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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 000-24733
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ENTRUST TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MARYLAND 62-1670648
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
ONE PRESTON PARK SOUTH, SUITE 400
4975 PRESTON PARK BLVD.
PLANO, TX 75093
(Address of principal executive offices & zip code)
Registrant's telephone number, including area code: (972) 943-7300
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Securities registered pursuant to Section
12(b) of the Act: none
Securities registered pursuant to Section
12(g) of the Act: Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common equity held by non-affiliates of
the registrant, computed using the closing sale price of common stock on March
7, 2000, as reported on the Nasdaq National Market, was approximately
$4,400,000,000 (affiliates included for this computation only: directors,
executive officers and holders of more than 5% of the registrant's common
stock).
The number of shares outstanding of the registrant's common stock as of
March 7, 2000 was 53,016,067.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered in connection
with the Annual Meeting of Stockholders to be held April 27, 2000 are
incorporated by reference into Part III of this Form 10-K.
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ENTRUST TECHNOLOGIES INC.
TABLE OF CONTENTS
PART I.
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Item 1. Business....................................................... 3
Item 2. Properties .................................................... 21
Item 3. Legal Proceedings.............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Executive Officers and Directors of the Registrant............. 21
PART II.
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Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters........................................................ 24
Item 6. Selected Financial Data........................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 40
Item 8. Financial Statements and Supplementary Data.................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 41
PART III.
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Item 10. Directors and Executive Officers of the Registrant............. 42
Item 11. Executive Compensation......................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 42
Item 13. Certain Relationships and Related Transactions................. 42
PART IV.
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Item 14. Exhibits, Financial Statements and Reports on Form 8-K......... 43
SIGNATURES............................................................... 44
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This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, among other things, statements regarding our expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this report are based on information available to us up
to and including the date of this document, and we assume no obligation to
update any such forward-looking statements. Our actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Quarterly Results of Operations" and "-- Certain Factors that May Affect Our
Business" and elsewhere in this report. You should also carefully review the
risks outlined in other documents that we file from time to time with the
Securities and Exchange Commission, including our Quarterly Reports on Form 10-
Q that we will file in 2000.
Entrust is a registered trademark, and We Bring Trust to e-Business,
Entrust/Access, Entrust.net, Entrust@YourService, Entrust/SecureControl,
Entrust-Ready, the Entrust design (Elmer), Entrust/Authority,
Entrust/Directory, Entrust Electronic Identities, Entrust/Engine,
Entrust/Entelligence, Entrust/Web Connector, Entrust/Commerce Connector,
Entrust/VPN Connector, Entrust/Lite, Entrust/Solo, Entrust/ICE,
Entrust/Express, Entrust/Direct, Entrust/Unity, Entrust/TrueDelete,
Entrust/Toolkit, Entrust/PKI, Entrust InSource, Entrust Partner, Entrust/RA,
Entrust/AutoRA, Entrust/Roaming, Entrust/Timestamp, Entrust/SignOn and Entrust
SecureSummit are trademarks or service marks, of Entrust Technologies Limited,
a majority-owned subsidiary of Entrust Technologies Inc. All other trademarks
and service marks used in this Annual Report are the property of their
respective owners.
PART I
ITEM 1. BUSINESS
Entrust Technologies is the leading global provider of public-key
infrastructure, or PKI, products and services to e-businesses and other
organizations. Unlike products and services that focus primarily upon the
issuance of digital certificates, which are similar to electronic passports,
our award-winning solution is a comprehensive, end-to-end PKI framework
designed to assure the security of electronic transactions and communications
over advanced networks, including the Internet. Our open, scalable software
solution operates across multiple platforms, network devices and applications.
According to International Data Corporation, the worldwide market for PKI-based
products and services is expected to grow from $122.7 million in 1998 to $1.3
billion in 2003. Since 1994, we have provided our PKI solution primarily to
global enterprises and government entities, including Citibank, FedEx, MCI
Worldcom, NASA, the United Kingdom Post Office and the Canadian Department of
National Defense. To date, over four million users worldwide have been licensed
to use Entrust products.
Our PKI solution is particularly relevant to organizations in the growing
business-to-business, or B2B, electronic commerce market. We offer B2B
organizations a comprehensive security solution that includes the robust
functionality required to support their increasingly advanced and high-value
electronic transactions and communications. We believe that we are well-
positioned to capitalize on our PKI market leadership to address B2B and other
important markets, such as the business-to-consumer, or B2C, market. We are
also actively developing additional functionality to address emerging
opportunities, such as the growing need to secure e-business transactions
conducted over wireless networks.
We are headquartered in Plano, Texas with offices in Canada, the United
Kingdom, Switzerland, Germany and Japan, as well as additional offices in the
United States.
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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. These types of
electronic interactions can occur with a variety of audiences, each of which
may have different business requirements for information security because of
the nature and content of their communications and transactions. Electronic
interactions can be divided into two market-based categories: business-to-
business and business-to-consumer.
. Business-to-business transactions and communications occur between
businesses and other organizations, and internally within these
entities. Forrester Research, Inc. estimates that the market for B2B e-
commerce will be $1.3 trillion by the year 2003. B2B transactions
generally require pre-existing or centrally managed relationships
between participants. Goods and services transacted through B2B
relationships are primarily paid for by means other than credit cards
and, therefore, do not receive the fraud protection provided to
consumers by credit card companies. B2B communications can also be
purely informational where the information being sent between parties
is often highly sensitive. For example, product research communications
between a pharmaceutical company and a collaborating university contain
extremely valuable intellectual property or confidential information
that needs to be properly protected. Business processes involved in B2B
transactions and communications are frequently complex, resulting in a
need for sophisticated networking and software solutions. The B2B
market typically requires supply-chain management software, procurement
and payment systems, virtual private networking and remote access
solutions, electronic mail systems, electronic forms software,
sophisticated Web-based solutions, database systems and human resources
applications.
. Business-to-consumer transactions and communications are generally
interactions between a selling organization and the general public.
Forrester Research, Inc. estimates that the market for online consumer
transactions will be $108 billion by the year 2003. B2C interactions
are typically less complex than B2B interactions, often do not require
a pre-existing relationship between buyer and seller and generally have
fewer information security requirements than their B2B counterparts.
Although many B2C interactions are currently executed over the Web
using out-of-the-box Web browser and server software security
capabilities, we anticipate that B2C participants will require more
complete security solutions.
Need For Secure Transactions and Communications
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 transactions and communications that are transmitted across or
stored on them. Key information security concerns relating to electronic
interactions include the risk of theft, alteration, interception or
dissemination of confidential data, fraud, loss of reputation and economic
loss. Threats to information 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. These risks have driven the demand
for effective and robust network and information security products.
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The security risks associated with communications and commerce over public
and private networks have accentuated the need for information security
solutions that address six 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 identities of the parties involved in communications
and transactions should be verified.
Authorization. Individuals should only be able to execute transactions or
perform operations for which they have permission.
Nonrepudiation. The parties involved in an electronic exchange should not
be able to deny or repudiate the exchange.
A wide range of products and services has been introduced to address one or
more of these six 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, authorization and nonrepudiation.
Encryption devices and programs provide confidentiality, but are device-
dependent and do not address issues of access control, integrity,
authentication, authorization and nonrepudiation. 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 six 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 users 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, authorization
and nonrepudiation are not satisfied.
Digital Certification. In addition to providing confidentiality, digital
certification systems use public and private keys to create digital signatures.
These signatures are encoded using the sender's private key. Upon receipt of
the message, the recipient obtains a copy of the sender's public key, which
verifies that the message originated from the expected sender. Public keys are
maintained in
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digital certificates issued by a Certification Authority, or CA. Digital
certificates securely bind the owner's identity to his public key. 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 also ensures the
integrity of a message by enclosing an encrypted summary or "hash" of the
message with the sender's digital signature. When the signature and hash are
decrypted using the sender's public key, the system can automatically detect
whether the message was altered since it was signed.
The security benefits of digital certification have led to increasing
market demand particularly in markets where information security is critical,
such as government, finance, health care and telecommunications. This
increasing demand has given rise to numerous products and services that issue
digital certificates or that are able to work with 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 updated, withdrawn or replaced. Indeed, the proliferation of users and
certificates greatly complicates management of these types of issues, which are
critical to maintaining an effective security environment across and between
organizations.
Need For a Comprehensive, End-to-End Public-Key Infrastructure
To address the management and business issues associated with use of
public-key encryption and certificates, organizations, particularly those in
the B2B market, must have a robust public-key infrastructure that supplements
certificate issuance functions with full life cycle management of public and
private keys, including issuance, authentication, storage, retrieval, backup,
recovery, updating and revocation. In addition, these functions must operate in
an easy-to-use, cost-effective manner.
Moreover, unless digital certificates and private keys can be easily
utilized on a consistent and reliable basis across multiple applications,
organizations will face the challenge and cost of maintaining a separate
security infrastructure for each application. Maintaining these different
security infrastructures could result in separate keys and certificates for
each user for different applications, multiple passwords and inconsistent or
incomplete security implementations. Such a disconnected, inconsistent set of
products would be costly to operate and difficult to use. Furthermore, any PKI
must be able to support an organization's security requirements as the
enterprise grows, business functions are altered, and underlying information
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 cohesive, reliable and secure computing environment that meets
the six critical network security needs.
Achieving these goals requires a highly functional and flexible public-key
infrastructure that enables secure communications between and within
organizations. The need for comprehensive, end-to-end public-key infrastructure
solutions is particularly apparent for B2B transactions and communications, the
majority of which have information security requirements that are met only by
complete, end-to-end solutions that are cost-effective to operate and easy to
use.
The Entrust Solution
We are the leading global provider of comprehensive, end-to-end public-key
infrastructure solutions, encompassing both products and services, that enable
e-businesses and other organizations to effectively manage secure transactions
and communications across a wide range of applications. Our PKI solution
addresses the six critical network security needs and allows for consistent
security policy management across and between organizations, and enables any
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organization to establish its own flexible, highly reliable PKI. We also offer
users encryption functionality and full digital signature and certification
management in an easy-to-use, integrated and automated solution. Among the
benefits offered by our PKI solution are:
Comprehensive, End-to-End Functionality. We believe that we are the only
provider of a comprehensive, end-to-end PKI solution offering the functionality
necessary for the full life-cycle management of keys and digital certificates,
including:
. certificate issuance;
. certificate authentication;
. key storage and backup;
. key retrieval and recovery;
. support for nonrepudiation;
. authorization management;
. certificate and key updating;
. certificate revocation; and
. cross-certification of PKIs.
Multiple Certificate Types. Our products and services support multiple
certificate types and configurations, including:
. Multi-application certificates that can be used across multiple
applications. A user's single set of multi-application certificates can
be accessed via our single sign-on solution and used across a wide
variety of applications, including e-mail, e-forms, supply-chain
management, payments and procurement, desktop encryption and remote
access. Multi-application certificates enable ease-of-use because users
only have one password to access numerous applications within an
organization. One set of multi-application certificates per user also
reduces operating costs because a single, comprehensive infrastructure
supports a wide variety of applications. Since multi-application
certificates are particularly valuable in the B2B marketplace, we
believe that our solution is well-positioned to take advantage of the
increasing number of e-business transactions and communications in that
market.
. Single-application certificates that allow enterprises to restrict use
of the certificates by a particular user to one application. Customers
can easily convert single-application certificates to multi-application
certificates by extending their license with us. There are no
technology changes required to convert single-application certificates
to multi-application certificates.
. Web certificates, including certificates for Web servers that are
frequently used to secure B2C credit-card transactions.
. Virtual private networking, or VPN, certificates for establishing
secure, real-time communications sessions over networks.
. Wireless application protocol, or WAP, server certificates for
establishing secure, real-time communication sessions with wireless
devices such as cellular telephones.
Our support of multiple certificate types offers flexibility and choice to
customers who can select the types of certificates and solutions that best meet
their current business and information security requirements and provides a
system that is easily adaptable to meet future security requirements.
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Open, Versatile Platform. Our PKI operates across a wide range of computing
platforms, including:
. Windows NT and UNIX servers;
. UNIX, Macintosh, Windows (95, 98, NT, 2000) and JAVA clients;
. applications, including e-mail, supply-chain management, payments and
procurement, desktop encryption, secure file erasure, electronic forms
and remote access;
. wireless devices such as cellular telephones and pagers;
. biometric devices, such as fingerprint readers, and smart cards;
. network infrastructure, including firewalls, network operating systems
and directories; and
. open industry standards, such as the lightweight directory access
protocol and well-known encryption algorithms, such as RSA, elliptic-
curve, DES and Triple-DES.
Because many organizations operate numerous platforms for critical business
systems, support for a wide variety of operating systems, devices, applications
and open standards is essential to address B2B information security
requirements. We also believe that support for these platforms makes us
attractive to partners whose products and services work on multiple platforms.
Highly-Scalable Architecture. Our products employ a distributed computing
architecture and directory management techniques that make them highly
scalable. One of our customers has used our products to support over 100,000
users, and we believe that our PKI solution can be configured to handle
millions of users.
Ease Of Use. Our products automatically and transparently enable complex
certification and key management functions without requiring any action by the
user. Users can access most functions via a single user login and simple point
and click graphical interfaces. We believe that our PKI solution enables users
to execute complex information security functions without needing significant
training, and in many cases no training at all is required. Furthermore, we
believe that the ease of use of our PKI solution is a significant benefit to
customers and differentiates our solution from those of other PKI vendors.
Reduced Cost Of Ownership. Our PKI solution enables organizations to
significantly reduce overall costs for addressing information security for the
following types of reasons:
. comprehensive and automated functionality reduces duplication of
personnel;
. its ease of use simplifies or eliminates the need for training; and
. its ability to interact with a wide variety of platforms and
applications avoids the need to purchase multiple security systems.
Full Range of Support Services. We supply a comprehensive set of support
services to organizations using our PKI solution. These services include:
. management of outsourced PKI operation and maintenance provided in
conjunction with partners;
. software upgrades and maintenance;
. telephone support; and
. installation and project management services.
Flexibility. Our PKI solution supports a wide variety of features and
options, allowing customers to easily select the types of functionality they
desire. This flexibility allows customers to allocate resources and tailor
capital expenditures to meet their specific business and information
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security requirements. For example, our solution enables customers to begin
with a less complex system and cost-effectively add advanced features as their
security requirements change. In addition, the versatility of our solution
allows customers to choose whether they wish to operate the PKI themselves or
outsource the back-end management of the PKI to us or other third parties. At
the same time, customers are able to change these types of decisions in the
future as their business needs change, and still maintain the value of their
investments in our solution.
Strategy
Our objective is to maintain and enhance our position as the leading global
provider of comprehensive, end-to-end PKI products and services that enable
organizations to effectively manage secure transactions and communications
across a wide range of applications. Key elements of our strategy include the
following:
Capitalize on B2B Market Opportunities. We are focused on developing,
marketing and selling products and services that enable secure B2B transactions
and communications. We believe that our market leadership is founded on our
strength and capabilities in providing an end-to-end, comprehensive solution
required in the B2B market. Although we currently have numerous, large
customers in this market, we believe that the market is still in the early
stages of development and provides substantial growth opportunities in the
future. We are targeting our sales and marketing activities at Global 2000
organizations and large government organizations having significant
requirements for comprehensive PKI solutions and the resources to deploy them
broadly. In particular, we are focusing our efforts in the finance, government,
health care, telecommunications and large manufacturing sectors. Organizations
in these markets frequently have thousands of customers, partners, subscribers
and service recipients who will, directly or indirectly, benefit from secure
transactions and communications enabled by our PKI solution.
Pursue Wireless Opportunities. We have developed, and will continue to
develop, PKI products for wireless devices. We intend to aggressively pursue
further extensions of our solution into the wireless market, including
solutions for cellular telephones, pagers and other wireless-enabled devices
such as personal digital assistants, or PDAs. We believe that these devices
will be increasingly used in B2B and B2C transactions and communications.
Maintain Product Leadership and Increase Brand Recognition. Our PKI
solution has been deployed commercially through multiple versions for over five
years. Our technological leadership is attributable in large part to our
research and development team, which includes researchers with international
reputations in their fields. We intend to maintain and enhance our
technological leadership in the e-business security market by continuing to
invest in product research and development, to extend the functionality and
interoperability of our products, and to participate actively in industry
standards-setting organizations. We believe that our current set of products
and technologies provides an extensive, versatile foundation that can be
efficiently extended or modified to address new opportunities as they arise in
the market. We further intend to capitalize on our product leadership by
increasing brand awareness. Our goal is to equate our brand name with trusted
e-business security. We undertake a variety of activities to promote the
recognition of our brand identity and products, including the promotion and
sponsorship of industry groups and conferences such as the Entrust
SecureSummit.
