<PAGE>
As filed with the Securities and Exchange Commission on February 3, 2000
Registration No. 333-95375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ENTRUST TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Maryland 62-1670648
(I.R.S. Employer
(State or other jurisdiction Identification Number)
of incorporation or organization)
----------------
One Preston Park South
4975 Preston Park Blvd., Suite 400
Plano, TX 75093
(972) 943-7300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
JOHN A. RYAN
President and Chief Executive Officer
Entrust Technologies Inc.
One Preston Park South
4975 Preston Park Blvd., Suite 400
Plano, TX 75093
(972) 943-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
JOHN A. BURGESS, ESQ. KEITH F. HIGGINS, ESQ.
JAMES R. BURKE, ESQ. Ropes & Gray
Hale and Dorr LLP One International Place
60 State Street Boston, MA 02110-2624
Boston, Massachusetts 02109 Telephone: (617) 951-7000
Telephone: (617) 526-6000 Telecopy: (617) 951-7050
Telecopy: (617) 526-5000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated February 3, 2000.
8,150,000 Shares
[ENTRUST LOGO APPEARS HERE]
Common Stock
-----------
Entrust Technologies Inc. is offering 1,875,000 of the shares to be sold in
the offering. The selling stockholders identified in this prospectus are
offering an additional 6,275,000 shares. Entrust will not receive any of the
proceeds from the sale of shares being sold by the selling stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"ENTU". The last reported sale price of the common stock on February 2, 2000
was $54.125 per share.
See "Risk Factors" on page 7 to read about factors you should consider before
buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public................................... $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to Entrust..................... $ $
Proceeds, before expenses, to the selling stockholders.... $ $
</TABLE>
To the extent that the underwriters sell more than 8,150,000 shares of common
stock, the underwriters have the option to purchase up to an additional
1,222,500 shares from Entrust and a selling stockholder at the initial price to
public less the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Wit SoundView
-----------
Prospectus dated , 2000.
<PAGE>
[Inside front cover]
The page is divided in half, horizontally across the center. In the top half of
the page, which is further divided into four quarters, the text, "Embracing the
e-business Reality" overlays 4 pictures. In the top left there is a picture of
people walking. In the top right, there is a picture of a sign with an arrow
pointing to the right and the word "Forward" on it. In the bottom right there is
a picture of people walking, and in the bottom left there is a picture of a
woman typing on a laptop computer. In the bottom half of the page is the text,
"Entrust(R) Technologies" below which is the text, "We Bring Trust to e-
Business(TM)". The text overlays a picture of binary code.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about us and our common stock being sold in this offering and our
consolidated financial statements and the notes to those statements appearing
elsewhere in this prospectus.
Our 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.
Our Market Opportunity
The widespread adoption in recent years of public and private networks has
revolutionized the manner in which organizations communicate and conduct
business. Businesses are increasingly relying on these networks to conduct
complex transactions and communicate confidential information, both internally
and with other businesses. However, there are important information security
concerns relating to these electronic interactions, such as the risk of theft,
alteration, interception or dissemination of confidential data, fraud, loss of
reputation and economic loss.
Although a wide range of products, such as firewalls and password tokens,
were introduced to address network security concerns, the limitations inherent
in these solutions led to the development of public-key encryption and digital
certification systems. However, these systems are only partial solutions and do
not address the management and business issues critical to maintaining an
effective security environment. To address these issues, organizations,
particularly those in the B2B market, must have a robust public-key
infrastructure that provides 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, scalable and cost-effective manner.
3
<PAGE>
Our Solution
Our PKI solution provides for the flexible management of network security
features, while offering the complete functionality necessary for full life-
cycle management of public keys and digital certificates. Our products and
services support multiple certificate types and configurations, including:
. multi-application certificates for use across a wide range of
applications;
. Web certificates for secure Web transactions;
. virtual private networking certificates, or VPN certificates, for secure
network communications; and
. wireless certificates for devices such as cellular telephones and pagers.
Our products can support large numbers of simultaneous users, while
seamlessly performing complex certification and key management functions that
allow organizations to significantly reduce their overall costs for addressing
security requirements.
Our 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;
. pursue wireless opportunities;
. maintain product leadership and increase brand recognition;
. expand and leverage strategic relationships;
. further penetrate B2C market; and
. leverage global presence.
Our History
We were originally established in January 1994 as the Secure Networks group
of Nortel Networks Corporation and its subsidiary, Nortel Networks Inc., to
pursue the development and sale of PKI products and services, and were
incorporated as a Maryland corporation in December 1996. Our principal
executive offices are located at One Preston Park South, 4975 Preston Park
Boulevard, Suite 400, Plano, Texas 75093, and our telephone number at that
location is (972) 943-7300. We also have offices in Canada, the United Kingdom,
Switzerland, Germany and Japan, as well as additional offices in the United
States.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by Entrust....................... 1,875,000 shares
Shares offered by the selling stockholders...... 6,275,000 shares
Shares to be outstanding after this offering.... 52,385,737 shares
Nasdaq National Market symbol................... ENTU
Use of proceeds................................. Working capital and other
general corporate purposes,
including product development
and possible acquisitions and
strategic investments
</TABLE>
The number of shares of our common stock that will be outstanding after
this offering is based on the number outstanding on December 31, 1999. This
number excludes an aggregate of 7,268,653 shares of common stock that were
subject to outstanding options as of December 31, 1999 at a weighted average
exercise price of $14.00 per share.
----------------
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 prospectus are the property of their respective
owners.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues............................. $12,802 $25,006 $ 48,988 $85,214
Gross profit............................... 9,252 20,090 39,457 69,912
Income (loss) from operations.............. 56 (490) (25,795) 3,943
Net income (loss).......................... 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 to compute net income (loss)
per basic share........................... 30,700 35,255 43,847
Shares used to compute net income (loss)
per diluted share......................... 41,743 35,255 54,803
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
-------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and marketable investments............................ $ 89,271 $186,138
Working capital............................................ 87,918 184,785
Total assets............................................... 130,520 227,387
Shareholders' equity....................................... 103,155 200,022
</TABLE>
The consolidated financial statements as of and for the year ended December
31, 1999 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation. The as adjusted balance sheet data give effect to our receipt of
the estimated net proceeds from the sale of 1,875,000 shares of common stock in
this offering, at an assumed offering price of $54.125 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses.
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the risks and uncertainties described below and the other information in this
prospectus, including our consolidated financial statements and related notes,
before deciding to invest in shares of our common stock. If any of the
following risks or uncertainties actually occurs, our business, financial
condition and operating results would likely suffer. In that event, the market
price of our common stock could decline and you could lose all or part of the
money you paid to buy our common stock.
Risks Relating To Our Financial Condition and Business Model
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.
7
<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 23% 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.
Risks Relating to Our Markets, Products and Strategy
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.
8
<PAGE>
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.
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.
9
<PAGE>
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.
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;
10
<PAGE>
. 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.
Risks Relating to Legal Uncertainty
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
11
<PAGE>
. 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.
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, whose sale to VeriSign,
Inc., one of our primary competitors, is pending. 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.
Risks Relating to this Offering
Our management may invest or spend the proceeds of this offering in ways which
may not benefit the business
Our management will retain broad discretion to allocate the proceeds of
this offering. Management's failure to apply these funds effectively could have
an adverse effect on our ability to implement our strategy.
Our stock price is volatile and may continue to be volatile in the future,
which could result in substantial losses for investors purchasing shares in
this offering
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;
12
<PAGE>
. 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 will be 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
Upon completion of this offering, Nortel Networks Corporation, directly and
indirectly through its subsidiary, Nortel Networks Inc., will beneficially own
approximately 33.3% of our outstanding voting stock, and two of our eight
directors will be representatives of Nortel Networks. Accordingly, Nortel
Networks will continue to have 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 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning our business,
operations and financial condition. You can identify these statements by words
such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates" and similar expressions. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this prospectus.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other "forward-
looking" information. Before you invest in our common stock, you should be
aware that the occurrence of any of the events described in these risk factors
and elsewhere in this prospectus could substantially harm our business, results
of operations and financial condition and that upon the occurrence of any of
these events, the trading price of our common stock could decline, and you
could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance or
achievements. We undertake no obligation to update any of the forward-looking
statements in this prospectus after the date of this prospectus.
13
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $96.5
million from our sale of 1,875,000 shares of common stock in this offering, at
an assumed public offering price of $54.125 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $112.4 million. We will
not receive any proceeds from the sale of shares of common stock by the selling
stockholders.
We intend to use the net proceeds of this offering for working capital and
other general corporate purposes, including product development. We may also
use a portion of the net proceeds to acquire or invest in complementary
companies, product lines, products or technologies. Except as described below,
we do not have any agreements or commitments with respect to any acquisition or
investment and we are not involved in any negotiations with respect to any
acquisition or investment. We are currently in negotiations to acquire a
professional services firm for up to $16.0 million in cash. Any acquisition is
subject to the execution of a definitive purchase agreement and customary
closing conditions. Pending the use of net proceeds described above, we intend
to invest net proceeds in short-term, investment grade, interest-bearing
securities.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
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
2000
----
First Quarter (through February 2, 2000)...................... $64.75 $44.25
</TABLE>
On February 2, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $54.125 per share. As of the close of business
on February 2, 2000, we had 114 holders of record of our common stock and one
holder of record of our special voting stock.
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".
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis; and
. on an as adjusted basis to reflect:
(a) our receipt of the estimated net proceeds from the sale of
1,875,000 shares of common stock, based upon an assumed public
offering price of $54.125 per share, and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us;
(b) the issuance of 150,000 shares of common stock upon the exercise of
stock options held by certain selling stockholders; and
(c) the issuance of 5,157,289 shares of common stock upon the surrender
of a like number of shares of our special voting stock by Nortel
Networks Corporation upon the closing of this offering.
This information excludes 7,268,653 shares of common stock that were
subject to outstanding options, as of December 31, 1999, at a weighted average
exercise price of $14.00 per share.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Actual As Adjusted
------------- ----------------
(in thousands, except share
and per share data)
<S> <C> <C>
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, no shares issued or
outstanding.................................. $ -- $ --
Common stock, $.01 par value; 100,000,000
shares authorized; 45,203,448 shares issued
and outstanding, actual; 52,385,737 shares
issued and outstanding, as adjusted.......... 452 524
Special voting stock, $.01 par value;
15,000,000 shares authorized; 5,157,289
shares issued and outstanding, actual; no
shares issued or outstanding, as adjusted.... 52 --
Additional paid-in capital...................... 122,883 219,730
Unearned deferred compensation and other........ (974) (974)
Accumulated deficit............................. (19,258) (19,258)
------------- -------------
Total shareholders' equity...................... 103,155 200,022
------------- -------------
Total capitalization.......................... $ 103,155 $200,022
============= =============
</TABLE>
15
<PAGE>
RECENT FINANCIAL RESULTS
On January 18, 2000, we announced the following unaudited condensed
consolidated financial data for the three months and years ended December 31,
1998 and 1999 and as of December 31, 1998 and 1999. In the opinion of
management, the unaudited condensed consolidated financial data presented below
have been prepared on a basis consistent with our audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations for those periods. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", "Selected Consolidated Financial Data" and our
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, December 31,
----------------------- -------------------
1998 1999 1998 1999
----------- ----------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations:
Revenues:
License.......................... $ 11,133 $ 19,426 $ 36,773 $ 61,482
Services and maintenance......... 3,878 6,585 12,215 23,732
---------- ---------- --------- --------
Total revenues................... 15,011 26,011 48,988 85,214
---------- ---------- --------- --------
Cost of revenues:
License.......................... 666 874 1,985 2,286
Services and maintenance......... 2,348 3,540 7,546 13,016
---------- ---------- --------- --------
Total cost of revenues........... 3,014 4,414 9,531 15,302
---------- ---------- --------- --------
Gross profit:
License.......................... 10,467 18,552 34,788 59,196
Services and maintenance......... 1,530 3,045 4,669 10,716
---------- ---------- --------- --------
Total gross profit............... 11,997 21,597 39,457 69,912
---------- ---------- --------- --------
Operating expenses:
Sales and marketing.............. 8,464 12,043 26,802 40,900
Research and development......... 3,814 4,494 12,840 16,605
General and administrative....... 1,419 2,383 5,046 7,752
Acquired in-process R&D and
goodwill amortization........... 178 178 20,564 712
---------- ---------- --------- --------
Total operating expenses......... 13,875 19,098 65,252 65,969
---------- ---------- --------- --------
Income (loss) from operations..... (1,878) 2,499 (25,795) 3,943
Interest income................... 1,073 1,043 1,807 3,776
---------- ---------- --------- --------
Income (loss) before income
taxes............................ (805) 3,542 (23,988) 7,719
(Provision) benefit for income
taxes............................ -- (873) 160 (1,800)
---------- ---------- --------- --------
Net income (loss)................. $ (805) $ 2,669 $ (23,828) $ 5,919
========== ========== ========= ========
Net income (loss) per share
Basic............................ $ (0.02) $ 0.06 $ (0.68) $ 0.13
Diluted.......................... $ (0.02) $ 0.05 $ (0.68) $ 0.11
Weighted average common shares
used in per share computation:
Basic............................ 42,491 44,876 35,255 43,847
Diluted.......................... 42,491 55,416 35,255 54,803
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Assets
Cash and marketable investments............................. $ 81,067 $ 89,271
Accounts receivable, net of allowance for doubtful
accounts................................................... 14,013 21,817
Other current assets........................................ 3,096 4,195
Long-term marketable investment............................. -- 2,405
Property and equipment, net................................. 4,874 6,904
Other long-term assets...................................... 4,779 5,928
-------- --------
Total assets............................................... $107,829 $130,520
======== ========
Liabilities And Shareholders' Equity
Accounts payable and accruals............................... $ 12,211 $ 15,805
Deferred income............................................. 7,791 10,761
Due to related party........................................ 768 799
-------- --------
Total liabilities.......................................... 20,770 27,365
Shareholders' equity........................................ 87,059 103,155
-------- --------
Total liabilities and shareholders' equity................. $107,829 $130,520
======== ========
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended December 31, 1996, 1997 and 1998 and as of December 31, 1997 and 1998 are
derived from our consolidated financial statements, which appear elsewhere in
this prospectus, and which have been audited by Deloitte & Touche LLP. The
selected consolidated financial data set forth below for the years ended
December 31, 1994 and 1995 and as of December 31, 1994, 1995 and 1996 are
derived from our audited consolidated financial statements, which are not
included in this prospectus. The selected consolidated financial data for the
nine months ended September 30, 1998 and 1999 are derived from our unaudited
consolidated financial statements which appear elsewhere in this prospectus. In
the opinion of management, the unaudited consolidated financial statements have
been prepared on a basis consistent with our audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our results of operations for
those periods. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Recent Financial Results" and our consolidated financial
statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- -------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
License................ $1,194 $ 1,845 $ 8,689 $16,486 $ 36,773 $ 25,640 $ 42,056
Services and
maintenance........... 2,687 2,128 4,113 8,520 12,215 8,337 17,147
------ ------- ------- ------- -------- --------- --------
Total revenues......... 3,881 3,973 12,802 25,006 48,988 33,977 59,203
------ ------- ------- ------- -------- --------- --------
Cost of revenues:
License................ 6 34 393 502 1,985 1,319 1,412
Services and
maintenance........... 1,179 950 3,157 4,414 7,546 5,198 9,476
------ ------- ------- ------- -------- --------- --------
Total cost of
revenues.............. 1,185 984 3,550 4,916 9,531 6,517 10,888
------ ------- ------- ------- -------- --------- --------
Gross profit............ 2,696 2,989 9,252 20,090 39,457 27,460 48,315
------ ------- ------- ------- -------- --------- --------
Operating expenses:
Sales and marketing.... 1,083 1,914 3,858 11,193 26,802 18,338 28,857
Research and
development........... 898 2,287 2,874 5,692 12,840 9,026 12,111
General and
administrative........ 688 1,212 2,464 3,695 5,046 3,627 5,369
Acquired in-process R&D
and goodwill
amortization.......... -- -- -- -- 20,564 20,386 534
------ ------- ------- ------- -------- --------- --------
Total operating
expenses.............. 2,669 5,413 9,196 20,580 65,252 51,377 46,871
------ ------- ------- ------- -------- --------- --------
Income (loss) from
operations............. 27 (2,424) 56 (490) (25,795) (23,917) 1,444
Interest income......... -- -- -- 723 1,807 734 2,733
------ ------- ------- ------- -------- --------- --------
Income (loss) before
income taxes........... 27 (2,424) 56 233 (23,988) (23,183) 4,177
(Provision) benefit for
income taxes........... 111 301 331 281 160 160 (927)
------ ------- ------- ------- -------- --------- --------
Net income (loss)....... $ 138 $(2,123) $ 387 $ 514 $(23,828) $ (23,023) $ 3,250
====== ======= ======= ======= ======== ========= ========
Net income (loss) per
basic share............ $ 0.02 $ (0.68) $ (0.70) $ 0.07
Net income (loss) per
diluted share.......... $ 0.01 $ (0.68) $ (0.70) $ 0.06
Shares used in basic per
share computation...... 30,700 35,255 32,843 43,504
Shares used in diluted
per share computation.. 41,743 35,255 32,843 54,598
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ -- $ -- $ -- $12,638 $ 81,067 $ 85,252
Working capital
(deficit).............. 1,831 1,016 (1,186) 13,707 77,438 83,798
Total assets............ 2,231 2,190 3,687 24,757 107,829 122,176
Shareholders' equity
(deficit).............. 2,095 1,672 (60) 14,662 87,059 97,478
</TABLE>
17
<PAGE>
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 Consolidated
Financial Data" and our consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. 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 "Risk Factors" and elsewhere in this prospectus.
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.
We recognize revenues in accordance with the provisions of the American
Institute of Certified Public Accountants' Statement of Position 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.
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.
18
<PAGE>
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.
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>
Nine Months Ended
Year Ended December 31, September 30,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
License.................... 67.9% 65.9% 75.1 % 75.5 % 71.0 %
Services and maintenance... 32.1 34.1 24.9 24.5 29.0
------- ------- ------- -------- --------
Total revenues........... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- -------- --------
Cost of revenues:
License.................... 3.0 2.0 4.1 3.9 2.4
Services and maintenance... 24.7 17.7 15.4 15.3 16.0
------- ------- ------- -------- --------
Total cost of revenues... 27.7 19.7 19.5 19.2 18.4
------- ------- ------- -------- --------
Gross profit................. 72.3 80.3 80.5 80.8 81.6
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing........ 30.1 44.8 54.7 54.0 48.7
Research and development... 22.4 22.7 26.2 26.5 20.5
General and
administrative............ 19.3 14.7 10.3 10.7 9.1
Acquired in-process
research and development
and goodwill
amortization.............. -- -- 42.0 60.0 0.9
------- ------- ------- -------- --------
Total operating
expenses................ 71.8 82.2 133.2 151.2 79.2
------- ------- ------- -------- --------
Income (loss) from
operations.................. 0.5 (1.9) (52.7) (70.4) 2.4
Interest income.............. -- 2.9 3.7 2.2 4.6
------- ------- ------- -------- --------
Income (loss) before income
taxes....................... 0.5 1.0 (49.0) (68.2) 7.0
(Provision) benefit for
income taxes................ 2.5 1.1 0.3 0.5 (1.5)
------- ------- ------- -------- --------
Net income (loss)............ 3.0% 2.1% (48.7)% (67.7)% 5.5 %
======= ======= ======= ======== ========
</TABLE>
Nine Months Ended September 30, 1998 and 1999
Revenues
Total Revenues. Total revenues increased 74% from $34.0 million for the
nine months ended September 30, 1998 to $59.2 million for the nine months ended
September 30, 1999. Total revenues derived from North America increased 94%
from $26.1 million for the nine months ended September 30, 1998 to $50.7
million for the nine months ended September 30, 1999, while total revenues
derived from outside of North America increased 8% from $7.9 million for the
nine months
19
<PAGE>
ended September 30, 1998 to $8.5 million for the nine months ended September
30, 1999. Although the majority of the overall growth in total revenues in 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.
License Revenues. License revenues increased 64% from $25.6 million for the
nine months ended September 30, 1998 to $42.1 million for the nine months ended
September 30, 1999, representing 76% and 71% of total revenues in the
respective periods. 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 organization; and
. sales to new industry segments.
The decrease in license revenues as a percentage of total revenues was
primarily a result of the increasing support revenue stream and increased
demand for consulting services.
