trading of such stock on the PRINCIPAL
MARKET.
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3. Closing
3.1 Conditions Precedent
CLOSING is subject to the following conditions precedent:
(a) the approval of the AGREEMENT by the board of directors of the COMPANY;
(b) the approval of the AGREEMENT by the stockholders and the board of
directors of ENTRUST;
(c) the holding of outstanding COMPANY SHARES at CLOSING by no more than two
minority shareholders; and
(d) the Watermark intellectual property has been transferred to the WATERMARK
COMPANY pursuant to Sec. 7.4. prior to CLOSING.
3.2 Completion of the sale
3.2.1 The sale and purchase of the SHARES will be completed at the offices of
Bar & Karrer, Seefeldstrasse 19, 8008 Zurich, at the latest on 8 June 1998
("CLOSING").
3.2.2 At CLOSING, the SELLER shall produce and deliver to ENTRUST:
(a) share certificates endorsed to ENTRUST representing the SHARES;
(b) share certificates endorsed to the COMPANY representing the COMPANY SHARES
held in treasury by the COMPANY as of CLOSING;
(c) the original of the minutes of the board of the COMPANY authorizing the
transfer of the SHARES to ENTRUST;
(d) the original share register of the Company (Art. 686 CO), duly signed by
the board of directors, and bearing ENTRUST as shareholder for the SHARES,
without any restriction or limitation; and
(e) the resignation letter of Dr. Markus Kroll and of Mr. Peter Titz.
3.2.3 At CLOSING, ENTRUST shall, on its part, deliver to the SELLER:
(a) a certificate of the Secretary evidencing the decision of the BOARD of
ENTRUST approving this AGREEMENT;
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(b) an original and irrevocable promise by a bank of international standing
and reputation to pay the PURCHASE PRICE or, at the election of ENTRUST, a
bank check drawn on a bank of international standing and reputation and
issued for the same amount;
(c) stock certificates registered in the name of the SELLER for the number of
CONSIDERATION SHARES;
(d) a receipt issued by the ESCROW AGENT as proof that the CONSIDERATION
SHARES to be delivered to the ESCROW AGENT at CLOSING pursuant to Sec.
1.5.1 have been placed into ESCROW.
3.3 Transfer of Risks
The risks and profits relating to the SHARES and to the COMPANY shall pass to
ENTRUST at CLOSING.
4. Representations of Seller
Subject to the disclosure made in the Disclosure Letter (Exhibit DIL) and to the
provisions of Sec. 5 below, the SELLER makes the following representations,
which truly and accurately reflect the factual and legal situation as of the
date of this AGREEMENT.
4.1 With Respect to US Securities Regulations
4.1.1 With respect to the CONSIDERATION SHARES issued to and acquired by the
SELLER hereunder, the SELLER represents and warrants as follows:
(a) The SELLER will be acquiring the CONSIDERATION SHARES for his own account
for investment only, and not with a view to, or for sale in connection
with, any distribution of such CONSIDERATION SHARES in violation of the
SECURITIES ACT or any rule or regulation under the SECURITIES ACT.
(b) The SELLER has sufficient experience in business, financial and investment
matters to be able to evaluate the risks involved in the acquisition of
the CONSIDERATION SHARES and to make an informed investment decision with
respect to such investment.
(c) The SELLER is not a "U.S. person" (as defined in Regulation S under the
SECURITIES ACT ("REGULATION S").
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(d) The SELLER understands and acknowledges that (i) the CONSIDERATION SHARES,
if and when issued, will be "restricted securities" under Rule 144 of the
SECURITIES ACT and may not be offered or sold in the United States or to,
or for the account or benefit of, any U.S. person unless such securities
are registered under the SECURITIES ACT or such offer or sale is made
pursuant to an exemption from the registration requirements of the
SECURITIES ACT, (ii) the CONSIDERATION SHARES are being distributed by
ENTRUST pursuant to the terms of REGULATION S, which permits securities to
be sold to non-U.S. persons in "offshore transactions" (as defined in
REGULATION S), subject to certain terms and conditions, and (iii) hedging
transactions involving the CONSIDERATION SHARES may not be conducted
unless in compliance with the SECURITIES ACT.
(e) The SELLER has signed this AGREEMENT outside the United States.
4.1.2 The following are definitions contained in REGULATION S as in effect on
the date of this Agreement:
(a) "U.S. person" means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or incorporated under the
laws of the United States;
(iii) Any estate of which any executor or administrator is a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the United
States;
(vi) Any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the
benefit or account of a U.S. person;
(vii) Any discretionary account or similar account (other than an estate
or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States;
and
(viii) Any partnership or corporation if:
- Organized or incorporated under the laws of any foreign
jurisdiction; and
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- Formed by a U.S. person principally for the purpose of investing in
securities not registered under the SECURITIES ACT, unless it is
organized or incorporated, and owned, by accredited investors (as
defined in Rule 501(a) of the SECURITIES ACT) who are not natural
persons, estates or trusts.
(b) The following are not "U.S. persons":
(i) Any discretionary account or similar account (other than an estate
or trust) held for the benefit or account of a non-U.S. person by a
dealer or other professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
(ii) Any estate of which any professional fiduciary acting as executor
or administrator is a U.S. person if:
- An executor or administrator of the estate who is not a U.S. person
has sole or shared investment discretion with respect to the assets
of the estate; and
- The estate is governed by foreign law;
(iii) Any trust of which any professional fiduciary acting as trustee is
a U.S. person, if a trustee who is not a U.S. person has sole or
shared investment discretion with respect to the trust assets, and
no beneficiary of the trust (and no settlor if the trust is
revocable) is a U.S. person;
(iv) An employee benefit plan established and administered in accordance
with the law of a country other than the United States and
customary practices and documentation of such country;
(v) Any agency or branch of a U.S. person located outside the United
States if:
- The agency or branch operates for valid business reasons; and
- The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking
regulation, respectively, in the jurisdiction where located;
and
(vi) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development
Bank, the Asian Development Bank, the African Development Bank, the
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United Nations, and their agencies, affiliates and pension plans,
and any other similar international organizations, their agencies,
affiliates and pension plans.
(c) "United States" means the United States of America, its territories
and possessions, any State of the United States, and the District of
Columbia.
4.2 With Respect to the SHARES and the COMPANY's Capital
4.2.1 The SHARES have been duly issued and are fully paid in. They are free of
any pledge, charge, encumbrances, or restrictions of any kind or nature.
4.2.2 The SELLER has good and valid title to the SHARES and he may freely
dispose of such SHARES without any limitation or restriction of any kind or
nature.
4.2.3 The COMPANY has a an issued share capital of CHF 400'000.-- composed of
40'000.--fully paid in registered shares with a nominal value of CHF 10.-- each.
8'000 of said registered shares are preferred shares. In addition to the issued
share capital, the COMPANY has a conditional capital of CHF 50'000.-- for 5'000
registered shares with a par value of CHF 10.-- each. The COMPANY has no other
issued, authorized or conditional equity.
4.2.4 There are no subscription rights, options, warrants, offers or other
commitments outstanding, which would oblige the COMPANY to issue any new COMPANY
SHARES or to transfer such COMPANY SHARES. Any such rights, options or offers
disclosed to ENTRUST in the due diligence have extinguished without affecting
the representation made under Sec. 4.2.3 above.
4.2.5 No prior issue, payment, contribution, sale, redemption, or transfer in
respect of the SHARES, has given or may give rise to any right, claim or action
against the COMPANY or ENTRUST.
4.3 With Respect to the COMPANY
4.3.1 Existence, Good Standing, and Records
4.3.1.1 The excerpt from the Commercial Register and the articles of
association in Exhibit DIL are current, true, and complete.
4.3.1.2 The minutes of the shareholders' and of the board of directors'
meetings listed in Exhibit DIL contain a complete, true and accurate record of
all such meetings over the period mentioned therein.
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4.3.1.3 To the extent that the COMPANY carries business outside of
Switzerland, it is presently in good standing and having the necessary licences
and permits to carry on its business in these jurisdictions.
4.3.1.4 The COMPANY has no subsidiary, and has no participation in any other
entity, except for its participation in Swiss Security Service Laboratory AG,
Solothurn.
4.3.2 Accounts
4.3.2.1 The accounts attached in Exhibit DIL, including the first quarter
results submitted to ENTRUST, comply with the requirement of the Swiss Code of
Obligations, and have been prepared in accordance with accounting principles and
practices generally accepted in Switzerland.
4.3.2.2 Subject to the applicable accounting principles, the audited accounts
as of 31 December 1997 (the "Accounts"), as well as the first quarter results,
as per the date they were established:
(a) set forth without overestimation the capital, reserves, assets, and
profits of the COMPANY;
(b) fully provide for all bad or doubtful claims and receivables;
(c) fully provide for all liabilities, including contingent liabilities, or
disclose them in the notes; and
(d) are not affected (except as disclosed in the Accounts) by any
extraordinary or exceptional event, circumstance or item.
4.3.2.3 The accounts of the COMPANY for each financial year since its creation
have been consistently approved, without any qualification or restriction of any
kind, by the statutory auditors of the COMPANY.
4.3.2.4 The accounting records of the COMPANY are up to date and contain
complete and accurate details of all transactions of the COMPANY in compliance
with Art. 662 et seq. and 957 et seq. CO.
4.3.2.5 The COMPANY's records' systems and information, and the means of
access to them, are under the COMPANY's direct control.
4.3.2.6 There was no distribution of, nor any decision or committment to
distribute any dividend in whatever form for the financial year ending on 31
December 1997. The spin-off of the WATERMARK BUSINESS pursuant to Sec. 7.4. is
reserved.
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4.3.2.7 ENTRUST is aware that the first quarter results do not contain the
accrued bonus payments for the first quarter of 1998, since the bonus payment,
if any, shall be decided at the end of the year. Said bonus payments are to be
made pursuant to the provisions of the employment agreements disclosed to
ENTRUST.
4.3.2.8 The issue prospectus dated 22 May 1998, including the financial
statements contained therein, constitutes full, true and plain disclosure of all
material facts relating to the COMPANY as of such date. The issue prospectus
contains no untrue statement of material facts, and the financial figures
contained in the issue prospectus are based on the same principle as those
applied for the establishment of the Accounts, as represented above in this
Sec. 4.3.2.
4.3.3 Financing
4.3.3.1 The COMPANY has not made nor entered into any contract to make any
loan to any person or other arrangement whereby it is or may be owed any money
other than trade debts incurred in the ordinary course of business.
4.3.3.2 The COMPANY is not entitled to the benefit of any debt otherwise than
as the original creditor and has not factored or discounted any debt or agreed
to do so.
4.3.3.3 All of the accounts receivable which are reflected in the Accounts as
owed to the COMPANY (apart from bad and doubtful debts to the extent to which
they have been provided for in the Accounts) or which have subsequently been
recorded in the books of COMPANY have realized or are reasonably expected to
realize in the normal course of collection and within three months of CLOSING
their full value as included in the Accounts, after deduction of any provision
for bad debts.
4.3.3.4 ENTRUST is aware that some employees may have an overdraft with the
COMPANY, such overdraft being in aggregate of no more than CHF 50'000.--.
4.3.4 Technical characteristics
4.3.4.1 The quality of the COMPANY'S source code base in terms of security
design, documentation, performance, stability and reliability including year
2000 compliance is sufficient to carry on the business of the COMPANY as
currently contemplated, subject, however, to (i) the ongoing improvements and
developments made in the ordinary course of the COMPANY's business, and (ii)
unforseen external market and technology developments.
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4.3.5 Intellectual property
4.3.5.1 The COMPANY owns, or is licensed or otherwise possesses a right to
use, all INTELLECTUAL PROPERTY (as defined below) used in the operation of its
business or necessary for the operation of its business as currently conducted,
except as otherwise disclosed in Exhibit IPR. The COMPANY has taken reasonable
measures to protect the proprietary nature of trade secrets and confidential
information (as defined below) that it owns or uses. Except as disclosed in
Exhibit IPR, the Company has not granted any rights to any of the INTELLECTUAL
PROPERTY owned by the COMPANY (other than any rights in any INTELLECTUAL
PROPERTY not owned by the COMPANY that constitutes commercially available
software generally available to the public) to any person or business entity. To
the SELLER's knowledge, no other person or business entity is infringing,
violating or misappropriating any of the INTELLECTUAL PROPERTY that the COMPANY
owns. The COMPANY has acquired all rights to INTELLECTUAL PROPERTY developed or
held by any employees (within the scope and term of his employment or otherwise
relating to the current or proposed business of the COMPANY) or third parties
who developed INTELLECTUAL PROPERTY for the COMPANY and no outstanding claims
for the payment of any purchase price or indemnity in respect of such
INTELLECTUAL PROPERTY is threatened or outstanding, except as disclosed in
Exhibit IPR.
4.3.5.2 For purposes of this Agreement, "INTELLECTUAL PROPERTY" means all (A)
patents, patent applications, patent disclosures and all related continuation,
continuation in part, divisional, reissue, reexamination, utility model,
certificate of invention and design patents, patent applications, registrations
and applications for registrations; (B) trademarks, service marks, trade dress,
logos, trade names and corporate names and registrations and applications for
registration thereof; (C) copyrights and registrations and applications for
registration thereof; (D) computer software, data and documentation; (E) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, know-how, manufacturing and
production processes and techniques, research and development information,
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information; (F) other proprietary rights relating to any of the foregoing and
(G) copies and tangible embodiments thereof.
4.3.5.3 None of the activities or business conducted by the COMPANY infringes,
violates or constitutes a misappropriation of (or in the past infringed,
violated or constituted a misappropriation of) any INTELLECTUAL PROPERTY rights
of any other person or business entity, except as disclosed in Exhibit IPR. The
COMPANY has not received any complaint, claim or notice alleging any such
infringement, violation or misappropriation, and, to SELLER's knowledge, there
is no basis for any such complaint, claim or notice.
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4.3.5.4 Exhibit IPR identifies each (a) patent or registration that has been
issued to the COMPANY with respect to any of its INTELLECTUAL PROPERTY, (b)
pending patent application or application for registration that the COMPANY has
made with respect to any of its INTELLECTUAL PROPERTY and (c) license or other
agreement pursuant to which the COMPANY has granted any rights to any third
party with respect to any of its INTELLECTUAL PROPERTY. The COMPANY has
delivered to ENTRUST or its advisors correct and complete copies of all such
patents, registrations, applications, licenses and agreements (as amended to
date) and has specifically identified and made available to ENTRUST or its
advisors correct and complete copies of all other written documentation
evidencing ownership of, and any claims or disputes relating to, each such item.
With respect to each item of INTELLECTUAL PROPERTY that the COMPANY owns, except
as provided in Exhibit IPR:
(a) the COMPANY possesses all right, title and interest in and to such item;
(b) such item is not subject to any outstanding judgment, order, decree,
stipulation or injunction; and
(c) the COMPANY has not agreed to indemnify any person or business entity for
or against any infringement, misappropriation or other conflict with
respect to such item.
4.3.5.5 The COMPANY has supplied ENTRUST or its advisors with correct and
complete copies of all licenses, sublicenses or other agreements (as amended to
date) pursuant to which the COMPANY uses such INTELLECTUAL PROPERTY, all of
which are annexed in Exhibit IPR. To the SELLER's knowledge and with respect to
each such item of INTELLECTUAL PROPERTY, except as otherwise disclosed in
Exhibit IPR:
(a) the license, sublicense or other agreement covering such item is legal,
valid, binding, enforceable and in full force and effect with respect to
the COMPANY, and is legal, valid, binding, enforceable and in full force
and effect with respect to each other party thereto;
(b) neither the COMPANY nor any other party to such license, sublicense or
other agreement is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default by the
COMPANY or by any such other party, or permit termination, modification or
acceleration thereunder;
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(c) the underlying item of INTELLECTUAL PROPERTY is not subject to any
outstanding judgment, order, decree, stipulation or injunction to which
the COMPANY is a party or has been specifically named, nor subject to any
other outstanding judgment, order, decree, stipulation or injunction;
4.3.5.6 With respect to each such item of INTELLECTUAL PROPERTY except as
otherwise disclosed in Exhibit IPR:
(a) the COMPANY has not agreed to indemnify any person or business entity for
or against any interference, infringement, misappropriation or other
conflict with respect to such item; and
(b) no license or other fee is payable upon any transfer or assignment of such
license, sublicense or other agreement by the terms thereof or the terms
of any other agreement or arrangement with the other party or parties
thereto.
4.3.5.7 The SELLER warrants to the best of its knowledge that the COMPANY has
taken and plans to take up to the year 2000 all reasonable measures up to then
known as state of the art to ensure that its software products are designed to
perform, and will perform correctly at all times prior to, during and after the
calendar year 2000, all functions, calculations, sequencing, displays and other
processing of calendar dates and date-related data without error or degradations
in performance, specifically including any error relating to, or the product of,
date data which represent different centuries or more than one century.
4.3.6 Insurances
4.3.6.1 Exhibit DIL lists all private insurance contracts concluded by the
COMPANY.
4.3.6.2 All premiums due in relation to the COMPANY's insurances have been
paid, and nothing has been done or omitted to be done which would make any
policy of insurance of the COMPANY void or voidable or which is likely to result
in an increase in premium or which would release any insurer from any of its
obligations under any policy of insurance of the COMPANY.
4.3.6.3 There is no insurance claim pending or outstanding and there are no
circumstances likely to give rise to any such claim.
4.3.7 Customers and Suppliers
4.3.7.1 To the SELLER's best knowledge, none of the current COMPANY's customers
or suppliers intends or has threatened to cease or alter their business with
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the COMPANY. The SELLER is not aware of the existence of any formal change of
control clause in any material contract with any customer or supplier of the
COMPANY, other than as might be contained in the contracts listed in Exhibit DIL
and provided to ENTRUST. The SELLER has not made and is not expected to make any
investigations as to the intents of the COMPANY's suppliers and customers.
4.3.7.2 Neither the COMPANY nor the SELLER has made extraordinary promises,
commitments or assurances, whether oral or written, express or implied, to the
effect that the COMPANY will or may:
(a) offer future price reductions, concessions or other special terms to any
customer of the COMPANY;
(b) accept future price increases or additional charges or other special terms
to any supplier of the COMPANY; or
(c) be liable to the payment of any liquidated damages, penalties or similar
liabilities.
4.3.7.3 There is no assumed contract which the SELLER can reasonably forsee
that will result in any material loss upon performance thereof by the COMPANY
after CLOSING.
4.3.8 Employees
4.3.8.1 Exhibit DIL accurately lists the name, position, and current annual
compensation of each employee of the COMPANY. The employment agreements with the
key-employees enclosed in Exhibit DIL are true and correct and fully in force.
4.3.8.2 None of the key-employees has notified the COMPANY of its intent to
terminate employment or is expected to terminate employment. With the exception
of military service and regular vacations, no such key-employee is absent from
work on disability or other leave or has notified the COMPANY of intent to take
any such leave. ENTRUST is aware of a possible termination of the contract with
Mr. Herrigel as well as of the absence of Mr. Wildhaber for education purposes
(for an aggregate amount of about 15 days).
4.3.8.3 All salaries, bonuses or other compensation of any kind and nature have
been timely paid to the COMPANY's employees.
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4.3.9 Pensions and social security contributions
4.3.9.1 The COMPANY has paid all contributions it is required to make by law
or by agreement with its employees, with any labour organization, or with any
insurance company with respect to pensions and social security, and especially
all contributions to the AHV / IV, ALV and SUVA.
4.3.9.2 The COMPANY complies with all legal obligations with respect to its
employees' pensions and social security.
4.3.10 Litigation
4.3.10.1 To the knowledge of the SELLER, there are no suits, arbitrations,
administrative or other proceedings (including debt collection proceeding or
other insolvency proceedings) in any matter subject to private or to public law,
pending, threatened against or otherwise affecting the COMPANY.
4.3.10.2 The COMPANY is not subject to any judgement, order or decree which has
affected or may affect its business.
4.3.11 Taxes
4.3.11.1 The COMPANY has filed all tax returns and withheld and paid or
discharged all taxes, assessments and penalties due and payable , and there is
no further liability for any such taxes and no interests or penalties accrued or
accruing with respect thereto.
4.3.11.2 All tax returns of the COMPANY are accurate and complete. To the
SELLER's best knowledge, no audit of any tax return of the COMPANY is pending or
proposed. There is no fact, circumstance, organizational structure, act or event
which could give rise to any claim of tax underpayments, penalties, or
disqualifications of any tax status of the COMPANY for prior years, which have
not been discharged of or provisioned for.
4.3.11.3 For the tax period ending on 31 December 1997, the tax returns can be
filed on the basis of the accounts for the business year 1997 as attached in
Exhibit DIL. There are no outstanding agreements or waivers extending any period
of limitation applicable to any tax return of the COMPANY. Notwithstanding the
previous sentence, the COMPANY has received an extension of the filing of the
tax return for 1997, since the COMPANY has just received the audit report in
relation to the 1997 figures.
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4.3.11.4 There are no disputes as to taxes nor any tax liens, whether existing
or threatened, on any assets as well as on any income or expense item of the
profit and loss statement of the COMPANY.
4.3.11.5 The words "tax" and "taxes" in this AGREEMENT mean all taxes, however
denominated, including interest, penalties, and other additions to taxes that
may become payable in respect thereof, imposed by the state, the cantons, the
municipalities or by any other agency or political subdivision, such as income
taxes and capital taxes due on the basis of taxable profit and taxable capital
as declared in the tax returns, or other taxes (for example VAT) due on the
basis of a filed tax return, as well as all other taxes, including but not
limited to taxes due on the basis of an adjustment of figures as declared in tax
returns filed with the tax authorities or due on the basis of an adjustment of a
provisional or final assessment from whatever authority and for whatever reason.
4.3.12 Events since Accounting Date and since end of Q1
4.3.12.1 Since 31 December 1997, respectively since 31 March 1998:
(a) the business of the COMPANY has been carried on in the ordinary and
normal course;
(b) there has been no material adverse change in the financial or market
position of the COMPANY, including any such change in respect of
turnover, profits, margins of profitability, liabilities (actual or
contingent) or expenses of the COMPANY; and
(c) there has been no substantial and abnormal change in the basis or terms
on which clients or suppliers are prepared to do business with the
COMPANY.
4.3.12.2 The spin-off of the Watermark business pursuant to Sec. 7.4 is
excluded from the representations made in this Sec. 4.3.12.
4.3.13 Effect of the transaction
4.3.13.1 To the SELLERS' best knowledge the customers and suppliers of the
COMPANY have not been informed that the control over the COMPANY may be sold to
ENTRUST. The SELLER is not aware of any formal notification that the execution
or CLOSING of this AGREEMENT and of the change of control will lead to the
termination of the relationship between the COMPANY and its normal customers or
suppliers. ENTRUST has been made aware that it might be preferable to maintain
the name of the COMPANY and th Swiss character of the COMPANY to avoid negative
impacts on the relationship with the COMPANY's customers and suppliers.
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4.3.13.2 The execution of the AGREEMENT and the observance and performance of
its provisions by the SELLER, including the spin-off of the WATERMARK business,
will not:
(a) result in a breach of any contract, law, regulation, order, judgement,
injunction, undertaking, decree or other like imposition to or by which
the COMPANY is a party or is bound, or entitle any person to terminate
or avoid any contract to which the COMPANY is a party, or have any
material effect on any such contract;
(b) result in the loss or impairment of or any default under any licence,
authorization or consent required by the COMPANY for the purposes of its
business;
(c) result in the creation, imposition, crystallization or enforcement of
any encumbrance whatsoever on any of the assets of the COMPANY;
(d) result in any present indebtedness of the COMPANY becoming due and
payable, or capable of being declared due and payable, prior to its
stated maturity date or in any financial facility of the COMPANY being
withdrawn; or
(e) result in any grant or subvention to the COMPANY, in connection with any
research, development, or consulting project being cancelled or claimed
back;
4.3.13.3 There is no contract to which the COMPANY is party which formally
depends on the continuation of the connection (whether as an officer of the
COMPANY or otherwise) of any person with the COMPANY.
4.3.13.4 Notwithstanding the intended generality of the above, the
representations made in this Sec. 4.3.13 are limited by the specific
qualifications made in this agreement (e.g. in Sec. 4.3.7.1) and by the general
principles governing the liability of the SELLER and laid down in Sec. 5.4.
4.3.14 Other material items
To the SELLER's best knowledge there is no fact, contractual or legal
obligations, which has or may have a material adverse effect on the value of the
COMPANY, and which, if known to ENTRUST prior to the date of this AGREEMENT,
could have caused ENTRUST not to enter into this AGREEMENT.
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5. Warranty Claims Against Seller
5.1 Subject to the provisions of this AGREEMENT, the SELLER shall be liable to
ENTRUST for any breach of the representations made in Sec. 4 above (a "DEFECT"),
and shall indemnify and hold ENTRUST (or at the option of ENTRUST, the COMPANY)
harmless against any damage incurred by ENTRUST or by the COMPANY, unless
ENTRUST was aware of the DEFECT at SIGNING.
5.2 In order to account for the effective participation of the SELLER in the
COMPANY's capital, the liability of the SELLER for the damage caused by the
DEFECT shall be reduced to 19.757 % of the damage, unless such damage affects
directly the SHARES.
5.3 For the purpose of any claim for the reduction of the PURCHASE PRICE in
connection with any DEFECT, such DEFECT shall be deemed to affect pro rata the
value of the SHARES in the same manner as it affects the value of the COMPANY.
The hypothetical value of the SHARES without the DEFECT shall be deemed to be
equal to the PURCHASE PRICE.
5.4 ENTRUST shall notify the SELLER in writing of any DEFECT no later than 45
days after ENTRUST has become aware of such DEFECT. ENTRUST shall not be deemed
to have been aware of, or to have accepted any DEFECT, unless such DEFECT has
been clearly disclosed by the COMPANY (i) in the course of the due diligence or
(ii) in the documents and information provided to ENTRUST and listed in the
answers to the due diligence questionnaire dated 10 May 1998, as attached in
Exhibit DIL. The requirement that ENTRUST examine the object of the sale after
CLOSING pursuant to Art. 201 CO is waived.
5.5 The claims of ENTRUST in connection with any DEFECT shall be subject to a
statute of limitation of 24 months after CLOSING and of one year after the
notification of the DEFECT by ENTRUST pursuant to Sec. 5.2., provided, however,
that claims raised in connection with taxes for any given tax period shall
expire one year after the final assessment for such tax period.
5.6 No claim may be raised against the SELLER in connection with any DEFECT,
unless the aggregate amount of the damage claimed by ENTRUST against the SELLER
and/or any other person in connection with DEFECTS exceeds CHF 100'000.--. The
maximum aggregate amount of warranty claims against the SELLER shall be limited
to 19.757 % of CHF 15'000'000. If a DEFECT affects only the value of the SHARES,
without any damage for the COMPANY, the claim of ENTRUST shall be limited to the
PURCHASE PRICE paid.
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5.7 A rescission of the sale of the SHARES is excluded.
6. Representations of Entrust
6.1 Good Standing and Authority
6.1.1 ENTRUST is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, United States of America, and
has requisite power and authority (corporate and other) to own its properties,
to carry on its business as now being conducted, to execute and deliver this
AGREEMENT and to consummate the transactions contemplated hereby.
6.1.2 The execution and delivery of this AGREEMENT by ENTRUST, and the
consummation by ENTRUST of all transactions contemplated hereby, have been duly
authorized by all requisite corporate action on the part of ENTRUST.
6.2 Consideration Shares
All CONSIDERATION SHARES will be, when issued in accordance with this AGREEMENT,
duly authorized, validly issued, fully paid and nonassessable.
6.3 Capitalization
6.3.1 As of the date of this AGREEMENT, the authorized capital stock of ENTRUST
consists of (a) 15'000'000 shares of Series A Common Stock, USD .01 par value
per share, of which approximately 5'078'010 shares are issued and outstanding,
(b) 260'000 shares of Series B Common Stock, USD .01 par value per share, of
which 221'052 shares are issued and outstanding, (c) 260'000 shares of Series B
Non-Voting Common Stock, of which 38'948 shares are issued and outstanding, (d)
2'500'000 shares of Special Voting Stock, USD .01 par value per share, of which
1'925'000 shares are issued and outstanding, and (e) 500'000 shares of Preferred
Stock, USD .01 par value per share, none of which shares are issued or
outstanding. ENTRUST's Series A Common Stock.
6.3.2 In addition to the issued stock of ENTRUST, as of the date of this
AGREEMENT, ENTRUST has reserved 1'857'230 shares of Series A Common Stock for
issuance pursuant to the 1996 Stock Incentive Plan. ENTRUST anticipates
reserving additional Series A Common Stock for issuance pursuant to the 1996
Stock Incentive Plan or similar plan.
6.3.3 The capital stock table of ENTRUST attached hereto as Exhibit CAP shows
the approximate fully diluted capital structure of ENTRUST at CLOSING.
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6.3.4 As a holder of CONSIDERATION SHARES, the SELLER shall have the same
rights, preferences and privileges as the other holders of ENTRUST's Series A
Common Stock.
6.4 Governmental Consents
No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any US GOVERNMENTAL AUTHORITY is
required on the part of ENTRUST in connection with the execution and delivery of
this AGREEMENT, the offer, issuance, sale and delivery of the CONSIDERATION
SHARES, or the other transactions to be consummated at the CLOSING, as
contemplated by this AGREEMENT.
6.5 Warranty Claims Against Entrust
6.5.1 Warranty claims in connection with a breach of the representations of
ENTRUST made under Sec. 6.1 to 6.3 are subject to the following limitations:
(a) The claims shall be capped at USD 10.-- per CONSIDERATION SHARE, i.e.
the difference between the agreed upon price per CONSIDERATION SHARE of
USD 58.30 and the price of USD 48.30 guaranteed by Sec. 2.4.2.
(b) If the conditions for the exercise of PUT RIGHT pursuant to Sec. 2.4.1.
are fulfilled, any warranty claim shall be excluded altogether.
6.5.2 If the breach of Sec. 6.4.3 impairs the enforceability of the PUT RIGHT
of Sec. 2.4.1. and 2.4.3, the claim shall be capped at 58.30 per CONSIDERATION
SHARE.
6.5.3 Without prejudice to the foregoing, Warranty Claims shall be subject to
a time-bar of 24 months following CLOSING.
7. Covenants
7.1 Management of the Company
7.1.1 Starting on the date of this AGREEMENT and until the earlier of (i)
three months following CLOSING or (ii) the issuance by the COMPANY of new
organizational by-laws under the control of ENTRUST, the SELLER shall not, alone
or acting with others, without the prior consent of ENTRUST:
(a) cause the business of the COMPANY to be conducted in any manner
inconsistent with the ordinary and usual course of the COMPANY's
business;
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(b) cause the COMPANY to enter into any contract or into any commitment
which is likely to have a material adverse effect upon the operations or
activities of the COMPANY or the value of the COMPANY for ENTRUST;
(c) cause the COMPANY to terminate any of the employment agreements with any
person employed by the COMPANY at the date of this AGREEMENT or to
transfer the title to any of the INTELLECTUAL PROPERTY listed in Exhibit
IPR;
(d) take any other action which is inconsistent with the provisions of this
AGREEMENT; or
(e) cause the COMPANY to sell any COMPANY SHARES held in treasury, or to
issue any new COMPANY SHARE or options, or to take any action which
would change the situation with respect to the COMPANY SHARES and,
generally, the COMPANY's capital, as represented in Sec.4.2.
7.1.2 The expenses incurred by the COMPANY in connection with the current
venture capital round shall not be charged to the COMPANY. No fees shall be paid
in connection with any work performed by or on behalf of INVISION.
7.2 Product Liability
7.2.1 The SELLER undertakes to hold the COMPANY free of any harm caused by
warranty claims in connection with defects affecting the products of the COMPANY
existing at CLOSING, provided, however, that ENTRUST cannot call upon this
covenant in connection with any product of the COMPANY if (i) ENTRUST or the
COMPANY fails to show reasonable care in maintaining such product or in
responding to customers' requests with respect to such product, or (ii) if
ENTRUST or the COMPANY made any modification to such product. The claim of
ENTRUST may only be raised if the warranty claims against the COMPANY exceed in
aggregate an amount of CHF 250'000, and if such claims are notified to the
COMPANY within 12 months following CLOSING. The claim of ENTRUST against the
SELLER shall be limited to 19.757 % of the excess of the aggregate warranty
claims raised against the COMPANY over CHF 250'000.--.
7.2.2 The claim of ENTRUST against the SELLER pursuant to this Sec. 7.2 is
subject to and shall be covered by the cap of Sec. 5.6.
7.3 Consideration Shares
7.3.1 The SELLER acknowledges that for a period of one year following the
CLOSING (the "DISTRIBUTION COMPLIANCE PERIOD"), the SELLER shall not (a)
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engage in any activity for the purpose of, or which may reasonably be expected
to have the effect of, conditioning the market in the United States for the
CONSIDERATION SHARES or (b) unless such CONSIDERATION SHARES are registered
under the SECURITIES ACT or an exemption from the registration requirements of
the SECURITIES ACT is available, offer, sell or transfer the CONSIDERATION
SHARES in the United States or to, or for the account or benefit of, a U.S.
person. The SELLER understands that the CONSIDERATION SHARES or any interest
therein are only transferable on the books and records of the transfer agent and
registrar of ENTRUST. The SELLER further understands that neither ENTRUST nor
its transfer agent and registrar will register any transfer of the CONSIDERATION
SHARES except in accordance with the provisions of REGULATION S, pursuant to
registration under the SECURITIES ACT or pursuant to an available exemption from
registration, and that ENTRUST may place stop transfer orders with its transfer
agent with respect to certificates representing CONSIDERATION SHARES.
7.3.2 Unless the CONSIDERATION SHARES shall first have been registered under
the SECURITIES ACT, any proposed offer, sale or transfer during the DISTRIBUTION
COMPLIANCE PERIOD of any of the CONSIDERATION SHARES shall be subject to the
condition that the SELLER must deliver to ENTRUST;
(a) a written certification that neither record nor beneficial ownership of
the CONSIDERATION SHARES has been offered or sold in the United States
or to, or for the account or benefit of, any U.S. person;
(b) a written certification of the proposed transferee that such transferee
(or any account for which such transferee is acquiring such
CONSIDERATION SHARES) is not a U.S. person, that such transferee is
acquiring such CONSIDERATION SHARES for such transferee's own account
(or an account over which he or she has investment discretion) and that
such transferee is knowledgeable of and agrees to be bound by the
restrictions on re-sale set forth in this Agreement and REGULATION S
during the DISTRIBUTION COMPLIANCE PERIOD, and
(c) a written opinion of United States counsel, in form and substance
reasonably satisfactory to ENTRUST, to the effect that the offer, sale
and transfer of such CONSIDERATION SHARES are exempt from registration
under the SECURITIES ACT. Any CONSIDERATION SHARES offered, sold or
transferred during the DISTRIBUTION COMPLIANCE PERIOD in accordance with
the foregoing restrictions will continue to be deemed "restricted
securities" under Rule 144 of the SECURITIES ACT, notwithstanding that
they were acquired in a resale transaction made pursuant to Rules 901 or
904 of REGULATION S.
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7.3.3 Rule 144. The SELLER understands that "restricted securities" may be
resold in the United States or to, or for the benefit of, U.S. persons in
accordance with Rule 144 of the SECURITIES ACT. The SELLER acknowledges that the
following is a summary of the resale requirements of Rule 144, and such summary
is qualified in its entirety by reference to such rule, a copy of which was
previously provided to the SELLER.
7.3.4 Rule 144, as currently in effect, imposes the following requirements on
any holder of restricted securities:
(a) at the time of resale, ENTRUST must have been a public company for at
least 90 days (i.e., ENTRUST must have securities registered pursuant to
Section 12 of the United States Securities Exchange Act of 1934, as
amended, and have filed all reports required to be field thereunder during
the 12 months preceding the sale (or for such shorter period as ENTRUST is
a public company);
(b) the holder of restricted securities must have held such securities for at
least one year;
(c) the number of shares of Series A Common Stock sold by the holder within
any three-month period may not exceed the greater of (a) 1% of the number
of outstanding shares of Series A Common Stock or (b) the average weekly
trading volume of the Series A Common Stock during the four calendar weeks
preceding the filing of the Form 144;
(d) the holder must sell the securities only in "brokers' transactions" or in
transactions directly with a "market maker," which transactions may not
involve any solicitations of orders to buy the securities or any payments
to any person other than the broker executing the sale order; and
(e) the holder must mail three copies of a Form 144 to the United States
Securities and Exchange Commission at the same time as he or she places
the sale order with the broker.
7.3.5 After the holder of CONSIDERATION SHARES has held the CONSIDERATION SHARES
for two years, and assuming the holder has not been an affiliate of ENTRUST
(such as an officer, director or principal stockholder) during the preceding
three months, ENTRUST shall, to the extent permitted by law, at the request of
SELLER remove the restrictive legend from the CONSIDERATION SHARES under Rule
144(k). Thereafter, and in respect of the transfers made in
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accordance with Rule 144, the holder need not comply with the restrictions on
resale noted above.
7.3.6 A legend substantially in the following form will be placed on the
certificates representing the CONSIDERATION SHARES which may be issued to the
SELLER.
"The shares represented by this certificate have not been registered under
the United States Securities Act of 1933, as amended, and may not be
offered, sold or otherwise transferred, pledged or hypothecated (i) unless
and until such shares are registered under such Act or an opinion of
counsel satisfactory to Entrust Technologies Inc. is obtained to the
effect that such registration is not required or (ii) except in accordance
with Regulation S of such Act. Hedging transactions involving the shares
represented by this certificate may not be conducted except in compliance
with the Securities Act of 1933, as amended.
The sale or other disposition of any of the shares represented by this
certificate is restricted by a Share Purchase Agreement entered into by
the holder of this certificate and Entrust Technologies Inc. A copy of the
Share Purchase Agreement is available for inspection during normal
business hours at the principal executive office of the corporation."
7.3.7 The SELLER, if requested by ENTRUST or the managing underwriter of a
public offering of ENTRUST's Series A Common Stock or other securities pursuant
to a registration statement under the SECURITIES ACT (a "REGISTRATION
STATEMENT"), shall agree not to sell publicly or otherwise transfer or dispose
of any CONSIDERATION SHARES or other securities of ENTRUST held by the SELLER
for a specified period of time (not to exceed 180 days) following the effective
date of such REGISTRATION STATEMENT; provided, however, that.
(a) such agreement shall only apply to the first REGISTRATION STATEMENT
covering Series A Common Stock or other securities to be sold to the
public in an underwritten offering, and
(b) all stockholders of ENTRUST holding not less than the number of shares of
Series A Common Stock held by the SELLER and all officers and directors of
ENTRUST enter into similar agreements.
7.3.8 ENTRUST represents that it has only made offers to sell the CONSIDERATION
SHARES outside the U.S.A. and that it did not generally advertise in the U.S.A.
in respect to the offering for sale or sale of the CONSIDERATION SHARES.
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7.4 Watermark Business
7.4.1 The Watermark intellectual property (watermark specific software and filed
patents) shall be transferred to a separate entity (the "WATERMARK COMPANY")
prior to CLOSING in consultation with ENTRUST. The Company shall be indemnified
for any claims arising from or relating to the Watermark intellectual property,
either before or after CLOSING. To the extent that the COMPANY is under any
obligation to perform any work on behalf of the WATERMARK COMPANY or in
connection with the Watermark intellectual property, such obligation will be
taken over by the WATERMARK COMPANY at no cost for the COMPANY. If such transfer
is not possible, the WATERMARK COMPANY will pay an arm's length consideration to
the COMPANY and grant to the COMPANY at no charge all licences necessary for the
performance of such work.
7.4.2 Any costs (including legal costs) or taxes imposed on the COMPANY or on
ENTRUST in connection with the transfer of the watermark intellectual property
to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as
determined by Sec. 5.2 in respect of the representations and warranties.
7.5 Offer to other Sellers
Provided that this AGREEMENT closes pursuant to Sec. 3.1 above, ENTRUST
undertakes to purchase during a period of 90 days after CLOSING any and all
outstanding COMPANY SHARES offered to it pursuant to any share purchase
agreement established in the form of Exhibit OTH, and completed in accordance
with the principles applied for the calculation of the figures contained in the
share purchase agreements entered into with the other sellers excluding Dr.
Rainer Rueppel.
8. Miscellaneous
8.1 Costs
8.1.1 Each Party shall bear its own costs, taxes and expenses relating to the
preparation, CLOSING and implementation of this AGREEMENT.
8.2 Confidentiality
Effective as of CLOSING, ENTRUSTS' obligation to the keep confidential the
information received on the COMPANY shall terminate.
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8.3 Assignment
8.3.1 The rights and obligations of the PARTIES out of this AGREEMENT may not be
assigned, provided, however, that ENTRUST is authorized to assign such rights
and obligations to any of its affiliates.
8.3.2 In case of such an assignment of the contract by ENTRUST to any of its
affiliates pursuant Sec. 8.3.1, a letter of comfort or a guarantee of ENTRUST
shall be delivered to the SELLERS.
8.4 Announcements
No announcement concerning the transaction contemplated by this AGREEMENT or any
matter ancillary to it and no disclosure of the terms of this AGREEMENT (save as
required by law, by any market regulations or as expressly provided in this
AGREEMENT) shall be made by the SELLER to any person or entity, except with the
prior written approval of ENTRUST.
8.5 Notices
8.5.1 Any notice or other communication to be given under this letter shall be
in writing and shall be delivered by hand or sent by registered post or by
courier to the address specified below, or sent by facsimile to the number
specified below;
(a) ENTRUST: General Counsel, Entrust Technologies Inc. 2323 North Central
Expressway, Richardson, Texas, 75080, phone: 001 972 994 8020, fax 001 972
994 8005
SELLER: Invision AG, Neuhofstrasse 4, Ch-6341 Baar Fax: 0041-7687593,
Phone 0041-41-7687682
8.5.2 Either Party hereto may change the address, facsimile number or name of
the person for whose attention notices are to be addressed by serving a notice
on the other party hereto in accordance with Sec. 8.5.1.
8.5.3 Each such notice or other communication shall be effective:
(a) if given by facsimile when the facsimile is transmitted to the facsimile
number specified in para. 8.5.1 or
(b) if given by any other means, when received at the address specified in
para. 8.5.1.
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8.6 Severability
Whenever possible, each provision of this AGREEMENT shall be interepreted in
such manner as to be effective and valid under the applicable law, but if any
provision of this AGREEMENT shall be unenforceable or invalid under applicable
law, such provision shall be ineffective only to the extent of such
unenforceability or invalidity and be replaced by such valid and enforceable
provision which bona fides parties would consider to match as closely as
possible the invalid or unenforceable provision, attaining the same or a similar
economic effect. The remaining provisions of this AGREEMENT shall under all
circumstances continue to be binding and in full force and effect.
8.7 Construction, amendments
8.7.1 This AGREEMENT constitutes the entire agreement among the parties and,
except as otherwise provided, supersedes any prior understandings or agreements,
written or oral, that relate to the acquisition of COMPANY SHARES by ENTRUST.
8.7.2 This AGREEMENT may not be amended except in writing, including
communications by letter, facsimile, or E-mail.
8.7.3 The PARTIES agree that the AGREEMENT shall not be construed against any
PARTY on the ground that such PARTY drafted or prepared the AGREEMENT.
8.8 Governing law
This AGREEMENT shall be governed by the internal law of Switzerland; the
application of the Vienna (United Nations) Convention on Contracts for the
International Sale of Goods is excluded.
8.9 Arbitration
All disputes arising out of or in connection with the present agreement,
including disputes on its conclusion, binding effect, amendment and termination
shall be resolved, to the exclusion of the ordinary courts by a three-person
Arbitral Tribunal in accordance with the International Arbitration Rules of the
Zurich Chamber of Commerce. The language of the arbitration shall be English.
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List of Exhibits
- - Exhibit DIL (List of Documents submitted to Entrust)
- - Exhibit CAP (Capital Structure of Entrust)
- - Exhibit IPR (Intellectual Property)
- - Exhibit OTH (Offer to Other Sellers)
(signature page on the next page)
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Signature Page
Zug, this 30 May 1998 Zug, this 30/05/98
ENTRUST Technologies Inc. Invision AG:
/s/ Brad Ross /s/ Peter Titz
- ----------------------------- ---------------------------
Name: Brad Ross Name: Peter Titz
Title: President Title: Director
<PAGE>
ENTRUST TECHNOLOGIES
Invision AG
Neuhofstrasse Y
CH-6341 Baar
CONSIDERATION SHARES
Dear Mr. PFISTER
Reference is made to the share purchase agreement between yourself and ourselves
for the purchase of shares in R3 Security Engineering AG closed on 8 June 1998
(the "Share Purchase Agreement").
The purpose of this letter is the amendment of the Share Purchase Agreement with
respect to its Section 7.3 as follows:
Rule 144 Reporting Requirements
From and after the time ENTRUST has securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
in order to permit the Seller to sell the CONSIDERATION SHARES it holds, if it
so desires, from time to time pursuant to Rule 144 or any successor to such rule
or any other rule or regulation of the Securities and Exchange Commission (the
"Commission") that may at any time permit the SELLER to sell its CONSIDERATION
SHARES to the public without registration (the "Resale Rules"), ENTRUST will:
a) comply with all rules and regulations of the Commission applicable in
connection with use of the Resale Rules;
b) make and keep adequate and current public information available, as
those terms are understood and defined in the Resale Rules, at all
times;
c) file with the Commission in a timely manner all reports and other
documents required of ENTRUST under the Securities Act and Exchange
Act;
d) furnish to the SELLER forthwith upon request (i) a written statement
by ENTRUST that it has complied with the reporting requirements of the
Resale Rules, the Securities Act and Exchange
<PAGE>
Act, (ii) a copy of the most recent annual or quarterly report of
ENTRUST and any other reports and documents filed by ENTRUST under the
Securities Act or the Exchange Act, and (iii) such other information
as may be reasonably requested in availing the SELLER of any rule or
regulation of the Commission which permits the selling of any such
CONSIDERATION SHARES without registration; and
e) take any action (including cooperation with the SELLER to cause the
transfer agent to remove any restrictive legend on certificates
evidencing the CONSIDERATION SHARES) which shall be reasonably
requested by the SELLER or which shall otherwise facilitate the sale
of the CONSIDERATION SHARES from time to time by the SELLER pursuant
to the Resale Rules.
Rule 144A Information
Until such time as ENTRUST is subject to Section 13 or 15(d) of the Exchange
Act, ENTRUST will make available, upon request, to the SELLER and prospective
purchaser or transferee of the CONSIDERATION SHARES designated by the Seller,
the information required to allow the resale or other transfer of such
CONSIDERATION SHARES pursuant to Rule 144A under the Securities Act.
Sec. 7.3.7
The legend to be placed on the certificates representing CONSIDERATION SHARES
shall include the following additional transfer exception:
or (iii) except to a "qualified institutional buyer" (as defined in Rule 144A
promulgated under the Securities Act) in a transaction which meets the
requirements of such Rule 144A.
Zurich, 8 June 1998
Entrust Technologies Inc.
/s/ Brad Ross
- -------------
Brad Ross
<PAGE>
ENTRUST TECHNOLOGIES
Invision AG
Neuhofstrasse Y
CH-6341 Baar
Watermark spin-off
Dear Mr. PFISTER
We confirm to you herewith that Entrust will bear up to CHF 30,000.-- of legal
fees in connection with the spin-off of the Watermark business. Sec. 7.4.2. of
the Share Purchase Agreement should, therefore, read as follows:
"Except for an aggregate of up to CHF 30,000.-- of legal fees, any fees,
costs or taxes imposed on the COMPANY or on ENTRUST in connection with the
transfer of the watermark intellectual property to the WATERMARK COMPANY
shall be borne by the SELLER in the same proportion as determined by Sec.
5.2 in respect of the representations and warranties."
Pursuant to the information received from Dr. Markus Kroll on 6 June 1998, the
tax authorities decided to levy against r3 Security Engineering AG a withholding
tax of CHF 177,697 in connection with the distribution of the shares in
Securights AG as a dividend. Since such taxes are to be borne pro rata by the
Sellers, we will in due course, send you an invoice for your portion of the
taxes, as determined in Sec. 7.4.2. of the Share Purchase Agreement. Indeed, you
may be entitled, to claim back this amount from the tax authorities in
accordance with the tax legislation.
We thank you for your comprehension.
Zurich, 8 June 1998
Entrust Technologies, Inc.
/s/ Brad Ross
- -------------
Brad Ross
<PAGE>
Exhibit 2.5
Form of Share Purchase Agreement
between
ENTRUST Technologies Inc., a Maryland corporation (hereinafter referred to
"ENTRUST")
on the one part
and
[Name], [Address] (hereinafter referred to as
the "SELLER"),
on the other part
(hereinafter collectively referred to as "the PARTIES")
concerning the acquisition of shares of
R/3/ Security Engineering AG
Seegraben
(the "COMPANY")
<PAGE>
TABLE OF CONTENTS
Definitions.................................................................iii
1. Sale and Purchase.......................................................1
1.1. Object of the Sale...............................................1
1.2. Amount of Purchase Price.........................................1
1.3. Basis Price......................................................1
1.4. Price Adjustment.................................................1
1.5. Escrow...........................................................1
2. Consideration Shares....................................................2
2.1. Value of Consideration Shares....................................2
2.2. Restrictions on Transfer.........................................3
2.3. Right of First Refusal...........................................3
2.4. Put Option and Make Whole Payment................................4
3. Closing.................................................................6
3.1. Conditions Precedent.............................................6
3.2. Completion of the sale...........................................6
3.3. Transfer of Risks................................................7
4. Representations of Seller...............................................7
4.1. With Respect to US Securities Regulations........................7
4.2. With Respect to the SHARES and the COMPANY's Capital............10
4.3. With Respect to the COMPANY.....................................10
5. Warranty Claims Against Seller.........................................19
6. Representations of Entrust.............................................20
6.1. Good Standing and Authority.....................................20
6.2. Consideration Shares............................................20
6.3. Capitalization..................................................20
6.4. Governmental Consents...........................................21
6.5. Warranty Claims Against Entrust.................................21
7. Covenants..............................................................22
(i)
<PAGE>
7.1. Management of the Company........................................22
7.2. Product Liability................................................22
7.3. Consideration Shares.............................................23
7.4. Watermark Business...............................................25
8. Miscellaneous...........................................................26
8.1. Costs............................................................26
8.2. Confidentiality..................................................26
8.3. Assignment.......................................................26
8.4. Announcements....................................................26
8.5. Notices..........................................................27
8.6. Severability.....................................................27
8.7. Construction, amendments.........................................27
8.8. Governing law....................................................28
8.9. Arbitration......................................................28
List of Exhibits.............................................................28
-------------------
Entrust Technologies Inc. has omitted the following schedules, which will be
provided supplementally to the Securities and Exchange Commission upon request:
- - Exhibit DIL (List of Documents Submitted to Entrust)
- - Exhibit CAP (Capital Structure of Entrust)
- - Exhibit IPR (Intellectual Property)
(ii)
<PAGE>
Definitions
"AGREEMENT"
this share purchase agreement, including
the exhibits;
"BASIS PRICE" the BASIS PRICE as defined in Sec. 1.3.;
"CLOSING" the CLOSING of this AGREEMENT
pursuant to Sec. 3;
"CO" the Swiss Code of Obligations;
"COMPANY SHARES" the common or preferred registered shares
of the COMPANY with a par value of
CHF 10 each;
"COMPANY" r/3/ Security Engineering AG, Seegraben, as
defined on the first page;
"CONSIDERATION
SHARES" Series A Common Stock of ENTRUST with
p.v. of USD 0.01 each;
"DEFECT" a DEFECT as defined in Sec. 5.1;
"DISTRIBUTION
COMPLIANCE PERIOD" the DISTRIBUTION COMPLIANCE
PERIOD defined in Sec. 7.3.;
"ENTRUST" ENTRUST Technologies Inc., a Maryland
corporation, as defined on the first page;
"ESCROW AGENT" Thouvenin Stutzer Eggimann & Partner,
Limmatquai 4, 8001 Zurich;
"ESCROW
AGREEMENT" the escrow agreement entered into between
ENTRUST, the SELLER and the ESCROW AGENT,
and signed by the SELLER on the same
date as this AGREEMENT;
(iii)
<PAGE>
"ESCROW" the escrow established pursuant to the
ESCROW AGREEMENT and referred to in
Sec. 1.5;
"FIRST ANNIVERSARY" the FIRST ANNIVERSARY defined in Sec.
2.4.1.;
"GOVERNMENTAL
AUTHORITY" any government, state, municipality or
other political subdivision thereof and
any entity exercising executive,
legislative, judicial, regulatory or
administrative functions of or pertaining
to government
"INTELLECTUAL
PROPERTY" the INTELLECTUAL PROPERTY defined
in Sec. 4.3.5.2;
"INVISION" INVISION AG, Neuhofstrasse 4, 6341
Baar;
"IPO PUT PRICE" the IPO PUT PRICE defined in Sec. 2.4.2;
"MAKE WHOLE PAYMENT" the MAKE WHOLE PAYMENT defined in
Sec. 2.4.2;
"MARKET PRICE" the MARKET PRICE defined in Sec. 2.4.3;
"NOTICE" the NOTICE defined in Sec. 2.3.3;
"OFFERED CONSIDERATION
SHARES" the OFFERED CONSIDERATION SHARES
defined in Sec. 2.3.3;
"OFFEROR" the OFFEROR defined in Sec. 2.3.3;
"outstanding" in respect of COMPANY SHARES, the
issued COMPANY SHARES less the
COMPANY SHARES held in treasury;
"PARTY" ENTRUST and/or the SELLER, as defined
on the first page;
(iv)
<PAGE>
"PRICE ADJUSTMENT" the PRICE ADJUSTMENT, as defined in
Sec. 1.4.;
"PRINCIPAL MARKET" the PRINCIPAL MARKET defined in Sec.
2.4.3;
"PUBLIC OFFERING" the PUBLIC OFFERING defined in Sec.
2.3.6;
"PURCHASE PRICE" the total consideration paid by ENTRUST
for the SHARES, as defined in Sec. 1.2.;
"PUT RIGHT" the PUT RIGHT defined in Sec. 2.4.1;
"PUT SHARES" the PUT SHARES defined in Sec. 2.4.1;
"REGULATION S" the REGULATION S defined in Sec. 4.1.1.;
"SECURITIES ACT" the U.S. Securities Act of 1933, as
amended;
"SELLER" [Name], [Address], as defined on the first
page;
"SHARES" the COMPANY SHARES sold by the SELLER
pursuant to Sec. 1.1.;
"SIGNING" the SIGNING of this AGREEMENT;
"STANDARD PUT PRICE" the STANDARD PUT PRICE defined in
Sec. 2.4.1;
"WATERMARK COMPANY" the WATERMARK COMPANY defined in
Sec. 7.4.;
(v)
<PAGE>
1. Sale and Purchase
1.1. Object of the Sale
ENTRUST purchases from the SELLER, and the SELLER sells to ENTRUST [___] COMPANY
SHARES ("the SHARES") pursuant to the terms and conditions of this AGREEMENT.
1.2. Amount of Purchase Price
The PURCHASE PRICE shall be composed of (i) the BASIS PRICE and, if any, the
PRICE ADJUSTMENT, provided, however, that such PRICE ADJUSTMENT shall be due
only if, within 90 days after CLOSING, ENTRUST obtains directly or through the
COMPANY 100 % of the COMPANY SHARES. The right of the SELLER to the PRICE
ADJUSTMENT expires at midnight on the 90th day after CLOSING.
1.3. Basis Price
The BASIS PRICE shall be paid to the Seller at CLOSING in (i) USD [____]-- and
(ii) [____] CONSIDERATION SHARES, valued at USD 58.30 each pursuant to Sec.
2.1.1.
1.3.1. Notwithstanding the previous Sec. 1.3.1., [____] out of the [_____]
CONSIDERATION SHARES shall be placed into ESCROW pursuant to Sec 1.5.
1.4. Price Adjustment
1.4.1. The PRICE ADJUSTMENT, if any, shall be composed of [___] CONSIDERATION
SHARES.
1.4.2. The PRICE ADJUSTMENT, if any, shall be paid to the SELLER within 10
business days after ENTRUST obtains directly or through the COMPANY 100 % of the
COMPANY SHARES. The CONSIDERATION SHARES composing the PRICE ADJUSTMENT shall be
paid to the SELLER in accordance with the SELLER's instructions. If the
conditions for the payment of the PRICE ADJUSTMENT are already fulfilled at
CLOSING, the payment of the PRICE ADJUSTMENT shall take place at the later (i)
of CLOSING or (ii) five business days following the receipt by ENTRUST of the
share purchase AGREEMENTS for all outstanding COMPANY SHARES.
1.5. Escrow
1.5.1. The [____] CONSIDERATION SHARES held in ESCROW pursuant to Section 1.3.1.
shall be delivered to, kept and/or released by the ESCROW AGENT pursuant to the
ESCROW AGREEMENT. The CONSIDERATION SHARES and any cash proceeds from the sale
of such CONSIDERATION SHARES whilst held in
<PAGE>
ESCROW pursuant to Sec. 1.5.4 hereof shall be deposited by the ESCROW AGENT in a
Swiss bank of international standing and reputation.
1.5.2. The CONSIDERATION SHARES held in ESCROW shall be released to the Seller
at the rate of two thirds of the [_____] CONSIDERATION SHARES on the first
anniversary date of CLOSING, and of one third on the second such anniversary
date, provided, however, that
(a) the CONSIDERATION SHARES shall be released to ENTRUST and not to the
SELLER, and the PURCHASE PRICE will be reduced accordingly, if, on such
anniversary date the SELLER (a) has terminated his employment
relationship with the COMPANY or (b) has been terminated by the COMPANY
for a cause of material nature [whereby the death of the SELLER or his
incapacity to work for the COMPANY without fault - Art. 324a CO - shall
not fall under lit a or b hereof], and that
(b) during a period of 24 months after CLOSING, the number of CONSIDERATION
SHARES held in escrow shall not be reduced to less than [___]
CONSIDERATION SHARES, or to such amount as adjusted to account for a MAKE
WHOLE PAYMENT pursuant to Sec. 2.4.2 hereof.