Expand and Leverage Strategic Relationships. To encourage widespread
acceptance of our PKI solution, we have established an Entrust Partner Program
which currently includes:
. Value-added resellers and original equipment manufacturer partners,
such as Compaq, Check Point Software, Newbridge Networks and IBM, which
resell our products with their hardware and networking solutions;
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. Consultant and system integration partners, such as
PricewaterhouseCoopers, Ernst & Young and KPMG, which recommend and
implement our Entrust PKI solution as part of their overall service
offerings;
. Application development partners, which have introduced more than 75
off-the-shelf, certified Entrust-Ready products and applications,
including solutions for SAP R/3, PeopleSoft, Documentum, Sybase, Nortel
Networks, Lucent, Adobe, Novell GroupWise, Axent, Jetform and Shana. We
have also announced expected solutions forthcoming from major vendors
such as Intel and Lotus Development;
. Interoperability partners such as Cisco, Netscape, Microsoft and
Network Associates, which offer products that can interoperate with and
utilize the security features of our PKI solution;
. Managed services partners such as First Data Corporation and EDS, which
offer or plan to offer outsourcing services for our customers; and
. Wireless partners such as Nokia and Research In Motion, or RIM, which
offer interoperable security solutions with their devices.
We intend to continue to invest in and enhance the Entrust Partner Program,
which provides services and products to partners, both to offer complete e-
business security solutions to our customers and to broaden adoption of our PKI
solution across markets and geographic areas.
Further Penetrate B2C Market. We intend to continue to expand our product
offerings and customer base by developing, marketing and selling products and
services for secure B2C interactions. In late May 1999, we founded a
certification authority services business, called Entrust.net, which currently
provides certificates for Web servers and wireless servers. From July through
December 1999, Entrust.net sold approximately 4,300 Web server certificates. We
believe that we obtained approximately 5% of the worldwide market for these
certificates in our first two full quarters of operation. Providing B2C
solutions allows us to add significant value to our B2B customers who often
prefer a single provider for all of their PKI solutions. Another element of our
B2C strategy includes embedding our certification authority in popular
applications, such as Microsoft's and Netscape's browsers and Microsoft's
Windows 2000 operating system.
Leverage Global Presence. We intend to leverage and expand our global
operations. We had 53 employees based in Europe as of December 31, 1999. With
our acquisition of r3 Security Engineering in June 1998, we obtained
substantial European research and development expertise for the development of
our PKI solution targeted at the European market. Our distribution partners in
Europe and Japan provide further coverage to address Global 2000 organizations
in target markets.
Products and Product Development
Our PKI solution provides an integrated, open and scalable security
framework that addresses e-business security needs across multiple platforms
and applications. It also includes robust features, such as support of multi-
application certificates, that make it well-suited for high-value, business-to-
business applications. Our solution includes:
. a PKI infrastructure, which provides the requisite networking and
security features to enable secure transactions and communications;
. desktop applications that transparently integrate features of our PKI
into common third-party desktop applications to address business-to-
business and business-to-consumer transactions; and
. application developer toolkits that allow application developers to
quickly and safely develop Entrust-Ready applications because the
toolkits do not require developers to understand the complexities of
information security.
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PKI Infrastructure
Our PKI infrastructure comprises software that manages and administers life
cycles of keys and digital certificates throughout an organization and across
multiple applications. The management of keys and digital certificates is
essential to maintain security, ease of use and low-operating costs in a PKI
solution. Critical elements of a PKI system, such as routinely updating keys
prior to expiration and maintaining copies of historical keys to ensure data
"locked" by these expired keys will not be lost, is all handled automatically
by our PKI solution. These and other features are managed transparently to
maintain a system that is easy to use, secure and low-cost to operate.
The PKI infrastructure also includes a directory compliant with the
lightweight directory access protocol, or LDAP, for the storage and retrieval
of certificates and software that enables applications and users to access the
functionality provided by the PKI. The infrastructure is configurable to
support the generation of certificates for virtual private network technologies
and Web browsers and servers. The infrastructure also supports multiple
hardware devices, such as smart cards, PC cards, biometric devices and third-
party key storage systems. Finally, the infrastructure provides a secure
timestamping capability that is valuable in business-to-business transactions
and communications where the tracking of time is an important element of the
interaction.
Our PKI infrastructure is designed with an open and flexible software
architecture that operates on a wide range of client/server platforms,
including:
. Windows NT, HP-UX and Solaris servers;
. Windows (95, 98, NT, 2000), HP-UX, Solaris, AIX, JAVA and Macintosh
clients; and
. wireless devices, including cellular telephones and pagers.
Our software 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. The system uses the LDAP
standard to interoperate with most major directory systems, allowing customers
to utilize existing directory systems and facilitating access to other
directories as required. The system architecture enables us to add
functionality as customer needs evolve and grow and allows the infrastructure
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 as an organization's security needs increase or as
users are added to existing infrastructures.
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We released the initial version of our PKI in 1994, with major upgrades in
1996, 1997, 1998 and 1999. Historically, the PKI infrastructure has generated a
major portion of our revenues. The following table lists the products that
constitute our core PKI solution, as well as a brief description of each
product.
<TABLE>
<CAPTION>
Product Name Description
------------ -----------
<C> <S>
Entrust/Authority Provides comprehensive
certification authority and key
recovery capabilities, among
numerous other functions.
Entrust/RA Allows registration authorities, or
RAs, to perform administrative
tasks.
Entrust/AutoRA Allows automated registration and
administration of users.
Entrust/Roaming Provides mobile users with secure
access to their keys and
certificates across multiple
workstations.
Entrust/Timestamp Securely establishes the time at
which data were digitally signed.
Entrust Electronic Identities Enterprise user "accounts" that
authorize use of different types of
certificates, including:
Entrust/Entelligence and Entrust/Engine Enables use of multi-application
and single-application certificates
with Entrust-Ready applications.
Entrust/Web Connector Enables use of digital certificates
with popular browsers and servers,
such as those offered by Microsoft
and Netscape.
Entrust/VPN Connector Enables use of digital certificates
in standards-based VPN devices.
</TABLE>
We license our Entrust/Authority and Entrust/RA products at a combined list
price of $25,000 per server. We offer an LDAP-compliant directory product to
enterprises for a list price of $3,000 for installations of up to 1,000 users
and $3,000 plus a per-user fee for installations of more than 1,000 users. We
charge for Entrust/AutoRA, Entrust/Roaming and Entrust/Timestamp according to
the number of licensed users, starting at $10,000. Entrust Electronic
Identities for multi-application certificates have a list price of $159 per
licensed user. Entrust Electronic Identities are offered on a registered-user
basis. We also offer customers with specialized security needs the ability to
issue Web certificates at a charge of $2 per certificate. Similarly, we allow
customers to issue dedicated VPN certificates at a charge of $100 per
certificate. The actual license fees paid by customers vary widely, based on
the number of products licensed, registered users, enabled platforms and volume
discounts, if any.
Entrust/Authority. Entrust/Authority provides certification authority, or
CA, and other functions that enable an organization to create, issue, manage,
back-up, update and revoke electronic identities. Entrust/Authority also
provides a secure enterprise key recovery system, issues certificate revocation
information and establishes cross-certification relationships with other
trusted certification authorities. A sophisticated audit reporting system
monitors all security aspects of Entrust/Authority operations.
Entrust/RA. Through an easy-to-use graphical interface, registration
authorities perform day-to-day administrative duties, including:
. creating and deleting user identities;
. changing users' names;
. helping users recover lost keys and forgotten passwords; and
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<PAGE>
. revoking users' certificates when necessary.
Entrust/AutoRA. Entrust/AutoRA allows customers to securely automate
initial registration and administration of users. Automated registration is
particularly important for highly-scalable customer environments to ensure that
operating costs are minimized.
Entrust/Roaming. Entrust/Roaming allows mobile users to securely access
their keys and certificates across multiple workstations without having to
manually transport their keys and certificates on a device such as a smart card
or floppy disk.
Entrust/Timestamp. Entrust/Timestamp allows users to securely associate the
current date and time with an e-business transaction or communication.
Entrust Electronic Identities. Our Electronic Identity is an individual
user's "account" or profile within the PKI. We offer Electronic Identities for
multi-application or single-application use, or for more limited Web or virtual
private networking use. Each multi- and single-application Electronic Identity
can support numerous key pairs and certificates over its lifetime. Multi-
application Electronic Identities may be used across multiple Entrust-Ready
applications whereas single-application Electronic Identities are licensed for
use with one application. Our multi- and single-application Electronic
Identities include software, known as Entrust/Entelligence and Entrust/Engine,
that enables users and applications to access essential functionality within
our PKI. A Web Electronic Identity enables a user to use certificates with
popular Web browsers and Web servers. VPN Electronic Identities enable
standards-compliant virtual private network technologies to establish secure
electronic communications over public networks like the Internet.
Entrust Applications
Our PKI infrastructure supports a wide variety of applications from
multiple vendors that enhance the flexibility and usefulness of our PKI. We
have also developed a number of applications in order to meet specific customer
demands and facilitate the implementation of our PKI solution. These products
both complement and interact with the PKI infrastructure to offer users
enhanced functionality and increased interoperability with third-party
applications, or they can operate as independent products, offering distinct
functionality.
13
<PAGE>
The following table lists applications that we offer, including a brief
description. Pricing for these products ranges from $15 to $39 per user. Some
of these applications are bundled together with other products.
<TABLE>
<CAPTION>
Product Name Description
------------ -----------
<C> <S>
Entrust/ICE Provides security for files and folders
Entrust/Express Provides security for popular e-mail
applications, such as Microsoft's Exchange and
Outlook products, and Qualcomm's Eudora
Entrust/Direct Provides Entrust's automated key and
certificate management features to secure Web
sessions
Entrust/Unity Provides Entrust's automated key and
certificate management features to Netscape
and Microsoft products
Entrust/SecureControl Provides administration and use of
authorization privileges for users of Web-
based applications
Entrust/TrueDelete Securely erases files from disks
Entrust/SignOn Allows single sign-on to Entrust-Ready
applications and Windows operating systems
Entrust/Access Provides secure virtual private networking for
remote access over public networks like the
internet
Entrust Security for SAP R/3 Provides PKI security for SAP systems and
applications. Certified by SAP
Entrust Security for PeopleSoft Provides PKI security for PeopleSoft systems
and applications. Certified by PeopleSoft
</TABLE>
Application Developer Toolkits
Our toolkits are a family of open, easy-to-integrate programming interfaces
that provide security services, including full key life cycle management, to a
broad range of applications. These toolkits operate across a variety of
operating systems and support multiple programming languages. Because key and
certificate management represents the most difficult aspect of adding security
to an application, we provide toolkits to enable application developers to make
their applications Entrust-Ready. The toolkits allow developers to rapidly make
their applications secure but do not require developers to understand the
complexities of information security. Our toolkits reduce the operating costs
of their applications because customers only have to operate a single PKI and
their Entrust-Ready applications operate in a consistent, cohesive manner.
New Product Development
We devote significant resources to the development of new and enhanced
product functionality to maintain our technology and product leadership. We
employ 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 the PKI Forum.
Some of our current and planned product development efforts include:
. additional products and services to secure transactions and
communications over wireless devices such as cellular telephones, pagers
and PDAs;
. attribute certificates for privilege management;
. electronic notary products and services; and
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<PAGE>
. monitoring and assessment systems.
We are also continuing to increase the number of third-party applications
and services that our PKI solution can manage, including VPN devices and
routers and other popular user applications. Our scientists are also actively
engaged in the development and improvement of the advanced cryptographic
algorithms for use in our products.
Services and Support
Professional Services
We believe that a high level of service and support is critical to our
success, and that a close and active service and support relationship is
important to facilitate rapid implementation of our solution, assure customer
satisfaction and provide us with important information regarding evolving
customer requirements. Toward these ends, we have made a significant investment
in expanding our services and support organization, which, as of December 31,
1999, consisted of 97 employees. Our services personnel have a broad range of
experience in network security and include mathematicians, cryptographers and
system designers. Furthermore, we are supplementing our traditional services
and support revenue streams with additional service-based revenue streams, such
as the revenue we receive through Entrust.net.
Our professional services organization provides consulting and systems
integration services to support customers in designing, implementing and
running our PKI solution. Activities of the professional services organization
are supplemented with a professional services partner program that includes
PricewaterhouseCoopers, Ernst & Young and KPMG. To facilitate the integration
of PKI management into the customer's business operations, we also offer our
Entrust InSource service, in which we provide on-site PKI management for
customers on a long-term basis, or while the customer implements and trains
personnel.
Our support offerings also include:
. direct telephone consulting support by experienced technical account
representatives;
. 24-hour pager access, e-mail and fax support;
. Internet access to our knowledge repository; and
. discussion group access.
Payment of an annual maintenance fee also entitles customers to receive
software enhancements to their licensed versions of our solution.
Certification Authority Services
In May 1999, we launched a certification authority services business called
Entrust.net. Entrust.net manages the issuance of multiple types of
certificates, including Web server certificates that are frequently used to
secure Web-based, B2C transactions. The list price for a one-year Web server
certificate is $299 and for a two-year certificate is $499. Entrust.net also
provides certificates to secure wireless transactions between cellular
telephones and WAP servers. The list price for a one-year WAP certificate is
$695 and for a two-year WAP certificate is $1,195.
Entrust@YourService
We recently announced Entrust@YourService, a managed services model for
delivering outsourced security solutions for B2B and B2C transactions and
communications. As part of the launch of Entrust@YourService, we entered into a
strategic alliance with Cash Tax, Inc., a subsidiary
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<PAGE>
of First Data Corporation, a large electronic commerce and payment services
company. Through this alliance, we plan to address the growing needs of
customers that want to enable e-business solutions but choose to outsource the
ongoing operational tasks. Entrust@YourService is designed to quickly and
efficiently provide customers with comprehensive, end-to-end security solutions
while still allowing these customers to retain control of the system
implementation.
The full range of solutions available to customers operating their own
PKI's are available to customers taking advantage of Entrust@YourService.
Moreover, because both the in-house and managed services model use the same
technology, customers have the flexibility to easily transition between the two
models to support their evolving business needs. We made Entrust@YourService
commercially available during the first quarter of 2000.
Research and Development
Our research and development efforts are focused on developing new
products, core technologies and enhancements to existing product lines to
maintain and extend our technology and product leadership position. We spent
approximately $5.7 million, $12.8 million and $16.6 million on research and
development in 1997, 1998 and 1999, respectively.
As of December 31, 1999, our research and development staff consisted of
166 employees. With the addition of r3, we added significant research and
development capabilities in Europe and expanded our internationally-recognized
team of professional cryptographers.
Our 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. We believe that we are 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
Our customers are generally domestic and foreign government entities and
Global 2000 companies, including financial, health care, telecommunications and
large manufacturing organizations. As of December 31, 1999, we had licensed our
software to more than 1,300 customers. The following is a representative list
of our current customers that have accounted for more than $200,000 of revenues
each:
Banca Nazionale del Industry Canada S.W.I.F.T.
Lavoro Interpay Schlumberger
Bell Emergis J.P. Morgan Science
Canadian Dept. of MCI Worldcom Applications
National Defense NASA International
Citibank Nortel Networks United Kingdom Post
Columbia/HCA Healthcare Royal Bank of Office
Corporation Scotland U.S. Coast Guard
Digital Medical Systems Royal Canadian U.S. Patent and
FDIC Mounted Police Trade Office
FedEx SECOM U.S. Postal Service
Government of Ontario
Historically, a limited number of customers have accounted for a
significant percentage of our revenues. In 1997, our three largest customers
accounted for 19%, 12% and 11% of our total revenues. In 1998, our three
largest customers accounted for an aggregate of 23% of total revenues, with no
individual customer accounting for more than 10% of revenues. In 1999, our
three largest customers accounted for an aggregate of 31% of revenues, with the
largest customer accounting for 24% of revenues. Although our largest customers
have varied from period to period, we anticipate that our results of operations
in any given period will continue to depend to a significant extent upon
revenues from a small number of customers.
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<PAGE>
Sales, Marketing and Business Development
We offer our products and services through a multi-tiered approach
reflecting the characteristics and buying behavior of the markets we cover. As
of December 31, 1999, we had 212 employees in sales, marketing and business
development.
Direct Sales
To address our target market of Global 2000 organizations, we sell our
products and services in North America, the United Kingdom and Germany
primarily through a direct sales force. We believe that direct coverage by our
sales force is necessary in light of the early stage of PKI adoption and the
sophisticated requirements of our targeted customer base, and that a direct
sales force gives us a competitive advantage in responding to customer needs as
they evolve. Our direct sales force is divided into five North American
regions, the United Kingdom and Germany. We assign teams within each region to
specific accounts as their exclusive responsibility. We have also focused our
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.
We also established a General Markets Sales Group responsible for
identifying and pursuing customer opportunities outside the defined
responsibilities of the regional sales teams. The direct sales organization is
also supplemented by targeted direct mail and telemarketing campaigns developed
by our marketing organization. Finally, the direct sales organization is
actively involved in selling all of our products and services, including those
available from Entrust.net.
Indirect Sales
To supplement our direct sales force, we have 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 our
functionality. These partners include Compaq, Hewlett-Packard and IBM,
which resell our products with their hardware and networking solutions,
as well as Check Point Software and Newbridge Networks, which bundle our
PKI solution with their own software products;
. distributors and agents that promote and sell our products in defined
geographic markets;
. 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
PricewaterhouseCoopers, Ernst & Young and KPMG; and
. referral partners that refer their consulting and integration customers
in designated markets to our PKI solution.