Services and Maintenance Revenues. Services and maintenance revenues
increased 106% from $8.3 million for the nine months ended September 30, 1998
to $17.1 million for the nine months ended September 30, 1999, representing 25%
and 29% of total revenues in the respective periods. Services and maintenance
revenues have continued to increase in absolute dollars and as a percentage of
total revenues as our installed customer base has grown and as these customers
continue to renew their maintenance agreements. In addition, our increasing
customer base has resulted in an acceleration of 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 increased from $1.3
million for the nine months ended September 30, 1998 to $1.4 million for the
nine months ended September 30, 1999, representing 4% and 2% of total revenues
for the respective periods. While the cost of license revenues was relatively
flat for the first nine months of 1999 compared to the first nine months of
1998, the decrease in cost of license revenues as a percentage of total
revenues for the nine months ended September 30, 1999 was primarily the result
of a shift in the mix of third-party software vendor products sold in the first
three quarters of 1999 compared to the same period in 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 increased 83% from $5.2 million for the nine months ended September
30, 1998 to $9.5 million for the nine months ended September 30, 1999,
representing 15% and 16% of total revenues for the respective periods. The
increase in costs in absolute dollars and as a percentage of total revenues
during the nine months ended September 30, 1999 reflected the increased costs
associated with the increased levels of services and maintenance revenues
experienced during the period.
20
<PAGE>
The gross margin with respect to services and maintenance revenues was 38%
and 45% for the nine months ended September 30, 1998 and 1999, respectively.
This increase in the services and maintenance margin reflected the shift in the
mix of services revenue toward higher-margin maintenance revenues. In addition,
the services personnel hired in 1998 were achieving higher productivity levels.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $18.3
million for the nine months ended September 30, 1998 to $28.9 million for the
comparable period in 1999. Sales and marketing expenses represented 54% of
total revenues for the nine months ended September 30, 1998, compared to 49%
for the comparable period in 1999. The increase in absolute dollars was
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 the first three quarters of 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 reflects 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
$9.0 million for the nine months ended September 30, 1998 to $12.1 million for
the comparable period in 1999. Research and development expenses represented
27% of total revenues for the nine months ended September 30, 1998, compared to
21% for the comparable period in 1999. The increased investment in research and
development expenses in absolute dollars reflects 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 Security Engineering AG in June 1998.
The investment in research and development as a percentage of total revenues
decreased for the nine months ended September 30, 1999 compared to the same
period in 1998, as a result of growth of revenues outpacing our expansion of
the 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.
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed", we have evaluated the establishment of technological feasibility of
our various products during the development phase. The time period during which
costs could be capitalized from the point of reaching technological
feasibility, which has been defined as development of a beta model, until the
time of general product release is very short and, consequently, the amounts
that could be capitalized are not material to our financial position or results
of operations. Therefore, we charged all product development expenses to
operations in the period incurred.
General and Administrative. General and administrative expenses increased
from $3.6 million for the nine months ended September 30, 1998 to $5.4 million
for the comparable period in 1999. General and administrative expenses
represented 11% of total revenues for the nine months ended September 30, 1998,
compared to 9% for the comparable period in 1999. The increase in general and
administrative expenses in absolute dollars reflected our continued investment
in
21
<PAGE>
increased staffing and related expenses for the enhancement of the
infrastructure necessary to support our growing business, including 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, which provides consulting, applied research and product
development services related to commercial security and encryption solutions.
In connection with the acquisition in 1998, an appraisal was done of the
intangible assets, resulting 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 the nine months ended September 30,
1998. We recorded $534,000 of amortization with respect to the goodwill that
arose as a result of this acquisition in the nine months ended September 30,
1999, compared to $178,000 for the nine months ended September 30, 1998.
Interest Income
Interest income increased from $734,000 for the nine months ended September
30, 1998 to $2.7 million for the comparable period in 1999. This increase
reflects the investment income earned on the net proceeds of our initial public
offering in August 1998 and on cash provided by operations in 1999.
Provision for Income Taxes
We recorded an income tax provision of $927,000 for the nine months ended
September 30, 1999 compared with an income tax benefit of $160,000 recognized
for the nine months ended September 30, 1998. We account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109.
Accordingly, the effective income tax rates differed from statutory rates due
to an adjustment to the valuation allowance for net operating loss
carryforwards from prior periods in the first three quarters of 1999, which
resulted in a tax provision of $927,000 for the nine months ended September 30,
1999. For the nine months ended September 30, 1998, the tax benefit of $160,000
arose primarily from Canadian research and development tax credits.
Years Ended December 31, 1996, 1997 and 1998
Revenues
Total Revenues. Total revenues increased 95% from $12.8 million in 1996 to
$25.0 million in 1997 and increased 96% to $49.0 million in 1998.
Geographically, revenues derived from sales outside North America accounted for
4%, 5% and 23% of total revenues for the years ended December 31, 1996, 1997
and 1998, respectively. We invested significantly in expanding our
international operations in 1998 through the acquisition of r3, the formation
of Entrust Japan, and the hiring of additional sales and marketing personnel.
In 1996, three customers accounted for an aggregate of 64% of revenues for that
year, and individually these customers accounted for 29%, 20% and 15% of
revenues, respectively. 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.
License Revenues. License revenues increased 90% from $8.7 million in 1996
to $16.5 million in 1997 and increased 123% to $36.8 million in 1998,
representing 68%, 66% and 75% of total revenues in the respective years. The
increase in license revenues in absolute dollars was
22
<PAGE>
primarily due to increasing market awareness and acceptance of our product
offerings, additional product development and increased sales and marketing
activities. The increase in license revenues as a percentage of total revenues
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.
Services and Maintenance Revenues. Services and maintenance revenues
increased 107% from $4.1 million in 1996 to $8.5 million in 1997 and increased
44% to $12.2 million in 1998, representing 32%, 34% and 25% of total revenues
in the respective periods. The increase in services and maintenance revenues
was primarily the result of an increase in demand for consulting services and
customer support, and 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.
Cost of Revenues
Cost of License Revenues. Cost of license revenues was $393,000 in 1996,
$502,000 in 1997, and $2.0 million in 1998, representing 3%, 2% and 4% 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.
We incorporated a higher level of third-party software in our products in 1998.
Cost of Services and Maintenance Revenues. Cost of services and maintenance
revenues was $3.2 million in 1996, $4.4 million in 1997 and $7.5 million in
1998, representing 25%, 18% 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 1997.
The decrease as a percentage of total revenues 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 and 1996 (79% in 1998 compared to
90% in 1997 and 89% in 1996) reflected the cost of hardware components related
to system integration arrangements during those years. We did not have a
significant hardware component of our system integration arrangements in 1998.
Services and maintenance gross profit as a percentage of services and
maintenance revenues was 48% in 1997 and 38% for 1998. This decrease in the
services and maintenance margin reflected the investment made during 1998 in
expanding our customer 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.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $3.9
million in 1996 to $11.2 million in 1997 and $26.8 million in 1998,
representing 30%, 45% and 55% of total revenues in the respective periods.
These increases in absolute dollars and as a percentage of total revenues were
primarily the result of costs associated with the expansion of our sales and
marketing organization to support increased revenue targets, both domestically
and internationally. We have continued our strategy of investing in hiring and
training our direct sales organization in anticipation of future market growth,
and investing in marketing efforts in support of new products launches.
23
<PAGE>
Failure of these investments to generate future revenues could have a
significant adverse effect on our operations.
Research and Development. Research and development expenses increased from
$2.9 million in 1996 to $5.7 million in 1997 and $12.8 million in 1998,
representing 22%, 23% and 26% 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 in 1997 and 1998 primarily reflected
higher expenses related to increased staffing of software engineers and
contractors. These employees were added in connection with the continuing
expansion and enhancement of our product offerings and our commitment to
quality assurance and testing. In addition, the acquisition of r3 in June 1998
increased the size of our global research and development team.
General and Administrative. General and administrative expenses increased
from $2.5 million in 1996 to $3.7 million in 1997 and $5.0 million in 1998,
representing 19%, 15% and 10% of total revenues in the respective periods. The
increase in general and administrative expenses in absolute dollars reflected
our continued investment in increased staffing and related expenses to enhance
the infrastructure required to support our growth, including investor relation
programs, improved management information systems and support and outside
professional service firms.
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
in exchange for an aggregate of 1,167,288 shares of our common stock and cash
consideration of approximately $4.4 million. This acquisition was recorded
under the purchase 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, 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, which was expensed
in the year ended December 31, 1998. In addition, $356,000 of amortization had
been recorded with respect to the goodwill that arose as a result of this
acquisition in 1998.
Interest Income
Interest income increased to $723,000 in 1997 and $1.8 million in 1998,
representing 3% and 4% of total revenues in the respective periods. Interest
income was not significant in 1996. The increase in interest income in 1998
reflected the interest earned on the net proceeds of the initial public
offering in August 1998, while the increase in interest income in 1997
represented interest earned on the net proceeds of the private placement of
shares in January 1997.
Provision for Income Taxes
We recorded income tax benefits of $331,000, $281,000 and $160,000 in 1996,
1997 and 1998, respectively. Income taxes are accounted for in accordance with
Statement of Accounting Standards No. 109. The effective income tax rates
differed from the statutory rates primarily due to the impact of the Canadian
research and development tax credits claimed.
24
<PAGE>
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 its 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.
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 prospectus. The operating results
for any quarter are not necessarily indicative of results for any future
period.
25
<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
-------- -------- --------- -------- -------- -------- --------- --------
(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>
26
<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
On January 18, 2000, we announced our results for the fourth quarter and
twelve months ended December 31, 1999.
Revenues for the fourth quarter of 1999 increased to $26.0 million from
$15.0 million for the fourth quarter of 1998, an overall increase of 73%.
License revenues of $19.4 million in the fourth quarter of 1999 increased by
75% from $11.1 million during the comparable period in 1998. Services and
maintenance revenues in the fourth quarter of 1999 increased to $6.6 million
from $3.9 million for the comparable period in 1998, an increase of 69%. Net
income for the fourth quarter of 1999 was $2.7 million, representing $0.05 per
diluted share. The $0.05 per share compares to a net loss of $(805,000),
representing a net loss of $(0.02) per basic share in the fourth quarter of
1998.
Total 1999 revenues of $85.2 million increased by 74% from $49.0 million in
1998. License revenues increased by 67% to $61.5 million in 1999, compared with
$36.8 million for 1998. Services and maintenance revenues in 1999 increased by
94% to $23.7 million, compared with $12.2 million for 1998. Net income of $5.9
million for 1999 generated $0.11 per diluted share, compared to a net loss of
$(3.6 million), or $(0.10) per basic share, for 1998, which excludes acquired
in-process research and development write-offs. Including the $20.2 million of
acquired in-process research and development write-offs, the 1998 net loss
increased to $(23.8 million), resulting in a net loss of $(0.68) per basic
share. In 1999, revenues from our three largest customers totaled 31% of
revenues, with the largest customer accounting for 23% of revenues.
27
<PAGE>
Liquidity and Capital Resources
We generated cash of $4.2 million from operating activities during the nine
months ended September 30, 1999. This cash inflow was primarily a result of an
increase in accrued liabilities and deferred income and the net income achieved
over the period. 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 for the quarter ended
September 30, 1999 was 72 days, which represents an increase over the 58 days
that we reported for the second quarter, but a reduction over the 84 days we
reported in the three quarters previous to that. The overall decrease in days
sales outstanding from the first quarter of 1999 reflects the improved
collection efforts over the quarters 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 nine months ended September 30, 1999, cash from investing
activities of $5.5 million was provided by the reduction of our short-term
investments by $10.2 million, net of $87.6 million of short-term investment
purchases, offset by investments of $3.1 million in property and equipment and
$1.5 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.
Cash provided by financing activities for the nine months ended September
30, 1999 was $7.0 million, primarily due to the exercise of employee stock
options and the sale of shares under our employee stock purchase plan.
As of September 30, 1999, our cash and short-term investments in the amount
of $85.3 million comprised our principal sources of liquidity. 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.
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.
28
<PAGE>
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 market 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 September 30, 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 September 30, 1999, that
would have been subject to market risk, and the related ranges of maturities as
of that date:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 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 $ -- $ -- $12,002 $ -- $ --
Investments classified
as marketable
investments............ 27,800 45,191 4,364 11,969 24,381 30,850
------- ------- ------ ------- ------- -------
Total................. $27,909 $45,191 $4,364 $23,971 $24,381 $30,850
======= ======= ====== ======= ======= =======
Fair Value.............. $27,909 $45,191 $4,364 $23,971 $24,381 $30,850
======= ======= ====== ======= ======= =======
</TABLE>
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.
29
<PAGE>
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.
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
30
<PAGE>
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.
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.
31
<PAGE>
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 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.
32
<PAGE>
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
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.
33
<PAGE>
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.
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.
34
<PAGE>
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 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
35
<PAGE>
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;
. 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.
36
<PAGE>
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.
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.
37
<PAGE>
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.
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
38
<PAGE>
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
. 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.
39
<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
. monitoring and assessment systems.
40
<PAGE>
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 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.
41
<PAGE>
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 expect to make
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 Royal Canadian
Lavoro Interpay Mounted Police
Bell Emergis J.P. Morgan SECOM
Canadian Dept. of Kansas Bureau of S.W.I.F.T.
National Defense Investigation Schlumberger
Citibank Lucent Technologies Science
Columbia/HCA Healthcare MCI Worldcom Applications
Corporation NASA International
Digital Medical Systems Nortel Networks United Kingdom Post
FDIC Royal Bank of Office
FedEx Scotland U.S. Coast Guard
Government of Ontario U.S. Patent and
Trade Office
U.S. Postal Service
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 23% 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.
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.
42
<PAGE>
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.
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
43
<PAGE>
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 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
44
<PAGE>
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 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 enduser or enduse. 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.
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 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.
45
<PAGE>
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. See "Risk Factors".
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.
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.
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.
46
<PAGE>
MANAGEMENT
Executive Officers and Directors
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
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>
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.
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,
47
<PAGE>
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.
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.
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
48
<PAGE>
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.
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.
49
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of December 31, 1999, and as adjusted to reflect the sale of the shares
offered by this prospectus, by the selling stockholders.
The number of shares beneficially owned by each selling stockholder is
determined in accordance with SEC rules, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the person has sole or
shared voting power or investment power and also any shares which the person
has the right to acquire within 60 days after December 31, 1999 through the
exercise of any stock option or other right. The inclusion of such shares in
the table below, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole voting
power and investment power, or shares such power with his or her spouse, with
respect to all shares of capital stock listed as owned by such person or
entity.
<TABLE>
<CAPTION>
Shares Beneficially Shares to Be
Owned Beneficially Owned
Prior to Offering After Offering
-----------------------Shares to Be ------------------
Name of Selling Stockholder Number Percent Sold Number Percent
- --------------------------- ------------ ---------------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Nortel Networks
Corporation(1)......... 23,567,789 46.8% 6,125,000 17,442,789 33.3%
John A. Ryan(2)......... 942,103 2.0% 125,000 817,103 1.5%
Richard D. Spurr(3)..... 183,000 * 25,000 158,000 *
</TABLE>
- --------
* less than 1%
(1) The 23,567,789 shares beneficially owned by Nortel Networks Corporation
consist of (a) 18,410,500 shares of common stock held of record by Nortel
Networks Inc., a wholly owned subsidiary of Nortel Networks Corporation, and
(b) 5,157,289 shares of common stock issuable upon the exchange of 5,157,289
exchangeable shares of Entrust Technologies Limited, a majority-owned
subsidiary, held by Nortel Networks Corporation. Nortel Networks Corporation
also holds 5,157,289 shares of special voting stock. At any time prior to
December 31, 2006, Nortel Networks Corporation may exchange one exchangeable
share, together with one share of special voting stock, for one share of our
common stock. The number of shares of common stock offered for sale consists of
(a) 5,157,289 shares of common stock issuable upon the exchange of the
exchangeable shares of Entrust Technologies Limited held by Nortel Networks
Corporation and (b) 967,711 shares of common stock held by Nortel Networks Inc.
Nortel Networks Corporation has sole voting and investment power with respect
to the shares of common stock held by Nortel Networks Inc. In addition to the
number of shares shown as offered for sale in the table, Nortel Networks
Corporation has granted the underwriters an option to purchase up to an
additional 916,875 shares pursuant to the underwriters' over-allotment option.
In the event the underwriters' over-allotment option is exercised in full,
Nortel Networks Corporation will beneficially own 16,525,914 shares, or 31.4%
after the offering.
(2) Includes 936,037 shares issuable pursuant to options.
(3) Consists of 183,000 shares issuable pursuant to options.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Ropes & Gray, Boston,
Massachusetts, has represented the underwriters.
50
<PAGE>
EXPERTS
The financial statements included in this prospectus as of December 31,
1997 and 1998 and for each of the three years in the period ended December 31,
1998 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm, given upon their authority as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other documents with the Securities
and Exchange Commission. You may read and copy any document we file at the
SEC's public reference room at Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available to
you on the SEC's Internet site at http://www.sec.gov.
This prospectus is part of a registration statement that we filed with the
SEC. The registration statement contains more information than this prospectus
regarding us and our common stock, including certain exhibits and schedules.
You can obtain a copy of the registration statement from the SEC at the
addresses listed above or from the SEC's Internet site.
The SEC allows us to "incorporate" into this prospectus information that we
file with the SEC in other documents. This means that we can disclose important
information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be part
of this prospectus. Information contained in this prospectus and information
that we file with the SEC in the future and incorporate by reference in this
prospectus automatically updates and supersedes previously filed information.
We are incorporating by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 prior to the sale of all the shares covered by
this prospectus:
. Our Annual Report on Form 10-K for the year ended December 31, 1998,
filed with the SEC on March 30, 1999;
. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
filed with the SEC on May 17, 1999;
. Our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
filed with the SEC on August 13, 1999;
. Our Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, filed with the SEC on November 12, 1999;
. Our Proxy Statement dated April 16, 1999, relating to our 1999 Annual
Meeting of Stockholders;
. The description of our common stock contained in our Registration
Statement on Form 8-A filed with the SEC on August 3, 1998; and
. All of our filings pursuant to the Exchange Act after the date of the
initial filing of this registration statement and prior to its
effectiveness.
You may request a copy of these documents, which will be provided to you at
no cost, by contacting: Entrust Technologies, One Preston Park South, 4975
Preston Park Boulevard, Suite 400, Plano, Texas 75093, Attention: Investor
Relations, (972) 943-7300.