1.5.3. The CONSIDERATION SHARES held in escrow pursuant to Sec. 1.5.2(b) shall
be kept for a period of 24 months following CLOSING as a security for claims of
ENTRUST in connection with claims based on the representations and warranties of
Sec. 4 and 5 and on the covenants of Sec. 7.1.1 and 7.1.2.
1.5.4. CONSIDERATION SHARES held in ESCROW may not be sold. Notwithstanding the
previous sentence, CONSIDERATION SHARES held in ESCROW only on the basis of Sec.
1.5.2(b) can be sold, provided, however, that during the 24-months period
following CLOSING, or thereafter if the duration of the ESCROW is extended in
connection with any warranty claim of ENTRUST, the transfer of such
CONSIDERATION SHARES to the acquirer shall be valid and shall take place only if
the cash consideration to be received by the SELLER is placed into escrow in
lieu of the CONSIDERATION SHARES.
1.5.5. Variations in the price of the CONSIDERATION SHARES shall not cause any
variation in the number of CONSIDERATION SHARES to be put in ESCROW.
1.5.6. The specific terms and conditions of the ESCROW AGREEMENT are reserved.
2. Consideration Shares
2.1. Value of Consideration Shares
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<PAGE>
2.1.1. For the purpose of the conversion of any amount expressed in USD into a
certain number of CONSIDERATION SHARES or vice-versa, each CONSIDERATION SHARE
shall be deemed to be worth USD 58.30 (or, after CLOSING, such other amount as
adjusted for stock splits, stock dividends and other recapitalizations taking
place after CLOSING). Fractions of CONSIDERATION SHARES shall be rounded to the
nearest whole number, and the difference paid or deducted from amounts otherwise
payable in cash, as the case may be.
2.1.2. If ENTRUST calls upon the ESCROW as a security in connection with a
DEFECT, the actual market value of the CONSIDERATION SHARES, and not the value
set pursuant to the previous Sec. 2.1.1. shall determine the number of
CONSIDERATION SHARES to be attributed to ENTRUST.
2.2. Restrictions on Transfer
2.2.1. The CONSIDERATION SHARES are restricted securities. They are the object
of the representations and warranties of Sec. 4.2 and of the covenants of Sec.
6.3.
2.2.2. Notwithstanding the SELLER's ability to resell CONSIDERATION SHARES under
United States or other securities laws, any sale or other disposition of any of
the CONSIDERATION SHARES by the SELLER, other than according to the provisions
of Sections 2.2.3, 2.3 or 2.4 below, shall be void and transfer no right, title,
or interest in or to any of such CONSIDERATION SHARES to the purported
transferee.
2.2.3. The SELLER may sell, assign or transfer CONSIDERATION SHARES to his
spouse or children or to a trust established for the benefit of his spouse,
children or himself, or dispose of them under his will, without compliance with
Section 2.3, provided, however, that such transferee will be subject to the same
contractual transfer restrictions as the SELLER.
2.3. Right of First Refusal
2.3.1. If the SELLER desires to sell, transfer or otherwise dispose of any of
his CONSIDERATION SHARES, or of any interest in such CONSIDERATION SHARES,
whether voluntarily or by operation of law, in any transaction other than
pursuant to Section 2.2.3. or 2.4 of this Agreement, the SELLER shall first
deliver written notice of his desire to do so (the "NOTICE") to ENTRUST in the
manner prescribed in Section 8.5 of this Agreement. The NOTICE must specify: (i)
the name and address of the party to which the SELLER proposes to sell or
otherwise dispose of the CONSIDERATION SHARES or an interest in the
CONSIDERATION SHARES (the "OFFEROR"), (ii) the number of CONSIDERATION SHARES
the SELLER proposes to sell or otherwise dispose of (the "OFFERED CONSIDERATION
SHARES"), (iii) the
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<PAGE>
consideration per SHARE to be delivered to the SELLER for the proposed sale,
transfer or disposition, and (iv) all other material terms and conditions of the
proposed transaction.
2.3.2. ENTRUST shall have the first option to purchase all but not less than all
of the OFFERED CONSIDERATION SHARES for the consideration per SHARE and on the
terms and conditions specified in the NOTICE. ENTRUST must exercise such option,
no later than 15 days after such NOTICE is deemed to have been delivered to it
under Section 8.5, by written NOTICE to the SELLER, provided, however, that such
deadline will be extended to 30 days if the number of OFFERED CONSIDERATION
SHARES exceeds 50'000.
2.3.3. In the event ENTRUST duly exercises its option to purchase the OFFERED
CONSIDERATION SHARES, the closing of such purchase shall take place at the
offices of the COMPANY, or at any other place mutually agreed between the
PARTIES five (Swiss) business days after the expiration of deadline for the
exercise of the right of first refusal pursuant to Section 2.3.2. above. If
ENTRUST does not exercise its option to purchase the CONSIDERATION SHARES, the
closing of the sale must take place in accordance with the terms and conditions
specified in the NOTICE no later than 60 days after the expiration of the option
of ENTRUST.
2.3.4. To the extent that the consideration proposed to be paid by the OFFEROR
for the OFFERED CONSIDERATION SHARES consists of property other than cash or a
promissory note, the consideration required to be paid by ENTRUST may consist of
cash equal to the value of such property, as determined in good faith by
agreement of the SELLER and ENTRUST.
2.3.6. The right of first refusal of ENTRUST set forth in this Section 2.3 shall
terminate upon the closing of ENTRUST's initial public offering of Series A
Common Stock pursuant to an effective registration statement under the
SECURITIES ACT (a "PUBLIC OFFERING").
2.4. Put Option and Make Whole Payment
2.4.1. If ENTRUST's Series A Common Stock is not listed on a United States
national securities exchange, the Nasdaq Stock Market or another U.S. nationally
recognized exchange or trading system on the first anniversary of CLOSING (the
"FIRST ANNIVERSARY"), and the SELLER is the beneficial owner of CONSIDERATION
SHARES as of the FIRST ANNIVERSARY, then the SELLER shall have 15 days to give
written notice to ENTRUST of its intention, if any, to sell to ENTRUST (the "PUT
RIGHT"), all, but not less than all, of the CONSIDERATION SHARES owned by the
SELLER (including any CONSIDERATION SHARES to be released from escrow on the
FIRST ANNIVERSARY but excluding any CONSIDERATION SHARES remaining in escrow
after the FIRST ANNIVERSARY) (the "PUT SHARES"). If the SELLER
-4-
<PAGE>
exercises its PUT RIGHT, the SELLER agrees to sell the PUT SHARES to ENTRUST,
and ENTRUST agrees to purchase the PUT SHARES from the SELLER, at a price of USD
$58.30 (subject to adjustment for stock dividends, stock splits and other
recapitalizations) (the "STANDARD PUT PRICE"). The PUT RIGHT is subject to the
following:
(a) The SELLER must not, at the time of giving notice of exercise of its PUT
RIGHT, either (i) have terminated his employment relationship with the
COMPANY or (ii) have been terminated by the COMPANY for a cause of material
nature (whereby the death of the SELLER or his incapacity to work for the
COMPANY without fault - Art. 324a CO - shall not fall under lit [i] or [ii]
hereof); and
(b) the payment of the STANDARD PUT PRICE against the delivery of the PUT
SHARES shall be made in three equal quarterly installments beginning within
5 (Swiss) business days after ENTRUST has received notice of exercise of
the PUT RIGHT.
2.4.2. If ENTRUST's Series A Common Stock is listed on a United States national
securities exchange, the Nasdaq Stock Market or another U.S. nationally
recognized exchange or trading system prior to the FIRST ANNIVERSARY, and the
MARKET PRICE is less than USD $48.30 (subject to adjustment for stock dividends,
stock splits and other recapitalizations) (the "IPO PUT PRICE"), then ENTRUST
shall make an additional payment per CONSIDERATION SHARE, in cash or in shares
of its Series A Common Stock (the choice of either form being at the sole
discretion of ENTRUST), to the SELLER equal to the difference between the IPO
PUT PRICE and the MARKET PRICE (the "MAKE WHOLE PAYMENT"), subject to the
following provisions:
(a) The SELLER must not, as of the effective date of the registration statement
relating to the PUBLIC OFFERING, either (i) have terminated his employment
relationship with the COMPANY, or (i) have been terminated by the COMPANY
for a cause of material nature (whereby the death of the SELLER or his
incapacity to work for the COMPANY without fault - Art. 324a CO shall not
fall under lit [i] or [ii] hereof); and
(b) ENTRUST agrees to deliver the MAKE WHOLE PAYMENT pursuant to the
instructions of the SELLER within 10 Swiss business days after the end of
the relevant period for the determination of the MARKET PRICE pursuant to
Sec. 2.4.3 hereinafter.
(c) Notwithstanding the previous paragraph and Sec. 1.5.5, any MAKE WHOLE
PAYMENT made in connection with any CONSIDERATION SHARES held in
-5-
<PAGE>
escrow pursuant to Sec. 1.5 shall be placed by ENTRUST into ESCROW and
shall be held and released like the CONSIDERATION SHARES it relates to.
2.4.3. MARKET PRICE means the average of the closing sale price of ENTRUST's
Series A Common Stock on the principal United States securities exchange or
trading market for such stock (the "PRINCIPAL MARKET") for the ten (10) trading
days beginning on the first day of trading of such stock on the PRINCIPAL
MARKET.
3. Closing
3.1. Conditions Precedent
CLOSING is subject to the following conditions precedent:
(a) the approval of the AGREEMENT by the board of directors of the COMPANY;
(b) the approval of the AGREEMENT by the stockholders and the board of
directors of ENTRUST;
(c) the share purchase agreements with Dr. Rainer Rueppel and Invision AG
concerning the sale of all their COMPANY SHARES to ENTRUST have come into
force; and
(d) the Watermark intellectual property has been transferred to the WATERMARK
COMPANY pursuant to Sec. 7.4. prior to CLOSING.
3.2. Completion of the sale
3.2.1. The sale and purchase of the SHARES will be completed at the offices of
Bar & Karrer, Seefeldstrasse 19, 8008 Zurich, at the latest on 8 June 1998
("CLOSING").
3.2.2. At CLOSING, the SELLER shall produce and deliver to ENTRUST:
(a) share certificates endorsed to ENTRUST representing the SHARES;
(b) share certificates endorsed to the COMPANY representing the COMPANY SHARES
held in treasury by the COMPANY as of CLOSING;
(c) the original of the minutes of the board of the COMPANY authorizing the
transfer of the SHARES to ENTRUST;
(d) the original share register of the Company (Art. 686 CO), duly signed by
the board of directors, and bearing ENTRUST as shareholder for the SHARES,
without any restriction or limitation; and
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<PAGE>
(e) the resignation letter of Dr. Markus Kroll and of Mr. Peter Titz.
3.2.3. At CLOSING, ENTRUST shall, on its part, deliver to the SELLER:
(a) a certificate of the Secretary evidencing the decision of the BOARD of
ENTRUST approving this AGREEMENT;
(b) an original and irrevocable promise by a bank of international standing and
reputation to pay the BASIS PRICE, and, if due at CLOSING, the PRICE
ADJUSTMENT or, at the election of ENTRUST, a bank check drawn on a bank of
international standing and reputation and issued for the same amount;
(c) stock certificates registered in the name of the SELLER for the number of
CONSIDERATION SHARES;
(d) a receipt issued by the ESCROW AGENT as proof that the CONSIDERATION SHARES
to be delivered to the ESCROW AGENT at CLOSING pursuant to Sec. 1.5.1 have
been placed into ESCROW.
3.3. Transfer of Risks
The risks and profits relating to the SHARES and to the COMPANY shall pass to
ENTRUST at CLOSING.
4. Representations of Seller
Subject to the disclosure made in the Disclosure Letter (Exhibit DIL) and to the
provisions of Sec. 5 below, the SELLER makes the following representations,
which truly and accurately reflect the factual and legal situation as of the
date of this AGREEMENT.
4.1. With Respect to US Securities Regulations
4.1.1. With respect to the CONSIDERATION SHARES issued to and acquired by the
SELLER hereunder, the SELLER represents and warrants as follows:
(a) The SELLER will be acquiring the CONSIDERATION SHARES for his own account
for investment only, and not with a view to, or for sale in connection
with, any distribution of such CONSIDERATION SHARES in violation of the
SECURITIES ACT or any rule or regulation under the SECURITIES ACT.
(b) The SELLER has sufficient experience in business, financial and investment
matters to be able to evaluate the risks involved in the acquisition of the
CONSIDERATION SHARES and to make an informed investment decision with
respect to such investment.
-7-
<PAGE>
(c) The SELLER is not a "U.S. person" (as defined in Regulation S under the
SECURITIES ACT ("REGULATION S").
(d) The SELLER understands and acknowledges that (i) the CONSIDERATION SHARES,
if and when issued, will be "restricted securities" under Rule 144 of the
SECURITIES ACT and may not be offered or sold in the United States or to,
or for the account or benefit of, any U.S. person unless such securities
are registered under the SECURITIES ACT or such offer or sale is made
pursuant to an exemption from the registration requirements of the
SECURITIES ACT, (ii) the CONSIDERATION SHARES are being distributed by
ENTRUST pursuant to the terms of REGULATION S, which permits securities to
be sold to non-U.S. persons in "offshore transactions" (as defined in
REGULATION S), subject to certain terms and conditions, and (iii) hedging
transactions involving the CONSIDERATION SHARES may not be conducted unless
in compliance with the SECURITIES ACT.
(e) The SELLER has signed this AGREEMENT outside the United States.
4.1.2. The following are definitions contained in REGULATION S as in effect on
the date of this Agreement:
(a) "U.S. person" means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or incorporated under the
laws of the United States;
(iii) Any estate of which any executor or administrator is a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the United
States;
(vi) Any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit
or account of a U.S. person;
(vii) Any discretionary account or similar account (other than an estate
or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States;
and
(viii) Any partnership or corporation if:
-8-
<PAGE>
- Organized or incorporated under the laws of any foreign jurisdiction;
and
- Formed by a U.S. person principally for the purpose of investing in
securities not registered under the SECURITIES ACT, unless it is
organized or incorporated, and owned, by accredited investors (as
defined in Rule 501(a) of the SECURITIES ACT) who are not natural
persons, estates or trusts.
(b) The following are not "U.S. persons":
(i) Any discretionary account or similar account (other than an estate or
trust) held for the benefit or account of a non-U.S. person by a
dealer or other professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
(ii) Any estate of which any professional fiduciary acting as executor or
administrator is a U.S. person if:
- An executor or administrator of the estate who is not a U.S. person
has sole or shared investment discretion with respect to the assets
of the estate; and
- The estate is governed by foreign law;
(iii) Any trust of which any professional fiduciary acting as trustee is a
U.S. person, if a trustee who is not a U.S. person has sole or shared
investment discretion with respect to the trust assets, and no
beneficiary of the trust (and no settlor if the trust is revocable)
is a U.S. person;
(iv) An employee benefit plan established and administered in accordance
with the law of a country other than the United States and customary
practices and documentation of such country;
(v) Any agency or branch of a U.S. person located outside the United
States if:
- The agency or branch operates for valid business reasons; and
- The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking
regulation, respectively, in the jurisdiction where located; and
(vi) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
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the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies, affiliates and pension plans, and any
other similar international organizations, their agencies, affiliates
and pension plans.
(c) "United States" means the United States of America, its territories
and possessions, any State of the United States, and the District of
Columbia.
4.2. With Respect to the SHARES and the COMPANY's Capital
4.2.1. The SHARES have been duly issued and are fully paid in. They are free of
any pledge, charge, encumbrances, or restrictions of any kind or nature.
4.2.2. The SELLER has good and valid title to the SHARES and he may freely
dispose of such SHARES without any limitation or restriction of any kind or
nature.
4.2.3. The COMPANY has a an issued share capital of CHF 400'000.-- composed of
40'000.--fully paid in registered shares with a nominal value of CHF 10.-- each.
8'000 of said registered shares are preferred shares. In addition to the issued
share capital, the COMPANY has a conditional capital of CHF 50'000.-- for 5'000
registered shares with a par value of CHF 10.-- each. The COMPANY has no other
issued, authorized or conditional equity.
4.2.4. There are no subscription rights, options, warrants, offers or other
commitments outstanding, which would oblige the COMPANY to issue any new COMPANY
SHARES or to transfer such COMPANY SHARES. Any such rights, options or offers
disclosed to ENTRUST in the due diligence have extinguished without affecting
the representation made under Sec. 4.2.3 above.
4.2.5. No prior issue, payment, contribution, sale, redemption, or transfer in
respect of the SHARES, has given or may give rise to any right, claim or action
against the COMPANY or ENTRUST.
4.3. With Respect to the COMPANY
4.3.1. Existence, Good Standing, and Records
4.3.1.1. The excerpt from the Commercial Register and the articles of
association in Exhibit DIL are current, true, and complete.
4.3.1.2. The minutes of the shareholders' and of the board of directors'
meetings listed in Exhibit DIL contain a complete, true and accurate record of
all such meetings over the period mentioned therein.
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4.3.1.3. To the extent that the COMPANY carries business outside of Switzerland,
it is presently in good standing and having the necessary licenses and permits
to carry on its business in these jurisdictions.
4.3.1.4. The COMPANY has no subsidiary, and has no participation in any other
entity, except for its participation in Swiss Security Service Laboratory AG,
Solothurn.
4.3.2. Accounts
4.3.2.1. The accounts attached in Exhibit DIL, including the first quarter
results submitted to ENTRUST, comply with the requirement of the Swiss Code of
Obligations, and have been prepared in accordance with accounting principles and
practices generally accepted in Switzerland.
4.3.2.2. Subject to the applicable accounting principles, the audited accounts
as of 31 December 1997 (the "Accounts"), as well as the first quarter results,
as per the date they were established:
(a) set forth without overestimation the capital, reserves, assets, and profits
of the COMPANY;
(b) fully provide for all bad or doubtful claims and receivables;
(c) fully provide for all liabilities, including contingent liabilities, or
disclose them in the notes; and
(d) are not affected (except as disclosed in the Accounts) by any extraordinary
or exceptional event, circumstance or item.
4.3.2.3. The accounts of the COMPANY for each financial year since its creation
have been consistently approved, without any qualification or restriction of any
kind, by the statutory auditors of the COMPANY.
4.3.2.4. The accounting records of the COMPANY are up to date and contain
complete and accurate details of all transactions of the COMPANY in compliance
with Art. 662 et seq. and 957 et seq. CO.
4.3.2.5. The COMPANY's records' systems and information, and the means of access
to them, are under the COMPANY's direct control.
4.3.2.6. There was no distribution of, nor any decision or commitment to
distribute any dividend in whatever form for the financial year ending on 31
December 1997. The spin-off of the WATERMARK BUSINESS pursuant to Sec. 7.4. is
reserved.
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4.3.2.7. ENTRUST is aware that the first quarter results do not contain the
accrued bonus payments for the first quarter of 1998, since the bonus payment,
if any, shall be decided at the end of the year. Said bonus payments are to be
made pursuant to the provisions of the employment agreements disclosed to
ENTRUST.
4.3.2.8. The issue prospectus dated 22 May 1998, including the financial
statements contained therein, constitutes full, true and plain disclosure of all
material facts relating to the COMPANY as of such date. The issue prospectus
contains no untrue statement of material facts, and the financial figures
contained in the issue prospectus are based on the same principle as those
applied for the establishment of the Accounts, as represented above in this Sec.
4.3.2.
4.3.3. Financing
4.3.3.1. The COMPANY has not made nor entered into any contract to make any loan
to any person or other arrangement whereby it is or may be owed any money other
than trade debts incurred in the ordinary course of business.
4.3.3.2. The COMPANY is not entitled to the benefit of any debt otherwise than
as the original creditor and has not factored or discounted any debt or agreed
to do so.
4.3.3.3. All of the accounts receivable which are reflected in the Accounts as
owed to the COMPANY (apart from bad and doubtful debts to the extent to which
they have been provided for in the Accounts) or which have subsequently been
recorded in the books of COMPANY have realized or are reasonably expected to
realize in the normal course of collection and within three months of CLOSING
their full value as included in the Accounts, after deduction of any provision
for bad debts.
4.3.3.4. ENTRUST is aware that some employees may have an overdraft with the
COMPANY, such overdraft being in aggregate of no more than CHF 50'000.--.
4.3.4. Technical characteristics
4.3.4.1. The quality of the COMPANY'S source code base in terms of security
design, documentation, performance, stability and reliability including year
2000 compliance is sufficient to carry on the business of the COMPANY as
currently contemplated, subject, however, to (i) the ongoing improvements and
developments made in the ordinary course of the COMPANY's business, and (ii)
unforeseen external market and technology developments.
4.3.5. Intellectual property
4.3.5.1. The COMPANY owns, or is licensed or otherwise possesses a right to use,
all INTELLECTUAL PROPERTY (as defined below) used in the operation of its
business
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or necessary for the operation of its business as currently conducted, except as
otherwise disclosed in Exhibit IPR. The COMPANY has taken reasonable measures to
protect the proprietary nature of trade secrets and confidential information (as
defined below) that it owns or uses. Except as disclosed in Exhibit IPR, the
Company has not granted any rights to any of the INTELLECTUAL PROPERTY owned by
the COMPANY (other than any rights in any INTELLECTUAL PROPERTY not owned by the
COMPANY that constitutes commercially available software generally available to
the public) to any person or business entity. To the SELLER's knowledge, no
other person or business entity is infringing, violating or misappropriating any
of the INTELLECTUAL PROPERTY that the COMPANY owns. The COMPANY has acquired all
rights to INTELLECTUAL PROPERTY developed or held by any employees (within the
scope and term of his employment or otherwise relating to the current or
proposed business of the COMPANY) or third parties who developed INTELLECTUAL
PROPERTY for the COMPANY and no outstanding claims for the payment of any
purchase price or indemnity in respect of such INTELLECTUAL PROPERTY is
threatened or outstanding, except as disclosed in Exhibit IPR.
4.3.5.2. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means all (A)
patents, patent applications, patent disclosures and all related continuation,
continuation in part, divisional, reissue, reexamination, utility model,
certificate of invention and design patents, patent applications, registrations
and applications for registrations; (B) trademarks, service marks, trade dress,
logos, trade names and corporate names and registrations and applications for
registration thereof; (C) copyrights and registrations and applications for
registration thereof; (D) computer software, data and documentation; (E) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, know-how, manufacturing and
production processes and techniques, research and development information,
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information; (F) other proprietary rights relating to any of the foregoing and
(G) copies and tangible embodiments thereof.
4.3.5.3. None of the activities or business conducted by the COMPANY infringes,
violates or constitutes a misappropriation of (or in the past infringed,
violated or constituted a misappropriation of) any INTELLECTUAL PROPERTY rights
of any other person or business entity, except as disclosed in Exhibit IPR. The
COMPANY has not received any complaint, claim or notice alleging any such
infringement, violation or misappropriation, and, to SELLER's knowledge, there
is no basis for any such complaint, claim or notice.
4.3.5.4. Exhibit IPR identifies each (a) patent or registration that has been
issued to the COMPANY with respect to any of its INTELLECTUAL PROPERTY, (b)
pending patent application or application for registration that the COMPANY has
made with respect to any of its INTELLECTUAL PROPERTY and (c) license or other
agreement
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pursuant to which the COMPANY has granted any rights to any third party with
respect to any of its INTELLECTUAL PROPERTY. The COMPANY has delivered to
ENTRUST or its advisors correct and complete copies of all such patents,
registrations, applications, licenses and agreements (as amended to date) and
has specifically identified and made available to ENTRUST or its advisors
correct and complete copies of all other written documentation evidencing
ownership of, and any claims or disputes relating to, each such item. With
respect to each item of INTELLECTUAL PROPERTY that the COMPANY owns, except as
provided in Exhibit IPR:
(a) the COMPANY possesses all right, title and interest in and to such item;
(b) such item is not subject to any outstanding judgment, order, decree,
stipulation or injunction; and
(c) the COMPANY has not agreed to indemnify any person or business entity for
or against any infringement, misappropriation or other conflict with
respect to such item.
4.3.5.5. The COMPANY has supplied ENTRUST or its advisors with correct and
complete copies of all licenses, sublicenses or other agreements (as amended to
date) pursuant to which the COMPANY uses such INTELLECTUAL PROPERTY, all of
which are annexed in Exhibit IPR. To the SELLER's knowledge and with respect to
each such item of INTELLECTUAL PROPERTY, except as otherwise disclosed in
Exhibit IPR:
(a) the license, sublicense or other agreement covering such item is legal,
valid, binding, enforceable and in full force and effect with respect to
the COMPANY, and is legal, valid, binding, enforceable and in full force
and effect with respect to each other party thereto;
(b) neither the COMPANY nor any other party to such license, sublicense or
other agreement is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default by the
COMPANY or by any such other party, or permit termination, modification or
acceleration thereunder;
(c) the underlying item of INTELLECTUAL PROPERTY is not subject to any
outstanding judgment, order, decree, stipulation or injunction to which the
COMPANY is a party or has been specifically named, nor subject to any other
outstanding judgment, order, decree, stipulation or injunction;
4.3.5.6. With respect to each such item of INTELLECTUAL PROPERTY except as
otherwise disclosed in Exhibit IPR:
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(a) the COMPANY has not agreed to indemnify any person or business entity for
or against any interference, infringement, misappropriation or other
conflict with respect to such item; and
(b) no license or other fee is payable upon any transfer or assignment of such
license, sublicense or other agreement by the terms thereof or the terms of
any other agreement or arrangement with the other party or parties thereto.
4.3.5.7. The SELLER warrants to the best of its knowledge that the COMPANY has
taken and plans to take up to the year 2000 all reasonable measures up to then
known as state of the art to ensure that its software products are designed to
perform, and will perform correctly at all times prior to, during and after the
calendar year 2000, all functions, calculations, sequencing, displays and other
processing of calendar dates and date-related data without error or degradations
in performance, specifically including any error relating to, or the product of,
date data which represent different centuries or more than one century.
4.3.6. Insurances
4.3.6.1. Exhibit DIL lists all private insurance contracts concluded by the
COMPANY.
4.3.6.2. All premiums due in relation to the COMPANY's insurances have been
paid, and nothing has been done or omitted to be done which would make any
policy of insurance of the COMPANY void or voidable or which is likely to result
in an increase in premium or which would release any insurer from any of its
obligations under any policy of insurance of the COMPANY.
4.3.6.3. There is no insurance claim pending or outstanding and there are no
circumstances likely to give rise to any such claim.
4.3.7. Customers and Suppliers
4.3.7.1. To the SELLER's best knowledge, none of the current COMPANY's customers
or suppliers intends or has threatened to cease or alter their business with the
COMPANY. The SELLER is not aware of the existence of any formal change of
control clause in any material contract with any customer or supplier of the
COMPANY, other than as might be contained in the contracts listed in Exhibit DIL
and provided to ENTRUST. The SELLER has not made and is not expected to make any
investigations as to the intents of the COMPANY's suppliers and customers.
4.3.7.2. Neither the COMPANY nor the SELLER has made extraordinary promises,
commitments or assurances, whether oral or written, express or implied, to the
effect that the COMPANY will or may:
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(a) offer future price reductions, concessions or other special terms to any
customer of the COMPANY;
(b) accept future price increases or additional charges or other special terms
to any supplier of the COMPANY; or
(c) be liable to the payment of any liquidated damages, penalties or similar
liabilities.
4.3.7.3. There is no assumed contract which the SELLER can reasonably foresee
that will result in any material loss upon performance thereof by the COMPANY
after CLOSING.
4.3.8. Employees
4.3.8.1. Exhibit DIL accurately lists the name, position, and current annual
compensation of each employee of the COMPANY. The employment agreements with the
key-employees enclosed in Exhibit DIL are true and correct and fully in force.
4.3.8.2. None of the key-employees has notified the COMPANY of its intent to
terminate employment or is expected to terminate employment. With the exception
of military service and regular vacations, no such key-employee is absent from
work on disability or other leave or has notified the COMPANY of intent to take
any such leave. ENTRUST is aware of a possible termination of the contract with
Mr. Herrigel as well as of the absence of Mr Wildhaber for education purposes
(for an aggregate amount of about 15 days).
4.3.8.3. All salaries, bonuses or other compensation of any kind and nature have
been timely paid to the COMPANY's employees.
4.3.9. Pensions and social security contributions
4.3.9.1. The COMPANY has paid all contributions it is required to make by law or
by agreement with its employees, with any labor organization, or with any
insurance company with respect to pensions and social security, and especially
all contributions to the AHV / IV, ALV and SUVA.
4.3.9.2. The COMPANY complies with all legal obligations with respect to its
employees' pensions and social security.
4.3.10. Litigation
4.3.10.1. To the knowledge of the SELLER, there are no suits, arbitrations,
administrative or other proceedings (including debt collection proceeding or
other
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insolvency proceedings) in any matter subject to private or to public law,
pending, threatened against or otherwise affecting the COMPANY.
4.3.10.2. The COMPANY is not subject to any judgement, order or decree which has
affected or may affect its business.
4.3.11. Taxes
4.3.11.1. The COMPANY has filed all tax returns and withheld and paid or
discharged all taxes, assessments and penalties due and payable , and there is
no further liability for any such taxes and no interests or penalties accrued or
accruing with respect thereto.
4.3.11.2. All tax returns of the COMPANY are accurate and complete. To the
SELLER's best knowledge, no audit of any tax return of the COMPANY is pending or
proposed. There is no fact, circumstance, organizational structure, act or event
which could give rise to any claim of tax underpayments, penalties, or
disqualifications of any tax status of the COMPANY for prior years, which have
not been discharged of or provisioned for.
4.3.11.3. For the tax period ending on 31 December 1997, the tax returns can be
filed on the basis of the accounts for the business year 1997 as attached in
Exhibit DIL. There are no outstanding agreements or waivers extending any period
of limitation applicable to any tax return of the COMPANY. Notwithstanding the
previous sentence, the COMPANY has received an extension of the filing of the
tax return for 1997, since the COMPANY has just received the audit report in
relation to the 1997 figures.
4.3.11.4. There are no disputes as to taxes nor any tax liens, whether existing
or threatened, on any assets as well as on any income or expense item of the
profit and loss statement of the COMPANY.
4.3.11.5. The words "tax" and "taxes" in this AGREEMENT mean all taxes, however
denominated, including interest, penalties, and other additions to taxes that
may become payable in respect thereof, imposed by the state, the cantons, the
municipalities or by any other agency or political subdivision, such as income
taxes and capital taxes due on the basis of taxable profit and taxable capital
as declared in the tax returns, or other taxes (for example VAT) due on the
basis of a filed tax return, as well as all other taxes, including but not
limited to taxes due on the basis of an adjustment of figures as declared in tax
returns filed with the tax authorities or due on the basis of an adjustment of a
provisional or final assessment from whatever authority and for whatever reason.
4.3.12. Events since Accounting Date and since end of Q1
4.3.12.1. Since 31 December 1997, respectively since 31 March 1998:
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(a) the business of the COMPANY has been carried on in the ordinary and normal
course;
(b) there has been no material adverse change in the financial or market
position of the COMPANY, including any such change in respect of turnover,
profits, margins of profitability, liabilities (actual or contingent) or
expenses of the COMPANY; and
(c) there has been no substantial and abnormal change in the basis or terms on
which clients or suppliers are prepared to do business with the COMPANY.
4.3.12.2. The spin-off of the Watermark business pursuant to Sec. 7.4 is
excluded from the representations made in this Sec. 4.3.12.
4.3.13. Effect of the transaction
4.3.13.1. To the SELLERS' best knowledge the customers and suppliers of the
COMPANY have not been informed that the control over the COMPANY may be sold to
ENTRUST. The SELLER is not aware of any formal notification that the execution
or CLOSING of this AGREEMENT and of the change of control will lead to the
termination of the relationship between the COMPANY and its normal customers or
suppliers. ENTRUST has been made aware that it might be preferable to maintain
the name of the COMPANY and the Swiss character of the COMPANY to avoid negative
impacts on the relationship with the COMPANY's customers and suppliers.
4.3.13.2. The execution of the AGREEMENT and the observance and performance of
its provisions by the SELLER, including the spin-off of the WATERMARK business,
will not:
(a) result in a breach of any contract, law, regulation, order, judgement,
injunction, undertaking, decree or other like imposition to or by which the
COMPANY is a party or is bound, or entitle any person to terminate or avoid
any contract to which the COMPANY is a party, or have any material effect
on any such contract;
(b) result in the loss or impairment of or any default under any license,
authorization or consent required by the COMPANY for the purposes of its
business;
(c) result in the creation, imposition, crystallization or enforcement of any
encumbrance whatsoever on any of the assets of the COMPANY;
(d) result in any present indebtedness of the COMPANY becoming due and payable,
or capable of being declared due and payable, prior to its stated maturity
date or in any financial facility of the COMPANY being withdrawn; or
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(e) result in any grant or subvention to the COMPANY, in connection with any
research, development, or consulting project being cancelled or claimed
back;
4.3.13.3. There is no contract to which the COMPANY is party which formally
depends on the continuation of the connection (whether as an officer of the
COMPANY or otherwise) of any person with the COMPANY.
4.3.13.4. Notwithstanding the intended generality of the above, the
representations made in this Sec. 4.3.13 are limited by the specific
qualifications made in this agreement (e.g. in Sec. 4.3.7.1) and by the general
principles governing the liability of the SELLER and laid down in Sec. 5.4.
4.3.14. Other material items
To the SELLER's best knowledge there is no fact, contractual or legal
obligations, which has or may have a material adverse effect on the value of the
COMPANY, and which, if known to ENTRUST prior to the date of this AGREEMENT,
could have caused ENTRUST not to enter into this AGREEMENT.
5. Warranty Claims Against Seller
5.1. Subject to the provisions of this AGREEMENT, the SELLER shall be liable to
ENTRUST for any breach of the representations made in Sec. 4 above (a "DEFECT"),
and shall indemnify and hold ENTRUST (or at the option of ENTRUST, the COMPANY)
harmless against any damage incurred by ENTRUST or by the COMPANY, unless
ENTRUST was aware of the DEFECT at SIGNING.
5.2. In order to account for the effective participation of the SELLER in the
COMPANY's capital, the liability of the SELLER for the damage caused by the
DEFECT shall be reduced to 0.986 % of the damage, unless such damage affects
directly the SHARES.
5.3. For the purpose of any claim for the reduction of the PURCHASE PRICE in
connection with any DEFECT, such DEFECT shall be deemed to affect pro rata the
value of the SHARES in the same manner as it affects the value of the COMPANY.
The hypothetical value of the SHARES without the DEFECT shall be deemed to be
equal to the PURCHASE PRICE, or, if no PRICE ADJUSTMENT was payable, to the
BASIS PRICE.
5.4. ENTRUST shall notify the SELLER in writing of any DEFECT no later than 45
days after ENTRUST has become aware of such DEFECT. ENTRUST shall not be deemed
to have been aware of, or to have accepted any DEFECT, unless such DEFECT has
been clearly disclosed by the COMPANY (i) in the course of the due diligence or
(ii)
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in the documents and information provided to ENTRUST and listed in the answers
to the due diligence questionnaire dated 10 May 1998, as attached in Exhibit
DIL. The requirement that ENTRUST examine the object of the sale after CLOSING
pursuant to Art. 201 CO is waived.
5.5. The claims of ENTRUST in connection with any DEFECT shall be subject to a
statute of limitation of 24 months after CLOSING and of one year after the
notification of the DEFECT by ENTRUST pursuant to Sec. 5.2., provided, however,
that claims raised in connection with taxes for any given tax period shall
expire one year after the final assessment for such tax period.
5.6. No claim may be raised against the SELLER in connection with any DEFECT,
unless the aggregate amount of the damage claimed by ENTRUST against the SELLER
and/or any other person in connection with DEFECTS exceeds CHF 100'000.--. The
maximum aggregate amount of warranty claims against the SELLER shall be limited
to 0.986 % of CHF 15'000'000. If a DEFECT affects only the value of the SHARES,
without any damage for the COMPANY, the claim of ENTRUST shall be limited to the
PURCHASE PRICE paid.
5.7. A rescission of the sale of the SHARES is excluded.
6. Representations of Entrust
6.1. Good Standing and Authority
6.1.1. ENTRUST is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, United States of America, and
has requisite power and authority (corporate and other) to own its properties,
to carry on its business as now being conducted, to execute and deliver this
AGREEMENT and to consummate the transactions contemplated hereby.
6.1.2. The execution and delivery of this AGREEMENT by ENTRUST, and the
consummation by ENTRUST of all transactions contemplated hereby, have been duly
authorized by all requisite corporate action on the part of ENTRUST.
6.2. Consideration Shares
All CONSIDERATION SHARES will be, when issued in accordance with this AGREEMENT,
duly authorized, validly issued, fully paid and nonassessable.
6.3. Capitalization
6.3.1. As of the date of this AGREEMENT, the authorized capital stock of ENTRUST
consists of (a) 15'000'000 shares of Series A Common Stock, USD .01 par value
per share, of which approximately 5'078'010 shares are issued and outstanding,
(b) 260'000 shares
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of Series B Common Stock, USD .01 par value per share, of which 221'052 shares
are issued and outstanding, (c) 260'000 shares of Series B Non-Voting Common
Stock, of which 38'948 shares are issued and outstanding, (d) 2'500'000 shares
of Special Voting Stock, USD .01 par value per share, of which 1'925'000 shares
are issued and outstanding, and (e) 500'000 shares of Preferred Stock, USD .01
par value per share, none of which shares are issued or outstanding. ENTRUST's
Series A Common Stock. 6.3.2. In addition to the issued stock of ENTRUST, as of
the date of this AGREEMENT, ENTRUST has reserved 1'857'230 shares of Series A
Common Stock for issuance pursuant to the 1996 Stock Incentive Plan. ENTRUST
anticipates reserving additional Series A Common Stock for issuance pursuant to
the 1996 Stock Incentive Plan or similar plan.
6.3.3. The capital stock table of ENTRUST attached hereto as Exhibit CAP shows
the approximate fully diluted capital structure of ENTRUST at CLOSING.
6.3.4. As a holder of CONSIDERATION SHARES, the SELLER shall have the same
rights, preferences and privileges as the other holders of ENTRUST's Series A
Common Stock.
6.4. Governmental Consents
No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any US GOVERNMENTAL AUTHORITY is
required on the part of ENTRUST in connection with the execution and delivery of
this AGREEMENT, the offer, issuance, sale and delivery of the CONSIDERATION
SHARES, or the other transactions to be consummated at the CLOSING, as
contemplated by this AGREEMENT.
6.5. Warranty Claims Against Entrust
6.5.1. Warranty claims in connection with a breach of the representations of
ENTRUST made under Sec. 6.1 to 6.3 are subject to the following limitations:
(a) The claims shall be capped at USD 10.-- per CONSIDERATION SHARE, i.e. the
difference between the agreed upon price per CONSIDERATION SHARE of USD
58.30 and the price of USD 48.30 guaranteed by Sec. 2.4.2.
(b) If the conditions for the exercise of PUT RIGHT pursuant to Sec. 2.4.1. are
fulfilled, any warranty claim shall be excluded altogether.
6.5.2. If the breach of Sec. 6.4.3 impairs the enforceability of the PUT RIGHT
of Sec. 2.4.1. and 2.4.3, the claim shall be capped at 58.30 per CONSIDERATION
SHARE. 6.5.3. Without prejudice to the foregoing, Warranty Claims shall be
subject to a time-bar of 24 months following CLOSING.
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7. Covenants
7.1. Management of the Company
7.1.1. Starting on the date of this AGREEMENT and until the earlier of (i) three
months following CLOSING or (ii) the issuance by the COMPANY of new
organizational by-laws under the control of ENTRUST, the SELLER shall not, alone
or acting with others, without the prior consent of ENTRUST:
(a) cause the business of the COMPANY to be conducted in any manner
inconsistent with the ordinary and usual course of the COMPANY's business;
(b) cause the COMPANY to enter into any contract or into any commitment which
is likely to have a material adverse effect upon the operations or
activities of the COMPANY or the value of the COMPANY for ENTRUST;
(c) cause the COMPANY to terminate any of the employment agreements with any
person employed by the COMPANY at the date of this AGREEMENT or to transfer
the title to any of the INTELLECTUAL PROPERTY listed in Exhibit IPR;
(d) take any other action which is inconsistent with the provisions of this
AGREEMENT; or
(e) cause the COMPANY to sell any COMPANY SHARES held in treasury, or to issue
any new COMPANY SHARE or options, or to take any action which would change
the situation with respect to the COMPANY SHARES and, generally, the
COMPANY's capital, as represented in Sec.4.2.
7.1.2. The expenses incurred by the COMPANY in connection with the current
venture capital round shall not be charged to the COMPANY. No fees shall be paid
in connection with any work performed by or on behalf of INVISION.
7.2. Product Liability
7.2.1. The SELLER undertakes to hold the COMPANY free of any harm caused by
warranty claims in connection with defects affecting the products of the COMPANY
existing at CLOSING, provided, however, that ENTRUST cannot call upon this
covenant in connection with any product of the COMPANY if (i) ENTRUST or the
COMPANY fails to show reasonable care in maintaining such product or in
responding to customers' requests with respect to such product, or (ii) if
ENTRUST or the COMPANY made any modification to such product. The claim of
ENTRUST may only be raised if the warranty claims against the COMPANY exceed in
aggregate an amount of CHF 250'000, and if such claims are notified to the
COMPANY within 12 months following CLOSING.
-22-
<PAGE>
The claim of ENTRUST against the SELLER shall be limited to [ ] % of the excess
of the aggregate warranty claims raised against the COMPANY over CHF 250'000.--.
7.2.2. The claim of ENTRUST against the SELLER pursuant to this Sec. 7.2 is
subject to and shall be covered by the cap of Sec. 5.6.
7.3. Consideration Shares
7.3.1. The SELLER acknowledges that for a period of one year following the
CLOSING (the "DISTRIBUTION COMPLIANCE PERIOD"), the SELLER shall not (a) engage
in any activity for the purpose of, or which may reasonably be expected to have
the effect of, conditioning the market in the United States for the
CONSIDERATION SHARES or (b) unless such CONSIDERATION SHARES are registered
under the SECURITIES ACT or an exemption from the registration requirements of
the SECURITIES ACT is available, offer, sell or transfer the CONSIDERATION
SHARES in the United States or to, or for the account or benefit of, a U.S.
person. The SELLER understands that the CONSIDERATION SHARES or any interest
therein are only transferable on the books and records of the transfer agent and
registrar of ENTRUST. The SELLER further understands that neither ENTRUST nor
its transfer agent and registrar will register any transfer of the CONSIDERATION
SHARES except in accordance with the provisions of REGULATION S, pursuant to
registration under the SECURITIES ACT or pursuant to an available exemption from
registration, and that ENTRUST may place stop transfer orders with its transfer
agent with respect to certificates representing CONSIDERATION SHARES.
7.3.2. Unless the CONSIDERATION SHARES shall first have been registered under
the SECURITIES ACT, any proposed offer, sale or transfer during the DISTRIBUTION
COMPLIANCE PERIOD of any of the CONSIDERATION SHARES shall be subject to the
condition that the SELLER must deliver to ENTRUST;
(a) written certification that neither record nor beneficial ownership of the
CONSIDERATION SHARES has been offered or sold in the United States or to,
or for the account or benefit of, any U.S. person;
(b) a written certification of the proposed transferee that such transferee (or
any account for which such transferee is acquiring such CONSIDERATION
SHARES) is not a U.S. person, that such transferee is acquiring such
CONSIDERATION SHARES for such transferee's own account (or an account over
which he or she has investment discretion) and that such transferee is
knowledgeable of and agrees to be bound by the restrictions on re-sale set
forth in this Agreement and REGULATION S during the DISTRIBUTION COMPLIANCE
PERIOD, and
(c) a written opinion of United States counsel, in form and substance
reasonably satisfactory to ENTRUST, to the effect that the offer, sale and
transfer of such
-23-
<PAGE>
CONSIDERATION SHARES are exempt from registration under the SECURITIES ACT.
Any CONSIDERATION SHARES offered, sold or transferred during the
DISTRIBUTION COMPLIANCE PERIOD in accordance with the foregoing
restrictions will continue to be deemed "restricted securities" under Rule
144 of the SECURITIES ACT, notwithstanding that they were acquired in a
resale transaction made pursuant to Rules 901 or 904 of REGULATION S.
7.3.3. Rule 144. The SELLER understands that "restricted securities" may be
resold in the United States or to, or for the benefit of, U.S. persons in
accordance with Rule 144 of the SECURITIES ACT. The SELLER acknowledges that the
following is a summary of the resale requirements of Rule 144, and such summary
is qualified in its entirety by reference to such rule, a copy of which was
previously provided to the SELLER.
7.3.4. Rule 144, as currently in effect, imposes the following requirements on
any holder of restricted securities:
(a) at the time of resale, ENTRUST must have been a public company for at least
90 days (i.e., ENTRUST must have securities registered pursuant to Section
12 of the United States Securities Exchange Act of 1934, as amended, and
have filed all reports required to be field thereunder during the 12 months
preceding the sale (or for such shorter period as ENTRUST is a public
company);
(b) the holder of restricted securities must have held such securities for at
least one year;
(c) the number of shares of Series A Common Stock sold by the holder within any
three-month period may not exceed the greater of (a) 1% of the number of
outstanding shares of Series A Common Stock or (b) the average weekly
trading volume of the Series A Common Stock during the four calendar weeks
preceding the filing of the Form 144;
(d) the holder must sell the securities only in "brokers' transactions" or in
transactions directly with a "market maker," which transactions may not
involve any solicitations of orders to buy the securities or any payments
to any person other than the broker executing the sale order; and
(e) the holder must mail three copies of a Form 144 to the United States
Securities and Exchange Commission at the same time as he or she places the
sale order with the broker.
7.3.5. After the holder of CONSIDERATION SHARES has held the CONSIDERATION
SHARES for two years, and assuming the holder has not been an affiliate of
ENTRUST (such as an officer, director or principal stockholder) during the
preceding three months, ENTRUST shall, to the extent permitted by law, at the
request of SELLER remove the
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<PAGE>
restrictive legend from the CONSIDERATION SHARES under Rule 144(k). Thereafter,
and in respect of the transfers made in accordance with Rule 144, the holder
need not comply with the restrictions on resale noted above.
7.3.6. A legend substantially in the following form will be placed on the
certificates representing the CONSIDERATION SHARES which may be issued to the
SELLER. "The shares represented by this certificate have not been registered
under the United States Securities Act of 1933, as amended, and may not be
offered, sold or otherwise transferred, pledged or hypothecated (i) unless and
until such shares are registered under such Act or an opinion of counsel
satisfactory to Entrust Technologies Inc. is obtained to the effect that such
registration is not required or (ii) except in accordance with Regulation S of
such Act. Hedging transactions involving the shares represented by this
certificate may not be conducted except in compliance with the Securities Act of
1933, as amended.
The sale or other disposition of any of the shares represented by this
certificate is restricted by a Share Purchase Agreement entered into by the
holder of this certificate and Entrust Technologies Inc. A copy of the Share
Purchase Agreement is available for inspection during normal business hours at
the principal executive office of the corporation."
7.3.7. The SELLER, if requested by ENTRUST or the managing underwriter of a
public offering of ENTRUST's Series A Common Stock or other securities pursuant
to a registration statement under the SECURITIES ACT (a "REGISTRATION
STATEMENT"), shall agree not to sell publicly or otherwise transfer or dispose
of any CONSIDERATION SHARES or other securities of ENTRUST held by the SELLER
for a specified period of time (not to exceed 180 days) following the effective
date of such REGISTRATION STATEMENT; provided, however, that.
(a) such agreement shall only apply to the first REGISTRATION STATEMENT
covering Series A Common Stock or other securities to be sold to the public
in an underwritten offering, and
(b) all stockholders of ENTRUST holding not less than the number of shares of
Series A Common Stock held by the SELLER and all officers and directors of
ENTRUST enter into similar agreements.
7.3.8. ENTRUST represents that it has only made offers to sell the CONSIDERATION
SHARES outside the U.S.A. and that it did not generally advertise in the U.S.A.
in respect to the offering for sale or sale of the CONSIDERATION SHARES.
7.4. Watermark Business
7.4.1. The Watermark intellectual property (watermark specific software and
filed patents) shall be transferred to a separate entity (the "WATERMARK
COMPANY") prior to CLOSING in consultation with ENTRUST. The Company shall be
indemnified for
-25-
<PAGE>
any claims arising from or relating to the Watermark intellectual property,
either before or after CLOSING. To the extent that the COMPANY is under any
obligation to perform any work on behalf of the WATERMARK COMPANY or in
connection with the Watermark intellectual property, such obligation will be
taken over by the WATERMARK COMPANY at no cost for the COMPANY. If such transfer
is not possible, the WATERMARK COMPANY will pay an arm's length consideration to
the COMPANY and grant to the COMPANY at no charge all licenses necessary for the
performance of such work.
7.4.2. Any costs (including legal costs) or taxes imposed on the COMPANY or on
ENTRUST in connection with the transfer of the watermark intellectual property
to the WATERMARK COMPANY shall be borne by the SELLER in the same proportion as
determined by Sec. 5.2 in respect of the representations and warranties.
8. Miscellaneous
8.1. Costs
8.1.1. Each Party shall bear its own costs, taxes and expenses relating to the
preparation, CLOSING and implementation of this AGREEMENT.
8.2. Confidentiality
Effective as of CLOSING, ENTRUSTS' obligation to the keep confidential the
information received on the COMPANY shall terminate.
8.3. Assignment
8.3.1. The rights and obligations of the PARTIES out of this AGREEMENT may not
be assigned, provided, however, that ENTRUST is authorized to assign such rights
and obligations to any of its affiliates.
8.3.2. In case of such an assignment of the contract by ENTRUST to any of its
affiliates pursuant Sec. 8.3.1, a letter of comfort or a guarantee of ENTRUST
shall be delivered to the SELLERS.
8.4. Announcements
No announcement concerning the transaction contemplated by this AGREEMENT or any
matter ancillary to it and no disclosure of the terms of this AGREEMENT (save as
required by law, by any market regulations or as expressly provided in this
AGREEMENT) shall be made by the SELLER to any person or entity, except with the
prior written approval of ENTRUST.
-26-
<PAGE>
8.5. Notices
8.5.1. Any notice or other communication to be given under this letter shall be
in writing and shall be delivered by hand or sent by registered post or by
courier to the address specified below, or sent by facsimile to the number
specified below;
(a) ENTRUST: General Counsel, Entrust Technologies Inc. 2323 North Central
Expressway, Richardson, Texas, 75080, phone: 001 972 994 8020, fax 001 972
994 8005
(b) SELLER: [Name], [Address]
8.5.2. Either Party hereto may change the address, facsimile number or name of
the person for whose attention notices are to be addressed by serving a notice
on the other party hereto in accordance with Sec. 8.5.1.
8.5.3. Each such notice or other communication shall be effective:
(a) if given by facsimile when the facsimile is transmitted to the facsimile
number specified in para. 8.5.1 or
(b) if given by any other means, when received at the address specified in
para. 8.5.1.
8.6. Severability
Whenever possible, each provision of this AGREEMENT shall be interpreted in such
manner as to be effective and valid under the applicable law, but if any
provision of this AGREEMENT shall be unenforceable or invalid under applicable
law, such provision shall be ineffective only to the extent of such
unenforceability or invalidity and be replaced by such valid and enforceable
provision which bona fides parties would consider to match as closely as
possible the invalid or unenforceable provision, attaining the same or a similar
economic effect. The remaining provisions of this AGREEMENT shall under all
circumstances continue to be binding and in full force and effect.
8.7. Construction, amendments
8.7.1. This AGREEMENT constitutes the entire agreement among the parties and,
except as otherwise provided, supersedes any prior understandings or agreements,
written or oral, that relate to the acquisition of COMPANY SHARES by ENTRUST.
8.7.2. This AGREEMENT may not be amended except in writing, including
communications by letter, facsimile, or E-mail.
-27-
<PAGE>
8.7.3. The PARTIES agree that the AGREEMENT shall not be construed against any
PARTY on the ground that such PARTY drafted or prepared the AGREEMENT.
8.8. Governing law
This AGREEMENT shall be governed by the internal law of Switzerland; the
application of the Vienna (United Nations) Convention on Contracts for the
International Sale of Goods is excluded.
8.9. Arbitration
All disputes arising out of or in connection with the present agreement,
including disputes on its conclusion, binding effect, amendment and termination
shall be resolved, to the exclusion of the ordinary courts by a three-person
Arbitral Tribunal in accordance with the International Arbitration Rules of the
Zurich Chamber of Commerce. The language of the arbitration shall be English.
List of Exhibits
- - Exhibit DIL (List of Documents submitted to Entrust)
- - Exhibit CAP (Capital Structure of Entrust)
- - Exhibit IPR (Intellectual Property)
_________________ , this ___________ _________________ , this __________
ENTRUST Technologies Inc. The SELLER:
- ---------------------------------- ----------------------------------
Name: [Name]
Title:
-28-
<PAGE>
This Form of Share Purchase Agreement (or comparable form) was entered into
by the shareholders of R3 Security Engineering AG listed below. The only
material differences in the Share Purchase Agreements relate to the
consideration paid to such shareholders, which is set forth after their
respective names.
Price
Consideration Escrow Adjusted
Shareholder U.S. Dollars Shares Shares Shares
- ----------- ------------ ------ ------ ------
Andreas E. Strate $52,573 16,062 5,140 1,073
Claus N. Rasmussen 5,286 1,606 513 107
Bruno Wildhaber 157,747 14,258 4,599 1,073
Jurgen Golz 3,960 357 114 26
Xuejia Lai 26,316 8,031 2,570 536
Fritz Bauspiess 2,614 804 257 53
Wilhelm Niehoff 5,286 1,606 513 107
-29-
<PAGE>
ENTRUST TECHNOLOGIES
[Name]
[Address]
CONSIDERATION SHARES
Dear [___________]
Reference is made to the share purchase agreement between yourself and ourselves
for the purchase of shares in R3 Security Engineering AG closed on 8 June 1998
(the "Share Purchase Agreement").
The purpose of this letter is the amendment of the Share Purchase Agreement with
respect to its Section 7.3 as follows:
Rule 144 Reporting Requirements
From and after the time ENTRUST has securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
in order to permit the Seller to sell the CONSIDERATION SHARES it holds, if it
so desires, from time to time pursuant to Rule 144 or any successor to such rule
or any other rule or regulation of the Securities and Exchange Commission (the
"Commission") that may at any time permit the SELLER to sell its CONSIDERATION
SHARES to the public without registration (the "Resale Rules"), ENTRUST will:
a) comply with all rules and regulations of the Commission applicable in
connection with use of the Resale Rules;
b) make and keep adequate and current public information available, as
those terms are understood and defined in the Resale Rules, at all
times;
c) file with the Commission in a timely manner all reports and other
documents required of ENTRUST under the Securities Act and Exchange
Act;
d) furnish to the SELLER forthwith upon request (i) a written statement
by ENTRUST that it has complied with the reporting requirements of the
Resale Rules, the Securities Act and Exchange Act, (ii) a copy of the
most recent annual or quarterly report of ENTRUST and any other
reports and documents filed by ENTRUST under the Securities Act or the
Exchange
<PAGE>
Act, and (iii) such other information as may be reasonably requested
in availing the SELLER of any rule or regulation of the Commission
which permits the selling of any such CONSIDERATION SHARES without
registration; and
e) take any action (including cooperation with the SELLER to cause the
transfer agent to remove any restrictive legend on certificates
evidencing the CONSIDERATION SHARES) which shall be reasonably
requested by the SELLER or which shall otherwise facilitate the sale
of the CONSIDERATION SHARES from time to time by the SELLER pursuant
to the Resale Rules.
Rule 144A Information
Until such time as ENTRUST is subject to Section 13 or 15(d) of the Exchange
Act, ENTRUST will make available, upon request, to the SELLER and prospective
purchaser or transferee of the CONSIDERATION SHARES designated by the Seller,
the information required to allow the resale or other transfer of such
CONSIDERATION SHARES pursuant to Rule 144A under the Securities Act.
Sec. 7.3.7
The legend to be placed on the certificates representing CONSIDERATION SHARES
shall include the following additional transfer exception:
or (iii) except to a "qualified institutional buyer" (as defined in Rule 144A
promulgated under the Securities Act) in a transaction which meets the
requirements of such Rule 144A.
Zurich, 8 June 1998
Entrust Technologies Inc.
/s/ Brad Ross
- -------------
Brad Ross
<PAGE>
ENTRUST TECHNOLOGIES
[Name]
[Address]
Watermark spin-off
Dear [____________]
We confirm to you herewith that Entrust will bear up to CHF 30,000.-- of legal
fees in connection with the spin-off of the Watermark business. Sec. 7.4.2. of
the Share Purchase Agreement should, therefore, read as follows:
"Except for an aggregate of up to CHF 30,000.-- of legal fees, any fees,
costs or taxes imposed on the COMPANY or on ENTRUST in connection with the
transfer of the watermark intellectual property to the WATERMARK COMPANY
shall be borne by the SELLER in the same proportion as determined by Sec.
5.2 in respect of the representations and warranties."
Pursuant to the information received from Dr. Markus Kroll on 6 June 1998, the
tax authorities decided to levy against R3 Security Engineering AG a withholding
tax of CHF 177,697 in connection with the distribution of the shares in
Securights AG as a dividend. Since such taxes are to be borne pro rata by the
Sellers, we will in due course, send you an invoice for your portion of the
taxes, as determined in Sec. 7.4.2. of the Share Purchase Agreement. Indeed, you
may be entitled, to claim back this amount from the tax authorities in
accordance with the tax legislation.