Marketing
To support our sales force, we have a marketing group whose goals are to
create a consistent, focused communication strategy that increases awareness of
our 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. We
have organized a number of major trade shows, including the annual Entrust
SecureSummit to be held this year in Dallas, Texas in May. We also provide
frequent Web updates, search engine registration, online advertising and
product downloads.
17
<PAGE>
Business Development
To identify and develop strategic relationships with targeted industry
partners more effectively, we have a business development organization of 17
persons as of December 31, 1999 that pursues selected business development
activities, including the administration and promotion of our Entrust Partner
Program. These activities permit us to strengthen our relationships with
existing strategic partners and identify and encourage new providers of
software, network, computing and communications products to make their products
Entrust-Ready. Our business development personnel are divided into three
distinct teams that focus on B2B, B2C and general application partners.
Competition
The e-business security solutions market is intensely competitive, subject
to rapid change and significantly affected by new product and service
introductions, consolidation and other market activities by industry
participants.
Because of the broad functionality of our e-business security solution, we
compete currently or may in the future compete with vendors offering a wide
range of security products and services as follows:
. companies offering commercial certification authority products and
services such as VeriSign, Xcert and IBM in the market for issuing and
maintaining digital certificates for use on public and private networks,
some of whom, such as IBM and XCert, provide a product-based solution,
while others, such as VeriSign, are primarily service providers;
. companies, such as RSA Security and Baltimore Technologies, which offer
PKI product solutions for enterprises;
. established companies developing new e-business security offerings, such
as 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 a certificate server and other PKI-compatible products based
on its Windows 2000 security framework;
. other major networking vendors who may bundle digital certificates with
their product offerings, with whom we compete on the basis of our
ability to provide a centrally managed, real-time, comprehensive
infrastructure with the features and functionality to support enterprise
applications; and
. companies in the emerging market for providing security across VPNs with
major networking device companies, such as Lucent Technologies and
Cisco, as well as firewall vendors such as AXENT and Check Point
Software.
We believe that the principal competitive factors affecting the market for
e-business security technology include technical features, ease of use,
quality/reliability, level of security, scalability, customer service and
support, and price. Although we believe that our products currently compete
favorably with respect to such factors, there can be no assurance that we can
maintain our competitive position against current and potential competitors.
Regulatory Matters
Our products are subject to special export restrictions administered by the
governments of the United States, Canada and other countries. Our products are
also subject to import restrictions and/or use restrictions imposed by
countries such as France. Consequently, our ability to export our products to
destinations outside of the U.S. and Canada is subject to a variety of
government
18
<PAGE>
approvals or licensing requirements. 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, depending on the country of destination, industry sector, and/or
end user, some of our 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 we will continue to be able to
export our products to any destinations outside of the U.S. and Canada. Such
restrictions could potentially have an adverse effect on our business,
financial condition or results of operations.
On January 14, 2000, the United States Department of Commerce issued new
export regulations that apply to products that contain or use cryptography.
These regulations generally make it substantially easier to sell U.S.
encryption products abroad. In general, the new rules eliminate the constraints
on the strength of the encryption that may be exported, after a one-time review
of the product, and greatly broaden the endusers who may receive the products
without a license.
This change should allow our products that are under the export license
authority of the U.S. to be more competitive with products of foreign
producers. However, we believe that some of our products are exempt from U.S.
export authorization and they have been marketed accordingly. U.S. producers of
products that compete with our non-U.S. products may now be able to market more
aggressively in foreign countries, offering stronger encryption and offering
products to broader industry groups.
In substance, the new rules are as follows: software products still cannot
be exported to the embargoed countries of Cuba, Iran, Iraq, Libya, North Korea,
Serbia, Sudan, Syria and Taliban-controlled areas of Afghanistan. However,
after a one-time government review, encryption products of any key length will
be exportable to non-governmental endusers worldwide, except for the embargoed
countries. Thus, it is generally no longer necessary to follow separate rules
based on encryption key length, "recoverability", or the type of end user or
end use. The Department of Commerce has indicated recently that eleven of our
products are now exportable to non-governmental end users worldwide without
further review under the revised regulations, except to the embargoed countries
listed above. In addition, our products which have been approved by the
Department of Commerce in the past may be exported to non-government end users
without a new technical review unless exports were previously limited to
subsidiaries of U.S. companies. Encryption items may be exported to foreign
subsidiaries of U.S. companies without any prior review or licensing, but new
products developed from the exported products are still subject to a one-time
government technical review.
If the government determines that an encryption product is a retail
product, then it may be exported to any user, including foreign government
endusers, in non-embargoed countries. Retail certification requires a new
application to the Commerce Department, except that previously-reviewed 56-bit
products and "finance-specific" products are considered to be retail products
without additional review.
Export licenses are still required for exports of non-retail encryption
products to Internet and telecommunications service providers if the products
are used to provide services specifically to a foreign government or provide
non-subscriber-based bulk backbone encryption.
Any mass market encryption product previously authorized for export under
License Exception "TSU" may be upgraded to 64-bit encryption without a new
technical review.
The government has imposed new post-export semi-annual reporting
requirements for most export products, but this should not affect our export
sales. However, these reporting requirements will create some administrative
obligations.
We believe, and have informed the U.S. government, that certain of our
products are exempt from U.S. encryption export restrictions under these
criteria. However, we have not obtained any
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<PAGE>
formal U.S. government ruling that any of our 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 our 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 our products outside the U.S. and Canada,
having a potentially significant adverse effect on our business, financial
condition and results of operations.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws, nondisclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. We own 11 issued U.S. patents,
along with corresponding, pending foreign patent applications, and 58 pending
U.S. patent applications relating to our products. The issued patents are and
will continue to be subject to certain license grants to others, including
Nortel Networks and its cross licensees, under patent cross license agreements.
We have copyright and trade secret rights for our products, consisting mainly
of source code and product documentation. We use a printed "shrink-wrap"
license for users of our products in order to protect certain of our copyrights
and trade secrets. We attempt to protect our trade secrets and other
proprietary information through agreements with suppliers, non-disclosure and
non-competition agreements with employees and consultants and other security
measures.
Employees
As of December 31, 1999, we had 545 full-time employees, 408 of whom were
employed by Entrust Technologies Limited, our Canadian subsidiary. Of our
employees, 166 were involved in research and development, 212 in sales,
marketing and business development, 97 in professional and customer support
services and 70 in administration and finance. No employees are covered by any
collective bargaining agreements, and we believe that our relationship with our
employees is good.
Corporate Information
Stockholder Information
American Securities Transfer & Trust, Inc.
12039 West Alameda Parkway, Suite Z-2
Lakewood, CO 80228
Phone: 303-986-5400
Fax: 303-986-2444
Legal Counsel
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Independent Auditors
Deloitte & Touche LLP
2200 Ross Avenue, Suite 1600
Dallas, TX 75201
For More Infromation
Please contact Entrust Technologies' Investor Relations Department at:
Phone: 613-248-3200
Email: [email protected]
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<PAGE>
ITEM 2. PROPERTIES
Our U.S. headquarters, including our executive offices and administrative
facilities, is located in Plano, Texas, where we lease approximately 8,716
square feet of office space. We also lease approximately 69,000 square feet of
office space at our Canadian headquarters in Ottawa, Ontario, Canada, with an
additional 29,149 square feet of office space in the Ottawa area to accommodate
expected growth in administrative, sales and marketing, research and
development and operations personnel. In addition, we are currently under a
development and leasing agreement to construct additional office space in
Kanata, Ontario of approximately 145,000 square feet to accommodate future
growth. It is anticipated that this facility will be completed in the fourth
quarter of 2000. We also have offices located in London, England and Zurich,
Switzerland.
We have sales offices in Chicago, Illinois, McLean, Virginia, Montreal,
Quebec, New York, New York and St. Louis, Missouri, a sales and business
development office in Menlo Park, California and a sales and professional
services office in Raleigh, North Carolina. We lease a sales and support office
in Bad Homburg, Germany.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a significant adverse
effect on our consolidated results of operations or consolidated financial
position.
On February 19, 1999, Surety Technologies, Inc. filed Civil Action 99-203
against us alleging that the Entrust/Timestamp product infringed various claims
of U.S. Patent Re 34,954. In a verdict returned on November 3, 1999, a federal
jury found that all of the claims of the 954 Patent asserted by Surety against
us were invalid for reasons of both anticipation and obviousness. As a result
of the jury's decision, Surety's complaint has been dismissed with prejudice.
On November 4, 1999, judgment was entered in favor of us in the United States
District Court for the Eastern District of Virginia in Civil Action 99-203.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Our executive officers and directors and their respective ages and
positions as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position with Entrust
- ---- --- ---------------------
<S> <C> <C>
John A. Ryan............ 43 President, Chief Executive Officer and Director
Brian O'Higgins......... 44 Executive Vice President and Chief Technology Officer
Richard D. Spurr........ 46 Executive Vice President, Global Sales And Services
David L. Thompson....... 46 Senior Vice President, Finance and Chief Financial Officer
Robert W. Heard......... 48 Senior Vice President, Marketing and Business Development
Hansen Downer........... 47 Vice President, Professional Services
F. William Conner....... 40 Chairman of the Board
Butler C. Derrick, Jr... 63 Director
Jawaid Ekram............ 49 Director
Terrell B. Jones........ 50 Director
Michael P. Ressner...... 51 Director
Christopher M. Stone.... 42 Director
James A. Thomson........ 54 Director
</TABLE>
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John A. Ryan has served as our President and Chief Executive Officer and as
a director since our 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 Networks. Prior to
that time, from August 1992 until October 1995, he served as Assistant Vice
President, Marketing for the Enterprise Network group of Nortel Networks. Since
joining Nortel Networks in 1981, he has also served in various senior positions
in marketing, customer service and finance.
Brian O'Higgins has served as our Executive Vice President and Chief
Technology Officer since our founding in December 1996. Mr. O'Higgins co-
founded the Nortel Networks Secure Networks business unit in 1994, which became
Entrust Technologies Inc. in December 1996. Previously, he was employed by Bell
Northern Research Ltd., the research and development subsidiary of Nortel
Networks, which he joined in 1979.
Richard D. Spurr has served as our Executive Vice President, Global Sales
and Services since December 1999 and was our Senior Vice President, Sales and
Marketing from March 1998 until December 1999. From June 1997 until March 1998,
he served as our Senior Vice President of Global Sales. 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.
David L. Thompson has served as our Senior Vice President, Finance and
Chief Financial Officer since October 1999. From September 1996 to September
1999, he served as Vice President of Finance of Nortel Networks' Enterprise
Solutions global business, which comprises customer premise data and voice
equipment research, manufacturing, sales and service. From January 1994 to
August 1996, he served as Vice President of Finance of Nortel Networks World
Trade, the marketing, sales and service organization for Nortel Networks' suite
of products outside North America. From January 1992 to December 1994, he
served as Vice President of Finance for Nortel Networks' Asia/Pacific business.
Robert W. Heard has served as our Senior Vice President, Marketing and
Business Development since April 1999. From December 1993 to March 1999, Mr.
Heard served as the Group Vice President and General Manager of the Commerce
Payments Business Unit at Sterling Commerce, a provider of end-to-end e-
commerce solutions. Prior to such time, he held various positions in sales,
marketing and product management at IBM Corporation, a computer company.
Hansen Downer has served as our Vice President, Professional Services since
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.
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<PAGE>
F. William Conner has served on our board of directors since July 1997 and
as Chairman of the Board since October 1998. He has served as Executive Vice
President and President, Enterprise Solutions of Nortel Networks since November
1999. From July 1999 to October 1999, Mr. Conner served as Executive Vice
President and Chief Marketing Officer of Nortel Networks. He served as
Executive Vice President of Nortel Networks Corporate Marketing and
Communications from September 1998 until August 1999. Mr. Conner served as
Senior Vice President and President of Nortel Networks' Enterprise Data
Networks line of business from February 1998 until September 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 Networks.
Prior to that time, from 1992 until July 1995, Mr. Conner held a variety of
sales and marketing executive positions in the voice and data enterprise lines
of business of Nortel Networks.
Butler C. Derrick, Jr. has served on our board of directors since May 1999.
Since August 1998, Mr. Derrick has been a Partner at the law firm of Power,
Goldstein, Frazer & Murphy LLP, Washington, D.C. From January 1995 to July
1998, Mr. Derrick was a Partner at the law firm of Williams & Jensen,
Washington, D.C. Mr. Derrick served in Congress as a United States
Representative from South Carolina from January 1975 to January 1995. While in
Congress, Mr. Derrick held numerous posts, including Deputy Majority Whip and
Vice Chairman of the House Rules Committee.
Jawaid Ekram has served on our board of directors since May 1999. Since
December 1994, Mr. Ekram has been a Senior Vice President of Visa International
Incorporated in various capacities. Currently Mr. Ekram is responsible for
International Network & Global Access Technology Services. This worldwide
online network supports the world's largest payment system for credit card
authorization and settlement.
Terrell B. Jones has served on our board of directors since November 1998.
He has served as Chief Information Officer and Senior Vice President of the
SABRE Group Holdings, Inc., an information technology company, as well as
President of SABRE Interactive since July 1996. He previously served as
President of the SABRE Computer Services for American Airlines from 1993 to
1996.
Michael P. Ressner has served on our board of directors since May 1999. He
has served as the Vice President of Finance of Nortel Networks Enterprise
Solutions group since February 1999. From May 1994 to January 1999, Mr. Ressner
served as Vice President of Finance for the Carrier Solutions business unit of
Nortel Networks. Prior to these assignments, Mr. Ressner held a number of
senior finance management posts within various business units of Nortel
Networks.
Christopher M. Stone has served on our board of directors since May 1999.
He founded Tilion.com Inc., a company which builds B2B Internet infrastructure
for Web intelligence, and has served as its Chief Executive Officer since
November 1999. From 1989 to October 1999, he served as Senior Vice President of
Strategy and Corporate Development at Novell, Inc., a network software
provider. Prior to joining Novell in 1989, Mr. Stone founded Object Management
Group, Inc., a not-for-profit corporation that develops specifications for the
software industry, and served as its Chairman, President and Chief Executive
Officer. Mr. Stone currently serves on the Board of Directors of NetObjects,
Inc.
James A. Thomson has served on our board of directors since May 1999. He
has served as President and Chief Executive Officer of RAND Corporation, a non-
profit, non partisan research and analysis institution, since August 1989.
Prior to joining RAND Corporation in 1981, Dr. Thomson was a member of the
National Security Council staff at the White House. Mr. Thomson serves on the
Boards of Directors of AK Steel Corporation and Texas Biotechnology
Corporation.
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 our directors or executive officers.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "ENTU" since August 18, 1998. The following table sets forth, for the
periods indicated, the high and low sales prices per share of our common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
----
Third Quarter (beginning August 18, 1998)..................... $25.13 $12.63
Fourth Quarter................................................ 29.44 9.00
1999
----
First Quarter................................................. $43.06 $20.63
Second Quarter................................................ 34.00 16.88
Third Quarter................................................. 34.88 20.13
Fourth Quarter................................................ 70.63 18.31
</TABLE>
As of March 7, 2000, we had approximately 124 holders of record of common
stock. Because many of these shares are held by brokers and other institutions
on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these holders of record.
We have never declared or paid any cash dividends on our shares of common
stock. We intend to retain future earnings, if any, to finance our growth
strategy. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, our operating results, our current and
anticipated cash needs, restrictions in any future financing agreements and our
plans for expansion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Use of Proceeds
On August 21, 1998, we closed an initial public offering of our common
stock, $.01 par value. The Registration Statement on Form S-1 (File No. 333-
57275) was declared effective by the Securities and Exchange Commission on
August 17, 1998 and we commenced the offering on that date.
After deducting the underwriting discounts and commissions and the offering
expenses, the net proceeds to us from the offering were approximately
$79,097,515.