51
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports............................................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 and September
30, 1999
(unaudited)............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998 and
1999 (unaudited)........................................................ F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 1996, 1997 and 1998 and the nine months
ended September 30, 1999 (unaudited).................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998 and
1999 (unaudited)........................................................ F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 5, 1999
(November 4, 1999 as to Note 11, third paragraph)
F-2
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
----------------- -------------
1997 1998 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 4,025 $ 3,712 $ 20,436
Short-term marketable investments............ 8,613 77,355 64,816
Accounts receivable (net of allowance for
doubtful accounts of $416 in 1997, $753 in
1998, and $659 at September 30, 1999)....... 7,152 14,013 18,154
Other receivables............................ 2,089 2,102 3,318
Prepaid expenses............................. 455 994 1,756
------- -------- --------
Total current assets....................... 22,334 98,176 108,480
Long-term marketable investment............... -- -- 2,384
Goodwill, net................................. -- 3,210 3,126
Property and equipment, net................... 1,680 4,874 6,323
Other long-term assets........................ 743 1,569 1,863
------- -------- --------
Total assets............................... $24,757 $107,829 $122,176
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 1,236 $ 7,187 $ 5,672
Accrued liabilities.......................... 2,066 4,992 8,523
Deferred income.............................. 3,068 7,791 9,698
Due to related party......................... 2,257 768 789
------- -------- --------
Total current liabilities.................. 8,627 20,738 24,682
Long-term debt and other long-term
liabilities.................................. 1,468 32 16
------- -------- --------
Total liabilities.......................... 10,095 20,770 24,698
------- -------- --------
Shareholders' equity:
Preferred stock, par value $0.01 per share;
none issued and outstanding................. -- -- --
Common stock:
Common, par value $0.01 per share; no
issued and outstanding shares at December
31, 1997, 42,492,681 and 44,548,100 issued
and outstanding shares at December 31,
1998 and September 30, 1999,
respectively.............................. -- 425 445
Series A and Series B common, par value
$0.01 per share; 20,560,000 issued and
outstanding shares at December 31, 1997,
none issued and outstanding at December
31, 1998 and September 30, 1999........... 205 -- --
Special voting stock, par value $0.01 per
share; exchangeable; 7,700,000 issued and
outstanding shares at December 31, 1997,
5,157,289 issued and outstanding shares at
December 31, 1998 and September 30, 1999.... 77 52 52
Additional paid-in capital................... 15,744 112,483 119,491
Unearned deferred compensation............... -- (635) (488)
Accumulated other comprehensive loss......... (15) (89) (95)
Accumulated deficit.......................... (1,349) (25,177) (21,927)
------- -------- --------
Total shareholders' equity................. 14,662 87,059 97,478
------- -------- --------
Total liabilities and shareholders'
equity.................................... $24,757 $107,829 $122,176
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------- ----------------------
1996 1997 1998 1998 1999
------ ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License............... $8,689 $ 16,486 $ 36,773 $ 25,640 $ 42,056
Services and
maintenance.......... 4,113 8,520 12,215 8,337 17,147
------ ---------- ---------- ---------- ----------
Total revenues...... 12,802 25,006 48,988 33,977 59,203
------ ---------- ---------- ---------- ----------
Cost of revenues:
License............... 393 502 1,985 1,319 1,412
Services and
maintenance.......... 3,157 4,414 7,546 5,198 9,476
------ ---------- ---------- ---------- ----------
Total cost of
revenues........... 3,550 4,916 9,531 6,517 10,888
------ ---------- ---------- ---------- ----------
Gross profit............ 9,252 20,090 39,457 27,460 48,315
------ ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing... 3,858 11,193 26,802 18,338 28,857
Research and
development.......... 2,874 5,692 12,840 9,026 12,111
General and
administrative....... 2,464 3,695 5,046 3,627 5,369
Acquired in-process
research and
development and
goodwill
amortization......... -- -- 20,564 20,386 534
------ ---------- ---------- ---------- ----------
Total operating
expenses........... 9,196 20,580 65,252 51,377 46,871
------ ---------- ---------- ---------- ----------
Income (loss) from
operations............. 56 (490) (25,795) (23,917) 1,444
Interest income......... -- 723 1,807 734 2,733
------ ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 56 233 (23,988) (23,183) 4,177
(Provision) benefit for
income taxes........... 331 281 160 160 (927)
------ ---------- ---------- ---------- ----------
Net income (loss)....... $ 387 $ 514 $ (23,828) $ (23,023) $ 3,250
====== ========== ========== ========== ==========
Net income (loss) per
share:
Basic................. -- $ 0.02 $ (0.68) $ (0.70) $ 0.07
Diluted............... -- $ 0.01 $ (0.68) $ (0.70) $ 0.06
Weighted average common
shares used in per
share computations:
Basic................. -- 30,700,000 35,254,735 32,842,941 43,503,972
Diluted............... -- 41,742,972 35,254,735 32,842,941 54,598,234
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 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,
1995............ -- $-- -- $ -- -- $-- -- $-- -- $-- $ --
Change in
shareholder's
net
investment..... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income:
Net income and
total
comprehensive
income......... -- -- -- -- -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ---- ------- ---- ---------- ---- --------
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 income...... -- -- -- -- -- -- -- -- -- -- --
Translation
adjustment..... -- -- -- -- -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ---- ------- ---- ---------- ---- --------
Balances at
December 31,
1998............ 42,492,681 425 -- -- -- -- -- -- 5,157,289 52 112,483
Deferred
compensation
earned
(unaudited).... -- -- -- -- -- -- -- -- -- -- --
Common shares
issued on
option exercise
(unaudited).... 1,981,248 20 -- -- -- -- -- -- -- -- 5,707
Employee Stock
Purchase Plan
shares issued
(unaudited).... 74,171 -- -- -- -- -- -- -- -- -- 1,301
Comprehensive
income (loss):
Net income
(unaudited).... -- -- -- -- -- -- -- -- -- -- --
Translation
adjustment
(unaudited).... -- -- -- -- -- -- -- -- -- -- --
---------- ---- ----------- ----- -------- ---- ------- ---- ---------- ---- --------
Balances at
September 30,
1999
(unaudited)..... 44,548,100 $445 -- $ -- -- $-- -- $-- 5,157,289 $52 $119,491
========== ==== =========== ===== ======== ==== ======= ==== ========== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME--(Continued)
for the years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 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>
Blanaces at December 31,
1995................... $ -- $-- $ 1,672 $ 1,672
Change in shareholder's
net investment........ -- -- (2,119) (2,119)
Comprehensive income:
Net income and total
comprehensive income.. -- -- 387 $ 387 287
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 income............. -- -- (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 (unaudited).... 147 -- -- -- 147
Common shares issued on
option exercise
(unaudited)........... -- -- -- -- 5,727
Employee Stock Purchase
Plan shares issued
(unaudited)........... -- -- -- -- 1,301
Comprehensive income
(loss):
Net income
(unaudited)........... -- -- 3,250 $ 3,250 3,250
Translation adjustment
(unaudited)........... -- (6) -- (6) (6)
----- ---- -------- -------- -------
Total comprehensive
income................ $ 3,244
========
Balances at September
30, 1999 (unaudited)... $(488) $(95) $(21,927) $97,478
===== ==== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
ENTRUST TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $ 387 $ 514 $ (23,828) $ (23,023) $ 3,250
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities:
Depreciation and
amortization........... 204 360 1,261 843 2,229
Adjustment to cumulative
translation account.... -- (15) (74) 4 (6)
Deferred income taxes... 4 (743) (143) (257) (33)
Deferred compensation
earned................. -- -- 149 100 147
Acquired in-process
research and
development............ -- -- 20,208 20,208 --
Changes in operating
assets and liabilities:
Increase in accounts
receivable........... (967) (4,665) (6,212) (4,556) (4,141)
Decrease (increase) in
other receivables.... -- (2,089) (125) 414 (521)
Increase in prepaid
expenses............. (40) (400) (504) (567) (669)
Increase in other
assets............... -- -- (178) -- --
Increase (decrease) in
accounts payable..... 647 335 4,755 2,425 (1,515)
Increase in accrued
liabilities.......... 891 1,121 1,998 1,553 3,542
Increase in deferred
income............... 1,686 1,186 4,573 3,627 1,907
Increase (decrease)
due to related
party................ -- 2,257 (2,588) (2,576) 21
-------- -------- --------- --------- --------
Net cash provided by
(used in) operating
activities........... 2,812 (2,139) (708) (1,805) 4,211
-------- -------- --------- --------- --------
Cash flows from investing
activities:
Purchases of marketable
investments.............. -- (12,308) (145,188) (52,227) (87,603)
Dispositions of
marketable investments... -- 3,695 76,446 21,531 97,758
Purchases of property and
equipment................ (693) (895) (3,791) (1,345) (3,144)
Increase in goodwill and
other long-term assets... -- -- (393) -- (1,518)
Payment on purchase of r3
Security Engineering
AG....................... -- -- (4,391) (4,391) --
-------- -------- --------- --------- --------
Net cash provided by
(used in) investing
activities........... (693) (9,508) (77,317) (36,432) 5,493
-------- -------- --------- --------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt..................... -- 1,449 -- -- --
Repayment of long-term
debt..................... -- -- (1,425) (1,422) (8)
Transfers from Nortel..... 9,716 -- -- -- --
Transfers to Nortel....... (11,835) (1,803) -- -- --
Proceeds from exercise of
stock options and
employee stock purchase
plan..................... -- -- 39 31 7,028
Proceeds from issuance of
5,400,000 common shares,
net of issuance costs of
$7,302................... -- -- 79,098 79,098 --
Proceeds from issuance of
common and special
voting stock, net of
issuance costs of
$2,015................... -- 16,026 -- -- --
-------- -------- --------- --------- --------
Net cash provided by
(used in) financing
activities........... (2,119) 15,672 77,712 77,707 7,020
-------- -------- --------- --------- --------
Net change in cash and cash
equivalents............... -- 4,025 (313) 39,470 16,724
Cash and cash equivalents
at beginning of period.... -- -- 4,025 4,025 3,712
-------- -------- --------- --------- --------
Cash and cash equivalents
at end of period.......... $ -- $ 4,025 $ 3,712 $ 43,495 $ 20,436
======== ======== ========= ========= ========
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 $ 17,013 $ --
======== ======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share data)
1. Background and Basis of Presentation
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 "Separation"). The Company was incorporated in December 1996
with nominal share capital, all of which was contributed by Nortel. At the
close of business on December 31, 1996, Nortel transferred to the Company
certain of the assets and liabilities, intellectual property, rights, licenses
and contracts of the Division of Nortel.
In exchange, Nortel received 20,300,000 shares of the Company's Series A
Common stock, 7,700,000 shares of the Company's Special Voting stock, and cash
consideration. At the close of business on December 31, 1996, the Company
issued 260,000 shares of its Series B common stock in a private placement for
$100 per share less underwriting costs and commissions of $7.75 per share.
After the completion of the private placement, Nortel owned approximately
73.0% of the outstanding shares of the Company's common stock assuming
conversion of the Series B common stock and Series B Non-Voting common stock
into an aggregate of 13,063,836 shares of Series A common stock.
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. See note 8
for further detail regarding changes in the issued capital of the Company.
Immediately following the IPO, Nortel owned approximately 55.3% of the
Company's Common stock.
At September 30, 1999, Nortel owned approximately 51.2% of the Company's
Common stock.
Basis of presentation
The historical comparative year results, comprising the statements of
operations, shareholders' equity and cash flows for the year ended December
31, 1996, represent the operations of the Division transferred to the Company
from Nortel in the Separation (the "Company Business"). These historical
results of the Division present the financial position of the Division as a
separate reporting entity independent of Nortel and its subsidiaries, as if
the Division were a stand-alone entity for that period. The 1996 consolidated
financial statements have been prepared using the historical basis in the
assets and liabilities and historical results of operations related to the
Company Business. Changes in shareholder's net investment in 1996 represent
Nortel's contribution of its net investment after giving effect to the net
income (loss) of the Division and net cash transfers to or from the Division.
The shareholder's net investment was not transferred to the Company as part of
the Separation.
The 1996 consolidated financial statements, presented here for comparison
purposes, include certain Nortel corporate costs that were allocated to the
Division using procedures deemed
F-8
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
appropriate for the nature of the expenses involved. The procedures utilized
various allocation bases such as invested net assets, number of employees and
related payroll costs, and direct effort expended. Management believes that the
allocations reflected in the 1996 consolidated financial statements are
reasonable, but they were not necessarily indicative of the costs that would
have been incurred had the Division functioned as a stand-alone company. No
Nortel corporate costs were allocated to the Company, in this way, in the years
ended December 31, 1997 and 1998 or the nine months ended September 30, 1999.
After the Separation, Nortel continued to provide certain "corporate" services
to the Company. Fees charged for such services are based on Nortel's internal
usage-based fee structures where applicable or Nortel's direct cost of
services, including total compensation and out-of-pocket expenses.
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
subsidiary, r/3/ Security Engineering AG. 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.
The Company does not use hedging or derivatives and, as a result, may be
exposed to currency translation adjustments in the future. However, the Company
transacts the majority of its international sales in U.S. dollars, except for
Canada where the Company has both significant costs and revenues, which the
Company believes mitigates the potential impact of currency fluctuations.
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 as a result.
Revenue recognition
The Company generates revenues primarily from licensing the rights to its
software products to end-users and from sublicense fees from resellers. The
Company also generates revenues from consulting, training and post-contract
support ("maintenance"). In October 1997, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition", which the Company adopted, effective January 1,
1998. Such
F-9
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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.
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
To date the Company has not capitalized any software development costs
under Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or otherwise Marketed".
The Company has defined attainment of technological feasibility as completion
of a working model. The period of time beginning with the establishment of a
working model and ending when a product is offered for sale is typically very
short. Accordingly, costs that were eligible for capitalization were
insignificant.
F-10
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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.
Prior to January 1, 1997, the Company, as a division of Nortel, participated in
the Nortel cash management system and, accordingly, did not maintain cash
balances other than minimal amounts.
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, 1997
and 1998 and September 30, 1999 (unaudited) 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 September 30, 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
---------- ----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
U.S. government agency
debt securities........ $ 7,825 $ 7,825 $13,394 $13,394 $ --
Corporate debt
securities............. 69,530 69,530 53,806 51,422 2,384
------- ------- ------- ------- ------
$77,355 $77,355 $67,200 $64,816 $2,384
======= ======= ======= ======= ======
</TABLE>
Accounts receivable
The Company's customer base consists primarily of large, well-established
companies or government agencies. Five customers accounted for approximately
55% and 45% of accounts receivable as of December 31, 1997 and 1998,
respectively, and approximately 44% as of September 30, 1999 (unaudited). The
Company performs ongoing credit evaluations of its customers, and generally,
does not require collateral from its customers to support accounts receivable.
Requests to extend significant credit to customers are reviewed and approved by
senior management. The Company maintains an allowance for potential losses due
to credit risk, but has not experienced significant write-offs. Management
believes that the reserves for losses are adequate. The following table
summarizes the changes in the allowance for doubtful accounts:
<TABLE>
<CAPTION>
December 31, September 30,
------------- -------------
1997 1998 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of
period...................................... $ 129 $ 416 $753
Additional provision......................... 287 450 290
Amounts written-off.......................... -- (113) (384)
------ ------ ----
Allowance for doubtful accounts, end of
period...................................... $ 416 $ 753 $659
====== ====== ====
</TABLE>
F-11
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Other receivables
Other receivables include federal income tax and Canadian goods and
services tax refunds of $1,644 and $973 at December 31, 1997 and 1998,
respectively, and $1,139 at September 30, 1999 (unaudited). Other receivables
also includes work-in-process relating to a long-term percentage-of-completion
contract of $432 and $826 at December 31, 1997 and 1998, respectively, and
$1,199 at September 30, 1999 (unaudited).
Property and equipment
Property and equipment is stated at cost. Depreciation is calculated
generally using the straight-line method over the estimated useful lives of the
assets. The expected useful lives of the furniture and fixtures, computer and
telecom equipment and software is three to five years and the remaining term of
the facility lease for leasehold improvements.
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in operations. Maintenance and repairs are charged to operations as
incurred.
Assets are reviewed for impairment on the basis of undiscounted cash flows.
If the cash flows are less than the asset's carrying value, the asset is
written down to its fair value.
Goodwill and other assets
Goodwill is stated net of accumulated amortization of $356 and $890 at
December 31, 1998 and September 30, 1999 (unaudited), respectively. Goodwill is
being amortized on a straight-line basis over five years. Included in other
long-term assets is an investment of $393 at December 31, 1998 and September
30, 1999 (unaudited), which represents a 10% ownership interest in Entrust
Japan. Other long-term assets also include costs incurred of $1,068 at
September 30, 1999 (unaudited) primarily for licenses 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 $56 at September 30,
1999 (unaudited).
Income taxes
The Company uses the asset and liability method to account for income
taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the carrying amounts of
existing assets and liabilities for accounting purposes, and their respective
tax bases. Deferred income tax assets and liabilities are measured using
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in statutory tax
rates is recognized in net income in the year of change. A valuation allowance
is recorded for those deferred income tax assets whose recoverability is not
sufficiently likely. As the Company operated as a division of Nortel in 1996,
it did not file separate income tax returns. Income tax expense has been
estimated based upon an application of Nortel's effective tax rate for that
period.
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
F-12
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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 9 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 effect excluded from the diluted net loss per share computation
due to the exchangeable Special Voting stock outstanding was 6,767,673 shares,
conversion rights of Series B was 1,687,096 shares, and options to purchase
Common stock was 5,437,769 shares. For the nine months ended September 30, 1998
(unaudited) the antidilutive effect excluded from the diluted net loss per
share computation due to the exchangeable Special Voting stock outstanding was
7,304,467 shares, conversion rights of Series B was 2,249,600 shares, and the
option to purchase Common stock was 5,156,750 shares.
Net income (loss) per share has been calculated as follows:
<TABLE>
<CAPTION>
December 31, September 30,
----------------------- ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net income (loss) available
to common shareholders (in
thousands).................. $ 514 $ (23,828) $ (23,023) $ 3,250
=========== =========== =========== ===========
Weighted average common
shares outstanding:
Basic:
Basic weighted average
common shares
outstanding............... 30,700,000 35,254,735 32,842,941 43,503,972
----------- ----------- ----------- -----------
Basic net income (loss) per
share..................... $ 0.02 $ ( 0.68) $ (0.70) $ 0.07
=========== =========== =========== ===========
Diluted:
Basic weighted average
common shares
outstanding............... 30,700,000 35,254,735 32,842,941 43,503,972
----------- ----------- ----------- -----------
Exchange rights on Special
Voting stock.............. 7,700,000 N/A N/A 5,157,289
Additional conversion
rights of Series B Voting
and Non-Voting common
stock..................... 2,663,836 N/A N/A --
Net effect of dilutive
options using the treasury
stock method.............. 679,136 N/A N/A 5,936,973
----------- ----------- ----------- -----------
Subtotal................. 11,042,972 N/A N/A 11,094,262
----------- ----------- ----------- -----------
Diluted weighted average
common shares
outstanding............... 41,742,972 35,254,735 32,842,941 54,598,234
=========== =========== =========== ===========
Diluted net income (loss)
per share................. $ 0.01 $ (0.68) $ (0.70) $ 0.06
=========== =========== =========== ===========
</TABLE>
F-13
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Concentration of credit risk
Financial instruments that potentially subject the Company to market 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 2000. The Company currently
does not use hedging or derivatives 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.
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.
Unaudited interim financial information
The consolidated financial statements as of and for the nine months ended
September 30, 1998 and 1999 are unaudited but, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the results for such periods. The results
of operations for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for the full fiscal year.
F-14
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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 has been 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 has no alternative future use.
Further, management estimates that related development costs will 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 (unaudited), respectively.
The following unaudited pro forma data summarize the combined results of
operations of Entrust Technologies Inc. and r/3/ as if the acquisition had
taken place as of the beginning of the years presented, 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 for each year presented.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues........................................... $ 28,635 $ 50,589
=========== ===========
Net loss........................................... (705) (4,923)
=========== ===========
Basic and diluted net loss per share............... (0.02) (0.14)
=========== ===========
</TABLE>
F-15
<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, September 30,
---------------- -------------
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Computer and telecom equipment............. $ 1,491 $ 3,345 $ 4,390
Furniture and fixtures..................... 86 1,180 1,795
Leasehold improvements..................... 639 1,504 1,914
Internal-use software...................... 218 668 1,209
------- ------- -------
2,434 6,697 9,308
Less: accumulated depreciation and
amortization.............................. (754) (1,823) (3,518)
------- ------- -------
Subtotal................................... 1,680 4,874 5,790
Assets to be placed in service............. -- -- 533
------- ------- -------
Total property and equipment, net.......... $ 1,680 $ 4,874 $ 6,323
======= ======= =======
5. Accrued Liabilities
Accrued liabilities consist of the following:
<CAPTION>
December 31, September 30,
---------------- -------------
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Payroll and related benefits............... $ 1,532 $ 3,127 $ 3,079
Stock option witholding taxes payable...... -- -- 2,886
Other...................................... 534 1,865 2,558
------- ------- -------
$ 2,066 $ 4,992 $ 8,523
======= ======= =======
</TABLE>
6. Long-Term Debt
At December 31, 1997, the Company had an installment note with a financial
institution for $1,449. This obligation was unsecured with interest at an
effective rate of 6.9% per annum and was retired in 1998.
F-16
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
7. Income Taxes
The following table presents the U.S. and foreign components of income
(loss) before income taxes and the provision for income taxes. 1996 figures are
estimated on a pro forma basis for comparative purposes.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Income (loss) before income taxes
United States................................. $ (8) $ 2 $(22,108)
Foreign....................................... 64 231 (1,880)
------- ------- --------
$ 56 $ 233 $(23,988)
======= ======= ========
(Provision) benefit for income taxes
Current:
Federal..................................... $ -- $ (337) $ 140
State and local............................. -- (76) 79
Foreign..................................... 331 (49) (202)
------- ------- --------
331 (462) 17
------- ------- --------
Deferred:
Federal..................................... -- 119 (52)
State and local............................. -- 28 7
Foreign..................................... 596 188
------- ------- --------
-- 743 143
------- ------- --------
Total benefit for income taxes.................. $ 331 $ 281 $ 160
======= ======= ========
A reconciliation between income taxes computed at the federal statutory
rate and income tax benefit is shown below:
<CAPTION>
Year Ended
December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Income tax (provision) benefit at federal
statutory rate................................. $ (19) $ (79) $ 8,156
State and local taxes, net of federal benefits.. -- (48) 57
Foreign earnings benefit (tax) at different
rate........................................... (6) 15 80
Acquired in-process research and development and
other expenses not deductible for tax
purposes....................................... -- -- (6,913)
Valuation allowances on benefit of tax losses... -- -- (1,220)
Foreign research and development tax credits
utilized....................................... 331 393 --
Utilization of tax loss carry-forwards.......... 25 -- --
------- ------- --------
Total benefit for income taxes.................. $ 331 $ 281 $ 160
======= ======= ========
</TABLE>
F-17
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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,
---------------
1997 1998
------ -------
<S> <C> <C>
Current asset:
Accruals and valuation allowances not currently
deductible............................................. $ -- $ 157
Deferred income currently taxable....................... 347 426
------ -------
Total................................................. 347 583
------ -------
Non-current asset (liability):
Accelerated depreciation for tax purposes............... (7) (34)
United States and Foreign NOL carry-forwards............ -- 1,220
Valuation allowance..................................... -- (1,220)
Foreign research and development tax credit carry-
forwards............................................... 384 1,307
Valuation allowance..................................... -- (989)
------ -------
Total................................................. 377 284
------ -------
Net deferred tax asset.................................... $ 724 $ 867
====== =======
</TABLE>
As at December 31, 1998, 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............................................. $ 598 2013
Foreign................................................... 622 2005
------
1,220
Foreign research and development tax credits................ 1,307 2007-2008
------
$2,527
======
</TABLE>
8. 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 have been restated to reflect the increase in the number of
authorized shares and these stock splits.