We thank you for your comprehension.
Zurich, 8 June 1998
Entrust Technologies, Inc.
/s/ Brad Ross
- -------------
Brad Ross
<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.
22
<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
23
<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).
24
<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.
27
<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
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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
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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
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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
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(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
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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
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<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
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<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
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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
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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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(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
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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
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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
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<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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<PAGE>
"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
61
<PAGE>
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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<PAGE>
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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<PAGE>
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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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 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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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."
THIRD: The Board of Directors of the Corporation, at a meeting duly
held on June 15, 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.
FOURTH: 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.
FIFTH: (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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<PAGE>
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.
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<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 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, according to the following: each outstanding share of Series A
Common Stock shall be converted into and deemed to represent one (1) share of
Common Stock.
Upon the effectiveness of these Articles of Amendment and Restatement,
the conversion of the issued and outstanding shares of the Series A 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,
the certificates representing the Series A Common Stock 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, 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, a certificate or
certificates for the number of shares of Common Stock into which the shares of
Series A Common Stock have been converted on the date on which such automatic
conversion occurred. Immediately after the conversion of the Series A Common
Stock, the series of capital stock previously designated as Series A 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 15, 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.
-----------------------------
14
<PAGE>
Exhibit 3.3
BY-LAWS
OF
ENTRUST TECHNOLOGIES INC.
<PAGE>
BY-LAWS
-------
TABLE OF CONTENTS
-----------------
ARTICLE I. - Stockholders...................................................1
A. Place of Meetings...............................................1
B. Annual Meeting..................................................1
C. Special Meetings................................................1
D. Notice of Meetings..............................................1
E. Voting List.....................................................1
F. Quorum. ........................................................2
G. Adjournments....................................................2
H. Voting and Proxies..............................................2
I. Action at Meeting...............................................2
J. Action without Meeting..........................................2
ARTICLE II. - Directors.....................................................3
A. General Powers..................................................3
B. Number; Election; Tenure and Qualification......................3
C. Vacancies.......................................................3
D. Resignation.....................................................3
E. Regular Meetings................................................3
F. Special Meetings................................................4
G. Notice of Special Meetings......................................4
H. Meetings by Telephone Conference Calls..........................4
I. Quorum..........................................................4
J. Action at Meeting...............................................4
K. Action by Consent...............................................4
L. Removal.........................................................4
M. Committees......................................................5
N. Compensation of Directors.......................................5
ARTICLE III. - Officers.....................................................5
A. Enumeration.....................................................5
B. Election........................................................5
C. Qualification...................................................6
D. Tenure..........................................................6
E. Resignation and Removal.........................................6
F. Vacancies.......................................................6
G. Chairman of the Board and Vice Chairman of the Board............6
H. President. .....................................................6
I. Vice Presidents.................................................7
-i-
<PAGE>
J. Secretary and Assistant Secretaries.............................7
K. Treasurer and Assistant Treasurers..............................7
L. Salaries........................................................8
ARTICLE IV. - Capital Stock.................................................8
A. Issuance of Stock...............................................8
B. Certificates of Stock...........................................8
C. Transfers.......................................................8
D. Lost, Stolen or Destroyed Certificates..........................9
E. Record Date.....................................................9
ARTICLE V. - General Provisions............................................10
A. Fiscal Year. ..................................................10
B. Corporate Seal.................................................10
C. Execution of Instruments.......................................10
D. Waiver of Notice...............................................10
E. Voting of Securities...........................................10
F. Evidence of Authority..........................................10
G. Articles of Incorporation......................................10
H. Transactions with Interested Directors.........................10
I. Severability...................................................11
J. Pronouns.......................................................11
ARTICLE VI. - Amendments...................................................11
A. By the Board of Directors......................................11
B. By the Stockholders............................................11
-ii-
<PAGE>
ARTICLE I. - Stockholders
--------------------------
A. Place of Meetings. All meetings of stockholders shall be held
-----------------
at such place within or without the State of Maryland as may be designated from
time to time by the Board of Directors or, if not so designated, at the
registered office of the corporation.
B. Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held each year at a time fixed
by the Board of Directors. If this date shall fall upon a legal holiday at the
place of the meeting, then such meeting shall be held on the next succeeding
business day at the same hour. If no annual meeting is held in accordance with
the foregoing provisions, the Board of Directors shall cause the meeting to be
held as soon thereafter as convenient.
C. Special Meetings. Special meetings of stockholders shall be
----------------
promptly called at any time by the President or by the Board of Directors or by
the Secretary upon the written request of stockholders entitled to cast at least
15 percent of all votes entitled to be cast at the meeting. Business transacted
at any special meeting of stockholders shall be limited to matters relating to
the purpose or purposes stated in the notice of meeting unless the purpose of
the special meeting is substantially the same as a matter voted on at any
special meeting of the stockholders held during the preceding 12 months in which
case a majority of the stockholders entitled to cast all of the votes at the
meeting is required to call a meeting.
D. Notice of Meetings. Except as otherwise provided by law,
------------------
written notice of each meeting of stockholders, whether annual or special, shall
be given not less than 10 nor more than 90 days before the date of the meeting
to each stockholder entitled to vote at such meeting and to each other
stockholder entitled to notice of the meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
E. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced
-1-
<PAGE>
and kept at the time and place of the meeting during the whole time of the
meeting, and may be inspected by any stockholder who is present.
F. Quorum. Except as otherwise provided by law, the Articles of
------
Incorporation or these By-laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
G. Adjournments. Any meeting of stockholders may be adjourned to
------------
any other time and to any other place at which a meeting of stockholders may be
held under these By-laws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
H. Voting and Proxies. Each stockholder shall have one vote for
------------------
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Articles of Incorporation. Each stockholder of record entitled to vote
at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of the corporation. No such proxy shall be voted or acted upon
after eleven months from the date of its execution, unless the proxy expressly
provides for a longer period.
I. Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Articles of
Incorporation or these By-laws. Any election by stockholders shall be
determined by a plurality of the votes cast by the stockholders entitled to vote
at the election.
J. Action without Meeting. Any action required or permitted to be
----------------------
taken at a meeting of stockholders may be taken without a meeting if the
following
-2-
<PAGE>
are filed with the records of stockholders meetings: (1) an unanimous written
consent which sets forth the action and is signed by each stockholder entitled
to vote on the matter; and (2) a written waiver of any right to dissent signed
by each stockholder entitled to notice of the meeting but not entitled to vote
at it.
ARTICLE II. - Directors
-----------------------
A. General Powers. The business and affairs of the corporation
--------------
shall be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the corporation except as otherwise provided by
law, the Articles of Incorporation or these By-laws. In the event of a vacancy
in the Board of Directors, the remaining directors, except as otherwise provided
by law, may exercise the powers of the full Board until the vacancy is filled.
B. Number; Election; Tenure and Qualification. The number of
------------------------------------------
directors which shall constitute the whole Board of Directors shall be
determined by resolution of the stockholders, but in no event shall be less than
three. The directors shall be elected at the annual meeting of stockholders by
such stockholders as have the right to vote on such election. Directors need
not be stockholders of the corporation.
C. Vacancies. Unless and until filled by the stockholders and
---------
except as provided by the Articles of Incorporation, any vacancy in the Board of
Directors, however occurring, including a vacancy resulting from an enlargement
of the Board, may be filled by vote of a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office, and a director chosen to fill a position resulting
from an increase in the number of directors 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.
D. Resignation. Any director may resign by delivering his written
-----------
resignation to the Board of Directors, the Chairman of the Board, the President
or Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some later date.
E. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held without notice at such time and place, either within or without the
State of Maryland, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination, which notice shall be given at
least 72 hours in advance of such meeting. A regular meeting of the Board of
Directors may be held
-3-
<PAGE>
without notice immediately after and at the same place as the annual meeting of
stockholders.
F. Special Meetings. Special meetings of the Board of Directors
----------------
may be held at any time and place, within or without the State of Maryland,
designated by the Chairman of the Board, two or more directors, or by one
director in the event that there is only a single director in office.
G. Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director by telephone or by electronic devices sent to his business or home
address at least 48 hours in advance of the meeting or by mailing written notice
to his last known address at least 72 hours in advance of the meeting. A notice
or waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting.
H. Meetings by Telephone Conference Calls. Directors or any
--------------------------------------
members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by any means of
communications by means of which all persons participating in the meeting can
hear each other, and participation by such means shall constitute presence in
person at such meeting.
I. Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the absence of a quorum at any such meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than announcement at the meeting, until a quorum shall be present.
J. Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Articles of Incorporation or these By-laws.
K. Action by Consent. Any action required or permitted to be taken
-----------------
at any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
L. Removal. Except as otherwise provided by the Articles of
-------
Incorporation, 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, except that the directors elected by the holders of
a particular
-4-
<PAGE>
class or series of stock may be removed without cause only by vote of the
holders of a majority of the outstanding shares of such class or series.
M. Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of two or more of the directors of the corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the Annotated Code of Maryland, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by the directors or in such rules, its
business shall be conducted as nearly as possible in the same manner as is
provided in these By-laws for the Board of Directors.
N. Compensation of Directors. Directors may be paid such
-------------------------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE III. - Officers
-----------------------
A. Enumeration. The officers of the corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
B. Election. The President, Treasurer and Secretary shall be
--------
elected annually by the Board of Directors at its first meeting following the
annual meeting
-5-
<PAGE>
of stockholders. Other officers may be appointed by the Board of Directors at
such meeting or at any other meeting.
C. Qualification. No officer need be a stockholder. Any two or
-------------
more offices may be held by the same person.
D. Tenure. Except as otherwise provided by law, by the Articles of
------
Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
E. Resignation and Removal. Any officer may resign by delivering
-----------------------
his written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation may be effective upon receipt unless
it is specified to be effective at some later date.
The Board of Directors, or a committee duly authorized to do so, may
remove any officer with or without cause. Except as the Board of Directors may
otherwise determine, no officer who resigns or is removed shall have any right
to any compensation as an officer for any period following his resignation or
removal, or any right to damages on account of such removal, whether his
compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.
F. Vacancies. The Board of Directors may fill any vacancy
---------
occurring in any office for any reason and may, in its discretion, leave
unfilled for such period as it may determine any offices other than those of
President, Treasurer and Secretary. Each such successor shall hold office for
the unexpired term of his predecessor and until his successor is elected and
qualified, or until his earlier death, resignation or removal.
G. Chairman of the Board and Vice Chairman of the Board. The
-----------------------------------------------------
Board of Directors may appoint a Chairman of the Board and may designate the
Chairman of the Board as Chief Executive Officer. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are assigned to him by the Board of Directors.
H. President. The President shall be the chief operating officer
---------
of the corporation. He shall also be the chief executive officer of the
corporation unless such title is assigned to a Chairman of the Board. The
President shall, subject to the direction of the Board of Directors, have
general charge and supervision of the business of the corporation. Unless
otherwise provided by the Board of Directors, he shall preside at all meetings
of the stockholders, and of the Board of Directors (except
-6-
<PAGE>
as provided in Section G above). The President may perform such other duties and
shall have such other powers as the Board of Directors may from time to time
prescribe.
I. Vice Presidents. Any Vice President shall perform such duties
---------------
and possess such powers as the Board of Directors or the President may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
J. Secretary and Assistant Secretaries. The Secretary shall
-----------------------------------
perform such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
K. Treasurer and Assistant Treasurers. The Board of Directors
----------------------------------
shall appoint a Treasurer, who shall perform such duties and shall have such
powers as may from time to time be assigned to him by the Board of Directors or
the President. In addition, the Treasurer shall perform such duties and have
such powers as are incident to the office of treasurer, including without
limitation the duty and power to keep and be responsible for all funds and
securities of the corporation, to deposit funds of the corporation in
depositories selected in accordance with these
-7-
<PAGE>
By-laws, to disburse such funds as ordered by the Board of Directors, to make
proper accounts of such funds, and to render as required by the Board of
Directors statements of all such transactions and of the financial condition of
the corporation.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer, (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
L. Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE IV. - Capital Stock
----------------------------
A. Issuance of Stock. Unless otherwise voted by the stockholders
-----------------
and subject to the provisions of the Articles of Incorporation, 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.
B. Certificates of Stock. Every holder of stock of the corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman of the Board of Directors, if
any, the President or a Vice President and counter-signed by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the corporation.
Any or all of the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Articles of Incorporation, the By-laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
C. Transfers. Except as otherwise established by rules and
---------
regulations adopted by the Board of Directors, and subject to applicable law,
shares
-8-
<PAGE>
of stock may be transferred on the books of the corporation by the surrender to
the corporation or its transfer agent of the certificate representing such
shares properly endorsed or accompanied by a written assignment or power of
attorney properly executed, and with such proof of authority or the authenticity
of signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Articles of Incorporation or
by these By-laws, the corporation shall be entitled to treat the record holder
of stock as shown on its books as the owner of such stock for all purposes,
including the payment of dividends and the right to vote with respect to such
stock, regardless of any transfer, pledge or other disposition of such stock
until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-laws.
D. Lost, Stolen or Destroyed Certificates. The corporation may
--------------------------------------
issue a new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen, or destroyed, upon such terms and conditions
as the Board of Directors may prescribe, including the presentation of
reasonable evidence of such loss, theft or destruction and the giving of such
indemnity as the Board of Directors may require for the protection of the
corporation or any transfer agent or registrar.
E. Record Date. The Board of Directors may fix in advance a date
-----------
as a record date for the determination of the stockholders entitled to notice of
or to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action. Such record date shall not be more than 70 nor less than 15 days
before the date of such meeting, nor more than 70 days prior to any other action
to which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
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<PAGE>
ARTICLE V. - General Provisions
-------------------------------
A. Fiscal Year. The fiscal year of the corporation shall be
-----------
designated by the Board of Directors.
B. Corporate Seal. The corporate seal shall be in such form as
--------------
shall be approved by the Board of Directors.
C. Execution of Instruments. The President shall have power to
------------------------
execute and deliver on behalf and in the name of the corporation any instrument
requiring the signature of an officer of the corporation, except as otherwise
provided in these By-laws, or where the execution and delivery of such an
instrument shall be expressly delegated by the Board of Directors to some other
officer or agent of the corporation.
D. Waiver of Notice. Whenever any notice whatsoever is required to
----------------
be given by law, by the Articles of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
E. Voting of Securities. Except as the directors may otherwise
--------------------
designate, the President may waive notice of, and act as, or appoint any person
or persons to act as, proxy or attorney-in-fact for this corporation (with or
without power of substitution) at any meeting of stockholders or shareholders of
any other corporation or organization, the securities of which may be held by
this corporation.
F. Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
G. Articles of Incorporation. All references in these By-laws to
-------------------------
the Articles of Incorporation shall be deemed to refer to the Articles of
Incorporation of the corporation, as amended and in effect from time to time.
H. Transactions with Interested Directors. No contract or
--------------------------------------
transaction between the corporation and one or more of the directors, or between
the corporation and any other corporation, firm, or other entity in which one or
more of the directors are directors or have a material financial interest, shall
be void or
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<PAGE>
voidable solely because of the common directorship or interest, or solely
because the director or officer is present at the meeting of the Board of
Directors or a committee of the Board of Directors which authorizes the contract
or transaction or solely because his or their votes are counted for such
purpose, if:
1. The fact of the common directorship or interest is disclosed
or known to:
(a) The Board of Directors or the committee, and the Board
of Directors or committee authorizes, approves, or ratifies the
contract or transaction by the affirmative vote of a majority of
disinterested directors, even if the disinterested directors
constitute less than a quorum; or
(b) The stockholders entitled to vote, and the contract or
transaction is authorized, approved, or ratified by a majority of the
votes cast by the stockholders entitled to vote other than the votes
of shares owned of record or beneficially by the interested director
or corporation, firm, or other entity; or
2. The contract or transaction is fair and reasonable to the
corporation.
I. Severability. Any determination that any provision of these By-
------------
laws is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
J. Pronouns. All pronouns used in these By-laws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE VI. - Amendments
------------------------
A. By the Board of Directors. These By-laws may be altered,
-------------------------
amended or repealed or new by-laws may be adopted by the affirmative vote of a
majority of the directors present at any regular or special meeting of the Board
of Directors at which a quorum is present.
B. By the Stockholders. These By-laws may be altered, amended or
-------------------
repealed or new by-laws may be adopted by the affirmative vote of the holders of
a majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting
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<PAGE>
of stockholders, provided notice of such alteration, amendment, repeal or
adoption of new by-laws shall have been stated in the notice of such special
meeting.
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<PAGE>
Exhibit 3.4
AMENDED AND RESTATED BYLAWS
OF
ENTRUST TECHNOLOGIES INC.
<PAGE>
BYLAWS
------
TABLE OF CONTENTS
-----------------
ARTICLE I. - Stockholders..................................................... 1
A. Place of Meetings................................................. 1
B. Annual Meeting.................................................... 1
C. Special Meetings.................................................. 1
D. Notice of Meetings................................................ 1
E. Voting List....................................................... 2
F. Quorum............................................................ 2
G. Adjournments...................................................... 2
H. Voting and Proxies................................................ 2
I. Action at Meeting................................................. 3
J. Action without Meeting............................................ 3
K. Nomination of Directors........................................... 3
L. Notice of Business at Annual Meetings............................. 4
M. Organization...................................................... 5
ARTICLE II. - Directors....................................................... 5
A. General Powers.................................................... 5
B. Number; Election; Tenure and Qualification........................ 5
C. Classes of Directors.............................................. 6
D. Terms of Office................................................... 6
E. Allocation of Directors Among Classes in the Event of Increases
or Decreases in the Number of Directors........................... 6
F. Vacancies......................................................... 6
G. Resignation....................................................... 7
H. Regular Meetings.................................................. 7
I. Special Meetings.................................................. 7
J. Notice of Meeting................................................. 7
K. Meetings by Telephone Conference Calls............................ 7
L. Quorum............................................................ 7
M. Action at Meeting................................................. 8
N. Action by Consent................................................. 8
O. Removal........................................................... 8
P. Committees........................................................ 8
Q. Compensation of Directors......................................... 9
ARTICLE III. - Officers....................................................... 9
A. Enumeration....................................................... 9
B. Election.......................................................... 9
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C. Qualification..................................................... 9
D. Tenure............................................................ 9
E. Resignation and Removal...........................................10
F. Vacancies.........................................................10
G. Chairman of the Board and Vice Chairman of the Board..............10
H. President.........................................................10
I. Vice Presidents...................................................10
J. Secretary and Assistant Secretaries...............................11
K. Treasurer and Assistant Treasurers................................11
L. Salaries..........................................................12
ARTICLE IV. - Capital Stock...................................................12
A. Issuance of Stock.................................................12
B. Certificates of Stock.............................................12
C. Transfers.........................................................12
D. Lost, Stolen or Destroyed Certificates............................13
E. Record Dates or Closing of Transfer Books.........................13
F. Stock Ledger......................................................14
G. Certification of Beneficial Owners................................14
ARTICLE V. - General Provisions...............................................14
A. Fiscal Year ......................................................14
B. Corporate Seal....................................................14
C. Execution of Instruments..........................................14
D. Waiver of Notice..................................................14
E. Voting of Securities in other Corporations........................15
F. Evidence of Authority.............................................15
G. Articles of Incorporation.........................................15
H. Transactions with Interested Directors............................15
I. Severability......................................................16
J. Pronouns..........................................................16
K. Books and Records.................................................16
ARTICLE VI. - Amendments......................................................16
A. By the Board of Directors.........................................16
B. By the Stockholders...............................................16
C. Certain Provisions................................................17
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ARTICLE I. - Stockholders
--------------------------
A. Place of Meetings. All meetings of stockholders shall be held
-----------------
at such place in the United States as may be designated from time to time by the
Board of Directors or, if not so designated, at the registered office of the
corporation.
B. Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held, either at 10:00 a.m. on
the second Thursday of April in each year if not a legal holiday, or at such
other time on such other day falling on or before the 30th day thereafter as
shall be set by the Board of Directors. Except as the Articles of Incorporation
or statute provides otherwise, any business may be considered at an annual
meeting without the purpose of the meeting having been specified in the notice.
Failure to hold an annual meeting does not invalidate the corporation's
existence or affect any otherwise valid corporate acts. If no annual meeting is
held in accordance with the foregoing provisions, a special meeting may be held
in lieu of the annual meeting, and any action taken at that special meeting
shall have the same effect as if it had been taken at the annual meeting, and in
such case all references in these Bylaws to the annual meeting of the
stockholders shall be deemed to refer to such special meeting.
C. Special Meetings. Special meetings of stockholders may be
----------------
called at any time by the President or by the Board of Directors or by the
Secretary upon the written request of stockholders entitled to cast at least 50
percent of all votes entitled to be cast at the meeting. A request for a
special meeting shall state the purpose of the meeting and the matters proposed
to be acted on at it. The Secretary shall inform the stockholders who make the
request of the reasonably estimated costs of preparing and mailing a notice of
the meeting and, on payment of these costs to the corporation, notify each
stockholder entitled to notice of the meeting. Business transacted at any
special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting unless the purpose of the
special meeting is to consider any matter which is substantially the same as a
matter voted on at any special meeting of the stockholders held during the
preceding 12 months in which case a majority of the stockholders entitled to
cast all of the votes at the meeting is required to call a meeting.
D. Notice of Meetings. Except as otherwise provided by law,
------------------
written notice of each meeting of stockholders, whether annual or special, shall
be given not less than 10 nor more than 90 days before the date of the meeting
to each stockholder entitled to vote at such meeting and to each other
stockholder entitled to notice of the meeting. The notices of all meetings
shall state the time and place of the meeting and, if the meeting is a special
meeting or notice of the purpose is required by statute, the purpose of the
meeting. Notice is given to a stockholder when it is
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personally delivered to him or her, left at his or her residence or usual place
of business, or mailed to him or her at his or her address as it appears on the
records of the corporation. Notwithstanding the foregoing provisions, each
person who is entitled to notice waives notice if he or she before or after the
meeting signs a waiver of the notice which is filed with the records of
stockholders' meetings, or is present at the meeting in person or by proxy.
E. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
F. Quorum. Except as otherwise provided by law, the Articles of
------
Incorporation or these Bylaws, the presence in person or by proxy of
stockholders entitled to cast a majority of all votes entitled to be cast at the
meeting shall constitute a quorum for the transaction of business.
G. Adjournments. Whether or not a quorum is present, a meeting of
------------
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
H. Voting and Proxies. Each stockholder shall have one vote for
------------------
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Articles of Incorporation. In all elections for directors, each share of
stock may be voted for as many individuals as there are directors to be elected
and for whose election the share is entitled to be voted. A stockholder may
vote the stock the stockholder owns of record either in person or by proxy. A
stockholder may sign a writing authorizing another person to act as proxy.
Signing may be accomplished by the stockholder or the stockholder's authorized
agent signing the writing or causing the stockholder's signature to be affixed
to the writing by any reasonable means, including facsimile signature. A
stockholder may authorize another person to act as proxy by transmitting, or
authorizing the transmission of, a telegram, cablegram,
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<PAGE>
datagram or other means of electronic transmission to the person authorized to
act as proxy or to a proxy solicitation firm, proxy support service organization
or other person authorized by the person who will act as proxy to receive the
transmission. Unless a proxy provides otherwise, it is not valid more than 11
months after its date. A proxy is revocable by a stockholder at any time without
condition or qualification unless the proxy states that it is irrevocable and
the proxy is coupled with an interest. A proxy may be made irrevocable for so
long as it is coupled with an interest. The interest with which a proxy may be
coupled includes an interest in the stock to be voted under the proxy or another
general interest in the corporation or its assets or liabilities.
I. Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Articles of
Incorporation or these Bylaws, except that a plurality of all votes cast at a
meeting at which a quorum is present is sufficient to elect a director.
J. Action without Meeting. Any action required or permitted to be
----------------------
taken at a meeting of stockholders may be taken without a meeting if the
following are filed with the records of stockholders' meetings: (i) an
unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter; and (ii) a written waiver of any
right to dissent signed by each stockholder entitled to notice of the meeting
but not entitled to vote at it.
K. Nomination of Directors. Only persons who are nominated in
-----------------------
accordance with the following procedures shall be eligible for election as
directors. Nomination for election to the Board of Directors of the corporation
at a meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Article
I.K. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by notice in writing delivered or mailed by first class
United States mail, postage prepaid, to the Secretary, and received not less
than 60 days nor more than 90 days prior to such meeting; provided, however,
--------
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given to stockholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the date on which the notice of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such notice shall set forth (i) as
to each proposed nominee (a) the name, age, business address and, if known,
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<PAGE>
residence address of each such nominee, (b) the principal occupation or
employment of each such nominee, (c) the number of shares of stock of the
corporation which are beneficially owned by each such nominee and (d) any other
information concerning the nominee that must be disclosed as to nominees in
proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (including such person's written consent to be named as a
nominee and to serve as a director if elected), and (ii) as to the stockholder
giving the notice (x) the name and address, as they appear on the corporation's
books, of such stockholder and (y) the class and number of shares of the
corporation which are beneficially owned by such stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director of the corporation.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
L. Notice of Business at Annual Meetings. At an annual meeting of
-------------------------------------
the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or (iii) otherwise properly brought before an annual meeting
by a stockholder. For business to be properly brought before an annual meeting
by a stockholder, if such business relates to the election of directors of the
corporation, the procedures in Article I.K must be complied with. If such
business relates to any other matter, the stockholder must have given timely
notice thereof in writing to the Secretary. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the corporation not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days' notice or
--------
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever occurs first. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the corporation which are beneficially owned by the stockholder and (d) any
material interest of the stockholder in such business. Notwithstanding
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anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Article I.L and except that any stockholder proposal which complies with Rule
14a-8 of the proxy rules (or any successor provision) promulgated under the
Securities Exchange Act of 1934, as amended, and is to be included in the
corporation's proxy statement for an annual meeting of stockholders shall be
deemed to comply with the requirements of this Article I.L.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Article I.L, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
M. Organization. The Chairman of the Board, or in his absence
------------
the Vice Chairman of the Board designated by the Chairman of the Board, or the
President, in the order named, shall call meetings of the stockholders to order,
and shall act as chairman of such meeting; provided, however, that the Board of
--------
Directors may appoint any stockholder to act as chairman of any meeting in the
absence of the Chairman of the Board. The Secretary of the corporation shall
act as secretary at all meetings of the stockholders; but in the absence of the
Secretary at any meeting of the stockholders, the presiding officer may appoint
any person to act as secretary of the meeting.
ARTICLE II. - Directors
-----------------------
A. General Powers. The business and affairs of the corporation
--------------
shall be managed under the direction of a Board of Directors. All powers of the
corporation may be exercised by or under the authority of the Board of Directors
except as conferred on or reserved to the stockholders by law, the Articles of
Incorporation or these Bylaws. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
B. Number; Election; Tenure and Qualification. The number of
------------------------------------------
directors which shall constitute the whole Board of Directors shall be
determined by resolution of a majority of the entire Board of Directors, but in
no event shall be more than ten or less than three, except as otherwise provided
by law. The directors shall be elected at the annual meeting of stockholders by
such stockholders as have the right to vote on such election as provided in
Article I.I. Directors need not be stockholders of the corporation. The
corporation shall have the number of directors provided in the Articles of
Incorporation until changed as herein provided.
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C. Classes of Directors. The Board of Directors shall be and is
--------------------
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.
D. Terms of Office. 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 annual meeting of stockholders in
1999; each initial director in Class II shall serve for a term ending on the
date of the annual meeting of stockholders in 2000; and each initial director in
Class III shall serve for a term ending on the date of the annual meeting of
stockholders in 2001; 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.
E. 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, (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.
F. 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
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the number of directors. A director elected by the Board of Directors to fill a
vacancy serves until the next annual meeting of stockholders and until his
successor is elected and qualifies.
G. Resignation. Any director may resign by delivering his
-----------
written resignation to the Board of Directors, the Chairman of the Board, the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some later date.
H. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held without notice at such time and place, either within or without the
State of Maryland, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination, which notice shall be given at
least 72 hours in advance of such meeting. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
I. Special Meetings. Special meetings of the Board of Directors
----------------
may be held at any time and place, within or without the State of Maryland,
designated by the Chairman of the Board, two or more directors, or by one
director in the event that there is only a single director in office.
J. Notice of Meeting. Except as provided in Article II.H, notice
-----------------
of any regular or special meeting of Board of Directors shall be given to each
director by the Secretary or by the officer or one of the directors calling the
meeting. Notice shall be duly given to each director by telephone or by
electronic devices sent to his business or home address at least 48 hours in
advance of the meeting or by mailing written notice to his last known address at
least 72 hours in advance of the meeting. Unless the Bylaws or a resolution of
the Board of Directors provides otherwise, the notice need not state the
business to be transacted at or the purposes of any regular or special meeting
of the Board of Directors.
K. Meetings by Telephone Conference Calls. Directors or any
--------------------------------------
members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time, and participation by such
means shall constitute presence in person at such meeting.
L. Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
Except as otherwise provided by law, in the event one or more of the directors
shall be
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disqualified to vote at any meeting, then the required quorum shall be reduced
by one for each such director so disqualified; provided, however, that in no
case shall less than one-third (1/3) of the number so fixed constitute a quorum.
In the absence of a quorum at any such meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than announcement at the meeting, until a quorum shall be present.
M. Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Articles of Incorporation or these Bylaws.
N. Action by Consent. Any action required or permitted to be taken
-----------------
at any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
O. Removal. Subject to the rights of the holders of any class
-------
separately entitled to elect one or more directors, any director, or the entire
Board of Directors, may be removed from office at any time, but only for cause
and then only 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.
P. Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence of a member of a committee, the member or members
of the committee present at any meeting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent member. Any such committee, to
the extent provided in the resolution of the Board of Directors and subject to
the provisions of the Maryland General Corporation Law, shall have and may
exercise all the powers of the Board of Directors, except the power to authorize
dividends on stock, issue stock other than as provided in the next sentence,
recommend to the stockholders any action which requires stockholder approval,
amend the Bylaws or approve any merger or share exchange which does not require
stockholder approval. If the Board of Directors has given general authorization
for the issuance of stock providing for or establishing a method or procedure
for determining the maximum number of shares to be issued, a committee of the
Board, in accordance with that
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general authorization or any stock option or other plan or program adopted by
the Board, may authorize or fix the terms of stock subject to classification or
reclassification and the terms on which any stock may be issued, including all
terms and conditions required or permitted to be established or authorized by
the Board of Directors. Each such committee shall keep minutes and make such
reports as the Board of Directors may from time to time request. Except as the
Board of Directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the directors or in
such rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these Bylaws for the Board of Directors.
Q. Compensation of Directors. Directors may be paid such
-------------------------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE III. - Officers
-----------------------
A. Enumeration. The officers of the corporation shall consist of a
-----------
President, a Treasurer, a Secretary and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
B. Election. The President, Treasurer and Secretary shall be
--------
elected annually by the Board of Directors at its first meeting following the
annual meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting. Election or appointment of
an officer, employee or agent shall not of itself create contract rights.
C. Qualification. No officer need be a stockholder. Any two or
-------------
more offices may be held by the same person, except that a person may not serve
concurrently as both President and Vice President of the corporation.
D. Tenure. Except as otherwise provided by law, by the Articles of
------
Incorporation or by these Bylaws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
-9-
<PAGE>
E. Resignation and Removal. Any officer may resign by delivering
-----------------------
his written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation may be effective upon receipt unless
it is specified to be effective at some later date.
The Board of Directors, or a committee duly authorized to do so, may
remove any officer with or without cause. The removal of an officer does not
prejudice any of his or her contract rights. Except as the Board of Directors
may otherwise determine, no officer who resigns or is removed shall have any
right to any compensation as an officer for any period following his resignation
or removal, or any right to damages on account of such removal, whether his
compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.
F. Vacancies. The Board of Directors may fill any vacancy
---------
occurring in any office for any reason and may, in its discretion, leave
unfilled for such period as it may determine any offices other than those of
President, Treasurer and Secretary. Each such successor shall hold office for
the unexpired term of his predecessor and until his successor is elected and
qualified, or until his earlier death, resignation or removal.
G. Chairman of the Board and Vice Chairman of the Board. The
-----------------------------------------------------
Board of Directors may appoint a Chairman of the Board and may designate the
Chairman of the Board as Chief Executive Officer. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are assigned to him by the Board of Directors.
H. President. The President shall be the chief operating officer
---------
of the corporation. He shall also be the chief executive officer of the
corporation unless such title is assigned to a Chairman of the Board. The
President shall, subject to the direction of the Board of Directors, have
general charge and supervision of the business of the corporation. Unless
otherwise provided by the Board of Directors, he shall preside at all meetings
of the stockholders, and of the Board of Directors (except as provided in
Article III.G above). The President may perform such other duties and shall
have such other powers as the Board of Directors may from time to time
prescribe.
I. Vice Presidents. Any Vice President shall perform such duties
---------------
and possess such powers as the Board of Directors or the President may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions
-10-
<PAGE>
upon the President. The Board of Directors may assign to any Vice President the
title of Executive Vice President, Senior Vice President or any other title
selected by the Board of Directors.
J. Secretary and Assistant Secretaries. The Secretary shall
-----------------------------------
perform such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
K. Treasurer and Assistant Treasurers. The Board of Directors
----------------------------------
shall appoint a Treasurer, who shall perform such duties and shall have such
powers as may from time to time be assigned to him by the Board of Directors or
the President. In addition, the Treasurer shall perform such duties and have
such powers as are incident to the office of treasurer, including without
limitation the duty and power to keep and be responsible for all funds and
securities of the corporation, to deposit funds of the corporation in
depositories selected in accordance with these Bylaws, to disburse such funds as
ordered by the Board of Directors, to make proper accounts of such funds, and to
render as required by the Board of Directors statements of all such transactions
and of the financial condition of the corporation.
Any Assistant Treasurer shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
-11-
<PAGE>
L. Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE IV. - Capital Stock
----------------------------
A. Issuance of Stock. Unless otherwise voted by the stockholders
-----------------
and subject to the provisions of the Articles of Incorporation and the Maryland
General Corporation Law, 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.
B. Certificates of Stock. Each stockholder is entitled to
---------------------
certificates which represent and certify the shares of stock he or she holds in
the corporation. Each stock certificate shall include on its face the name of
the corporation, the name of the stockholder or other person to whom it is
issued, and the class of stock and number of shares it represents. It shall be
in such form, not inconsistent with law or with the Articles of Incorporation,
as shall be approved by the Board of Directors or any officer or officers
designated for such purpose by resolution of the Board of Directors. Each stock
certificate shall be signed by the Chairman of the Board, the President or a
Vice President, and countersigned by the Secretary, an Assistant Secretary, the
Treasurer or an Assistant Treasurer. Each certificate may be sealed with the
actual corporate seal or a facsimile of it or in any other form and the
signatures may be either manual or facsimile signatures. A certificate is valid
and may be issued whether or not an officer who signed it is still an officer
when it is issued.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Articles of Incorporation, the Bylaws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement that the corporation will furnish information about the restriction to
the stockholder on request and without charge.
C. Transfers. Except as otherwise established by rules and
---------
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the corporation by the
surrender to the corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly
-12-
<PAGE>
executed, and with such proof of authority or the authenticity of signature as
the corporation or its transfer agent may reasonably require. Except as may be
otherwise required by law, by the Articles of Incorporation or by these Bylaws,
the corporation shall be entitled to treat the record holder of stock as shown
on its books as the owner of such stock for all purposes, including the payment
of dividends and the right to vote with respect to such stock, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
transferred on the books of the corporation in accordance with the requirements
of these Bylaws.
D. Lost, Stolen or Destroyed Certificates. The corporation may
--------------------------------------
issue a new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen or destroyed, upon such terms and conditions
as the Board of Directors may prescribe, including the presentation of
reasonable evidence of such loss, theft or destruction and the giving of such
indemnity as the Board of Directors may require for the protection of the
corporation or any transfer agent or registrar.
E. Record Dates or Closing of Transfer Books. The Board of
-----------------------------------------
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend or be allotted other
rights. The record date may not be prior to the close of business on the day
the record date is fixed nor, subject to Article I.G, more than 90 days before
the date on which the action requiring the determination will be taken; the
transfer books may not be closed for a period longer than 20 days; and, in the
case of a meeting of stockholders, the record date or the closing of the
transfer books shall be at least 10 days before the date of the meeting.
If no record date is set and the stock transfer books are not closed,
(i) the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders is the later of the close of business on the
day on which notice of the meeting is mailed or the thirtieth day before the
meeting and (ii) the record date for determining stockholders entitled to
receive payment of a dividend or an allotment of any rights is the close of
business on the day on which the resolution of the Board of Directors declaring
the dividend or allotment of rights is adopted (but the payment or allotment may
not be made more than 60 days after the date on which the resolution is
adopted).
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
- --------
adjourned meeting.
-13-
<PAGE>
F. Stock Ledger. The corporation shall maintain a stock ledger
------------
which contains the name and address of each stockholder and the number of shares
of stock of each class which the stockholder holds. The stock ledger may be in
written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. The original or a duplicate of
the stock ledger shall be kept at the offices of a transfer agent for the
particular class of stock, or, if none, at the principal office in the State of
Maryland or the principal executive office of the corporation.
G. Certification of Beneficial Owners. The Board of Directors may
----------------------------------
adopt by resolution a procedure by which a stockholder of the corporation may
certify in writing to the corporation that any shares of stock registered in the
name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the corporation; and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Article IV.G, the person specified in the
certification is, for the purpose set forth in the certification, the holder of
record of the specified stock in place of the stockholder who makes the
certification.
ARTICLE V. - General Provisions
-------------------------------
A. Fiscal Year. The fiscal year of the corporation shall be
-----------
designated by the Board of Directors.
B. Corporate Seal. The corporate seal shall be in such form as
--------------
shall be approved by the Board of Directors. If the corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any law, rule, or regulation relating to a corporate seal to place the word
"Seal" adjacent to the signature of the person authorized to sign the document
on behalf of the corporation.
C. Execution of Instruments. A person who holds more than one
------------------------
office in the corporation may not act in more than one capacity to execute,
acknowledge or verify an instrument required by law to be executed, acknowledged
or verified by more than one officer.
D. Waiver of Notice. Whenever any notice whatsoever is required to
----------------
be given by law, by the Articles of Incorporation or by these Bylaws, a waiver
of
-14-
<PAGE>
such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
E. Voting of Securities in other Corporations. Stock of other
------------------------------------------
corporations or associations, registered in the name of the corporation, may be
voted by the President, a Vice President or a proxy appointed by either of them.
The Board of Directors, however, may by resolution appoint some other person to
vote such shares, in which case such person shall be entitled to vote such
shares upon the production of a certified copy of such resolution.
F. Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
G. Articles of Incorporation. All references in these Bylaws to
-------------------------
the Articles of Incorporation shall be deemed to refer to the Articles of
Incorporation of the corporation, as amended and in effect from time to time.
H. Transactions with Interested Directors. No contract or
--------------------------------------
transaction between the corporation and any of its directors, or between the
corporation and any other corporation, firm or other entity in which any of its
directors are directors or have a material financial interest, shall be void or
voidable solely because of the common directorship or interest, or solely
because the director or officer is present at the meeting of the Board of
Directors or a committee of the Board of Directors which authorizes the contract
or transaction or solely because his or their votes are counted for such
purpose, if:
1. The fact of the common directorship or interest is disclosed
or known to:
(a) The Board of Directors or the committee, and the Board
of Directors or committee authorizes, approves or ratifies the
contract or transaction by the affirmative vote of a majority of
disinterested directors, even if the disinterested directors
constitute less than a quorum; or
(b) The stockholders entitled to vote, and the contract or
transaction is authorized, approved, or ratified by a majority of the
-15-
<PAGE>
votes cast by the stockholders entitled to vote other than the votes
of shares owned of record or beneficially by the interested director
or corporation, firm, or other entity; or
2. The contract or transaction is fair and reasonable to the
corporation.
Common or interested directors or the stock owned by them or by an
interested corporation, firm or other entity may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee of
the Board or at a meeting of the stockholders, as the case may be, at which the
contract or transaction is authorized, approved or ratified.
I. Severability. Any determination that any provision of these By-
------------
laws is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these Bylaws.
J. Pronouns. All pronouns used in these Bylaws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
K. Books and Records. The corporation shall keep correct and
-----------------
complete books and records of its accounts and transactions and minutes of the
preceding of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors.
The books and records of a corporation may be in written form or in any other
form which can be converted within a reasonable time into written form for
visual inspection. Minutes shall be recorded in written form but may be
maintained in the form of a reproduction. The original or a certified copy of
the Bylaws shall be kept at the principal office of the corporation.
ARTICLE VI. - Amendments
------------------------
A. By the Board of Directors. These Bylaws may be altered, amended
-------------------------
or repealed or new bylaws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
B. By the Stockholders. Except as otherwise provided in Article
-------------------
VI.C, these Bylaws may be altered, amended or repealed or new by-laws may be
adopted by the affirmative vote of the holders of a majority of the shares of
the capital stock of the corporation issued and outstanding and entitled to vote
at any regular meeting of stockholders, or at any special meeting of
stockholders, provided
-16-
<PAGE>
notice of such alteration, amendment, repeal or adoption of new by-laws shall
have been stated in the notice of such special meeting.
C. Certain Provisions. Notwithstanding any other provision of law,
------------------
the Articles of Incorporation or these Bylaws, and notwithstanding the fact that
a lesser percentage may be specified by law, in the event of stockholder action,
the affirmative vote of the holders of at least seventy-five percent (75%) of
the shares of the 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 Article I.K, Article I.L, Article II or Article VI of these
Bylaws.
-17-
<PAGE>
Exhibit 10.1
Entrust Technologies Inc.
SERIES B COMMON STOCK PURCHASE AGREEMENT
dated December 31, 1996
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
1. Authorization and Sale of Shares........................................ 1
1.1 Authorization............................................. 1
1.2 Sale of Shares............................................ 1
1.3 Use of Proceeds........................................... 1
2. The Closing............................................................. 2
3. Representations of the Company.......................................... 2
3.1 Organization and Standing................................. 2
3.2 Capitalization............................................ 2
3.3 Subsidiaries, etc. ....................................... 3
3.4 Stockholder List and Agreements........................... 3
3.5 Issuance of Shares........................................ 4
3.6 Authority for Agreement................................... 4
3.7 Governmental Consents..................................... 4
3.8 Litigation................................................ 5
3.9 Financial Statements...................................... 5
3.10 Absence of Liabilities.................................... 5
3.11 Taxes..................................................... 6
3.12 Property and Assets....................................... 6
3.13 Intellectual Property .................................... 6
3.14 Material Contracts and Obligations........................ 7
3.15 Completeness of Assets.................................... 7
3.16 Employees................................................. 8
3.17 Leases.................................................... 8
3.18 Compliance................................................ 8
3.19 Employees................................................. 8
3.20 ERISA..................................................... 9
3.21 Outstanding Debt; No Default.............................. 9
3.22 Offering of Purchased Shares.............................. 9
3.23 Holding Company Status.................................... 9
3.24 Investment Company Status................................. 10
3.25 Disclosure................................................ 10
3.26 Environmental Compliance.................................. 10
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
3.27 Representation of NTL..................................... 10
4. Representations of the Purchasers....................................... 11
4.1 Investment................................................ 11
4.2 Authority................................................. 11
4.3 Experience................................................ 11
4.4 Accredited Investor Status................................ 11
5. Conditions to the Obligations of the Purchasers......................... 11
5.1 Accuracy of Representations and Warranties................ 11
5.2 Performance............................................... 12
5.3 Opinion of Counsel........................................ 12
5.4 Ancillary Agreements...................................... 13
5.5 Certificates and Documents................................ 14
5.6 Compliance Certificate.................................... 14
5.7 Other Matters............................................. 14
5.8 Proceeds.................................................. 14
6. Conditions to the Obligations of the Company............................ 14
6.1 Accuracy of Representations and Warranties................ 15
6.2 Compliance with Securities Laws........................... 15
6.3 Stockholders' Agreement................................... 15
6.4 Registration Rights Agreement............................. 15
6.5 Additional Agreements..................................... 15
7. Covenants of the Company................................................ 15
7.1 Inspection and Observation................................ 15
7.2 Financial Statements and Other Information................ 15
7.3 Termination of Covenants.................................. 16
7.4 Corporate Existence, Licenses and Permits;
Maintenance of Properties................................. 16
7.5 Taxes..................................................... 17
7.6 Insurance................................................. 17
7.7 Books and Accounts........................................ 17
7.8 Compliance with Environmental Laws........................ 18
7.9 Conflict.................................................. 18
7.10 Special Board Approval.................................... 18
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
7.11 Non-Competition and Non-Solicitation...................... 19
7.12 Further Assurances........................................ 19
8. Transfer of Shares...................................................... 20
8.1 Restricted Shares......................................... 20
8.2 Requirements for Transfer................................. 20
8.3 Legend.................................................... 21
8.4 Rule 144A Information..................................... 21
9. Miscellaneous........................................................... 21
9.1 Successors and Assigns.................................... 21
9.2 Confidentiality........................................... 21
9.3 Survival of Representations and Warranties................ 22
9.4 Expenses.................................................. 22
9.5 Notices................................................... 22
9.6 Brokers................................................... 23
9.7 Entire Agreement.......................................... 23
9.8 Amendments and Waivers.................................... 23
9.9 Counterparts.............................................. 24
9.10 Section Headings.......................................... 24
9.11 Severability.............................................. 24
9.12 Governing Law............................................. 24
</TABLE>
EXHIBITS
--------
Exhibit A - List of Purchasers
Exhibit B - Articles of Amendment and Restatement
Exhibit C - Exceptions of Representations
Exhibit D - List of Stockholders
Exhibit E - Jurisdictions of Foreign Qualification
Exhibit F - Stockholders' Agreement
Exhibit G - Registration Rights Agreement
Exhibit H - Additional Agreements
Exhibit I - List of Individuals Subject to Section 7.11(b) Restrictions
-iii-
<PAGE>
SERIES B COMMON STOCK PURCHASE AGREEMENT
----------------------------------------
This Agreement dated as of December 31, 1996 is entered into by and among
Entrust Technologies Inc., a Maryland corporation (the "Company"), and the
individuals and entities listed on Exhibit A hereto (the "Purchasers").
---------
WHEREAS, the Entrust Business (as defined below), has operated as a
division of Northern Telecom Limited ("NTL"), and its subsidiaries
(collectively, "Nortel") and the Company was created to acquire from Nortel,
rights in and to Nortel assets relating to the Entrust Business, including
without limitation Entrust licenses, executory contracts for distributing and
licensing to customers the Entrust products and other related assets, the
services of the Nortel employees and contractors involved in the Entrust
Business and certain equipment, inventory and other related assets of the
Entrust Business.
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. Authorization and Sale of Shares.
--------------------------------
1.1 Authorization. The Company has, or before the Closing (as
-------------
defined in Section 2) will have, duly authorized the sale and issuance, pursuant
to the terms of this Agreement, of 257,500 shares of its Series B Common Stock,
$.01 par value per share (the "Series B Common Stock"), having the rights,
restrictions, privileges and preferences set forth in the Articles of Amendment
and Restatement to the Charter attached hereto as Exhibit B (the "Articles of
---------
Amendment and Restatement"). The Company has, or before the Closing will have,
adopted and filed the Articles of Amendment and Restatement with the State
Department of Assessments and Taxation of the State of Maryland.
1.2 Sale of Shares. Subject to the terms and conditions of this
--------------
Agreement, at the Closing the Company will sell and issue to each of the
Purchasers, and each of the Purchasers will purchase, the number of shares of
Series B Common Stock set forth opposite such Purchaser's name on Exhibit A for
---------
the purchase price of $100 per share. The shares of Series B Common Stock being
sold under this Agreement are referred to as the "Shares." The Company's
agreement with each of the Purchasers is a separate agreement, and the sale of
Shares to each of the Purchasers is a separate sale.
1.3 Use of Proceeds. The Company will use a portion of the net
---------------
proceeds from the sale of the Shares for working capital and other general
corporate
<PAGE>
purposes, including product development, research, expansion of the Company's
sales and marketing efforts, increased hiring of personnel and capital
expenditures as well as $8.0 million of the net proceeds to repay an unsecured
promissory note (the "Note") issued to Northern Telecom Inc., a Delaware
corporation ("NTI").
2. The Closing. The closing ("Closing") of the sale and purchase of the
-----------
Shares under this Agreement shall take place at the offices of Northern Telecom
Limited, a Canadian corporation ("NTL"), 8200 Dixie Road, Suite 100, Brampton,
Ontario at 10:00 a.m. on December 31, 1996. At the Closing, the Company shall
deliver to each of the Purchasers a certificate for the number of Shares being
purchased by such Purchaser, registered in the name of such Purchaser, against
payment to the Company of the purchase price therefor, by wire transfer, check,
or other method acceptable to the Company. The date of the Closing is
hereinafter referred to as the "Closing Date." If at the Closing any of the
conditions specified in Section 5 shall not have been fulfilled, each of the
Purchasers shall, at his or its election, be relieved of all of his or its
obligations under this Agreement without thereby waiving any other rights he or
it may have by reason of such failure or such non-fulfillment.
3. Representations of the Company. Subject to and except as disclosed by
------------------------------
the Company in Exhibit C hereto, the Company hereby represents and warrants to
---------
each of the Purchasers as follows:
3.1 Organization and Standing. Each of the Company and its majority-
-------------------------
owned subsidiary, Entrust Technologies Limited, a corporation incorporated under
the laws of Ontario, Canada (the "Canadian Subsidiary"), is a corporation duly
organized, validly existing and, in the case of the Company, in good standing
under the laws of its respective jurisdiction of incorporation and has full
corporate power and authority to conduct its business as presently conducted and
as proposed to be conducted by it and, in the case of the Company, to enter into
and perform this Agreement and to carry out the transactions contemplated by
this Agreement. Each of the Company and the Canadian Subsidiary is duly
qualified to do business as a foreign corporation and is in good standing in
every jurisdiction in which the failure to so qualify would have a material
adverse effect on the business, assets or financial condition of the Company and
the Canadian Subsidiary, taken as a whole (a "Material Adverse Effect"). The
Company has furnished to the Special Purchaser Counsel true and complete copies
of its Articles of Incorporation and By-laws, each as amended to date and
presently in effect.
3.2 Capitalization. The authorized capital stock of the Company
--------------
(immediately prior to the Closing) consists of (a) 5,000,000 shares of Series A
Common Stock, $.01 par value per share, of which 507,500 shares are issued and
-2-
<PAGE>
outstanding (the "Series A Common Stock"), (b) 257,500 shares of Series B Common
Stock, $.01 par value per share, none of which shares are issued and
outstanding, (c) 500,000 shares of Special Voting Stock, $.01 par value per
share, of which 192,500 shares are issued and outstanding (the "Special Voting
Stock"), and (d) 500,000 shares of Preferred Stock, $.01 par value per share,
none of which shares are issued or outstanding (such shares of capital stock of
the Company referred to in clauses (a), (b), (c) and (d) of this sentence being
collectively referred to herein as the "Company Capital Stock"). The authorized
capital stock of the Canadian Subsidiary (immediately prior to the Closing)
consists of (a) an unlimited number of common shares, without par value per
share, of which 100,000 shares are issued and outstanding (the "Canadian Common
Shares"), (b) an unlimited number of exchangeable shares, without par value per
share, of which 192,500 shares are issued and outstanding (the "Exchangeable
Shares"), and (c) an unlimited number of special shares, without par value per
share, of which no shares are issued and outstanding (the "Special Shares"),
which, together with the Canadian Common Shares and the Exchangeable Shares, are
referred to herein as the "Canadian Capital Stock"). All of the issued and
outstanding shares of Company Capital Stock and Canadian Capital Stock
(together, the "Entrust Capital Stock") have been duly authorized and validly
issued, are fully paid and nonassessable. Except as set forth in Exhibit C
---------
hereto pursuant to the terms of the Entrust Capital Stock, (a) no subscription,
warrant, option, convertible security or other right (contingent or otherwise)
to purchase or acquire any shares of Entrust Capital Stock is authorized or
outstanding, (b) neither the Company nor the Canadian Subsidiary has any
obligation (contingent or otherwise) to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to holders of
any shares of its capital stock any evidences of indebtedness or assets of the
Company or the Canadian Subsidiary, as the case may be, and (c) neither the
Company nor the Canadian Subsidiary has any obligation (contingent or otherwise)
to purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof. All of the issued and outstanding shares of Entrust Capital
Stock have been offered, issued and sold by the Company or the Canadian
Subsidiary, as the case may be, in compliance with applicable Federal, Canadian,
state and provincial securities laws.
3.3 Subsidiaries, etc. Except for the Canadian Subsidiary, the
-----------------
Company has no subsidiaries and does not own or control, directly or indirectly,
any shares of capital stock of any other corporation or any interest in any
partnership, joint venture or other non-corporate business enterprise.
3.4 Stockholder List and Agreements. Attached as Exhibit D is a true
------------------------------- ----------
and complete list of the stockholders of the Company and the Canadian
Subsidiary, showing the number of shares of Entrust Capital Stock held by each
stockholder as of
-3-
<PAGE>
the date of this Agreement. Except as provided in Exhibit C, there are no
---------
agreements, written or oral, between the Company or the Canadian Subsidiary, on
the one hand, and any holder of Entrust Capital Stock, or, to the Company's
knowledge, among any holders of Entrust Capital Stock, relating to the
acquisition (including without limitation rights of first refusal or pre-emptive
rights), disposition, registration under the Securities Act of 1933, as amended
(the "Securities Act"), or voting of the Entrust Capital Stock.
3.5 Issuance of Shares. The issuance, sale and delivery of the
------------------
Shares in accordance with this Agreement, and the issuance and delivery of the
shares of Series A Common Stock issuable upon conversion of the Shares, have
been, or will be on or prior to the Closing, duly authorized by all necessary
corporate action on the part of the Company, and all such shares have been duly
reserved for issuance. The Shares when so issued, sold and delivered against
payment therefor in accordance with the provisions of this Agreement, and the
shares of Series A Common Stock issuable upon conversion of the Shares, when
issued upon such conversion, will be duly and validly issued, fully paid and
non-assessable.
3.6 Authority for Agreement. The execution, delivery and performance
-----------------------
by the Company of this Agreement and all other agreements required to be
executed by the Company on or prior to the Closing pursuant to Section 5.4 (the
"Ancillary Agreements"), and the consummation by the Company of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action. This Agreement and the Ancillary Agreements have been duly
executed and delivered by the Company and constitute valid and binding
obligations of the Company enforceable in accordance with their respective
terms. The execution of and performance of the transactions contemplated by this
Agreement and the Ancillary Agreements and compliance with their provisions by
the Company will not violate any provision of law and will not conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute a default under, or require a consent or waiver under, its Articles
of Incorporation or By-laws (each as amended to date) or any material indenture,
lease, agreement or other instrument to which the Company or the Canadian
Subsidiary is a party or by which either corporation or any of its respective
properties is bound, or any decree, judgment, order, statute, rule or regulation
applicable to the Company or the Canadian Subsidiary.
3.7 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority is required on the part of the Company
in connection with the execution and delivery of this Agreement, the offer,
issuance, sale and delivery of the Shares, or the other transactions to be
consummated at the Closing, as contemplated by this Agreement, except for
filing, if any, required pursuant to
-4-
<PAGE>
applicable state securities or blue sky laws, which filings will be made within
the required statutory or regulatory periods, and any filing pursuant to
Regulation D under the Securities Act, which filing, if made, will be effected
within 15 days of the Closing. Based on the representations made by each of the
Purchasers in Section 4 of this Agreement, the offer and sale of the Shares to
each of the Purchasers will be in compliance with applicable Federal and state
securities laws.
3.8 Litigation. There is no action, suit or proceeding, or
----------
governmental inquiry or investigation, pending, or, to the Company's knowledge,
any threat thereof, against the Company or the Canadian Subsidiary, which
questions the validity of this Agreement or the right of the Company to enter
into it, or which might result, either individually or in the aggregate, in a
Material Adverse Effect, nor is there any litigation pending, or, to the
Company's knowledge, any basis therefor or threat thereof, against the Company
or the Canadian Subsidiary by reason of the proposed activities of the Company
or the Canadian Subsidiary.
3.9 Financial Statements. The Company has furnished to each of the
--------------------
Purchasers a complete and correct copy of the audited statement of net assets of
the Secure Networks Division (the "Division") of NTL and its subsidiaries
(collectively, "Nortel") as at June 30, 1996, December 31, 1995 and December 31,
1994, and the statement of revenues and direct costs and expenses for the six-
month period ended June 30, 1996 and each of the two years in the period ended
December 31, 1995 (collectively, the "Financial Statements"). The Financial
Statements are complete and correct, present fairly the financial condition and
results of operations of the Division, as at the dates and for the periods
indicated, and have been prepared from the books, records and accounts of the
Division on the basis of established accounting methods, policies, practices and
procedures and the judgments and estimation methodologies used by Nortel and the
Division, in accordance with generally accepted accounting principles in the
United States. There have been no material adverse changes in the condition,
financial or other, of the Division or of the Company and its Canadian
Subsidiary since June 30, 1996.
3.10 Absence of Liabilities. Except as disclosed in Exhibit C, the
---------------------- ---------
Division did not have, at June 30, 1996, any liabilities of any type which in
the aggregate exceeded $50,000, whether absolute or contingent, which were not
fully reflected on the Financial Statements. Except as set forth in Exhibit C,
---------
(a) from June 30, 1996 through December 31, 1996 (the "Formation Date"), the
date on which certain assets and liabilities of the Division were transferred to
the Company and the Canadian Subsidiary (the business conducted by the Division
prior to the Formation Date and by the Company and the Canadian Subsidiary on
and after the Formation Date to design, develop, market and license automated
public key infrastructure software and encryption hardware products being
referred to herein as the "Entrust
-5-
<PAGE>
Business"), the Division did not incur or otherwise become subject to any of the
liabilities or obligations referred to in the preceding sentence except in the
ordinary course of business and (b) since the Formation Date, the Company has
not incurred or otherwise become subject to any such liabilities or obligations
except in the ordinary course of business.