As of December 31, 1999, approximately $19.1 million of the net proceeds of
the offering had been used to fund working capital, expansion of our facilities
and our investments in other long-term assets. The remaining net proceeds are
invested in short-term, interest-bearing, investment grade securities. The
entire amount of the net proceeds has been allocated for general corporate
purposes and working capital, including product development and the possible
acquisition of additional businesses and technologies that are complementary to
our current or future business. None of the proceed amounts were paid directly
or indirectly to any director, officer, or general partner of us or our
associates, persons owning 10 percent or more of any class of our equity
securities, or an affiliate of us.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License.......................... $ 1,845 $ 8,689 $16,486 $ 36,773 $61,482
Services and maintenance......... 2,128 4,113 8,520 12,215 23,732
------- ------- ------- -------- -------
Total revenues................... 3,973 12,802 25,006 48,988 85,214
------- ------- ------- -------- -------
Cost of revenues:
License.......................... 34 393 502 1,985 2,286
Services and maintenance......... 950 3,157 4,414 7,546 13,016
------- ------- ------- -------- -------
Total cost of revenues........... 984 3,550 4,916 9,531 15,302
------- ------- ------- -------- -------
Gross profit...................... 2,989 9,252 20,090 39,457 69,912
------- ------- ------- -------- -------
Operating expenses:
Sales and marketing.............. 1,914 3,858 11,193 26,802 40,900
Research and development......... 2,287 2,874 5,692 12,840 16,605
General and administrative....... 1,212 2,464 3,695 5,046 7,752
Acquired in-process R&D and
goodwill amortization........... -- -- -- 20,564 712
------- ------- ------- -------- -------
Total operating expenses......... 5,413 9,196 20,580 65,252 65,969
------- ------- ------- -------- -------
Income (loss) from operations..... (2,424) 56 (490) (25,795) 3,943
Interest income................... -- -- 723 1,807 3,776
------- ------- ------- -------- -------
Income (loss) before income
taxes............................ (2,424) 56 233 (23,988) 7,719
(Provision) benefit for income
taxes............................ 301 331 281 160 (1,800)
------- ------- ------- -------- -------
Net income (loss)................. $(2,123) $ 387 $ 514 $(23,828) $ 5,919
======= ======= ======= ======== =======
Net income (loss) per basic
share............................ $ 0.02 $ (0.68) $ 0.13
Net income (loss) per diluted
share............................ $ 0.01 $ (0.68) $ 0.11
Shares used in basic per share
computation...................... 30,700 35,255 43,847
Shares used in diluted per share
computation...................... 41,743 35,255 54,803
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................... $ -- $ -- $12,638 $ 81,067 $ 89,271
Working capital (deficit)........... 1,016 (1,186) 13,707 77,438 87,918
Total assets........................ 2,190 3,687 24,757 107,829 130,520
Shareholders' equity (deficit)...... 1,672 (60) 14,662 87,059 103,155
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report. This discussion and analysis contains forward-
looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Certain Factors That May Affect Our Business" and elsewhere in this
Annual Report.
Overview
We are the leading global provider of PKI products and services to e-
businesses and other organizations. We are committed to enabling businesses to
conduct e-commerce securely, ensuring they benefit from increased service
efficiency, technology cost savings and the confidence associated with trusted
e-business technologies. Our products and services enable organizations and
their partners to manage trusted, secure electronic transactions and
communications over today's advanced networks, including intranets, extranets
and the Internet.
We were originally established in January 1994 as the Secure Networks group
of Nortel Networks Corporation to pursue the development and sale of PKI
products. During December 1996, Nortel Networks restructured its Secure
Networks group by incorporating Entrust Technologies Inc. in Maryland and
Entrust Technologies Limited in Ontario, Canada. As a result of the
restructuring and concurrent private placement, the assets and business of the
Secure Networks group were transferred to the newly incorporated companies, and
Entrust Technologies Inc. became a majority-owned subsidiary of Nortel Networks
and Entrust Technologies Limited became a majority-owned subsidiary of Entrust
Technologies Inc. In 1998, Entrust Technologies (UK) Limited was incorporated
in the United Kingdom as a wholly owned subsidiary of Entrust Technologies Inc.
In June 1998, we acquired 100% ownership of r3 Security Engineering AG, a
professional services organization specializing in electronic security
consulting, located in Switzerland. We completed our initial public offering of
common stock in August 1998. In 1999, we incorporated two additional, wholly
owned European subsidiaries, Entrust Technologies GmbH in Germany and Entrust
Technologies S.A.R.L. in France. Additionally, at the end of November 1999, we
reorganized our r3 business in Switzerland and formed Entrust Technologies
(Switzerland) Ltd. Liab. Co.
26
<PAGE>
Results Of Operations
The following table sets forth certain statement of operations data
expressed as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
License.......................................... 65.9% 75.1 % 72.2%
Services and maintenance......................... 34.1 24.9 27.8
------- ------- -------
Total revenues................................. 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
License.......................................... 2.0 4.1 2.7
Services and maintenance......................... 17.7 15.4 15.3
------- ------- -------
Total cost of revenues......................... 19.7 19.5 18.0
------- ------- -------
Gross profit....................................... 80.3 80.5 82.0
------- ------- -------
Operating expenses:
Sales and marketing.............................. 44.8 54.7 48.0
Research and development......................... 22.7 26.2 19.5
General and administrative....................... 14.7 10.3 9.1
Acquired in-process research and development and
goodwill amortization........................... -- 42.0 0.8
------- ------- -------
Total operating expenses....................... 82.2 133.2 77.4
------- ------- -------
Income (loss) from operations...................... (1.9) (52.7) 4.6
Interest income.................................... 2.9 3.7 4.4
------- ------- -------
Income (loss) before income taxes.................. 1.0 (49.0) 9.0
(Provision) benefit for income taxes............... 1.1 0.3 (2.1)
------- ------- -------
Net income (loss).................................. 2.1% (48.7)% 6.9%
======= ======= =======
</TABLE>
27
<PAGE>
Years Ended December 31, 1997, 1998 and 1999
Revenues
We recognize revenues in accordance with the provisions of the American
Institute of Certified Public Accountants' Statement of Position ("SOP") 97-2
"Software Revenue Recognition". We generate revenues primarily from licensing
the rights to our software products to end users and, to a lesser extent, from
sublicense fees from resellers. We also generate revenues from consulting,
training and post-contract support, or maintenance, performed for customers who
license our products. Prior to 1998, our revenue recognition policy was in
accordance with the provisions of the previous authoritative guidance provided
by SOP 91-1, "Software Revenue Recognition".
Accordingly, 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, collection
of the receivable is probable and payment is due within twelve months.
Revenues from maintenance services 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 services to other
customers. Revenues from the sale of Web server certificates by Entrust.net,
our certification authority service, are also recognized ratably over the term
of the certificate, which is typically one to two years.
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 materials basis.
Such services primarily consist of implementation services related to the
installation and deployment of our products and do not include significant
customization or development of the underlying software code.
We use the percentage of completion method to account for large custom
development contracts. Under this method, we recognize revenues and profit as
the work on the contract progresses. Revenues are recognized by applying the
percentage of the total cost incurred to date divided by the total estimated
contract cost to the total contract value, and any projected loss is recognized
immediately. The project cost estimates in each case are reviewed on a regular
basis.
Total Revenues. Total revenues increased 96% from $25.0 million in 1997 to
$49.0 million in 1998 and increased 74% to $85.2 million in 1999. Total
revenues derived from North America increased 60% from $23.6 million in 1997 to
$37.7 million in 1998 and increased 90% to $71.8 million in 1999, while total
revenues derived from outside of North America increased 707% from $1.4 million
in 1997 to $11.3 million in 1998 and increased 19% to $13.4 million in 1999.
Although the majority of the overall growth in total revenues in 1998 and 1999
has been experienced in North America, we have also focused on growing our
revenue base internationally, particularly in Europe and Asia. However, the
level of non-North American revenues has fluctuated from period to period and
is expected to continue that trend in the foreseeable future. In 1997, three
customers individually accounted for 19%, 12% and 11% of revenues,
respectively. In 1998, no single customer accounted for 10% or more of total
revenues. In 1999, a single customer accounted for 24% of revenues, and no
other customers accounted for 10% or more of revenues.
License Revenues. License revenues increased 123% from $16.5 million in
1997 to $36.8 million in 1998 and increased 67% to $61.5 million in 1999,
representing 66%, 75% and 72% of total revenues in the respective years. The
increase in license revenues in absolute dollars was primarily due to
increasing market awareness and acceptance of our product offerings, continued
enhancement and increasing breadth of our product offerings, expansion of our
sales and marketing
28
<PAGE>
organization, and sales to new industry segments. The increase in license
revenues as a percentage of total revenues from 1997 to 1998 reflected our
continued focus on the product side of the
business and the increased use of third-party consulting firms and systems
integrators to provide implementation services to our customers. The decrease
in license revenues as a percentage of total revenues from 1998 to 1999 was
primarily a result of the increasing maintenance revenue stream and increased
demand for consulting services.
Services and Maintenance Revenues. Services and maintenance revenues
increased 44% from $8.5 million in 1997 to $12.2 million in 1998 and increased
94% to $23.7 million in 1999, representing 34%, 25% and 28% of total revenues
in the respective years. The increase in services and maintenance revenues was
primarily the result of an increase in demand for consulting services and
customer support, and increases in maintenance revenues from a larger installed
product base. The decrease in services and maintenance revenues as a percentage
of total revenues from 1997 to 1998 was largely due to our focus on building
the product side of the business and building successful partnering
relationships with third-party service providers to provide services to
customers. The increase in services and maintenance revenues as a percentage of
total revenues from 1998 to 1999 was the result of our increasing customer base
accelerating the demand for consulting services to assist these customers as
they deploy our solutions. We continue to focus on building our relationships
with outside service providers to ensure that we have adequate resources
available to meet the demand of our customers.
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 was $502,000 in 1997,
$2.0 million in 1998 and $2.3 million in 1999, representing 2%, 4% and 3% of
total revenues for the respective years. The increase in cost of license
revenues in absolute dollars and as a percentage of revenues for 1998 and 1997
was primarily a result of higher royalty fees paid to third-party software
vendors, as we incorporated a higher level of third-party software in our
products in 1998. While the cost of license revenues was relatively flat from
1998 to 1999, the decrease in cost of license revenues as a percentage of total
revenues was primarily the result of a shift in the mix of third-party software
vendor products sold in 1999 compared to 1998. The mix of third-party products
may vary from period to period and our gross margins and, consequently, our
results of operations could be adversely affected.
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 amounts paid to third-
party consulting firms for those services. Cost of services and maintenance
revenues was $4.4 million in 1997, $7.5 million in 1998 and $13.0 million in
1999, representing 18%, 15% and 15% of total revenues for the respective years.
The increase in absolute dollars reflects the increased costs associated with
the higher levels of services and maintenance revenues during 1998 and 1999.
The decrease as a percentage of total revenues from 1997 to 1998 was primarily
a result of license revenues growing more rapidly than service and maintenance
revenues. The higher percentage of cost of services and maintenance revenues as
a percentage of total cost of revenues in 1997 reflected the cost of hardware
components related to system integration arrangements during that year. The
cost of services and maintenance revenues as a percentage of total revenues
remained flat from 1998 to 1999 despite increasing services and maintenance
revenues as a percentage of total revenues due to improved productivity levels
achieved in 1999 by the consulting team.
Services and maintenance gross profit as a percentage of services and
maintenance revenues was 48% in 1997, 38% in 1998 and 45% in 1999. The decrease
in the services and maintenance margin from 1997 to 1998 reflected the
investment made during 1998 in expanding our customer
29
<PAGE>
support organization to support the growing customer base and the impact on
productivity related to the integration of the r3 consulting organization
during the third and fourth quarters of 1998. Also, investments were made in
building our consulting organization in order to prepare for expected future
increases in demand for these services. The increase in the services and
maintenance margin from 1998 to 1999 reflected the shift in the mix of services
revenues toward higher-margin maintenance revenues. In addition, the services
personnel hired in 1998 were achieving higher productivity levels in 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $11.2
million in 1997 to $26.8 million in 1998 and $40.9 million in 1999,
representing 45%, 55% and 48% of total revenues in the respective years. These
increases in absolute dollars from 1997 to 1999 and as a percentage of total
revenues from 1997 to 1998 were primarily the result of costs associated with
the expansion of our sales and marketing organization, both domestically and
internationally, as well as significant investments in marketing during 1999 as
we launched a number of new products and marketing programs. We have continued
our strategy of (a) investing in hiring and training our direct sales
organization in anticipation of future market growth, and (b) investing in
marketing efforts in support of new product launches. Failure of these
investments to generate future revenues could have a significant adverse effect
on our operations. The decrease as a percentage of total revenues from 1998 to
1999 reflected the higher revenue base as well as improvements achieved in
productivity of sales and marketing personnel and efficiencies gained in the
related processes.
Research and Development. Research and development expenses increased from
$5.7 million in 1997 to $12.8 million in 1998 and $16.6 million in 1999,
representing 23%, 26% and 20% of total revenues in the respective periods. The
increased investment in research and development expenses in absolute dollars
and as a percentage of total revenues from 1997 to 1998 primarily reflected
higher expenses related to increased staffing of software developers. These
employees were added primarily in the second half of 1998 in connection with
the continuing expansion and enhancement of our product offerings and our
commitment to quality assurance and testing and as a result of our acquisition
of r3 in June 1998. The investment in research and development as a percentage
of total revenues decreased in 1999 as a result of growth of revenues outpacing
the expansion of our development team in 1999. However, we believe that we must
continue to invest in research and development in order to maintain our
technological leadership position and, thus, expect research and development
expenses to continue to increase in absolute dollars as we hire additional
experienced security experts and software engineers.
General and Administrative. General and administrative expenses increased
from $3.7 million in 1997 to $5.0 million in 1998 and $7.8 million in 1999,
representing 15%, 10% and 9% of total revenues in the respective years. The
increase in general and administrative expenses in absolute dollars reflected
our continued investment in increased staffing and related expenses for the
enhancement of the infrastructure necessary to support our growing business,
including investor relation programs, improved management information systems
and the increased utilization of outside professional service firms. The
decrease as a percentage of total revenues reflected efficiencies gained
throughout our administrative processes as we have grown as a company.
Acquired In-process Research and Development and Goodwill Amortization. On
June 8, 1998, we completed the acquisition of r3, 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 us and
the shareholders of r3, we agreed to acquire all the outstanding shares of r3
for an aggregate purchase price of $23,774, which included 1,167,288 shares of
our common stock and cash consideration of approximately $4.4 million. This
acquisition was recorded under the purchase
30
<PAGE>
method of accounting, and, therefore, the results of operations of r3 and the
fair value of the acquired assets and liabilities are included in our financial
statements beginning on the acquisition date. Upon consummation of the
acquisition, r3 became a wholly owned subsidiary of Entrust Technologies Inc.
In connection with the acquisition in 1998, we obtained an appraisal of the
intangible assets, which resulted in $20.2 million of the purchase price being
allocated to in-process research and development that had not yet reached
technological feasibility and had no alternative future use. This in-process
research and development was expensed in 1998. We recorded $712,000 of
amortization in 1999 with respect to the goodwill that arose as a result of
this acquisition, compared to $356,000 in 1998.
Interest Income
Interest income increased from $723,000 in 1997 to $1.8 million in 1998 and
$3.8 million in 1999, representing 3%, 4% and 4% of total revenues in the
respective periods. The increase in investment income in 1998 and 1999
reflected the interest earned on the net proceeds of the initial public
offering in August 1998 and on cash provided by operations in 1999.
Provision for Income Taxes
We recorded an income tax benefit of $281,000 and $160,000 in 1997 and
1998, respectively, compared with an income tax provision of $1.8 million in
1999. We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109. The income tax benefits recorded in 1997 and 1998
arose primarily from foreign research and development tax credits. The
effective income tax rate of 23% in 1999 differed from statutory rates
primarily due to the recognition of a portion of the tax benefits from the
significant net operating loss and tax credit carryforwards available.
Quarterly Results of Operations
Our 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. In particular, our period-to-period operating results are
significantly dependent upon the completion date of large license agreements.
In this regard, the purchase of our products often requires a significant
capital investment which customers may view as a discretionary cost and,
therefore, a purchase that can be deferred or canceled due to budgetary or
other business reasons. Estimating future revenues is also difficult because we
ship our products soon after an order is received and, therefore, we do not
have a significant backlog. Thus, quarterly license revenues are heavily
dependent upon orders received and shipped within the same quarter. Moreover,
we have generally recorded a significant portion of our total quarterly
revenues in the third month of a quarter, with a concentration of these
revenues in the last half of that third month. This concentration of revenues
is influenced by customer tendencies to make significant capital expenditures
at the end of a fiscal quarter. We expect 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 acceptance. In this
regard, we have from time to time experienced delays in recognizing revenues
with respect to certain orders. In any period a significant portion of our
revenue may be derived from large sales to a limited number of customers.
Despite the uncertainties in our revenue patterns, our 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 delayed or otherwise not realized in a quarter for any reason, our
business, operating results and financial condition would be adversely affected
in a significant way.