F-18
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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 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, 1998, 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, 1998, 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.
F-19
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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, 1998, the Company had
not issued any shares of Preferred stock.
9. Stock Options
Employee Stock Option Plan
During the year ended December 31, 1997, the Company's shareholders
approved the 1996 Stock Incentive Plan (the "Plan") applicable to the Company's
full-time employees, officers, 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 May 1998, the Company's
shareholders increased the authorized number of shares available for issuance
under this plan to 7,630,920. On June 18, 1998, the Company's Board of
Directors approved an increase of 2,369,080 in the number of shares available
under the Plan, subject to shareholder approval. In July 1998, 400,000 of the
shares available for issuance under the Plan were transferred to the Employee
Stock Purchase Plan. On December 10, 1999, the Company's Board of Directors
approved an increase of 2,500,000 in the number of shares available under the
Plan. The options under the 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.
A summary of the activity under the 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
Granted (unaudited)..................... (1,230,030) 1,230,030 24.59
Forfeited (unaudited)................... 178,738 (178,738) 16.18
Exercised (unaudited)................... -- (1,981,248) 3.00
---------- ----------
Balance at September 30, 1999
(unaudited).............................. 508,936 7,090,970 7.70
========== ==========
</TABLE>
F-20
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
The number of outstanding options exercisable into common stock was
4,042,662 at September 30, 1999 (unaudited). The weighted average exercise
price of these exercisable outstanding options was $2.95.
The following table summarizes information concerning currently outstanding
options as at September 30, 1999 (unaudited):
<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.......... 4,577,890 7.4 years $ 2.17 3,677,671 $ 2.16
$6.25................... 524,059 8.4 years $ 6.25 167,893 6.25
$12.08 to $17.63........ 672,251 8.8 years $14.35 186,598 14.34
$19.50 to $26.25........ 1,030,670 9.5 years $22.55 10,500 22.88
$26.50 to $34.13........ 286,100 9.6 years $29.72 -- N/A
--------- ---------
7,090,970 4,042,662
========= =========
</TABLE>
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, effective for the next Offering Period beginning February
1, 2000.
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 has been 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 has
recorded unearned deferred
F-21
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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 amortized into compensation expense as of December 31, 1998 and an
additional $147 amortized into compensation expense in the nine months ended
September 30, 1999 (unaudited). For all other 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 Stock
Incentive Plan been determined based on the fair value at the grant date for
awards under the Plan, consistent with the methodology prescribed under SFAS
123, the Company's net income (loss) and net income (loss) per share would have
been as follows, on a pro forma basis.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net income (loss), as reported................. $ 387 $ 514 $(23,828)
Estimated additional stock based compensation
costs under SFAS 123.......................... -- (1,535) (2,687)
------- -------- --------
Pro forma net income (loss).................... $ 387 $ (1,021) $(26,515)
======= ======== ========
Basic and diluted net income (loss) per share.. -- $ (0.03) $ (0.75)
======= ======== ========
</TABLE>
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,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected option life, in years.................. -- 6 6
Risk free interest rate......................... -- 6.22% 5.37%
Dividend yield.................................. -- -- --
Volatility...................................... -- -- 108%
</TABLE>
The weighted average fair value for stock options granted during 1997 and
1998 was $0.66 and $5.47 per option, respectively.
10. Related Party Transactions
Significant related party transactions with the Company's parent, Nortel,
and affiliated companies, not otherwise disclosed in the financial statements,
include the following:
The Company paid $3,656 and $273 in the years ended December 31, 1996 and
1997, respectively, 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, 1996,
1997, and 1998 of $300, $495, and $1,916, respectively and $386 and $1,247 for
the nine months ended
F-22
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
September 30, 1998 and 1999 (unaudited), respectively. Revenues for the years
ended December 31, 1997 and 1998 include sales to Nortel-affiliated companies
totaling $332 and $2,076, respectively, and $1,949 and $221 for the nine months
ended September 30, 1998 and 1999 (unaudited), respectively. Sales to Nortel-
affiliated companies were immaterial in 1996.
During the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1999 (unaudited), 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 and
$1,390 for the years ended December 31, 1997 and 1998, respectively, and $946
and $437 for the nine months ended September 30, 1998 and 1999 (unaudited),
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. At September 30, 1999
(unaudited), there were no amounts receivable from Nortel and $32 receivable
from Nortel-affiliated companies.
11. Commitments and Contingencies
Lease commitments
The Company leases administrative and sales offices and certain property
and equipment under noncancellable operating leases expiring through 2003 with
certain renewal options. Total rent expense under such leases for the years
ended December 31, 1996, 1997 and 1998 were $100, $956 and $3,083,
respectively, and for the nine months ended September 30, 1998 and 1999
(unaudited) were $1,952 and $3,473, respectively. At September 30, 1999
(unaudited), the future minimum lease payments under operating leases were as
follows:
<TABLE>
<S> <C>
1999 (three months)................................................. $ 1,102
2000................................................................ 4,372
2001................................................................ 2,854
2002................................................................ 1,408
2003................................................................ 672
-------
Total future minimum lease payments................................. $10,408
=======
</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
F-23
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
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.
12. 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 and $383
for the years ended December 31, 1997 and 1998, respectively, and $442 for the
nine months ended September 30, 1999 (unaudited).
13. 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.
F-24
<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,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenues:
United States................................ $ 9,758 $14,978 $ 25,861
Canada....................................... 2,571 8,669 11,832
Europe and Asia.............................. 473 1,359 11,295
------- ------- --------
Total revenues............................. $12,802 $25,006 $ 48,988
======= ======= ========
Segment operating income (loss):
United States................................ $ (8) $ (720) $ (3,297)
Canada....................................... 268 356 (167)
Europe and Asia.............................. -- 234 (862)
------- ------- --------
Total segment operating income (loss)...... 260 (130) (4,326)
------- ------- --------
Depreciation and amortization expense:
United States................................ -- 1 410
Canada....................................... 204 356 573
Europe and Asia.............................. -- 3 278
------- ------- --------
Total depreciation and amortization........ 204 360 1,261
------- ------- --------
Interest income:
United States................................ -- 723 1,807
------- ------- --------
Acquired in-process research and development:
United States................................ -- -- 20,208
------- ------- --------
Net income (loss) before income taxes:
United States................................ (8) 2 (22,108)
Canada....................................... 64 -- (740)
Europe and Asia.............................. -- 231 (1,140)
------- ------- --------
Total net income (loss) before income
taxes..................................... $ 56 $ 233 $(23,988)
======= ======= ========
<CAPTION>
December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Long-lived assets (generally depreciated
over three to five years):
United States................................ $ -- $ 118 $ 4,323
Canada....................................... 1,145 1,540 3,510
Europe and Asia.............................. -- 40 775
------- ------- --------
Total long-lived assets.................... $ 1,145 $ 1,698 $ 8,608
======= ======= ========
Total assets:
United States................................ $ 2,025 $18,637 $ 95,110
Canada....................................... 1,662 4,689 8,244
Europe and Asia.............................. -- 1,431 4,475
------- ------- --------
Total...................................... $ 3,687 $24,757 $107,829
======= ======= ========
</TABLE>
F-25
<PAGE>
ENTRUST TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of dollars, except share and per share data)
Major customer information
In 1996, three customers accounted for an aggregate of 64% of revenues for
the year, and individually these customers accounted for 29%, 20% and 15% of
revenues for that year. In 1997, three customers accounted for an aggregate of
42% of revenues. One of these customers was the same customer who accounted for
29% of 1996 revenues and this customer accounted for 19% of revenues for 1997.
The other two major customers in 1997 accounted for 12% and 11% of revenues,
respectively. In 1998, no individual customer accounted for 10% or more of
revenues. For the nine months ended September 30, 1999 (unaudited) there was a
single customer which accounted for 26% of revenues, and no other customers
accounted for 10% or more of revenues.
F-26
<PAGE>
UNDERWRITING
We, the selling stockholders and the underwriters for the offering named
below have entered into an underwriting agreement with respect to the shares
being offered. Subject to the terms of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette Securities Corporation and SoundView Technology Group, Inc.
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................
Bear, Stearns & Co. Inc............................................
Donaldson, Lufkin & Jenrette Securities Corporation................
SoundView Technology Group, Inc....................................
---------
Total............................................................ 8,150,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 305,625
and 916,875 shares from us and a selling stockholder, respectively, to cover
such sales. They may exercise that option for 30 days. If any shares are
purchased pursuant to this option, the underwriters will severally purchase
shares in approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase 1,222,500 additional shares.
<TABLE>
<CAPTION>
Paid by Entrust
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by Selling
Stockholders
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any of those
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
price to public. If all the shares are not sold at the initial price to public,
the representatives may change the offering price and the other selling terms.
We and the selling stockholders have agreed with the underwriters not to
dispose of or hedge any of our common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 90 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans.
U-1
<PAGE>
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Securities Exchange Act of 1934, some
underwriters and selling group members that, if any, may act as "passive" are
market makers in the common stock, which means they may make bids for or
purchases of common stock in the Nasdaq National Market until a stabilizing bid
has been made. Rule 103 generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for
the two full consecutive calendar months, or any 60 consecutive days
ending within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part;
. a passive market maker may not effect transactions or display bids for
common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers; and
. bids made by passive market makers must be identified as such.
A prospectus in electronic format will be made available on the web sites
maintained by one or more of the lead managers of this offering and may also be
made available on web sites maintained by other underwriters. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make Internet distributions on the
same basis as other allocations.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $750,000. We will
pay for all of such expenses.
We and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Cautionary Note Regarding Forward-Looking Statements..................... 13
Use of Proceeds.......................................................... 14
Price Range of Common Stock
and Dividend Policy..................................................... 14
Capitalization........................................................... 15
Recent Financial Results................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 30
Management............................................................... 47
Selling Stockholders..................................................... 50
Legal Matters............................................................ 50
Experts.................................................................. 51
Where You Can Find More Information...................................... 51
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,150,000 Shares
Entrust Technologies Inc.
Common Stock
---------------
[ENTRUST LOGO APPEARS HERE]
---------------
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Wit SoundView
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by us, in connection with the sale and distribution of the securities
being registered, other than the underwriting discounts and commissions. All
amounts shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $123,717
NASD filing fee.................................................... 47,363
Nasdaq National Market listing fee................................. 17,500
Blue Sky and similar fees and expenses............................. 10,000
Transfer Agent and Registrar fees.................................. 5,000
Accounting fees and expenses....................................... 150,000
Legal fees and expenses............................................ 250,000
Printing and mailing expenses...................................... 100,000
Miscellaneous...................................................... 46,420
--------
Total............................................................ $750,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers
Section 2-418 of the General Corporation Law of Maryland (the "Maryland
Law") provides that, unless a corporation's charter includes a provision which
restricts or limits the corporation's right to indemnify its officers and
directors, the corporation may indemnify a director or officer with respect to
proceedings instituted against such officer or director by reason of his or her
service in that capacity, unless the act or omission in question was material
and was committed in bad faith or was the result of active and deliberate
dishonesty, unless the director or officer received an improper personal
benefit or unless the director or officer had reasonable cause to believe that
the act or omission was unlawful. The Registrant's Articles of Incorporation
and Bylaws provide that the Registrant shall indemnify and advance expenses to
its currently acting and its former directors to the fullest extent permitted
by the Maryland Law and that the Registrant shall indemnify and advance
expenses to its officers to the same extent as its directors and to such
further extent as is consistent with law. However, nothing in the Articles of
Incorporation or Bylaws of the Registrant protects or indemnifies a director,
officer, employee or agent against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office. To the
extent that a director has been successful in defense of a proceeding, unless
limited by charter, the Maryland Law provides that he shall be indemnified
against reasonable expenses incurred in connection therewith.
The Underwriting Agreement, a form of which is filed as Exhibit 1 to this
Registration Statement on Form S-3, provides that the Underwriters are
obligated under certain circumstances to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. Reference is made to
the form of Underwriting Agreement.
Two of the directors of the Registrant are also officers of Nortel Networks
Corporation ("NNC"), a shareholder of the Registrant, and are serving on the
Registrant's Board of Directors at the request of NNC. Pursuant to NNC's
Bylaws, NNC will indemnify its officers when they are acting at NNC's
II-1
<PAGE>
request as directors of a corporation of which NNC is a shareholder, provided
that such officers acted honestly, in good faith and had reasonable grounds to
believe their conduct was lawful.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1* Form of Underwriting Agreement.
4.1** Specimen Certificate for shares of Common Stock, $.01 par value, of
the Registrant.
5* Opinion of Hale and Dorr LLP with respect to the validity of the
securities being offered.
10.1 Amendment No. 1 to the 1996 Amended and Restated Stock Incentive Plan.
10.2 Release Agreement between Bradley Ross and the Registrant and Entrust
Technologies Ltd. dated June 30, 1999.
10.3 Letter Agreement dated October 11, 1999 between the Registrant and
David L. Thompson.
10.4 Development Agreement dated December 29, 1999 between Canderel
Management Inc. and Entrust Technologies Limited.
10.5 Lease dated December 29, 1999 in Pursuance of the Short Forms of Lease
Act between 786473 Ontario Limited, Entrust Technologies Limited and
the Registrant.
10.6 Lease dated December 29, 1999 by and between 3559807 Canada Inc.,
Entrust Technologies Limited and the Registrant.
23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
24+ Powers of Attorney.
</TABLE>
- --------
* To be filed by amendment.
** Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-57275).
+ Previously filed.
Item 17. Undertakings
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act will be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the indemnification provisions described herein, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Plano, Texas, on this 3rd day of February, 2000.
Entrust Technologies Inc.
/s/ John A. Ryan
By: _________________________________
John A. Ryan
President and Chief Executive
Officer
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John A. Ryan President, Chief Executive February 3, 2000
______________________________________ Officer and Director
John A. Ryan
* Senior Vice President and February 3, 2000
______________________________________ Chief Financial Officer
David L. Thompson (Principal Financial and
Accounting Officer)
* Director February 3, 2000
______________________________________
F. William Conner
* Director February 3, 2000
______________________________________
Butler C. Derrick, Jr.
* Director February 3, 2000
______________________________________
Jawaid Ekram
* Director February 3, 2000
______________________________________
Terrell B. Jones
* Director February 3, 2000
______________________________________
Michael P. Ressner
* Director February 3, 2000
______________________________________
Christopher M. Stone
* Director February 3, 2000
______________________________________
James A. Thomson
*By: /s/ John A. Ryan
______________________________________
John A. Ryan
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1* Form of Underwriting Agreement.
4.1** Specimen Certificate for shares of Common Stock, $.01 par value, of
the Registrant.
5* Opinion of Hale and Dorr LLP with respect to the validity of the
securities being offered.
10.1 Amendment No. 1 to the 1996 Amended and Restated Stock Incentive Plan.
10.2 Release Agreement between Bradley Ross and the Registrant and Entrust
Technologies Ltd. dated June 30, 1999.
10.3 Letter Agreement dated October 11, 1999 between the Registrant and
David L. Thompson.
10.4 Development Agreement dated December 29, 1999 between Canderel
Management Inc. and Entrust Technologies Limited.
10.5 Lease dated December 29, 1999 in Pursuance of the Short Forms of Lease
Act between 786473 Ontario Limited, Entrust Technologies Limited and
the Registrant.
10.6 Lease dated December 29, 1999 by and between 3559807 Canada Inc.,
Entrust Technologies Limited and the Registrant.
23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
24+ Powers of Attorney.
</TABLE>
- --------
* To be filed by amendment.
** Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-57275).
+ Previously filed.
<PAGE>
Exhibit 10.1
AMENDMENT NO. 1
TO THE
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
OF
ENTRUST TECHNOLOGIES INC.
The Amended and Restated 1996 Stock Incentive Plan (the "Plan") of Entrust
Technologies Inc. is hereby amended as follows (capitalized terms used herein
and not defined herein shall have the respective meanings ascribed to such
terms in the Plan):
1. Section 5(e) of the Plan shall be deleted in its entirety and replaced with
the following:
"(e) Exercise of Option. Options may be exercised by delivery to the
------------------
Company of a written notice of exercise signed by the proper person or by
any other form of notice (including electronic notice) approved by the Board
together with payment in full as specified in Section 5(f) for the number of
shares for which the Option is exercised."
2. Section 8(b) of the Plan shall be deleted in its entirety and replaced with
the following:
"(b) Documentation. Each Award shall be evidenced by a written
-------------
instrument in such form as the Board shall determine, it being understood
that an electronic form of Award shall be deemed to be a written instrument
for purposes of the Plan. Each Award may contain terms and conditions in
addition to those set forth in the Plan."
3. Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the Board of Directors on December 10, 1999
<PAGE>
Exhibit 10.2
------------
RELEASE AGREEMENT
This agreement is made between:
BRADLEY ROSS, for himself, his heirs, dependents, executors,
administrators, successors and assigns; hereinafter referred to as
"Employee",
and
ENTRUST TECHNOLOGIES INC. and ENTRUST TECHNOLOGIES LTD.; hereinafter
referred to as "ENTRUST".
Whereas the Parties wish to terminate the employment relationship between
Entrust and Employee, it is therefore agreed as follows:
IN CONSIDERATION of the payments less the required deductions for income taxes
and other statutory deductions, and other good and valuable consideration as
herein, Employee agrees as follows:
1) Employee agrees that the contract of employment between himself and ENTRUST
will be terminated on January 31, 2000 with notice received on June 1,
1999.
2) Employee wholly releases ENTRUST, its successors and assigns, its officers
and directors, shareholders, agents and employees and its affiliated and
associated companies and assigns, of and from any and all actions, causes
of actions, complaints, debts, dues, warranties, claims or demands for any
loss, losses or damage whatsoever in existence prior to, on or after the
date hereof, directly or indirectly arising from his employment with
ENTRUST or the
<PAGE>
termination thereof. Without limiting the generality of the foregoing,
Employee acknowledges that the said payment is in satisfaction of all
claims for damages for wrongful dismissal including all non-salary benefits
ordinarily provided to or on his behalf in respect of the employment,
vacation pay, any and all expenses whether incurred before, on or after the
date hereof in respect of the employment and as more particularly described
in his International Assignment Agreement dated September 30, 1998 and his
Offer of Employment dated November 18, 1996 and any and all claims which
Employee may have had under the Employment Standards Act and the Human
Rights Code of Ontario or the Canada Labour Code.
3) Employee agrees not to make any claims or take any proceedings against any
other person or corporation which might claim contribution or indemnity
from ENTRUST under the provisions of any statute or otherwise with respect
to any matter which arose or may have arisen between ENTRUST and Employee
at the present time.
4) Employee agrees to indemnify and save harmless ENTRUST from and against any
and all claims, actions, causes of action, debts or demands under the
Income Tax Act for or in respect of withholding taxes relating to the
cessation of his employment together with any interest or penalties
relating thereto and any costs or expenses incurred by ENTURST in defending
such claim, cause of action, demand, debt or assessment by Revenue Canada
or by any other taxing authority.
5) Employee agrees that the terms of his non-compete agreement described in
his employment offer letter dated November 18, 1996, which provide that he
may not compete with ENTRUST, are hereby modified to include Europe in
addition to Canada and the United States and will take effect on his
termination date of January 31, 2000 and remain effective
<PAGE>
until January 31, 2001. Notwithstanding the foregoing, if a court finds
that the addition of Europe make the non- competition terms unenforceable,
the parties agree that Section 5 is severable from this agreement and the
non-competition terms.
6) Employee agrees to resign as member of the Board of Security Engineering AG
effective July 15, 1999 or as soon as notice of a replacement being
appointed is received, whichever comes first.
7) Employee understands that, as an employee, he remains subject to ENTRUST's
insider trading restrictions until January 31, 2000 and that although he is
no longer subject to SEC Section 16b reporting, he will continue to abide
by the trade restrictions in place for 16b Officers until January 31, 2000.
8) Employee agrees to return to Entrust any and all company property on or
before the termination date and agrees to fulfill his obligations as a
departing employee not to disclose confidential or proprietary information.
Employee continues to be bound by the Conflict of Interest and the
Intellectual Property and Confidentiality agreements. Furthermore, Employee
will not speak of Entrust or Nortel or any of their employees, officers or
representatives, in disparaging terms nor in any other negative way
communicate about his employment with Entrust.
9) Employee acknowledges and agrees that the payment referred to herein does
not represent any admission or recognition of liability by ENTRUST.
10) Employee further acknowledges and agrees that the terms of this Release
Agreement are fully understood by him, that Employee has had independent
legal representation in connection with this Release Agreement and that
this Release Agreement is voluntarily entered into by him.