3.11 Taxes. Each of the Company and the Canadian Subsidiary has filed
-----
or has obtained presently effective extensions with respect to all Federal,
state, provincial, county, local and foreign tax returns which are required to
be filed by it, such returns are true and correct and all taxes shown thereon to
be due have been timely paid with exceptions not material to the Company and the
Canadian Subsidiary, taken as a whole. United States federal and Canadian
income tax returns of the Company have not been audited by the Internal Revenue
Service or Revenue Canada, as the case may be, and no controversy with respect
to taxes of any type is pending or, to the Company's knowledge, threatened.
Neither the Company nor any of its stockholders has ever filed (a) an election
pursuant to Section 1362 of the United States Internal Revenue Code of 1986, as
amended (the "Code"), that the Company be taxed as an S Corporation or (b) a
consent pursuant to Section 341(f) of the Code relating to collapsible
corporations.
3.12 Property and Assets. Each of the Company and the Canadian
-------------------
Subsidiary has good title to all of its material properties and assets, and none
of such properties or assets is subject to any mortgage, pledge, lien, security
interest, lease, charge or encumbrance other than those the material terms of
which are described in the Financial Statements or in Exhibit C.
---------
3.13 Intellectual Property. Set forth on Exhibit C is a true and
--------------------- ---------
complete list of all patents, patent applications, trademarks, service marks,
trademark and service mark applications, trade names, copyright registrations
and licenses presently used by the Entrust Business or necessary for the conduct
of the Entrust Business, as well as any agreement under which the Company or the
Canadian Subsidiary has access to any confidential information used by the
Company or the Canadian Subsidiary, as the case may be, in its business (the
"Intellectual Property Rights"). The Intellectual Property Rights include in all
material respects the rights necessary for the conduct of the Entrust Business
as presently conducted. Either the Company or the Canadian Subsidiary owns
(subject to the limitations set forth in the respective Additional Agreements),
or has the right to use by license under the agreements or otherwise upon the
terms described in Exhibit C, all of the Intellectual
---------
Property Rights, and, except as set forth in Exhibit C, has taken all actions
---------
reasonably necessary to protect the Intellectual Property Rights. To the
Company's knowledge, the business conducted by the Company and the Canadian
Subsidiary does not and will not cause either the Company or the Canadian
Subsidiary to infringe or violate
-6-
<PAGE>
any of the patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets or other intellectual property rights of any other
person or entity, and neither the Company nor any of its affiliates has received
notice of any such infringement or violation or any claim thereof. To the
Company's knowledge, no person is infringing any of the Intellectual Property
Rights. The Company is not aware that any employee is obligated under any
contract (including any license, covenant or commitment of any nature), or
subject to any judgment, decree or order of any court or administrative agency,
that would conflict or interfere with (a) the performance of such employee's
duties as an officer, employee or director of the Company or the Canadian
Subsidiary, (b) the use of such employee's best efforts to promote the interests
of the Company or the Canadian Subsidiary or (c) the conduct of the Entrust
Business. No other person or entity (including without limitation any present or
former employee of, or, to the Company's knowledge, any prior employer of any
employee of the Company or the Canadian Subsidiary or any of their respective
affiliates), has any right to or interest in any inventions, improvements,
discoveries or other confidential information utilized by either the Company or
the Canadian Subsidiary in its business.
3.14 Material Contracts and Obligations. Exhibit C sets forth a list
---------------------------------- ---------
of all material agreements or commitments of any nature to which the Company or
the Canadian Subsidiary is a party or by which either of such corporations is
bound, including without limitation (a) each agreement which requires future
expenditures by the Company or the Canadian Subsidiary in excess of $50,000 or
which might result in payments to the Company or the Canadian Subsidiary in
excess of $50,000, (b) all employment and consulting agreements, employee
benefit, bonus, pension, profit-sharing, stock option, stock purchase and
similar plans and arrangements, and distributor and sales representative
agreements, (c) any agreement with any stockholder, officer or director of the
Company or the Canadian Subsidiary, or any "affiliate" or "associate" of such
persons (as such terms are defined in the rules and regulations promulgated
under the Securities Act), including without limitation any agreement or other
arrangement providing for the furnishing of services by, rental of real or
personal property from, or otherwise requiring payments to, any such person or
entity and (d) any agreement relating to the Intellectual Property Rights. The
Company has delivered to the Special Purchaser Counsel copies of such of the
foregoing agreements as such counsel has requested. All of such agreements and
contracts are valid, binding and in full force and effect.
3.15 Completeness of Assets. Except as otherwise set forth on Exhibit
---------------------- -------
C or in the Additional Agreements, Nortel is the exclusive owner of each of the
- -
assets (the "Business Assets") transferred to the Company pursuant to the
Additional Agreements. Except as otherwise set forth on Exhibit C, the assets
---------
being transferred to, or the rights which are being granted or made available
to, the
-7-
<PAGE>
Company as part of the Business Assets include all material leases, contracts,
machinery and equipment, intellectual property rights and other items and rights
used by Nortel in the operation of the Entrust Business by Nortel in the
ordinary course as presently being conducted; provided, however, that certain
-------- -------
items (the "Excluded Assets"), a true and complete list of which is set forth on
the schedules to the Additional Agreements will not be transferred to the
Company, in which event the services associated with certain items shall be made
available to the Company in accordance with the terms and conditions of such
Additional Agreements Except as disclosed on Exhibit C, the Business Assets
---------
constitute all assets owned or leased by Nortel on the date hereof from which
revenues are included within the Financial Statements provided to the
Purchasers. Except as set forth on Exhibit C, the transfer of the Business
---------
Assets and conveyance of rights with respect thereto does not require the
consent by any third party that has not already been obtained nor does such
transfer or conveyance cause or with the passage of time will cause, a default
under any contract, agreement or other instrument being transferred or conveyed.
3.16 Employees. No employee ("Employee") of Nortel necessary for the
---------
operation of the Entrust Business has provided notice to the Company or Nortel
of his or her intention to terminate his or her relationship with the Company
subsequent to the consummation of the transactions contemplated by this
Agreement. To the knowledge of the Company, all employees necessary to operate
the Entrust Business are willing to be employed by the Company.
3.17 Leases. The Company and the Canadian Subsidiary enjoys peaceful
------
and undisturbed possession of all leases necessary in any material respect for
the operation of its respective properties and assets. All such leases are
valid and subsisting and are in full force and effect.
3.18 Compliance. Each of the Company and the Canadian Subsidiary has,
----------
in all material respects, complied with all laws, regulations and orders
applicable to its business and has all material permits and licenses required
thereby. To the Company's knowledge, no employee of the Company or the Canadian
Subsidiary is in violation of any term of any contract or covenant (either with
the Company, the Canadian Subsidiary or another entity) relating to employment,
patents, proprietary information disclosure, non-competition or non-
solicitation.
3.19 Employees. All employees of the Company or the Canadian
---------
Subsidiary whose employment responsibility requires access to confidential or
proprietary information have executed and delivered nondisclosure and assignment
of invention agreements, and all of such agreements are in full force and
effect. None of the employees of the Company or the Canadian Subsidiary is
represented by any labor union, and there is no labor strike or other labor
trouble pending with
-8-
<PAGE>
respect to the Company or the Canadian Subsidiary, as the case may be
(including, without limitation, any organizational drive), or, to the Company's
knowledge, threatened. The events contemplated by the Agreement (either alone or
together with any other event) will not (i) entitle any employee to severance
pay or other similar payments and (ii) materially increase the amount of cash
compensation or result in any payments becoming due to any employee.
3.20 ERISA. Neither the Company nor any entity required to be
-----
aggregated with the Company under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended, has or otherwise contributes to or
participates in any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974 other than a medical benefit plan with respect to
which the Company has made all required contributions and has complied with all
applicable laws. Neither the Company nor any Subsidiary has any liability
(contingent or otherwise) with respect to retiree medical or death benefits.
Neither the Company, nor the Canadian Subsidiary nor any other person, including
any fiduciary, has engaged in any transaction prohibited by Section 4975 of the
Internal Revenue Code of 1986, as amended, or Section 406 of ERISA which could
subject the Company, the Canadian Subsidiary or any entity that the Company or
the Canadian Subsidiary has an obligation to indemnify to any tax or penalty
imposed under Section 4975 of the Internal Revenue Code of 1986, as amended, or
Section 502 of ERISA. The transactions contemplated by this Agreement will not
involve any transaction prohibited by Section 406 of ERISA or in Section 4975 of
the Internal Revenue Code of 1986, as amended.
3.21 Outstanding Debt; No Default. Neither the Company nor the
----------------------------
Canadian Subsidiary has outstanding any indebtedness except as set forth in the
Financial Statements or as evidenced by the Note.
3.22 Offering of Purchased Shares. Neither the Company nor any other
-----------------------------
agent acting on the Company's behalf has taken or will take any action which
would subject the issuance or sale of the Shares to the provisions of Section 5
of the Securities Act, or to the registration or qualification requirements of
any securities or Blue Sky law of any applicable jurisdiction. The Company has
not authorized or employed any agent, broker or dealer in connection with the
offering or sale of the Shares or any similar security of the Company, other
than Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
3.23 Holding Company Status. Neither the Company nor the Canadian
----------------------
Subsidiary is a "holding company," or a Subsidiary or affiliate of a "holding
company," or a "subsidiary company" of a "holding company," or a "public
utility,"
-9-
<PAGE>
within the meaning of the Public Utility Holding Company Act of 1935, as
amended, or a "public utility" within the meaning of the Federal Power Act, as
amended.
3.24 Investment Company Status. Neither the Company nor the Canadian
-------------------------
Subsidiary is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, or an "investment adviser" within the meaning of the Investment
Advisers Act of 1940, as amended.
3.25 Disclosure. Neither this Agreement nor any other document,
----------
certificate or instrument furnished to the Purchasers by or on behalf of the
Company when taken in conjunction with any supplemental or revised information
furnished to the Purchasers in writing prior to the date hereof in connection
herewith contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein, in the light of the circumstances under which made, not misleading
except that with respect to any projected financial information, the Company's
representation is limited to that such information was prepared in good faith
and the assumptions made in preparing such projections were reasonable as of the
date of such projections. Except as relates to events of general economic nature
that do not relate specifically to the Company, there is no fact peculiar to the
Company or the Canadian Subsidiary and known to the Company which has a Material
Adverse Effect or in the future may (so far as the Company can now reasonably
foresee) have a Material Adverse Effect, which has not been set forth in this
Agreement or in the other documents described herein and furnished to the
Purchasers by or on behalf of the Company prior to the date of the Closing in
connection with the transactions contemplated hereby.
3.26 Environmental Compliance. Neither the Company nor the Canadian
------------------------
Subsidiary is in violation, or alleged to be in violation, of any judgment,
decree, order, law, license, rule or regulation pertaining to environmental
matters, including without limitation, those arising under the Resource
Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean
Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any
state or local statute, regulation, ordinance, order or decree relating to
health, safety or the environment (hereinafter "Environmental Laws"), which
violation would have a Material Adverse Effect.
3.27 Representations of NTL. NTL hereby joins, jointly and severally,
----------------------
in the representations and warranties of the Company set forth in Sections 3.7,
3.8, 3.9, 3.10, 3.11, 3.13, 3.14, 3.15, 3.16 and 3.18 above, as if directly made
by NTL.
-10-
<PAGE>
4. Representations of the Purchasers. Each of the Purchasers severally
---------------------------------
represents and warrants to the Company as follows:
4.1 Investment. Such Purchaser is acquiring the Shares, and the
----------
shares of Series A Common Stock into which the Shares may be converted, for his
or its own account for investment and not with a view to, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling the same; and, except as contemplated by this Agreement
and the Exhibits hereto, such Purchaser has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness or commitment
providing for the disposition thereof.
4.2 Authority. Such Purchaser has full power and authority to enter
---------
into and to perform this Agreement in accordance with its terms. Any Purchaser
which is a corporation, partnership or trust represents that it has not been
organized, reorganized or recapitalized specifically for the purpose of
investing in the Company.
4.3 Experience. Such Purchaser has carefully reviewed the
----------
representations concerning the Company contained in this Agreement, has read the
Company's Confidential Private Placement Memorandum, dated November 1996 (the
"Memorandum"), and has made detailed inquiry concerning the Company, its
business and its personnel; the officers of the Company have made available to
such Purchaser any and all written information which he or it has requested and
have answered to such Purchaser's satisfaction all inquiries made by such
Purchaser; and such Purchaser has sufficient knowledge and experience in
investing in companies similar to the Company so as to be able to evaluate the
risks and merits of its investment in the Company and is able financially to
bear the risks thereof.
4.4 Accredited Investor Status. Such Purchaser is an "accredited
--------------------------
investor" as defined in Rule 501(a) under the Securities Act.
5. Conditions to the Obligations of the Purchasers. The obligation of
-----------------------------------------------
each of the Purchasers to purchase Shares at the Closing is subject to the
fulfillment, or the waiver by such Purchaser, of each of the following
conditions on or before the Closing:
5.1 Accuracy of Representations and Warranties. Each representation
------------------------------------------
and warranty contained in Section 3 shall be true on and as of the Closing Date
with the same effect as though such representation and warranty had been made on
and as of that date.
-11-
<PAGE>
5.2 Performance. The Company shall have performed and complied with
-----------
all agreements and conditions contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
5.3 Opinion of Counsel. Each Purchaser shall have received an
------------------
opinion from Hale and Dorr, counsel for the Company, dated the Closing Date,
addressed to the Purchasers, and satisfactory in form and substance to each
Purchaser, to the effect that:
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Maryland and has
full corporate power and authority to conduct its business as presently
conducted, to enter into and perform this Agreement and to carry out the
transactions contemplated by this Agreement. The Company is duly qualified to do
business and in good standing in the jurisdictions set forth on Exhibit E
---------
attached hereto.
(b) Except for changes contemplated by this Agreement, the
authorized capital stock of the Company is as described in Section 3.2 of this
Agreement and, to such counsel's knowledge, the other representations and
warranties contained in Section 3.2 are true and correct (other than the last
sentence thereof, as to which an opinion need only be expressed that no
registration was required for the offer, issuance and sale of such capital stock
under applicable Federal and state securities laws), except that no opinion need
be expressed with respect to the Canadian Capital Stock or the Canadian
Subsidiary. The rights, preferences and privileges of, and restrictions on, the
Series B Common Stock are as stated in the Articles of Amendment and Restatement
and are valid under the provisions of the General Corporation Law of the State
of Maryland.
(c) The Shares, and the shares of Series A Common Stock issuable
upon conversion of the Shares, have been duly authorized and reserved for
issuance by all necessary corporate action on the part of the Company; and the
Shares, when issued, sold and delivered against payment therefor in accordance
with the provisions of this Agreement, and the shares of Series A Common Stock
issuable upon conversion of the Shares, when issued upon such conversion, will
be duly and validly issued, fully paid and non-assessable.
(d) The execution and delivery by the Company of this Agreement
and the Ancillary Agreements, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action and this Agreement and the Ancillary Agreements have been duly
executed and delivered by the Company. This Agreement and the Ancillary
Agreements (other than Sections 6 and 7 of the Registration Rights Agreement (as
-12-
<PAGE>
defined below), as to which no opinion need be expressed) constitute the valid
and binding obligations of the Company, enforceable in accordance with their
respective terms, subject as to enforcement of remedies to applicable
bankruptcy, insolvency, reorganization or similar laws affecting generally the
enforcement of creditors' rights and subject to a court's discretionary
authority with respect to the granting of a decree ordering specific performance
or other equitable remedies. The execution and delivery of this Agreement and
the Ancillary Agreements and the offer, issue and sale of the Shares hereunder
will not conflict with, or result in any breach of any of the terms, conditions,
or provisions of, or constitute a default under, the Articles of Incorporation
or By-laws of the Company, any applicable law or statute, or any decree,
judgment or order specifically naming the Company and known to such counsel.
(e) Except as obtained and in effect at the Closing, no consent,
approval, order or authorization of, or registration, qualification,
designation, declaration, or filing with, any governmental authority (other than
filings required to be made after the Closing under applicable federal and state
securities laws) is required on the part of the Company in connection with the
execution and delivery of this Agreement, or the offer, issue, sale and delivery
of the Shares, or shares of Series A Common Stock issuable upon conversion of
the Shares, or the other transactions to be consummated at the Closing pursuant
to this Agreement.
(f) Based on the representations of each of the Purchasers in Section
4, the offer, issuance and sale of the Shares pursuant to this Agreement are
exempt from registration under the Securities Act.
(g) To such counsel's knowledge, there is no action, suit or
proceeding, or governmental inquiry or investigation, pending or threatened
against the Company.
5.4 Ancillary Agreements.
--------------------
(a) The Stockholders' Agreement attached hereto as Exhibit F (the
---------
"Stockholders' Agreement") shall have been executed and delivered by the
Company, NTL, NTI and each of the Purchasers. All such action shall have been
taken as may be necessary to elect a Board of Directors of the Company,
effective upon the Closing, in accordance with the Stockholders' Agreement.
(b) The Registration Rights Agreement attached hereto as Exhibit G
---------
(the "Registration Rights Agreement") shall have been executed and delivered by
the Company and each of the Purchasers.
-13-
<PAGE>
(c) The Additional Agreements attached hereto as Exhibit H (the
---------
"Additional Agreements") shall have been executed and delivered by each of the
other parties named therein.
5.5 Certificates and Documents. The Company shall have delivered to the
--------------------------
Special Purchaser Counsel:
(a) The Articles of Incorporation of the Company, as amended and in
effect as of the Closing Date (including the Articles of Amendment and
Restatement), certified by the Secretary of State of the State of Maryland;
(b) Certificates, as of the most recent practicable dates, as to the
corporate good standing of the Company issued by the Secretary of State of the
State of Maryland and the Secretaries of State of each of the jurisdictions
listed on Exhibit E attached hereto;
---------
(c) By-laws of the Company, certified by its Secretary or Assistant
Secretary as of the Closing Date; and
(d) Resolutions of the Board of Directors of the Company (the "Board
of Directors"), authorizing and approving all matters in connection with this
Agreement and the transactions contemplated hereby, certified by the Secretary
or Assistant Secretary of the Company as of the Closing Date.
5.6 Compliance Certificate. The Company shall have delivered to the
----------------------
Purchasers a certificate, executed by the President of the Company, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
Sections 5.1, 5.2, 5.4 and 5.5 of this Agreement.
5.7 Other Matters. All corporate and other proceedings in connection
-------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be reasonably satisfactory in
substance and form to the Purchasers and Special Purchaser Counsel, and the
Purchasers and Special Purchaser Counsel shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.
5.8 Proceeds. The Company shall have received at least $20,000,000
--------
from the sale and issuance of the Shares to the Purchasers.
6. Conditions to the Obligations of the Company. The obligations of the
--------------------------------------------
Company under Section 1.2 of this Agreement are subject to fulfillment, or the
waiver, of the following conditions on or before the Closing:
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<PAGE>
6.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of the Purchasers contained in Section 4 shall be true on and as
of the Closing Date with the same effect as though such representations and
warranties had been made on and as of that date.
6.2 Compliance with Securities Laws. The Company shall be satisfied
-------------------------------
that the offer and sale to the Purchasers shall be qualified or exempt from
registration or qualification under all applicable federal and state securities
laws.
6.3 Stockholders' Agreement. The Stockholders' Agreement shall have
-----------------------
been executed and delivered by each of the Purchasers.
6.4 Registration Rights Agreement. The Registration Rights Agreement
-----------------------------
shall have been executed and delivered by each of the Purchasers.
6.5 Additional Agreements. The Additional Agreements shall have been
---------------------
executed and delivered by each of the parties thereto other than the Company.
7. Covenants of the Company.
------------------------
7.1 Inspection and Observation. The Company shall permit each Purchaser,
--------------------------
or any authorized representative thereof, to visit and inspect the properties of
the Company, including its corporate and financial records, and to discuss its
business and finances with officers of the Company, during normal business hours
following reasonable notice and as often as may be reasonably requested.
7.2 Financial Statements and Other Information.
------------------------------------------
(a) The Company shall deliver to each Purchaser:
(i) prior to the beginning of each budget year, an annual
budget of the Company;
(ii) within 120 days after the end of each fiscal year of the
Company, an audited balance sheet of the Company as at the end of such year and
audited statements of income, stockholders' equity and of cash flows of the
Company for such year, certified by certified public accountants of established
national reputation selected by the Company, and prepared in accordance with
United States generally accepted accounting principles;
(iii) within 45 days after the end of each fiscal quarter of the
Company, an unaudited balance sheet of the Company as at the end of such
quarter,
-15-
<PAGE>
and unaudited statements of income, stockholders' equity and of cash flows of
the Company for such fiscal quarter and for the current fiscal year to the end
of such fiscal quarter;
(iv) promptly upon receipt thereof, any report, so-called
"management letter," and any other communication submitted to the Company by its
independent public accountants relating to the business, prospects or financial
condition of the Company; and
(v) with reasonable promptness, such material information as the
Company delivers to the Board of Directors of the Company.
(b) So long as any Purchaser owns Shares having an aggregate value of
at least U.S. $1,000,000, the Company shall deliver to such Purchaser, promptly
upon transmission thereof, copies of Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q and any current Reports on Form 8-K, in definitive form
which it files or which it is or may be required to file with the Securities and
Exchange Commission.
(c) The foregoing financial statements shall be prepared on a
consolidated basis if the Company then has any subsidiaries. The financial
statements delivered pursuant to clause (iii) of paragraph (a) shall be
accompanied by a certificate of the Chief Financial Officer of the Company
stating that such statements have been prepared in accordance with United States
generally accepted accounting principles consistently applied (except as noted)
and fairly present the financial condition and results of operations of the
Company at the date thereof and for the periods covered thereby.
7.3 Termination of Covenants. The covenants of the Company contained
------------------------
in Sections 7.1 and 7.2 shall terminate, and be of no further force or effect,
upon the earlier of (a) the effective date of a registration statement filed by
the Company under the Securities Act relating to a Qualified Initial Public
Offering (as that term is defined in the Company's Articles of Amendment and
Restatement) or (b) when the Company first becomes subject to the periodic
reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
7.4 Corporate Existence, Licenses and Permits; Maintenance of
---------------------------------------------------------
Properties. So long as any Shares shall remain outstanding, the Company will at
- ----------
all times do or cause to be done all things necessary to maintain, preserve and
renew its existence as a corporation organized under the laws of a state of the
United States of America, preserve and keep in force and effect, and cause each
of the Canadian Subsidiary, any other corporation in which the Company owns or
controls, directly or
-16-
<PAGE>
indirectly, the majority of the capital stock, and any other partnership, joint
venture or other non-corporate business enterprise in which the Company owns,
directly or indirectly, the majority equity interest (individually, a
"Subsidiary" and collectively, the "Subsidiaries") its Subsidiaries to preserve
and keep in force and effect, all licenses and permits necessary and material to
the conduct of the business of the Company and its consolidated Subsidiaries,
taken as a whole, and to maintain and keep, and cause each of its Subsidiaries
to maintain and keep, its and their respective properties in good repair,
working order and condition (except for normal wear and tear), and from time to
time to make all needful and proper repairs, renewals and replacements,
including without limitation all trade name and trademark registration renewals,
so that any business material to the Company carried on in connection therewith
may be properly and advantageously conducted at all times. In furtherance of the
foregoing, the Company shall also take commercially reasonable steps to protect
its Intellectual Property Rights. In addition to the foregoing, it is agreed
that, if at any time requested by the directors elected by the Purchasers, the
Company shall pursue any claims which it might have under the indemnification
provisions extended by Nortel to the Company pursuant to the Additional
Agreements or otherwise enforce its rights under the Additional Agreements.
7.5 Taxes. So long as any Shares shall remain outstanding, the
-----
Company will duly pay and discharge, and cause each of its Subsidiaries duly to
pay and discharge, all taxes, assessments and governmental charges upon or
against the Company or its Subsidiaries or their respective properties, in each
case before the same become delinquent and before penalties accrue thereon,
unless and to the extent that the same are being contested in good faith and by
appropriate proceedings and the Company and its Subsidiaries shall have set
aside on their books adequate reserves with respect thereto.
7.6 Insurance. So long as any Shares shall remain outstanding, the
---------
Company will apply for and continue in force, or cause to be applied for and
continued in force, adequate insurance covering the respective risks of the
Company and its Subsidiaries of such types and in such amounts and with such
deductibles as are customary for other corporations engaged in similar lines of
business and with good and responsible insurance companies.
7.7 Books and Accounts. So long as any Shares shall remain outstanding,
------------------
the Company will, and will cause each Subsidiary to, maintain proper books of
record and account in which full, true and correct entries shall be made of its
transactions and set aside on its books from its earnings for each fiscal year
all such proper reserves as in each case shall be required in accordance with
generally accepted accounting principles.
-17-
<PAGE>
7.8 Compliance with Environmental Laws. So long as any Shares shall
----------------------------------
remain outstanding, the Company will not, and will not permit any Subsidiary to,
except in compliance with applicable Environmental Laws, or in the event of any
noncompliance with applicable Environmental Laws, only to the extent which such
noncompliance would not have a material adverse effect on the business,
operations or financial condition of the Company, individually, or of the
Company and its Subsidiaries, taken as a whole, (a) use any of the property of
the Company or any Subsidiary or any portion thereof for the handling,
processing, storage or disposal of hazardous substances, (b) cause or permit to
be located on any of the property any underground tank or other underground
storage receptacle for hazardous substances, (c) generate any hazardous
substances on any of the property, (d) conduct any activity on the property or
use any property in any manner so as to cause a release (i.e., releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, disposing or dumping) or threatened release of hazardous
substances on, upon or into the property or (e) otherwise conduct any activity
on the property or use any property in any manner that would violate any
Environmental Law or bring such property in violation of any Environmental Law.]
7.9 Conflict. So long as any Shares shall remain outstanding, the
--------
Company will not permit any action to be taken by the Company or its
subsidiaries that constitutes a conflict of interest between the Company or any
of its subsidiaries on one hand and Nortel or any other party on the other
without the consent of a majority of the directors of the Company which are not
nominated by the party with a conflict, provided, however, (i) effectuation of
transactions contemplated by the Additional Agreements in accordance with their
respective terms or (ii) arrangements in the ordinary course not exceeding
$500,000 in any single issuance shall not be deemed to constitute a conflict of
interest hereunder.
7.10 Special Board Approval. So long as any Shares shall remain
----------------------
outstanding, the Company shall not, and shall cause each of its Subsidiaries not
to, without the approval of a majority of the Board of Directors, including at
least one director appointed by the Purchasers, of the Company:
(a) Enter into any sale, disposition, license or other transfer of
assets of the Company, in one or more related transactions, having an
aggregate value of $1,000,000 or more other than in the ordinary course of
business;
(b) Transfer any material assets from the Canadian Subsidiary or
any other Subsidiary of the Company; or
-18-
<PAGE>
(c) Enter into or guarantee any indebtedness in aggregate
principal excess amount of $1,000,000 or more except for trade
accounts arising out of the ordinary course of business.
7.11 Non-Competition and Non-Solicitation.
------------------------------------
(a) For a period of three years from the date hereof, Nortel agrees
that it, directly or through any affiliate, will not establish or engage in any
business substantially similar to the Entrust Business provided, however, that
-------- -------
nothing herein shall (i) restrict or prevent Nortel or any of its affiliates
from being a distributor, reseller or otherwise maintaining a strategic
relationship with the Company; (ii) restrict the access to intellectual property
which Nortel may have pursuant to any Additional Agreement for internal use; or
(iii) limit Nortel or any affiliate from selling hardware or software products
bundling software with functionality corresponding to that of products of the
Company, if that functionality is incidental to such products of Nortel or its
affiliates.
(b) For a period of two years from the date hereof, Nortel agrees that
it shall not hire any of the persons set forth on Exhibit I attached hereto,
---------
unless (i) such person shall first have been involuntarily terminated by the
Company or (ii) such person shall have ceased to be an employee of the Company
for a period of not less than four months.
(c) For a period of two years from the date hereof, Nortel agrees that
it will not solicit or interfere with, or endeavor to entice away, any person
employed by the Company, or any person who otherwise performs services on a
regular basis for the Company, provided, however, that the regular recruitment
-------- -------
program or general advertising by Nortel shall not be deemed solicitation for
the purposes of this clause (c).
7.12 Further Assurances.
------------------
(a) Nortel shall from time to time and at all times hereafter make,
do, execute or cause or procure to be made, done and executed such further acts,
deeds, conveyances, consents and assurances, without further consideration,
which may reasonably be required to effect the transactions contemplated by the
Additional Agreements and to fully vest in the Company the Entrust Assets,
including the Intellectual Property, to the full extent of Nortel's legal
capacity to do so.
(b) For the period continuing 270 days from the Closing Date, any
third party costs associated with such actions that Nortel or the Company may be
required to take hereunder shall be borne up to a maximum of $75,000 by the
-19-
<PAGE>
Company and the remainder by Nortel. Each party shall pay its own costs and
expenses incurred in connection with such activities.
(c) Notwithstanding the provisions of Section 7.12(b), Nortel shall
deliver, at its expense and within 30 days of the Closing Date, opinions of
counsel (which may include inside counsel of NTL and NTI), which opinions shall
be reasonably acceptable to Dewey Ballantine, Special Purchaser Counsel,
generally to the effect that the execution and delivery of the Nortel Agreements
(as defined below) by NTL and NTI, as the case may be, and the consummation of
the transactions contemplated thereby, have been duly authorized by all
necessary corporate action and the Nortel Agreements have been duly executed and
delivered by NTL and NTI, as the case may be, and that the Nortel Agreements
constitute the valid and binding obligations of NTL and NTI, as the case may be,
enforceable in accordance with their respective terms. For purposes of this
paragraph, the "Nortel Agreements" shall mean the Stock Purchase Agreement and
each of the Additional Agreements (other than the Support Agreement).
8. Transfer of Shares.
------------------
8.1 Restricted Shares. "Restricted Shares" means (a) the Shares, (b)
-----------------
the shares of Series A Common Stock issued or issuable upon conversion of the
Shares, and (c) any other shares of capital stock of the Company issued in
respect of such shares (as a result of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events); provided, however,
-------- -------
that shares of Series A Common Stock which are Restricted Shares shall cease to
be Restricted Shares (a) upon any sale pursuant to the Registration Rights
Agreement, Section 4(1) of the Securities Act or Rule 144 under the Securities
Act or, (b) at such time as they become eligible for sale under Rule 144(k)
under the Securities Act.
8.2 Requirements for Transfer.
-------------------------
(a) Restricted Shares shall not be sold or transferred unless either
(i) they first shall have been registered under the Securities Act, or (ii) the
Company first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to the Company, to the effect that such sale or transfer
is exempt from the registration requirements of the Securities Act.
(b) Notwithstanding the foregoing, no registration or opinion of
counsel shall be required for a transfer (i) by any Purchaser which is a
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, if the
-20-
<PAGE>
transferee agrees in writing to be subject to the terms of this Section 8 to the
same extent as if he were an original Purchaser hereunder, (ii) to any trust
beneficiary, in the case of any Purchaser that is a trust, (iii) to any member,
in the case of any Purchaser that is a limited liability company or (iv) made in
accordance with Rule 144 under the Securities Act.
8.3 Legend. Each certificate representing Restricted Shares shall
------
bear a legend substantially in the following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, and may not be offered, sold or
otherwise transferred, pledged or hypothecated unless and until such shares
are registered under such Act or an opinion of counsel satisfactory to the
Company is obtained to the effect that such registration is not required."
The foregoing legend shall be removed from the certificates representing
any Restricted Shares, at the request of the holder thereof, at such time as
they become eligible for resale pursuant to Rule 144(k) under the Securities
Act.
8.4 Rule 144A Information. The Company shall, at all times during
---------------------
which it is neither subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under
the Exchange Act, upon the written request of any Purchaser, provide in writing
to such Purchaser and to any prospective transferee of any Restricted Shares of
such Purchaser the information concerning the Company described in Rule
144A(d)(4) under the Securities Act ("Rule 144A Information"). The Company's
obligations under this Section 8.4 shall at all times be contingent upon receipt
from the prospective transferee of Restricted Shares of a written agreement to
take all reasonable precautions to safeguard the Rule 144A Information from
disclosure to anyone other than persons who will assist such transferee in
evaluating the purchase of any Restricted Shares.
9. Miscellaneous.
-------------
9.1 Successors and Assigns. This Agreement, and the rights and
----------------------
obligations of each Purchaser hereunder, may be assigned by such Purchaser to
any person or entity to which Shares are transferred by such Purchaser, and such
transferee shall be deemed a "Purchaser" for purposes of this Agreement;
provided that the transferee provides written notice of such assignment to the
Company.
-21-
<PAGE>
9.2 Confidentiality. Each Purchaser agrees that he or it will keep
---------------
confidential and will not disclose or divulge or use any confidential,
proprietary or secret information which such Purchaser may obtain from the
Company pursuant to the Memorandum or financial statements, reports and other
materials submitted by the Company to such Purchaser pursuant to this Agreement,
or pursuant to visitation or inspection rights granted hereunder, unless such
information is known, or until such information becomes known, to the public;
provided, however, that a Purchaser may disclose such information (a) to its
- -------- -------
attorneys, accountants, consultants, and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (b) to any prospective purchaser of any Shares from such Purchaser as
long as such prospective purchaser agrees in writing to be bound by the
provisions of this Section or (c) to any affiliate of such Purchaser or to a
partner, beneficiary, member, shareholder or subsidiary of such Purchaser who
agrees in writing to be bound by the provisions of this Agreement.
9.3 Survival of Representations and Warranties. All agreements,
------------------------------------------
representations and warranties contained herein shall survive the execution and
delivery of this Agreement and the closing of the transactions contemplated
hereby.
9.4 Expenses. The Company shall pay, at the Closing, (i) the
--------
reasonable costs and expenses of Dewey Ballantine, the Special Purchaser
Counsel, in connection with the preparation of this Agreement and the other
agreement contemplated hereby and the closing of the transactions contemplated
hereby, up to a maximum of $85,000 and (ii) the reasonable itemized out-of-
pocket costs and expenses of each Purchaser, up to an aggregate maximum for all
Purchasers of $20,000.
9.5 Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (a) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (b) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at Entrust Technologies Inc., 2 Constellation Crescent,
Nepean, Ontario, Canada K2G 5J9, Attention: President, or at such other address
or addresses as may have been furnished in writing by the Company to the
Purchasers, with a copy to John A. Burgess, Esq., Hale and Dorr, 60 State
Street, Boston, Massachusetts 02109; or
If to a Purchaser, at his or its address set forth on Exhibit A, or at such
---------
other address or addresses as may have been furnished to the Company in writing
by such
-22-
<PAGE>
Purchaser, with a copy to Richard Stenberg, Esq., Dewey Ballantine, 1301 Avenue
of the Americas, New York, New York 10019.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section 9.5.
9.6 Brokers. Each Purchaser (a) represents and warrants to the other
-------
parties hereto that he or it has retained no finder or broker in connection with
the transactions contemplated by this Agreement, and (b) will indemnify and save
the other parties harmless from and against any and all claims, liabilities or
obligations with respect to brokerage or finders' fees or commissions, or
consulting fees in connection with the transactions contemplated by this
Agreement asserted by any person on the basis of any statement or representation
alleged to have been made by such indemnifying party. The Company (a)
represents and warrants to the other parties hereto that except for its
retention of DLJ, it has retained no finder or broker in connection with the
transactions contemplated by this Agreement and (b) will indemnify and save the
other parties harmless from and against any and all claims, liabilities or
obligations with respect to brokerage or finders' fees or commissions, or
consulting fees in connection with the transactions contemplated by this
Agreement asserted by any person on the basis of any statement or representation
alleged to have been made by such indemnifying party.
9.7 Entire Agreement. This Agreement and the Ancillary Agreements
----------------
embody the entire agreement and understanding between the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements and
understandings relating to such subject matter.
9.8 Amendments and Waivers. Except as otherwise expressly set forth
----------------------
in this Agreement, any term of this Agreement may be amended and the observance
of any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), with the written consent of
the Company and Purchasers holding at least two-thirds of the shares of Series A
Common Stock issued or issuable upon conversion of the Shares. Any amendment or
waiver effected in accordance with this Section 9.8 shall be binding upon each
holder of any Shares (including shares of Series A Common Stock into which such
Shares have been converted), each future holder of all such securities and the
-23-
<PAGE>
Company. No waivers of or exceptions to any term, condition or provision of
this Agreement, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition or
provision.
9.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
9.10 Section Headings. The section headings are for the convenience
----------------
of the parties and in no way alter, modify, amend, limit, or restrict the
contractual obligations of the parties.
9.11 Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
9.12 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Maryland, without giving
effect to conflict-of-laws principles.
-24-
<PAGE>
ENTRUST TECHNOLOGIES INC.
By: /s/ John A. Ryan
----------------------------------
Name: John A. Ryan
Title: President
NORTHERN TELECOM LIMITED
By: /s/ Peter W. Currie
----------------------------------
Name: Peter W. Currie
Title: Senior Vice President and
Chief Financial Officer
By: /s/ David D. Archibald
----------------------------------
Name: David D. Archibald
Title: Vice President and
Deputy General Counsel
PURCHASERS:
OLYMPUS EXECUTIVE FUND, L.P.
By: OEF, L.P., its general partner
By: RSM Corporation, its managing
general partner
By: /s/ Robert S. Morris
----------------------------------
Name: Robert S. Morris
Title: President
-25-
<PAGE>
OLYMPUS GROWTH FUND II, L.P.
By: OGP II, L.P., its general partner
By: RSM Corporation, its managing
general partner
By: /s/ Robert S. Morris
----------------------------------
Name: Robert S. Morris
Title: President
ORCHID & CO., nominee for T. Rowe
Price Threshold Fund III, L.P.
By: T. Rowe Price Threshold Fund
Associates, Inc., General Partner
By: /s/ Douglas O. Hickman
----------------------------------
Name: Douglas O. Hickman
Title: President
SOCIETE GENERALE INVESTMENT
CORPORATION
By: /s/ David I. Brunson
----------------------------------
Name: David I. Brunson
Title: President
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, AS
TRUSTEE OF THE MULTI-MARKET
SPECIAL INVESTMENT TRUST
FUND OF MORGAN GUARANTY
TRUST COMPANY OF NEW YORK
By: /s/ Ronald G. Hodge
----------------------------------
Name: Ronald G. Hodge
Title: Vice President
-26-
<PAGE>
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, AS
TRUSTEE OF THE COMMINGLED
PENSION TRUST FUND
(MULTI-MARKET SPECIAL
INVESTMENT FUND II) OF
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/ Ronald G. Hodge
----------------------------------
Name: Ronald G. Hodge
Title: Vice President
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, AS
INVESTMENT MANAGER AND
AGENT FOR THE ALFRED P.
SLOAN FOUNDATION
(MULTI-MARKET ACCOUNT)
By: /s/ Ronald G. Hodge
----------------------------------
Name: Ronald G. Hodge
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ Robert E. Diemar, Jr.
----------------------------------
Name: Robert E. Diemar, Jr.
Title:
-27-
<PAGE>
Exhibit 10.2
Entrust Technologies Inc.
SERIES B NON-VOTING COMMON STOCK PURCHASE AGREEMENT
dated January 31, 1997
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page No.
<S> <C>
1. Authorization and Sale of Shares........................................................1
1.1 Authorization.................................................................1
1.2 Sale of Shares................................................................1
2. The Closing.............................................................................1
3. Representations of the Company..........................................................1
3.1 Exception to Section 3.2 of the Purchase Agreement............................2
3.2 Exception to Section 3.4 of the Purchase Agreement............................3
3.3 Exception to Section 3.5 of the Purchase Agreement............................3
3.4 Exception to Section 3.6 of the Purchase Agreement............................4
4. Representations of the Purchaser........................................................4
4.1 Investment....................................................................4
4.2 Authority.....................................................................4
4.3 Experience....................................................................5
4.4 Accredited Investor Status....................................................5
5. Conditions to the Obligations of the Parties............................................5
5.1 Conditions to the Obligation of the Purchaser.................................5
5.2 Condition to the Obligation of the Company....................................6
6. Covenants of the Company................................................................6
6.1 Exception to Section 7.11 of the Purchase Agreement...........................6
6.2 Exception to Section 7.12(b) of the Purchase Agreement........................6
7. Transfer of Shares......................................................................6
7.1 Restricted Shares.............................................................6
7.2 Requirements for Transfer.....................................................6
7.3 Legend........................................................................7
7.4 Rule 144A Information.........................................................7
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
8. Miscellaneous...........................................................................7
8.1 Successors and Assigns........................................................7
8.2 Confidentiality...............................................................8
8.3 Survival of Representations and Warranties....................................8
8.4 Notices.......................................................................8
8.5 Brokers.......................................................................9
8.6 Entire Agreement..............................................................9
8.7 Amendments and Waivers........................................................9
8.8 Counterparts.................................................................10
8.9 Section Headings.............................................................10
8.10 Severability.................................................................10
8.11 Governing Law................................................................10
</TABLE>
EXHIBITS
- --------
Exhibit A - Articles of Amendment
Exhibit B - List of Stockholders
Exhibit C - Exceptions of Representations
Exhibit D - Form of Stockholder Agreement and Waiver
-ii-
<PAGE>
SERIES B NON-VOTING COMMON STOCK PURCHASE AGREEMENT
---------------------------------------------------
This Agreement dated as of January 31, 1997 is entered into by and among
Entrust Technologies Inc., a Maryland corporation (the "Company"), and Societe
Generale Investment Corporation (the "Purchaser"). Except as otherwise provided
herein, all capitalized terms have the same meaning as in the Series B Common
Stock Purchase Agreement dated as of December 31, 1996 entered into by and among
the Company and the individuals and entities listed on Exhibit A thereto (the
---------
"Purchase Agreement").
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. Authorization and Sale of Shares.
--------------------------------
1.1 Authorization. The Company has, or before the Closing (as
-------------
defined in Section 2) will have, duly authorized the sale and issuance, pursuant
to the terms of this Agreement, of 2,500 shares of its Series B Non-Voting
Common Stock, $.01 par value per share (the "Series B Non-Voting Common Stock"),
having the rights, restrictions, privileges and preferences set forth in the
Articles of Amendment to the Charter attached hereto as Exhibit A (the "Articles
---------
of Amendment"). The Company has, or before the Closing will have, adopted and
filed the Articles of Amendment with the State Department of Assessments and
Taxation of the State of Maryland.
1.2 Sale of Shares. Subject to the terms and conditions of this
--------------
Agreement, at the Closing the Company will sell and issue to the Purchaser, and
the Purchaser will purchase, 2,500 shares of Series B Non-Voting Common Stock
for the purchase price of $100 per share. The shares of Series B Non-Voting
Common Stock being sold under this Agreement are referred to as the "Shares."
2. The Closing. The closing ("Closing") of the sale and purchase of the
-----------
Shares under this Agreement shall take place at the offices of Hale and Dorr
LLP, 60 State Street, Boston, Massachusetts at 10:00 a.m. on January 31, 1997.
At the Closing, the Company shall deliver to the Purchaser a certificate for the
Shares being purchased by the Purchaser, registered in the name of the
Purchaser, against payment to the Company of the purchase price therefor, by
wire transfer, check, or other method acceptable to the Company. The date of
the Closing is hereinafter referred to as the "Closing Date."
3. Representations of the Company. Except as set forth below or in
------------------------------
Exhibit C hereto, each of the representations and warranties contained in
- ---------
Sections 3.1 to 3.26 of the Purchase Agreement is true and correct on and as of
the date hereof with the
<PAGE>
same effect as though such representation or warranty had been made on and as of
the date hereof. Except as set forth below or in Exhibit C hereto, such
---------
representations and warranties, and the exhibits referred to therein, are
incorporated by reference herein and shall be deemed to be a part of this
Agreement; provided, however, that (a) any defined term contained in the
representations and warranties that is redefined in this Agreement shall have
the meaning set forth in this Agreement and (b) all references to Exhibit C
---------
contained in such representations and warranties shall be deemed to refer to
Exhibit C to the Purchase Agreement.
- ---------
3.1 Exception to Section 3.2 of the Purchase Agreement. Section 3.2
--------------------------------------------------
of the Purchase Agreement is hereby deleted in its entirety and the following
Section 3.2 is inserted in lieu thereof:
"3.2 Capitalization. The authorized capital stock of the Company
--------------
(immediately prior to the Closing) consists of (a) 15,000,000 shares of
Series A Common Stock, $.01 par value per share (the "Series A Common
Stock"), of which 507,500 shares are issued and outstanding, (b) 260,000
shares of Series B Common Stock, $.01 par value per share, of which 257,500
shares are issued and outstanding (the "Series B Common Stock"), (c)
260,000 shares of Series B Non-Voting Common Stock, none of which shares
are issued and outstanding, (d) 2,500,000 shares of Special Voting Stock,
$.01 par value per share, of which 192,500 shares are issued and
outstanding, and (e) 500,000 shares of Preferred Stock, $.01 par value per
share, none of which shares are issued or outstanding (such shares of
capital stock of the Company referred to in clauses (a), (b), (c), (d) and
(e) of this sentence being collectively referred to herein as the "Company
Capital Stock"). The authorized capital stock of the Canadian Subsidiary
(immediately prior to the Closing) consists of (a) an unlimited number of
common shares, without par value per share, of which 100,000 shares are
issued and outstanding (the "Canadian Common Shares"), (b) an unlimited
number of exchangeable shares, without par value per share, of which
192,500 shares are issued and outstanding (the "Exchangeable Shares"), and
(c) an unlimited number of special shares, without par value per share, of
which no shares are issued and outstanding (the "Special Shares"), which,
together with the Canadian Common Shares and the Exchangeable Shares, are
referred to herein as the "Canadian Capital Stock." The Board of Directors
of the Company has declared (a) a ten-for-one split of the Series A Common
Stock in the form of a stock dividend in which holders of record of Series
A Common Stock on February 5, 1997 (the "Record Date") will receive, on or
about February 7, 1997 (the "Distribution Date"), nine shares of Series A
Common Stock for each share of Series A Common Stock held as of the Record
Date and (b) a ten-for-one split of the Special Voting Stock in the form of
a
-2-
<PAGE>
stock dividend in which holders of record of Special Voting Stock on the
Record Date will receive, on or about the Distribution Date, nine shares of
Special Voting Stock for each share of Special Voting Stock held as of the
Record Date. The Board of Directors of the Canadian Subsidiary has
declared a ten-for-one split of the Exchangeable Shares in the form of a
stock dividend in which holders of record of Exchangeable Shares on the
Record Date will receive, on or about the Distribution Date, nine
Exchangeable Shares for each Exchangeable Share held as of the Record Date.
All of the issued and outstanding shares of Company Capital Stock and
Canadian Capital Stock (together, the "Entrust Capital Stock") have been
duly authorized and validly issued, are fully paid and nonassessable.
Except as otherwise waived or as set forth in Exhibit C to the Purchase
---------
Agreement or pursuant to the terms of the Entrust Capital Stock, (a) no
subscription, warrant, option, convertible security or other right
(contingent or otherwise) to purchase or acquire any shares of Entrust
Capital Stock is authorized or outstanding, (b) neither the Company nor the
Canadian Subsidiary has any obligation (contingent or otherwise) to issue
any subscription, warrant, option, convertible security or other such right
or to issue or distribute to holders of any shares of its capital stock any
evidences of indebtedness or assets of the Company or the Canadian
Subsidiary, as the case may be, and (c) neither the Company nor the
Canadian Subsidiary has any obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any shares of its capital stock or
any interest therein or to pay any dividend or make any other distribution
in respect thereof. All of the issued and outstanding shares of Entrust
Capital Stock have been offered, issued and sold by the Company or the
Canadian Subsidiary, as the case may be, in compliance with applicable
Federal, Canadian, state and provincial securities laws."
3.2 Exception to Section 3.4 of the Purchase Agreement. The
--------------------------------------------------
reference to "Exhibit D" in Section 3.4 of the Purchase Agreement shall be
---------
deemed to refer to Exhibit B of this Agreement.
---------
3.3 Exception to Section 3.5 of the Purchase Agreement. Section 3.5
--------------------------------------------------
of the Purchase Agreement is hereby deleted in its entirety and the following
Section 3.5 is inserted in lieu thereof:
"3.5 Issuance of Shares. The issuance, sale and delivery of the
------------------
Shares in accordance with this Agreement, the issuance and delivery of the
shares of Series B Common Stock issuable upon exchange of the Shares, and
the issuance and delivery of the shares of Series A Common Stock issuable
upon conversion of such shares of Series B Common Stock, have been, or will
be on or prior to the Closing, duly authorized by all
-3-
<PAGE>
necessary corporate action on the part of the Company, and all such
shares have been duly reserved for issuance. The Shares when so
issued, sold and delivered against payment therefor in accordance with
the provisions of this Agreement, the shares of Series B Common Stock
issuable upon exchange of the Shares, and the shares of Series A
Common Stock issuable upon conversion of such shares of Series B
Common Stock, when issued upon such exchange or conversion, as the
case may be, will be duly and validly issued, fully paid and non-
assessable."
3.4 Exception to Section 3.6 of the Purchase Agreement. The first
--------------------------------------------------
sentence in Section 3.6 of the Purchase Agreement is hereby deleted in its
entirety and the following sentence inserted in lieu thereof:
"The execution, delivery and performance by the Company of this
Agreement, the Stockholder Agreement and Waiver of even date hereof by
and among the Company and the persons whose signatures are set forth
therein (the "Stockholder Agreement and Waiver") and all other
agreements required to be executed by the Company on or prior to
December 31, 1996 pursuant to Section 5.4 of the Purchase Agreement
(with the Stockholder Agreement and Waiver, the "Ancillary
Agreements"), and the consummation by the Company of the transactions
contemplated hereby and thereby, have been duly authorized by all
necessary corporate action."
4. Representations of the Purchaser. The Purchaser represents and
--------------------------------
warrants to the Company as follows:
4.1 Investment. The Purchaser is acquiring the Shares, the shares of
----------
Series B Common Stock for which the Shares may be exchanged, and the shares of
Series A Common Stock into which such shares of Series B Common Stock may be
converted, for its own account for investment and not with a view to, or for
sale in connection with, any distribution thereof, nor with any present
intention of distributing or selling the same; and, except as contemplated by
this Agreement and the Exhibits hereto, the Purchaser has no present or
contemplated agreement, undertaking, arrangement, obligation, indebtedness or
commitment providing for the disposition thereof.
4.2 Authority. The Purchaser has full power and authority to enter
---------
into and to perform this Agreement in accordance with its terms. The Purchaser
represents that it has not been organized, reorganized or recapitalized
specifically for the purpose of investing in the Company.
-4-
<PAGE>
4.3 Experience. The Purchaser has carefully reviewed the
----------
representations concerning the Company contained in this Agreement, has read the
Company's Confidential Private Placement Memorandum, dated November 1996, and
has made detailed inquiry concerning the Company, its business and its
personnel; the officers of the Company have made available to the Purchaser any
and all written information which it has requested and have answered to the
Purchaser's satisfaction all inquiries made by the Purchaser; and the Purchaser
has sufficient knowledge and experience in investing in companies similar to the
Company so as to be able to evaluate the risks and merits of its investment in
the Company and is able financially to bear the risks thereof.
4.4 Accredited Investor Status. The Purchaser is an "accredited
--------------------------
investor" as defined in Rule 501(a) under the Securities Act.
5. Conditions to the Obligations of the Parties.
--------------------------------------------
5.1 Conditions to the Obligation of the Purchaser. The obligation of
---------------------------------------------
the Purchaser to purchase the Shares at the Closing is subject to the
fulfillment, or the waiver by the Purchaser, of each of the following conditions
on or before the Closing:
(a) Accuracy of Representations and Warranties. Each representation
------------------------------------------
and warranty contained in, or incorporated by reference in, Section 3 shall be
true on and as of the Closing Date with the same effect as though such
representation and warranty had been made on and as of that date.
(b) Performance. The Company shall have performed and complied with
-----------
all agreements and conditions contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
(c) Opinion of Counsel. The Purchaser shall have received an opinion
------------------
form Hale and Dorr LLP, counsel for the Company, dated the Closing Date,
addressed to the Purchaser, and substantially in the form delivered in
connection with the closing of the transactions contemplated by the Purchase
Agreement.
(d) Stockholder Agreement and Waiver. The Stockholder Agreement and
--------------------------------
Waiver attached hereto as Exhibit D (the "Stockholder Agreement") shall have
---------
been executed and delivered by the Company and each of the stockholders of the
Company.
(e) Certificates and Documents. The Company shall have delivered to
--------------------------
the Purchaser a certificate of the Secretary of the Company substantially in the
form delivered in connection with the closing of the transactions contemplated
by the Purchase Agreement.
-5-
<PAGE>
(f) Compliance Certificate. The Company shall have delivered to the
----------------------
Purchaser a certificate, executed by the President of the Company, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
Subsections (a), (b), (d) and (e) of Section 5.1 of this Agreement.
5.2 Condition to the Obligation of the Company. The obligation of
------------------------------------------
the Company under Section 1.2 of this Agreement is subject to the execution and
delivery of the Stockholder Agreement by each of the stockholders of the
Company.
6. Covenants of the Company. Except as set forth below, the Company
------------------------
agrees to all covenants contained in Section 7 of the Purchase Agreement other
than the covenants contained in Sections 7.10 and 7.12(c) of the Purchase
Agreement. Except as set forth below, such covenants (including the termination
provisions of Section 7.3 of the Purchase Agreement) are incorporated by
reference herein and shall be deemed to be a part of this Agreement; provided,
however, that any defined term contained in the covenants that is redefined in
this Agreement shall have the meaning set forth in this Agreement.
6.1 Exception to Section 7.11 of the Purchase Agreement. All
---------------------------------------------------
references to "the date hereof" in Section 7.11 of the Purchase Agreement shall
be deemed to refer to December 31, 1996.
6.2 Exception to Section 7.12(b) of the Purchase Agreement. The
------------------------------------------------------
reference to "the Closing Date" in Section 7.12(b) of the Purchase Agreement
shall be deemed to refer to December 31, 1996.
7. Transfer of Shares.
------------------
7.1 Restricted Shares. "Restricted Shares" means (a) the Shares, (b)
-----------------
the shares of Series B Common Stock issued or issuable in exchange for the
Shares, (c) the shares of Series A Common Stock issued or issuable upon
conversion of such shares of Series B Common Stock, and (d) any other shares of
capital stock of the Company issued in respect of such shares (as a result of
stock splits, stock dividends, reclassifications, recapitalizations, or similar
events).
7.2 Requirements for Transfer.
-------------------------
(a) Restricted Shares shall not be sold or transferred unless either
(i) they first shall have been registered under the Securities Act, or (ii) the
Company first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to the Company, to the effect that such sale or transfer
is exempt from the registration requirements of the Securities Act.
-6-
<PAGE>
(b) Notwithstanding the foregoing, no registration or opinion of
counsel shall be required for a transfer (i) by any Purchaser which is a
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, if the transferee agrees in writing to be subject to
the terms of this Section 7 to the same extent as if he were an original
Purchaser hereunder, (ii) to any trust beneficiary, in the case of any Purchaser
that is a trust, (iii) to any member, in the case of any Purchaser that is a
limited liability company or (iv) made in accordance with Rule 144 under the
Securities Act.
7.3 Legend. Each certificate representing Restricted Shares shall
------
bear a legend substantially in the following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, and may not be offered, sold or
otherwise transferred, pledged or hypothecated unless and until such shares
are registered under such Act or an opinion of counsel satisfactory to the
Company is obtained to the effect that such registration is not required."
The foregoing legend shall be removed from the certificates representing
any Restricted Shares, at the request of the holder thereof, at such time as
they become eligible for resale pursuant to Rule 144(k) under the Securities
Act.
7.4 Rule 144A Information. The Company shall, at all times during
---------------------
which it is neither subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under
the Exchange Act, upon the written request of the Purchaser, provide in writing
to the Purchaser and to any prospective transferee of any Restricted Shares of
the Purchaser the Rule 144A Information. The Company's obligations under this
Section 7.4 shall at all times be contingent upon receipt from the prospective
transferee of Restricted Shares of a written agreement to take all reasonable
precautions to safeguard the Rule 144A Information from disclosure to anyone
other than persons who will assist such transferee in evaluating the purchase of
any Restricted Shares.
8. Miscellaneous.
-------------
8.1 Successors and Assigns. This Agreement, and the rights and
----------------------
obligations of the Purchaser hereunder, may be assigned by the Purchaser to any
person or entity to which Shares are transferred by the Purchaser, and such
transferee shall be deemed a "Purchaser" for purposes of this Agreement;
provided that the transferee provides written notice of such assignment to the
Company.
-7-
<PAGE>
8.2 Confidentiality. The Purchaser agrees that it will keep
---------------
confidential and will not disclose or divulge or use any confidential,
proprietary or secret information which the Purchaser may obtain from the
Company pursuant to the Memorandum or financial statements, reports and other
materials submitted by the Company to the Purchaser pursuant to this Agreement,
or pursuant to visitation or inspection rights granted hereunder, unless such
information is known, or until such information becomes known, to the public;
provided, however, that the Purchaser may disclose such information (a) to its
- -------- -------
attorneys, accountants, consultants, and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (b) to any prospective purchaser of any Shares from the Purchaser as
long as such prospective purchaser agrees in writing to be bound by the
provisions of this Section 8.2 or (c) to any affiliate of the Purchaser or to a
partner, beneficiary, member, shareholder or subsidiary of the Purchaser who
agrees in writing to be bound by the provisions of this Agreement.