31
<PAGE>
The following tables set forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 1999, as
well as such data expressed as a percentage of our total revenues for the
periods indicated. These data have been derived from unaudited consolidated
financial statements that, in our opinion, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
information when read in conjunction with our consolidated financial statements
and related notes appearing elsewhere in this Annual Report. The operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ $7,681 $ 8,164 $ 9,795 $11,133 $11,626 $13,915 $16,515 $19,426
Services and
maintenance........... 2,243 2,850 3,244 3,878 5,199 5,840 6,108 6,585
------ -------- ------- ------- ------- ------- ------- -------
Total revenues......... 9,924 11,014 13,039 15,011 16,825 19,755 22,623 26,011
------ -------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 342 470 507 666 395 414 603 874
Services and
maintenance........... 1,478 1,620 2,100 2,348 2,847 3,244 3,385 3,540
------ -------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 1,820 2,090 2,607 3,014 3,242 3,658 3,988 4,414
------ -------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,104 8,924 10,432 11,997 13,583 16,097 18,635 21,597
------ -------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 4,936 6,072 7,330 8,464 8,610 9,769 10,478 12,043
Research and
development........... 2,285 3,072 3,669 3,814 3,881 4,005 4,225 4,494
General and
administrative........ 1,064 1,207 1,356 1,419 1,494 1,882 1,993 2,383
Acquired in-process R&D
and goodwill
amortization.......... -- 20,208 178 178 178 178 178 178
------ -------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 8,285 30,559 12,533 13,875 14,163 15,834 16,874 19,098
------ -------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (181) (21,635) (2,101) (1,878) (580) 263 1,761 2,499
Interest income......... 146 71 517 1,073 914 853 966 1,043
------ -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (35) (21,564) (1,584) (805) 334 1,116 2,727 3,542
(Provision) benefit for
income taxes........... 160 -- -- -- -- (245) (682) (873)
------ -------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 125 $(21,564) $(1,584) $ (805) $ 334 $ 871 $ 2,045 $ 2,669
====== ======== ======= ======= ======= ======= ======= =======
Net income (loss) per
share
Basic.................. $ -- $ (0.70) $ (0.04) $ (0.02) $ 0.01 $ 0.02 $ 0.05 $ 0.06
====== ======== ======= ======= ======= ======= ======= =======
Diluted................ $ -- $ (0.70) $ (0.04) $ (0.02) $ 0.01 $ 0.02 $ 0.04 $ 0.05
====== ======== ======= ======= ======= ======= ======= =======
Shares used in per share
computation
Basic.................. 30,700 30,997 36,830 42,491 42,910 43,496 44,106 44,876
====== ======== ======= ======= ======= ======= ======= =======
Diluted................ 45,231 30,997 36,830 42,491 54,642 54,463 54,690 55,416
====== ======== ======= ======= ======= ======= ======= =======
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ 77.4 % 74.1% 75.1 % 74.1 % 69.1 % 70.4 % 73.0 % 74.7 %
Services and
maintenance........... 22.6 25.9 24.9 25.9 30.9 29.6 27.0 25.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License................ 3.4 4.3 3.9 4.4 2.4 2.1 2.7 3.4
Services and
maintenance........... 14.9 14.7 16.1 15.6 16.9 16.4 14.9 13.6
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues.............. 18.3 19.0 20.0 20.0 19.3 18.5 17.6 17.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 81.7 81.0 80.0 80.0 80.7 81.5 82.4 83.0
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing.... 49.8 55.1 56.2 56.4 51.2 49.5 46.3 46.3
Research and
development........... 23.0 27.9 28.1 25.4 23.0 20.3 18.7 17.3
General and
administrative........ 10.7 11.0 10.4 9.5 8.9 9.5 8.8 9.1
Acquired in-process R&D
and goodwill
amortization.......... -- 183.5 1.4 1.2 1.0 0.9 0.8 0.7
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 83.5 277.5 96.1 92.5 84.1 80.2 74.6 73.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (1.8) * (16.1) (12.5) (3.4) 1.3 7.8 9.6
Interest income......... 1.5 0.6 4.0 7.1 5.4 4.3 4.2 4.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... (0.3) * (12.1) (5.4) 2.0 5.6 12.0 13.6
(Provision) benefit for
income taxes........... 1.6 -- -- -- -- (1.2) (3.0) (3.4)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 1.3 % * (12.1)% (5.4)% 2.0 % 4.4 % 9.0 % 10.2 %
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------
*Not meaningful
Liquidity and Capital Resources
We generated cash of $7.8 million from operating activities during 1999.
This cash inflow was primarily a result of an increase in accrued liabilities
and deferred income and the net income achieved over the year. These inflows
were partially offset by cash outflows relating to an increase in accounts
receivable, prepaid expenses, and a decrease in accounts payable. Our average
days sales outstanding at December 31, 1999 decreased to 75 days, from 84 days
at December 31, 1998. The overall decrease in days sales outstanding from 1998
to 1999 reflects the improved collection efforts over the year and the quality
of our relationships with our customers. For purposes of calculating average
days sales outstanding, we divide ending accounts receivable by the current
quarter's revenues and multiply this amount by 90 days. 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
expanded international revenues in relation to total revenues as licenses to
international customers often have longer payment terms.
During the year ended December 31, 1999, cash from investing activities
included $7.6 million provided primarily by the reduction of our marketable
investments, net of $102.2 million of marketable investment purchases. This was
offset by investments of $4.4 million in property and equipment and $3.2
million in goodwill and other long-term assets. The property and equipment
investments primarily took the form of computer hardware and leasehold
improvements to support our growing organization. The investment in other long-
term assets was largely related to a new investment, at cost, in a strategic
business alliance and licenses for technology purchased for use in the
provision of services to customers.
33
<PAGE>
Cash provided by financing activities for the year ended December 31, 1999
was $10.4 million, primarily due to the exercise of employee stock options and
the sale of shares under our employee stock purchase plan.
As of December 31, 1999, our cash and short-term investments in the amount
of $89.3 million comprised our principal sources of liquidity. In addition, we
issued and sold an aggregate of 2,074,260 shares of common stock in a follow-on
offering in the first quarter of 2000, which resulted in proceeds to us of
$162.6 million, net of underwriting discounts and commissions but before
expenses. It is our belief that cash flows from operations, the net proceeds
from this offering and existing cash and cash equivalents and short-term
investments will suffice to meet our needs for at least the next twelve months.
Certain Factors That May Affect Our Business
Our quarterly revenues and operating results are subject to significant
fluctuations and such fluctuations may lead to a reduced market price for our
stock
Our quarterly revenues and operating results have varied in the past and
may continue to fluctuate in the future. We believe that period-to-period
comparisons of our operating results are not necessarily meaningful, but
securities analysts and investors often rely upon these comparisons as
indicators of future performance. If our operating results in any future period
fall below the expectations of securities analysts and investors, the market
price of our securities would likely decline. Factors that have caused our
results to fluctuate in the past and which are likely to affect us in the
future include the following:
. length of sales cycles associated with our product offerings;
. the timing, size and nature of our licensing transactions;
. market acceptance of new products or product enhancements by us or our
competitors;
. the relative proportions of revenues derived from licenses and services
and maintenance;
. the timing of new personnel hires and the rate at which new personnel
become productive;
. changes in pricing policies by our competitors;
. changes in our operating expenses; and
. fluctuations in foreign currency exchange rates.
Estimating future revenues is difficult, and our failure to do so accurately
may lead to a reduced market price for our stock and reduced profitability
Estimating future revenues is difficult because we ship our products soon
after an order is received and, as such, we do not have a significant backlog.
Thus, quarterly license revenues depend heavily upon orders received and
shipped within the same quarter. Moreover, we historically have recorded 60% to
80% of our total quarterly revenues in the third month of the quarter, with a
concentration of revenues in the second half of that month. We expect that this
concentration of revenues, which is attributable in part to the tendency of
some 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.
Our expense levels are based, in significant part, upon our expectations as
to future revenues and are largely fixed in the short term. We may be unable to
adjust spending in a timely manner to compensate for any unexpected shortfall
in revenues. Any significant shortfall in revenues in relation to our
expectations could have an immediate and significant effect on our
profitability for that quarter and may lead to a reduced market price for our
stock.
34
<PAGE>
Because of the lengthy and unpredictable sales cycle associated with our large
PKI transactions, we may not succeed in closing transactions on a timely basis
or at all, which would adversely affect our revenues and operating results
Transactions for our PKI solution often involve large expenditures, and the
sales cycles for these transactions are often lengthy and unpredictable.
Factors affecting the sales cycle include:
. customers' budgetary constraints;
. the timing of customers' budget cycles; and
. customers' internal approval processes.
We may not succeed in closing such large transactions on a timely basis or
at all, which could cause significant variability in our revenues and results
of operations for any particular period. If our results of operations and cash
flows fall below the expectations of securities analysts, our stock price may
decline.
A limited number of customers has accounted for a significant percentage of our
revenues, which may decline if we cannot keep or replace these customer
relationships
Historically, a limited number of customers has accounted for a significant
percentage of our revenues. In 1997, three customers accounted for 19%, 12% and
11% of revenues, respectively. In 1998, our three largest customers accounted
for 23% of revenues. In 1999, our three largest customers accounted for 31% of
revenues, with the largest customer accounting for 24% of revenues. We
anticipate that our 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, we anticipate that such customers will continue to vary over time,
so that the achievement of our long-term goals will require us to obtain
additional significant customers on an ongoing basis. Our failure to enter into
a sufficient number of large licensing agreements during a particular period
could have a significant adverse effect on our revenues.
If the e-business security market does not continue to grow, demand for our
products and services will be adversely affected
The market for e-business security solutions is at an early stage of
development. Continued growth of the e-business security market will depend, in
large part, on the following:
. the continued expansion of Internet usage and the number of
organizations adopting or expanding intranets and extranets;
. the ability of network 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 the Internet, intranets and extranets.
A decline in the growth of this market could reduce demand for our
products, adversely affecting our revenues and results of operations.
A breach of security at one of our customers, whether or not due to our
products, could harm our reputation and reduce the demand for our products
The processes used by computer hackers to access or sabotage networks and
intranets are rapidly evolving. A well-publicized actual or perceived breach of
network or computer security at one of our customers, regardless of whether
such breach is attributable to our products, or any significant advance in
techniques for decoding or "cracking" encrypted information, could adversely
affect the market's perception of us and our products, and could have an
adverse effect on our reputation and the demand for our products.
35
<PAGE>
If our products contain errors or bugs, sales of our products would likely
decline
Our products may contain errors, failures or bugs that our existing testing
procedures have not detected. The errors may become evident at any time during
the life of our products. The discovery of any errors, failures or bugs in any
products may result in:
. adverse publicity;
. product returns;
. the loss or delay of market acceptance of our products; and
. third-party claims against us.
Accordingly, the discovery of any errors, failures or bugs would have a
significant adverse effect on the sales of our products.
Our revenues may decline if we cannot compete successfully in an intensely
competitive market
We target our products at the rapidly evolving market for e-business
security solutions. Many of our current and potential competitors have longer
operating histories, greater name recognition, larger installed bases and
significantly greater financial, technical, marketing and sales resources than
we do. 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. In addition, certain of
our 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 our functionality.
Increased competition, as well as consolidation of competitors, could
result in lower prices, reduced margins or the failure of our products and
services to achieve or maintain market acceptance, any of which could have a
serious adverse effect on our business, financial condition and results of
operations. See "Business--Competition" for a list of our competitors.
Our business will not be successful if we do not keep up with the rapid changes
in our industry
The emerging market for e-business security products and related services
is characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. To be competitive, we have to
continually improve the performance, features and reliability of our products
and services, particularly in response to competitive offerings, and be first
to market with new products and services or enhancements to existing products
and services. Our failure 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 significant adverse effect on our business,
financial condition and results of operations.
We may have difficulty managing our expanding operations, which could adversely
affect our ability to successfully grow our business
The growth in the size and complexity of our business over the past few
years has placed a significant strain on our managerial, operational and
financial resources. Our ability to manage future growth, if any, will depend
upon our ability to:
. continue to implement and improve operational, financial and management
information systems on a timely basis; and
. expand, train, motivate and manage our work force.
36
<PAGE>
Our personnel, systems, procedures and controls may not be adequate to
support our operations. The geographic dispersal of our operations, including
the separation of our headquarters in Plano, Texas, from our research and
development facility in Ottawa, Canada, may make it more difficult to manage
our growth.
If we fail to continue to attract and retain qualified personnel, our business
may be harmed
Our future success depends upon our ability to continue 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 we can retain our key
scientific, technical, sales and managerial employees or that we can attract,
motivate or retain other highly qualified personnel in the future. If we cannot
retain or are unable to hire such key personnel, our business, financial
condition and results of operations could be significantly adversely affected.
Future acquisitions or investments could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations
It is possible, as part of our future growth strategy, that we will from
time-to-time acquire or make investments in companies, technologies, product
solutions or professional services offerings. With respect to these
acquisitions, we would face the difficulties of assimilating personnel and
operations from the acquired businesses and the problems of retaining and
motivating key personnel from such businesses. In addition, these acquisitions
may disrupt our ongoing operations, divert management from day-to-day business,
increase our expenses and adversely impact our results of operations. Any
future acquisitions would involve certain other risks, including the assumption
of additional liabilities, potentially dilutive issuances of equity securities
and incurrence of debt. In addition, these types of transactions often result
in charges to earnings for such items as amortization of goodwill or in-process
research and development expenses.
We face risks associated with our international operations and plans for
expansion, which, if not managed properly, could have a significant adverse
effect on our business, financial condition or results of operations
In the future, we may establish additional foreign operations, hire
additional personnel and establish relationships with additional partners
internationally. This expansion would require significant management attention
and financial resources and could have an adverse effect on our business,
financial condition and results of operations. Although our international sales
currently are primarily denominated in U.S. dollars, we may increasingly
denominate sales in foreign currencies in the future. In addition, our
international business may be subject to the following risks:
. difficulties in collecting international accounts receivable;
. difficulties in obtaining U.S. export licenses, especially for products
containing encryption technology;
. potentially longer payment cycles for customer payments;
. increased costs associated with maintaining international marketing
efforts;
. introduction of non-tariff barriers and higher duty rates;
. difficulties in enforcement of contractual obligations and intellectual
property rights;
. difficulties managing personnel and operations in remote locations; and
. increased complexity in global corporate tax structure.
Any one of these could significantly and adversely affect our business,
financial condition or results of operations.
37
<PAGE>
If the laws regarding exports of our products further limit or otherwise
restrict our business, we could be prohibited from shipping our products to
restricted countries, which would result in a loss of revenues
Some of our products are subject to export controls under laws of the U.S.,
Canada and other countries. The list of products and countries for which
exports are restricted, and the relevant regulatory policies, are likely to be
revised from time to time. If we cannot obtain required government approvals
under these regulations, we may not be able to sell products abroad or make
products available for sale internationally via computer networks such as the
Internet. Furthermore, U.S. governmental controls on the exportation of
encryption products and technology may in the future restrict our ability to
freely export some of our products with the most powerful information security
encryption technology. See "Business--Regulatory Matters" for a discussion of
our regulatory environment.
We may not be able to protect our intellectual property rights, which could
make us less competitive and cause us to lose market share
Our future success will depend, in part, upon our intellectual property
rights and our ability to protect these rights. We rely on a combination of
patent, copyright, trademark and trade secret laws, nondisclosure agreements,
shrink-wrap licenses and other contractual provisions to establish, maintain
and protect our proprietary rights. Despite our efforts to protect our
proprietary rights, unauthorized third parties may:
. copy aspects of our products;
. obtain and use information that we regard as proprietary; or
. infringe upon our patents.
Policing piracy and other unauthorized use of our products is difficult,
particularly in international markets and as a result of the growing use of the
Internet. In addition, third parties might successfully design around our
patents or obtain patents that we would need to license or design around.
Finally, the protections we have obtained may not be sufficient because:
. some courts have held that shrink-wrap licenses, because they are not
signed by the licensee, are not enforceable;
. our trade secrets, confidentiality agreements and patents may not
provide meaningful protection of our proprietary information; and
. we may not seek additional patents on our technology or products and
such patents, even if obtained, may not be broad enough to protect our
technology or products.
Our inability or failure to protect our proprietary rights could have a
significant adverse effect on our business, financial condition or results of
operations.
We have been subject to, and may in the future become subject to, intellectual
property infringement claims that could be costly and could result in a
diversion of management's attention
As the number of 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.
Surety Technologies, Inc. asserted an unsuccessful patent infringement claim
against us in February 1999, and third parties may assert infringement or
misappropriation claims against us in the future. Defending or enforcing our
intellectual property could be costly and could result in a diversion of
management's attention, which could have a significant adverse effect on our
business, financial condition or results of operations. A successful claim
against us could also have a significant adverse effect on our results of
operations for the period in which damages are paid.
38
<PAGE>
We may lose access to technology that we license from outside vendors, which
loss could adversely affect our ability to sell our products
We rely on outside licensors for patent and/or software license rights in
encryption technology that is incorporated into and is necessary for the
operation of our products. For example, we license encryption technology that
is fundamental to our product from RSA Security Inc., which holds a patent for
this technology that expires in September 2000. We recently received
correspondence from RSA indicating that it believes that, as of November 1999,
we were no longer properly licensed to use this patent. While we strongly
believe that RSA's assertion is without merit, we cannot assure you of the
outcome of our discussions with RSA about this matter. An adverse outcome could
subject us to significant additional licensing fees, money damages or other
legal relief. In January 2000, RSA filed a complaint against us with respect to
this matter but did not serve notice, and subsequently withdrew, the complaint.
There can be no assurance that RSA will not institute litigation against us
with respect to this matter in the future. In addition, our ability to provide
Web server certificates is currently dependent upon a licensing agreement we
have with Thawte Consulting (Pty.) of South Africa, which was recently acquired
by VeriSign, Inc., one of our primary competitors. Our success will depend in
part on our continued ability to have access to such technologies that are or
may become important to the functionality of our products. Any inability to
continue to procure or use such technology could have a significant adverse
effect on our ability to sell some of our products.
Our stock price is volatile and may continue to be volatile in the future.