<PAGE>
IN CONSIDERATION of the covenants made above, ENTRUST agrees to provide as
follows:
1) Eight months notice to Employee of intent to terminate employment, provided
on June 1, 1999 with termination date of January 31, 2000, whereby Employee
shall work through the notice period.
2) Lump sum payment to Employee of CHF53,334.00 less applicable taxes, plus
outstanding reimbursements for Entrust business expenses (if any), to be
paid on or before February 15, 2000.
3) Benefits (specifically health, insurance and social security benefits)
continuation until January 31, 2000 followed by a lump sum payment on or
before February 15, 2000 of CHF 3,333.34 less applicable taxes, for 4
months benefits compensation. An additional lump sum payment of CHF
7,500.00 will also be provided in lieu of relocation expenses. Vacation,
earned and accrued, is to be taken during the 8 month notice period. As fo
June 30, 1999, other benefits associated with the International Assignment
Agreement will be discontinued including: cost of living allowance, company
paid house rental in Zurich, storage of household goods in Canada, home
management service for apartment in Canada, relocation expenses for return
to Canada, personal transportation allowance and return trips home. For
clarity, ENTRUST will deduct from rental proceeds any actual repair or
maintenance up to CDN$2,500, with remaining expenses, if any, to be
Employee's responsibility. Condo fees of CDN$355.67 per month can be
expensed through June 30.
4) Company paid preparation of Canadian and foreign income tax returns for the
years 1998 and 1999.
<PAGE>
5) Stock option vesting through January 31, 2000, (provided the Employee works
through the notice period) after which any remaining unvested option will
be forfeited. Specifically, the Parties understand and agree that of the
602,400 options with a strike price of US$2.125 granted to Employee on
January 1, 1997, of which 361,440 options have vested as of January 1,
1999; an additional 120,480 options will vest as of January 1, 2000, for a
total of 481,920 options that Employee will have acquired rights to
exercise by January 1, 2000.
6) The following company property and contracts are assigned, to the extent
possible, to Brad Ross without charge who will take over payment
obligations to third parties (if any) as of 1st July 1999:
a) company purchased furnishings, insurance policy and lease for the
apartment at Seehofstr. 4, Zurich
b) Internet account agreement ([email protected])
c) mobile phone, account agreement and accessories (+41 79 230 9326)
d) computer accessories (monitor, key board, mouse, palmpilot, external
disk drive, memory, port replicator, power supply, SCSI card). All
company proprietary information contained on the computer must be
immediately deleted and verification of deletion provided to Entrust
through a certified statement signed by Brad Ross.
e) Prudential home management agreement (2108-1500 Riverside Dr., Ottawa)
f) Swiss rail passes
g) art work from the office of Brad Ross (4 framed Entrust graphics)
h) assignment, to the extent possible, and transfer assistance for health
insurance and remaining benefits to Brad Ross who will take over
payment obligations to third parties (if any) as of February 1, 2000.
<PAGE>
i) auto responder service until June 1, 2000 on [email protected]
---------------------
indicating that the new e-mail address is [email protected].
---------------
7) ENTRUST fully releases Employee of and from any and all actions, causes of
actions, complaints, debts, dues, warranties, claims or demands for any
loss, losses or damage whatsoever in existence prior to, on or after the
date hereof, directly or indirectly arising from conduct within the
authorized scope of his employment that was or ought to have been known to
ENTRUST.
8) ENTRUST agrees not to make any claims or take any proceedings against any
other person or corporation which might claim contribution or indemnity
from Employee under the provisions of any statute or otherwise with respect
to the Employee's conduct within the authorized scope of his employment
that was or ought to have been known to ENTRUST.
9) ENTRUST agrees to indemnify and save harmless Employee from and against any
and all claims, actions, causes of action, debts or demands from a third
party relating to conduct within the authorized scope of his employment
together with any interest or penalties relating thereto and any costs or
expenses incurred by Employee in defending such claim, cause of action,
demand, debt or assessment by such third party.
10) ENTRUST will not speak of Employee in disparaging terms nor in any other
negative way communicate about his employment with Entrust.
The Parties understand and agree that the fact of settlement between Employee
and ENTRUST and the terms of same are confidential to the Parties and must not
be disclosed to any person, save and except counsel representing the Parties and
as may be required by law.
<PAGE>
This Agreement is governed by the laws of Ontario.
Employee directs that the payment of the amounts under this agreement be made by
direct deposit to his personal bank account of record at Credit Suisse, Zurich.
IN WITNESS WHEREOF the Parties have duly executed this Agreement.
/s/ Michele A. Axelson /s/ Bradley Ross
- ------------------------------- -----------------------------
ENTRUST BRADLEY ROSS
Plano, TX, USA June 29, 1999 Zurich 30.6.99
- ------------------------------- -----------------------------
Place/Date Place/Date
<PAGE>
Exhibit 10.3
------------
September 24, 1999
David Thompson
5505 Kinross Drive
Plano, TX 75093
Dear Dave,
We are pleased to confirm our verbal job offer of Senior Vice President and
Chief Financial Officer with Entrust Technologies Inc. (the "Company") reporting
to John Ryan. Your salary, on an annualized basis, will be $185,000.00 US, which
will be paid biweekly. Your salary and performance will be subject to review on
an annual basis.
You are eligible for an executive bonus of $100,000 annualized, and which is
subject to meeting identified business objectives.
You are also eligible for a signing bonus of $40,000 payable when your
employment begins.
In addition, you will be granted an award of incentive stock options to purchase
200,000 shares of common stock of Entrust with an exercise price equal to the
fair market value of the common stock on the day of grant. This award is subject
to the terms of the Incentive Stock Option Agreement that will be provided to
you in due course.
If you are terminated from the position of Chief Financial Officer within one
year of an Acquisition Event (as defined in the Amended and Restated 1996 Stock
Incentive Plan), and this termination is not by reason of your disability,
retirement, death, resignation or a for cause termination, 50% of your unvested
stock options will vest immediately as of the date the CFO duties are
reassigned.
Benefits, payroll, and other human resource management services are provided
through TriNet Employer Group, Inc. TriNet is an employer services organization
contracted by the Company to perform selected employer responsibilities on our
behalf. As a result of the Company's arrangement with TriNet, TriNet will be
considered your employer of record for payroll, benefits, and other functions
involving employer related administration, including your new hire enrollment
processing. However, as Entrust is the company for which you will perform
service, we will retain the right to control and direct your work, its results,
and the manner and means by which your work is accomplished.
A summary of the benefit plan is enclosed. TriNet will be sending you a package
that includes more complete benefit information along with certain forms that
are required for employment.
With the exception of the provision for at will employment described below,
Entrust Technologies Inc. and/or TriNet may modify, revoke, suspend or terminate
any of the terms, plans, policies and/or procedures described in the employee
handbook or as otherwise communicated to you, in whole or part, at any time,
with or without notice, and Entrust Technologies Inc. may change or terminate
the TriNet relationship at any time.
<PAGE>
As with all employees, your employment with the Company is at will. This means
that your terms and conditions of employment, including but not limited to
termination, demotion, promotion, transfer, compensation, benefits, duties and
location of work may be changed with or without cause, for any or no reason, and
with or without notice. Your status as an at-will employee cannot be changed by
any statement, promise, policy, course of conduct, in writing or manual except
through a written agreement signed by the CEO of the company.
This employment at will offer is contingent upon the following:
. Your signing the following agreements and returning with your offer letter:
Entrust's Conflict of Interest and Intellectual Property and
Confidentiality. By accepting this offer of employment at will, you also
agree to any terms and conditions contained in those documents as written
(included with this letter).
. Your completing the employment application (included in TriNet package).
. Your ability to provide documentation to establish your identity and
eligibility for employment as required under the Immigration Reform and
Control Act of 1986. Please review the enclosed "List of Acceptable
Documents", and provide the appropriate ones to your manager on your first
day of employment (included in TriNet package).
We believe that your abilities and our needs are compatible and that your
acceptance of this offer will prove mutually beneficial. However, it is
understood and agreed that your employment is terminable at the will of either
party and is not an employment agreement for a year or any other specified term.
To accept and confirm your start date or to decline this employment at will
offer, please contact me or Tracey Love at 972-943-7312 within five days of this
letter's date. Please sign and return the original offer letter along with all
other required documentation to Tracey Love before your first day of employment.
Any questions should be directed to me.
Sincerely,
John A. Ryan
President and Chief Executive Officer
<PAGE>
I have read, understood, and therefore, accept this offer of employment a will,
as set forth above, and will attend the October 14th Board.
Signature: /s/ David L. Thompson Date: October 11, 1999
------------------------------ -----------------------
Upon your acceptance of this offer as set forth above, please provide or confirm
your social security number and date of birth. This will facilitate your
enrollment on our payroll and employee benefit programs.
SS#: _______________________________________
Date of Birth: _________________________________
Attachments:
Benefit Plan Summary
Conflict of Interest Agreement
Intellectual Property and Confidentiality Agreement
<PAGE>
CONFLICT OF INTEREST AGREEMENT
------------------------------
Every director, officer, and employee will at all times, be conscious of the
interests of Entrust ("the Company"), and will not:
a) appropriate or convert the Company's property, tangible or intangible,
including trade secrets, confidential information, and other proprietary
information;
b) offer bribes, or accept corrupt payments or other like illegal or unethical
considerations;
c) accept gifts or gratuities that cannot be reciprocated in the ordinary
course of business;
d) disparage the Company or the Company's products, services or personnel;
e) influence, in a manner unfavorable to the Company, negotiations or
transactions between the Company and its suppliers, contractors, customers
and others, because of a personal, commercial, or financial interest in the
outcome of the negotiations or transactions;
f) without prior written permission, or having previously declared the
activity in a prescribed manner, serve or continue to serve as a director,
officer, or employee of, or perform, directly or indirectly, services for,
or act as a consultant to, a business that is or may be:
i) in competition with the Company; or
ii) a supplier of goods and/or services to the Company;
g) without prior written permission, directly or indirectly invest in, or
control, an entity that:
i) competes or may compete with a business or activity of the Company; or
ii) is or may be a supplier of goods and/or services to the Company;
except, in the case of publicly traded shares, when the investment does not
exceed five percent of the issued shares.
The above examples are merely illustrations of sources of possible conflicts. it
is anticipated that the activities of directors, officers, employees, and
immediate members of their families will comply with both the letter and the
spirit of this Agreement.
<PAGE>
2
Directors, officers, and employees will only trade in shares or securities of
the Company (or of any company with which it has dealings), having full regard
to the provisions of the relevant securities laws dealing with insider trading
and trading in securities.
/s/ David L. Thompson /s/David L. Thompson October 11, 1999
- --------------------------- --------------------------- ---------------------
Employee name (print) Employee signature Date
/s/ Christopher R. Thompson /s/ Christopher R. Thompson October 11, 1999
- --------------------------- --------------------------- ---------------------
Witness name (print) Witness Signature Date
<PAGE>
INTELLECTUAL PROPERTY AND CONFIDENTIALITY AGREEMENT
---------------------------------------------------
In consideration of my employment by Entrust ("the Company"), I agree to the
following:
1) I am under no obligation to anyone, including a former employer, which is
an impediment to my entering into this Agreement or which imposes any
restrictions on the activities or duties which may be assigned to me from
time to time by the Company.
2) I hereby assign to and waive in favour of the Company all my rights in and
to all inventions, discoveries, improvements, designs, know-how, technical
or commercial information, computer programs in any form, written
materials, data bases, integrated circuit topologies, plans, diagrams,
drawings, models, and other items, which I may conceive, develop or reduce
to practice during the period of my employment with the Company and which:
i) relate, directly or indirectly, to the Company's present or reasonably
foreseeable business or research or development; or,
ii) result from any work performed by me for the Company; or,
iii) are created or made using any equipment, supplies, facilities,
resources, or Confidential Information of the Company;
whether or not they are made during or after working hours, on or off the
Company's premises, or alone or with others.
3) I shall make prompt and full disclosure to the Company of any of the things
covered in paragraph 2. During and subsequent to my employment, I shall
sign documents, and provide such assistance, as may be required by the
Company to obtain, maintain, enforce, protect or grant any rights which I
have assigned to or waived in favour of the Company and which the Company
may desire in respect of such things in all countries of the world.
4) I shall not (except as expressly permitted by the Company in writing) at
any time during and subsequent to my employment with the Company:
i) disclose, or authorize the disclosure, to anyone other than authorized
officers or employees of the Company; or,
ii) use for non-Company purposes or other non-permitted purposes;
any of the Company's Confidential Information or any other information
disclosed to the Company by a third party in circumstances which oblige the
Company to protect such information from unauthorized use and/or
disclosure.
5) "Confidential Information" for the purposes of this Agreement shall mean
all information, including trade secrets, formulas, patterns, compilations,
programs, devices, methods, techniques, or processes, of a business,
planning, marketing, scientific,
<PAGE>
2
technical or other nature, that derives actual or potential value from not
being generally known, or readily ascertainable.
6) I shall keep on the Company's premises (except when required elsewhere in
connection with the conduct of the Company's business) and shall deliver to
the Company upon termination of my employment, all things including models,
circuits, instructions, drawings, notes, files, memoranda or other
writings, software programs in source code or object code form, and
magnetically or electronically stored information, which embody or contain
any of the rights or information described in paragraphs 2 and 4 above. I
further agree not to make or retain any copy, duplication, facsimile,
reproduction or replication of the foregoing.
7) This Agreement shall supersede any and all previous oral or written
communications, discussions or agreements between me and the Company
relating to the general subject matter addressed herein.
8) I shall at any time during and subsequent to my employment with the Company
reaffirm this Agreement or execute such further or other agreements with
respect to the general subject matter addressed herein as the Company, or
an affiliate company may from time to time require.
9) In the event that my employment by the Company is succeeded by employment
with an affiliate company, the terms of this Agreement apply until an
agreement relating to this subject matter is signed with the affiliate
company, and if I do not execute an agreement with such affiliate company
relating to this subject matter, terms identical to those set forth in this
Agreement shall apply immediately in favour of such affiliate company upon
commencement of my employment and until such agreement is executed with
such affiliate company.
Agreed this 11th day of October ____, 1999.
/s/ David L. Thompson /s/ David L. Thompson
- -------------------------------- --------------------------------
Employee name (print) Employee signature
<PAGE>
Exhibit 10.4
------------
THIS DEVELOPMENT AGREEMENT dated the 29th day of December, 1999
BETWEEN:
CANDEREL MANAGEMENT INC.
(hereinafter "the Developer")
AND:
ENTRUST TECHNOLOGIES LIMITED
(hereinafter "Entrust")
WHEREAS Entrust and the Developer have prepared the Project Definition Binder,
pursuant to which the parties now enter into this Development Agreement;
WHEREAS the Developer will design and build the Premises pursuant to the terms
of this Development Agreement; and
WHEREAS Entrust has agreed to lease the Premises on the terms and conditions of
the Lease Agreement to be executed concurrently with this Development Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, agreements, conditions
and undertakings in this Development Agreement, the Developer and Entrust
covenant and agree as follows:
SECTION 1
---------
RECITALS
--------
The recitals set out above are true and correct.
SECTION 2
---------
DEFINITIONS
-----------
In this Development Agreement:
"Base Building Core & Shell" means the structures, facilities and improvements
described in the Project Definition Binder as being the Landlord's
responsibility to provide on its own behalf including, without limitation, the
Exterior Building Amenities, as amended during the course of development under
and subject to this Development Agreement.
"Building" means the turnkey office building to be constructed under and subject
to the terms of this Development Agreement, consisting of approximately 146,100
square feet of total floor rentable area.
"Business Day" means a day on which the Land Registry Office for the Land Titles
Division of Ottawa-Carleton is open for business with the public.
<PAGE>
2
"Commencement Date" has the meaning ascribed to it in the Lease Agreement.
"Construction Lien Act" means the Construction Lien Act, R.S.O. 1990, c. C.30,
as amended.
"Construction Plans and Specifications" means the final plans and specifications
for the Base Building Core & Shell.
"Delay Days" means the calendar days of delay beyond the date of Substantial
Performance of the Base Building Core & Shell and the Tenant Fit-Up.
"Development Schedule" means the schedule annexed to this Development Agreement
as Schedule "2", as amended by the Developer from time to time (provided that no
amendment may reduce the period of time for any action to be taken by Entrust
unless Entrust otherwise agrees in writing).
"Entrust Delay" means delays arising directly or indirectly out of acts or
omissions by Entrust or any person for whom Entrust is responsible in law,
including, without limitation, delays arising from change orders, the
specifications imposed (except to the extent specifically set forth in the
Project Definition Binder) or materials or equipment selected by Entrust or
Entrust's failure to take any action within the time contemplated by the
Development Schedule.
"Exterior Building Amenities" means the structures, facilities and improvements
exterior to the Building:
(i) described in the Project Definition Binder; and / or
(ii) set forth in the Site Plan,
including, without limitation, landscaping, parking, paving, striping, curbing,
grading and drainage, exterior lighting, flagpoles and signage to the extent:
(i) described in the Project Definition Binder; and / or
(ii) set forth in the Site Plan.
"Force Majeure Delay" excludes Entrust Delay and means delays caused by:
(i) acts of God, war, civil commotion, fire, flood or other casualty,
government regulations not in effect on the date of this Development
Agreement and labour disputes (other than those limited to the site of the
Building;
(ii) inability to obtain materials, goods, equipment, service, utility or
labour, inability to procure any licence or permit or unusual delay by
common carrier, provided that the Developer has exercised commercially
reasonable efforts and has diligently attempted to avoid and to mitigate
such cause(s) of delay; and
<PAGE>
3
(iii) other matters beyond the reasonable control of the Developer, provided
that the Developer has exercised commercially reasonable efforts and has
diligently attempted to avoid and to mitigate such cause(s) of delay.
"General Conformity Plans and Specifications" has the meaning ascribed to it in
subsection 3.3(b).
"Lands" means the parcel of land in the City of Kanata, Ontario described in
Schedule "l", consisting of approximately 11.58 acres.
"Lease Agreement" means the lease agreement being executed by the parties
contemporaneously with, and collateral to, this Development Agreement, pursuant
to which Entrust is leasing the Land and the Building.
"Owner" means 3559807 CANADA INC.
"Owner's Mortgagee" means any mortgagee of the Owner holding a mortgage of the
Lands or holding a mortgage of a ground lease granted by the Owner in respect of
the Lands.
"Preliminary Plans and Specifications" means the preliminary plans and
specifications for the Base Building Core & Shell to be prepared by the
Developer's, design consultants and accepted by Entrust.
"Premises" means the Base Building Core & Shell and the Tenant Fit-Up.
"Progress Drawings and Specifications" means the second and subsequent
generations of the Preliminary Plans and Specifications, other than the
Construction Plans and Specifications.
"Project Definition Binder" means the binder of documents and information
assembled and accepted by the parties dated December 20, 1999, representing the
understanding and agreement of the parties as to the scope and definition of the
Building and the Exterior Building Amenities.
"Site Plan" means the site plan for that part of the Lands on which the Building
and the Exterior Building Amenities will be located to be prepared by the
Developer, accepted by Entrust and which is to be approved by the City of
Kanata, as amended from time to time (provided that after acceptance by Entrust,
any material amendments, other than amendments required by municipal
authorities, are subject to further acceptance by Entrust, to be granted or
denied within four (4) Business Days of request for it).
"Substantial Performance" has the meaning ascribed to it in section 2 of the
Construction Lien Act and shall be evidenced by a Certificate or Certificates of
Substantial Performance issued by the Developer's architect, as to the Base
Building Core & Shell, and by the principal of the Developer's interior design
firm, as to the Tenant Fit-Up, which Certificate or Certificates shall be in the
standard form contemplated by the Construction Lien Act. "Substantially
Performed" has a corresponding meaning. Notwithstanding the foregoing, the
parties hereto agree that items of a minor nature relating to the exterior of
the Building (such as landscaping) which could not reasonably be completed
because of weather conditions and which do not materially affect Entrust's
ability to enjoy the Building are not to be considered in calculating
<PAGE>
4
whether or not Substantial Performance has occurred. For the purposes of this
Agreement, the said items are to be referred to as "the Finishing Items".
"Substantial Performance Date" means October 23, 2000 subject to revision in
accordance with the terms of this Development Agreement.
"Tenant Fit-Up" means the design, procurement, construction, commissioning and
all related management and supervision with respect to the structures,
facilities and improvements on the interior of the Building, including the
structures, facilities and improvements described as being part of the tenant
fit-up in the Project Definition Binder, but excluding Base Building Core &
Shell. The structures, facilities and improvements to be included in Tenant
Fit-Up that have been identified as of the date of this Development Agreement
are listed in the Project Definition Binder.
"Tenant Fit-Up Plans and Specifications" means the final plans and
specifications for the Tenant Fit-Up.