8.3 Survival of Representations and Warranties. All agreements,
------------------------------------------
representations and warranties contained herein, or incorporated by reference
herein, shall survive the execution and delivery of this Agreement and the
closing of the transactions contemplated hereby.
8.4 Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (a) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (b) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at Entrust Technologies Inc., 2 Constellation Crescent,
Nepean, Ontario, Canada K2G 5J9, Attention: President, or at such other address
or addresses as may have been furnished in writing by the Company to the
Purchaser, with a copy to John A. Burgess, Esq., Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109; or
If to the Purchaser, at Societe Generale Investment Corporation, 1221
Avenue of the Americas, Tenth Floor, New York, New York 10020, Attention: David
I. Brunson, or at such other address or addresses as may have been furnished to
the Company in writing by the Purchaser, with a copy to Richard Stenberg, Esq.,
Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended.
-8-
<PAGE>
Any party may change the address to which notices, requests, consents or other
communications hereunder are to be delivered by giving the other parties notice
in the manner set forth in this Section 8.4.
8.5 Brokers. The Purchaser (a) represents and warrants to the
-------
Company that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement, and (b) will indemnify and save the
Company harmless from and against any and all claims, liabilities or obligations
with respect to brokerage or finders' fees or commissions, or consulting fees in
connection with the transactions contemplated by this Agreement asserted by any
person on the basis of any statement or representation alleged to have been made
by such indemnifying party. The Company (a) represents and warrants to the
Purchaser that except for its retention of DLJ, it has retained no finder or
broker in connection with the transactions contemplated by this Agreement and
(b) will indemnify and save the Purchaser harmless from and against any and all
claims, liabilities or obligations with respect to brokerage or finders' fees or
commissions, or consulting fees in connection with the transactions contemplated
by this Agreement asserted by any person on the basis of any statement or
representation alleged to have been made by such indemnifying party.
8.6 Entire Agreement. This Agreement, together with the provisions
----------------
of the Purchase Agreement specifically incorporated by reference herein,
embodies the entire agreement and understanding between the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements and
understandings relating to such subject matter.
8.7 Amendments and Waivers. Except as otherwise expressly set forth
----------------------
in this Agreement, any term of this Agreement may be amended and the observance
of any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), with the written consent of
the Company and Purchasers holding at least two-thirds of the shares of Series B
Common Stock issued or issuable upon exchange of the Shares. Any amendment or
waiver effected in accordance with this Section 8.7 shall be binding upon all
Purchasers, each future holder of any Shares (including shares of Series B
Common Stock into which such Shares have been converted), and the Company. No
waivers of or exceptions to any term, condition or provision of this Agreement,
in any one or more instances, shall be deemed to be, or construed as, a further
or continuing waiver of any such term, condition or provision.
-9-
<PAGE>
8.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
8.9 Section Headings. The section headings are for the convenience
----------------
of the parties and in no way alter, modify, amend, limit, or restrict the
contractual obligations of the parties.
8.10 Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
8.11 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Maryland, without giving
effect to conflict-of-laws principles.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
ENTRUST TECHNOLOGIES INC.
By: /s/ John A. Ryan
-----------------------------
Name: John A. Ryan
Title: President
SOCIETE GENERALE INVESTMENT
CORPORATION
By: /s/ David I. Brunson
-----------------------------
Name: David I. Brunson
Title: President
<PAGE>
Exhibit 10.4
STOCKHOLDERS' AGREEMENT
-----------------------
This Agreement dated as of December 31, 1996, is entered into by and
among Entrust Technologies Inc., a Maryland corporation (the "Company"),
Northern Telecom Inc., a Delaware corporation ("NTI"), Northern Telecom Limited,
a Canadian corporation ("NTL"), and the individuals and entities listed on
Exhibit A hereto (the "Purchasers"). The Purchasers, NTI and NTL are sometimes
- ---------
collectively referred to herein as the "Stockholders."
Recitals
--------
A. The Purchasers are acquiring an aggregate of 257,500 shares of the
Company's Series B Common Stock, $.01 par value per share (the "Series B Common
Stock"), pursuant to the Series B Common Stock Purchase Agreement of even date
herewith (the "Purchase Agreement").
B. It is a condition to the obligation of the Purchasers under the
Purchase Agreement that this Agreement be executed by the parties hereto, and
the parties are willing to execute this Agreement and be bound by the provisions
hereof.
C. As used in this Agreement, the term "Shares" shall include all
shares of the Company's Series A Common Stock, $.01 par value per share (the
"Series A Common Stock"), Series B Common Stock, Special Voting Stock, $.01 par
value per share (the "Special Voting Stock"), and Preferred Stock, $.01 par
value per share (the "Preferred Stock"), as well as the Exchangeable Shares of
Entrust Technologies Limited, an Ontario corporation (the "Canadian
Subsidiary"), (the "Exchangeable Shares"), outstanding, whether now owned or
hereafter acquired by the Stockholders. Other terms used as defined terms and
not otherwise defined in this Agreement shall have the meanings set forth in the
Articles of Amendment and Restatement of the Company (as amended, the "Articles
of Restatement"). For purposes of calculating any Purchaser's ownership of
Shares, all shares of Series B Common Stock convertible into Series A Common
Stock shall be deemed to have been converted into Series A Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and the consummation of the sale and purchase of Series B Common Stock
pursuant to the Purchase Agreement, and for other valuable consideration, it is
agreed as follows:
1. Restrictions on Transfer.
------------------------
1.1 Any sale, transfer or other disposition of any Shares
by a Stockholder, other than according to the terms of this Agreement, shall be
void and
<PAGE>
transfer no right, title, or interest in or to any of such Shares to the
purported transferee.
1.2 An original copy of this Agreement, duly executed by
each of the parties hereto, shall be delivered to the Secretary of the Company
and maintained at the principal executive office of the Company and made
available for inspection by any person requesting it.
2. Transfers Not Subject to Restrictions. Any Stockholder may
-------------------------------------
sell, transfer or otherwise dispose of any of his Shares (i) to any current or
former limited or general partner of such Stockholder, in the case of any
Stockholder that is a partnership; (ii) to any trust beneficiary, in the case of
any Stockholder that is a trust; (iii) to any member in the case of any
Stockholder that is a limited liability company, or (iv) to any current security
holder of such Stockholder, or any transferee who acquires substantially all of
the assets of such Stockholder, or any transferee controlled by, controlling or
under common control with such Stockholder, in the case of any Stockholder that
is a corporation; provided, however, that any such transferee under clauses (i)
through (iv) of this Section 2 shall agree in writing with the Company and the
other Stockholders, as a condition precedent to such transfer, to be bound by
all of the provisions of the Agreement to the same extent as if such transferee
were the Stockholder transferring such Shares.
3. Offer of Sale; Notice of Proposed Sale. If any Stockholder
--------------------------------------
desires to sell, transfer or otherwise dispose (but excluding any exchange or
redemption effected in accordance with the terms of the Share Exchange Agreement
of even date hereof) of any of his Shares, or of any interest in such Shares,
whether voluntarily or by operation of law, in any transaction other than
pursuant to Section 2 of this Agreement, such Stockholder (the "Selling
Stockholder") shall first deliver written notice of his desire to do so (the
"Notice") to the Company and each of the other Stockholders, in the manner
prescribed in Section 11.4 of this Agreement. The Notice must specify: (i) the
name and address of the party to which the Selling Stockholder proposes to sell,
transfer or otherwise dispose of the Shares or an interest in the Shares (the
"Offeror"), (ii) the number of Shares the Selling Stockholder proposes to sell,
transfer or otherwise dispose of (the "Offered Stock"), (iii) the consideration
per Share to be delivered to the Selling Stockholder for the proposed sale,
transfer or disposition, and (iv) all other material terms and conditions of the
proposed transaction.
4. Stockholders' Option to Purchase.
--------------------------------
4.1 Subject to Section 6.1, each Stockholder shall have an
option, exercisable for a period of 15 days from the date of delivery of the
Notice, to purchase, on a pro rata basis according to the number of Shares owned
by such Stockholder, the Offered Stock for the consideration per share and on
the terms and
- 2 -
<PAGE>
conditions set forth in the Notice. Such option shall be exercised by delivery
of written notice to the Secretary of the Company.
4.2 In the event options to purchase have been exercised by
the Stockholders with respect to some but not all of the Offered Stock, those
Stockholders who have exercised their options within the 15-day period specified
in Section 4.1 shall have an additional option, for a period of five days next
succeeding the expiration of such 15-day period (the "20-day period"), to
purchase all or any part of the balance of such Shares on the terms and
conditions set forth in the Notice, which option shall be exercised by the
delivery of written notice to the Secretary of the Company. In the event there
are two or more such Stockholders that choose to exercise the last-mentioned
option for a total number of Shares in excess of the number available, the
Shares available for each such Stockholder's option shall be allocated to such
Stockholder pro rata based on the number of Shares owned by the Stockholders so
electing.
4.3 If the options to purchase the Offered Stock are
exercised by the Stockholders, the Secretary of the Company shall immediately
notify all of the exercising Stockholders of that fact. The closing of the
purchase of the Offered Stock shall take place at the offices of the Company on
the later of (i) the date twenty days after the expiration of such 15-day or
20-day period or (ii) the date that the Company consummates its purchase of
Offered Stock under Section 5.2 hereof.
4.4 In the event the Stockholders do not exercise their
option within such 15-day or 20-day period with respect to all of the Offered
Stock, the Secretary of the Company shall, by the last day of such period, give
written notice of that fact to the Company (the "Company Notice"). The Company
Notice shall specify the number of shares of Offered Stock not proposed to be
purchased by the Stockholders (the "Remaining Stock").
4.5 To the extent that the consideration proposed to be
paid by the Offeror for the Offered Stock consists of property other than cash
or a promissory note, the consideration required to be paid by the Stockholders
and/or the Company exercising their options or option under Sections 4 and 5
hereof may consist of cash equal to the value of such property, as determined in
good faith by agreement of the Selling Stockholder and the Stockholders and/or
the Company acquiring such Offered Stock.
4.6 Notwithstanding anything to the contrary herein,
neither any of the Stockholders nor the Company shall have any right to purchase
any of the Offered Stock hereunder unless the Stockholders and/or the Company
exercise their options or option to purchase all of the Offered Stock.
- 3 -
<PAGE>
5. Company's Option to Purchase.
----------------------------
5.1 Subject to Section 6, the Company shall have an option,
exercisable for a period of 15 days following delivery of the Company Notice, to
purchase all of the Remaining Stock for the consideration per share and on the
terms and conditions specified in the Notice. Such option shall be exercised by
delivery of written notice to the Secretary of the Company.
5.2 In the event the Company duly exercises its option to
purchase all of the Remaining Stock, the closing of such purchase shall take
place at the offices of the Company twenty days after the date of receipt of
such notice to the Secretary of the Company.
6. Failure to Fully Exercise Options. If the Stockholders and the
---------------------------------
Company do not exercise their options to purchase all of the Offered Stock
within the periods described in this Agreement (the "Option Period"), then all
options of the Stockholders and the Company to purchase the Offered Stock,
whether exercised or not, shall terminate. The Selling Stockholder shall then be
entitled to sell to the Offeror, according to the terms set forth in the Notice,
the Offered Stock. The closing of such sale must take place not later than 60
days after the expiration of the Option Period. If the Selling Stockholder
wishes to sell, transfer or otherwise dispose of any such shares of Offered
Stock at a price per share which differs from that set forth in the Notice, upon
terms different from those previously offered to the Company and the other
Stockholders, or more than 60 days after the expiration of the Option Period, as
a condition precedent to such transaction, such shares of Offered Stock must
first be offered to the other Stockholders and the Company on the same terms and
conditions as given the Offeror, and in accordance with the procedures and time
periods set forth above.
7. Right of First Refusal.
----------------------
7.1 The Company shall not issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any shares of its Series A Common Stock, (ii) any shares of its Special
Voting Stock, (iii) any other equity securities of the Company, including,
without limitation, shares of Preferred Stock, (iv) any option, warrant or other
right to subscribe for, purchase or otherwise acquire any equity securities of
the Company, or (v) any debt securities convertible into capital stock of the
Company (collectively, the "Offered Securities"), unless in each such case the
Company shall have first complied with this Agreement. The Company shall deliver
to each Purchaser a written notice of any proposed or intended issuance, sale or
exchange of Offered Securities (the "Offer"), which Offer shall (i) identify and
describe the Offered Securities, (ii) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the
Offered Securities to be issued, sold or exchanged, (iii) identify the
- 4 -
<PAGE>
persons or entities to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (iv) offer to issue and sell to or
exchange with such Purchaser (A) such portion of the Offered Securities as the
aggregate number of Shares then held by such Purchaser bears to the total number
of Shares (the "Basic Amount"), and (B) any additional portion of the Offered
Securities as such Purchaser shall indicate it will purchase or acquire should
the other Purchasers subscribe for less than their Basic Amounts (the
"Undersubscription Amount"). Each Purchaser shall have the right, for a period
of 15 days following delivery of the Offer, to purchase or acquire, at a price
and upon the other terms specified in the Offer, the number or amount of Offered
Securities described above. The Offer by its term shall remain open and
irrevocable for such 15-day period.
7.2 The amount of the Offered Securities available to the
Purchasers as a class shall be the sum of the Basic Amounts of all the
Purchasers (the "Available Purchaser Securities").
7.3 To accept an Offer, in whole or in part, a Purchaser
must deliver a written notice to the Company prior to the end of the 15-day
period of the Offer, setting forth the portion of the Purchaser's Basic Amount
that such Purchaser elects to purchase and, if such Purchaser shall elect to
purchase all of its Basic Amount, the Undersubscription Amount (if any) that
such Purchaser elects to purchase (the "Notice of Acceptance"). If the Basic
Amounts subscribed for by all Purchasers are less than the Available Purchaser
Securities, then each Purchaser who has set forth Undersubscription Amounts in
its Notice of Acceptance shall be entitled to purchase, in addition to the Basic
Amounts subscribed for, all Undersubscription Amounts it has subscribed for;
provided, however, that should the Undersubscription Amounts subscribed for
- -------- -------
exceed the difference between the Available Purchaser Securities and the Basic
Amounts subscribed for (the "Available Undersubscription Amount"), each
Purchaser who has subscribed for any Undersubscription Amount shall be entitled
to purchase only that portion of the Available Undersubscription Amount as the
Undersubscription Amount subscribed for by such Purchaser bears to the total
Undersubscription Amounts subscribed for by all Purchasers, subject to rounding
by the Board of Directors to the extent it reasonably deems necessary.
7.4 In the event that Notices of Acceptance are not given
by the Purchasers in respect of all the Available Purchaser Securities, the
Company shall have 90 days from the expiration of the period set forth in
Section 7.1 above to issue, sell or exchange (i) all or any part of such
Available Purchaser Securities as to which a Notice of Acceptance has not been
given by the Purchasers and (ii) any remaining Offered Securities (collectively,
the "Saleable Securities"), but only to the offerees or purchasers described in
the Offer and only upon terms and conditions (including, without limitation,
unit prices and interest rates) which are not more favorable, in the aggregate,
to the acquiring person or persons or less favorable to the Company than those
set forth in the Offer.
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<PAGE>
7.5 In the event the Company shall propose to sell less
than all the Saleable Securities (any such sale to be in the manner and on the
terms specified in Section 7.4 above), then each Purchaser may, at its sole
option and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the Offered Securities that the Purchaser
elected to purchase pursuant to Section 7.3 above multiplied by a fraction, (i)
the numerator of which shall be the number or amount of Offered Securities the
Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Purchasers pursuant to Section 7.3 above
prior to such reduction) and (ii) the denominator of which shall be the amount
of all Offered Securities. In the event that any Purchaser so elects to reduce
the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have
again been offered to the Purchasers in accordance with Section 7.1 above.
7.6 Upon the closing of the issuance, sale or exchange of
all or less than all the Saleable Securities, the Purchasers shall acquire from
the Company, and the Company shall issue to the Purchasers, the number or amount
of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 7.4 above if the Purchasers have so elected, upon the terms
and conditions specified in the Offer. The purchase by the Purchasers of any
Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Purchasers of a purchase agreement relating to
such Offered Securities reasonably satisfactory in form and substance to the
Purchasers and their respective counsel.
7.7 Any Offered Securities not acquired by the Purchasers
or other persons in accordance with Section 7.3 above may not be issued, sold or
exchanged until they are again offered to the Purchasers under the procedures
specified in this Agreement.
7.8 The rights of the Purchasers under this Section 7 shall
not apply to:
(a) Series A Common Stock or Special Voting Stock
issued as a stock dividend to holders of Series A
Common Stock or Special Voting Stock, as the case
may be, or upon any subdivision or combination of
shares of Series A Common Stock or Special Voting
Stock, as the case may be;
(b) the issuance of any shares of Series A Common Stock
upon conversion of (i) outstanding Shares or (ii)
outstanding shares of Preferred Stock convertible
into Series A
- 6 -
<PAGE>
Common Stock;
(c) the issuance of any shares of Series A Common Stock
upon the exchange of Exchangeable Shares, pursuant
to the Share Exchange Agreement of even date
herewith between the Company and the Canadian
Subsidiary;
(d) shares of Series A Common Stock, or options
exercisable therefor, including options outstanding
on the date of this Agreement, issuable to
officers, directors, consultants and employees of
the Company and any subsidiary pursuant to any
plan, agreement or arrangement approved by a vote
of not less than 75% of the Board of Directors of
the Company, including without limitation the
Company's 1996 Stock Incentive Plan;
(e) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the
Company or any of its subsidiaries of all or
substantially all of the stock or assets of any
other entity;
(f) securities issued to a strategic partner, joint
venturer, supplier or customer in an arrangement
approved by a vote of not less than 75% of the
Board of Directors of the Company; or
(g) shares of Series A Common Stock sold by the Company
in an underwritten public offering pursuant to an
effective registration statement under the
Securities Act of 1933, as amended.
8. Voting of Shares.
----------------
8.1 Except as provided in Subsection B.3.(b) of Article IV
of the Articles of Restatement, in any and all elections of directors of the
Company (whether at a meeting or by written consent in lieu of a meeting), each
Purchaser shall vote or cause to be voted all Shares, which carry voting rights
(including voting rights which arise by reason of default), owned by him, or
over which he has voting control, and otherwise use his best efforts, so as to
fix the number of directors of the Company at seven and to elect (i) so long as
Nortel holds any shares, four members designated by NTI and NTL (collectively,
"Nortel"), (ii) one member designated by the Company, (iii) one member
designated by the Purchasers other than Olympus Growth Fund II, L.P. (by action
of the holders of a majority of the shares of Series B Common Stock held by all
such Purchasers) and (iv) so long as Olympus holds at least 49,500 Shares
- 7 -
<PAGE>
(as adjusted for any stock splits, stock dividend or recapitalization), one
member designated by Olympus Growth Fund II, L.P., or, if Olympus ceases to hold
such number of Shares, by all the Purchasers.
8.2 The Company shall provide the Purchasers including
Olympus Growth Fund II, L.P. with 20 days prior written notice of any intended
mailing of a notice to Purchasers for a meeting at which directors are to be
elected and shall notify the Stockholders including Olympus Growth Fund, II,
L.P. of the person designated by the Company as a nominee for election as a
director, which notice shall provide that, if any party shall fail to designate
a nominee as provided herein, the then incumbent directors or director
previously designated by such party shall be deemed to have been designated
hereunder. Nortel, Olympus Growth Fund II, L.P. and the Purchasers shall give
written notice to all other parties to this Agreement, no later than 10 days
prior to such mailing, of the persons designated by Nortel, Olympus Growth Fund
II, L.P. or the Purchasers, as the case may be, as nominees for election as
directors. The Company agrees to nominate and recommend for election as
directors only the individuals designated, or to be designated, pursuant to this
Section 8. If Nortel, Olympus Growth Fund II, L.P. or the Purchasers shall fail
to give notice to the Company as provided above, it shall be deemed that the
designees of Nortel, Olympus Growth Fund II, L.P. or the Purchasers, as the case
may be, then serving as directors shall be their designees for reelection.
8.3 Except for director's bad faith or wilful misconduct,
(i) the Purchasers (other than Olympus Growth Fund II, L.P.) shall not vote to
remove any director designated by the Company, Olympus Growth Fund II, L.P. or
Nortel, (ii) Nortel shall not vote to remove any director designated by the
Company, Olympus Growth Fund II, L.P. or the Purchasers (other than Olympus
Growth Fund II, L.P.), (iii) the Company shall not vote to remove any director
designated by Nortel, Olympus Growth Fund II, L.P., or the Purchasers, (other
than Olympus Growth Fund II, L.P.), and (iv) Olympus Growth Fund II, L.P. shall
not vote to remove any director designated by the Company, the Purchasers (other
than Olympus Growth Fund II, L.P.) or Nortel.
8.4 If, prior to the occurrence of an Automatic Conversion
Event (as defined in Subsection B.5.(a) of Article IV of the Articles of
Restatement), the Purchasers exercise the Triggering Event Option (as defined in
Subsection B.3.(b)(ii) of such Article IV), then the provisions of this Section
8 will terminate.
9. Restrictive Legends. All certificates representing Shares owned
-------------------
or hereafter acquired by the Purchasers or any transferee of the Purchasers
bound by this Agreement shall have affixed thereto a legend substantially in the
following form:
"The shares represented by this certificate have not been
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<PAGE>
registered under the Securities Act of 1933, as amended, and
may not be offered, sold, or otherwise transferred, pledged or
hypothecated unless and until such shares are registered under
such Act or an opinion of counsel satisfactory to the Company
is obtained to the effect that such registration is not
required.
The Company has authority to issue stock of more than one
class. The Company will furnish without charge to each
Purchaser who so requests the designations and any preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of redemption of the stock of each class which the
Company is authorized to issue.
The Company has authority to issue a preferred class of stock
in series. The Company will furnish without charge to each
Purchaser who so requests the differences in the relative
rights and preferences between the shares of each series to the
extent they have been set, and the authority of the board of
directors to set the relative rights and preferences of
subsequent series.
The shares of stock represented by this certificate are subject
to certain voting agreements as set forth in a Stockholders'
Agreement by and among the registered owner of this
certificate, the Company, and certain other Stockholders of the
Company, a copy of which is available for inspection at the
offices of the Secretary of the Company."
10. Management Rights. The Company hereby agrees that, if any
-----------------
Purchaser shall not have its representative elected to the Board of Directors of
the Company in accordance with the provisions of Section 8 above, (i) the
Company will notify such Purchaser, concurrently with notice given to members of
the Board of Directors of the Company, of all meetings of the Board of
Directors, and, as soon as available, will provide to such Purchaser all
reports, financial statements or other information distributed to the Board of
Directors of the Company, (ii) the Company will permit a person designated by
such Purchaser to attend all such meetings of the Board of Directors as an
observer and to participate as an elected member with all rights of an elected
member, voting excepted, and (iii) the Company will permit a person designated
by such Purchaser, at the Company's expense, to visit and inspect any of the
properties of the Company and its subsidiaries and to discuss the affairs,
finances and accounts of the Company and its subsidiaries with the principal
officers and the
- 9 -
<PAGE>
auditors of the Company, all at such reasonable times during business hours and
as often as such Purchaser may reasonably request.
11. Sharing Agreement.
-----------------
11.1 If (x) a Change in Control (as defined in Article 5 of the
Amendment and Restatement to the Company's Articles of Incorporation (the
"Articles")) occurs at a price per share of less than $100 (as adjusted to
reflect any stock split, stock dividend or recapitalization) or (y) an
Infringement Liquidation (as defined below in Section 11.2) occurs, and Nortel,
immediately prior to that Change of Control or Infringement Liquidation as the
case may be, owns a majority of the voting power of the then outstanding capital
stock of the Company (including shares of Special Voting Stock and Series A
Common Stock on a fully-diluted basis), Nortel and its transferees, if any, on
the one hand, and the holders of Series B Common Stock immediately prior to such
Change in Control, on the other hand, will share any net proceeds resulting from
such Change in Control or Infringement Liquidation as the case may be, in the
following manner: (a) the first $26.0 million of net proceeds distributable to
such holders under the Articles will be allocated to the holders of Series B
Common Stock immediately prior to such Change in Control, (b) then net proceeds
in excess of $26.0 million but less than $52.0 million distributable to such
holders under the Articles will be allocated 90.0% to Nortel and its
transferees, if any, and 10.0% to the holders of Series B Common Stock and (c)
then net proceeds in excess of $52.0 million distributable to such holders
immediately prior to such Change in Control under the Articles will be allocated
pro-rata to Nortel and its transferees, if any, and the Series B Common Stock on
the basis of their fully-diluted ownership of the Series A Common Stock.
11.2 The parties hereby agree that upon the occurrence of an event,
or a series of events, (a "Infringement Liquidation") relating to any action,
suit, proceeding, claim, demand, judgment or assessment relating to the
infringement by the Company, or its subsidiaries of any patent, trade secret,
trademark or copyright of any person with respect to any of the Entrust Assets
(collectively, as such term is defined in both (i) the NTL-ETL Transfer
Agreement, of even date hereof, between NTL and the Canadian Subsidiary and (ii)
the NTI-ETI Transfer Agreement of the even date hereof, between NTI and the
Company), which such event, or series of events taken together, has a
substantial adverse effect on the Company so as to make it impractical for the
Company to continue to conduct the Entrust Business (as defined in the Purchase
Agreement), then, unless otherwise agreed by the holders of a majority of the
then outstanding shares of the Class B Common Stock, the parties shall take all
such actions as may be necessary to cause the liquidation of the Company as soon
as practical after such Infringement Liquidation.
11.3 The parties agree that the foregoing allocation of proceeds
shall be made in accordance with the provisions of this Section notwithstanding
any other
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<PAGE>
rights to such proceeds that the parties might have under the Articles or
applicable provisions of the Maryland General Corporation Law, and the parties
hereby waive any right to such proceeds except as provided herein.
12. Approval of Share Transfers.
---------------------------
12.1 Transfers by Nortel. Without limiting the application of
-------------------
any other provisions of this Agreement, Nortel shall not sell, transfer or
otherwise dispose (but excluding any exchange or redemption effected in
accordance with the terms of the Share Exchange Agreement of even date herewith
or any transfer permitted pursuant to Section 2 above so long as such exchange,
redemption or transfer shall not result in Nortel's ceasing to own a majority
voting power of the then outstanding capital stock of the Company (including
shares of Special Voting Stock and Series A Common Stock on a fully-diluted
basis) of Shares, nor shall the Company effect any transaction, which would
result in Nortel's ceasing to own majority voting power of the then outstanding
capital stock of the Company (including shares of Special Voting Stock and
Series A Common Stock on a fully-diluted basis) without the prior approval by
the holders of a majority of the then outstanding shares of Class B Common
Stock.
12.2 Transfer of Rights. Any transferee to whom capitalized
------------------
Shares are transferred by any party hereto, whether voluntarily or by operation
of law, shall be bound by the obligations imposed upon the transferor under this
Agreement, and shall be entitled to the rights granted to the transferor under
this Agreement, to the same extent as if such transferee were a party hereto.
13. Termination of Agreement. This Agreement shall terminate upon the
------------------------
occurrence of an Automatic Conversion Event (as defined in Subsection B.5.(a) of
Article IV of the Articles of Restatement).
14. General.
-------
14.1 Severability. The provisions of this Agreement are
------------
severable, so that the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other term or
provision of this Agreement, which shall remain in full force and effect.
14.2 Specific Performance. In addition to any and all other
--------------------
remedies that may be available at law in the event of any breach of this
Agreement, each Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
14.3 Governing Law. This Agreement shall be governed by and
-------------
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<PAGE>
construed in accordance with the laws of the State of Maryland, without giving
effect to conflict-of-laws principles.
14.4 Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at Entrust Technologies Inc., 2 Constellation
Crescent, Nepean, Ontario, Canada K2G 5J9, Attention: Corporate Secretary, or at
such other address or addresses as may have been furnished in writing by the
Company to the Purchasers, with a copy to John A. Burgess, Esq., Hale and Dorr,
60 State Street, Boston, Massachusetts 02109;
If to NTL, at Northern Telecom Limited, 8200 Dixie Road, Suite 100,
Brampton, Ontario, Canada L6T 5P6, Attention: President, or at such other
address or addresses as may have been furnished in writing by NTL to the
Purchasers, with a copy to John A. Burgess, Esq., Hale and Dorr, 60 State
Street, Boston, Massachusetts 02109;
If to NTI, at Northern Telecom Inc., 2221 Lakeside Blvd., Richardson,
Texas 75039, Attention: President, Enterprise Networks, or at such other address
or addresses as may have been furnished in writing by NTI to the Purchasers,
with a copy to John A. Burgess, Esq., Hale and Dorr, 60 State Street, Boston,
Massachusetts 02109; or
If to a Purchaser, at his or its address set forth on Exhibit A or at
---------
such other address or addresses as may have been furnished to the Company in
writing by such Purchaser, with a copy to Richard Stenberg, Esq., Dewey
Ballantine, 1301 Avenue of the Americas, New York, New York 10019-6092.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section 11.4.
14.5 Complete Agreement; Amendments. This Agreement constitutes
------------------------------
the full and complete agreement of the parties hereto with respect to the
subject matter hereof. No amendment, modification or termination of any
provision of this
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<PAGE>
Agreement shall be valid unless in writing and signed by (i) the Company, (ii)
NTL, (iii) NTI and (iv) Purchasers holding a majority of the shares of the
Series B Common Stock held by all of the Purchasers.
14.6 Pronouns. Whenever the content may require, any pronouns
--------
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural, and vice versa.
14.7 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall constitute one Agreement binding on all the
parties hereto.
14.8 Captions. Captions of sections have been added only for
--------
convenience and shall not be deemed to be a part of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
COMPANY:
ENTRUST TECHNOLOGIES INC.
By: /s/ John A. Ryan
Name: John A. Ryan
Title: President
NORTHERN TELECOM LIMITED
By: /s/ Peter W. Currie
Name: Peter W. Currie
Title: Senior Vice President and Chief
Financial Officer
By: /s/ David D. Archibald
Name: David D. Archibald
Title: Vice President and
Deputy General Counsel
NORTHERN TELECOM INC.
By: /s/ Peter W. Currie
Name: Peter W. Currie
Title: Senior Vice President and
Chief Financial Officer
PURCHASERS:
OLYMPUS EXECUTIVE FUND, L.P.
By: OEF, L.P., its general partner
By: RSM Corporation, its managing
general partner
By: /s/ Robert S. Morris
Name: Robert S. Morris
Title: President
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<PAGE>
OLYMPUS GROWTH FUND II, L.P.
By: OGP II, L.P., its general partner
By: RSM Corporation, its managing
general partner
By: /s/ Robert S. Morris
Name: Robert S. Morris
Title: President
ORCHID & CO., nominee for
T. Rowe Price Threshold Fund III, L.P.
By: T. Rowe Price Threshold Fund
Associates, Inc., General Partner
By: /s/ Douglas 0. Hickman
Name: Douglas 0. Hickman
Title: President
SOCIETE GENERALE INVESTMENT CORPORATION
By: /s/ David I. Brunson
Name: David I. Brunson
Title: President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, AS TRUSTEE OF THE
MULTI-MARKET SPECIAL INVESTMENT
TRUST FUND OF MORGAN GUARANTY
TRUST COMPANY OF NEW YORK
By: /s/ Ronald G. Hodge
Name: Ronald G. Hodge
Title: Vice President
-15-
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, AS TRUSTEE OF THE
COMMINGLED PENSION TRUST FUND
(MULTI-MARKET SPECIAL INVESTMENT
FUND II) OF MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/ Ronald G. Hodge
Name: Ronald G. Hodge
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, AS INVESTMENT MANAGER
AND AGENT FOR THE ALFRED P. SLOAN
FOUNDATION (MULTI-MARKET ACCOUNT)
By: /s/ Ronald G. Hodge
Name: Ronald G. Hodge
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ Robert Diemar, Jr.
Name: Robert Diemar, Jr.
Title:
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<PAGE>
STOCKHOLDER AGREEMENT AND WAIVER
--------------------------------
THIS Agreement and Waiver (this "Agreement") dated as of January 31, 1997
is entered into by and among Entrust Technologies Inc., a Maryland corporation
(the "Company"), and the persons whose signatures are set forth below.
WHEREAS, the Company has entered into a Series B Common Stock Purchase
Agreement, dated as of December 31, 1996 (the "Series B Common Stock Purchase
Agreement"), with the parties whose names are set forth on Exhibit A thereto
---------
(the "Purchasers"); and
WHEREAS, in connection with the execution of the Series B Common Stock
Purchase Agreement, the Company has entered into a Registration Rights
Agreement, dated as of December 31, 1996, with the Purchasers (the "Registration
Rights Agreement"); and
WHEREAS, Section 15(c) of the Registration Rights Agreement provides that
the Registration Rights Agreement may not be amended, and no provision thereof
may be waived, without the written consent of the Company and the holders of at
least two-thirds of the Registrable Shares (as defined in the Registration
Rights Agreement); and
WHEREAS, the persons whose signatures are set forth below represent the
Company and the holders of at least two-thirds of the Registrable Shares; and
WHEREAS, in connection with the execution of the Series B Common Stock
Purchase Agreement, the Company has entered into a Stockholders' Agreement,
dated as of December 31, 1996, with Northern Telecom Inc., a Delaware
corporation ("NTI"), Northern Telecom Limited, a Canadian corporation ("NTL"),
and the Purchasers (the "Stockholders' Agreement"); and
WHEREAS, Section 14.5 of the Stockholders' Agreement provides that the
Stockholders' Agreement may not be amended, modified or terminated without the
written consent of the Company, NTI, NTL and Purchasers holding a majority of
the shares of the Series B Common Stock held by all of the Purchasers; and
WHEREAS, the persons whose signatures are set forth below represent the
Company, NTI, NTL and Purchasers holding a majority of the shares of the Series
B Common Stock held by all of the Purchasers; and
WHEREAS, the Company shall not issue any shares of capital stock without
complying with the right of first refusal set forth in Section 7 of the
Stockholders'
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<PAGE>
Agreement; and
WHEREAS, the Company is entering into a Series B Non-Voting Common
Stock Purchase Agreement of even date herewith (the "Series B Non-Voting Common
Stock Purchase Agreement") with Societe Generale Investment Corporation
("Societe Generale") providing for the sale of an aggregate of 2,500 shares (the
"Series B Non-Voting Shares") of Series B Non-Voting Common Stock, $.01 par
value per share, of the Company (the "Series B Non-Voting Common Stock"); and
WHEREAS, the Purchasers desire to waive the right of first refusal set
forth in Section 7 of the Stockholders' Agreement with respect to the Series B
Non-Voting Shares; and
WHEREAS, Societe Generale intends to exchange 36,448 shares (the
"Series B Exchange Shares") of Series B Common Stock, $.01 par value per share,
of the Company (the "Series B Common Stock") for 36,448 shares of Series B
Non-Voting Common Stock (the "Series B Non-Voting Exchange Shares"); and
WHEREAS, Societe Generale shall not transfer the Series B Exchange
Shares without complying with the provisions of Sections 3 through 6 of the
Stockholders' Agreement and the Company shall not issue any Series B Non-Voting
Exchange Shares without complying with the right of first refusal set forth in
Section 7 of the Stockholders' Agreement; and
WHEREAS, the Company and the Purchasers desire to waive their rights
set forth in Sections 3 through 7 of the Stockholders' Agreement with respect to
the Series B Exchange Shares and the Series B Non-Voting Exchange Shares; and
WHEREAS, the Purchasers desire to provide the holder of Series B
Non-Voting Common Stock with rights under the Registration Rights Agreement and
the Stockholders' Agreement;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the undersigned do hereby agree with each other as follows:
1. Amendments to the Stockholders' Agreement. The undersigned do
-----------------------------------------
hereby consent to and approve the following amendments to the Stockholders'
Agreement;
(a) The following clause is hereby inserted in the first sentence
of Section C of the Recitals following the phrase "Series B Common Stock,":
"Series B Non-Voting Common Stock, $.01 par value per share (the
"Series B Non-Voting Common Stock"),";
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<PAGE>
(b) The following clause is hereby inserted at the end of the last
sentence of Section C of the Recitals:
"and all shares of Series 13 Non-Voting Common Stock exchangeable into
Series B Common Stock shall be deemed to have been exchanged into
Series B Common Stock and such shares of Series B Common Stock
converted into Series A Common Stock";
(c) The clause following the phrase "(i) any shares of its Series A
Common Stock," in the first sentence of Section 7.1 is hereby deleted in its
entirety and the following clause is inserted in lieu thereof:
"(ii) any shares of its Series B Non-Voting Common Stock, (iii) any
shares of its Special Voting Stock, (iv) any other equity securities
of the Company, including, without limitation, shares of Preferred
Stock, (v) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any equity securities of the Company, or
(vi) any debt securities convertible into capital stock of the Company
(collectively, the "Offered Securities"), unless in each such case
the Company shall have first complied with this Agreement."; and
(d) Section 11.1 is hereby deleted in its entirety and the following
Section 11.1 is inserted in lieu thereof:
"11.1 If (x) a Change in Control (as defined in Article 5 of the
Amendment and Restatement to the Company's Articles of Incorporation
(as amended, the "Articles")) occurs at a price per share of less than
$100 (as adjusted to reflect any stock split, stock dividend or
recapitalization) or (y) an Infringement Liquidation (as defined below
in Section 11.2) occurs, and Nortel, immediately prior to that Change
of Control or Infringement Liquidation, as the case may be, owns a
majority of the voting power of the then outstanding capital stock of
the Company (including shares of Special Voting Stock and Series A
Common Stock on a fully-diluted basis), Nortel and its transferees, if
any, on the one hand, and the holders of Series B Common Stock and
Series B Non-Voting Common Stock immediately prior to such Change in
Control, on the other hand, will share any net proceeds resulting from
such Change in Control or Infringement Liquidation as the case may be,
in the following manner: (a) the first $26.0 million of net proceeds
distributable to such holders under the Articles will be allocated to
the holders of Series B Common Stock and Series B Non-Voting Common
Stock pro rata in accordance with their interests
-19-
<PAGE>
immediately prior to such Change in Control, (b) then net proceeds in
excess of $26.0 million but less than $52.0 million distributable to
such holders under the Articles will be allocated 90.0% to Nortel and
its transferees, if any, and 10.0% to the holders of Series B Common
Stock and Series B Non-Voting Common Stock pro rata in accordance with
their interests, and (c) then net proceeds in excess of $52.0 million
distributable to such holders immediately prior to such Change in
Control under the Articles will be allocated pro-rata to Nortel and
its transferees, if any, the Series B Common Stock on the basis of
their fully-diluted ownership of the Series A Common Stock, and the
Series B Non-Voting Common Stock on the basis of their fully-diluted
ownership of the Series A Common Stock had each such share of Series B
Non-Voting Common Stock been exchanged for Series B Common Stock
pursuant to Article IV.E.4. of the Articles immediately prior to such
allocation.".
2. Amendments to the Registration Rights Agreement. The undersigned do
-----------------------------------------------
hereby consent to and approve the following amendments to the Registration
Rights Agreement:
(a) The following clause is inserted as a definition in Section 1:
"Series B Non-Voting Common Stock" means the Series B Non-Voting
--------------------------------
Common Stock, $.01 par value per share, of the Company";
(b) The following clause is inserted as a definition in Section 1:
"Series B Non-Voting Common Stock Purchase Agreement" means the Series
---------------------------------------------------
B Non-Voting Common Stock Purchase Agreement dated as of January __,
1997 entered into by and between the Company and Societe Generale
Investment Corporation"; and
(c) The definition of "Shares" in Section 1 is hereby deleted in its
------
entirety and the following new definition of "Shares" is inserted in lieu
------
thereof:
"Shares" means (i) the shares of Series B Common Stock specified in
Subsection 1.2 of the Purchase Agreement, and (ii) the shares of
Series B Common Stock issued or issuable upon exchange of the shares
of Series B Non-Voting Common Stock specified in Subsection 1.2 of the
Series B Non-Voting Stock Purchase Agreement.".
3. Waiver of Right of First Refusal. Each of the undersigned does hereby
--------------------------------
(i) acknowledge that this Agreement satisfies all notice requirements under
-20-
<PAGE>
the Stockholders' Agreement, including without limitation the notice provisions
set forth in Sections 3 through 7 of the Stockholders' Agreement, with respect
to (A) the sale of the Series B Non-Voting Shares pursuant to the Series B Non-
Voting Common Stock Purchase Agreement (the "Series B Non-Voting Common Stock
Offering") and (B) the transfer by Societe Generale of the Series B Exchange
Shares, and the issuance by the Company of the Series B Non-Voting Exchange
Shares (the "Series B Exchange Shares Issuance"), and (ii) waive, for purposes
of the Series B Non-Voting Common Stock Offering and the Series B Exchange
Shares Issuance only, the undersigned's right, pursuant to Sections 3 through 7
of the Stockholders' Agreement, to purchase or acquire any portion of the Series
B Non-Voting Shares, the Series B Exchange Shares or the Series B Non-Voting
Exchange Shares, as the case may be.
4. Amendment Only. In all other respects, each of the Registration Rights
--------------
Agreement and the Stockholders' Agreement shall remain in full force and effect.
5. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute one in the same instrument.
-21-
<PAGE>
EXECUTED as of the date first above written.
ENTRUST TECHNOLOGIES INC.
By: /s/ John A. Ryan
Name: John A. Ryan
Title: President
NORTHERN TELECOM LIMITED
By: /s/ Peter W. Currie
Name: Peter W. Currie
Title: Senior Vice President and
Chief Financial Officer
By: /s/ David D. Archibald
Name: David D. Archibald
Title: Vice President and
Deputy General Counsel
NORTHERN TELECOM INC.
By: /s/ Peter W. Currie
Name: Peter W. Currie
Title: Senior Vice President and
Chief Financial
Officer
OLYMPUS EXECUTIVE FUND, L.P.
By: OEF, L.P., its general partner
By: RSM Corporation, its managing
general partner
By: /s/ Robert S. Morris
Name: Robert S. Morris
Title: President
-22-
<PAGE>
OLYMPUS GROWTH FUND II, L.P.
By: OGP II, L.P., its general partner
By: RSM Corporation, its managing
general partner
By: /s/ Robert S. Morris
Name: Robert S. Morris
Title: President
ORCHID & CO., nominee for
T. Rowe Price Threshold Fund III,
L.P.
By: T. Rowe Price Threshold Fund
Associates, Inc., General Partner
By: /s/ Douglas 0. Hickman
Name: Douglas 0. Hickman
Title: President
SOCIETE GENERALE INVESTMENT
CORPORATION
By: /s/ David I. Brunson
Name: David I. Brunson
Title: President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, AS TRUSTEE OF THE
MULTI-MARKET SPECIAL INVESTMENT
TRUST FUND OF MORGAN GUARANTY
TRUST COMPANY OF NEW YORK
By: /s/ Ronald G. Hodge
Name: Ronald G. Hodge
Title: Vice President
-23-
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, AS TRUSTEE OF THE
COMMINGLED PENSION TRUST FUND
(MULTI-MARKET SPECIAL INVESTMENT
FUND II) OF MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/ Ronald G. Hodge
Name: Ronald G. Hodge
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, AS INVESTMENT MANAGER
AND AGENT FOR THE ALFRED P. SLOAN
FOUNDATION (MULTI-MARKET ACCOUNT)
By: /s/ Ronald G. Hodge
Name: Ronald G. Hodge
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ Robert Diemar, Jr.
Name: Robert Diemar, Jr.
Title:
-24-
<PAGE>
Exhibit 10.6
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") is made as of 31 December 1996 between
---------
Northern Telecom Limited, a Canadian corporation ("NTL"), and Entrust
---
Technologies Inc., a Maryland corporation ("ETI").
---
WHEREAS, until the Effective Date (as defined herein), NTL and its subsidiary,
Northern Telecom Inc. (collectively, "Nortel"), have provided administrative,
------
financial, management and other services to the business (the "Entrust
-------
Business") acquired from Nortel by ETI and its Canadian subsidiary, Entrust
- --------
Technologies Limited (collectively, "Entrust"); and
-------
WHEREAS, from and after the Effective Date, Entrust desires Nortel to continue
to provide management, consulting and financial services to Entrust and Nortel
is willing to provide such services to Entrust on the terms and subject to the
conditions set forth herein;
NOW THEREFORE, NTL and ETI, intending to be legally bound, do hereby agree as
follows:
ARTICLE I
DEFINITIONS
-----------
Capitalized terms used in this Agreement are used as defined in this Article I
or elsewhere in this Agreement. As used in this Agreement:
"Actions" has the meaning specified in Section 6.03.
-------
"Agreement" has the meaning specified in the preamble hereof.
---------
"Cost Plus Billing" has the meaning specified in Section 3.01.
-----------------
"Customary Billing" has the meaning specified in Section 3.01.
-----------------
"Effective Date" means the close of business on the date specified in the
--------------
preamble.
"Entrust" has the meaning specified in the first recital hereof.
-------
"Entrust Business" has the meaning specified in the first recital hereof.
----------------
"Entrust Entity" means either ETI or Entrust Technologies Limited, as the
--------------
context requires.
"Entrust Entities" means both ETI and Entrust Technologies Limited.
----------------
1
<PAGE>
"Entrust Indemnified Person" has the meaning specified in Section 6.04.
--------------------------
"ETI" has the meaning specified in the preamble hereof.
---
"Facilities" has the meaning specified in Section 5.02.
----------
"Nortel" has the meaning specified in the first recital hereof.
------
"Nortel Entity" means either NTL or Northern Telecom Inc., as the context
-------------
requires.
"Nortel Indemnified Person" has the meaning specified in Section 6.02.
-------------------------
"NTL" has the meaning specified in the preamble hereof.
---
"Pass-Through Billing" has the meaning specified in Section 3.01.
--------------------
"Payment Date" has the meaning specified in Section 3.05(b).
------------
"Service Costs" has the meaning specified in Section 3.01.
-------------
"Services" has the meaning specified in Exhibit A hereof.
--------
"Subsidiary" shall mean: (i) a corporation, company or other entity, in which a
----------
party now or hereafter, owns or controls, directly or indirectly, fifty percent
(50%) or more of the outstanding shares or securities (representing the right to
vote for the election of directors or other managing authority), provided,
however, that such corporation, company, or other entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists; or (ii) an entity
which does not have outstanding shares or securities, as may be the case in a
partnership, joint venture or unincorporated association, but in which a party
now or hereafter, owns or controls, directly or indirectly, fifty percent (50%)
or more of the ownership interest representing the right to make the decisions
for such entity, provided, however, that such entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists.
ARTICLE II
PURCHASE AND SALE OF SERVICES
-----------------------------
Section 2.01. Purchase and Sale of Services.
-----------------------------
(a) Nortel shall provide to Entrust, or procure for the provision to
Entrust of, and Entrust shall purchase from Nortel, the Services which
shall be substantially similar in scope, quality, and nature to those
provided to, or procured on behalf of, the Entrust Business prior to
the Effective Date.
2
<PAGE>
(b) Services to be provided in the U.S.A. under this Agreement will be provided
by Northern Telecom Inc. and Services to be provided elsewhere will be
provided by NTL or one or more of NTL's Subsidiaries. ETI agrees to cause
Entrust Technologies Limited to pay all amounts due and owing in respect of
Services directly to NTL.
Section 2.02. Changes to Service by Nortel.
----------------------------
(a) Prior to the end of each year for so long as the relevant Services continue
to be provided under this Agreement, NTL shall prepare and deliver to ETI
updated versions of Exhibit A, setting forth with respect to the Services,
any proposed changes in billing methodology and, to the extent available,
the Service Costs estimated to be payable for such Services for the next
fiscal year. Except as ETI and NTL may otherwise agree, and except as
specifically described in this Agreement, the method of allocating and
charging the costs reflected in Exhibit A, and any updated versions of such
schedules, shall be consistent with Nortel's practices with respect to the
allocation of costs for services to the Entrust Entities immediately prior
to the Effective Date; provided, however, that if Nortel changes the method
-------- -------
of allocating and charging such costs to Nortel businesses generally, such
revised method shall also be applied to Entrust. If a revised method of
allocating and charging costs for particular Services would increase
significantly the amount of Service Costs payable under this Agreement as
compared to the amount payable were such method not revised, then ETI shall
have the right for 30 days following receipt of NTL's updated Exhibit A to
terminate such Services upon written notice to NTL. Such change in
allocation method shall be deemed accepted by ETI if no such notice of
termination is received by NTL.
(b) Entrust shall take all reasonable efforts to perform its own human
resources and payroll services within one hundred and twenty (120) days of
the Effective Date, failing which NTL may terminate the provision to
Entrust of those human resources and payroll services on ninety (90) days
notice to ETI.
Section 2.03. Changes to Service by Entrust. Except as provided herein, Entrust
-----------------------------
may from time to time terminate the purchase of one or more of the Services, in
whole or in part, upon giving (ninety) 90 days notice to NTL.
Section 2.04. Additional Services. If requested by ETI and to the extent that
-------------------
NTL agrees, Nortel shall provide services in addition to Services to Entrust.
The scope of any such services, as well as the prices and other terms
applicable to such services, shall be as mutually agreed by NTL and ETI.
3
<PAGE>
ARTICLE III
SERVICE COSTS; OTHER CHARGES
----------------------------
Section 3.01. Service Costs Generally. Exhibit A indicates, with respect to each
-----------------------
Service, whether the costs to be charged to Entrust for such Service are
determined by (i) the customary billing method ("Customary Billing"), (ii) the
-----------------
pass-through billing method ("Pass-Through Billing"), or (iii) the
--------------------
cost-plus-fixed-fee billing method ("Cost Plus Billing"). The Customary Billing,
-----------------
Pass-Through Billing, and Cost Plus Billing methods applicable to Services
provided to Entrust are collectively referred to herein as the "Service Cost".
------------
It is the express intent of the parties that Service Costs shall not exceed the
fair market value of the Services.
Section 3.02. Customary Billing. The method of calculating the costs of Services
-----------------
determined by the Customary Billing method shall be the same as the method from
time to time used to calculate the cost of comparable services charged to other
businesses operated by Nortel.
Section 3.03. Pass-Through Billing. The costs of Services determined by the
--------------------
Pass-Through Billing method shall be equal to the third-party costs and expenses
incurred by Nortel on behalf of an Entrust Entity. If Nortel incurs costs or
expenses on behalf of Entrust as well as other businesses operated by Nortel,
Nortel will allocate any such costs or expenses in good faith between the
relevant businesses exercising reasonable judgment. Nortel or its agents shall
keep and maintain such books and records as may be reasonably necessary to make
such allocations. NTL shall make copies of such books and records available to
ETI upon request and with reasonable notice.
Section 3.04. Cost Plus. The costs of Services determined by the Cost Plus
---------
Billing method shall be equal to the costs and expenses incurred by NTL or any
of NTL's subsidiaries on behalf of an Entrust Entity, plus the fixed percentage
of related indirect and overhead costs and expenses. The fully loaded costs of
Nortel to provide Services under this Section 3.04 may be based on reasonable
estimates of those costs, including the amount of time necessary to perform the
Services. If Nortel incurs costs or expenses on behalf of Entrust as well as
other businesses operated by Nortel, NTL will allocate any such costs or
expenses in good faith between the relevant businesses exercising reasonable
judgment. Nortel shall apply usual and accepted accounting conventions in making
such allocations and Nortel or its agents shall keep and maintain such books and
records as may be reasonably necessary to make such allocations. Nortel shall
make copies of such books and records available to ETI upon request and with
reasonable notice.
ARTICLE IV
PAYMENT PROVISIONS
------------------
4
<PAGE>
Section 4.01. Invoicing. Nortel will invoice or notify Entrust of the Service
---------
Costs at the end of each month either directly or through Nortel's intracompany
billing system, in a manner substantially consistent with the billing practices
used in connection with services provided to the Entrust Business prior to the
Effective Date (except as otherwise agreed). In connection with the invoicing
described in this Section 4.01, Nortel will provide to Entrust the same billing
data and level of detail as it customarily provided to the Entrust Business
prior to the Effective Date and as it customarily provides to other businesses
and subsidiaries operated by Nortel and such other data as may be reasonably
requested by Entrust.
Section 4.02. Settlement of Costs. Entrust shall pay promptly after receipt of
-------------------
Nortel invoice or notification of the Service Costs on the Payment Date (as
defined herein), through Nortel's intracompany billing system, cash management
systems, or, if requested by Nortel, by wire transfer of immediately available
funds payable to the order of Nortel and without set off, all amounts invoiced
by Nortel pursuant to paragraph (a) during the preceding calendar month (or
since the Effective Date, in the case of the first Payment Date).
Section 4.03. Payment Date. For so long as Entrust remains a Subsidiary of NTL,
------------
the "Payment Date" shall be the date of receipt of the Nortel invoice,
thereafter the "Payment Date" shall be 30 days after delivery of the Nortel
invoice. If Entrust fails to pay any monthly payment by the relevant Payment
Date, Nortel may charge Entrust, in addition to the amount due on such Payment
Date, interest on such amount of twelve percent (12%) per annum compounded
monthly from the relevant Payment Date through the date of payment.
Section 4.04. Taxes. Sales and use taxes, if any, are for the account of Entrust
-----
and will be rendered in accordance with applicable legislation.
ARTICLE V
PROVISIONS SPECIFIC TO FACILITIES
---------------------------------
Section 5.01 Headquarters.
------------
(a) Subject to the provisions hereof and Exhibit B, Nortel has leased office
facilities for Entrust Technologies Limited located at 750 Heron Road, Ottawa,
Ontario (the "Ottawa Headquarters") and shall lease for ETI's headquarter staff
an office facility at such other location in the United States (the "U.S.
Headquarters") as ETI may designate subject to Nortel's consent, such consent
not to be unreasonably withheld (collectively, the "Headquarters").
(b) Notwithstanding any provision in this Agreement, including without
limitation the provisions of Article VIII, to the contrary, Entrust shall
remain.
5
<PAGE>
liable to pay Service Costs for either the U.S. or Ottawa Headquarters: (i) for
the period commencing when ETI or ETL takes possession of the Premise and ending
when Nortel's lease for the Ottawa Headquarters or U.S. Headquarters (the "head
lease") is terminated in accordance with its terms, (ii) Entrust requests
Nortel's consent to vacate the Ottawa Headquarters or U.S. Headquarters and NTL,
in its sole discretion, determines that it has use for the Ottawa Headquarters
or U.S. Headquarters. The parties acknowledge that term of the head lease for
the Ottawa Headquarters is five years from the date of occupation provided for
therein. At Entrust's request, Nortel shall make commercially reasonable efforts
to (i) assign to Entrust the relevant Ottawa or U.S. Headquarters lease, or (ii)
early terminate the Ottawa Headquarters or U.S. Headquarters head lease. So long
as Entrust is not in default under the terms of this Agreement, Nortel shall, at
Entrust's request, use commercially reasonable efforts to obtain renewal of an
Ottawa or U.S. Headquarters head lease in the name of ETI provided, however,
-------- -------
that such renewal can be effected without recourse to Nortel.
Section 5.0.2. Regional Sales Offices Facilities. Subject to the provisions
---------------------------------
hereof and Exhibit B, Nortel shall, to the extent commercially reasonable, make
designated portions of space available at its owned or leased office facilities
(the "Facilities") to Entrust for Entrust's regional sales and technical support
personnel in New York, Raleigh and such other locations in the United States as
the parties may agree and Entrust shall have the right to use designated
portions of those office facilities. Entrust agrees to take all actions to
accommodate Nortel's real estate objectives, including, without limitation,
vacating Facilities where Nortel voluntarily terminates or is required to
terminate its own lease or operations. Nortel shall give Entrust as much advance
notice as is reasonably practicable in connection with any planned early
termination of any leased Facility or the sale, abandonment or vacating by
Nortel of any owned Facility.
Section 5.03. Definition of Premises. The Ottawa Headquarters and U.S.
----------------------
Headquarters and Nortel office facilities made available to Entrust pursuant to
Section 5.02 shall be referred to collectively as the "Premises".
Section 5.04. Conflicts. In the event of conflict between the provisions of this
---------
Article V and the remainder of the Agreement, the provisions of this Article V
shall govern.
ARTICLE VI
THE SERVICES
------------
Section 6.01. General Standard of Service. Except as otherwise agreed with
---------------------------
Entrust or as described in this Agreement, and provided that Nortel is not
restricted by contract with third parties or by applicable law, the Services
shall be substantially the same in nature, quality and standard of care as the
Services
6
<PAGE>
which Nortel provides from time to time throughout its businesses; provided that
in no event shall such standard of care be less than the standard of care that
Nortel has customarily provided to the Entrust Business with respect to the
relevant Service prior to the Effective Date.
Section 6.02. Limitation of Liability. None of NTL and its Subsidiaries and
-----------------------
their respective directors, officers, agents, and employees (each, a "Nortel
------
Indemnified Person") shall have any liability, whether direct or indirect, in
- ------------------
contract or tort or otherwise, to Entrust for or in connection with the Services
rendered or to be rendered by any Nortel Indemnified Person pursuant to this
Agreement, the transactions contemplated hereby or any Nortel Indemnified
Person's advice, actions or inactions in connection with any such Services or
transactions, except for damages which have resulted from such Nortel Indemnifed
Person's gross negligence or willful misconduct in connection with any such
Services, actions or inactions.
Section 6.03. Indemnification of Nortel by Entrust. Entrust shall indemnify and
------------------------------------
hold harmless each Nortel Indemnifed Person from and against any damages, and
reimburse each Nortel Indemnified Person for all reasonable expenses as they are
incurred in investigating, preparing, pursuing or defending any claim, action,
proceeding, or investigation, whether or not in connection with pending or
threatened litigation and whether or not any Nortel Indemnifed Person is a party
(collectively, "Actions"), arising out of or in connection with Services
-------
rendered or to be rendered by any Nortel Indemnified Person pursuant to this
Agreement (including any damages, and all reasonable expenses resulting or
arising from any claim by an employee of Entrust that Nortel is his/her
employer, a related employer of the employee or a co-employer of the employee),
the transactions contemplated hereby or any Nortel Indemnified Person's actions
or inactions in connection with any such Services or transactions; provided that
Entrust will not be responsible for any damages of any Nortel Indemnified Person
that have resulted from such Nortel Indemnified Person's gross negligence or
willful misconduct in connection with any of the advice, actions, inactions, or
Services referred to above.