The trading price of our common stock has been, and is expected to continue
to be, highly volatile and may be significantly and adversely affected by
factors such as:
. actual or anticipated fluctuations in our operating results;
. announcements of technological innovations;
. new products or new contracts by us or our competitors;
. developments with respect to patents, copyrights or propriety rights;
. conditions and trends in the security industry;
. changes in financial estimates by securities analysts; and
. general market conditions and other factors.
Nortel Networks is able to exercise substantial influence over all matters
requiring stockholder and board approval and could make decisions about our
business that conflict with the Interests of other stockholders.
As of March 7, 2000, Nortel Networks Corporation, through its subsidiary,
Nortel Networks Inc., beneficially owned approximately 31.8% of our outstanding
voting stock and two of our eight directors were representatives of Nortel
Networks. Accordingly, Nortel Networks has the ability to exert significant
influence over our affairs, including the election of directors and decisions
relating to our strategic and operating activities. This concentration of
ownership and board representation may have the effect of delaying or
preventing a change in control that other stockholders may find favorable.
Provisions of our charter and bylaws may delay or prevent transactions that are
in your best interests.
Our charter and bylaws contain provisions, including a staggered board of
directors, that may make it more difficult for a third party to acquire us, or
may discourage bids to do so. These
39
<PAGE>
provisions could limit the price that investors might be willing to pay for
shares of our 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 our
outstanding voting stock. Our board of directors also has the authority to
issue up to 5,000,000 shares of 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. 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 our outstanding voting stock.
Year 2000 Impact
We have not experienced any problems with our computer systems relating to
such systems being unable to recognize appropriate dates related to the year
2000. We are also not aware of any material problems with our clients or
vendors. Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any Year 2000
issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Associated with Interest Rates
Our investment policy states that we will invest our cash reserves,
including cash, cash equivalents and marketable investments, in investments
that are designed to preserve principal, maintain liquidity and maximize
return. We actively manage our investments in accordance with these objectives.
Some of these investments are subject to interest rate risk, whereby a change
in market interest rates will cause the principal amount of the underlying
investment to fluctuate. Therefore, a depreciation in principal value of an
investment is possible in situations where the investment is made at a fixed
interest rate and the market interest rate then subsequently increases. We try
to manage this risk by maintaining our cash, cash equivalents and marketable
investments with high quality financial institutions and investment managers.
We also restrict the investments to primarily securities with short-term
maturities, such that, at December 31, 1999, the majority of our marketable
investments had maturities of less than six months from that date. As a result,
we believe that our exposure to market risk related to interest rates is
minimal.
The following table presents the cash, cash equivalents and marketable
investments that we held at December 31, 1998 and 1999, that would have been
subject to interest rate risk, and the related ranges of maturities as of that
date:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------------------- -----------------------------
Maturity Maturity
----------------------------- -----------------------------
Within Within
3 Months 3-6 Months >6 Months 3 Months 3-6 Months >6 Months
-------- ---------- --------- -------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments classified
as cash and cash
equivalents............ $ 109 $ -- $ -- $11,540 $ -- $ --
Investments classified
as marketable
investments............ 27,800 45,191 4,364 34,590 28,728 6,481
------- ------- ------ ------- ------- ------
Total amortized cost.. $27,909 $45,191 $4,364 $46,130 $28,728 $6,481
======= ======= ====== ======= ======= ======
Fair Value.............. $27,909 $45,191 $4,364 $46,112 $28,706 $6,436
======= ======= ====== ======= ======= ======
</TABLE>
40
<PAGE>
Risk Associated with Exchange Rates
We are subject to foreign exchange risk as a result of exposures to changes
in currency exchange rates, specifically between the United States and Canada,
the United Kingdom, Germany and Switzerland. However, this exposure is
considered to be minimal due to the fact that the United Kingdom, German and
Swiss operations are not significant, and the Canadian operations are naturally
hedged against exchange rate fluctuations since both revenues and expenses are
denominated in Canadian dollars. Therefore, an unfavorable change in the
exchange rate for the Canadian subsidiary would result in lower revenues when
translated into U.S. dollars, but the expenses would be lowered in a
corresponding fashion.
As a result, we do not engage in formal hedging activities, but we do
periodically review the potential impact of this risk to ensure that the risk
of significant potential losses remains minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements together with the related notes and
the report of Deloitte & Touche LLP, independent auditors, are set forth in the
Index to Consolidated Financial Statements at Item 14 and incorporated herein
by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE>
PART III
Certain information required by Part III is omitted from this Annual Report
as we intend to file our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on April 27, 2000, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, not later than 120 days after the
end of the fiscal year covered by this Report, and certain information included
in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a)Executive Officers and Directors -- The information in the section entitled
"Executive Officers and Directors of the Registrant" in Part I hereof is
incorporated herein by reference.
(b)Directors -- The information in the section entitled "Directors and Nominees
for Director" in the Proxy Statement is incorporated herein by reference.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information in the sections entitled "Compensation of Executive
Officers", "Director Compensation" and "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section entitled "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)The following documents are filed as part of this Form 10-K:
1. Consolidated Financial Statements. The following consolidated
financial statements of Entrust Technologies Inc. are filed as part
of this Form 10-K on the pages indicated:
<TABLE>
<CAPTION>
Page
ENTRUST TECHNOLOGIES INC. ----
<S> <C>
Independent Auditors' Report.............................................. 45
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. 46
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999...................................................... 47
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 1997, 1998 and 1999..................... 48
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999......................................... 50
Notes to Consolidated Financial Statements................................ 51
</TABLE>
2. Schedules other than the ones listed above are omitted as the
required information is inapplicable or the information is presented
in the consolidated financial statements or related notes.
3. Exhibits. The exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended December 31, 1999.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 13th day of
March, 2000.
Entrust Technologies Inc.
(Registrant)
/s/ John A. Ryan
By: _________________________________
John A. Ryan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 13th day of March, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ John A. Ryan President, Chief Executive Officer and Director
______________________________________ (Principal Executive Officer)
John A. Ryan
/s/ David L. Thompson Senior Vice President and Chief Financial
______________________________________ Officer (Principal Financial and Accounting
David L. Thompson Officer)
/s/ F. William Conner Chairman of the Board
______________________________________
F. William Conner
/s/ Butler C. Derrick, Jr. Director
______________________________________
Butler C. Derrick, Jr.
/s/ Jawaid Ekram Director
______________________________________
Jawaid Ekram
/s/ Terrell B. Jones Director
______________________________________
Terrell B. Jones
/s/ Michael P. Ressner Director
______________________________________
Michael P. Ressner
/s/ Christopher M. Stone Director
______________________________________
Christopher M. Stone
/s/ James A. Thomson Director
______________________________________
James A. Thomson
</TABLE>
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of Entrust Technologies Inc:
We have audited the consolidated balance sheets of Entrust Technologies
Inc. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, shareholders' equity and comprehensive income, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Entrust Technologies Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 28, 2000
45
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,712 $ 21,877
Short-term marketable investments......................... 77,355 67,394
Accounts receivable (net of allowance for doubtful
accounts of $753 in 1998 and $703 in 1999)............... 14,013 21,817
Other receivables......................................... 2,102 1,994
Prepaid expenses.......................................... 994 2,201
-------- --------
Total current assets.................................... 98,176 115,283
Long-term marketable investment............................ -- 2,405
Goodwill, net.............................................. 3,210 2,948
Property and equipment, net................................ 4,874 6,904
Other long-term assets..................................... 1,569 2,980
-------- --------
Total assets............................................ $107,829 $130,520
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,187 $ 6,636
Accrued liabilities....................................... 4,992 9,169
Deferred income........................................... 7,791 10,761
Due to related party...................................... 768 799
-------- --------
Total current liabilities............................... 20,738 27,365
Long-term debt and other long-term liabilities............. 32 --
-------- --------
Total liabilities....................................... 20,770 27,365
-------- --------
Shareholders' equity:
Preferred stock, par value $0.01 per share; none issued
and outstanding.......................................... -- --
Common stock, par value $0.01 per share; 42,492,681 and
45,203,448 issued and outstanding shares at December 31,
1998 and 1999, respectively.............................. 425 452
Special voting stock, par value $0.01 per share;
exchangeable; 5,157,289 issued and outstanding shares.... 52 52
Additional paid-in capital................................ 112,483 122,883
Unearned deferred compensation............................ (635) (439)
Accumulated other comprehensive loss...................... (89) (535)
Accumulated deficit....................................... (25,177) (19,258)
-------- --------
Total shareholders' equity.............................. 87,059 103,155
-------- --------
Total liabilities and shareholders' equity.............. $107,829 $130,520
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
46
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
License.................................. $ 16,486 $ 36,773 $ 61,482
Services and maintenance................. 8,520 12,215 23,732
---------- ---------- ----------
Total revenues......................... 25,006 48,988 85,214
---------- ---------- ----------
Cost of revenues:
License.................................. 502 1,985 2,286
Services and maintenance................. 4,414 7,546 13,016
---------- ---------- ----------
Total cost of revenues................. 4,916 9,531 15,302
---------- ---------- ----------
Gross profit............................... 20,090 39,457 69,912
---------- ---------- ----------
Operating expenses:
Sales and marketing...................... 11,193 26,802 40,900
Research and development................. 5,692 12,840 16,605
General and administrative............... 3,695 5,046 7,752
Acquired in-process research and
development and goodwill amortization... -- 20,564 712
---------- ---------- ----------
Total operating expenses............... 20,580 65,252 65,969
---------- ---------- ----------
Income (loss) from operations.............. (490) (25,795) 3,943
Interest income............................ 723 1,807 3,776
---------- ---------- ----------
Income (loss) before income taxes.......... 233 (23,988) 7,719
(Provision) benefit for income taxes....... 281 160 (1,800)
---------- ---------- ----------
Net income (loss).......................... $ 514 $ (23,828) $ 5,919
========== ========== ==========
Net income (loss) per share:
Basic.................................... $ 0.02 $ (0.68) $ 0.13
Diluted.................................. $ 0.01 $ (0.68) $ 0.11
Weighted average common shares used in per
share computations:
Basic.................................... 30,700,000 35,254,735 43,846,922
Diluted.................................. 41,742,972 35,254,735 54,802,682
</TABLE>
See accompanying notes to consolidated financial statements
47
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
for the years ended December 31, 1997, 1998 and 1999
(in thousands of dollars, except share data)
<TABLE>
<CAPTION>
Series B
Series A Series B Non-Voting Special
Common Stock Common Stock Common Stock Common Stock Voting Stock Additional
----------------- ------------------- ---------------- --------------- ------------------ Paid-In
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
---------- ------ ----------- ------ -------- ------ ------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1996............ -- $-- -- $ -- -- $-- -- $-- -- $-- $ --
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)
Change in
shareholder's
net
investment..... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income (loss):
Net income...... -- -- -- -- -- -- -- -- -- -- --
Translation
adjustment..... -- -- -- -- -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ---- ------- ---- ---------- ---- --------
Balances at
December 31,
1997............ -- -- 20,300,000 203 221,052 2 38,948 -- 7,700,000 77 15,744
Series A common
shares issued
on option
exercise....... -- -- 14,346 -- -- -- -- -- -- -- 31
Unearned
compensation
related to
stock options
granted........ -- -- -- -- -- -- -- -- -- -- 784
Deferred
compensation
earned......... -- -- -- -- -- -- -- -- -- -- --
Series A common
shares
converted...... 20,314,346 203 (20,314,346) (203) -- -- -- -- -- -- --
Series B common
shares
converted...... 13,063,836 131 -- -- (221,052) (2) (38,948) -- -- -- (129)
Special voting
shares
exchanged...... 2,542,711 25 -- -- -- -- -- -- (2,542,711) (25) --
Redeemable
series A common
shares issued
and converted.. 1,167,288 12 -- -- -- -- -- -- -- -- 17,001
Common shares
issued......... 5,400,000 54 -- -- -- -- -- -- -- -- 86,346
Common shares
issuance
costs.......... -- -- -- -- -- -- -- -- -- -- (7,302)
Common shares
issued on
option
exercise....... 4,500 -- -- -- -- -- -- -- -- -- 8
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- -- -- -- -- --
Translation
adjustment..... -- -- -- -- -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ---- ------- ---- ---------- ---- --------
Balances at
December 31,
1998............ 42,492,681 425 -- -- -- -- -- -- 5,157,289 52 112,483
Deferred
compensation
earned......... -- -- -- -- -- -- -- -- -- -- --
Common shares
issued on
option
exercise....... 2,636,482 27 -- -- -- -- -- -- -- -- 8,388
Tax reduction
from non-
qualified
option
exercises...... -- -- -- -- -- -- -- -- -- -- 708
Employee Stock
Purchase Plan
shares issued.. 74,285 -- -- -- -- -- -- -- -- -- 1,304
Comprehensive
income (loss):
Net income...... -- -- -- -- -- -- -- -- -- -- --
Translation
adjustment..... -- -- -- -- -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ---- ------- ---- ---------- ---- --------
Balances at
December 31,
1999............ 45,203,448 $452 -- $ -- -- $-- -- $-- 5,157,289 $52 $122,883
========== ==== =========== ===== ======== ==== ======= ==== ========== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements
48
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME--(Continued)
for the years ended December 31, 1997, 1998 and 1999
(in thousands of dollars, except share data)
<TABLE>
<CAPTION>
Accumulated
Unearned Other Accumulated Comprehensive Total
Deferred Comprehensive Income Income Shareholders'
Compensation Loss (Deficit) (Loss) Equity
------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1996................... $ -- $ -- $ (60) $ (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)
Change in shareholder's
net investment........ -- -- (1,803) (1,803)
Comprehensive income
(loss):
Net income............. -- -- 514 $ 514 514
Translation
adjustment............ -- (15) -- (15) (15)
----- ----- -------- -------- --------
Total comprehensive
income................ $ 499
========
Balances at December 31,
1997................... -- (15) (1,349) 14,662
Series A common shares
issued on option
exercise.............. -- -- -- 31
Unearned compensation
related to stock
options granted....... (784) -- -- --
Deferred compensation
earned................ 149 -- -- 149
Series A common shares
converted............. -- -- -- --
Series B common shares
converted............. -- -- -- --
Special voting shares
exchanged............. -- -- -- --
Redeemable series A
common shares issued
and converted......... -- -- -- 17,013
Common shares issued... -- -- -- 86,400
Common shares issuance
costs................. -- -- -- (7,302)
Common shares issued on
option exercise....... -- -- -- 8
Comprehensive income
(loss):
Net loss............... -- -- (23,828) $(23,828) (23,828)
Translation
adjustment............ -- (74) -- (74) (74)
----- ----- -------- -------- --------
Total comprehensive
loss.................. $(23,902)
========
Balances at December 31,
1998................... (635) (89) (25,177) 87,059
Deferred compensation
earned................ 196 -- -- -- 196
Common shares issued on
option exercise....... -- -- -- -- 8,415
Tax reduction from non-
qualified option
exercises............. -- -- -- -- 708
Employee Stock Purchase
Plan shares issued.... -- -- -- -- 1,304
Comprehensive income
(loss):
Net income............. -- -- 5,919 $ 5,919 5,919
Translation
adjustment............ -- (446) -- (446) (446)
----- ----- -------- -------- --------
Total comprehensive
income................ $ 5,473
========
Balances at December 31,
1999................... $(439) $(535) $(19,258) $103,155
===== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
49
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 514 $ (23,828) $ 5,919
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 360 1,261 3,348
Adjustment to cumulative translation
account..................................... (15) (74) (446)
Deferred income taxes........................ (743) (143) 867
Deferred compensation earned................. -- 149 196
Acquired in-process research and
development................................. -- 20,208 --
Changes in operating assets and liabilities:
Increase in accounts receivable............ (4,665) (6,212) (7,804)
Decrease (increase) in other receivables... (2,089) (125) 108
Increase in prepaid expenses............... (400) (504) (1,207)
Decrease (increase) in other assets........ -- (178) 178
Increase (decrease) in accounts payable.... 335 4,755 (551)
Increase in accrued liabilities............ 1,121 1,998 4,175
Increase in deferred income................ 1,186 4,573 2,970
Increase (decrease) due to related party... 2,257 (2,588) 31
-------- --------- --------
Net cash provided by (used in) operating
activities................................ (2,139) (708) 7,784
-------- --------- --------
Cash flows from investing activities:
Purchases of marketable investments............ (12,308) (145,188) (102,230)
Dispositions of marketable investments......... 3,695 76,446 109,786
Purchases of property and equipment............ (895) (3,791) (4,421)
Increase in goodwill and other long-term
assets........................................ -- (393) (3,149)
Payment on purchase of r3 Security Engineering
AG............................................ -- (4,391) --
-------- --------- --------
Net cash used in investing activities...... (9,508) (77,317) (14)
-------- --------- --------
Cash flows from financing activities:
Proceeds from long-term debt................... 1,449 -- --
Repayment of long-term debt.................... -- (1,425) (32)
Transfers to Nortel............................ (1,803) -- --
Proceeds and tax reduction from exercise of
stock options and employee stock purchase
plan.......................................... -- 39 10,427
Proceeds from issuance of 5,400,000 common
shares, net of issuance costs................. -- 79,098 --
Proceeds from issuance of common and special
voting stock, net of issuance costs........... 16,026 -- --
-------- --------- --------
Net cash provided by financing activities.. 15,672 77,712 10,395
-------- --------- --------
Net change in cash and cash equivalents......... 4,025 (313) 18,165
Cash and cash equivalents at beginning of year.. -- 4,025 3,712
-------- --------- --------
Cash and cash equivalents at end of year........ $ 4,025 $ 3,712 $ 21,877
======== ========= ========
Non-cash investing and financing activities:
Issuance of redeemable Series A common stock
(and subsequent conversion into common stock)
related to the acquisition of r3 Security
Engineering AG................................ $ -- $ 17,013 $ --
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
50
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share data)
1. Company Background
In January 1994, Nortel Networks Corporation, and its subsidiary Nortel
Networks 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 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.