"Tenant's Work" means all work relating to the furnishing and installation of
trade fixtures, furnishings, cabling, equipment and other tangible personal
property which Entrust may desire and which is not required of the Developer
under the Construction Plans and Specifications or the Tenant Fit-Up Plans and
Specifications and which may be installed by Entrust.
SECTION 3
---------
DESIGN AND CONSTRUCTION OF BASE BUILDING CORE & SHELL AND
---------------------------------------------------------
TENANT FIT-UP
-------------
3.1 The Developer's Design and Construction Obligations
---------------------------------------------------
(a) The Developer shall design and construct the Base Building Core & Shell in
accordance with:
(i) any change orders implemented pursuant to subsection 3.4;
(ii) plans, specifications, clarifications, confirmations or modifications
(other than the General Conformity Plans and Specifications (as that
term is defined in subsection 3.3)) proposed by the Developer which
may be approved in writing by Entrust from time to time;
(iii) the General Conformity Plans and Specifications; and
(iv) the Project Definition Binder, provided that the Developer may make
changes to the mechanical, electrical or architectural design or
specifications if the performance criteria set forth in the Project
Definition Binder are met or exceeded.
If there is any conflict among the provisions of subparagraphs (i), (ii),
(iii) and (iv) of this paragraph 3.1(a), then subparagraph (i) prevails
over subparagraphs (ii), (iii) and (iv),
<PAGE>
5
subparagraph (ii) prevails over subparagraphs (iii) and (iv) and
subparagraph (iii) prevails over subparagraph (iv).
(b) The Developer shall design and construct the Tenant Fit-Up in accordance
with the Tenant Fit-Up Plans and Specifications, subject to any change
orders implemented pursuant to subsection 3.4.
(c) If and when Entrust becomes aware of any error in, omission from or
discrepancy between:
(i) the Construction Plans and Specifications; and
(ii) the Project Definition Binder, subject to any change orders
implemented pursuant to subsection 3.4 and to any approved plans,
specifications, clarifications, confirmations or modifications
referred to in subparagraph 3.1(a)(ii),
then Entrust shall forthwith provide written notice to the Developer
setting out in reasonable detail the error, omission or discrepancy.
(d) The Developer shall commence and diligently prosecute and complete the
design and construction of the Base Building Core & Shell and Tenant Fit-Up
in accordance with the terms and conditions of this section 3.
3.2 Development Schedule
--------------------
Subject to extension for Force Majeure Delay or Entrust Delay, the Developer
shall perform its work by the dates set out in the Development Schedule. The
Developer shall: (i) monitor and control the progress of the work relative to
the Development Schedule; (ii) provide proposed updates or revisions of the
Development Schedule to Entrust's authorized representative from time to time;
and (iii) advise Entrust of any revisions required as the result of delays,
indicating the impact expected from the change in schedule. The Developer shall
advise Entrust in writing, providing reasonable particulars of any alleged
Entrust Delay which will affect the Development Schedule forthwith after the
Developer becomes aware of the delay.
3.3 Entrust Review and Acceptance of Plans and Specifications
---------------------------------------------------------
(a) The parties acknowledge that the Developer shall prepare and Entrust is to
review and accept the Site Plan, and the Preliminary Plans and
Specifications and that the Developer has, as of the date of execution
hereof prepared and Entrust has received and tentatively accepted a
preliminary Site Plan, Development Schedule dated December 17, 1999 and
preliminary Plans and Specifications attached as Schedules hereto.
(b) In consultation with Entrust, the Developer shall cause the Construction
Plans and Specifications to be promptly prepared in conformity with: (i)
the Project Definition Binder (subject to subparagraphs 3.1(a)(i), (ii) and
(iv)); (ii) the Preliminary Plans and Specifications; and (iii) the
Progress Drawings and Specifications and in compliance with applicable
zoning and other laws, codes, by-laws and governmental regulations. The
Developer shall submit to Entrust, for the sole purpose of obtaining
Entrust's
<PAGE>
6
acknowledgment that they are in general conformity with the Project
Definition Binder (subject to subparagraphs 3.1(a)(i), (ii) and (iv), the
following (the "General Conformity Plans and Specifications"):
(i) Site Plan (preliminary Site Plan being Drawing No. A01 dated
November, 1999);
(ii) typical floor plate (as set forth in Drawing No. A04 dated November,
1999);
(iii) building elevations (for aesthetic purposes only) (as set forth in
Drawings Nos. A08 and A09 dated November, 1999);
(iv) overall concept of mechanical and electrical systems (as set forth in
the Section C-1 of the Project Definition Binder under the heading
"Mechanical/Electrical Outline Specification" prepared by R. J. McKee
Engineering dated November 24, 1999);
(v) ground floor plan (as set forth in Drawing No. A03 dated November,
1999)
For greater certainty, Entrust's review of the General Conformity Plans and
Specifications does not diminish in any way the Developer's obligation to design
and construct the Base Building Core & Shell in a good and workmanlike manner
fit for the purpose intended and in accordance with applicable law. The General
Conformity Plans and Specifications shall be initialed by both parties and shall
be deemed to be incorporated by reference as part of this Development Agreement.
(c) In consultation with Entrust, the Developer shall cause the Tenant Fit-Up
Plans and Specifications to be prepared in conformity with the Project
Definition Binder (except as the requirements of the Project Definition
Binder may be amended by written instructions received from Entrust). The
Developer shall submit the Tenant Fit-Up Plans and Specifications to
Entrust for Entrust's review and, in the case of architectural and interior
design plans and specifications forming part of the Tenant Fit-Up Plans and
Specifications, for Entrust's acceptance. Upon acceptance by Entrust, the
architectural and interior design plans and specifications forming part of
the Tenant Fit-Up Plans and Specifications supersede the provisions of the
Project Definition Binder. The Tenant Fit-Up Plans and Specifications shall
be initialed by both parties and shall be deemed to be incorporated by
reference as part of this Development Agreement. The Tenant Fit-Up Plans
and Specifications shall be prepared by the Developer and reviewed by
Entrust in accordance with the time frames contemplated by the Development
Schedule,
(d) The Developer shall prepare promptly any additional plans which may be
required by all authorities having jurisdiction in order to obtain all
necessary permits and approvals. The Developer shall comply with the
requirements of the governmental agencies having jurisdiction and public
utilities (including, without limitation, the granting of easements for
public services). The Developer shall obtain all preliminary and final
building permits necessary to construct and permit occupancy of the
Premises in accordance with the Construction Plans and Specifications, the
Tenant Fit-Up Plans and Specifications and the Development Schedule. The
Developer shall bear the costs (including, without limitation, applicable
development charges) associated with obtaining permits for the
<PAGE>
7
Base Building Core & Shell and Entrust shall bear the costs (including,
without limitation, applicable development charges) associated with
obtaining permits for the Tenant Fit-Up.
3.4 Change Orders
-------------
Prior to completion of construction, Entrust may from time to time in its
discretion order modifications to the Preliminary Plans and Specifications, the
Progress Drawings and Specifications, the Construction Plans and Specifications
and the Tenant Fit-Up Plans and Specifications, subject to an appropriate
extension of the Substantial Performance Date (if applicable). Each
modification requested by Entrust is subject to the following:
(a) the consent of the Developer (which consent may only be withheld as set out
in Section 2 of Schedule "F" of the Lease);
(b) if the modification increases or decreases total cost of the Base Building
Core & Shell, then the cost of the modification will be dealt with as set
out in Section 2 of Schedule "F" of the Lease;
(c) if consented to, the cost of the modification is to be dealt with as set
out in Section 4.1 (c) of this Development Agreement.
If at any one time Entrust requests modifications which both increase and
decrease costs, then only the net cost effect of those modifications shall be
considered, provided that the cost effect of modifications to the Base Building
Core & Shell and to the Tenant Fit-Up shall be considered separately.
Entrust also may, in its discretion, require certain immaterial (i.e., at no
change of cost or change in time or material change in design) field
modifications in the Tenant Fit-Up Plans and Specifications without the consent
of the Developer. The Construction Plans and Specifications shall not be
amended by the Developer in any manner which materially affects the Tenant Fit-
Up Plans and Specifications without the written consent of Entrust.
Except for immaterial field modifications to the Tenant Fit-Up Plans and
Specifications as described above, approval of all modifications requested by
Entrust to or affecting the Construction Plans and Specifications or the Tenant
Fit-Up Plans and Specifications and approval of modifications requested by the
Developer to or affecting the Tenant Fit-Up Plans and Specifications must be in
writing and signed or initialed by both parties through their authorized
construction representatives from time to time. As of the date of this
Development Agreement, Entrust's authorized representative is Carol Lim or David
Wagner and the Developer's authorized representative is Jonathan Wener, Douglas
Pascal, Oakley Semple or Wayne Jennings. Each party shall give written notice
to the other of any change in the individuals who have full binding authority to
approve modifications. If a party withdraws the authority of any such
individual by written notice to the other party, then that withdrawal is not
valid unless the notice specifies a new authorized construction representative
for the withdrawing party. The Developer shall obtain approval of one of
Entrust's authorized construction representatives for any modifications or
contemplated modifications (the cost of investigating which is Entrust's)
requested by Entrust to or affecting the Construction Plans and Specifications
or the Tenant Fit-Up Plans and
<PAGE>
8
Specifications and for any modifications requested by the Developer to or
affecting the Tenant Fit-Up Plans and Specifications and the Developer is solely
responsible for any changes not approved by one of Entrust's authorized
representatives.
If the Developer forecasts that any changes or modifications requested by
Entrust may cause a delay in meeting the Substantial Performance Date, then the
Developer shall give Entrust notice of the estimated number of Delay Days (which
Delay Days are to be deemed to cause an Entrust Delay). If Entrust decides to
have the Developer proceed with the change or modification, then the Substantial
Performance Date shall be extended by the actual number of Delay Days.
3.5 Reporting
---------
From and after the execution of this Development Agreement, the Developer shall
submit to Entrust monthly written reports describing: (i) the status of the
Developer's obligations under this Development Agreement; (ii) the status of
Base Building Core & Shell and Tenant Fit-Up change orders requested by Entrust
to the date of the report; and (iii) any material deviation from the
Construction Plans and Specifications and Tenant Fit-Up Plans and
Specifications. The Developer's bi-weekly reports shall be accompanied by
architectural and engineering inspection reports received during the preceding
two week period which relate to the Tenant Fit-Up. In addition, the Developer
shall submit to Entrust monthly written reports describing: (i) the schedule of
the Developer's obligations under this Development Agreement and (ii) the status
of the Tenant Fit-Up budget to the date of the report.
3.6 Contractors and Consultants
---------------------------
The Developer shall be the construction manager for the construction of the
Premises and is responsible for all work described in the Construction Plans and
Specifications and the Tenant Fit-Up Plans and Specifications. Entrust also has
authorized the Developer's use of the following consultants:
for architecture: Tolchinsky & Goodz, Architects
for mechanical/electrical engineering: R.J. McKee Engineering Ltd.;
for structural engineering: Adjeleian Allen Rubeli Limited;
for civil engineering: Novatech Engineering Consultants Ltd.;
for interior design: Gansen Lindsay
for landscape architecture: Larocque Levstek;
for elevator consulting: Rooney, Irving & Associates;
for food service consulting: Design Food Services Incorporated;
for soils: Golder Associates.
The Developer shall not use any other consultants for the functions and purposes
listed above in connection with the design and construction of the Premises
without first obtaining Entrust's written approval.
3.7 Warranties
----------
(a) The Developer warrants and guarantees that the Base Building Core & Shell
will be constructed in a good and workmanlike manner and shall correct
promptly, at its sole cost
<PAGE>
9
and expense, defects or deficiencies in workmanship, materials and
equipment not caused by normal wear and tear or by the negligence or
misconduct of Entrust which appear during the period of one (1) year from
the date of Substantial Performance.
(b) The Developer warrants and guarantees that the Tenant Fit-Up will be
constructed in a good and workmanlike manner and shall correct promptly, at
its sole cost and expense, defects or deficiencies in workmanship,
materials and equipment not caused by normal wear and tear or by the
negligence or misconduct of Entrust which appear during the period of one
(1) year from the date of Substantial Performance.
(c) The Developer shall provide the necessary qualified resources to ensure
that all Base Building Core and Shell CAD standard drawings are provided
and added to Entrust's database and will deliver as-built drawings, CAD
representations (updated with all changes of the as-built condition upon
completion) and training manuals to Entrust within ninety (90) calendar
days after Substantial Performance of the Premises. All Tenant Fit-Up CAD
standard drawings are also to be provided and added to Entrust's database
as well as as-built drawings, CAD representations.
(d) Without limiting the scope, nature or timing of any claims under the
warranties in this subsection 3.7, Entrust and the Developer shall inspect
the Premises immediately prior to the expiry of each warranty period for
the purpose of agreeing on a list of warranty items to be rectified or
completed. The Developer shall promptly commence and diligently pursue to
correction and completion the work set forth in any deficiency list arising
out of that inspection. If the Developer disputes any item on the
deficiency list, then the matter shall be settled in accordance with the
provisions of section 12.
(e) To the extent that they are assignable, any and all warranties obtained by
the Owner or Developer and relating to the Base Building Core & Shell and
the Tenant Fit-Up shall and are hereby assigned to Entrust jointly with the
Owner and Developer, so that each party shall be able to enforce such
warranties in order to assist them to comply with their respective
obligations under this Development Agreement and the Lease.
3.8 Substantial Performance
-----------------------
(a) Substantial Performance The Developer shall Substantially Perform the
-----------------------
construction of the Premises in accordance with the Construction Plans and
Specifications and Tenant Fit-Up Plans and Specifications and shall deliver
up possession of the Premises to Entrust no later than the Substantial
Performance Date, subject to extension for Force Majeure Delay or Entrust
Delay. Finishing Items are to be completed as soon as possible after
weather conditions permit such completion.
(b) Notice of Substantial Performance The Developer shall notify Entrust from
---------------------------------
time to time of the expected date of Substantial Performance of: (i) the
Base Building Core & Shell; (ii) the Tenant Fit-Up; or (iii) components of
the Base Building Core & Shell or Tenant Fit-Up selected by the Developer
as being ready for Tenant's Work, in each case at least thirty (30)
calendar days before the expected date of the applicable Substantial
<PAGE>
10
Performance, and subsequently shall notify Entrust of the actual date of
the applicable Substantial Performance.
(c) Joint Inspection/Deficiency List Within five (5) calendar days after the
--------------------------------
later of (i) receipt by Entrust of the Developer's notice of the actual
date of Substantial Performance or (ii) the actual date of Substantial
Performance as set forth in the Developer's notice, Entrust has the right
to attend at the Premises together with a representative of the Developer
for the purpose of carrying out a joint inspection with the Developer and
the Developer's representative of the Substantially Performed work to which
the Developer's notice relates and agreeing on a list of items to be
rectified or completed.
(d) Dispute as to Deficiency List If either party disputes the inclusion or
-----------------------------
exclusion of any item from the parties' joint deficiency list, then the
matter shall be referred to and determined by an arbitration conducted in
accordance with section 12. If applicable, this subsection constitutes the
required submission to arbitration.
(e) Correction of Deficiencies In any event, the Developer shall promptly
--------------------------
commence and diligently pursue to correction and completion the work set
forth in the joint deficiency list and shall complete it within thirty (30)
calendar days after the preparation of the joint deficiency list (except
for items which cannot be completed within that thirty (30) day period for
reasons beyond the Developer's reasonable control, provided the Developer
shall diligently pursue the correction and completion of those items).
(f) Deemed Acceptance Upon the expiration of the five (5) day period referred
-----------------
to in paragraph 3.8(c), Entrust shall be deemed to have accepted the
Substantially Performed work to which the Developer's notice relates and
the Developer shall be deemed to have satisfied all of its obligations in
respect to it, save and expect for the uncompleted and incorrectly
completed items described in the joint deficiency list and latent defects.
Entrust's deemed acceptance of that work and the Developer's deemed
satisfaction of its obligations in respect to it does not diminish in any
way the Developer's warranties and guarantees given to Entrust pursuant to
subsection 3.7.
3.9 Remedies For Failure to Deliver Premises on the Substantial Performance
-----------------------------------------------------------------------
Date
----
Entrust shall have no right to terminate the Lease Agreement or to abate rent
due under the Lease Agreement for any failure by the Developer to meet the
Substantial Performance Date, as extended for Force Majeure Delay or Entrust
Delay. The effect of Force Majeure Delay, Entrust Delay and the failure of the
Developer to meet the Substantial Performance Date (as extended for Force
Majeure Delay or Entrust Delay) on the determination of the Commencement Date is
governed by the Lease Agreement.
The Developer agrees that it shall assign a project manager satisfactory to
Entrust, acting reasonably, for the construction of the Base Building Core &
Shell as well as the Tenant Fit-Up and that such project manager shall be
dedicated on a full-time basis to such construction. Entrust hereby confirms
that Stephen Martin is a project manager satisfactory to Entrust.
<PAGE>
11
3.10 General Conditions Regarding Construction Work
----------------------------------------------
All of the work to be performed by, through and under the Developer shall be
done: (i) in a good and workmanlike manner; (ii) in compliance with all
applicable construction-related legislation, bylaws, ordinances, regulations,
building codes, rules, orders,, licences, zoning and building requirements
applicable to it; and (iii) in accordance with this Development Agreement.
After Substantial Performance, the Developer shall obtain and evidence to
Entrust all permits and authorizations permitting lawful occupancy of the
Premises. The Developer shall bear the costs (including, without limitation,
applicable development charges) associated with obtaining permits for the Base
Building Core & Shell and Entrust shall bear the costs (including, without
limitation, applicable development charges) associated with obtaining permits
for the Tenant Fit-Up.
Except for Tenant's Work and subject to:
(a) the Developer's allowance to Entrust of the sum of Fifteen Dollars
($15.00) per square foot of rentable area of the Building (exclusive of
G.S.T.) in respect of the Tenant Fit-Up;
(b) Entrust paying for the cost of the Tenant Fit-Up in excess the said
Fifteen Dollars ($15.00) per square foot of rentable area of the Building
(exclusive of G.S.T.); and
(c) Entrust paying for the cost of certain items in excess of the Allowance
(as contemplated by section 3.14 of this Agreement),
the Developer shall pay all construction trades and suppliers monies properly
due and owing to them and shall comply with the provisions of the Construction
Lien Act and all applicable construction-related legislation, bylaws,
ordinances, regulations and building codes. The Developer shall ensure that
there are no lien claims, notices of security interests or other such
encumbrances registered against Entrust's leasehold interest in the Building as
at and after the Substantial Performance Date arising as a result of the
Developer's failure to comply with its obligations under this subsection. In
the event of any such lien claim, notice or other encumbrance, the Developer
shall take whatever steps may be required to vacate forthwith the registration
of it. The Developer also shall indemnify Entrust and hold Entrust harmless
with respect to any and all claims (including, without limitation, solicitor-
client costs) arising out of the supply of services and materials to the
Developer, its construction manager or trades and suppliers for the construction
of the Premises (subject to Entrust's payment of that portion of the cost of the
Tenant Fit-Up which is in excess of Fifteen Dollars ($15.00) per square foot of
rentable area of the Building (exclusive of G.S.T.) in accordance with the terms
of this Development Agreement).
3.11 Entrust's Installations Prior to Completion
-------------------------------------------
Entrust, at its sole cost and expense, shall perform Tenant's Work. All
Tenant's Work shall be performed in accordance with the provisions of this
subsection.
In performing the Tenant's Work, Entrust shall pay all construction trades and
suppliers monies properly due and owing to them and comply with the provisions
of the Construction Lien Act and all applicable construction-related
legislation, bylaws, ordinances, regulations and building
<PAGE>
12
codes. Entrust shall ensure that there are no lien claims, notices of security
interests or other such encumbrances registered against the Lands or Building
arising from the Tenant's Work or, to the extent that the cost of the Tenant
Fit-Up exceeds Fifteen Dollars ($15.00) per square foot of rentable area of the
Building (exclusive of G.S.T.), arising from Entrust's failure to pay that
excess in accordance with the terms of this Development Agreement. In the event
of any such lien claim, notice or other encumbrance, Entrust shall take whatever
steps may be required to vacate forthwith the registration of it. Entrust shall
indemnify and hold the Developer and the Owner harmless from any construction
lien claims (including, without limitation, solicitor-client costs) arising out
of the Tenant's Work or, to the extent that the cost of the Tenant Fit-Up
exceeds Fifteen Dollars ($15.00) per square foot of rentable area of the
Building (exclusive of G.S.T.), arising from Entrust's failure to pay that
excess in accordance with the terms of this Development Agreement, including,
without limitation, claims arising out of the supply of services and materials
to Entrust, its trades and suppliers for the Tenant's Work.