Section 6.04. Indemnification of Entrust by Nortel. NTL shall indemnify and hold
------------------------------------
harmless Entrust and their respective directors, officers, agents, and employees
(each, an "Entrust Indemnified Person") from and against any damages, and shall
--------------------------
reimburse each Entrust Indemnified Person for all reasonable expenses as they
are incurred in investigating, preparing, or defending any Action, arising out
of the gross negligence or willful misconduct of any Nortel Indemnified Person
in connection with the Services rendered or to be rendered pursuant to this
Agreement.
ARTICLE VII
INFORMATION EXCHANGES
---------------------
7
<PAGE>
Section 7.01. Information Exchanges. Subject to applicable law and privileges,
---------------------
each party hereof shall provide the other party with all information regarding
itself and transactions under this Agreement that the other party reasonably
believes are required to comply with all applicable federal, state, county and
local laws, ordinances, regulations and codes, including, but not limited to,
securities laws and regulations.
Section 7.02. Confidential Information. Entrust and Nortel shall hold in trust
------------------------
and maintain confidential all Confidential Information relating to the other
party. "Confidential Information" shall mean all information disclosed by either
party to the other in connection with this Agreement whether orally, visually,
in writing or in any other tangible form, and includes, but is not limited to,
economic, scientific, technical, product and business data, business plans, and
the like, but shall not include (i) information which becomes generally
available other than by release in violation of the provisions of this Section
7.02, (ii) information which becomes available on a non-confidential basis to a
party from a source other than the other party to this Agreement and its
Subsidiaries provided the party in question reasonably believes that such source
is not or was not bound to hold such information confidential, (iii) information
acquired or developed independently by a party without violating this Section
7.02 or any other confidentiality agreement with the other party and (iv)
information that any party hereof reasonably believes it is required to disclose
by law, provided the it first notifies the other party hereof of such
requirement and allows such party a reasonable opportunity to seek a protective
order or other appropriate remedy to prevent such disclosure. Without prejudice
to the rights and remedies of either party to this Agreement, a party disclosing
any Confidential Information to other party in accordance with the provisions of
this Agreement shall be entitled to equitable relief by way of an injunction if
the other party hereof breaches or threatens to breach any provison of this
Section 7.02.
ARTICLE VIII
TERM AND TERMINATION
--------------------
Section 8.01. Term. This Agreement shall have an initial term of two years from
----
the Effective Date, and will be renewed automatically thereafter for successive
one-year terms unless either ETI or NTL elects not to renew this Agreement upon
not less than ninety (90) days' written notice prior to the end of any such
term.
Section 8.02. Early Termination.
-----------------
(a) This Agreement shall be subject to early termination by NTL upon 90
days' written notice if Nortel ceases to own shares of stock
representing more than fifty percent (50%) of the combined voting power
of the stock of ETI, provided, however, that:
-------- -------
8
<PAGE>
<PAGE>
(i) this right of early termination may not be exercised prior to the
first anniversary of the Effective Date; and
(ii) if the holders of ETI's Series B Common Stock exercise a
Triggering Event Option (as defined in the Articles of
Incorporation of ETI). prior to Nortel providing such notice,
NTL may not exercise this right of early termination until the
first anniversary of the date of exercise by the holders of ETI's
Series B Common Stock of the Triggering Event Option.
(b) This Agreement shall be subject to early termination by NTL upon 90 days'
written notice on or after the first anniversary of the date of exercise by
the holders of ETI's Series B Common Stock of the Triggering Event Option
(as defined in the Articles of Incorporation of ETI).
(b) This Agreement is subject to early termination in whole or with respect to
any Service by ETI on ninety (90) days written notice.
(c) Nortel may terminate any Service at any time if Entrust fails to perform
any of its material obligations under this Agreement relating to such
Service, Nortel has notified Entrust in writing of such failure, and such
failure has continued for a period of sixty (60) days after receipt of
Entrust of notice of such failure.
(d) Entrust may terminate any Service at any time if Nortel fails to perform
any of its material obligations under this Agreement relating to such
Service, Entrust has notified Nortel in writing of such failure, and such
failure has continued for a period of sixty (60) days after receipt by
Nortel of notice of such failure.
Section 8.03. Effect of Termination.
---------------------
(a) Other than as required by law, upon termination of any Service pursuant to
Section 8.01 or Section 8.02 and upon termination of this Agreement in
accordance with its terms, Nortel shall have no further obligation to
provide the terminated Service (or any Service, in the case of termination
of this Agreement) and Entrust shall have no obligation to pay any fees
relating to such Services or make any other payments hereunder; provided
that notwithstanding such termination, (i) Entrust shall remain liable to
Nortel for fees owed and payable in respect of Services provided prior to
the effective date of the termination; (ii) Nortel shall continue to charge
Entrust for administrative and program costs relating to benefits paid
after but incurred prior to the termination of any Service and other
services required to be provided after the
9
<PAGE>
termination of such Service and Entrust shall be obligated to pay such
expenses in accordance with the terms of this Agreement; and (iii) the
provisions of Articles V, VI , VII and VIII shall survive any such
termination.
(b) Following termination of this Agreement with respect to any Service, Nortel
and Entrust will cooperate in providing for an orderly transition of such
Service to Entrust or to a successor service provider.
ARTICLE IX
MISCELLANEOUS
-------------
Section 9.01. Future Litigation and Other Proceedings. In the event that Entrust
---------------------------------------
(or any of its officers or directors) or Nortel (or any of its officers or
directors) at any time after the date hereof initiates or becomes subject to any
litigation or other proceedings before any governmental authority or arbitration
panel with respect to which the parties have no prior agreements (as to
indemnification or otherwise), the party (and its officers and directors) that
has not initiated and is not subject to such litigation or other proceedings
shall comply, at the other party's expense, with any reasonable requests by the
other party for assistance in connection with such litigation or other
proceedings (including by way of provision of information and making available
of employees as witnesses). In the event that Entrust (or any of its officers or
directors) and Nortel (or any of its officers and directors) at any time after
the date hereof initiate or become subject to any litigation or other
proceedings before any governmental authority or arbitration panel with respect
to which the parties have no prior agreements (as to indemnification or
otherwise), each party (and its officers and directors) shall, at their own
expense, coordinate their strategies and actions with respect to such litigation
or other proceedings to the extent such coordination would not be detrimental to
their respective interests and shall comply, at the expense of the requesting
party, with any reasonable requests of the other party for assistance in
connection therewith (by way of provision of information and making available of
employees as witnesses).
Section 9.02. No Agency. Nothing in this Agreement shall constitute or be deemed
---------
to constitute a partnership or joint venture between the parties hereof or,
except to the extent provided herein, constitute or be deemed to constitute any
party the agent of the other party for any purpose whatsoever and neither party
shall have authority or power to bind the other or to contract in the name of,
or create a liability against, the other in any way or for any purpose.
Section 9.03. Subcontractors. Nortel may hire or engage one or more
--------------
subcontractors to perform all or any of its obligations under this Agreement,
provided that, except to the extent provided herein, Nortel shall in all cases
remain primarily responsible for all obligations undertaken by it in this
Agreement with respect to the scope, quality and nature of the Services
10
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provided to Entrust.
Section 9.04. Force Majeure.
-------------
(a) For purposes of this Section, "force majeure" means an event beyond
the reasonable control of either party, which by its nature could not
have been foreseen by such party or, if it could have been foreseen,
was unavoidable, and includes without limitation, acts of God, storms,
floods, riots, fires, sabotage, civil commotion or civil unrest,
interference by civil or military authorities, acts of war (declared
or undeclared) and failure of energy sources.
(b) Neither party shall be under any liability for failure to fulfill any
obligation under this Agreement, so long as and to the extent to which
the fulfillment of such obligation is prevented, frustrated, hindered,
or delayed as a consequence of circumstances of force majeure,
provided always that such party shall have exercised all due diligence
to minimize to the greatest extent possible the effect of force
majeure on its obligations hereunder.
(c) Promptly on becoming aware of force majeure causing a delay in
performance or preventing performance of any obligations imposed by
this Agreement (and termination of such delay), the party affected
shall give written notice to the other party giving details of the
same, including particulars of the actual and, if applicable, any
estimated continuing effects of such force majeure on the obligations
of the party whose performance is prevented or delayed. If such notice
shall have been duly given, any actual delay resulting from such force
majeure shall be deemed not to be a breach of this Agreement, and the
period for performance of the obligation to which it relates shall be
extended accordingly, provided that if force majeure results in the
performance of a party being delayed by more than 60 days, the other
party shall have the right to terminate this Agreement with respect to
any Service affected by such delay forthwith by written notice.
Section 9.05. Notices. Any notice, instruction, direction or demand under the
-------
terms of this Agreement required to be in writing shall be duly given upon
delivery, if delivered by hand, facsimile transmission, intercompany mail, or
mall, to the following addresses:
(a) If to ETI, to: Entrust Technologies Inc.
2 Constellation Crescent
Nepean, Ontario
Attention: Contracts Administration
(b) If to NTL, to: Northern Telecom Limited
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8200 Dixie Road
Suite 100
Brampton, Ontario
L6T 5P6
Attention: Corporate Secretary
Fax: 905 863 8429
or to such other addresses or telecopy numbers as may be specified by like
notice to the other parties.
Section 9.06 Entire Agreement. This Agreement (including all Schedules hereto
----------------
and any other writing signed by the parties that specifically references in this
Agreement constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements, understandings and
negotiations, both written and oral, among Entrust, Nortel and NTL's
Subsidiaries between the parties with respect to the subject matter hereof. This
Agreement is not intended to confer upon any person other than the parties any
rights or remedies hereunder.
Section 9.07. Modification. This Agreement may only be amended by a written
------------
agreement executed by both parties.
Section 9.08. Waivers. No waiver of any breach of any of the terms of this
-------
Agreement shall be effective unless such waiver is in writing and signed by the
party against which such waiver is claimed. No waiver of any breach shall be
deemed to be a waiver of any other or subsequent breach.
Section 9.09. Severability. If any provision of this Agreement shall be invalid
------------
or unenforceable, such invalidity or unenforceability shall not render the
entire Agreement invalid. Rather, this Agreement shall be construed as if not
containing the particular invalid or unenforceable provision, and the rights and
obligations of each party shall be construed and enforced accordingly.
Section 9.10. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the Province of Ontario, Canada.
Section 9.11. Waiver of Jury Trial. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE
--------------------
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 9.12. Assignment. etc. Entrust's rights under this Agreement are
----------------
personal to Entrust and Entrust shall not assign, sublet or otherwise transfer
any right or interest under this Agreement to any other party. Subject to the
foregoing, this Agreement and all of the provisions hereof shall be binding
12
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upon and inure to the benefit of, and be enforceable by, the parties hereto and
their respective heirs, administrators, executors, successors, and permitted
assigns.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their
authorized representatives.
NORTHERN TELECOM LIMITED ENTRUST
TECHNOLOGIES INC.
By: /s/ Peter W. Currie By: /s/ John A. Ryan
Name: Peter W. Currie Name: John A. Ryan
Title: Senior Vice President and Title: President
Chief Financial Officer
By: /s/ David D. Archibald
Name: David D. Archibald
Title: Vice President and
Deputy General Counsel
13
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EXHIBIT A
DESCRIPTION OF SERVICES
PART I -- Services Subject to Customary Billing. The billing methodology shall
be based on Nortel's internal apportionment formulas.
Property administration
Premises other than property leased exclusively for ETL and ETI (such as the
Headquarters)
Treasury services (money and banking and other related services)
Finance services customarily provided to like business units of Nortel
Accounting services customarily provided to like business units of Nortel (e.g.,
---
accounts receivable, accounts payable, payroll, general ledger, fixed assets and
related services)
Credit and collection
Human resource services
Employee and executive training
Corporate supply purchasing
Environment and ethics
Insurance (liability, property, casualty, fiduciary and surety bonds)
Information system services
Global telecommunications and network services
International operations support
PART II -- Services Subject to Pass Through Billing. The billing methodology
shall be based on the actual cost of Nortel's occupancy of a given Facility
including lease charges, utilities charges, real and personal property taxes
relating to the Premises.
Headquarters and other properties leased exclusively for ETL and ETI. The
14
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actual costs will include rent and all other charges which Nortel is obligated
to pay to Nortel's landlord or others, such as operating costs.
PART III -- Services Subject to Cost Plus Billing. The billing methodology shall
be based on actual usage.
Interim CEO
Law Department (legal and secretarial services)
Tax Department (tax advice and tax return preparation)
Financial and accounting services over and above those customarily provided to
like business units of Nortel.
ETI Interim Benefit Plans (Nortel will provide medical, dental, vision, hearing
and EAP benefits to ETI employees utilizing COBRA until Entrust implements its
own plans.)
15
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EXHIBIT B
FACILITIES PROVISIONS
1. Right to Use Premises.
1.1. Premises. Entrust shall have the right to use the Premises, subject to the
--------
provisions of the Agreement, including Article V and this Exhibit B and shall
comply in all material respects with any applicable head lease (as hereinafter
defined).
1.2. Common Areas. Entrust's right to use any of the Premises shall include a
------------
non-exclusive right to use such interior common areas as may exist with respect
to the Facility in which the Premises are located and as designated by Nortel,
which may include circulation corridors, stairwells, lobbies, library,
cafeteria, restrooms and conference rooms, if any, and exterior common areas
serving the Facilities, including parking areas and sidewalks, if any (which
designated interior common areas and exterior common parking and other such
exterior common areas within the Facility are herein collectively referred to as
the "Common Areas"). Nortel reserves the right to limit access to any part of
any Facility for confidentiality purposes.
1.3. Nortel Right of Entry. Except for the Premises and Common Areas, Entrust
---------------------
shall not be entitled to enter in or on any other portions of the Facilities
including without limitation all non-Entrust office areas and laboratory spaces,
unless with express written permission from Nortel and in the company of an
authorized Nortel employee. Except (a) in connection with the performance of its
obligations under this Agreement or any head lease; (b) for purposes of
inspecting the Premises for compliance with Entrust's obligations under this
Agreement; (c) to show the Facility to any prospective purchaser or mortgagor;
(d) to make alterations, additions, repairs or improvements as provided for
herein; or, (e) in an emergency, Nortel shall not be entitled to enter the
Premises unless with express written permission from and in the company of an
Entrust employee.
2. Use
2.1 No Warranties. Entrust specifically agrees that its right to use each of the
-------------
Premises is limited to each of the Premises and the Common Areas in its existing
condition "as-is" and "where-is" and acknowledges that, in entering into this
Agreement, Entrust does not rely on, and, Nortel does not make, any express or
implied representations or warranties as to any matters including, without
limitation, any characteristics of any of the Facilities or the Premises, the
suitability of any of the Premises for Entrust's intended use, or the compliance
or noncompliance of the Premises, the Facilities or any use thereof
16
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with any Applicable Laws (as defined below). Entrust acknowledges having
inspected the Premises and accepts same in their present condition.
2.2 No Changes to Premises. Entrust shall not make any alterations or
----------------------
improvements to any of the Premises whatsoever, including without limitation,
placing any sign or identification of any kind whatsoever in or on any of the
Facilities, without the prior written consent of Nortel, which may be withheld
in Nortel's sole discretion, except that Nortel's consent shall not be
unreasonably withheld as to alterations or improvements that are not material
and that are not inconsistent with Nortel's local space allocation policies and
interior decor and do not violate the terms of the head lease. Failure of
Nortel's landlord to consent to or approve the alterations or improvements,
where required by an head lease or non-compliance of alterations or improvements
with the head lease, shall be a reasonable grounds for Nortel to withhold
consent under this Section.
2.3 Nortel Right to Alter. Nortel reserves the right, at any time, and from time
---------------------
to time, to make alterations, additions, repairs or improvements to or in, or to
decrease the size or area of all or any part of any Facility, including, without
limitation, building partitions around, and establishing separate access to, any
of the Premises for security purposes, provided that any such alterations shall
not materially and adversely affect Entrust's use of the Premises located
therein and provided any alterations to any Facility which would materially
affect Entrust's use of the Premises located therein shall not be made without
reasonable notice to Entrust.
2.4 Use of Premises. Entrust shall use the Premises only for purposes specified
---------------
in the head lease or by Nortel. In no event shall Entrust use or permit the use
of any of the Premises or the Common Areas for any purpose or use that is
inconsistent with or interferes in any way with the conduct of other business
operations in the respective Facilities.
2.5 Entrust Controls. Entrust shall be responsible for and shall supervise and
----------------
control all of its officers, agents, employees, licensees, contractors,
customers and other invitees (collectively "Entrust Parties") so as to assure
compliance with all of the terms and conditions of this Agreement and the
applicable head lease. Entrust shall comply with all present and future security
measures implemented by Nortel in each of the Facilities, including, without
limitation, prohibitions of access to certain Facilities and Premises to
competitors of Nortel. Without limitation of the foregoing, Entrust shall make
reasonable efforts to ensure that no Personnel enter onto any space other than
the Premises or the Common Areas except with the permission from Nortel and in
the company of an authorized Nortel employee, that all Personnel comply with all
Applicable Laws, and do not conduct any illegal activities or activities
resulting in any nuisance or which may constitute harassment of any kind. All
Personnel
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shall be clearly identified as affiliated with Entrust and wear appropriate name
badges or other easily visible identification approved or required by Nortel at
all times while on any of the Facilities.
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3. Maintenance; Compliance with Laws, Rules and Regulations; Hazardous
Materials
3.1 Maintenance. Entrust shall not cause or permit any damage to any of the
-----------
Premises or Facilities and shall maintain the Premises in a clean, safe and
sanitary condition, reasonable wear and tear associated with normal office usage
excluded. Entrust shall not make any repairs to any of the Premises or
Facilities, without the prior written consent of Nortel, which may be withheld
in Nortel's sole discretion. If Nortel determines that it is necessary to repair
any damage attributable to Entrust's use and makes such repairs, Entrust shall
reimburse Nortel for the cost of all such repairs within thirty (30) days of
receipt by Entrust of an invoice from Nortel. Entrust shall not permit or suffer
any injury, waste or nuisance in or to any of the Premises or Facilities.
3.2 Compliance With Laws. Entrust, at Entrust's sole cost and expense, shall
--------------------
comply with all Applicable Laws relating to Entrust's use of each of the
Premises. Notwithstanding the foregoing, Entrust shall not make any physical
change to the Premises in order to comply with Applicable Laws without the prior
written consent of Nortel, which may be withheld in Nortel's sole discretion,
except that Nortel's consent shall not be unreasonably withheld as to changes
that are not structural or capital improvements and are required in order to
comply with Applicable Laws. If Nortel consents to any changes, at Nortel's
election, Nortel may make such changes. As used herein, the term "Applicable
Laws" means all applicable laws, codes, ordinances, rules and regulations of all
foreign, federal, state, county, municipal or other governmental authorities or
instrumentalities.
3.3 Other Compliance. Entrust shall comply with the requirements of Nortel's
----------------
property/liability and workers compensation insurance carriers and all rules and
regulations of the Facilities as are established from time to time including,
without limitation, all Facility security procedures and requirements.
3.4 Head Lease Compliance. Notwithstanding any other provision of this Schedule
---------------------
B, Entrust shall comply with all provisions of any head lease for any of the
Premises that are leased and not owned by Nortel (the "head lease"). Nortel
shall furnish Entrust with a copy of any applicable head lease. Nortel may
request that Entrust enter into a specific license, sublease, assignment or
similar arrangement with respect to any Premises and the parties shall negotiate
in good faith such a license, sublease, assignment or other arrangement on terms
customary for the location of the Premises before Entrust may occupy such
Premises and consistent with the terms of this Agreement and the applicable head
lease. At the request of Nortel, Entrust shall satisfy the requirements of any
head lease with respect to Entrust's use of the Premises, including, but not
limited to, executing and delivering such documents and taking such other
actions as may be required by the landlord under the terms of
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any head lease (including terminating this Agreement with respect to the
Premises and vacating the Premises, provided that Nortel and Entrust will
cooperate in good faith to vacate in a manner so as to minimize any disruption
of Entrust's business and any cost to Entrust) or to prevent or cure a default
under any head lease, as well as any other actions reasonably requested by
Nortel with respect thereto;
3.5 Hazardous Materials. Entrust shall not cause or permit any Hazardous
-------------------
Material to be used, stored, discharged, released or disposed of in, from, under
or about any of the Premises or Facilities (except in accordance with Applicable
Laws). As used herein, the term "Hazardous Material" means any substance or
material which has been determined by any applicable foreign, federal, state,
county, municipal or other governmental authority to be capable of losing a risk
of injury to health or safety or damage to the environment. Entrust shall not
undertake any hazardous or other activity at any of the Premises which could
result in an increase in Nortel's insurance premiums.
4. Insurance; Condemnation
4.1 Insurance. At all times during Entrust's use of any of the Premises under
---------
this Agreement, Entrust shall maintain comprehensive general liability
insurance, including contractual liability with a combined single limit of
liability of not less than two million dollars ($2,000,000) or if the Premise is
leased Entrust shall maintain the insurance coverage required in the applicable
head lease between Nortel and the landlord.
(a) Such coverage shall be in a commercial or comprehensive general liability
form with at least the following coverages: (i) including employees as
additional insureds, and (ii) providing for blanket contractual coverage,
broad form property damage coverage and products and completed operations
coverage. Such coverage may be provided by a combination of primary and
umbrella liability coverage.
(b) Such insurance shall be issued by financially reputable insurance companies
acceptable to Nortel, shall name Nortel as an additional insured, shall
include contractual liability coverage insuring the liability assumed
hereunder by Entrust, shall provide that it is primary insurance and not
excess over or contributory with any other valid, existing and applicable
insurance covering the same loss carried by Nortel or any other party,
shall provide for severability of interests, shall further provide that an
act or omission of one of the named insureds which would void or otherwise
reduce coverage shall not reduce or void the coverage as to any insured,
shall afford coverage for all claims based on acts, omissions, injury or
damage which occurred or arose (or the onset of which occurred or arose) in
whole or in part during the policy period,
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and shall provide that Nortel will receive thirty (30) days' written notice
from the insurer prior to any cancellation or change of coverage.
(c) Nortel acknowledges that the insurance Service provided by Nortel to
Entrust as of the Effective Date and for so long as Entrust contracts for
such insurance Service complies with the requirements of this Section 4.1.
4.2 Worker's Compensation. Entrust shall also maintain Worker's Compensation
---------------------
Insurance in the amounts and coverages required under worker's compensation,
disability and similar employee benefit laws applicable to the states and
countries where each of the Premises is located and Employer's Liability
Insurance, with limits customary to the state or country where each Premises is
located.
4.3 Risk Allocation. Entrust shall bear all risk to its property at each of the
---------------
Premises and shall maintain at its sole expense such fire and other property
insurance on the property of Entrust in the Facilities as it deems desirable for
its protection. If any of the Premises or Facilities shall be damaged or
destroyed by fire or any other casualty howsoever caused or by any other cause
whatsoever, Entrust agrees to give prompt notice thereof to Nortel. Nortel shall
have no obligation to Entrust whatsoever to repair any damage done to the
Premises or the Facilities or replace any property of Entrust located therein.
If a casualty occurs such that the head lease with respect to any Premises is
terminated, by Nortel or the landlord, or Nortel otherwise elects to cease using
the Premises as a result of the casualty, the provisions of Section 1.2 above
shall apply, and this Agreement shall terminate with respect to such Premises.
If a casualty occurs such that Entrust's use of a Premises is materially
adversely affected and the damage is not able to be repaired within one hundred
twenty (120) days as determined by Nortel on notice to Entrust, Entrust shall
have the right to terminate this Agreement with respect to such Premises by
written notice to Nortel within thirty (30) days after.
5. Utilities and Services.
5.1 Services. During the use by Entrust of any Premises in accordance with this
--------
Agreement, if Nortel owns the Facility, subject to force majeure (as defined in
the head lease including any cause beyond Nortel's commercially reasonable
control), Nortel shall furnish to Entrust such services and utilities as are
furnished currently at each such Premises, each in such amounts, on average, as
have been customarily furnished to equivalent space in the respective
Facilities, it being understood and agreed that Nortel shall not be required to
make any improvements to the respective Facilities or the Facilities' systems or
provide any greater services to the applicable Premises than the greater of such
services as (a) are currently furnished under the head lease or (b) Nortel
reasonably
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determines from time to time to be necessary or appropriate for the conduct of
Nortel's business in the respective Facilities. During the use by Entrust of any
Premises in accordance with this Agreement, if Nortel leases the Facility,
Nortel shall use reasonable efforts to cause the landlord of the leased Facility
to furnish to or for the benefit of the Premises the services and utilities that
the landlord is obligated to provide under the head lease, it being understood
and agreed that Nortel shall not be required to make any improvements or provide
any services to Entrust Premises in leased Facilities.
5.2 Communication Services. Nortel shall have no liability hereunder to Entrust
----------------------
for any computer crash [failure or malfunction], system programming error, virus
or other hardware software malfunction of any kind which results in Entrust
being unable to use any computer, network or system or which results in a loss
of data or the destruction or degradation of any programs or source codes.
6. Termination.
6.1 Termination for Default. If Entrust fails to perform any obligation under
-----------------------
Exhibit B this Agreement, Nortel may give written notice to Entrust of its
intent to terminate this Exhibit B, which notice shall be effective thirty (30)
days after receipt written notice from Nortel if such default remains uncured at
the end of such thirty (30) day period if the default by its nature can be cured
within sixty (60) days, or, if the default by its nature cannot be cured within
thirty (30) days, if such default remains uncured at the end of such longer
period as may be required to cure the default, so long as the cure is commenced
within the thirty (30) day period and thereafter diligently prosecuted to
completion; provided, however, the maximum cure period shall not exceed the cure
period for a default by tenant pursuant to the head lease. Upon such
termination, Entrust shall immediately vacate and surrender the Premises to
Nortel in accordance with Section 6.4 below. In the event of any such
termination by Entrust, Entrust's right to terminate shall be Entrust's sole and
exclusive remedy in the event of any default on the part of Nortel hereunder,
except as follows: if Nortel fails to provide services or utilities to Entrust
in a Facility owned by Nortel pursuant to Section 8.1 or fails to use reasonable
efforts to cause the landlord of a leased Facility to furnish to or for the
benefit of the Premises the services and utilities that the landlord is
obligated to provide under the head lease and fails to cure any such default
after notice within the cure period provided for above, Entrust shall be
entitled to Entrust's actual damages for such default.
6.2 Rights on Termination, in addition to the foregoing rights to terminate,
---------------------
Nortel shall be entitled to exercise all other rights and remedies under this
Agreement and under Applicable Laws (which shall be cumulative and not
exclusive), specifically including the right to summary dispossession of
Entrust.
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6.3 Default. Nortel shall be entitled to perform any obligation of Entrust
-------
hereunder the performance of which is not commenced within five (5) business
days after notice from Nortel or which obligation is not thereafter diligently
prosecuted to completion, and in such event Entrust shall reimburse Nortel for
all actual costs and expenses incurred by Nortel in performing such obligation.
6.4 Surrender. Upon the expiration or termination of this Agreement for
---------
whatever reason with respect to any of the Premises, Entrust shall surrender the
applicable Premises to Nortel in good order and repair and in the condition in
which it was delivered to Entrust, free and clear of all occupancies, liens and
encumbrances and shall remove all of its personal property and subject to the
following.
(a) Any items of Entrust's personal property that remain on any Premises after
the expiration or termination of this Agreement with respect to such
Premises, may, at the option of Nortel, be deemed abandoned, and, in such
case, may either be retained by Nortel as its property or disposed of,
without accountability, at Entrust's expense in such manner as Nortel may
see fit.
(b) Entrust shall not holdover beyond the expiration or termination of this
Agreement with respect to any Premises without the express written consent
of Nortel.
6.5 Survival. Entrust's obligations under this Section 6 shall survive the
--------
expiration or termination of this Agreement.
7. Other Provisions
7.1 Release. Entrust acknowledges and agrees that, anything set forth in this
-------
Agreement to the contrary notwithstanding, other than the last sentence of
Section 8.3, Nortel, its employees, agents, officers and directors shall not be
responsible for or liable to Entrust and Entrust hereby waives and releases, to
the fullest extent permitted by Applicable Laws, all claims against such persons
for any injury, loss or damage to any person or property in or about the
Premises or the Facilities by or from any cause whatsoever including, without
limitation, acts or omissions of persons using adjoining premises or any part of
the Facilities or areas in the vicinity of the Premises or the Facilities;
theft; burst, stopped or leaking water, gas, sewer or steam pipes; or
interruption or failure of utility or other services for, or existence of, gas,
fire, oil or electricity in, on or about the Premises or the Facilities. Further
notwithstanding anything to the contrary set forth in this Agreement, in no
event shall Nortel be liable for any consequential damages, including without
limitation, lost profits, lost opportunity or interference with Entrust's
business, arising out of a breach of this Agreement.
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7.2 Indemnity. Entrust agrees to indemnify, protect and defend against and save
---------
and hold harmless Nortel its employees, agents, officers and directors from, any
and all losses, costs, liabilities, claims, damages and expenses, including,
without limitation, reasonable attorneys' fees and expenses, incurred in
connection with any injury, loss or damage to any person or property arising
from the use or occupancy or manner of use or occupancy of any of the Premises
or the Facilities by Entrust or Entrust's contractors, agents, servants,
employees, visitors or licensees. This Section 7.2 shall survive expiration or
termination of this Agreement.
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Exhibit 10.7
SUPPORT AGREEMENT
-----------------
MEMORANDUM OF AGREEMENT made as of the 31st day of December, 1996.
BETWEEN:
ENTRUST TECHNOLOGIES INC.,
a corporation existing under the laws
of the State of Maryland,
(hereinafter referred to as "Entrust"),
OF THE FIRST PART;
- and -
ENTRUST TECHNOLOGIES LIMITED,
a corporation existing under the laws of the
Province of Ontario,
(hereinafter referred to as the "Corporation"),
OF THE SECOND PART.
WHEREAS the parties hereto desire to make appropriate provision and to
establish a procedure whereby Entrust will take certain actions and make certain
payments and deliveries necessary to ensure that the Corporation will be able to
make certain payments and to deliver or cause to be delivered shares of Series A
common stock, par value U.S. $0.01 per share, of Entrust ("Entrust Common
Shares") in satisfaction of the obligations of the Corporation under the
provisions (the "Exchangeable Share Provisions") attaching to the Exchangeable
Shares with respect to the payment and satisfaction of dividends, Liquidation
Amounts, Retraction Prices and Redemption Prices all in accordance with the
Exchangeable Share Provisions;
NOW THEREFORE in consideration of the respective covenants in this
Agreement and for other good and valuable consideration (the receipt and
sufficiency of which are hereby acknowledged), the parties hereto agree as
follows:
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ARTICLE 1
DEFINITIONS AND INTERPRETATIONS
-------------------------------
1.1 DEFINED TERMS. In this Agreement including the recitals hereto, all
-------------
capitalized words and expressions used herein and not otherwise defined herein
shall have the meanings ascribed to such words and expressions in the
Exchangeable Share Provisions, unless the context requires otherwise.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this
--------------------------------------------
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
1.3 NUMBER, GENDER, ETC. In this Agreement, words importing the singular
-------------------
number only shall include the plural and vice versa, words importing the use of
any gender shall include all genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is required to be
-------------------
taken under this Agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day.
ARTICLE 2
COVENANTS OF ENTRUST AND THE CORPORATION
----------------------------------------
2.1 COVENANTS OF ENTRUST REGARDING EXCHANGEABLE SHARES. So long as any
--------------------------------------------------
Exchangeable Shares are outstanding, Entrust shall:
(a) not declare or pay any dividend on Entrust Common Shares unless (i)
the Corporation shall have sufficient assets, funds and other property
(including, where applicable, Entrust Common Shares or other
securities of Entrust) available to enable the due declaration and the
due and punctual payment in accordance with applicable law, of an
equivalent dividend on the Exchangeable Shares in accordance with the
Exchangeable Share Provisions, and (ii) the Corporation shall
simultaneously declare or pay, as the case ma be, an equivalent
dividend on the Exchangeable Shares in accordance with the
Exchangeable Share Provisions;
(b) cause the Corporation to declare simultaneously with the declaration
of any dividend on Entrust Common Shares an equivalent dividend on the
Exchangeable Shares and, when such dividend is paid on Entrust Common
Shares, cause the Corporation to pay simultaneously therewith
2
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such equivalent dividend on the Exchangeable Shares, in each case in
accordance with the Exchangeable Share Provisions;
(c) advise the Corporation sufficiently in advance of the declaration by
Entrust of any dividend on Entrust Common Shares and take all such
other actions as are necessary in cooperation with the Corporation, to
ensure that the declaration date, record date and payment date for any
dividend on the Exchangeable Shares shall be the same as the record
date, declaration date and payment date for the corresponding dividend
on Entrust Common Shares, and such dates in respect of dividends on
the Exchangeable Shares shall be in accordance with any requirement of
the Exchangeable Share Provisions;
(d) ensure that the record for any dividend declared on Entrust Common
Shares, Entrust Common Share Reorganization, Rights Offering, Special
Distribution or Capital Reorganization is not less than ten Business
Days after the declaration date for such dividend, Entrust Common
Share Reorganization, Rights Offering, Special Distribution or Capital
Reorganization;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with
applicable law, to pay and otherwise perform its obligations with
respect to the satisfaction of the Liquidation Amount in respect of
each issued and outstanding Exchangeable Share upon the liquidation,
dissolution or winding-up of the Corporation, including without
limitation all such actions and all such things as are necessary or
desirable to enable and permit the Corporation to deliver Entrust
Common Shares to the holders of Exchangeable Shares in satisfaction of
the Liquidation Amount for each such Exchangeable Share, in accordance
with the provisions of Article 4 of the Exchangeable Share Provisions;
(f) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with
applicable law, to pay and otherwise perform its obligations with
respect to the satisfaction of the Retraction Price and the Redemption
Price, including without limitation all such actions and all such
things as are necessary or desirable to enable and permit the
Corporation to deliver Entrust Common Shares to the holders of
Exchangeable Shares, upon the retraction or redemption of the
Exchangeable Shares in accordance with the provisions of Article 5 or
Article 6 of the Exchangeable Share Provisions, as the case may be;
3
<PAGE>
(g) not exercise its vote as a shareholder of the Corporation to initiate,
consent to or approve the voluntary liquidation, dissolution or
winding-up of the Corporation nor take any action or omit to take any
action that is designed to result in the liquidation, dissolution or
winding-up of the Corporation; and
(h) not exercise its vote as a shareholder of the Corporation to authorize
the continuance or other transfer of the corporate existence of the
Corporation to any jurisdiction outside Canada.
2.2 SEGREGATION OF FUNDS. Entrust will cause the Corporation to deposit a
--------------------
sufficient amount of funds in a separate account and segregate a sufficient
amount of such assets and other property as if necessary to enable the
Corporation to pay or otherwise satisfy the applicable dividends, Liquidation
Amount, Retraction Price or Redemption Price, and will cause the Corporation to
use such funds, assets and other property so segregated exclusively for the
payment of dividends and the payment or other satisfaction of the Liquidation
Amount, the Retraction Price or the Redemption Price, as applicable, in each
case in accordance with the Exchangeable Share Provisions.
2.3 RESERVATION OF ENTRUST COMMON SHARES. Entrust hereby represents and
------------------------------------
warrants that it has irrevocably reserved for issuance out of its authorized and
unissued capital stock such number of Entrust Common Shares as is equal to the
number of Exchangeable Shares outstanding immediately following the Effective
Date and covenants that at all times in the future while any Exchangeable Shares
are outstanding it will keep available, free from pre-emptive and other rights
out of its authorized and unissued capital stock such number of Entrust Common
Shares (or other shares or securities into which Entrust Common Shares may be
reclassified or changed) as is necessary to enable Entrust and the Corporation
to perform their respective obligations pursuant to this Agreement and the
Exchangeable Share Provisions.
2.4 NOTIFICATION OF CERTAIN EVENTS. In order to assist Entrust to comply with
------------------------------
its obligations hereunder, the Corporation will give Entrust notice of each of
the following events at the time set forth below:
(a) in the event of any determination by the Board of Directors of the
Corporation to institute voluntary liquidation, dissolution or winding
up proceedings with respect to the Corporation or to effect any other
distribution of the assets of the Corporation among its shareholders
for the purpose of winding up its affairs, at least 60 days prior to
the proposed effective date of such liquidation, dissolution, winding
up or other distribution;
4
<PAGE>
(b) immediately, upon the earlier of (i) receipt by the Corporation of
notice of, and (ii) the Corporation otherwise becoming aware of, any
threatened or instituted claim, suit, petition or other proceedings
with respect to the involuntary liquidation, dissolution or winding up
of the Corporation or to effect any other distribution of the assets
of the Corporation among its shareholders for the purpose of winding
up its affairs;
(c) immediately, upon receipt by the Corporation of a Retraction Request;
and
(d) as soon as practicable upon the issuance by the Corporation of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
2.5 DELIVERY OF ENTRUST COMMON SHARES. In furtherance of its obligations under
---------------------------------
subsections 2.1(e) and (f) hereof, upon notice of any event that requires the
Corporation to cause to be delivered Entrust Common Shares to any holder of
Exchangeable Shares, Entrust shall forthwith issue and deliver the requisite
Entrust Common Shares to the Corporation or, if the Corporation so directs, to
or to the order of the former holder of the surrendered Exchangeable Shares.
All such Entrust Common Shares shall be duly issued as fully paid and non-
assessable and shall be free and clear of any Liens. In consideration of the
issuance of each such Entrust Common Share by Entrust, the Corporation shall
issue to Entrust, or as Entrust shall direct, such number of common shares of
the Corporation as is equal to the fair value of such Entrust Common Shares.
2.6 QUALIFICATION OF ENTRUST COMMON SHARES. Entrust shall use all reasonable
--------------------------------------
efforts to obtain or have available exemptions from the registration and
prospectus requirements of applicable Canadian and United States securities laws
to permit the issuance of the Entrust Common Shares upon any exchange of the
Exchangeable Shares to the extent possible without registration or qualification
with, or approval of, or the filing of any document including any registration
statement or prospectus or similar document with, any Canadian or United States
securities authorities.
2.7 TENDER OFFERS, ETC. In the event that a tender offer, share exchange
------------------
offer, issuer bid, take-over bid or similar transaction with respect to Entrust
Common Shares (an "Offer") is proposed by Entrust or is proposed to Entrust or
its stockholders and is recommended by the board of directors of Entrust, or is
otherwise effected or to be effected with the consent or approval of the board
of directors of Entrust, Entrust will use all commercially reasonable efforts
expeditiously and in good faith to take all such actions and do all such things
as are necessary or desirable to enable and permit holders of Exchangeable
Shares to participate in such Offer to the same extent and on an economically
equivalent basis as the holders of Entrust Common Shares, without
discrimination. Without limiting the generality of
5
<PAGE>
the foregoing, Entrust will use all commercially reasonable efforts
expeditiously and in good faith to ensure that holders of Exchangeable Shares
may participate in all such Offers without being required to retract
Exchangeable Shares as against the Corporation (or, if so required, to ensure
that any such retraction shall be effective only upon, and shall be conditional
upon, the closing of the Offer and only to the extent necessary to tender or
deposit to the Offer).
2.8 OWNERSHIP OF OUTSTANDING SHARES. Entrust covenants and agrees in favor of
-------------------------------
the Corporation that, as long as any outstanding Exchangeable Shares are owned
by any person or entity other than Entrust or any of its Affiliates, Entrust
will be and remain the direct or indirect beneficial owner of all issued and
outstanding shares in the capital of the Corporation (other than one common
share and the Exchangeable Shares) and all other outstanding securities of the
Corporation carrying or otherwise entitled to voting rights in any circumstances
(other than Exchangeable Shares), unless Entrust shall have obtained the prior
approval of the Corporation and the holders of the Exchangeable Shares given in
accordance with section 9.2 of the Exchangeable Share Provisions.
2.9 ENTRUST NOT TO VOTE EXCHANGEABLE SHARES. Entrust covenants and agrees
---------------------------------------
that it will appoint and cause to be appointed proxyholders with respect to all
Exchangeable Shares held by Entrust and its Affiliates for the sole purpose of
attending each meeting of holders of Exchangeable Shares in order to be counted
as part of the quorum for each such meeting. Entrust further covenants and
agrees that it will not, and will cause its Affiliates not to, exercise any
voting rights that may be exercisable by holders of Exchangeable Shares from
time to time pursuant to the Exchangeable Share Provisions or pursuant to the
provisions of the OBCA with respect to any Exchangeable Shares held by it or by
its Affiliates in respect of any matter considered at any meeting of holders of
Exchangeable Shares, including without limitation any approval to be given by
holders of Exchangeable Shares pursuant to section 9.2 of the Exchangeable Share
Provision.
2.10 ECONOMIC EQUIVALENCE. Entrust hereby acknowledges that it will be bound
--------------------
by any determination of economic equivalence made by the Board of Directors of
the Corporation pursuant to section 10.1 of the Exchangeable Share Provisions.
2.11 CAPITAL REORGANIZATION OF ENTRUST. If at any time there is a capital
---------------------------------
reorganization of Entrust that is not provided for in subsection 1.1(o) of the
Exchangeable Share Provisions or a consolidation, merger, arrangement or
amalgamation (statutory or otherwise) of Entrust with or into another entity
(any such event being called a "Capital Reorganization"), Entrust shall take all
such actions and do all such things as are necessary to ensure that holders of
Exchangeable Shares whose Exchangeable Shares have not been exchanged for
Entrust Common Shares in accordance with the Exchangeable Share Provisions prior
to the record date for such Capital Reorganization shall receive, upon any such
exchange occurring pursuant to
6
<PAGE>
the Exchangeable Share Provisions at any time after the record date for such
Capital Reorganization, in lieu of the Entrust Common Shares that such holders
would otherwise have been entitled to receive pursuant to the Exchangeable Share
Provisions, the number of shares or other securities of Entrust or of the body
corporate resulting, surviving or continuing from the Capital Reorganization, or
other property, that such holders would have been entitled to receive as a
result of such Capital Reorganization if, on the record date, such holders would
have been the registered holders of the number of Entrust Common Shares to which
such holders were then entitled upon any exchange of their Exchangeable Shares
into Entrust Common Shares in accordance with the Exchangeable Share Provisions,
subject to adjustment thereafter in the same manner, as nearly as may be
possible, as is provided for in subsection 1.1(o) of the Exchangeable Share
Provisions; provided that no such Capital Reorganization shall be carried into
effect unless all necessary steps shall have been taken so that each holder of
Exchangeable Shares shall thereafter be entitled to receive, upon any exchange
of his Exchangeable Shares pursuant to the Exchangeable Share Provisions, such
numbers of shares or other securities of Entrust or of the body corporate
resulting, surviving or continuing from the Capital Reorganization, or other
property.
2.12 OTHER CHANGE IN ENTRUST COMMON SHARES. In the case of any
-------------------------------------
reclassification of, or other change in, the outstanding Entrust Common Shares
other than a Common Share Reorganization or a Capital Reorganization, Entrust
shall take all such actions and do all such things as are necessary to ensure
that holders of Exchangeable Shares shall receive, upon the occurrence at any
time after such record date of any event whereby they would receive Entrust
Common Shares pursuant to the Exchangeable Share Provisions, such shares,
securities or rights as they would have received if their Exchangeable Shares
had been exchanged for Entrust Common Shares pursuant to the Exchangeable Share
Provisions immediately prior to such record date, subject to adjustment
thereafter in the same manner, as nearly as may be possible, as is provided for
in subsection 1.1(o) of the Exchangeable Share Provisions.
ARTICLE 3
GENERAL
-------
3.1 TERM. This Agreement shall come into force and be effective as of the date
----
hereof and shall terminate and be of no further force and effect at such time as
there are no Exchangeable Shares (or securities or rights convertible into or
exchangeable for or carrying rights to acquire Exchangeable Shares) held by any
party other than Entrust and its Affiliates.
3.2 CHANGES IN CAPITAL OF ENTRUST AND THE CORPORATION. Notwithstanding the
-------------------------------------------------
provisions of section 3.4 hereof, at all times after the occurrence of any event
effected pursuant to sections 2.7, 2.11 or 2.12 hereof as a result of which
either Entrust
7
<PAGE>
Common Shares or the Exchangeable Shares or both are in any way changed, this
Agreement shall forthwith be amended and modified as necessary in order that it
shall apply with full force and effect, mutatis mutandis, to all new securities
into which Entrust Common Shares or the Exchangeable Shares or both are so
changed and the parties hereto shall execute and deliver an agreement in writing
giving effect to and evidencing such necessary amendments and modifications.
3.3 SEVERABILITY. If any provision of this Agreement is held to be invalid,
------------
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or impaired thereby
and this Agreement shall be carried out as nearly as possible in accordance with
its original terms and conditions.
3.4 AMENDMENTS, MODIFICATIONS, ETC. This Agreement may not be amended or
------------------------------
modified except by an agreement in writing executed by the Corporation and
Entrust and approved by the holders of the Exchangeable Shares in accordance
with section 11.2 of the Exchangeable Share Provisions.
3.5 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section 3.4, the
----------------------
parties to this Agreement may without approval of the holders of the
Exchangeable Shares, at any time and from time to time, amend or modify this
Agreement in writing for the purposes of:
(a) adding to the covenants of either or both parties for the protection
of the interests of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of
the Corporation and Entrust, it may be expedient to make, provided
that each such board of directors shall be of the opinion that such
amendments or modifications will not be prejudicial to the interests
of the holders of the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel to
the Corporation and Entrust, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error herein, provided that
the boards of directors of each of the Corporation and Entrust shall
be of the opinion that such changes or corrections will not be
prejudicial to the interests of the holders of the Exchangeable
Shares.
3.6 MEETING TO CONSIDER AMENDMENTS. The Corporation, at the request of
------------------------------
Entrust, shall call a meeting or meetings of the holders of the Exchangeable
Shares for
8
<PAGE>
the purpose of considering any proposed amendment or modification requiring
approval pursuant to section 3.4 hereof. Any such meeting or meetings shall be
called and held in accordance with the by-laws of the Corporation and the
Exchangeable Share Provisions. In lieu of calling a meeting of holders of
Exchangeable Shares, with the consent of Entrust, any proposed amendment or
modification requiring approval of the holders of Exchangeable Shares pursuant
to section 3.4 hereof may be given by such holders executing a written
resolution evidencing the approval of such proposed amendment or modification,
which resolution must be signed by all the holders of Exchangeable Shares
entitled to vote on such matter.
3.7 WAIVERS ONLY IN WRITING. No waiver of any of the provisions of this
-----------------------
Agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by both of the parties hereto.
3.8 ENUREMENT. This Agreement shall be binding upon and enure to the benefit
---------
of the parties hereto and their respective successors and permitted assigns.
3.9 ENTRUST SUCCESSORS. Entrust shall not enter into any transaction (whether
------------------
by way of reconstruction, reorganization, consolidation, merger, transfer, sale,
lease or otherwise) whereby all or substantially all its undertaking, property
and assets would become the property of any other person or, in the case of a
merger, of the continuing corporation resulting therefrom, unless:
(a) such other person or continuing corporation is a corporation (the
"Entrust Successor") incorporated under the laws of any state of the
United States or the laws of Canada or any province thereof; and
(b) the Entrust Successor, by operation of law, becomes, without more,
bound by the terms and provisions of this Agreement or, if not so
bound, executes, prior to or contemporaneously with the consummation
of such transaction, an agreement to be bound by the provisions hereof
as if it were an original party hereto and to observe and perform all
of the covenants and obligations of Entrust pursuant to this
Agreement, in form satisfactory to the Corporation, acting reasonably.
Nothing herein shall be constructed as preventing the amalgamation or merger of
any wholly-owned subsidiary of Entrust with or into Entrust.
3.10 NOTICE TO PARTIES. All notices and other communications between the
-----------------
parties shall be in writing and shall be deemed to have been given if delivered
personally or by confirmed telecopy to the parties at the following addresses
(or at such other addresses for either such party as shall be specified in like
notice):
9
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(i) if to Entrust Technologies Inc.:
Entrust Technologies Inc.
2 Constellation Crescent
Nepean, Ontario
K2G 5J9
Attention: President
---------------------
(ii) if to the Corporation at:
Entrust Technologies Limited
2 Constellation Crescent
Nepean, Ontario
K2G 5J9
Attention: President
---------------------
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of the confirmed receipt
thereof unless such day is not a Business Day or unless such notice or
communication was not given during the normal business hours of the recipient on
such day, in which case it shall be deemed to have been given and received upon
the immediately following Business Day.
3.11 COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.12 JURISDICTION. This Agreement shall be construed and enforced in
------------
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
3.13 ATTORNMENT. Entrust agrees that any action or proceeding arising out of
----------
or relating to this Agreement may be instituted in the courts of the Province of
Ontario, waives any objection which it may have now or hereafter to the venue of
any such action or proceeding, irrevocably submits to the jurisdiction of the
said courts in any such action or proceeding, agrees to be bound by any judgment
of the said courts and not to seek, and hereby waives, any review of the merits
of any such judgment by the courts of any other jurisdiction and hereby appoints
Northern Telecom Limited, 8200 Dixie Road, Suite 100, Brampton, Ontario L6T 5P6,
attention: Corporate Secretary as Entrust's attorney for service of process in
Ontario.
10
<PAGE>
IN WITNESS WHEREOF the parties have executed this Agreement as of the
date first above written.
ENTRUST TECHNOLOGIES INC.
by /s/John A. Ryan
President
ENTRUST TECHNOLOGIES LIMITED
by /s/John A. Ryan
President
11
<PAGE>
Exhibit 10.8
SHARE EXCHANGE AGREEMENT
------------------------
MEMORANDUM OF AGREEMENT made as of the 31st day of December, 1996.
AMONG:
ENTRUST TECHNOLOGIES INC.,
a corporation existing under the
laws of the State of Maryland
(hereinafter referred to as "Entrust"),
OF THE FIRST PART,
- and -
ENTRUST TECHNOLOGIES LIMITED,
a corporation existing under the laws of the
Province of Ontario,
(hereinafter referred to as the "Corporation"),
OF THE SECOND PART,
- and -
NORTHERN TELECOM LIMITED,
a corporation existing under the laws of
Canada, and the holder of non-voting exchangeable
shares in the capital of the Corporation,
(hereinafter referred to as "Nortel"),
OF THE THIRD PART.
WHEREAS the parties agree that Entrust is to grant to and in favour of
Nortel and such other holders (other than Entrust) from time to time of
exchangeable non-voting shares in the capital of the Corporation (the
"Exchangeable Shares") the right, in the circumstances set forth herein, to
require Entrust to purchase from each such holder, as the case may be, all or
any part of the Exchangeable Shares held by such holder;
<PAGE>
NOW THEREFORE in consideration of the respective covenants and
agreements provided in this Agreement and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
------------------------------
1.1 DEFINITIONS. In this Agreement, the following terms shall have the
-----------
following meanings and all other capitalized words and expressions used but not
otherwise defined herein shall have the meanings ascribed to such words and
expressions in the rights, restrictions, privileges and conditions set forth in
the provisions attaching to the Exchangeable Shares, unless the context requires
otherwise:
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of
Entrust to effect the automatic exchange of Entrust Common Shares for
Exchangeable Shares pursuant to subsection 2.11(b) hereof.
"CALL RIGHTS" means collectively the Liquidation Call Right, the
Redemption Call Right and the Retraction Call Right.
"DEFAULT EVENT" means any failure, other than by reason of an
Insolvency Event, of the Corporation to perform any of its obligations pursuant
to the Exchangeable Share Provisions including, without limitation, its
obligation to redeem any Retracted Shares.
"ENTRUST COMMON SHARES" means the shares of common stock, par value
U.S. $0.01 per share, in the capital of Entrust.
"ENTRUST SUCCESSOR" has the meaning ascribed thereto in subsection
3.1(a) hereof.
"EXCHANGE RIGHT" has the meaning ascribed thereto in section 2.1
hereof.
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions set forth in the provisions attaching to the
Exchangeable Shares.
"EXCHANGEABLE SHARES" has the meaning ascribed thereto in the recitals
hereto.
"HOLDERS" means the registered holders from time to time of
2
<PAGE>
Exchangeable Shares including, without limitation, Nortel but excluding Entrust.
"INSOLVENCY EVENT" means the institution by the Corporation of any
proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or wound
up, or the consent of the Corporation to the institution of bankruptcy,
insolvency, dissolution or winding up proceedings against it, or the filing of a
petition, answer or consent seeking dissolution or winding up under any
bankruptcy, insolvency or analogous laws, including without limitation the
Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency
Act (Canada), and the failure by the Corporation to contest in good faith any
such proceedings commenced in respect of the Corporation within 15 days of
becoming aware thereof, or the consent by the Corporation to the filing of any
such petition or to the appointment of a receiver, or the making by the
Corporation of a general assignment for the benefit of creditors, or the
admission in writing by the Corporation of its inability to pay its debts
generally as they become due, or the Corporation not being permitted, pursuant
to solvency requirements of applicable law, to redeem any Retracted Shares
pursuant to section 5.6 of the Exchangeable Share Provisions.
"LIQUIDATION EVENT" has the meaning ascribed thereto in subsection
2.11(a) hereof.
"LIQUIDATION EVENT EFFECTIVE DATE" has the meaning ascribed thereto in
subsection 2.11(b) hereof.
"OFFICER'S CERTIFICATE" means, with respect to Entrust or the
Corporation, as the case may be, a certificate signed by any one of the Chairman
of the Board, the President, any Vice-President or any other senior officer of
Entrust or the Corporation, as the case may be.
"PERSON" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"RETRACTED SHARES" has the meaning ascribed thereto in section 2.6
hereof.
"SUPPORT AGREEMENT" means the support agreement made as of even date
herewith between the Corporation and Entrust.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this
---------------------------------------------
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
3
<PAGE>
1.3 NUMBER, GENDER, ETC. In this Agreement, words importing the singular
--------------------
number only shall include the plural and vice versa, and words importing the use
of any gender shall include all genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is required to
-------------------
be taken under this Agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
1.5 WITHHOLDING OF TAX. All amounts required to be paid, deposited or
------------------
delivered hereunder shall be paid, deposited or delivered after deduction of any
amount required by applicable law to be deducted or withheld on account of tax
and the deduction of such amounts and remittance to the applicable tax
authorities shall, to the extent thereof, satisfy such requirement to pay,
deposit or deliver hereunder.
ARTICLE 2
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE RIGHTS
--------------------------------------------
2.1 GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT. In consideration of the
-----------------------------------------
granting of the Call Rights to Entrust, Entrust hereby grants to the Holders (a)
the right (the "Exchange Right"), upon the occurrence and during the continuance
of an Insolvency Event or a Default Event, to require Entrust to purchase from
each Holder all or any part of the Exchangeable Shares held by such Holder, and
(b) the Automatic Exchange Rights, all in accordance with the provisions of this
Agreement.
2.2 LEGENDED SHARE CERTIFICATES. The Corporation shall cause each
---------------------------
certificate representing Exchangeable Shares to bear an appropriate legend
notifying the Holders of:
(a) the right to exercise the Exchange Right in respect of the
Exchangeable Shares held by a Holder; and
(b) the Automatic Exchange Rights.
2.3 PURCHASE PRICE. The purchase price payable by Entrust for each
--------------
Exchangeable Share to be purchased by Entrust under the Exchange Right shall be
an amount per share equal to (a) the Current Market Price multiplied by the
Current Entrust Common Share Equivalent, in each case determined on the day of
closing of the purchase and sale of such Exchangeable Share under the Exchange
Right, which shall be satisfied in full in respect of the Exchangeable Shares in
regard to which a Holder has exercised the Exchange Right by causing to be
delivered to such Holder such whole number of Entrust Common Shares as is equal
to the product obtained by multiplying the number of such Exchangeable Shares by
the Current Entrust
4
<PAGE>
Common Share Equivalent (together with an amount in lieu of any fractional
Entrust Common Share resulting from such calculation payable in accordance with
section 10.4 of the Exchangeable Share Provisions), plus (b) the aggregate of
all dividends declared and unpaid on each such Exchangeable Share (provided that
if the record date for any such declared and unpaid dividends occurs on or after
the day of closing of such purchase and sale the purchase price shall not
include such declared and unpaid dividends).
2.4 EXERCISE OF THE EXCHANGE RIGHT. Subject to the terms and conditions
------------------------------
herein set forth, a Holder shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event or a Default Event, to exercise the Exchange
Right with respect to all or any part of the Exchangeable Shares registered in
the name of such Holder on the books of the Corporation. To exercise the
Exchange Right, the Holder shall deliver to Entrust, in person, by courier or by
certified or registered mail, at its principal office or at such other place as
Entrust may from time to time designate by written notice to the Holders, the
certificates representing the Exchangeable Shares that such Holder desires
Entrust to purchase pursuant to the Exchange Right, duly endorsed in blank, and
accompanied by such other documents and instruments as Entrust may reasonably
require together with:
(a) a duly completed form of notice of exercise of the Exchange Right,
contained on the reverse of or attached to the Exchangeable Share
certificates, stating (i) that the Holder thereby exercises the
Exchange Right so as to require Entrust to purchase from the Holder
the number of Exchangeable Shares specified therein, (ii) that such
Holder has good title to and owns all such Exchangeable Shares to be
acquired by Entrust free and clear of all Liens, (iii) the names in
which the certificates representing Entrust Common Shares issuable in
connection with the exercise of the Exchange Right are to be issued,
and (iv) the names and addresses of the persons to whom such new
certificates should be delivered; and
(b) payment (or evidence satisfactory to Entrust of payment) of the taxes
(if any) payable as contemplated by section 2.7 of this Agreement.