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 voting stock assuming conversion of
the Series B common stock and Series B Non-Voting common stock into an
aggregate of 13,063,836 shares of Series A common stock.
On August 21, 1998, the Company closed its initial public offering ("IPO"),
issuing 5,400,000 shares of its Common stock at an initial public offering
price of $16 per share. The net proceeds to the Company from the offering,
after deducting underwriting discounts and commissions and offering expenses
incurred by the Company, were approximately $79.1 million. Immediately
following the IPO, Nortel owned approximately 55.3% of the Company's voting
stock.
At December 31, 1999, Nortel owned approximately 46.8% of the Company's
voting stock.
2. Significant Accounting Policies
Consolidation
The consolidated financial statements of the Company include the accounts
of its majority-owned Canadian subsidiary, Entrust Technologies Limited, its
wholly-owned U.K. subsidiary, Entrust Technologies (UK) Limited, its wholly-
owned German subsidiary, Entrust Technologies GmbH, and, its wholly-owned Swiss
subsidiaries, r/3/ Security Engineering AG and Entrust Technologies
(Switzerland) Ltd. Liab. Co. 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 resulting 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.
51
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
The Company does not use derivative financial products for hedging or
speculative purposes and, as a result, is exposed to currency fluctuations.
However, the Company transacts the majority of its international sales in U.S.
dollars, except for Canada where the Company has both significant costs and
revenues, which the Company believes mitigates the potential impact of currency
fluctuations.
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, Germany, Switzerland 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.
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"). The Company adopted, effective January 1, 1998,
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition". 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, collection of the
receivable is probable and payment is due within twelve months.
Revenues from maintenance services 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.
Revenues from the sale of Entrust.net Web server certificates are also
recognized ratably over the term of the certificate (typically one to two
years).
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 materials 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.
The Company uses the percentage of completion method to account for large
custom development contracts. Under this method, the Company recognizes revenue
and profit as the work on the contract progresses. Revenues are recognized by
applying the percentage of the total cost incurred to date divided by the total
estimated contract cost to the total contract value, and any projected loss is
recognized immediately. The total project cost estimates are reviewed on a
regular basis.
Cost of revenues
Cost of licenses includes the cost of media, product packaging,
documentation and other production costs and third-party royalties.
52
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Cost of services and maintenance 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.
Research and development costs
In applying 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 eligible for capitalization have
been insignificant. To date, the Company has not capitalized any internal
software development costs and has capitalized, in limited circumstances, costs
of software development by third-party contractors.
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.
Marketable investments
Marketable investments consist of investments in a strategic cash
management account. This account is invested primarily in highly rated
corporate securities, in securities guaranteed by the U.S. government or its
agencies and highly rated municipal bonds primarily with a remaining maturity
of not more than 12 months. 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 stated at amortized cost. At December 31, 1998
and 1999, the amortized cost of the Company's investments approximated fair
value.
The Company's marketable investments consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
---------------------- -----------------------------------
Maturity of Maturity of Maturity of
Total Securities Total Securities Securities
Amortized Within One Amortized Within One Greater Than
Cost Basis Year Cost Basis Year One Year
---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
U.S. government agency
debt securities........ $ 7,825 $ 7,825 $ 8,962 $ 8,962 $ --
Corporate debt
securities............. 69,530 69,530 60,837 58,432 2,405
------- ------- ------- ------- ------
$77,355 $77,355 $69,799 $67,394 $2,405
======= ======= ======= ======= ======
</TABLE>
Accounts receivable
The Company's customer base consists primarily of large, well-established
companies or government agencies. Five customers accounted for approximately
45% and 47% of accounts receivable as of December 31, 1998 and 1999,
respectively. Two customers accounted for 18% and 13%, respectively, of
accounts receivable at December 31, 1999. The Company performs ongoing
53
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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, and
believes that the allowance for losses is adequate. The following table
summarizes the changes in the allowance for doubtful accounts:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of year.......... $129 $416 $753
Additional provision........................................ 287 450 426
Amounts written-off......................................... -- (113) (476)
---- ---- ----
Allowance for doubtful accounts, end of year................ $416 $753 $703
==== ==== ====
</TABLE>
Other receivables
Other receivables include federal income tax and other tax refunds of $973
and $166 at December 31, 1998 and 1999, respectively. Other receivables also
includes work-in-process relating to a long-term percentage-of-completion
contract of $826 and $1,470 at December 31, 1998 and 1999, respectively.
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 periodically 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.
Goodwill and other assets
Goodwill is stated net of accumulated amortization of $356 and $1,068 at
December 31, 1998 and 1999, respectively. Goodwill is being amortized on a
straight-line basis over five years. Included in other long-term assets are
investments, at cost, of $393 at December 31, 1998 and 1999, which represents a
10% ownership interest in Entrust Japan, and $1,300 at December 31, 1999, which
represents a 2% interest in a privately-owned company; both these investees are
customers of the Company. Other long-term assets also include costs incurred of
$1,287 at December 31, 1999 primarily for licenses of technology used by the
Company to provide services. These costs are amortized straight-line over three
to four years and are stated net of accumulated amortization of $112 at
December 31, 1999.
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
54
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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.
Stock-based compensation
Stock-based compensation arising from stock option grants is accounted for
by the intrinsic value method under Accounting Principles Board ("APB") Opinion
No. 25. Statement of Financial Accounting Standards ("SFAS") No. 123 encourages
(but does not require) the cost of stock-based compensation arrangements with
employees to be measured based on the fair value of the equity instrument
awarded. As permitted by SFAS No. 123, the Company applies APB Opinion No. 25
to its stock-based compensation awards to employees and discloses in Note 8 the
required pro forma effect on net income and earnings per share.
Net income (loss) per share
Basic net income (loss) per share is computed by dividing the net income
(loss) by the weighted average number of shares of Common stock of all classes
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) 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 exchanged basis, and options to
purchase Common stock using the treasury stock method. The dilutive effect of
the exchangeable Special Voting stock and the options to purchase Common stock
are excluded from the computation of diluted net income (loss) per share if
their effect is antidilutive. For the year ended December 31, 1998, the
antidilutive effects excluded from the diluted net loss per share computation
were 6,767,673 shares due to the exchangeable Special Voting stock outstanding,
1,687,096 shares due to the conversion rights of Series B, and 5,437,769 shares
due to options to purchase Common stock.
55
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Net income (loss) per share has been calculated as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) available to common
shareholders (in thousands).............. $ 514 $ (23,828) $ 5,919
=========== =========== ===========
Weighted average common shares
outstanding:
Basic:
Basic weighted average common shares
outstanding............................ 30,700,000 35,254,735 43,846,922
----------- ----------- -----------
Basic net income (loss) per share....... $ 0.02 $ (0.68) $ 0.13
=========== =========== ===========
Diluted:
Basic weighted average common shares
outstanding............................ 30,700,000 35,254,735 43,846,922
----------- ----------- -----------
Exchange rights on Special Voting
stock.................................. 7,700,000 N/A 5,157,289
Additional conversion rights of Series B
Voting and Non-Voting common stock..... 2,663,836 N/A --
Net effect of dilutive options using the
treasury stock method.................. 679,136 N/A 5,798,470
----------- ----------- -----------
Subtotal.............................. 11,042,972 N/A 10,955,759
----------- ----------- -----------
Diluted weighted average common shares
outstanding............................ 41,742,972 35,254,735 54,802,682
=========== =========== ===========
Diluted net income (loss) per share..... $ 0.01 $ (0.68) $ 0.11
=========== =========== ===========
</TABLE>
Concentration of credit risk
Financial instruments that potentially subject the Company to interest rate
and credit risk consist principally of cash equivalents, marketable 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 equivalents, and marketable 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.
Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which establishes accounting and reporting standards for derivative
instruments. SFAS No. 133 is effective beginning in 2001. The Company currently
does not use derivative financial products for hedging or speculative purposes
and, as a result, does not anticipate any impact on the financial statements.
In December 1998, the AICPA issued SOP No. 98-9, "Modifications of SOP 97-
2, Software Revenue Recognition, with Respect to Certain Transactions" ("SOP
No. 98-9"). SOP No. 98-9 requires recognition of revenue using the "residual
method" in a multiple-element software arrangement, whereby the total fair
value of undelivered elements is deferred and recognized in accordance with the
provisions of SOP No. 97-2, "Software Revenue Recognition". The Company will be
required to implement the provisions of SOP No. 98-9 beginning in 2000. The
Company does not expect the adoption of SOP No. 98-9 to have a material impact
on its results of operations.
56
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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. Acquisition of r/3/ Security Engineering AG and Acquired
In-Process Research and Development
On June 8, 1998, the Company completed the acquisition of r/3/ Security
Engineering AG ("r/3/"), a company based in Zurich, Switzerland which provides
consulting, applied research and product development services related to
commercial security and encryption solutions. The Company acquired all the
outstanding shares of r/3/ for an aggregate purchase price of $23,774, which
included approximately $4,391 in cash, $17,013 representing 1,167,288 shares
of Redeemable Series A common stock (subsequently converted into Common stock
upon the closing of the Company's initial public offering), approximately $994
in assumed net liabilities and acquisition expenses, and approximately $1,376
of adjustments to the June 8, 1998 opening balance sheet of r/3/ to record the
acquired assets and liabilities at fair value.
This acquisition was accounted for under the purchase method of
accounting. In connection with the purchase price allocation, the Company
obtained an independent appraisal of the intangible assets which indicated
approximately $20,208 of the acquired intangible assets consisted of in-
process product development. The development of these projects had not reached
technological feasibility and the technology had no alternative future use.
Further, management estimated that related development costs would continue to
be incurred and, accordingly, the $20,208 was included as an expense in the
consolidated statement of operations for the year ended December 31, 1998.
Goodwill of $3,566 and $450 was recorded as a result of this acquisition, in
1998 and 1999, respectively.
The following unaudited pro forma data summarize the combined results of
operations in 1998 of Entrust Technologies Inc. and r/3/ as if the acquisition
had taken place as of the beginning of the year, and accordingly, excludes the
$20,208 write-off of in-process research and development in 1998 as it would
have been a charge to beginning retained earnings, and includes a full year of
goodwill amortization.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998
----
<S> <C>
Revenues............................................. $50,589
=======
Net loss............................................. (4,923)
=======
Basic and diluted net loss per share................. (0.14)
=======
</TABLE>
57
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
4. Property and Equipment
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Computer and telecom equipment............................. $ 3,345 $ 4,947
Furniture and fixtures..................................... 1,180 2,146
Leasehold improvements..................................... 1,504 2,143
Internal-use software...................................... 668 1,095
------- -------
6,697 10,331
Less: accumulated depreciation and amortization............ (1,823) (3,984)
------- -------
Subtotal................................................... 4,874 6,347
Assets to be placed in service............................. -- 557
------- -------
Total property and equipment, net.......................... $ 4,874 $ 6,904
======= =======
5. Accrued Liabilities
Accrued liabilities consist of the following:
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Payroll and related benefits............................... $ 3,127 $ 5,095
Withholding taxes payable for stock options exercised...... -- 2,075
Other...................................................... 1,865 1,999
------- -------
$ 4,992 $ 9,169
======= =======
</TABLE>
58
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1997 1998 1999
----- -------- -------
<S> <C> <C> <C>
Income (loss) before income taxes
United States................................... $ 2 $(22,108) $ 4,271
Foreign......................................... 231 (1,880) 3,448
----- -------- -------
$ 233 $(23,988) $ 7,719
===== ======== =======
(Provision) benefit for income taxes
Current:
Federal....................................... $(337) $ 140 $ 21
State and local............................... (76) 79 (70)
Foreign....................................... (49) (202) (176)
----- -------- -------
(462) 17 (225)
----- -------- -------
Deferred:
Federal....................................... 119 (52) (360)
State and local............................... 28 7 (189)
Foreign....................................... 596 188 (318)
----- -------- -------
743 143 (867)
----- -------- -------
Tax equivalent related to non-qualified option
exercises (credited to additional paid-in
capital)..................................... -- -- (708)
----- -------- -------
Total (provision) benefit for income taxes........ $ 281 $ 160 $(1,800)
===== ======== =======
</TABLE>
59
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
A reconciliation between income taxes computed at the federal statutory
rate and income tax (provision) benefit is shown below:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Income tax (provision) benefit at federal
statutory rate................................. $ (79) $ 8,156 $ (2,624)
State and local taxes, net of federal benefits.. (48) 57 (171)
Foreign earnings benefit (tax) at different
rate........................................... 15 80 (226)
Acquired in-process research and development and
other expenses (not deductible) deductible for
tax purposes................................... -- (6,913) 3,314
Foreign research and development tax credits.... 393 -- 1,933
Tax write-off of intercompany investment in and
advances to foreign subsidiary................. -- -- 10,472
Valuation allowances on future benefits of tax
losses and credits available................... -- (1,220) (14,498)
------ ------- --------
Total (provision) benefit for income taxes...... $ 281 $ 160 $ (1,800)
====== ======= ========
</TABLE>
Deferred income taxes represent the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) net operating loss (NOL) and tax credit carry-forwards. The tax effects of
significant items comprising the Company's net deferred tax benefits
(liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Current asset:
Accruals not currently deductible..................... $ 157 $ 256
Deferred income currently taxable..................... 426 597
------- --------
Total............................................... 583 853
------- --------
Non-current asset (liability):
Accelerated depreciation and amortization for tax
purposes............................................. (34) 2,382
United States and Foreign NOL and tax credit
carry-forwards....................................... 2,527 19,446
------- --------
Total............................................... 2,493 21,828
------- --------
Total deferred tax asset................................ 3,076 22,681
Valuation allowance..................................... (2,209) (22,681)
------- --------
Net deferred tax asset.................................. $ 867 $ --
======= ========
</TABLE>
United States and foreign NOL and tax credit carry-forwards include $5,974
at December 31, 1999 related to NOL carry-forwards resulting from the exercise
in 1999 of non-qualified stock options with a corresponding amount included in
the valuation allowance, the tax benefit of which, when recognized, will be
credited to additional paid-in capital.
60
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
As at December 31, 1999, the Company has available the following income tax
carry-forwards to reduce future income tax liabilities:
<TABLE>
<CAPTION>
Period
Amount Expiring
------- ---------
<S> <C> <C>
Net operating losses (tax benefits):
United States............................................ $15,580 2018-2019
Foreign.................................................. 626 2005-2006
-------
16,206
Foreign research and development tax credits............... 3,240 2007-2009
-------
$19,446
=======
</TABLE>
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 the Company's initial public offering. The consolidated financial
statements reflect the increase in the number of authorized shares and these
stock splits, on a retroactive basis.
Concurrent with the closing of the initial public offering on August 21,
1998, each of the 20,314,346 outstanding shares of the Company's Series A
common stock and each of the 1,167,288 outstanding shares of the Company's
Redeemable Series A common stock were automatically converted into one share of
Common stock. Also, the 260,000 outstanding shares of the Company's Series B
(including non-voting) common stock were automatically converted into
13,063,836 shares of Common stock. Furthermore, the majority shareholder of the
Company exercised its option to exchange 2,542,711 shares of the Company's
Special Voting stock into the equivalent number of shares of Common stock.
After this exchange, the remaining number of issued and outstanding Special
Voting shares was 5,157,289.
Common Stock
The holders of 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 Company is authorized to issue up to 100,000,000 shares of Common
stock.
Series A and Series B Common Stock
The holders of Series A and Series B common stock were entitled to one vote
per share and were entitled to dividends when and if declared by the Board of
Directors of the Company. The Series B Non-Voting common stock had the same
rights and privileges as the Series B common
61
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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 were automatically converted
into 13,063,836 shares of Common stock upon completion of the public offering
of the Company's Common stock. Also, the Company's Series A common stock was
converted to Common stock upon completion of the public offering. As of
December 31, 1999, there were no issued and outstanding shares of the Company's
Series A and Series B common stock.
Redeemable Series A Common Stock
The holders of the Redeemable Series A common stock were entitled to the
same rights and privileges as the Series A common stock. The 1,167,288 of these
issued and outstanding shares were converted to an equivalent number of shares
of Common stock upon completion of the public offering of the Company's Common
stock. As of December 31, 1999, there were no issued and outstanding shares of
the Company's Redeemable Series A common stock.