After the execution of this Development Agreement and the Lease Agreement and
prior to the Substantial Performance Date, the Developer shall permit
representatives, agents, employees, contractors, architects and engineers
designated by Entrust to enter on the Lands and in the Building at their own
risk for the purpose of performing the Tenant's Work without payment of rent or
other charges except costs relating to the work performed (such as hoisting and
garbage removal and clean-up). Any such entry and the performance of Tenant's
Work: (i) shall be done on notice by Entrust to the Developer; (ii) must not
hamper or delay the Developer's construction work; (iii) shall be scheduled and
coordinated with the Developer's work; (iv) shall be done in accordance with the
Development Schedule; and (v) shall be subject to the reasonable rules and
regulations of the Developer. Until Substantial Performance of the Base Building
Core & Shell, the Developer shall pay the cost of water, sewer, electricity and
other utilities used for the construction of the Base Building Core and Shell
and Entrust shall be responsible for the payment of such items after such time
as well as payments related to such items with respect to the Tenant Fit-Up and
the Tenant's Work.
Without limiting the generality of the foregoing and subject to Force Majeure
Delay and Entrust Delay, the Developer will grant Entrust access on or before
the applicable date(s) set out in the Development Schedule to perform Tenant's
Work in the communication rooms and also will grant Entrust access to other
areas in the Building required to connect communications or electrical cabling
to those rooms, provided that those rooms are not required to be fully completed
or operational by that date and subject to the reasonable rules and regulations
of the Developer. The final locations of those rooms may change during the
course of development, but if Entrust has provided all necessary information to
the Developer in accordance with the Development Schedule with respect to the
location and design of those rooms, then the Developer will provide Entrust
access to those rooms on or before the applicable date(s) set out in the
Development Schedule (subject to Force Majeure Delay and Entrust Delay).
3.12 Entrust's Right of Entry To Review Progress of Construction
-----------------------------------------------------------
Whenever Entrust considers it appropriate, the Developer shall permit
representatives, agents, employees, lenders, contractors, appraisers, architects
and engineers designated by Entrust to enter the Lands and Building at their own
risk for the purpose of reviewing the progress of construction without the
payment of rent or other charges; provided that except as set forth
<PAGE>
13
below in this subsection 3.12 and in subsection 7.1, Entrust is not assuming any
liability whatsoever as a result of any such entry or review and no such entry
and review diminishes in any way the responsibilities of the Developer under
this Development Agreement. Any such entry: (i) shall be done on notice by
Entrust to the Developer; (ii) is subject to the reasonable rules and
regulations of the Developer; and (iii) must not hamper or delay the Developer's
construction work (including not giving any instructions to construction
personnel on the job site).
3.13 Approvals
---------
No approval, consent, authorization or acceptance required or contemplated under
this Development Agreement shall be unreasonably withheld or delayed and each
such approval, consent, authorization or acceptance must be given within the
time frame, if any, contemplated by the Development Schedule or this Development
Agreement.
3.14 Base Building Core & Shell Budget
---------------------------------
The parties acknowledge that the budget for the Base Building Core & Shell
includes certain allowances totaling $235,000.00 (the "Allowance"), being
allowances for signage ($25,000.00), relocation of existing signage or new
Building signage ($20,000.00) and landscaping and hardscaping ($150,000.00),
smoking shelter ($15,000.00), security desk ($15,000.00) and bicycle shelter
($10,000.00). Subject to the Developer's obligations to comply with applicable
laws (including municipal site plan requirements), the said allowances may be
used by Entrust as Entrust sees fit. Provided that the Allowance is not
exceeded, Entrust shall also have the ability to allocate or reallocate portions
of the Allowance as between cost items and categories as it sees fit. For
clarity, in the event that the total actual costs for the items set out above
exceeds the Allowance, such excess cost shall be paid by Entrust within forty-
five (45) days after receipt of invoice from time to time from the Developer,
subject to the provisions of the Construction Lien Act.
SECTION 4
---------
TENANT FIT-UP
-------------
4.1 General
-------
(a) The Developer shall ensure that each part of the Tenant Fit-Up complies
with and conforms to all applicable municipal by-laws for its intended use
and meets or exceeds all fire and life safety requirements of the Ontario
Building Code, including all barrier-free provisions and guidelines, as of
the date on which a building permit is issued for that part.
(b) The services supplied and the roles and responsibilities assumed by the
Developer in respect of the Tenant Fit-Up include, but are not limited to,
the services, roles and responsibilities described in the "Canadian
Standard Construction Management Contract Form Between Owner and
Construction Manager" (CCA 5 - 1988), except as otherwise agreed in
writing.
(c) The Developer shall contribute up to the sum of Fifteen Dollars ($15.00)
per square foot of rentable area of the Building (exclusive of G.S.T.) to
the cost of the Tenant Fit-Up.
<PAGE>
14
The costs to be paid from that contribution include the costs of all plans
and permits, the cost of insurance for the Tenant Fit-Up and the costs
described in the Tenant Fit-Up economics schedule (Section A-4- Schedule
"B") in the Project Definition Binder, together with those fees set out in
Section 6 of Schedule "F" of the Lease. If the total cost of the Tenant
Fit-Up exceeds Fifteen Dollars ($15.00) per square foot of rentable area of
the Building (exclusive of G.S.T.), then the excess is payable by Entrust
within forty-five (45) days after receipt of invoice from time to time from
the Developer, subject to the provisions of the Construction Lien Act.
4.2 Services of the Developer
-------------------------
The Developer shall provide or cause to be provided the services as described in
the Project Definition Binder from time to time. As well, the Developer shall
identify alternatives and provide value engineering services for the Tenant Fit-
Up that may yield cost benefits to Entrust.
4.3 Budget
------
The Developer shall provide cost estimates to Entrust for the Tenant Fit-Up in
accordance with the Project Definition Binder during the schematic design phase,
the design development phase and the tender documents phase. After preparation
of the budget for Tenant Fit-Up and acceptance thereof by Entrust, acting
reasonably, the budget is subject to revision by the Developer during the course
of development to reflect the latest cost estimates received by it, having
regard to the progression of the schematic design phase, the design development
phase and the tender documents phase, subject to review and acceptance of those
cost estimates by Entrust, acting reasonably. The budget shall be monitored and
controlled by the Developer so that it is not exceeded, other than as a result
of changes ordered by Entrust or Force Majeure or with Entrust's agreement. The
budget shall provide an allowance for contingencies equal to ten (10%) percent
of all costs, it being understood that all unused allowances and contingencies
in the Tenant Fit-Up budget shall be to the credit of Entrust.
4.4 Quality Assurance / Quality Control
-----------------------------------
The Developer shall supply a qualified Quality Assurance / Quality Control
manager who may be an employee of the Developer (subject to Entrust's reasonable
approval) who will use commercially reasonable efforts to ensure that all
aspects pertaining to the quality of the Tenant Fit-Up are met or exceeded, in
accordance with the Project Definition Binder until the completion of the Tenant
Fit-Up Plans and Specifications and then in accordance with the Tenant Fit-Up
Plans and Specifications. The Developer's monthly written reports during Tenant
Fit-Up construction shall include a section entitled "Quality Assurance/Quality
Control" in which all material exceptions are reported and described.
4.5 Schedule
--------
Subject to Force Majeure Delay and Entrust Delay, the Developer is responsible
for the timely delivery of materials, equipment and labour required to perform
and complete the Tenant Fit-Up in accordance with the Development Schedule.
Entrust is responsible to provide the necessary input, review and approvals
required by the Developer in a timely manner in accordance with the Development
Schedule. The Developer shall provide to Entrust detailed sub-schedules
reflecting
<PAGE>
15
activities in the Tenant Fit-Up design and procurement phases. The sub-schedules
shall incorporate the time frames described in the Development Schedule and
shall provide further detail pertaining to the Developer's design activities and
Entrust input, review and approval dates. In the sub-schedules, the Developer
also shall illustrate in detail procurement activity, including, without
limitation, long-term delivery items, tender packages, tender processes, tender
analysis, tender recommendation and contract award. In all cases, the Developer
shall immediately notify Entrust in writing if and when the Developer forecasts
that the Tenant Fit-Up will or may cause a delay in the Substantial Performance
Date or the Commencement Date.
4.6 Procurement
-----------
The Developer shall issue all Tenant Fit-Up work for tender and shall obtain no
less than three (3) competitive quotations for all Tenant Fit-Up work, subject
to Entrust's written agreement to accept less than three (3) quotations. The
Developer shall provide to Entrust copies of the approved tender packages to be
issued for tender, all correspondence during the tender period and all tender
submissions. The Developer shall provide its review and analysis of all tender
submissions and shall make a recommendation for contract award to Entrust. Upon
receipt of Entrust's approval and instructions, the Developer shall award the
Tenant Fit-Up contract(s) (which award the Developer agrees Entrust may direct
to a tendering party which may not have been the lowest bidder). If the
quotations received as a result of tendering exceed the most recent budget cost
estimates which have been prepared by the Developer and accepted by Entrust
reflecting the then current accepted design status of the Tenant Fit-Up and if
required by Entrust, the Developer shall arrange to re-design and re-tender as
required to ensure that .costs are within the project budget for the Tenant Fit-
Up, the cost of such re-design and re-tender to be borne by the Developer if it
was negligent in the performance of its obligations hereunder, and otherwise to
be borne by Entrust. In all respects, the Developer shall clearly differentiate
between Base Building Core & Shell work and Tenant Fit-Up work and shall use
commercially reasonable efforts to ensure compatibility and coordination between
them.
Notwithstanding anything to the contrary in this subsection 4.6:
(a) wherever Tenant Fit-Up mechanical and electrical work interfaces with Base
Building Core & Shell mechanical and electrical systems and any warranty
for the Base Building Core & Shell mechanical or electrical system may be
affected if the work is performed by another person, the Base Building Core
& Shell mechanical and electrical subcontractor must be used; and
(b) if Entrust fails to provide information in a timely manner to allow the
Developer to obtain competitive pricing, then the Developer may require
unit pricing.
4.7 Construction
------------
(a) All changes and additions to building systems to be located in the ceiling
space, including, but not limited to, lighting, sprinklers, life support
systems, HVAC diffusers, electrical distribution systems and ceiling grid
and tiles, that are part of the Tenant Fit-Up are subject to approval by
Entrust. It is understood that the Developer shall be
<PAGE>
16
responsible to install, at its cost, the Base Building Core & Shell
building systems in the ceiling spaces with due regard to the Tenant Fit-Up
requirements, so long as:
(i) Entrust adheres to the Development Schedule;
(ii) the Tenant Fit-Up item is delivered and capable of being carried out
within the Development Schedule; and
(iii) Entrust gives all necessary information requested by the Developer
before the installation of those building systems as part of the
construction of the Base Building Core & Shell.
It is also understood that the Tenant shall pay for the incremental costs
associated with the Tenant Fit-Up as it impacts the Base Building Core & Shell
ceiling systems. If, however, the Developer installs the Base Building Core &
Shell ceiling systems without due regard to the Tenant Fit-Up requirements, and
Entrust has complied with its obligations set out in the Development Schedule,
then the costs of relocating the Base Building Core & Shell ceiling systems
shall be borne by the Developer. If Entrust does not give all necessary
information requested by the Developer in accordance with the Development
Schedule before the installation of those building systems as part of the
construction of the Base Building Core & Shell or if Entrust requests any
additions to those building systems, then any changes to those systems resulting
from the Tenant Fit-Up and all additions to those building systems are at
Entrust's cost and, if applicable, the Substantial Performance Date may be
extended for Entrust Delay.
(b) All wall coverings that are part of the Tenant Fit-Up and all floor
coverings that are part of the Base Building Core & Shell (except for those
parts of the Base Building Core & Shell which are usually regarded as
common areas in multi-tenant office buildings, such as lobbies and
washrooms) are subject to approval by Entrust. The Developer agrees to
consult with Entrust with respect to floor coverings for those parts of the
Base Building Core & Shell which are usually regarded as common areas in
multi-tenant office buildings.
(c) Subject to subsection 7.1, the Developer shall take all necessary
precautions to protect the Tenant Fit-Up work at Entrust's expense during
construction and acknowledges that it is responsible for all damages caused
by the Developer or those for whom the Developer is in law responsible
prior to Substantial Performance of the Premises and turnover to Entrust.
(d) Subject to subsection 3.4, at Entrust's request the Developer shall in good
faith consider changes to the Base Building Core & Shell so as to satisfy
Entrust's requirements for the Tenant Fit-Up, provided that Entrust adheres
to the Development Schedule and gives all necessary information required by
the Developer in a timely manner to enable the Developer to make the
requested changes, if the Developer deems them feasible.
<PAGE>
17
SECTION 5
---------
REPRESENTATIONS AND WARRANTIES OF THE DEVELOPER AND ENTRUST
-----------------------------------------------------------
5.1 The Developer's Representations and Warranties
----------------------------------------------
(a) The Developer represents and warrants that on the Commencement Date, the
Owner will have good and marketable title in fee simple to the Lands,
subject only to covenants, restrictions, agreements, rights-of-way,
easements, mortgages and other encumbrances registered on title to or
otherwise affecting the Lands and title defects, encroachments or
irregularities of a minor nature. Schedule "1" sets out the covenants,
restrictions, agreement, rights-of-way, easements, mortgages and other
encumbrances of record with respect to the Lands as of the date of this
Development Agreement.
(b) The Developer represents and warrants as follows:
(i) The Developer is a corporation, duly organized, validly existing and
in good standing under the laws of Canada and is qualified to do
business in the Province of Ontario.
(ii) The Developer has full capacity, right, power and authority to
execute, deliver and perform this Development Agreement and all
documents to be executed by the Developer pursuant to it, and all
required corporate actions and approvals have been duly taken and
obtained. The individual(s) signing this Development Agreement and
all other documents executed or to be executed pursuant to it on
behalf of the Developer are duly authorized to sign them and to bind
the Developer. This Development Agreement and all documents to be
executed pursuant to this Development Agreement by the Developer are
binding upon and enforceable against the Developer in accordance with
their respective terms.
(iii) There are no claims, causes of action or other litigation or
proceedings pending or, to the best of the Developer's knowledge,
threatened with respect to the Developer or any of its related
corporations which would affect the operation of the Lands or
Building or any part of them or the Developer's ability to enter into
and perform its obligations under this Development Agreement.
The Developer shall notify Entrust within ten (10) calendar days of receipt of
notice of any contemplated, threatened or anticipated: (i) special tax or
assessment to be levied against the Lands or Building; (ii) widening, change of
grade or limitation on use of streets abutting the Lands or Building; (iii)
change in the zoning classification of the Lands or Building; or (iv) change in
the tax assessment of the Lands or Building, in each case of which the Developer
has been put on notice.
5.2 Entrust's Representations and Warranties
----------------------------------------
Entrust represents and warrants as follows:
(a) Entrust is a corporation, duly organized, validly existing and in good
standing under the laws of Canada and is qualified to do business in the
Province of Ontario.
<PAGE>
18
(b) Entrust has full capacity, right, power and authority to execute, deliver
and perform this Development Agreement and all documents to be executed by
Entrust pursuant to it, and all required action and approvals have been
duly taken and obtained. The individuals signing this Development Agreement
and all other documents executed or to be executed pursuant to it on behalf
of Entrust are duly authorized to sign them on Entrust's behalf and to bind
Entrust. This Development Agreement, the Lease Agreement and all documents
to be executed pursuant to this Development Agreement by Entrust are
binding upon and enforceable against Entrust in accordance with their
respective terms.
(c) There are no claims, causes of action or other litigation or proceedings
pending or, to the best of Entrust's knowledge, threatened with respect to
Entrust which would affect Entrust's ability to enter into and perform its
obligations under this Development Agreement or the Lease Agreement.
SECTION 6
---------
NO LIABILITY FOR ENTRUST
------------------------
Nothing in this Development Agreement, including, without limitation, any
review, acceptance, authorization, initialing or approval by Entrust of the
design, construction, commissioning or development of the Premises, in whole or
in part, diminishes in any way the Developer's obligations to construct the Base
Building Core & Shell and the Tenant Fit-Up in a good and workmanlike manner and
to construct the Base Building Core & Shell and Tenant Fit-Up in accordance with
applicable law.
SECTION 7
---------
INDEMNITY
---------
7.1 Entrust's Indemnity
----------
Entrust shall indemnify and hold harmless the Developer, the Owner and the
Owner's Mortgagee, their respective officers, directors, employees and agents
and their respective successors and assigns against any and all liabilities,
losses, damages, costs, expense (including reasonable legal fees and expenses),
claims, demands or judgments of any nature arising during the period prior to
the Commencement Date from:
(a) entry on the Lands or in the Building by Entrust, its representatives,
agents, employees, lenders, contractors, appraisers, architects or
engineers after the date of this Development Agreement and before the
Substantial Performance of the Premises;
(b) the performance of the Tenant's Work; or
(c) Entrust's failure to pay in accordance with the provisions of this
Development Agreement any sums payable by Entrust under it.
Entrust is not liable in any case to any indemnified party for any liabilities,
obligations, claims, damages, penalties, causes of action, costs or expense to
the extent that they result from the negligence or misconduct of the indemnified
party or the negligence or misconduct of the Developer, any related corporation
of the Developer, or any contractor, subcontractor or material
<PAGE>
19
supplier of the Developer or of a related corporation of the Developer. If the
Developer, any agent of the Developer, the Owner or the Owner's Mortgagee is
made a party to any litigation commenced against Entrust (for liabilities
covered by Entrust's indemnity as specified above) and if Entrust, at its
expense, fails to provide the Developer, its agent, the Owner or the Owner's
Mortgagee with counsel approved by the Developer, its agent, the Owner or the
Owner's Mortgagee, as applicable (which approval shall not be unreasonably
withheld), then Entrust shall pay all costs and reasonable legal fees and
expenses incurred or paid by the Developer, its agent, the Owner or the Owner's
Mortgagee in connection with that litigation. Notwithstanding anything contained
in this Development Agreement to the contrary, Entrust has no liability
whatsoever for consequential, special, exemplary or punitive damages of the
Developer under this Development Agreement or to the Owner under the Lease
Agreement, provided that: (i) the Owner is not precluded from collecting rent
under the Lease Agreement as a result of the deemed commencement of the Lease
Agreement notwithstanding Entrust Delay and (ii) if the Owner is unable to draw
funds from the Owner's Mortgagee on the funding date for the Owner's take-out
financing for the Building as a result of Entrust Delay, Entrust's failure to
execute any subordination agreement or certificate required by the Owner's
Mortgagee, the terms of which have been agreed to by Entrust, within three (3)
business days of receipt of it or otherwise due to the fault of Entrust, then
Entrust shall be liable for and shall indemnify and save harmless the Owner or
Developer as the case may be from any consequential costs and expenses incurred
by it (including, without limitation, all costs and expenses incurred to the
Owner's Mortgagee).
7.2 The Developer's Indemnity
-------------------------
Save for those matters for which Entrust is to give its indemnity pursuant to
the provisions of subsection 7.1, the Developer and Owner assume liability for
and shall protect, defend and indemnify Entrust, Entrust's officers, directors,
employees and agents and their respective successors and assigns against and
hold them harmless for all liabilities, losses, damages, costs, expense
(including reasonable legal fees and expenses), claims, demands or judgments of
any nature as follows (including claims by third parties):
(a) relating to any provincial, federal, municipal or other sales, use, excise
or other taxes due and payable by the Developer;
(b) actually arising from or in connection with the construction, condition,
maintenance, or use of the Premises during the period prior to the
Commencement Date;
(c) relating to the Premises and the appurtenances to them and the use of them
by the Developer or anyone claiming by, through or under the Developer
which may arise with respect to this Development Agreement; and
(d) arising from or in connection with any of the following events during the
period prior to the Commencement Date:
(i) any injury to or the death of any person arising out of or directly
connected with the ownership, use, non-use, operation, possession,
condition, construction, repair or rebuilding of the Premises or
adjoining property, sidewalks, streets or ways or
<PAGE>
20
resulting from the condition of any of them during the period prior
to the Commencement Date;
(ii) any claims by third parties to the extent proximately resulting from:
(A) any actual violation by the Developer of any provision of this
Development Agreement; (B) any legal requirement affecting the
Premises during the period prior to the Commencement Date; (C) any
agreement relating to the Premises to which the Developer is a party
or by which the Developer is bound; (D) any contract or agreement to
which the Developer is a party; or (E) any restriction, law,
ordinance or regulation affecting the Premises or the ownership, use,
non-use, condition, construction, repair or rebuilding of them or of
adjoining property, sidewalks, streets or ways; or
(iii) the Developer's failure to pay in accordance with the provisions of
this Development Agreement any sums payable by the Developer under
it.
The Developer is not liable in any case to any indemnified party for any
liabilities, obligations, claims, damages, penalties, causes of action, costs or
expenses to the extent that they result from the negligence or misconduct of the
indemnified party or the negligence or willful misconduct of Entrust or its
subsidiaries. The foregoing shall not be construed to give rise to any third
party beneficiary rights with respect to any person or entity who is not an
indemnified party. If Entrust or any agent of Entrust is made a party to any
litigation commenced against the Developer and if the Developer, at its expense,
fails to provide Entrust or its agent with counsel approved by Entrust or its
agent, as applicable (which approval shall not be unreasonably withheld), then
the Developer shall pay all costs and reasonable legal fees and expenses
incurred or paid by Entrust or its agent in connection with that litigation. The
Developer has no liability to Entrust for any consequential, special, punitive
or exemplary damages under this Development Agreement or the Lease Agreement.