If only a part of the Exchangeable Shares represented by any certificate or
certificates delivered to Entrust are to be purchased by Entrust under the
Exchange Right, a new certificate for the balance of such Exchangeable Shares
shall be issued to the Holder at the expense of the Corporation.
2.5 DELIVERY OF ENTRUST COMMON SHARES: EFFECT OF EXERCISE. Promptly after
-----------------------------------------------------
receipt of the certificates, duly endorsed in blank, representing the
Exchangeable Shares in respect of which the Exchange Right was exercised
pursuant to section 2.4 (together with such documents and instruments of
transfer and a duly completed
5
<PAGE>
form of notice of exercise of the Exchange Right (and payment of taxes, if any,
or evidence thereof in accordance with section 2.4)), Entrust shall notify the
Corporation of its receipt of the same and Entrust shall immediately thereafter
deliver or cause to be delivered to the Holder of such Exchangeable Shares (or
to such other persons, if any, properly designated by such Holder), the
certificates for the number of Entrust Common Shares issuable in connection with
the exercise of the Exchange Right, which shares shall be duly issued as fully
paid and non-assessable and shall be free and clear of any Liens, and cheques
for the balance, if any, of the total purchase price therefor (or, if part of
the purchase price consists of dividends payable in property, such property or
property the same as or economically equivalent to such property). Immediately
upon the exercise of the Exchange Right, as provided in section 2.4, the closing
of the transaction of purchase and sale contemplated by the Exchange Right shall
be deemed to have occurred, and the Holder of such Exchangeable Shares shall be
deemed to have transferred to Entrust all of its right, title and interest in
and to such Exchangeable Shares and shall cease to be a holder of such
Exchangeable Shares and shall not be entitled to exercise any of the rights of a
holder in respect thereof, other than the right to receive the purchase price
therefor, unless the requisite number of Entrust Common Shares (together with a
cheque for the balance, if any, of the purchase price therefor or, if part of
the purchase price consists of dividends payable in property, such property or
property the same as or economically equivalent to such property) is not
allotted, issued and delivered by Entrust to such Holder (or to such other
persons, if any, properly designated by such Holder) within five Business Days
of the date of the exercise of the Exchange Right, in which case the rights of
the Holder shall remain unaffected until such Entrust Common Shares are so
allotted, issued and delivered by Entrust and any such cheque or property is so
delivered and paid. Concurrently with such Holder ceasing to be a holder of
Exchangeable Shares, the Holder shall be considered and deemed for all purposes
to be the holder of the Entrust Common Shares delivered to it pursuant to the
Exchange Right. The Board of Directors shall sanction or approve any transfer of
Exchangeable Shares made pursuant to an exercise of the Exchange Right pursuant
to the provisions hereof and such sanction or approval shall be effective as at
the closing of the transaction of purchase and sale of Exchangeable Shares as
provided in this section 2.5.
2.6 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION. In the event
---------------------------------------------------
that a Holder has exercised its right under Article 5 of the Exchangeable Share
Provisions to require the Corporation to redeem any or all of the Exchangeable
Shares held by the Holder (the "Retracted Shares") and is notified by the
Corporation pursuant to section 5.6 of the Exchangeable Share Provisions that
the Corporation is not permitted as a result of solvency requirements of
applicable law to redeem all of such Retracted Shares, and provided that Entrust
shall not have exercised the Retraction Call Right with respect to the Retracted
Shares, the retraction request shall constitute and shall be deemed to
constitute an exercise of the Exchange Right with respect to those Retracted
Shares that the Corporation is unable to redeem. In any
6
<PAGE>
such event, the Corporation hereby agrees with the Holder immediately to notify
Entrust of such prohibition against the Corporation redeeming all of the
Retracted Shares and immediately to forward or cause to be forwarded to Entrust
all relevant materials delivered by the Holder to the Corporation (including
without limitation a copy of the retraction request delivered pursuant to
section 5.1 of the Exchangeable Share Provisions) in connection with such
proposed redemption of the Retracted Shares and Entrust shall thereupon purchase
the Retracted Shares that the Corporation is not permitted to redeem in
accordance with the provisions of this Article 2.
2.7 STAMP OR OTHER TRANSFER TAXES. Upon any sale of Exchangeable Shares
-----------------------------
to Entrust pursuant to the Exchange Right or the Automatic Exchange Rights, the
share certificate or certificates representing Entrust Common Shares to be
delivered in connection with the payment of the purchase price therefor shall be
issued in the name of the Holder of the Exchangeable Shares so sold or in such
names as such Holder may otherwise direct in writing without charge to the
Holder, provided, however, that such Holder (a) shall pay (and neither Entrust
nor the Corporation shall be required to pay) any documentary, stamp, transfer
or other similar taxes that may be payable in respect of any transfer involved
in the issuance or delivery of such shares to a person other than such Holder or
(b) shall establish to the satisfaction of Entrust and the Corporation that such
taxes, if any, have been paid.
2.8 NOTICE OF INSOLVENCY EVENT OR DEFAULT EVENT. Immediately upon the
-------------------------------------------
occurrence of an Insolvency Event or a Default Event or any event that with the
giving of notice or the passage of time or both would be an Insolvency Event or
a Default Event, the Corporation and Entrust shall give written notice thereof
to the Holders. Such notice shall describe the event that has occurred and
shall specify that, pursuant to this Agreement, the Holders are currently
entitled, or may become entitled at a later date, to exercise the Exchange
Right.
2.9 QUALIFICATION OF ENTRUST COMMON SHARES. Entrust shall use all
--------------------------------------
reasonable efforts to obtain or have available exemptions from the registration
and prospectus requirements of applicable Canadian and United States securities
laws to permit the issuance of the Entrust Common Shares upon any exchange of
the Exchangeable Shares for Entrust Common Shares pursuant to this agreement to
the extent possible without registration or qualification with, or approval of,
or the filing of any registration statement or prospectus or similar document
with, any Canadian or United States securities authorities.
2.1 RESERVATION OF ENTRUST COMMON SHARES. Entrust hereby represents and
------------------------------------
warrants that it has irrevocably reserved for issuance out of its authorized and
unissued capital stock such number of Entrust Common Shares as is equal to the
number of Exchangeable Shares outstanding at the date hereof and covenants that
it will at all times keep available, free from pre-emptive and other rights, out
of its
7
<PAGE>
authorized and unissued capital stock such number of Entrust Common Shares (or
other shares or securities into which Entrust Common Shares may be reclassified
or changed) as is necessary to enable Entrust to perform its obligations
pursuant to this Agreement.
2.11 AUTOMATIC EXCHANGE ON LIQUIDATION OF ENTRUST.
--------------------------------------------
(a) Entrust shall give the Holders notice of each of the following events
(a "Liquidation Event") at the time set forth below:
(i) in the event of any determination by the board of directors of
Entrust to institute voluntary liquidation, dissolution or
winding-up proceedings with respect to Entrust or to effect any
other distribution of assets of Entrust among its stockholders
for the purpose of winding up its affairs, at least 60 days
prior to the proposed effective date of such liquidation,
dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of (A) receipt by Entrust of
notice of and (B) Entrust otherwise becoming aware of any
threatened or instituted claim, suit, petition or other
proceedings with respect to the involuntary liquidation,
dissolution or winding up of Entrust or to effect any other
distribution of assets of Entrust among its stockholders for the
purpose of winding up its affairs.
Such notice shall describe the event that has occurred and shall specify that,
pursuant to this Agreement, the occurrence of such event causes the Exchangeable
Shares to be exchanged automatically for Entrust Common Shares.
(b) In order that the Holders will be able to participate on a pro rata
basis with the holders of Entrust Common Shares in the distribution of assets of
Entrust in connection with a Liquidation Event, on the fifth Business Day prior
to the effective date of a Liquidation Event (the "Liquidation Event Effective
Date") all of the then outstanding Exchangeable Shares shall be automatically
exchanged for Entrust Common Shares. To effect such automatic exchange, Entrust
shall purchase each Exchangeable Share outstanding on the fifth Business Day
prior to the Liquidation Event Effective Date and held by Holders, and each
Holder shall sell the Exchangeable Shares held by it at such time, for a
purchase price per share equal to (a) the Current Market Price multiplied by the
Current Entrust Common Share Equivalent on such fifth Business Day prior to the
Liquidation Event Effective Date, which shall be satisfied in full in respect of
the Exchangeable Shares held by each Holder by Entrust issuing to such Holder
such whole number of Entrust Common Shares as is equal to the product obtained
by multiplying the number of such Exchangeable Shares by the Current Entrust
Common Share Equivalent (together
8
<PAGE>
with an amount in lieu of any fractional Entrust Common Share resulting from
such calculation payable in accordance with section 10.4 of the Exchangeable
Share Provisions), plus (b) an additional amount equal to the aggregate of all
dividends declared and unpaid on each such Exchangeable Share (provided that if
the record date for any such declared and unpaid dividends occurs on or after
the day of closing of such purchase and sale, the purchase price shall not
include such additional amount equal to such declared and unpaid dividends). The
Board of Directors shall sanction or approve any transfer of Exchangeable Shares
made pursuant to the Automatic Exchange Rights and such sanction or approval
shall be effective as of the fifth Business Day prior to the Liquidation Event
Effective Date.
(c) On the fifth Business Day prior to the Liquidation Event Effective
Date, the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for Entrust Common Shares shall be
deemed to have occurred, and each Holder of Exchangeable Shares shall be deemed
to have transferred to Entrust all of the Holder's right, title and interest in
and to such Exchangeable Shares and shall cease to be a holder of Exchangeable
Shares and Entrust shall issue to the Holder the Entrust Common Shares issuable
upon the automatic exchange of Exchangeable Shares for Entrust Common Shares and
shall deliver to the Holder a cheque for the balance, if any, of the purchase
price for such Exchangeable Shares (or, if any part of the purchase price
consists of dividends payable in property, such property or property that is the
same as or economically equivalent to such property). Concurrently with such
Holder ceasing to be a holder of Exchangeable Shares, the Holder shall be
considered and deemed for all purposes to be the holder of the Entrust Common
Shares issued to it pursuant to the automatic exchange of Exchangeable Shares
for Entrust Common Shares and the certificates held by the Holder previously
representing the Exchangeable Shares exchanged by the Holder with Entrust
pursuant to such automatic exchange shall thereafter be deemed to represent the
Entrust Common Shares issued to the Holder by Entrust pursuant to such automatic
exchange. Upon the request of a Holder and the surrender by the Holder of
Exchangeable Share certificates deemed to represent Entrust Common Shares, duly
endorsed in blank and accompanied by such instruments of transfer as Entrust may
reasonably require, Entrust shall deliver or cause to be delivered to the Holder
certificates representing the Entrust Common Shares of which the Holder is the
holder.
ARTICLE 3
ENTRUST SUCCESSORS
------------------
3.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC. Entrust shall
----------------------------------------------------
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially
9
<PAGE>
all of its undertaking, property and assets would become the property of any
other person or, in the case of a merger, of the continuing corporation
resulting therefrom, unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Entrust Successors") incorporated under the laws of any
state of the United States or the laws of Canada or any province
thereof; and
(b) Entrust Successor, by operation of law, becomes, without more, bound
by the terms and provisions of this Agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of such
transaction an agreement supplemental hereto and such other
instruments (if any) as are satisfactory to the Holders, acting
reasonably, to evidence the assumption by Entrust Successor of
liability for all moneys payable and property deliverable hereunder
and the covenant of such Entrust Successor to pay and deliver or cause
to be delivered the same and its agreement to observe and perform all
the covenants and obligations of Entrust under this Agreement.
3.2 VESTING OF POWERS IN SUCCESSOR. Whenever the conditions of section
------------------------------
3.1 hereof have been duly observed and performed, the Holders, if required by
section 3.1 hereof, Entrust Successor and the Corporation shall execute and
deliver a supplemental agreement provided for in section 4.1 hereof and
thereupon Entrust Successor shall possess and from time to time may exercise
each and every right and power of Entrust under this Agreement in the name of
Entrust or otherwise and any act or proceeding by any provision of this
Agreement required to be done or performed by the board of directors of Entrust
or any officers of Entrust may be done and performed with like force and effect
by the directors or officers of such Entrust Successors.
3.3 WHOLLY-OWNED SUBSIDIARIES. Nothing herein shall be construed as
-------------------------
preventing the amalgamation or merger of any wholly-owned subsidiary of Entrust
with or into Entrust.
ARTICLE 4
AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
--------------------------------------
4.1 AMENDMENTS, MODIFICATIONS, ETC. Except as provided for in section
-------------------------------
4.2, this Agreement may not be amended or modified except by an agreement in
writing executed by the Corporation, Entrust and the Holders. From time to time
the Corporation (when authorized by a resolution of the Board of Directors),
Entrust (when authorized by a resolution of its board of directors) and the
Holders may,
10
<PAGE>
subject to the provisions hereof, and they shall, when so directed by these
presents, execute and deliver by their proper officers, agreements or other
instruments supplemental hereto, which thereafter shall form part hereof, for
evidencing the succession of Entrust Successors to Entrust and the covenants of
and obligations assumed by each such Entrust Successor in accordance with the
provisions of Article 3.
4.2 CHANGES IN THE CAPITAL OF ENTRUST OR THE CORPORATION. Notwithstanding
-----------------------------------------------------
section 4.1, at all times after the occurrence of any Entrust Common Share
Reorganization or Capital Reorganization (as such terms are respectively defined
in the Exchangeable Share Provisions) or other change in either the Entrust
Common Shares or the Exchangeable Shares or both, this Agreement shall forthwith
be deemed to have been amended and modified as necessary in order that it shall
apply with full force and effect, mutatis mutandis, to all new securities into
which Entrust Common Shares or the Exchangeable Shares or both are so changed
and the parties hereto shall execute and deliver an agreement giving effect to
and evidencing such necessary amendments and modifications.
ARTICLE 5
TRANSFERS OF EXCHANGEABLE SHARES
--------------------------------
5.1 APPROVAL OF THE BOARD OF DIRECTORS. Except for any transfers of
----------------------------------
Exchangeable Shares to Entrust or any of its Affiliates pursuant to the
provisions hereof or the Exchangeable Share Provisions, the Holders shall not be
entitled to transfer any Exchangeable Shares except as permitted pursuant to the
articles of incorporation of the Corporation. Entrust and the Board of
Directors shall not sanction any transfer of Exchangeable Shares (other than to
Entrust or any of its Affiliates pursuant to the provisions hereof or the
Exchangeable Share Provisions) unless, as a condition precedent to any such
transfer of Exchangeable Shares, the transferee, if it is not a party to this
Agreement, executes and delivers an agreement in form and containing terms
satisfactory to Entrust and the Corporation, acting reasonably, whereby the
transferee shall become a party hereto and shall agree to be bound by the
provisions hereof as if the transferee was an original party hereto, and
thereupon the transferee shall have the same rights, and shall be subject to the
same obligations, as the transferor hereunder.
11
<PAGE>
ARTICLE 6
TERMINATION
-----------
6.1 TERM.
----
(a) This Agreement, including the Exchange Right and the Automatic
Exchange Rights, shall come into force and effect as at and from the date hereof
and shall remain in force and effect until the earliest to occur of the
following events, at which time this Agreement shall terminate:
(i) no outstanding Exchangeable Shares are held by any Holder; and
(ii) each of the Holders, the Corporation and Entrust agree in
writing to terminate this Agreement.
(b) Notwithstanding anything herein to the contrary, the provisions of
this Agreement shall no longer be applicable to any person (including, without
limitation, any Seller) that ceases to be a registered holder of Exchangeable
Shares and such person shall, upon ceasing to be a registered holder of
Exchangeable Shares, be deemed to have ceased to be a party to this Agreement
until, if applicable, such time as such person subsequently becomes a party to
this Agreement by executing an agreement referred to in Section 5.1.
ARTICLE 7
GENERAL
-------
7.1 SEVERABILITY. If any provision of this Agreement is held to be
------------
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this Agreement shall not in any way be affected or impaired
thereby and this Agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions; provided, however, that if
the provision or provisions so held to be invalid, in the reasonable judgment of
the parties, is or are so fundamental to the intent of the parties and the
operation of this Agreement that the enforcement of the other provisions hereof,
in the absence of such invalid provision or provisions, would damage irreparably
the intent of the parties in entering into this Agreement, the parties shall
agree (i) to terminate this Agreement, or (ii) to amend or otherwise modify this
Agreement so as to carry out the intent and purposes hereof and the transactions
contemplated hereby.
7.2 INUREMENT. Subject to the provisions of Article 6, this Agreement
---------
shall be binding upon and inure to the benefit of the parties hereto and their
respective
12
<PAGE>
successors and permitted assigns and to the benefits of the Holders.
7.3 NOTICE TO PARTIES. All notices and other communications between the
-----------------
parties shall be in writing and shall be deemed to have been given if delivered
personally or by confirmed telecopy to the parties at the following addresses
(or at such other address for either such party as shall be specified in like
notice):
(a) if to Entrust at:
Entrust Technologies Inc.
2 Constellation Crescent
Nepean, Ontario
K2G 5J9
Attention: President
---------------------
(b) if to the Corporation at:
Entrust Technologies Limited
2 Constellation Crescent
Nepean, Ontario
K2G 5J9
Attention: President
---------------------
(c) if to Nortel at:
Northern Telecom Limited
8200 Dixie Road
Suite 100
Brampton, Ontario
L6T 5P6
Attention: Corporate Secretary
-------------------------------
(d) if to any other Holder, at such address or telecopy specified in
a notice given by such Holder to the other parties hereto
pursuant to the provisions of this section 7.3, failing which
any notice required to be given to such Holder shall be given in
accordance with the provisions of section 7.4
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a
13
<PAGE>
Business Day or unless such notice or communication was not given during the
normal business hours of the recipient on such day, in which case it shall be
deemed to have been given and received upon the immediately following Business
Day.
7.4 NOTICE TO HOLDERS. If a Holder does not provide an address for
-----------------
delivering a notice pursuant to subsection 7.3(f), any and all notices to be
given and any documents to be sent to such Holder shall be given or sent to the
address of such Holder shown at the relevant time on the register of Holders
maintained by the Corporation.
7.5 RISK OF PAYMENTS BY POST. Whenever payments are to be made or
------------------------
documents are to be sent to any Holder by Entrust or by the Corporation, or by
such Holder to Entrust or the Corporation, the making of such payment or sending
of such document sent through the post shall be at the risk of:
(a) Entrust, in the case of payments made or documents sent by Entrust;
(b) the Corporation, in the case of payments made or documents sent by the
Corporation; and
(c) the Holder, in the case of payments made or documents sent by the
Holder.
7.6 COUNTERPARTS. This Agreement and any amendments or supplements
------------
thereto may be executed in counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
7.7 JURISDICTION. This Agreement shall be construed and enforced in
------------
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
7.8 ATTORNMENT. Entrust agrees that any action or proceeding arising
----------
out of or relating to this Agreement may be instituted in the courts of the
Province of Ontario, waives any objection which it may have now or hereafter to
the venue of any such action or proceeding, irrevocably submits to the
jurisdiction of the said courts in any such action or proceeding, agrees to be
bound by any judgment of the said courts and agrees not to seek, and hereby
waives, any review of the merits of any such judgment by the courts of any other
jurisdiction and hereby appoints Entrust Technologies Limited, 2 Constellation
Crescent, Nepean, Ontario K2G 5J9 as Entrust's attorney for service of process
in Ontario.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ENTRUST TECHNOLOGIES INC.
by /s/ John Ryan
------------------------------------
President
------------------------------------
ENTRUST TECHNOLOGIES LIMITED
by /s/ John Ryan
------------------------------------
President
------------------------------------
NORTHERN TELECOM LIMITED
by /s/ Peter W. Currie
------------------------------------
/s/ David A. Archibald
------------------------------------
15
<PAGE>
-1-
Exhibit 10.10
November 18, 1996
Personal and Strictly Confidential
- ----------------------------------
Brian O'Higgins
2 Constellation Crescent
Nepean, Ontario
Dear Mr. O'Higgins,
As you are aware, we intend to reorganize the Secure Networks business in Canada
and the U.S. into two subsidiaries. While it is anticipated that Entrust
Technologies Inc., the U.S. parent company (the "Parent"), will be a majority-
owned subsidiary of Nortel after the reorganization, there is no guarantee of
Nortel majority ownership in the future. The principal objective of the intended
reorganization is to unlock the market value of Secure Networks business by
creating a structure to achieve long-term, sustainable growth.
We are writing on behalf of Nortel to express its intent to cause Entrust
Technologies Limited, the Canadian subsidiary of Parent ("Entrust"), to offer
you the position of Executive Vice President, Technology, reporting to John Ryan
and initially located at the facility at 2 Constellation Crescent, Nepean,
Ontario.
This offer of employment is conditional upon the completion of certain
commercial arrangements relating to the intended reorganization and your
continued employment with Nortel until that date. You will be notified when
these arrangements are complete. It is anticipated that your employment with
Nortel would end in the month of December 1996, and your employment with Entrust
would commence thereafter.
Please note that any information relating to these commercial arrangements,
including this letter, is considered confidential and should not be disclosed to
anyone, other than your legal advisor, without express, prior authorization.
The principal elements of Entrust's offer are:
(Yen) Position Responsibilities
-------------------------
The nature of the position and your key responsibilities will be substantially
the same as they are currently but may be supplemented by such other
responsibilities as may be assigned from time to time.
<PAGE>
-2-
(Yen) Base Salary
-----------
Your initial Base Salary will be Cdn $130,000 per annum, paid bi-weekly. Your
compensation and job performance will be reviewed on a periodic basis having
regard to the compensation of others in the senior management of Parent and
Entrust. Parent's Board of Directors shall be responsible for determining your
compensation and any discretionary adjustments. Your compensation will be
reviewed on or before March 31, 1997.
(Yen) Annual Bonus
------------
Commencing January 1, 1997, you will be eligible to receive annually a
discretionary award. Your initial target award is twenty-five (25) percent of
your Base Salary, although Parent's Board of Directors may, in its discretion,
award more or less based on its assessment of the achievement of corporate and
individual goals.
(Yen) Stock Plan
----------
You will be eligible to participate in a stock incentive plan. A copy of the
Parent's draft 1996 stock incentive plan and draft incentive stock option
agreement are attached for your review. The Parent's stock incentive plan, the
incentive stock option agreement and any grant of options pursuant thereto are
subject to the discretion of the Parent's Board of Directors.
When you join Entrust, you will be awarded stock options to purchase series A
common stock of Parent equal to approximately 1.25% of the series A common stock
of Parent on a fully diluted basis as at the date of the reorganization with an
exercise price equal to the fair market value of the series A common stock on
the day of grant. This award will be granted by Parent's Board of Directors
following the anticipated completion of reorganization in December 1996. Details
of the draft stock incentive plan are set out in the attached documents. "Series
A common stock on a fully diluted basis as at the date of reorganization" gives
effect to the (i) conversion of all the Parent's series B common stock into
series A common stock, (ii) exchange of all Entrust's Exchangeable Special
Shares for series A common stock and (iii) issuance of series A common stock
upon the exercise of all options available to be granted to employees under the
Parent's 1996 stock incentive plan.
For the purposes of determining the recommended award, it is assumed that the
aggregate "employee pool" for series A common stock issuable upon the exercise
of stock options will be approximately 15% of Parent's series A common stock on
a fully diluted basis as at the date of the reorganization. Should the employee
pool for stock, as determined by the Parent's Board of Directors, be greater
than 15% as of the date of reorganization, your initial award of 1.25% will be
adjusted pro-rata. Any subsequent issue of capital
<PAGE>
-3-
stock or increase in the "employee pool" beyond that set on the date of
reorganization will dilute your ownership percentage.
Your stock options will have a vesting as outlined in the draft incentive stock
option agreement. Your ability to sell the common stock received upon the
exercise of the options will be subject to restriction.
Since your participation in the stock incentive plan may produce individual
income tax consequences, you should consider obtaining independent financial
advice.
(Yen) Group Benefits
--------------
You may apply for coverage under the group benefit plans that are, from time to
time, provided. A list of the plans that are intended to be provided is
attached. The initial insurance provider will be Great West Life. Enrollment
eligibility and entitlement to benefits are subject to the terms of the plans.
(Yen) Vacations
---------
Your annual vacation entitlement will be 4 weeks. Entrust will respect your
outstanding and accrued vacation entitlement. Vacations may be taken at a
mutually convenient time.
(Yen) Conflict of Interest
--------------------
You will be required to sign, as a condition of employment, an agreement
relating to conflict of interest. A copy is enclosed for your review. Please
take any necessary steps to ensure that you can execute this document on your
first day of work. In addition, you agree to refrain from other business
activities which, in Entrust's opinion, may prevent you from devoting
substantially all of your time to Entrust's business.
(Yen) Intellectual Property and Confidentiality
-----------------------------------------
You will be required to sign, as a condition of employment, an agreement
relating to intellectual property and confidentiality. A copy is attached for
your review. You should be prepared to execute this document on your first day
of work.
(Yen) Termination
-----------
Your employment with Entrust may be terminated as follows: (i) by your
resignation upon your providing reasonable notice, in writing, to Entrust; or
(ii) by Entrust, without notice to you, for just cause; (iii) by Entrust with or
without just cause, upon Entrust providing reasonable notice of termination, or
pay in lieu thereof. Where termination is pursuant to subprovision (iii), and
<PAGE>
-4-
occurs within three (3) years of the commencement of your employment by Entrust,
Entrust shall treat you as though it had employed you continuously for 17.5
years, notwithstanding that your service date for all other purposes (except
vacation calculation) will be the date of commencement of employment with
Entrust.
In the event that Entrust terminates your employment on a without just cause
basis, reasonable notice of termination, or pay in lieu thereof, will be no less
than 12 months Base Salary, plus an allowance of Cdn$ 10,000 to replace
benefits, inclusive of termination pay and severance pay pursuant to the
Employment Standards Act (Ontario). If the payment is received as "pay in lieu
thereof", such payment shall be a lump sum. Entrust will cooperate with a view
to minimizing the individual tax consequences associated with the receipt of
such termination payment.
(Yen) Non-Competition and Non-Solicitation
------------------------------------
For a period of twelve (12) months following the termination of your employment
with Entrust, regardless of how that termination may occur, you will not be
employed by or engaged to supply services to any entity in Canada or the United
States that is competitive with Parent's or Entrust's business. Further, you
will not speak of Nortel's, Parent's or Entrust's business, or any of their
employees, officers, or representatives in disparaging terms nor in any other
negative way communicate about your employment with Entrust. In the event that a
Court of competent jurisdiction should determine that this provision is
unenforceable and severable, the parties agree that the Court shall, instead of
severing the provision, modify its terms to the extent the Court considers
necessary to render the provision enforceable.
This letter, together with the attached documents, will constitute the entire
understanding of Entrust and you with respect to the offer of employment. We
trust that the offer is satisfactory to you. To indicate your acceptance, please
sign and date both of the enclosed originals of this letter and return one to
me. The offer is open for acceptance until close of business, Tuesday, November
19, 1996. In the event you do not to accept this offer, Nortel will not offer
continued employment in any other position.
Sincerely,
/s/ John A. Ryan
John A. Ryan
Vice-President and General Manager
Multimedia and Internet Solutions
Attach.
<PAGE>
-5-
I have read this letter and the attachments, and understand the terms and
conditions of my employment with Entrust. My signature below signifies my
voluntary acceptance of this offer of employment.
Signed: /s/ Brian O'Higgins
---------------------
Dated: November 18, 1996
----------------------
Attachments:
(Yen) stock incentive plan (draft)
(Yen) incentive stock option agreement (draft)
(Yen) conflict of interest agreement
(Yen) intellectual property and confidentiality agreement
(Yen) group benefits list
<PAGE>
-1-
Exhibit 10.11
November 18, 1996
Personal and Strictly Confidential
- ----------------------------------
Brad Ross
2 Constellation Crescent
Nepean, Ontario
Dear Mr. Ross,
As you are aware, we intend to reorganize the Secure Networks business in Canada
and the U.S. into two subsidiaries. While it is anticipated that Entrust
Technologies Inc., the U.S. parent company (the "Parent"), will be a majority-
owned subsidiary of Nortel after the reorganization, there is no guarantee of
Nortel majority ownership in the future. The principal objective of the
intended reorganization is to unlock the market value of Secure Networks
business by creating a structure to achieve long-term, sustainable growth.
We are writing on behalf of Nortel to express its intent to cause Entrust
Technologies Limited, the Canadian subsidiary of Parent ("Entrust"), to offer
you the position of Executive Vice President, Marketing and Product Line
Management, reporting to John Ryan and initially located at the facility at 2
Constellation Crescent, Nepean, Ontario.
This offer of employment is conditional upon the completion of certain
commercial arrangements relating to the intended reorganization and your
continued employment with Nortel until that date. You will be notified when
these arrangements are complete. It is anticipated that your employment with
Nortel would end in the month of December 1996, and your employment with Entrust
would commence thereafter.
Please note that any information relating to these commercial arrangements,
including this letter, is considered confidential and should not be disclosed to
anyone, other than your legal advisor, without express, prior authorization.
The principal elements of Entrust's offer are:
(Yen) Position Responsibilities
-------------------------
The nature of the position and your key responsibilities will be substantially
the same as they are currently but may be supplemented by such other
responsibilities as may be assigned from time to time.
<PAGE>
-2-
(Yen) Base Salary
-----------
Your initial Base Salary will be Cdn $130,000 per annum, paid bi-weekly. Your
compensation and job performance will be reviewed on a periodic basis having
regard to the compensation of others in the senior management of Parent and
Entrust. Parent's Board of Directors shall be responsible for determining your
compensation and any discretionary adjustments. Your compensation will be
reviewed on or before March 31, 1997.
(Yen) Annual Bonus
------------
Commencing January 1, 1997, you will be eligible to receive annually a
discretionary award. Your initial target award is twenty-five (25) percent of
your Base Salary, although Parent's Board of Directors may, in its discretion,
award more or less based on its assessment of the achievement of corporate and
individual goals.
(Yen) Stock Plan
----------
You will be eligible to participate in a stock incentive plan. A copy of the
Parent's draft 1996 stock incentive plan and draft incentive stock option
agreement are attached for your review. The Parent's stock incentive plan, the
incentive stock option agreement and any grant of options pursuant thereto are
subject to the discretion of the Parent's Board of Directors.
When you join Entrust, you will be awarded stock options to purchase series A
common stock of Parent equal to approximately 1.25% of the series A common stock
of Parent on a fully diluted basis as at the date of the reorganization with an
exercise price equal to the fair market value of the series A common stock on
the day of grant. This award will be granted by Parent's Board of Directors
following the anticipated completion of reorganization in December 1996.
Details of the draft stock incentive plan are set out in the attached
documents. "Series A common stock on a fully diluted basis as at the date of
reorganization" gives effect to the (i) conversion of all the Parent's series B
common stock into series A common stock, (ii) exchange of all Entrust's
Exchangeable Special Shares for series A common stock and (iii) issuance of
series A common stock upon the exercise of all options available to be granted
to employees under the Parent's 1996 stock incentive plan.
For the purposes of determining the recommended award, it is assumed that the
aggregate "employee pool" for series A common stock issuable upon the exercise
of stock options will be approximately 15% of Parent's series A common stock on
a fully diluted basis as at the date of the reorganization. Should the employee
pool for stock, as determined by the Parent's Board of Directors, be greater
than 15% as of the date of reorganization, your initial award of 1.25% will be
adjusted pro-rata. Any subsequent issue of capital
<PAGE>
-3-
stock or increase in the "employee pool" beyond that set on the date of
reorganization will dilute your ownership percentage.
Your stock options will have a vesting as outlined in the draft incentive stock
option agreement. Your ability to sell the common stock received upon the
exercise of the options will be subject to restriction.
Since your participation in the stock incentive plan may produce individual
income tax consequences, you should consider obtaining independent financial
advice.
(Yen) Group Benefits
--------------
You may apply for coverage under the group benefit plans that are, from time to
time, provided. A list of the plans that are intended to be provided is
attached. The initial insurance provider will be Great West Life. Enrollment
eligibility and entitlement to benefits are subject to the terms of the plans.
(Yen) Vacations
---------
Your annual vacation entitlement will be 4 weeks. Entrust will respect your
outstanding and accrued vacation entitlement. Vacations may be taken at a
mutually convenient time.
(Yen) Conflict of Interest
--------------------
You will be required to sign, as a condition of employment, an agreement
relating to conflict of interest. A copy is enclosed for your review. Please
take any necessary steps to ensure that you can execute this document on your
first day of work. In addition, you agree to refrain from other business
activities which, in Entrust's opinion, may prevent you from devoting
substantially all of your time to Entrust's business.
(Yen) Intellectual Property and Confidentiality
-----------------------------------------
You will be required to sign, as a condition of employment, an agreement
relating to intellectual property and confidentiality. A copy is attached for
your review. You should be prepared to execute this document on your first day
of work.
(Yen) Termination
-----------
Your employment with Entrust may be terminated as follows: (i) by your
resignation upon your providing reasonable notice, in writing, to Entrust; or
(ii) by Entrust, without notice to you, for just cause; (iii) by Entrust with or
without just cause, upon Entrust providing reasonable notice of termination, or
pay in lieu thereof. Where termination is pursuant to subprovision (iii), and
<PAGE>
-4-
occurs within three (3) years of the commencement of your employment by Entrust,
Entrust shall treat you as though it had employed you continuously for 14 years,
notwithstanding that your service date for all other purposes (except vacation
calculation) will be the date of commencement of employment with Entrust.
In the event that Entrust terminates your employment on a without just cause
basis, reasonable notice of termination, or pay in lieu thereof, will be no less
than 12 months Base Salary, plus an allowance of Cdn$ 10,000 to replace
benefits, inclusive of termination pay and severance pay pursuant to the
Employment Standards Act (Ontario). If the payment is received as "pay in lieu
thereof", such payment shall be a lump sum. Entrust will cooperate with a view
to minimizing the individual tax consequences associated with the receipt of
such termination payment.
(Yen) Non-Competition and Non-Solicitation
------------------------------------
For a period of twelve (12) months following the termination of your employment
with Entrust, regardless of how that termination may occur, you will not be
employed by or engaged to supply services to any entity in Canada or the United
States that is competitive with Parent's or Entrust's business. Further, you
will not speak of Nortel's, Parent's or Entrust's business, or any of their
employees, officers, or representatives in disparaging terms nor in any other
negative way communicate about your employment with Entrust. In the event that
a Court of competent jurisdiction should determine that this provision is
unenforceable and severable, the parties agree that the Court shall, instead of
severing the provision, modify its terms to the extent the Court considers
necessary to render the provision enforceable.
This letter, together with the attached documents, will constitute the entire
understanding of Entrust and you with respect to the offer of employment. We
trust that the offer is satisfactory to you. To indicate your acceptance,
please sign and date both of the enclosed originals of this letter and return
one to me. The offer is open for acceptance until November 18, 1996. In the
event you do not to accept this offer, Nortel will not offer continued
employment in any other position.
Sincerely,
/s/ John A. Ryan
John A. Ryan
Vice-President and General Manager
Multimedia and Internet Solutions
Attach.
<PAGE>
-5-
I have read this letter and the attachments, and understand the terms and
conditions of my employment with Entrust. My signature below signifies my
voluntary acceptance of this offer of employment.
Signed: /s/ Bradley N. Ross
-------------------
Dated: November 18, 1996
-----------------
Attachments:
(Yen) stock incentive plan (draft)
(Yen) incentive stock option agreement (draft)
(Yen) conflict of interest agreement
(Yen) intellectual property and confidentiality agreement
(Yen) group benefits list
<PAGE>
Exhibit 10.12
June 4, 1997
Rick Spurr
6507 Westgate Drive
Dallas, TX 75240
Dear Rick,
On behalf of Entrust Technologies Inc. (Entrust), I am pleased to offer you
employment as Vice President of Global Sales. The principal terms of your
employment are set forth below.
Your annual base salary upon commencement of employment will be $125,000 US$ and
will be paid biweekly.
You will be eligible to participate in Entrust's current sales incentive plan
which is the equivalent to $125,000 annually at 100% achievement. However, this
program may be amended or discounted at any time. All Entrust sales
professionals have an upside earning potential for additional compensation above
100%.
You will also receive an option to purchase 100,000 shares of series A common
stock of Entrust at an option price of $8.50 per share. Details of the Stock
Incentive Plan which will govern this option are set out in the attached
documents.
At this time, Entrust has not yet adopted a benefit plan. Entrust will
reimburse you for the documented cost of health coverage for you and your
eligible dependents, which you can elect to continue in accordance with the
provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA) under
your medical election with your previous employer's plan until such coverage
ends or Entrust adopts a medical plan for its employees, whichever occurs
sooner.
This position is initially located at 2221 Lakeside Blvd, Richardson, Texas.
This offer of employment at will is contingent upon the following:
. formal ratification of this offer of employment by the Entrust Board of
Directors;
. your signing the following enclosed agreements: namely, Conflict of Interest
and Intellectual Property and Confidentiality. Please review these forms prior
to your first day of employment. By accepting this offer of employment at
will, you also agree to any terms and conditions contained in those documents
as written;
<PAGE>
. your completing the following forms: the Determination of Eligibility to Work
on Jobs Affected by U.S. Export Control Laws; and the Employment Application
(if you have not previously submitted one). These forms must be returned with
your signed offer letter;
. your ability to provide documentation to establish your identity and
eligibility for employment as required under the Immigration Reform and
Control Act of 1986. Although you have three (3) business days from your hire
date to provide the required documents (See List of Acceptable Documents),
please bring them on your first date of employment so that this process can be
expedited;
. your satisfactory completion of our pre-employment background investigation.
Upon your request, we identify any consumer reporting agency involved in the
process so that you may, if you wish, seek access to its records as provided
under the relevant statute;
. your contacting Assurance Medical Inc. (AMI) at 1-800-625-7881 on the next
business day following the receipt of your verbal offer of employment to
schedule a drug test, designed to detect current use of illegal drugs;
. your taking and obtaining a negative test result concerning the drug test
referenced in the previous paragraph above. If your test is positive you may
not reapply for employment for twelve (12) months.
We believe that your abilities and our needs are compatible and that your
acceptance of this offer will prove mutually beneficial. However, it is
understood and agreed that your employment is terminable at the will of either
party, at any time and for any reason, and is not an employment agreement for
any specified term.
This offer is valid and open for acceptance in writing for 7 business days. If
you need more time, please call me right away so we can discuss a mutually
acceptable validity period.
Rick, we would be delighted to have you lead our global sales team and look
forward to your acceptance. Please indicate your agreement by signing below and
returning a copy of this letter to my attention.
Sincerely,
/s/ John A. Ryan
John A. Ryan
President and CEO
Entrust Technologies Inc.
<PAGE>
Agreed &
Accepted By: /s/ Richard D. Spurr
--------------------------
June 4, 1997
----------------------------
Date
Attachments:
Conflict of Interest Agreement
Incentive Stock Option Agreement
Intellectual Property and Confidentiality Agreements
Stock Incentive Plan
Immigration Form I-9
Determination of Eligibility to Work on Jobs Affected by U.S. Export Control
Laws
Employment Application
<PAGE>
Exhibit 10.13
November 14, 1997
Hansen Downer
102 Braelands Drive
Cary, NC 27511
Dear Hans,
We are pleased to confirm our offer to you for the position of Vice President
Professional Services with Entrust Technologies Inc. (the "Company") reporting
to John Ryan. Your salary, on an annualized basis, will be $125,000 US$, which
will be paid biweekly. You will be eligible to participate in the Company's
management incentive/option plan currently targeted at 25% of your base pay.
A signing bonus of $7,500 US$ will be awarded upon acceptance of this offer and
completion of the contingencies for employment outlined below.
Additionally, you will be awarded incentive stock options to purchase 50,000
shares of series A common stock of Entrust with an exercise price equal to the
fair market value of the series A common stock on the day of grant, subject to
the approval of the Company's Board of Directors. Details of the stock incentive
plan are set out in the attached documents.
Benefits, payroll, and other human resource management services are provided
through TriNet Employer Group, Inc. TriNet is an employer services organization
contracted by the Company to perform selected employer responsibilities on our
behalf. As a result of the Company's arrangement with TriNet, TriNet will be
considered your employer of record for payroll, benefits, and other functions
involving employer related administration, including your new hire enrollment
processing. However, as Entrust is the company for which you will perform
service, we will retain the right to control and direct your work, its results,
and the manner and means by which your work is accomplished.
A summary of the benefit plan is enclosed. TriNet will be sending you a package
that includes more complete benefit information along with certain forms that
are required for employment.
With the exception of the provision for at will employment described below,
Entrust Technologies Inc. and/or TriNet may modify, revoke, suspend or terminate
any of the terms, plans, policies and/or procedures described in the employee
handbook or as otherwise communicated to you, in whole or part, at any time,
with or without notice, and Entrust Technologies Inc. may change or terminate
the TriNet relationship at any time.
As with all employees, your employment with the Company is at will. This
means that your terms and conditions of employment,
<PAGE>
including but not limited to termination, demotion,
promotion, transfer, compensation, benefits, duties and
location of work may be changed with or without cause,
for any or no reason, and with or without notice. Your
status as an at-will employee cannot be changed by any
statement, promise, policy, course of conduct, in writing
or manual unless except through a written agreement
signed by the CEO of the company.
This employment at will offer is contingent upon the following:
- - Your signing the following agreements and returning with your offer letter:
Entrust's Conflict of Interest and Intellectual Property and Confidentiality. By
accepting this offer of employment at will, you also agree to any terms and
conditions contained in those documents as written. (included with this letter)
- - Your completing the employment application (included in TriNet package)
- - Your ability to provide documentation to establish your identity and
eligibility for employment as required under the Immigration Reform and Control
Act of 1986. Please review the enclosed "List of Acceptable Documents", and
provide the appropriate ones on your first day of employment. (included in
TriNet package)
- - Your satisfactory completion of our pre-employment background investigation.
The authorization form should be completed and faxed, within two business days,
to me at 972-994-8005. Upon your request, we will identify any consumer
reporting agency involved in this process so that you may, if you wish, seek
access to its records as provided under the relevant statute. (included with
this letter)
- - Your taking, and receiving a negative result on, a drug screen designed to
detect the current use of illegal drugs. Enclosed is an information sheet
describing the drug screen procedure and the location of the lab or clinic
closest to your home address. If you either, fail to take the test, or secure a
positive result, you may not reapply for a twelve month period.
We believe that your abilities and our needs are compatible and that your
acceptance of this offer will prove mutually beneficial. However, it is
understood and agreed that your employment is terminable at the will of either
party and is not an employment agreement for a year or any other specified term.
<PAGE>
To accept and confirm your start date, or to decline this employment at will
offer, please contact me at 972-994-8012 by November 26, 1997. Please sign and
return the original offer letter along with the Conflict of Interest and
Intellectual Property Agreement to me on or before your first day of employment.
Any questions should be directed to me or John Ryan.
Sincerely,
/s/ Tracey Love
Tracey Love
Director
Human Resources
cc: John Ryan
I have read, understood, and therefore, accept this offer of employment at will,
as set forth above, and will report on December 1, 1997. .
------------------------------
Signature: /s/ Hansen Downer Date: November 17, 1997
----------------------------- -----------------------
Upon your acceptance of this offer as set forth above, please provide or confirm
your social security number and date of birth. This will facilitate your
enrollment on our payroll and employee benefit programs.
SS#: :
--------------------------------
Date of Birth:
---------------------
Attachments:
Background Information Authorization
Benefit Plan Summary
Conflict of Interest Agreement
Drug Screen Procedure
Incentive Stock Option Agreement- Specimen
Intellectual Property and Confidentiality Agreement
Stock Incentive Plan
<PAGE>
Exhibit 10.14
ENTRUST TECHNOLOGIES INC.
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
----------------------------------------------
1. Purpose
-------
The purpose of this Amended and Restated 1996 Stock Incentive Plan (the
"Plan") of Entrust Technologies Inc., a Maryland corporation (the "Company"), is
to advance the interests of the Company's stockholders by enhancing the
Company's ability to attract, retain and motivate persons who make (or are
expected to make) important contributions to the Company by providing such
persons with equity ownership opportunities and performance-based incentives and
thereby better aligning the interests of such persons with those of the
Company's stockholders. Except where the context otherwise requires, the term
"Company" shall include any present or future subsidiary corporations of Entrust
Technologies Inc. as defined in Section 424(f) of the Internal Revenue Code of
1986, as amended, and any regulations promulgated thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other stock-
based awards (each, an "Award") under the Plan. Any person who has been granted
an Award under the Plan shall be deemed a "Participant."
3. Administration, Delegation
--------------------------
a. Administration by Board of Directors. The Plan will be administered
------------------------------------
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
b. Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the
<PAGE>
power to make Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to be
made by such executive officers.
c. Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the
Series A Common Stock, $.01 par value per share, of the Company (after giving
effect to the redesignation of the Company's Series A Common Stock into Common
Stock upon the filing of Articles of Amendment and Restatement, the "Common
Stock") is registered under the Securities Exchange Act of 1934 (the "Exchange
Act"), the Board shall appoint one such Committee of not less than two members,
each member of which shall be an "outside director" within the meaning of
Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b-
3 promulgated under the Exchange Act. All references in the Plan to the "Board"
shall mean the Board or a Committee of the Board or the executive officer
referred to in Section 3(b) to the extent that the Board's powers or authority
under the Plan have been delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
a. Number of Shares. Subject to adjustment under Section 4(c), Awards
----------------
may be made under the Plan for up to 10,000,000 shares of Common Stock (after
giving effect to the four-for-one split of the Common Stock in the form of a
stock dividend declared by the Board on June 15, 1998 (the "Split")). If any
Award expires or is terminated, surrendered or canceled without having been
fully exercised or is forfeited in whole or in part or results in any Common
Stock not being issued, the unused Common Stock covered by such Award shall
again be available for the grant of Awards under the Plan, subject, however, in
the case of Incentive Stock Options (as hereinafter defined), to any limitation
required under the Code. Shares issued under the Plan may consist in whole or
in part of authorized but unissued shares or treasury shares.
b. Per-Participant Limit. Subject to adjustment under Section 4(c), for
---------------------
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
Participant under the Plan shall be 5,000,000 per calendar year (after giving
effect to the Split). The per-participant limit described in this Section 4(b)
shall be construed and applied consistently with Section 162(m) of the Code.
c. Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or
2
<PAGE>
event, or any distribution to holders of Common Stock other than a normal cash
dividend, (i) the number and class of securities available under this Plan, (ii)
the number and class of security and exercise price per share subject to each
outstanding Option, (iii) the repurchase price per security subject to each
outstanding Restricted Stock Award and (iv) the terms of each other outstanding
stock-based Award shall be appropriately adjusted by the Company (or substituted
Awards may be made, if applicable) to the extent the Board shall determine, in
good faith, that such an adjustment (or substitution) is necessary and
appropriate. If this Section 4(c) applies and Section 8(e)(i) also applies to
any event, Section 8(e)(i) shall be applicable to such event, and this Section
4(c) shall not be applicable.
5. Stock Options
-------------
a. General. The Board may grant options to purchase Common Stock (each,
-------
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive
Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option."
b. Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
c. Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
d. Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
e. Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
f. Payment Upon Exercise. Common Stock purchased upon the exercise of an
----------------------
Option granted under the Plan shall be paid for as follows:
3
<PAGE>
i. in cash or by check, payable to the order of the Company;
ii. except as the Board may otherwise provide in an Option Agreement,
delivery of an irrevocable and unconditional undertaking by a creditworthy
broker to deliver promptly to the Company sufficient funds to pay the exercise
price, or delivery by the Participant to the Company of a copy of irrevocable
and unconditional instructions to a creditworthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price;
iii. to the extent permitted by the Board and explicitly provided in
an Option Agreement (i) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery, (ii) by delivery of a promissory note
of the Participant to the Company on terms determined by the Board, or (iii) by
payment of such other lawful consideration as the Board may determine; or
iv. any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
a. Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
b. Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
4
<PAGE>
7. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
8. General Provisions Applicable to Awards
---------------------------------------
a. Transferability of Awards. Except as the Board may otherwise
-------------------------
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
b. Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
c. Board Discretion. Except as otherwise provided by the Plan, each type
----------------
of Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board
need not treat Participants uniformly.
d. Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
e. Acquisition Events
------------------
i. Consequences of Acquisition Events. Upon the occurrence of an
-----------------------------------
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Awards: (i)
provide that outstanding Options shall be assumed, or equivalent Options shall
be substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such Options substituted for Incentive Stock Options
shall satisfy, in the determination of the Board, the requirements of Section
424(a) of the Code; (ii) upon written notice to the Participants, provide that
all then unexercised Options will
5
<PAGE>
become exercisable in full and will terminate immediately prior to the
consummation of such Acquisition Event, except to the extent exercised by the
Participants within a specified period following the date of such notice; (iii)
in the event of an Acquisition Event under the terms of which holders of Common
Stock will receive upon consummation thereof a cash payment for each share of
Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition
Price"), provide that all outstanding Options shall terminate upon consummation
of the Acquisition Event and that Participants shall receive, in exchange
therefor, a cash payment equal to the amount (if any) by which (A) the
Acquisition Price multiplied by the number of shares of Common Stock subject to
such outstanding Options (whether or not then exercisable), exceeds (B) the
aggregate exercise price of such Options; (iv) provide that all Restricted Stock
Awards then outstanding shall become free of all restrictions prior to the
consummation of the Acquisition Event; and (v) provide that any other stock-
based Awards outstanding (A) shall become exercisable, realizable or vested in
full, or shall be free of all conditions or restrictions, as applicable to each
such Award, prior to the consummation of the Acquisition Event, or (B) shall be
assumed, or equivalent Awards shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof).
An "Acquisition Event" shall mean: (a) any merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or acquiring entity)
less than 60% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such
merger or consolidation; (b) any sale of all or substantially all of the assets
of the Company; (c) the complete liquidation of the Company; or (d) the
acquisition of "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act) of securities of the Company representing 60% or more of the
combined voting power of the Company's then outstanding securities (other than
through an acquisition of securities directly from the Company) by any "person,"
as such term is used in Sections 13(d) and 14(d) of the Exchange Act other than
the Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company. Notwithstanding the foregoing, the exercise
of the Triggering event option (as defined in the Company's Articles of
Incorporation) by the holders of the Company's Series B Common Stock shall not
be deemed to be an Acquisition Event.
ii. Assumption of Options Upon Certain Events. The Board may grant
------------------------------------------
Awards under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a result
of a merger or consolidation of the employing corporation with the Company or
the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
6
<PAGE>
(f) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
9. Miscellaneous
-------------
a. No Right To Employment or Other Status. No person shall have any
--------------------------------------
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
7
<PAGE>
b. No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
c. Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the date on which it is adopted by the Board, but no Award granted to a
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, vested or realizable, as applicable to such Award, unless and until
the Plan has been approved by the Company's stockholders. No Awards shall be
granted under the Plan after the completion of ten years from the earlier of (i)
the date on which the Plan was adopted by the Board or (ii) the date the Plan
was approved by the Company's stockholders, but Awards previously granted may
extend beyond that date.
d. Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time, provided that no Award granted to a
Participant designated as subject to Section 162(m) by the Board after the date
of such amendment shall become exercisable, realizable or vested, as applicable
to such Award (to the extent that such amendment to the Plan was required to
grant such Award to a particular Participant), unless and until such amendment
shall have been approved by the Company's stockholders.
e. Stockholder Approval. For purposes of this Plan, stockholder approval
--------------------
shall mean approval by a vote of the stockholders in accordance with the
requirements of Section 162(m) of the Code.
f. Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Maryland, without regard to any applicable conflicts of law.
Adopted by the Board of Directors
on June 18, 1998
Approved by the Stockholders
on ________, 1998
8
<PAGE>
EXHIBIT 10.15
STANDARD OFFICE BUILDING
LEASE AGREEMENT
STATE OF Texas
COUNTY OF Dallas
THIS AGREEMENT,
entered into this 11th day of July, 1997
between
1. LANDLORD
G & F INTERNATIONAL, INC.
-------------------------
herein designed as Landlord, and
2. TENANT
ENTRUST TECHNOLOGIES, INC.
--------------------------
herein designated as Tenant.
3. LEASED PREMISES
Landlord, in consideration of covenants and agreements to be performed by
Tenant and upon terms and conditions hereinafter stated, does hereby lease to
Tenant suite number(s) #360 on the third floor(s) of the building known as Fall
----- ----- ----
Creek I, located at 2323 North Central Expressway (hereinafter called the
- ------- -----------------------------
"Leased Premises") on a tract of land situated in the City of Richardson, State
----------
of Texas, as described in Exhibit A attached hereto. The number of square feet
-----
contained in the Leased Premises is approximately Three Thousand Two Hundred
--------------------------
Nineteen (3219) rentable square feet.
- ------------------------------------
4. TERM
For term of eighteen (18) months, beginning on August 1, 1997 and ending on
-------------------- --------------
January 31, 1999, to be continuously used and occupied during term of this Lease
- ----------------
by the Tenant for no other purpose than:
<PAGE>
5. USE
General Office Use
------------------
This Lease is conditioned upon faithful performance by Tenant of the
following agreements, covenants, rules and regulations, herein set out and
agreed to by Tenant.
6. BASE RENTAL
In consideration of this Lease, Tenant promises to pay Landlord at office
of Landlord, in Richardson, Texas, the sum of One Hundred Three Thousand Eight
--------------------------------
Hundred and Twelve Dollars and 75/100's ($103,812.75) in lawful money of the
- -----------------------------------------------------
United States of America, payable in monthly amounts of: (see Addendum B) in
advance without demand, on the first day of each and every calendar month during
term hereof; provided, however, that the first such monthly rental payment shall
be due upon execution of this Lease. The base rental stated herein shall be
subject, however, to adjustment as provided in Section 7 of this Lease.
Should the term of this Lease begin on a day other than the first day of a
calendar month or terminated on a day other than the last day of a calendar
month, the rent for such partial month shall be proportionately reduced.
All rent and sums provided to be paid under this Lease shall be paid to
Landlord at the address stated in Section 38 of this Lease.
7. ADJUSTMENT OF RENTAL
As set out in Addendum A.
8. LATE CHARGE
Tenant agrees to pay Landlord an additional amount of 3% per day of any sum
owing by Tenant under this Lease if such sum is not in Landlord's office by the
10th day following the date on which sum became due for the extra expenses
involved in handling delinquent payments. A $50.00 charge will be assessed by
Landlord for every returned check.
9. SERVICE BY THE LANDLORD
Landlord agrees to furnish Tenant, while occupying premises, water - hot,
cold and refrigerated - at those points of supply provided for general use of
tenants; electric current for ordinary office use; heated and refrigerated air
conditioning in season, at such times as Landlord normally furnishes these
services to all tenants of
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<PAGE>
building, and at such temperatures and in such amounts as are considered by
Landlord to be standard, such service on Saturdays, Sundays and holidays to be
optional on part of Landlord; elevator and janitor service and electric lighting
service for all public areas and special service areas of building in the manner
and to the extent deemed by Landlord to be standard; but failure to furnish or
any interruption of these services, from any cause whatsoever, shall not make
Landlord liable for damage or loss to persons, property or Tenant's business;
shall not be considered an eviction of Tenant; shall not entitle Tenant to any
refund or reduction of rent, and shall not relieve Tenant from compliance with
any term or provision of this Lease. Landlord shall use reasonable diligence to
repair promptly any malfunction of the building improvements or facilities but
Tenant shall have no claim for rebate or abatement of rent for damages resulting
from such repair or from any interruptions in service occasioned by such repair.
10. PAYMENTS AND PERFORMANCE
Tenant agrees to pay all rents and other sums required to be paid to
Landlord at the times and in the manner provided in this Lease. The obligation
of Tenant to pay rent is an independent covenant and under no circumstances
shall Tenant be released from its obligation to pay rent.
11. REPAIRS AND RE-ENTRY
Tenant will maintain the Leased Premises in good repair and sound
condition, at Tenant's own expense, and shall repair, using only contractors
approved by Landlord, any damage done to the building or any part of the
building by Tenant or Tenant's agents, employees and invitees. If Tenant fails
to make such repairs promptly, within 15 days of occurrence, Landlord shall have
the option to make such repairs itself and Tenant shall reimburse Landlord for
the cost of the repairs on demand. Tenant shall not commit nor allow any waste
or damage to be committed on any part of the Leased Premises, and at the time of
termination of this Lease, shall deliver the Leased Premises to Landlord in as
good condition as existed on date of Tenant's possession, ordinary wear and tear
and casual excepted, and Landlord shall have the right to re-enter and resume
possession.
12. ASSIGNMENT - SUBLETTING
Tenant shall not assign or mortgage this Lease or any right under or
interest in it; allow same to be assigned by operation of law or otherwise;
sublet the Leased Premises or any part thereof, or allow any other person to
occupy or use the Leased Premises or any part thereof in place of Tenant without
the prior written consent of Landlord. Any such assignment, mortgage or
subletting without Landlord's consent shall be void and shall, at Landlord's
option, constitute a breach of this Lease. Notwithstanding approval by Landlord
of any subletting or assignment by Tenant,
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<PAGE>
any guarantor of Tenant's obligations under this Lease and each assignee and
subtenant shall remain fully responsible and liable for payment of rent required
under this Lease and for compliance with all of Tenant's other obligations.
Consent of Landlord to any assignment, mortgage or subletting shall constitute
approval only as to that specific assignment, mortgage or subletting, and none
other. Notwithstanding the foregoing, Tenant may assign or sublet the Premises
or any portion thereof without the consent of Landlord to any wholly owned
affiliate, subsidiary or parent of Tenant.