Special Voting Stock
The holders of the Special Voting stock also hold an equivalent number of
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
5,157,289 shares of 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 December 31, 1999, the Company had
not issued any shares of Preferred stock.
8. Stock Options
Employee Stock Option Plans
During the year ended December 31, 1997, the Company's shareholders
approved the 1996 Stock Incentive Plan (the "1996 Plan") applicable to the
Company's full-time employees, officers, directors, and consultants and
authorized 7,228,920 shares of Series A common stock (Common stock following
the Company's public offering) for issuance thereunder. In 1998, the Company's
Board of Directors and shareholders approved increases to 9,600,000 as the
total authorized number of shares available for issuance under the 1996 Plan.
In 1999, the Company's Board of Directors approved the 1999 Non-Officer
Employee Stock Incentive Plan (the "1999 Plan") and authorized 2,500,000 shares
for issuance thereunder. The options under the 1996 Plan and 1999 Plan are
granted at the then-current fair market value of the Series A common stock
(Common stock following the Company's public offering) of the Company and
generally may be exercised in equal proportions over the defined vesting period
for each grant, generally two to four years, and expire on the tenth
anniversary or upon termination of employment.
62
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
A summary of the activity under the 1996 Plan and the 1999 Plan is set
forth below:
<TABLE>
<CAPTION>
Options Outstanding
--------------------
Weighted
Shares Average
Available Number of Exercise
for Grant Shares Price
---------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1996................ -- -- --
Authorized................................ 7,228,920 --
Granted................................... (6,628,800) 6,628,800 $ 2.16
Forfeited................................. 140,720 (140,720) 2.13
---------- ----------
Balance at December 31, 1997................ 740,840 6,488,080 2.16
Authorized................................ 2,371,080 --
Granted................................... (1,673,016) 1,673,016 11.79
Forfeited................................. 121,324 (121,324) 4.44
Exercised................................. -- (18,846) 2.13
---------- ----------
Balance at December 31, 1998................ 1,560,228 8,020,926 4.13
Authorized................................ 2,500,000 --
Granted................................... (2,531,330) 2,531,330 32.85
Forfeited................................. 496,951 (496,951) 11.35
Exercised................................. -- (2,636,482) 3.28
---------- ----------
Balance at December 31, 1999................ 2,025,849 7,418,823 13.76
========== ==========
</TABLE>
The number of outstanding options exercisable into common stock was
3,441,860 at December 31, 1999. The weighted average exercise price of these
exercisable outstanding options was $3.16.
The following table summarizes information concerning currently outstanding
options as at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Number of Weighted Average Average Number of Average
Options Remaining Exercise Options Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.13 to $2.50.......... 3,938,736 7.2 years $ 2.17 3,092,898 $ 2.17
$6.25................... 462,497 8.2 years $ 6.25 165,675 $ 6.25
$9.25 to $17.63......... 426,482 8.6 years $15.58 141,474 $15.77
$19.25 to $26.25........ 1,379,998 9.4 years $21.95 41,813 $21.35
$26.50 to $39.25........ 357,850 9.5 years $31.13 -- N/A
$40.06 to $53.69........ 850,000 10.0 years $49.80 -- N/A
$65.00.................. 3,260 10.0 years $65.00 -- N/A
--------- ---------
7,418,823 3,441,860
========= =========
</TABLE>
63
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in July 1998 and approved by the stockholders
of the Company in August 1998. The Purchase Plan authorized the issuance of up
to a total of 400,000 shares of Common stock to participating employees.
All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries whose customary
employment is more than 20 hours per week and more than five months in any
calendar year are eligible to participate in the Purchase Plan.
Under the terms of the Purchase Plan, the price per share paid by each
participant on the last day of the Offering Period is an amount equal to 90% of
the fair market value of the Common stock on either the first day or the last
day of the Offering Period, whichever is lower. On December 10, 1999, the
Company's Board of Directors made a change in the Purchase Plan to lower the
price per share paid to an amount equal to 85% of the fair market value of the
Common stock on either the first day or last day of the Offering Period,
whichever is lower.
The Purchase Plan terminates on July 21, 2000 or such earlier date as the
Board determines. Upon termination of the Purchase Plan all amounts in the
accounts of participating employees will be promptly refunded.
Stock-based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly,
compensation expense was recognized for its stock-based compensation plans in
the year ended December 31, 1998 because the exercise price of some options
granted in that period were determined, for accounting purposes, to be below
the fair value of the underlying stock as of the grant date for such stock
options. In connection with the granting of these options, the Company recorded
unearned deferred compensation of $784 for the year ended December 31, 1998.
This amount is being amortized over the vesting period of four years from the
date of grant, with $149 and $196 amortized into compensation expense for the
years ended December 31, 1998 and 1999, respectively. For all other options
granted in the periods disclosed, the exercise price of each option granted was
equal to the fair value of the underlying stock at the date of grant. Had
compensation costs for the Company's 1996 Plan and 1999 Plan been determined
based on the fair value of the options at the grant date for awards under the
1996 Plan and 1999 Plan, consistent with the methodology prescribed under
SFAS 123, the Company's net income (loss) and net income (loss) per share would
have been as follows, on a pro forma basis.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss), as reported............... $ 514 $(23,828) $ 5,919
Estimated additional stock based compensation
costs under SFAS 123........................ (1,535) (2,687) (13,464)
-------- -------- --------
Pro forma net income (loss).................. $ (1,021) $(26,515) $ (7,545)
======== ======== ========
Pro forma basic and diluted net income (loss)
per share................................... $ (0.03) $ (0.75) $ (0.17)
======== ======== ========
</TABLE>
64
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
In the pro forma calculations, the weighted average fair value for stock
options granted during 1997, 1998 and 1999 was estimated at $0.66, $5.47 and
$24.97 per option, respectively. The fair value of all options granted prior to
the Company's initial public offering on August 17, 1998 were estimated as of
the date of grant using the minimum value model. The fair value of all options
granted subsequent to the Company's initial public offering were estimated as
of the date of grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used in the calculations.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected option life, in years.................... 6 6 5
Risk free interest rate........................... 6.22% 5.37% 5.69%
Dividend yield.................................... -- -- --
Volatility........................................ -- 108% 98%
</TABLE>
9. Related Party Transactions
Significant related party transactions with the Company's largest
shareholder, Nortel, and affiliated companies, not otherwise disclosed in the
financial statements, include the following:
The Company paid $273 in the year ended December 31, 1997 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, 1997,
1998 and 1999 of $495, $1,916 and $1,453, respectively. Revenues for the years
ended December 31, 1997, 1998 and 1999 include sales to Nortel-affiliated
companies totaling $332, $2,076 and $269, respectively.
During the years ended December 31, 1997, 1998 and 1999, 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, $1,390 and $512 for the years ended December 31,
1997, 1998 and 1999, 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 typically payable net 30 days
from the date of the related intercompany invoice. At December 31, 1998,
accounts receivable included $1,724 related to Nortel. The accounts receivable
at December 31, 1999, related to Nortel, was insignificant.
65
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
10. Commitments and Contingencies
Lease commitments
The Company leases administrative and sales offices and certain property
and equipment under noncancellable operating leases expiring through 2010 with
certain renewal options. Total rent expense under such leases for the years
ended December 31, 1997, 1998 and 1999 were $956, $3,083 and $4,754,
respectively. At December 31, 1999, the future minimum lease payments under
operating leases were as follows:
<TABLE>
<S> <C>
2000................................................................ $ 4,708
2001................................................................ 4,974
2002................................................................ 3,340
2003................................................................ 2,390
Thereafter.......................................................... 13,852
-------
Total future minimum lease payments................................. $29,264
=======
</TABLE>
Legal proceedings
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any such legal matters will have a material
adverse effect on the consolidated results of operations or consolidated
financial position.
On February 19, 1999, Surety Technologies, Inc. ("Surety") filed Civil
Action 99-203 against the Company alleging that the Entrust/Timestamp product
infringed various claims of U.S. Patent Re 34,954 (the "954 Patent"). In a
verdict returned on November 3, 1999, a federal jury found that all of the
claims of the 954 Patent asserted by Surety against the Company were invalid
for reasons of both anticipation and obviousness. As a result of the jury's
decision, Surety's complaint has been dismissed with prejudice. On November 4,
1999, judgment was entered in favor of the Company in the United States
District Court for the Eastern District of Virginia in Civil Action 99-203.
11. Employee Savings Plan
The Company has a defined contribution retirement savings plan covering
substantially all of its full-time employees. This plan qualifies under Section
401(k) of the Internal Revenue Code for participating U.S. based employees. The
Company matches 50% of employee contributions up to 3% of their individual
compensation. Matching contributions made by the Company totaled $183, $383 and
$592 for the years ended December 31, 1997, 1998 and 1999, respectively.
66
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
12. Segment, Geographic and Major Customer Information
Segment information
The Company conducts business in one operating segment; namely, the design,
production and sale of software products and related services for encryption
and digital signature. The nature of the Company's different products and
services is similar and, in general, the type of customers for those products
and services is not distinguishable.
The Company does, however, prepare information for internal use by the
Chief Operating Decision Maker ("CODM"), the President and Chief Executive
Officer, on a geographic basis. Accordingly, under SFAS 131, the Company has
included a summary of the segment financial information reported to the CODM as
follows in the next section regarding geographic information. The Company's
CODM does not view geographic segment results below net income (loss) before
income taxes and, therefore, the provision for income taxes is not broken out
by geographic segment below. The accounting policies of the reportable
geographic segments are the same as those described in the summary of
significant accounting policies.
Geographic information
Revenues are attributed to specific geographical areas based on where the
sales order originated. Long-lived assets and total assets of the Company are
those that are identified with operations in the respective geographic areas.
67
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
The Company operates in three main geographic areas as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenues:
United States................................. $14,978 $ 25,861 $ 55,709
Canada........................................ 8,669 11,832 16,107
Europe, Asia and Other........................ 1,359 11,295 13,398
------- -------- --------
Total revenues.............................. $25,006 $ 48,988 $ 85,214
======= ======== ========
Segment operating income (loss):
United States................................. $ (720) $ (3,297) $ 1,724
Canada........................................ 356 (167) 3,950
Europe, Asia and Other........................ 234 (862) 1,617
------- -------- --------
Total segment operating income (loss)....... (130) (4,326) 7,291
------- -------- --------
Depreciation and amortization expense:
United States................................. 1 410 1,229
Canada........................................ 356 573 1,625
Europe, Asia and Other........................ 3 278 494
------- -------- --------
Total depreciation and amortization......... 360 1,261 3,348
------- -------- --------
Interest income:
United States................................. 723 1,807 3,776
------- -------- --------
Acquired in-process research and development:
United States................................. -- 20,208 --
------- -------- --------
Income (loss) before income taxes:
United States................................. 2 (22,108) 4,271
Canada........................................ -- (740) 2,325
Europe, Asia and Other........................ 231 (1,140) 1,123
------- -------- --------
Total income (loss) before income taxes..... $ 233 $(23,988) $ 7,719
======= ======== ========
<CAPTION>
December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Long-lived assets (generally depreciated
over three to five years):
United States................................. $ 118 $ 4,323 $ 8,493
Canada........................................ 1,540 3,510 5,921
Europe, Asia and Other........................ 40 775 823
------- -------- --------
Total long-lived assets..................... $ 1,698 $ 8,608 $ 15,237
======= ======== ========
Total assets:
United States................................. $18,637 $ 95,110 $107,517
Canada........................................ 4,689 8,244 15,216
Europe, Asia and Other........................ 1,431 4,475 7,787
------- -------- --------
Total....................................... $24,757 $107,829 $130,520
======= ======== ========
</TABLE>
68
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Major customer information
In 1997, three customers accounted for an aggregate of 42% of revenues.
These customers, individually, accounted for 19%, 12% and 11% of revenues,
respectively. In 1998, no individual customer accounted for 10% or more of
revenues. In 1999, a single customer accounted for 24% of revenues, and no
other customers accounted for 10% or more of revenues.
69
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description Form Number
- ------- ----------- ---- ------
2.1* Share Purchase Agreement, dated as of May 30, 1998, as
amended, between the Registrant and Rainer A. Rueppel. S-1 2.3
2.2* Share Purchase Agreement, dated as of May 30, 1998, as
amended, between the Registrant and Invision AG. S-1 2.4
2.3* Form of Share Purchase Agreement between the Registrant
and the minority stockholders of r/3/ Security
Engineering AG. S-1 2.5
3.1* Amended and Restated Articles of Incorporation of the
Registrant. S-1 3.2
3.2* Amended and Restated Bylaws of the Registrant. S-1 3.4
4.1* Specimen certificate for shares of Common Stock,
$.01 par value, of the Registrant. S-1 4.1
10.1* Amended and Restated Registration Rights Agreement,
dated as of July 30, 1998, by and among the
Registrant and certain stockholders. S-1 10.3
10.2* Strategic Alliance Agreement, dated as of December 31,
1996, between the Registrant and Northern Telecom
Limited. S-1 10.5
10.3*# Letter Agreement, dated as of April 21, 1997, between
the Registrant and John A. Ryan. S-1 10.9
10.4*# Letter Agreement, dated as of November 18, 1996,
between Northern Telecom Limited, on behalf of the
Registrant, and Brian O'Higgins. S-1 10.10
10.5*# Letter Agreement, dated as of June 4, 1997, between
the Registrant and Richard D. Spurr. S-1 10.12
10.6*# Letter Agreement, dated as of November 14, 1997,
between the Registrant and Hansen Downer. S-1 10.13
10.7*# Amended and Restated 1996 Stock Incentive Plan. S-1 10.14
10.8* Lease Agreement, dated as of January 28, 1998,
between Colonnade Development Incorporated and
Entrust Technologies Limited. S-1 10.16
<PAGE>
10.9** Standard Office Building Lease Agreement, dated as of
January 19, 1999, between HMS office L.P. and the
Registrant. 10-K 10.16
10.10+# Amendment No. 1 to the 1996 Amended and Restated Stock
incentive Plan. S-3 10.1
10.11+# Release Agreement between Bradley Ross and the
Registrant and Entrust Technologies Limited dated
June 30, 1999. S-3 10.2
10.12+# Letter Agreement dated October 11, 1999 between the
Registrant and David L. Thompson. S-3 10.3
10.13+ Development Agreement dated December 29, 1999 between
Canderel Management Inc. and Entrust Technologies
Limited. S-3 10.4
10.14+ Lease dated December 29, 1999 in Pursuance of the
Short Forms of Lease Act between 786473 Ontario
Limited, Entrust Technologies Limited and the
Registrant. S-3 10.5
10.15+ Lease dated December 29, 1999 by and between 3559807
Canada Inc., Entrust Technologies Limited and the
Registrant. S-3 10.6
21 Subsidiaries of the Registrant. Enclosed
herewith
23.1 Consent of Deloitte & Touche LLP. Enclosed
herewith
27 Financial Data Schedule. Enclosed
herewith
- -----------
* Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-57275).
# Management contract or compensatory plan or arrangement filed in response to
Item 14(a)(3) of the instructions to Form 10-K.
** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (File No. 000-24733).
+ Incorporated herein by reference to the Registrant's Registration Statement
on Form S-3 (File No. 333-95375).
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Legal Address of Jurisdiction of Percentage of
Name Subsidiary Incorporation Ownership
---- ---------- ------------- ---------
<S> <C> <C> <C>
Entrust Technologies Limited 750 Heron Road Ontario 99.999%
Ottawa, ON, Canada
K1V 1A7
Entrust Technologies (UK) Limited 29 The Forbury England 100%
Reading, Berkshire
England, RG1 3oJ
r3 Security Engineering AG 6th Floor, Glatt Tower Switzerland 100%
CH-8301 Glattzontrum
Zurich, Switzerland
Entrust Technologies GMBH Hessenring 119-121 Germany 100%
61348 Bad Homburg
Germany
Entrust Technologies (Switzerland) 6th Floor, Glatt Tower Switzerland 100%
Ltd. Liab. Co. CH-8301 Glattzentrum
Zurich, Switzerland
Entrust.net Limited 750 Heron Road Ontario 100%
Ottawa, ON, Canada
K1V 1A7
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-65245, No. 333-65255 and No. 333-31054 of Entrust Technologies Inc. on Forms
S-8 of our report dated January 28, 2000, appearing in this Annual Report on
Form 10-K of Entrust Technologies Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 21,877
<SECURITIES> 67,394
<RECEIVABLES> 21,817
<ALLOWANCES> (703)
<INVENTORY> 0
<CURRENT-ASSETS> 115,283
<PP&E> 10,888
<DEPRECIATION> 3,984
<TOTAL-ASSETS> 130,520
<CURRENT-LIABILITIES> 27,365
<BONDS> 0
0
0
<COMMON> 452
<OTHER-SE> 102,703
<TOTAL-LIABILITY-AND-EQUITY> 130,520
<SALES> 85,214
<TOTAL-REVENUES> 85,214
<CGS> 15,302
<TOTAL-COSTS> 81,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (50)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,719
<INCOME-TAX> 1,800
<INCOME-CONTINUING> 5,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,919
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.11
</TABLE>