13. ALTERATION AND ADDITIONS BY TENANT
Tenant shall make no alterations, additions or improvements to the Leased
Premises, including the installation of trade fixtures, without the prior
written consent of the Landlord. Landlord may impose, as a condition of its
consent, requirements as to the manner in which, the times at which, and the
contractor by whom such work shall be done. All such alterations, additions or
improvements shall be made by the Tenant at its sole cost and expense, shall be
part of the building, shall become the property of Landlord at the time they are
placed on the Leased Premises, and shall be surrendered with the Leased Premises
upon termination of this Lease. Landlord may, however, by written notice to
Tenant given at least 30 days prior to the end of the term, require Tenant to
remove all partitions, counters, railings and like installed by Tenant and to
repair any damage to the premises caused by such removal. Tenant agrees to
indemnify and hold Landlord harmless from and against any and all claims for
mechanics, materialmen or other liens in connection with any alterations,
additions or improvements, including trade fixtures. In addition, Tenant shall,
if required by Landlord, furnish such waiver or waivers of lien in form and with
surety satisfactory to Landlord before commencing any work on such alterations,
additions, or improvements, including trade fixtures. Landlord reserves the
right to enter the Leased Premises for the purpose of posting any notices of
non-responsibility as may be permitted by law or desired by Landlord.
14. LEGAL USE - VIOLATIONS OF INSURANCE COVERAGE - NUISANCE
Tenant will not use the Leased Premises nor allow the Leased Premises to be
used for any purpose other than that stated in this Lease or for any other
purpose which is unlawful; disreputable; or extra-hazardous on account of fire,
explosion or other casualty; nor permit any act which would increase the fire
and casualty insurance on the building or its contents. If insurance rates on
the building or its contents are increased due to action, conduct or business of
Tenant, Tenant will pay such amount of insurance rate increase to Landlord on
demand. Tenant will not create a nuisance, interfere with, annoy or disturb
other tenants or Landlord, nor allow Tenant's agents, employees or invitees to
do so.
15. LAWS AND REGULATIONS
-4-
<PAGE>
Tenant will maintain the Leased Premises in a clean and healthful condition
and will comply with all laws, ordinances, orders, rules and regulations of any
governmental authority having jurisdiction over Tenant's particular use,
conditions or occupancy of the Leased Premises. Tenant shall not be responsible
for any structural or capital improvements in furtherance of this section.
16. INDEMNITY AND LIABILITY
By moving into the Leased Premises, Tenant acknowledges that the premises
are received by it in a good state of repair, accepts the premises as suitable
for the purposes for which same are leased, waives any and all defects of the
premises and assumes all risk of damage to persons, property or Tenant's
business. Landlord shall not be liable for any injury to person, damage to
property or to Tenant's business arising from any acts or omissions of Landlord
or from any cause whatsoever except Landlord's gross negligence or willful
wrong. Tenant will indemnify and hold Landlord harmless from all suits, actions,
damages, liability and expense in condition with loss of life, bodily or
personal injury damage arising from any occurrence upon the Leased Premises,
from use or occupancy by Tenant of the Leased Premises, and from any acts or
omissions of Tenant, its agents, contractors, employees or invitees. In
addition, if Landlord should, without fault on its part, be made a party to any
action by or against Tenant, Tenant shall pay all costs, expense and reasonable
attorney's fees of Landlord.
Notwithstanding anything to the contrary hereinbefore, each party shall
indemnify and hold harmless the other from any liability, losses, damages,
claims, suits or actions, judgments and expenses (including reasonable attorneys
fees) which may arise or grow out of injury to or death of any person or damage
to any property caused by the negligence or misconduct of such party, its
agents, employees or contractors. In case either party shall, without fault on
its part, be made a party to any litigation commenced by or against such party
for which it is to be indemnified hereunder, then the other party shall protect
and hold harmless and pay all costs, penalties, charges, damages, expenses, and
reasonable attorneys fees incurred or paid by the party indemnified hereunder.
17. RULES OF BUILDING
Tenant, Tenant's agents, employees and invitees will comply fully with all
building rules and regulations which are attached to this Lease and made a part
of it by this referenced. Landlord may amend or change the rules and regulations
as it may deem advisable to provide for the safety, protection, care and
cleanliness of the building, and Landlord shall give Tenant a written copy of
all such rules and amendments.
-5-
<PAGE>
18. ENTRY FOR REPAIRS AND INSPECTION
Landlord and its agents and representatives may enter the Leased Premises
at any reasonable hour or at any time during emergencies to inspect, clean and
make repairs, alterations or additions as Landlord deems necessary. Tenant will
not be entitled to reduction or abatement of rent due to Landlord's entry for
such purposes.
19. CONDEMNATION
If the Leased Premises shall be taken or condemned in whole or in part for
public purposes, or transferred by agreement in connection with or under threat
of condemnation, this Lease shall, at Landlord's option, terminate at the time
the title is transferred. Tenant shall not be entitled to any portion of the
condemnation award or of any compensation paid for any transfer by agreement.
20. LANDLORD'S LIEN AND SECURITY INTEREST
21. ABANDONED PROPERTY
All of Tenant's furniture, movable trade fixtures and personal property not
removed from the Leased Premises within 5 days of Landlord's written request at
the termination of this Lease, whether such termination occurs by lapse of time
or otherwise, shall be conclusively presumed abandoned by Tenant, and Landlord
may declare such property to be the property of Landlord or may dispose of the
property by any method it deems advisable. Landlord's rights under this
paragraph shall be cumulative of its rights under Section 20 above.
22. HOLDING OVER
It is agreed and understood that any holding over by the Tenant of the
Leased Premises at the termination of this Lease, whether such termination
occurs by lapse of time or otherwise, shall be construed as a tenancy at will at
a daily rental equal to 1/30th of an amount equal to twice the monthly rental
payable during the last month prior to termination of this Lease. Such tenancy
shall be subject to all other terms and provisions of this Lease except any
right of renewal.
23. CASUALTY
In the event the Leased Premises are damaged by fire or other casualty
covered by Landlord's insurance, Landlord shall repair the damage at its expense
within 180 days. If the damage cannot be repaired with 180 days (as estimated by
an architect chosen by Landlord), this Lease may be terminated by either
Landlord or
-6-
<PAGE>
Tenant by written notice within 30 days after receipt of the architect's damage
certification and shall then terminate 30 days after such date such notice is
given. Tenant shall pay all rent due under this Lease, prorated to the date of
such notice, and all other sums owing at that time and shall immediately
surrender possession of the Leased Premises to Landlord.
However, if the damage can be repaired within 180 days or if it cannot be
repaired within such time but neither party exercises its option to terminate
this Lease, Landlord shall, within 30 days of such damage, begin to repair the
Leased Premises and shall proceed with reasonable diligence to restore the
Leased Premises to the same conditions as existed immediately prior to the
occurrence of such casualty. The rent shall be abated or any proportionate
amount of rent during the time the premises or any portion thereof are unfit for
occupancy. Landlord shall not be required to rebuild or repair or replace any of
the furniture, equipments, fixtures or other improvements which may have been
placed on the Leased Premises by Tenant. In the event any mortgagee under a deed
of trust, security agreement or mortgage on the building should require that the
insurance proceeds be used to retire the mortgage debt, Landlord shall have no
obligation to rebuild and this Lease shall terminate upon written notice to
Tenant. In the event the building is so badly damaged by fire or other casualty,
even though the Leased Premises may not be affected, that Landlord decides,
within 60 days after the destruction, not to rebuild or repair the building
(such decision being vested exclusively in the discretion of Landlord), then in
such event Landlord shall so notify Tenant in writing and this Lease shall
terminate 30 days after notice is given, and the Tenant shall pay rent hereunder
apportioned to the time such notice is given and shall pay all other obligations
of Tenant owing on the date of termination, and Tenant shall immediately
surrender the Leased Premises to Landlord. Notwithstanding the foregoing
provisions of this Section 23, Tenant agrees that if the Leased Premises or any
other part of the building is damaged by fire or other casualty caused by the
fault or negligence of Tenant or Tenant's agents, employees or invitees, Tenant
shall have no option to terminate this and the rent shall not be abated or
reduced before or during the repair period.
24. FORCE MAJEURE
In the event Landlord shall be delayed, hindered or prevented from the
performance of any act required under this Lease by reason of acts of God; acts
of common enemies; fire, storm, flood, explosion or other casualty; strikes;
lockouts, labor disputes; labor troubles; inability to procure materials;
failure of power; restrictive governmental authority; or other cause not within
the reasonable control of Landlord, then the performance of such acts shall be
excused for the period of the delay and the period for the performance of any
such act shall be extended for a period equivalent to the period of such delay.
-7-
<PAGE>
25. INSURANCE
A. Subrogation: Landlord and Tenant hereby waive and release any and
all rights, claims, demands and causes of action each may have against the other
on account of any loss or damage occasioned to Landlord or to Tenant as the case
may be, their respective business, properties, real and personal, the Leased
Premises or its contents, arising from any risk or peril covered by any
insurance policy carried by either party. Inasmuch as the above mutual waivers
will preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
hereby agrees immediately to give to its respective insurance companies written
notice of the terms of said mutual waivers, and to have said insurance policies
properly endorsed if necessary, to prevent the invalidation of said insurance
coverages by reason of said waivers. This provision shall be cumulative of
Section 16.
B. Liability Insurance: Tenant shall procure and maintain throughout
the term of this Lease a policy or polices of insurance, at its sole cost and
expense, insuring Tenant and Landlord against any and all liability for tangible
property damage or injury to or death of person or persons occasioned by or
arising out of or in connection with the use or occupancy of the Leased
Premises, the limits of such policy or policies to be in an amount not less than
$300,000 with respect to injuries to or death of any one person, in an amount
not less than $300,000 with respect to any one accident or disaster, and in an
amount not less than $100,000 with respect to property damaged or destroyed.
Tenant shall furnish evidence satisfactory to Landlord of the maintenance of
such insurance and shall obtain a written obligation on the part of each
insurance company to notify Landlord at least 10 days prior to cancellation of
such insurance.
C. Whenever any loss or damage to property which is covered by
insurance occurs resulting from any cause, then the party so insured hereby
releases the other party from any liability it may have on account of such loss,
cost, damage or expense to the extent of any amount recovered by reason of such
insurance and waives any right of subrogation which might otherwise exist in or
accrue to any person on account thereof.
26. TRANSFER OF LANDLORD'S RIGHTS
Landlord shall have the right to transfer and assign, in whole or in part,
all and every feature of its rights and obligations under this Lease. In such
event Landlord shall be released from any further obligation under this Lease
and Tenant agrees to look solely to Landlord's successor for the performance of
such obligations, provided such successor assumes all obligations of Tenant's
Lease.
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<PAGE>
27. BANKRUPTCY
Bankruptcy, insolvency or inability to pay its debts as such become due of
Tenant or any guarantor of this lease; filing by or against Tenant or any
guarantor in any court pursuant to any statute either of the United States or of
any state of a petition in bankruptcy or insolvency or for reorganization,
arrangement or for the appointment of a receiver or trustee of all or a portion
of Tenant's or any such guarantor's property or the making by tenant or any such
guarantor of an assignment for the benefit of creditors, shall constitute a
default by Tenant under this Lease and this Lease shall terminate. Tenant shall
then immediately surrender the Leased Premises to Landlord. If Tenant fails to
do so, Landlord may expel or remove Tenant and its property and retake
possession of the Leased Premises using appropriate judicial process without
liability for any prosecution or any claim for damages by reason of such re-
entry. Tenant further agrees to indemnify Landlord for all loss and damage
suffered by the Landlord of such termination, including loss of rental for the
remainder of the lease term.
28. DEFAULT
The following shall also constitute events of default by Tenant under this
Lease:
(a) Tenant's failure to pay rent and other sums payable by Tenant under
this Lease when due.
(b) Tenant's failure to comply with other provisions of this Lease.
(c) Tenant's desertion or abandonment of a substantial part of the Leased
Premises, and failure to pay rent.
(d) Any transfer of property by Tenant the purpose of which might tend to
defeat the collection of rent due or to become due under this Lease.
29. REMEDIES
A. Upon the occurrence of any of the events of default listed in Section
28 above, Landlord shall have the option to take any one or more of the
following actions without notice or demand in addition to and not in limitation
of any other remedy permitted by law under this Lease.
(1) Terminate this Lease, at which time Tenant shall immediately surrender
the Leased Premises to Landlord. If Tenant fails to do so, Landlord
may expel or remove Tenant and its property and retake possession of
the Leased Premises without liability for any prosecution or any claim
-9-
<PAGE>
for damages by reason of such re-entry. Tenant further agrees to
indemnify Landlord for all loss and damage suffered by Landlord by
reason of such termination, including loss of rental for the remainder
of the lease term.
(2) Enter upon and take possession using appropriate judicial process of
the Leased Premises, and relet the Leased Premises and receive rent
thereof. Tenant agrees to pay Landlord on demand for any costs
incurred by Landlord through such reletting, including costs of
renovating or repairing the Leased Premises for a new tenant and for
any deficiency that may arise between amount of rent due for the
remainder of Tenant's lease and that received by Landlord from
reletting the Leased Premises. It is expressly understood and agreed
however, that Landlord shall have no duty to relet the Leased Premises
and Landlord's failure to do so shall not release or affect Tenant's
liability for rent or damages.
(3) Landlord may do whatever Tenant is obligated to do under the terms of
this Lease and in order to accomplish this purpose Landlord may enter
the Leased Premises without liability to prosecution of any claim for
damages thereof. Tenant shall reimburse Landlord for any expenses
Landlord may incur in effecting compliance with this Lease on Tenant's
behalf. Tenant further agrees that Landlord shall not be liable for
any damages which may result to Tenant from such action by Landlord,
whether caused by Landlord's negligence or otherwise.
B. Upon the occurrence of the default event stated in Section 28(a)
above, Landlord shall have the option, in addition to and not in limitation of
any other remedy permitted by law or by this Lease, of declaring the entire
amount of rent for the remainder of the lease term due and payable immediately;
without terminating this Lease, as liquidated and agreed damages for the payment
of costs and expenses that Landlord will incur in regaining possession,
restoring or reletting the Leased Premises. It is understood and agreed that
the actual determination of Landlord's cost and expenses is not feasible and
that the amount of rent for the remainder of the lease term represents a
reasonable estimate of such cost.
30. NO WAIVER
No action by Landlord or its agents shall constitute an acceptance of an
attempted surrender of the Leased Premises and no agreement to accept such a
surrender of the Leased Premises shall be valid unless in writing. Re-entry of
the Leased Premises by Landlord shall not constitute an election by landlord to
terminate this Lease unless Landlord so notifies Tenant in writing. Acceptance
of rent by Landlord following the occurrence of an event of default shall not
waive such default, nor shall the receipt by Landlord of rent from any assignee,
subtenant or
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<PAGE>
occupant of said premises other than Tenant be deemed a waiver of Section 12 of
this Lease. Landlord's waiver of any default or breach of the terms of this
Lease (including any violation or failure to enforce the Building Rules attached
hereto) or failure by Landlord to enforce one or more of the remedies provided
herein upon such default or breach shall not constitute a waiver of any other
default or breach of this Lease. No provision of this Lease shall be deemed
waived by Landlord unless evidenced in writing. Landlord's rights and remedies
under this Lease shall be cumulative of every other right or remedy Landlord may
have otherwise at law or in equity, and Landlord's exercise of one or more of
the rights of remedies shall not bar or in any way impair Landlord's exercise of
other rights and remedies.
30A. RELOCATION
Landlord shall have the right at any time, following 30 days notice to
Tenant, to relocate Tenant to other space in building designated by Landlord,
provided such other space is of equal or larger size than the Leased Premises.
Landlord shall pay all reasonable out of pocket expenses of such relocation,
including the expenses of moving and reconstruction of all Tenant furnished or
Landlord furnished improvements.
In the event of such relocation, this Lease shall continue in full force
and effect without any change in the terms and conditions of this Lease, but
with the new location substituted for the old location set forth in Section 3 of
this Lease.
31. SUBORDINATION
This Lease and all rights of the Tenant hereunder are subject and
subordinate to any deeds of trust, mortgages or other instruments of security
which do now or may hereafter cover the building and the land or any interest of
Landlord therein, and to any and all advances made on the security thereof, and
to any and all increases, renewals, modifications, consolidations, replacements
and extensions of any such deeds of trust, mortgages or instruments of security.
This provision is hereby declared by Landlord and Tenant to be self-operative
and no further instrument shall be required to effect such subordination of this
Lease. Tenant shall, however, from time to time within 10 days of demand,
execute, acknowledge and deliver to Landlord any and all instruments and
certificates that in the judgment of Landlord may be necessary or proper to
confirm or evidence such subordination, and Tenant hereby irrevocably appoints
Landlord as Tenant's agent and attorney-in-fact for the purpose of executing,
acknowledging and delivering any such instruments and certificates. This Lease
and all rights of Tenant hereunder are further subject and subordinate to all
ground or primary leases in existence at the date hereof and to any and all
supplements, modifications, and extensions thereof heretofore or hereafter made.
However, notwithstanding the foregoing provisions of this Section 31, Tenant
agrees that any such mortgagee shall have the right at any time to subordinate
any
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<PAGE>
such deeds of trust, mortgages or other instruments of security to this Lease on
such terms and subject to such conditions as such mortgagee may deem appropriate
in its discretion. Tenant further agrees, upon demand by Landlord's mortgagee at
any time, before or after the institution of any proceedings for the foreclosure
of any such deeds of trust, mortgages or other instruments of security, or sale
of the building pursuant to any such deeds of trust, mortgages or other
instruments of security, to attorn to such purchaser upon any such sale and to
recognize such purchaser as Landlord under this Lease. This agreement of Tenant
to attorn upon demand of Landlord's mortgagee shall survive any such foreclosure
sale or trustee's sale. Tenant shall upon demand at any time or times, or after
any such foreclosure sale or trustee's sale, execute, acknowledge and deliver to
Landlord's mortgagee any and all instruments and certificates that in the
judgment of Landlord's mortgagee may be necessary or proper to confirm or
evidence such attornment, and Tenant hereby irrevocably appoints Landlord's
mortgagee as Tenant's agent and attorney-in-fact for the purpose of executing,
acknowledging and delivering any such instruments and certificates.
32. ESTOPPEL CERTIFICATES
Tenant agrees to furnish from time to time when requested by Landlord or
the holder of any deed or mortgage covering the land and building or any
interest of Landlord therein, a certificate signed by Tenant to the effect that
this Lease is then presently in full force and effect and unmodified; that the
term of this Lease has commenced and the full rental is then accruing hereunder;
that Tenant has accepted possession of the Leased Premises and that any
improvements required (if any) by the terms of this Lease to be made by Landlord
have been completed to the satisfaction of Tenant; that no rent under this Lease
has been paid more than 30 days in advance of its due date; that the address for
notices to be sent to Tenant is as set forth in this Lease, that Tenant, as of
the date of such certificate, has no charge, lien or claim of offset under this
Lease or otherwise against rents or other charges due or to become due
hereunder; and that to the knowledge of Tenant, Landlord is not then in default
under this Lease. The certificate shall also contain an agreement by Tenant
with such holder that from and after the date of such certificate. Tenant will
not pay any rent under this Lease more than 30 days in advance of its due date,
will not surrender or consent to the modification of any of the terms of this
Lease nor to the termination of this Lease by Landlord, and will not seek to
terminate this Lease by reason of any act or omission of Landlord until Tenant
shall have given written notice of such act or omission to the holder of such
deed of trust or mortgage (at such holder's last address furnished to Tenant)
and until a reasonable period of time shall have elapsed following the giving of
such notice; during which period such holder shall have the right, but not be
obligated, to remedy such act or omission; provided, however, that (i) the
agreement of Tenant described in this sentence will be of no effect under such
certificate unless Tenant is furnished by such holder with a copy of any
assignment to such holder of Landlord's interest in this Lease within 120
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days after the date of such certificate, and (ii) the agreement of Tenant with
such holder that is embodied in such certificate shall terminate upon the
subsequent termination of any such assignment.
33. JOINT AND SEVERAL LIABILITY
The obligations imposed upon Tenant (if more than one) under this Lease
shall be joint and several. If Tenant has a guarantor, the obligation of Tenant
under this Lease shall be joint and several obligations of Tenant and guarantor.
Landlord may proceed against guarantor without first proceeding against Tenant,
and no guarantor shall be released from its guaranty for any reason, including,
but not limited to, any amendment of this Lease, any waiver of Landlord's
rights, failure of Landlord to give Tenant or any guarantor any notices, or
release of any party liable for payment and performance of Tenant's obligations
under this Lease.
34. ATTORNEY'S FEES
If Landlord brings any action under this Lease or consults or places this
Lease or any amount payable under it with an attorney for the enforcement of any
of Landlord's rights under this Lease, Tenant agrees in each case to pay
Landlord reasonable attorneys' fees and other costs and expenses incurred by
Landlord in connection therewith.
35. QUIET POSSESSION
Landlord hereby covenants that Tenant, upon payment of rent as provided
under this Lease and performing all other agreements contained in this Lease,
shall and may peacefully have, hold and enjoy the Leased Premises.
36. BUILDING NAME
Tenant may use the present name of the building in the name of its business
and in its business address, provided, however, that Landlord reserves the right
to change the name of the building at any time without prior notice to Tenant.
Tenant agrees to immediately cease use of the building name in connection with
its business upon termination of this Lease, by lapse of time or otherwise.
37. PARKING
Tenant shall be allowed the use of five "Reserved" parking spaces
designated for ENTRUST. Landlord reserves the right to designate specific areas
and spaces within which Tenant, Tenant's employees, agents, visitors and
customers may park. Tenant shall not, however, be entitled to exclusive use of
such designated parking spaces (unless granted such right by Landlord in
writing) and Landlord may, in its
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sole discretion, reassign the location of such parking spaces at any time.
Landlord further reserves the right to promulgate rules and regulations for the
use of all Parking areas at any time during the term of this Lease.
Notwithstanding any foregoing provisions of this Section 37, Landlord shall have
the right to designate any parking area or space for the exclusive use of a
tenant or other person or persons. Tenant agrees that it will employ its best
efforts to prevent the use by Tenant's employees, agents, visitors and customers
of parking spaces allocated to other tenants.
38. NOTICES
Any notice required or permitted to be given by one party to the other
under this Lease shall be in writing and shall be effective when deposited
pursuant hereto with the Untied States Mail, Certified or Registered Mail,
Return Receipt Requested, Nationally Recognized Overnight Courier, Postage
Prepaid, addressed as follows:
If to LANDLORD: G & F INTERNATIONAL, INC.
2323 North Central Expressway
Suite #170
Richardson, TX 75080
If to TENANT:
ENTRUST
2323 North Central Expressway
Suite #360
Richardson, TX 75080
and
NTI
221 Lakeside Drive
MSE 6700
Richardson, TX 75082
Attn: Real Estate
With a copy to:
NTI
200 Athens Way
Nashville, TN 37228
Attn: Law Dept.
Either party may change its address as designated above by written notice to the
other party.
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<PAGE>
39. FINANCIAL STATEMENTS
Tenant shall furnish Landlord from time to time when requested by Landlord
a statement of financial condition of Tenant prepared by an independent
certified public accountant and in form reasonably satisfactory to Landlord.
40. LEASEHOLD IMPROVEMENTS
If the Leased Premises are not ready for occupancy by Tenant on the lease
commencement date, because Tenant's leasehold improvements are not substantially
complete or for any other reason, the obligations of Landlord and Tenant shall
nevertheless continue in full force and effect. In the event the Leased
Premises are not ready for occupancy for reasons other than any delay in the
installation of Tenant's leasehold improvements due to any changes or additions
ordered by Tenant, then the rent hereinabove provided shall abate and not
commence until the date the leasehold improvements to the Leased Premises are
substantially complete; but such abatement of rent shall constitute full
settlement of all claims that Tenant might otherwise have against Landlord by
reason of the Leased Premises are not being ready for occupancy by Tenant on the
lease commencement date. If the Leased Premises are not ready for occupancy by
Tenant on the lease commencement date, the term of this Lease shall be extended
by the period of time which elapses between the lease commencement date and the
date the Leased Premises are ready for occupancy by Tenant, and the parties
agree to execute an agreement between them confirming any such extension of the
lease term.
41. ENTIRE AGREEMENT
Tenant and Landlord agree that as a material consideration for execution of
this Lease there are no oral representations, understandings, stipulations or
promises to this agreement that are not incorporated in this Lease, and it is
also agreed that this Lease shall not be altered, waived, amended or extended
except by written agreement signed by both parties, unless expressly provided
otherwise in this Lease.
42. SEVERABILITY
If any provision of this Lease is illegal, invalid or unenforceable under
present or future laws during the term of this Lease, it is the intention of
both parties that the remainder of this Lease shall not be affected, and that a
clause be added to this Lease as similar to such invalid or unenforceable clause
as possible and be legal, valid and enforceable.
43. CAPTIONS
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<PAGE>
The captions of each paragraph of this Lease are added as a matter of
convenience only and shall not be considered in the construction or
interpretation of any part of this Lease.
44. BINDING EFFECT
The provisions of this Lease shall be binding and inure to the benefit of
Landlord and Tenant, respectively, and to their heirs, personal representatives,
successors and assigns, subject to the provisions of Section 26 above.
45. SPECIAL CONDITIONS
Attached hereto and made a part hereof are the following Exhibits:
Rules and Regulations
Exhibit A - Legal Description
Exhibit B - Floor Plan
Addendum A - Adjustment to Base Rental
Addendum B - Monthly Rental Due
Addendum D - Special Provisions
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<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
BEING: A part of Fall Creek Park (Phase 1) an addition to the City of
Richardson, Dallas County, Texas as recorded on Volume 84188 at Page
0096 of the Deeds Records of said Dallas County.
BEGINNING: at the Northwest corner of Lot 1 Block 1 of said Fall Creek Park;
THENCE: South 89 degrees 34 minutes 58 seconds East along the North line of
said Lot 1 Block 1 a distance of 297.63 feet;
THENCE: South 00 degrees 25 minutes 02 seconds West a distance of 287.28 feet;
THENCE: North 89 degrees 34 minutes 58 seconds West a distance of 32.63 feet;
THENCE: South 00 degrees 25 minutes 02 seconds West a distance of 143.59 feet
to a point in a curve to the left whose radius is 184.50 feet and
whose central angle is 23 degrees 03 minutes 35 seconds;
THENCE: Westerly along said curve to the left whose chord bears North 81
degrees 28 minutes 11 seconds West a distance of 73.76 feet and an arc
length of 74.26 feet;
THENCE: South 87 degrees 00 minutes 02 seconds West a distance of 78.36 feet;
THENCE: South 87 degrees 02 minutes 27 seconds West a distance of 75.89 feet;
THENCE: North 89 degrees 26 minutes 15 seconds West a distance of 39.09 feet
to a point in the West line of said Lot 1 Block 1;
THENCE: North 00 degrees 33 minutes 45 seconds East along the West line of
said lot 1 Block 1 a distance of 429.50 feet to the POINT OF BEGINNING
and containing 122,272.67 square feet of 2.807 acres of land more or
less.
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IN WITNESS WHEREOF, this Lease is entered into by the parties hereto and on
the date and year first set forth above.
TENANT: ENTRUST TECHNOLOGIES, INC.
--------------------------
By: /s/ John A. Ryan
_________________________________________
Title: President
______________________________________
LANDLORD: G. & F. INTERNATIONAL, INC.
---------------------------
/s/ Rachael Moorhead
________________________________________________________________________________
By: Rachael Moorhead______________
Title: Vice President________________
CORPORATE ACKNOWLEDGMENT
STATE OF
COUNTY OF
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this day personally appeared ________________________ whose name is
subscribed to the foregoing instrument, and acknowledged to me that the same was
the act of the said _____________________________, a corporation, and he/she
executed the same as the act of such corporation for the purposes and
consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this ________ day of
_______________________________, 19__.
(SEAL)
_____________________________________
Notary Public in and for
_____________________________________
County
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<PAGE>
BUILDING RULES AND AGREED REGULATIONS
1. Tenant agrees to make deposit, in amount fixed by Landlord from time
to time, for each key issued by Landlord to Tenant for its offices, and upon
termination of lease contract, to return all keys to Landlord. Landlord will
refund amount deposited on each key returned.
2. Tenant will refer all contractors, contractor's representatives and
installation technicians, rendering any service to Tenant to Landlord for
Landlord's supervision, approval, and control before performance of any
contractual service. This provision shall apply to all work performed in
building including installations of telephones, telegraph equipment, electrical
devices and attachments, and installations of any nature affecting floors, walls
woodwork, trim, windows, ceilings, equipment or any other physical portion of
building.
3. Movement in or out of building of furniture or office equipment, or
dispatch or receipt by Tenant of any merchandise or materials which requires use
of elevators or stairways, or movement through building entrances or lobby shall
be restricted to hours designated by Landlord. All the manner agreed between
Tenant and Landlord by prearrangement before performance. Such prearrangement
initialed by Tenant will include determination by Landlord and subject to its
decision and control, time, method, and routing of movement, limitations imposed
by safety or other concerns which may prohibit any article, equipment or any
other item from being brought into building. Tenant is to assume all risk as to
damage to articles moved and injury to persons or public engaged or not engaged
in such movement, including equipment, property, and personnel of Landlord if
damaged or injured as a result of acts in connection with carrying out this
service for Tenant from time of entering property to completion of work; and
Landlord shall not be liable for acts of any person engaged in, or any damage or
loss to any of said property or persons resulting from any act in connection
with such service performed for Tenant.
4. No signs will be allowed in any form on exterior of building or
windows inside or out, and no signs except in uniform location and uniform style
fixed by Landlord will be permitted in the public corridors or on corridor doors
or entrances to Tenant's space. All signs will be contracted for by Landlord
for Tenant at the rate fixed by Landlord from time to time, and Tenant will be
billed and pay for such service accordingly.
5. No portion of Tenant's area or any other part of building shall at any
time be used or occupied as sleeping or lodging quarters.
6. Tenant shall not place, install or operate on leased premises or in
any part of building, any engine, stove, or machinery, or conduct mechanical
operations or thereon or therein, or place or use in or about premises any
explosives, gasoline,
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kerosene, oil, acids, caustics, or any other inflammable, explosive, or
hazardous material without written consent of Landlord.
7. Landlord will not be responsible for lost or stolen personal property,
equipment, money, or jewelry from Tenant's area of public rooms regardless of
whether such loss occurs when area is located against entry or not.
8. No birds or animals shall be brought into or kept in or about
building.
9. Employees of Landlord shall not receive or carry messages for or to
any Tenant or other person, not contact with or render free or paid services to
any Tenant or Tenant's agents, employees, or invitees.
10. Landlord will not permit entrance to Tenant's offices by use of pass
keys controlled by Landlord, to any person at any time without written
permission by Tenant except employees, contractors, or service personnel
directly supervised by Landlord.
11. None of the entries, passages, doors, elevators, elevator doors,
hallways or stairways shall be blocked or obstructed, or any rubbish, litter,
trash, or material of any nature placed, emptied or thrown into these areas, or
such area to be used at any time except for access or egress by Tenant, Tenant's
agents, employees, or invitees.
12. The Landlord desires to maintain the highest standards of
environmental comfort and convenience for the tenantry. It will be appreciated
if any undesirable conditions or lack of courtesy or attention are reported
directly to the management.
SECURITY DEPOSIT
Amount: $5767.38
The security deposit shall be payable on the date of Tenant's execution of
this Lease and shall be held by Landlord without liability for interest and as
security for the performance by Tenant of Tenant's obligations under this Lease.
It is expressly understood that the security deposit shall not be considered an
advance payment of rental or a measure of Landlord's damages in case of default
by Tenant or upon termination of this Lease. Landlord may commingle the
security deposit with Landlord's other funds. Landlord may, from time to time,
without prejudice to any other remedy, use the security deposit to the extent
necessary to make good any arrearages of rent or to satisfy any other obligation
of Tenant hereunder. Following any such application of the security deposit,
Tenant shall pay to Landlord on demand the amount so applied in order to restore
the security deposit to its original amount. If Tenant is not in default at the
termination of the Lease, the balance of the security
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deposit remaining after any such application shall be returned by Landlord to
Tenant. If Landlord transfers its interest in the Leased Premises during the
term of this Lease, Landlord may assign the security deposit to the transferee
and thereafter shall have no further liability for the return of such security
deposit.
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ADDENDUM A
Attached hereto and made a part of the Lease Agreement dated August 1, 1997
by and between G & F International Inc. ("Landlord") and Entust Technologies,
Inc. ("Tenant").
(1) Adjustment to Base Rental
(A) For purposes of ascertaining the adjustment to Base Rental, the
following terms shall have the following meanings:
(i) "Base Amount" shall mean the actual figure per square foot of
Rentable Area in the Building for the year 1997 (to be determined
$_______);
(ii) "Basic Costs" shall mean all Building and Complex Operating Expenses;
(iii) "Complex" shall mean the Building and any other land or improvements,
including related parking facilities, now or hereafter operated, in
whole or in part, in common with the Building;
(iv) "Estimated Basic Costs" shall mean a good faith projection of Basic
Costs for the forthcoming calendar year;
(v) "Tenant's Share" shall mean the ratio determined by dividing Rentable
Area in the Premises by Rentable Area in the Building. As of the time
of execution of this Lease, Tenant's Share is 2.62%;
(vi) "Operating Expenses" shall mean all expenses, costs, and
disbursements (but not replacement of capital investment items nor
specific costs especially billed to and paid by tenants) of every
kind and nature which Landlord shall pay or become obligated to pay
because of or in connection with the ownership and operation of the
Building and/or Complex, including, but not limited to, the
following:
(a) Wages, salaries, and fees of all personnel engaged in the operation,
maintenance, or security of the Building and/or Complex and personnel who may
provide traffic control relating to ingress and egress from the parking areas
for the Building to adjacent streets. All taxes, insurance, and benefits
relating to employees providing these services shall be included;
(b) All supplies and materials used in the operation and maintenance of the
building and/or Complex;
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(c) Costs of all utilities for the Building and/or Complex, including but not
limited to, the cost of water and power, heating, lighting, air conditioning,
and ventilation;
(d) Costs of all maintenance, janitorial, and service agreements for the
Building and/or Complex and the equipment therein, including but not limited to,
alarm service, window cleaning, and elevator maintenance;
(e) Cost of all insurance relating to the Building and/or Complex, including
but not limited to, the cost of casualty and liability insurance and Landlord
personal property used in connection therewith;
(f) All taxes, assessments, and other governmental charges, whether federal,
state, county, or municipal, and whether they be by taxing districts or
authorities presently taxing responsible for taxes on its personal property and
on the value of leasehold improvements to the extent that same exceed standard
Building allowances;
(g) Cost of labor and materials in performing repairs and general maintenance
in connection with the Building and/or Complex, including without limitation,
Landlord share of all maintenance for the access road to the Building and
Landlord share of maintenance of the underground storm drainage system, but
excluding repairs and general maintenance paid by proceeds of insurance or by
Tenant or other third parties, and alterations attributable solely to tenants of
the Building other than Tenant;
(h) Amortization of the cost of installation of capital investment items which
are primarily for the purpose of reducing operating costs of the Building and/or
Complex (e.g. energy saving devices) or which may be required by governmental
authority. All such costs shall be amortized over the reasonable life of the
capital investment items by an additional charge to be added to rent and paid by
Tenant as additional rent, with the reasonable life and amortization schedule
being determined by Landlord in accordance with generally accepted accounting
principles, but in no event to extend beyond the reasonable life of the
Building;
(i) Landlord accounting, auditing, legal, and management fees applicable to the
Building and/or Complex; such operating expenses shall be computed on a modified
cash basis. All operating expenses shall be determined pursuant to accepted
accounting principles which shall be consistently applied.
(B) For each calendar year of the term of this Lease, Base Rental shall be
adjusted upward by the amount of Tenant's Share of the increase, if any of Basic
Costs over the Base Amount.
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Prior to January 1st of each year during the term of this Lease, or soon
thereafter, Landlord shall provide Tenant with Estimated Basic Costs for the
calendar year ahead and Tenant's Share of the Increase of Estimated Basic Costs
over the Base Amount; thereafter, Tenant's Share of the increase of Estimated
Basic Costs over the Base Amount; shall be paid in twelve equal monthly
installments together with the monthly installment of rental due hereunder.
(C) By June 1, 1998 and each June 1st thereafter throughout the term of this
Lease, or as soon thereafter as practical, Landlord shall furnish to Tenant a
statement of Basic Costs for the previous calendar year. A lump sum payment
(payment shall be deemed a payment of rent hereunder) will be made either from
Tenant to Landlord, or, from Landlord to Tenant within thirty (30) days
following the delivery of said statement equal to the difference between
Tenant's Share of the increase of actual Basic Costs over the Base Amount and
Tenant's Share of the increase of Estimated Basic Costs over the Base Amount for
the previous calendar year. The effect of this reconciliation payment is that
Tenant will pay during the term of this Lease its share of Basic Cost increases
over the original $_______________/square foot Base Amount and no more (to be
determined based on 1997 actual expenses).
(D) Tenant at its expense shall have the right to all reasonable times,
following prior written notice to Landlord, to audit Landlord books and records
relating to this Lease for any year or years for which Base Rental is adjusted
pursuant to this Addendum hereof; or at Landlord's sole discretion, Landlord
will provide such audit prepared by a certified public accountant.
(E) If this Lease shall terminate on a date other that the last day of a
calendar year, the amount of any adjustment between Estimated Basic Costs and
Actual Basic Costs with respect to the calendar year in which termination occurs
shall be prorated on the basis which the number of days from the commencement of
such calendar year to and including such termination date bears to 365; and any
amount payable by Landlord to Tenant or Tenant to Landlord with respect to such
adjustment shall be payable within thirty (30) days after delivery by Landlord
to Tenant of the statement of Actual Basic Costs with respect to such calendar
years.
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ADDENDUM B
Attached hereto and made a part of the Lease Agreement dated ____________,
1997 by and between G & F International, Inc. ("Landlord") and Entrust
Technologies, Inc. "Tenant").
Monthly Rental Due:
August 1, 1997 January 31, 1999 $5,767.38
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ADDENDUM D
Special Provisions
------------------
- -- Tenant shall be granted a one time right to cancel this Lease Agreement
following the 12th month of the term provided Tenant provides Landlord not
less than sixty (60) days written notice of Tenant's desire to exercise
such right and Tenant pays to Landlord an amount equal to three months
rental plus the unamortized portion of the lease commission Landlord paid
to Tenant's Broker. Such payments for early cancellation shall be due at
the time notice is provided in order for Tenant to properly exercise this
right.
- -- Landlord agrees to cut door opening and install door on South wall of
reception area (as the space is presently designed.) Landlord further
agrees to allow Tenant to clean the existing carpeting within Tenant's
Leased Premises and construct a box amount the existing telephone equipment
presently mounted on the wall at the North end of the Leased Premises, any
contractors Tenant uses for such work must be approved by Landlord before
beginning work.
Consequential Damage Provision
------------------------------
Notwithstanding anything to the contrary herein, in no event shall the
parties be liable to each other or any party claiming through or on behalf
of Landlord or Tenant, for any indirect, special or consequential damages,
including without limitation, lost profits or revenues arising from breach
of this Lease or otherwise. This limitation shall not, however, apply to
claims relating to bodily injury or damage to tangible property caused by
Tenant's negligence or Landlord's negligence.
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EXHIBIT 10.16
January 28, 1998
Mr. Cal Kirkpatrick
Vice President
Colonnade Developments
1 Antares Drive
Suite 510
Nepean, Ontario
K2E 8C4
Dear Sir:
SUBJECT: OFFER TO LEASE
9 AURIGA DIVE, NEPEAN, ONTARIO
------------------------------
Entrust Technologies Limited ("Tenant") hereby offers to lease the premises
hereinafter described from Colonnade Development Incorporated ("Landlord") upon
the terms and conditions hereinafter set forth.
1.0 PREMISES
--------
1.1 LOCATION OF PROPERTY
--------------------
9 Auriga Drive
Nepean, Ontario ("the Building")
1.2 REGISTERED OWNER OF PROPERTY
----------------------------
Colonnade Development Incorporated
1.3 DESCRIPTION OF SPACE TO BE LEASED ("THE PREMISES")
--------------------------------------------------
The gross rentable area ("GRA") of the Premises is approximately 29, 149
square feet, on the ground and second floor, as outlined on Schedule "A"
attached hereto, and shall be subject to final measurement as reflected in
a certificate to be prepared in accordance with BOMA standard (Z65.1-1996)
at Landlord's cost by a professional land surveyor or architect.
(y) Total Gross Rentable Area of the Premises (GRA) 29,149 Sq. Ft.
(z) Total Gross Rentable Area of Building: 29,149 Sq. Ft.
Tenant's Proportionate Share: y x 100 = 100%
-
Z
<PAGE>
1.4 USE OF PREMISES
---------------
General offices, research and development, related uses and for any other
legal use.
2.0 PARKING
-------
Tenant shall have the right during the term and any renewals to occupy the
entire parking lot at no cost.
3.0 TERM AND OCCUPANCY
------------------
3.1 INITIAL TERM
------------
The lease shall be for a Term of 3 years and 5 months commencing November
1, 1998 ("Commencement Date") and terminating on March 31, 2002.
3.2 OCCUPANCY
---------
The Leased Premises shall be available for occupancy by Tenant October 1,
1998 following waiver of the conditions outlined in section 18 0 of the
Offer to Lease, for the purpose of installing Leasehold Improvements.
Subject to mutual agreement, Tenant may be permitted earlier occupancy of
the Premises. In such event, Tenant shall be bound by the provisions of
the Offer to Lease except that Minimum Rent and Additional Rent shall not
be payable prior to November 1, 1998. The Tenant shall be responsible for
all Utilities consumed, and for all legal obligations under the Lease.
3.3 OPTION TO RENEW
---------------
Tenant shall have the option to renew this Lease for one further term of
five (5) years on the same terms and conditions save as to further right of
renewal, tenant inducements, and Minimum Rent; the Minimum Rent shall be
the then current Market Rate, determined as described in paragraph 5.0.
Tenant shall advise Landlord of its intention to exercise this option at
least nine (9) months prior to the expiration of the Term.
4.0 RENT
----
4.1 MINIMUM RENT
------------
Tenant shall pay to Landlord annual Minimum Rent, payable in equal
2
<PAGE>
consecutive monthly payments in advance on the first (1st) day of each
month during the Term, as follows:
November 1, 1998 to March 31, 2002 - $9.00 per sq. ft. of GRA per annum
net.
4.2 ADDITIONAL RENT
---------------
Tenant shall pay, as Additional Rent, its proportionate share of Realty
Taxes and Operating Expenses including sales tax, and G.S.T. in respect of
the Premises and common areas and facilities, which may be estimated by
Landlord subject to final year end adjustments. Landlord estimates Realty
Taxes, Operating Expenses and Hydro charges to be $9.00 per square foot for
1998, excluding the new tax assessment legislation effective January 1,
1998.
In the event the Tenant is occupying 100% of the building, they shall have
the option of having all utilities billed directly to them.
In the event that Tenant, acting reasonably, is dissatisfied with the cost,
standard or quality of the delivery of cleaning and janitorial services for
the Premises, and after giving the Landlord written notice of its
dissatisfaction and at least 30 days to rectify, which Landlord has failed
to do, the Tenant may request that Landlord replace the provider of the
service, or Tenant may have the option to manage the service directly, and
Landlord shall use best efforts to comply with such request. Tenant shall
manage its own security services directly. In the event the Tenant decides
to manage these property management items directly, the administration fees
will be reduced proportionately.
5.0 MARKET RATE
-----------
Market Rate for the renewal term shall be established through the mutual
agreement of the Landlord and Tenant and shall be equal to the net rental
rate per square foot for comparable space in the Building and in other
buildings in the area of comparable quality, considering the size of the
premises, the quality of the tenancy and the tenant inducements being
offered at the time for five (5) year leases, including, but not limited
to, cash allowances, and free rent.
Landlord and Tenant shall use reasonable efforts to agree as to the Market
Rate. In the event agreement is not reached six (6) months prior to the
renewal period, Tenant and Landlord may, at its option, cancel the Option
to Renew by notice in writing to Landlord at least five (5) months prior to
commencement of the renewal period; otherwise, the parties agree to submit
to an arbitration process in accordance with Ontario Law to determine the
Market
3
<PAGE>
Rate.
6.0 LANDLORD'S WORK
---------------
The Landlord shall provide the Leased Premises in an "as is condition" as
per Schedule "B" hereto at no cost to the Tenant. The Tenant's design
company will co-ordinate with the Tenant to determine any existing
leaseholds that will be incorporated into the space plan. The Landlord
agrees to complete the Landlord's Work in the Leased Premises prior to
November 1, 1998.
7.0 DELAY
-----
In the event the Landlord's Work to be completed by the Commencement Date
is not completed by the Commencement Date except by reason of force majeure
or Tenant's delay, then the Commencement Date and end of Term shall be
postponed by the same number of days that the completion of Landlord's work
has been delayed beyond the original Commencement Date.
8.0 LEASEHOLD IMPROVEMENTS
----------------------
The General Contractor and the Construction Manager of the Tenant's
Leasehold Improvements shall be the Landlord. Tenant shall have final
approval and disclosure of the construction schedules and contracts and the
Landlord shall be entitled to a project management fee of 10% of all costs
incurred, save and except Landlord's work, Tenant's interior design and any
furniture installations.
9.0 RIGHT OF CANCELLATION
---------------------
Tenant shall have the one time option on March 30, 2000, on six (6) months
prior written notice to Landlord, to cancel the Lease with a penalty equal
to the amount of the unamortized balance of the leasing commissions and one
(1) months minimum and additional rent.
For the purpose of this calculation, Landlord will be deemed to have
amortized the leasing commissions over a Period of 41 months from the
Commencement Date. The interest rate factor to be applied in the
calculation shall be a nominal rate of 8% per annum, calculated semi-
annually, not in advance. Such payment shall be made by Tenant to Landlord
at the termination date.
10.0 TENANT RIGHTS TO INSTALL
------------------------
Tenant shall, at its expense, have the right to install any or all of the
following,
4
<PAGE>
subject to municipal approvals where applicable and Landlord's written
consent regarding size installation method and location, such consent not
to be unreasonably withheld or delayed:
. exterior signage at the top and on the facade of the Building
. exterior signage adjacent to the entrance of the Building and entrance
to site
. signage within the Building lobby
. raised flooring
. security system at the front and rear entrance door, shipping doors and
on any floors occupied by the Tenant
. building infrastructure upgrade
. generator
. core drilling as required
. roof top mechanical units
Tenant shall be responsible at its own cost to remove any of these
installations at the end of the Term and make good any damage to the
Building.
11.0 UNRESTRICTED TIME OF USE
------------------------
Tenant shall have access and use of the Premises twenty-four (24) hours a
day, seven (7) days a week.
12.0 FORM OF LEASE
-------------
Upon acceptance of this "Offer to Lease" by both the Landlord and Tenant a
formal lease shall be prepared by Landlord incorporating the terms and
conditions hereof and reflecting the principles in SCHEDULE "B" attached
(except as modified herein) and subject to Tenant's and Landlord's
solicitors' reasonable approval. Landlord and Tenant will use their
reasonable efforts to negotiate and execute the lease within thirty (30)
days of receipt of the lease by Tenant from Landlord.
13.0 This Offer to Lease shall be conditional upon the approval of Tenant's
senior management on or before February 20, 1998. Should written notice of
such approval not be provided to Landlord by such date, this Offer to Lease
shall become null and void and have no further effect.
The Tenant agrees that it will not accept any offers to lease on competing
space during this conditional period.
14.0 GENERAL PROVISIONS
------------------
Any commission payable to real estate companies or agent(s) with respect to
5
<PAGE>
the lease shall be borne by Landlord.
No news release, public announcement or any form of advertising shall be
made by Landlord and Tenant and Tenant's real estate broker with respect to
this Offer to Lease or the leasing of space in the Building by Tenant
without the prior written consent of Tenant, such consent not to be
unreasonably withheld or delayed.
15.0 TIME OF ESSENCE
---------------
Time shall be of the essence herein.
This Offer to Lease is open for acceptance by the Landlord until 6:00 p.m.
February 2, 1998 after which time if not accepted, it will become null and
void and of no further effect.
Yours truly
/s/ David Wagner
________________
David Wagner
Attachment
WE HEREBY ACCEPT THE TERMS AND CONDITIONS OF THIS OFFER TO LEASE.
DATED AT ____________________, THIS ________ DAY OF _________________, 1998.
Colonnade Development Incorporated
(Landlord)
Per: /s/ Cal Kirkpatrick
________________________________
Title:
Per:
________________________________
Title:
6
<PAGE>
SCHEDULE "B"
------------
PRINCIPLES TO BE REFLECTED IN LEASE
CANADA
1. MEASUREMENT OF PREMISES - BOMA standards (Z65.1-1996)
2. OPERATING COSTS
. Landlord shall not act in an unreasonable or arbitrary manner in
incurring and allocating operating costs
. administration fees shall not exceed agreed percentage of operating
expenses (and not applied to costs for which Landlord is responsible or
depreciation or amortization)
. statement of operating costs shall be forwarded to Tenant within 120
days of end of each fiscal year
. costs of services/supplies provided by persons/companies not dealing at
arm's length with Landlord shall be competitive
. to include capital tax based on capital employed at the time of signing
of this Offer to Lease and estimated by the Landlord to be $0.14 per
square foot.
NOT TO INCLUDE:
. cost of Landlord's head office personnel, but to include (salary, wages
only of personnel involved in management of the building)
. cost of structural repairs of the Building including the Premises
(including foundation, concrete floors and structural frame and roof
system including membrane)
. amounts directly chargeable to other tenants
. ground rent (if any), amortization and interest or any capital
retirement of debt affecting the property
. any loss or damage to the Building or any personal injury for which the
Landlord is or ought to have been insured under the Lease, except in
the event of Tenant negligence
. any cost or expense which is normally treated in accordance with
generally accepted accounting principles as being of a capital nature
. all fines, suits, claims, demands, costs, charges and expenses for
which Landlord is liable by reason of the negligent or willful act or
omission of Landlord or those for whom it is in law responsible
. all work to the Building or Land made necessary by Landlord's non-
compliance with governing codes, etc. relating to the construction of
the Building
. cost of repairing latent defects in the Building and parking areas.
3. REALTY TAXES
. Landlord shall pay all such taxes on or before due date
7
<PAGE>
. Tenant shall not be responsible for any interest or fines for late
payment
. Landlord shall provide to Tenant, on request, receipted tax bills
4. CONDITION OF BUILDING - Landlord shall warrant at time of signing the Offer
to Lease and at Lease Commencement Date that (a) the HVAC, electrical and
all other Building systems are in excellent working order and of sufficient
capacity to service the Building and Premises for their current use; (b) it
is not aware of any structural or major repairs required to be effected to
the Building including the Premises; (c) it has not received any notice of
non-compliance of laws, by-laws, etc. in respect of the Building or Land
which has not been remedied, and the Building and Land comply with all
applicable zoning & construction laws, by-laws, etc.; (d) the Building and
Landlord's equipment therein do not contain formaldehyde foam insulation,
asbestos, or polychlorinated biphenyls.
REPAIR AND MAINTENANCE - Landlord shall maintain the Building and Land in a
first-class condition, in a good state of repair, and in compliance with
applicable laws, etc.
Tenant shall provide for normal maintenance of Premises, reasonable wear
and tear, damage by fire and other insured perils excepted.
If Landlord supervises any repairs, alterations, etc., separate from the
tenant leasehold improvements Landlord's costs shall include only actual
direct costs, plus a supervision fee of 10%.
Where Landlord has right to perform any work related to the Premises, or
where Landlord directs the use of specified contractors, the costs of any
such contractor shall be competitive.
6. LEASEHOLD IMPROVEMENTS - Tenant may make interior alterations and changes
in the Premises. Tenant shall obtain Landlord's prior written approval for
alterations.
The Landlord may require the Tenant to remove any non standard or unusual
Leasehold Improvements and to restore the premises to Base Building
condition upon the expiry of the Lease term. Following the finalization of
the Tenant Improvements the Landlord and Tenant will agree and itemize as
an addendum to this Offer to Lease those Leasehold Improvements which will
be removed at the end of the Lease Term.
Any contractors'/suppliers' warranties applying to work performed by
Landlord on behalf of Tenant shall be assigned to Tenant, on request.
8
<PAGE>
7. INSURANCE
Tenant shall take out and keep in force during the Term:
(i) all risks property insurance and, if applicable, broad comprehensive
boiler and machinery insurance on all objects owned or operated by
Tenant in the Premises and leasehold improvements
(ii) comprehensive general liability insurance in an amount not less than
$5,000,000 per occurrence;
(iii) Tenant's legal liability insurance;
(iv) automobile liability insurance including contractual liability
covering all licensed vehicles operated by or on behalf of Tenant;
(v) rental insurance sufficient to replace rent payable under the Lease
for at least 12 months.
Landlord shall take out and keep in force during the Term:
(i) all risks property insurance on the Building;
(ii) broad comprehensive boiler and machinery insurance on the equipment
contained in the Building;
(iii) comprehensive general liability insurance with respect to Landlord's
operations in respect of the Building in an amount not less than
$2,000,000 per occurrence.
All property insurance shall contain a waiver of subrogation rights of the
insurer against the other party and those for whom any of them is
responsible in law (whether or not the loss or damage is caused by their
act or omission).
All liability insurance shall contain a provision for cross-liability and
severability of interest.
Tenant and Landlord shall provide to one another, on request, certificates
of the insurance described above.
8. LIABILITY - Tenant shall be responsible for personal injury or property
damages, if damages result from breach by Tenant of Lease or willful or
negligent act of Tenant or those whom Tenant is responsible for at law.
9. OBSERVANCE OF LAWS - Tenant shall comply with all laws, etc. pertaining to
the Premises and Tenant's occupancy, provided the Premises were in
compliance with all such laws at the commencement of the Term. Except to
the extent Tenant is responsible therefor under the Lease, Landlord shall
comply with all laws, by-laws etc., in respect of the operation,
maintenance and condition of the Building and Land.
9
<PAGE>
10. SUBLET/ASSIGNMENT - Consent of Landlord is required for any sublet or
assignment of the Lease, except to any subsidiary or affiliate of Tenant
(in which case prompt prior notice shall be given to Landlord). Tenant
shall remain liable notwithstanding sublet or assignment.
11. LANDLORD'S RIGHT OF ENTRY (INSPECTION, ETC.) - To be exercised only at
reasonable times on prior written notice except in the event of an
emergency.
12. DEFAULT - Tenant shall be given the following notice periods to remedy any
default:
. non-payment or Rent - 10 days' written notice
. breach of any other covenant - 15 days' written notice or such longer
period of time as is necessary for Tenant to remedy such default
(provided Tenant promptly commences and thereafter continues diligently
to remedy such default), except in the event of an emergency.
13. DAMAGE OR DESTRUCTION
. If the Building or the Premises cannot be restored in 180 days as
determined by an independent architect, Landlord or Tenant can
terminate the Lease.
. Rent shall abate until the Premises are restored by Landlord.
14. INTEREST ON ARREARS - Not to exceed prime plus 2% (to apply also on amounts
due by Landlord to Tenant).
15. CONSENT/APPROVALS - Any consent, permission or approval of Landlord or
Tenant required under the Lease shall not be unreasonably withheld or
delayed; adequate reasons in writing shall be given if consent refused.
16. EXERCISE OF RIGHTS BY LANDLORD - Landlord shall act reasonably and as a
prudent owner in exercising all rights and so as not to interfere more than
is reasonably necessary under the circumstances with Tenant's use and
enjoyment of the Premises.
17. TENANT'S RIGHT TO VACATE - Tenant may vacate the Premises at any time
provided it continues to pay the rent and meet its other financial
obligations under the Lease until its termination.
18. ENVIRONMENT - Landlord shall be responsible, at its expense, for the cost
of clean up or any other remedial measures for any contamination to the
Land or Building existing prior to the commencement of the Lease or caused
at any time thereafter by the Landlord or anyone for whom the Landlord is
responsible at law. Landlord warrants it is not aware of any such
contamination.
10
<PAGE>
19. RULES AND REGULATIONS - All rules and regulations shall be adopted by
Landlord, acting reasonably, and shall not be applied by Landlord in an
arbitrary or capricious manner.
20. WAIVER - Provision to apply to both Landlord and Tenant.
21. FORCE MAJEURE - Provision to apply to both Landlord and Tenant (other than
for payment of rent).
22. NON-DISTURBANCE AGREEMENT - Landlord shall use reasonable efforts to obtain
from mortgagee (if any) of the Building.
11
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
------------------------------
Name Jurisdiction of Incorporation
---- -----------------------------
Entrust Technologies Limited Ontario
R3 Security Engineering AG Switzerland
Entrust Technologies Limited England and Wales
Entrust Technologies GmbH Germany
<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
DELOITTE & TOUCHE
Chartered Accountants
Ottawa, Canada
June 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCED SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 4,025 5,409
<SECURITIES> 8,613 5,606
<RECEIVABLES> 7,152 10,327
<ALLOWANCES> 416 435
<INVENTORY> 0 0
<CURRENT-ASSETS> 22,334 22,927
<PP&E> 1,680 1,939
<DEPRECIATION> 754 934
<TOTAL-ASSETS> 24,757 25,917
<CURRENT-LIABILITIES> 8,627 9,858
<BONDS> 0 0
0 0
0 0
<COMMON> 205 205
<OTHER-SE> 14,457 14,560
<TOTAL-LIABILITY-AND-EQUITY> 24,757 25,917
<SALES> 25,006 9,924
<TOTAL-REVENUES> 25,006 9,924
<CGS> 4,916 1,818
<TOTAL-COSTS> 25,496 10,095
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 287 19
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 233 (25)
<INCOME-TAX> (281) (160)
<INCOME-CONTINUING> 514 135
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 514 135
<EPS-PRIMARY> 0.02 0
<EPS-DILUTED> 0.01 0
</TABLE>