SECTION 8
---------
INSURANCE
---------
8.1 Entrust's Insurance
-------------------
(a) Liability Insurance At all times prior to Substantial Performance of the
Premises Entrust shall maintain insurance covering:
(i) Tenant's Work and any materials Entrust causes to be delivered to the
Building; and
(ii) Entrust's liability for maintenance and use of the Building.
Such insurance shall provide limits of not less than $10,000,000 combined single
limit coverage with respect to bodily injury or death to persons and to property
damage.
<PAGE>
21
8.2 The Developer's Insurance
-------------------------
(a) Liability Insurance At all times prior to Substantial Performance of the
-------------------
Premises, the Developer shall maintain insurance covering:
(i) the Developer's liability with respect to all construction that the
Developer may perform in connection with the Lands or Premises under
this Development Agreement; and
(ii) the Developer's liability for ownership, maintenance and use of the
Lands and Building;
Such insurance shall provide limits of not less than $10,000,000 combined single
limit coverage with respect to bodily injury or death to persons and to property
damage.
(b) Casualty Insurance At all times prior to Substantial Performance of the
Premises, the Developer shall maintain:
(i) all-risk casualty insurance covering the Premises against loss or
damage resulting from fire and other insurable casualties in the
amount of the full replacement value of the Premises;
(ii) delayed start-up insurance in the amount of $4,000,000; and
(iii) general wrap-up insurance in the amount of $10,000,000.
8.3 General Requirements
--------------------
(a) Provisions of Policies. The Developer and Entrust shall use reasonable
----------------------
efforts to maintain insurance policies:
(i) on an occurrence basis;
(ii) providing primary coverage;
(iii) containing endorsements requiring thirty (30) calendar days' advance
written notice to named insureds of any cancellation or reduction in
coverage; and
(iv) written by financially sound insurance companies whose policies are
valid in the Province of Ontario.
Any policy may be a so-called blanket policy covering additional locations.
Promptly upon the request of either party, the Developer or Entrust shall
provide the other with evidence of the insurance required under this section 8.
All policies which affect the Building shall name Entrust, the Developer, the
Owner and the Owner's Mortgagee as loss payees as their interests may appear, in
the case of casualty policies, and as additional insureds as their interests may
appear, in the case of liability policies.
<PAGE>
22
(b) Release: Waiver of Subrogation. The Developer and Entrust each release the
------------------------------
other from liability for damage to the property of the other to the extent
of insurance maintained under this section 8. The Developer and Entrust
shall use reasonable efforts to obtain waivers of subrogation rights by
their respective insurers against the other in all casualty insurance
policies affecting any portion of the Building and shall promptly notify
the other party of those waivers.
SECTION 9
---------
REMEDIES
--------
All rights and remedies of the parties set out in this Development Agreement are
cumulative and not alternative and, except as set forth in subsections 3.9, 7.1
and 7.2 are without prejudice to any further or other remedies available to the
parties at law.
SECTION 10
----------
TIME
----
Time is of the essence with respect to this Development Agreement, subject to
Force Majeure Delay and Entrust Delay.
SECTION 11
----------
RISK OF LOSS OF PREMISES
------------------------
(a) If at any time or from time to time prior to Substantial Performance of the
Premises any proceedings are contemplated, commenced or consummated for the
taking of the Building, the Exterior Building Amenities or a material
portion of either of them for public or quasi-public use which materially
affect Entrust's use and enjoyment of the Premises, then the Developer
shall forthwith give notice to Entrust. That notice shall, if possible, be
accompanied by a sketch of the portion of the Building or Exterior Building
Amenities which is affected by the taking and a metes and bounds
description delineating the area affected. If any taking of the Building,
the Exterior Building Amenities or any material portion of either of them
for public or quasi-public use prevents the Developer from complying with
its obligations under this Development Agreement such that this Development
Agreement is frustrated in law, then either party may elect to terminate
this Development Agreement by written notice to the other party given no
later that thirty (30) calendar days from the date of the notice of taking.
If this Development Agreement is terminated as aforesaid, then Entrust will
cooperate with the Developer to attempt to maximize any and all awards and
other compensation for any such taking. Entrust may make a separate claim
to the taking authority for Entrust's expenses including, without
limitation, its expenses related to Tenant's Work to the extent incurred.
(b) Until Substantial Performance of the Premises, the risk of loss or damage
to the Premises (but not the Tenant's Work) by fire or otherwise is the
Developer's. In the event of any fire or other insured damage: (i) the
Developer shall forthwith give written notice of it to Entrust; (ii) a
Force Majeure Delay shall be deemed to have occurred; and (iii) the
Developer shall complete the Premises in accordance with the terms of this
Development Agreement. The Developer's notice shall specify the extent of
the damage and the
<PAGE>
23
estimated time to repair the damage. If the Premises are materially damaged
by an occurrence against which the Developer is not insured or required to
be insured under this Development Agreement or beyond the extent to which
the Developer is required to insure under this Development Agreement and if
the cost to repair such uninsured damage would exceed $1,000,000 as
determined by the Developer, acting reasonably, then the Developer may
elect, in its discretion, to terminate this Development Agreement or to
complete the Premises in accordance with the terms of this Development
Agreement (in which event a Force Majeure Delay shall be deemed to have
occurred), subject to the requirements of the Owner's Mortgagee.
SECTION 12
----------
DISPUTES
--------
12.1 Differences between the parties as to the interpretation, application or
administration of this Development Agreement shall be submitted to arbitration
pursuant and subject to the Arbitration Act 1991 by one arbitrator. The
arbitrator shall be selected by the parties within ten (10) days after the
giving of written notice by either party to the other that the matter or
disagreement is to be submitted to arbitration, and failing agreement within
that ten (10) day period either party may apply to a Judge of the Superior
Court, Eastern Ontario District for the purpose of having that Judge appoint the
arbitrator. The expense of the arbitration shall be borne equally between the
parties, subject to the jurisdiction of the arbitrator, in his or her
discretion, to award the costs of the arbitration to either party. Any award by
the arbitrator under this subsection is final and binding and is not subject to
appeal.
12.2 The arbitration of any dispute under subsection 12.1 shall not affect the
obligation of 'the Developer to comply with the Development Schedule or the
Substantial Performance Date (subject to extension for Force Majeure Delay or
Entrust Delay) and, as part of the arbitration, the arbitrator shall determine
the proportion of the costs which each party shall bear of any work or other
requirement in dispute performed by the Developer in order to comply with its
obligations under this subsection.
SECTION 13
----------
ASSIGNMENT
----------
13.1 Subject to:
(a) the right of the Developer to assign this Development Agreement to the
Owner's Mortgagee as security for financing its obligations under this
Development Agreement; and
(b) the right of the Developer to assign this Development Agreement to a third
party ("the Third Party"), so long as:
(i) the Developer is not released from its obligations hereunder;
(ii) the Third Party agrees with Entrust that it is bound by the provisions
of this Agreement;
<PAGE>
24
(iii) the Third Party is not a direct competitor of Entrust or an affiliate
of such a competitor (as in the Canada Business Corporations Act,
R.S.C. 1985, as such Act is constituted as at the date of execution
of this Agreement); and
(iv) Canderel Management Inc. continues to be the party which carries out
the Developer's obligations hereunder,
the Developer and Entrust have no right to assign this Development Agreement or
the obligations under it.
SECTION 14
----------
NOTICES
-------
All notices, demands, requests, instructions and other communications to be
given or made under this Development Agreement shall be in writing and given by:
(i) messenger or a recognized overnight delivery service; (ii) registered or
certified mail, return receipt requested and postage prepaid; or (iii) facsimile
transmission, as follows:
(a) If to Entrust:
c/o Entrust Technologies Incorporated
One Preston Park South
Suite 400
4975 Preston Park Blvd.
Plano, TX
USA 75093
Attention: Controller
Fax: (972) 943-7305
with a copy to:
(i) prior to the Commencement Date,
Entrust Technologies Limited
750 Heron Road
Suite E08
Ottawa, Ontario
K1V 1A7
Attention: The Facilities Manager
Fax: (613) 247-3663
(ii) on and after the Commencement Date, at the Building
<PAGE>
25
(b) If to Developer: c/o Canderel Management, Inc.
1145 Hunt Club Road,
Suite 220,
Ottawa, Ontario,
K1V 0Y3
Phone: (613) 738-9899
Fax: (613) 738-6196
Attention: The Senior Vice-President
With a copy to: c/o Canderel Management Inc.
2000 Peel Street, Suite 900
Montreal, Quebec H3A 2W5
Phone: (514) 842-8636
Fax: (514) 284-1054
Attention: The President
With a copy to the Owner at: c/o Canderel Management Inc.
1145 Hunt Club Road,
Suite 220,
Ottawa, Ontario
KlV 0Y3
Phone: (613) 738-9899
Fax: (613) 738-6196
Attention: The Senior Vice-President
With a copy to: c/o Canderel Management Inc.
2000 Peel Street, Suite 900
Montreal, Quebec H3A 2W5
Phone: (514) 842-8636
Fax: (514) 284-1054
Attention: The President
or to such other person or address as may be designated by written notice from
either party to the other. Any notice is deemed to have been given and received:
(i) if sent by messenger or overnight delivery service, then on the date of
receipt; (ii) if sent by mail, then three (3) calendar days after mailing; or
(iii) if sent by facsimile transmission during normal business hours, then on
the date of transmission or if sent by facsimile transmission outside of normal
business hours, then on the following Business Day. Any notice given by
facsimile transmission must be confirmed by overnight recognized courier
delivery.
SECTION 15
----------
PUBLIC ANNOUNCEMENT
-------------------
<PAGE>
26
Neither party shall make any public announcement of this transaction or other
matters covered by this Development Agreement or by the Lease Agreement without
the other party's prior written consent.
SECTION 16
----------
SUCCESSORS AND ASSIGNS
----------------------
This Development Agreement is binding upon and endures to the benefit of the
parties to it and their successors. This Development Agreement shall not be
amended and no provision of it may be waived except by an instrument in writing
signed by the party against whom enforcement of the amendment or waiver is
sought.
SECTION 17
----------
GOVERNING LAW
-------------
This Development Agreement and the transactions contemplated by it shall be
interpreted, governed and enforced in accordance with the laws of the Province
of Ontario.
IN WITNESS WHEREOF the undersigned have executed this Development Agreement and
affixed their corporate seals through their duly authorized signing officer or
officers.
CANDEREL MANAGEMENT INC.
Per: /s/ Douglas Pascal (c/s)
----------------------------
I have authority to Name: Douglas Pascal
bind the corporation ----------------------------
Title: Secretary
----------------------------
3559807 CANADA INC.
(with respect only to Section 7.2)
Per: /s/ Douglas Pascal (c/s)
----------------------------
I have authority to Name: Douglas Pascal
bind the corporation ----------------------------
Title: Secretary
----------------------------
ENTRUST TECHNOLOGIES LIMITED
Per: /s/ David L. Thompson (c/s)
---------------------------
Name: David L. Thompson
Title: SVP & CFO
Per: ____________________________(c/s)
Name: ___________________________
<PAGE>
27
Title: __________________________
We have authority to bind the corporation.
<PAGE>
28
SCHEDULE "1"
LEGAL DESCRIPTION OF LANDS/ENCUMBRANCES
LEGAL DESCRIPTION
Part of Lots 8, Concession 3, Township of March, now in the City of Kanata,
Regional Municipality of Ottawa-Carleton, designated as parts 4, 5, 6 and 7 on
Plan 4R-15831
ENCUMBRANCES
<TABLE>
<CAPTION>
INSTRUMENT DOCUMENT
NUMBER
<S> <C>
MH3261 Easement in favour of the Hydro-Electric Power Commission of Ontario
MH3289 Easement in favour of the Hydro-Electric Power Commission of Ontario
MH3515 Easement in favour of the Hydro-Electric Power Commission of Ontario
MH3622 Easement in favour of the Hydro-Electric Power Commission of Ontario
MH3993 Easement in favour of the Hydro-Electric Power Commission of Ontario
MH4019 Easement in favour of the Hydro-Electric Power Commission of Ontario
N483594 Easement in favour of The Kanata Hydro-Electric Commission
LT563174 Easement in favour of Kanata Hydro-Electric Commission
LT599592 Easement in favour of The Kanata Hydro-Electric Commission
LT 1097015 Charge in favour of Fussen Investment (Ontario) Inc.
LT1097017 Charge in favour of Sils-Hines Developments Inc.
</TABLE>
<PAGE>
29
SCHEDULE "2"
DEVELOPMENT SCHEDULE
6 pages attached
<PAGE>
30
SCHEDULE "3"
PRELIMINARY SITE PLAN, OUTLINE OF BUILDING, FLOOR PLANS
5 pages attached
<PAGE>
Exhibit 10.5
------------
THIS LEASE made the 29th day of December, 1999.
IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT
BETWEEN:
786473 ONTARIO LIMITED
hereinafter called "the Landlord"
OF THE FIRST PART
AND:
ENTRUST TECHNOLOGIES LIMITED
hereinafter called "the Tenant"
OF THE SECOND PART
AND:
ENTRUST TECHNOLOGIES INCORPORATED
hereinafter called "the Guarantor"
OF THE SECOND PART
BACKGROUND
1. The Landlord is the owner of those lands and premises ("the Reserved
Premises") located within the City of Kanata, Regional Municipality of
Ottawa-Carleton, being the lands legally described as Part of Lots 8 and 9,
Concession 3, Township of March, now in the City of Kanata, Regional
Municipality of Ottawa-Carleton described as parts 1, 2, 3, 8 and 9 on plan
4R-l5831 ("the Reference Plan"),
2. The Tenant will be entering into a lease ("the Main Lease") with 3559807
Canada Inc. with respect to certain lands and premises ("the Main Premises")
abutting the Reserved Premises and legally described as Part of Lot 8,
Concession 3, Township of March, now in the City of Kanata, Regional
Municipality of Ottawa-Carleton described as parts 4, 5, 6 and 7 on the
Reference Plan.
3. The Landlord and the Tenant have agreed that the Tenant is to lease the
Reserved Premises from the Landlord and this Lease is being entered into in
order to evidence same.
<PAGE>
2
DEMISE
4. WITNESSETH that in consideration of the rents, covenants and agreements
hereinafter reserved and contained on the part of the Tenant, to be paid,
observed and performed, the Landlord by these presents does demise and lease
unto the Tenant the Reserved premises.
TERM
5. The term of this Lease ("the Term") is to be for a period commencing on the
Commencement Date (as defined in the Main Lease) and terminating:
(a) with respect to that portion of the Reserved Premises designated as
parts 1, 2, and 3 on the Reference Plan ("the North Expansion Lands"),
on the earlier of:
(i) the fifth (5th) anniversary of the Commencement Date; and
(ii) ninety (90) days after the date on which the Tenant notifies the
Landlord that the Term is to be at an end;
(b) with respect to that portion of the Reserved Premises designated as
parts 8 and 9 on the Reference Plan ("the Phase 2 Lands"), on the
earlier of:
(i) the Termination Date (as defined in the Main Lease, as extended
by the provisions of the Main Lease, if applicable); and
(ii) ninety (90) days after the date on which the Tenant notifies the
Landlord that the Term is to be at an end; and
(c) with respect to any portion of the Reserved Premises, once a lease has
been entered between the Landlord and the Tenant with respect to an
Additional Premises (and then only in respect of that portion of the
Reserved Premises that is the subject of such new lease).
RENTAL
6. The Tenant agrees to pay to the Landlord during each year of the Term rent
("the Rent") calculated as being the aggregate of the following:
(i) 13.5% of the amount obtained by multiplying the area, expressed
in acres, of the North Expansion Lands by $150,000.00 (which
amount is to increase yearly on each anniversary of the
Commencement Date commencing on the second (2nd) anniversary of
the Commencement Date by the percentage increase, if any, in the
Consumer Price Index (all items, Ottawa) ("CPI") in effect on
each said anniversary date over the CPI in effect as of the
Commencement Date);
(ii) the amount payable by the Landlord on account of real estate
taxes applicable to the Reserved Premises for such year; and
<PAGE>
3
(iii) Operating Expenses (as defined in the Main Lease) with respect
to the Phase 2 Lands.
The Rent shall be payable by the Tenant to the Landlord in and by way
of even, equal, consecutive monthly installments each on the first
(1st) day of each month of the Term. Partial months are to be
prorated.
USE OF THE RESERVED PREMISES
7. The Reserved Premises are to be used only for recreational purposes, and
then only in conjunction with the Tenant's use of the Main Premises. The Tenant
agrees that:
(a) the Landlord shall be permitted to construct from time to time parking
areas within the Phase 2 Lands (which parking areas are to be used
solely by the occupants from time to time of the Main Premises);
(b) the Landlord shall be permitted to locate therein such services and
grant such easements therein as the Landlord may require from time to
time to service the Main Premises, the Expansion Lands and other
portions of the subdivision within which the Main Premises and the
Expansion Lands are located.
The Tenant shall not be permitted to carry out any improvements to the
Reserved Premises without the prior written approval by the Landlord of the
Tenant's plans and specifications (the plans so approved to be herein
referred to as "the Approved Plans and Specifications") as well as the
consent of the Landlord. The Landlord agrees that it will not unreasonably
withhold its consent to an improvement so long as:
(a) the Tenant abides by the provisions of any site development
or subdivision agreement applicable to the Reserved Premises in
terms of carrying out such improvement, including, without
limitation, any such provision dealing with the preservation of
natural landscaping and vegetation;
(b) the improvement does not include any permanent structure;
(c) any and all permits required from any governmental authority
having jurisdiction with respect to the Reserved Premises have
been obtained by the Tenant at its expense; and
(d) the implementation of the improvement has been carried out
in accordance with the Approved Plans and Specifications; and
(e) the Tenant agrees to restore the Reserved Premises at its
expense at the end of the Term to the condition they were in
prior to the improvement being carried out. Notwithstanding the
foregoing, any restoration with respect to Additional Premises
(as hereinafter defined) shall be dealt with in the lease or
other agreement relating to the construction of the Additional
Premises.
<PAGE>
4
In any other event the Landlord's consent may be unreasonably withheld.
COVENANT TO PAY RENT
8. The Tenant covenants with the Landlord to pay Rent.
ASSIGNMENT
9. The Tenant will not assign this Lease or sub-let the whole or any part of
the Reserved Premises without consent, which consent may be unreasonably
withheld and/or delayed. This Lease shall be deemed to have been assigned with
consent to a permitted assignee of the Main Lease. The Tenant hereby waives and
renounces the benefit of any present or future act of the Legislature of Ontario
which would allow the Tenant to assign this Lease or sub-let the Reserved
Premises without consent of the Landlord.
RISKS OF INJURY
10. The Tenant agrees that the Tenant shall indemnify and save harmless the
Landlord for any accident, injury (including death) or damage whatsoever or
howsoever caused to any person or persons (including the Tenant, its employees,
agents and invitees, any subtenant or licensee of the Tenant and all other
persons claiming through or under any of them) or to the property of any such
person or persons occurring during the Term, caused by want of repair to or by
the use or occupation of the Reserved Premises (the foregoing to be restricted
to matters against which the Tenant is not insured nor obliged to be insured
pursuant to this Lease). Notwithstanding the foregoing, the Landlord agrees that
in the event that any such injury or damage is caused by the acts or omissions
of the Landlord or those for whom the Landlord is in law responsible, the Tenant
shall not be bound to indemnify and save harmless the Landlord for same (with
the Landlord agreeing to indemnify and save harmless the Tenant with respect to
any such matter).
INSURANCE
11. During the Term, the Tenant shall at its expense maintain in force
comprehensive general liability insurance against claims for personal injury,
death or property damage arising out of all of its operations at the Reserved
Premises in an amount of no less than Five Million Dollars ($5,000,000.00) per
occurrence. The Landlord, the Landlord's mortgagees and the Tenant shall be
named as an additional insured in respect of the insurance policy. The Landlord
shall on request being made by the Tenant provide the Tenant with proof of the
said insurance coverage.
FURTHER LEASING OF THE RESERVED PREMISES
12. In the event that the Tenant wishes to cause the Landlord to construct any
improvements in the nature of a building within the Reserved Premises for the
Tenant's use (such improvements to be referred to herein as "Additional
Premises"), the Tenant shall give written notice thereof to the Landlord
("Tenant's Notice"). The Landlord and the Tenant agree that unless mutually
agreed to as part of the negotiations detailed below, any such building shall be
constructed on the Phase 2 Lands, and the North Expansion Lands will be used for
such building's associated parking and landscaping. The Landlord and the Tenant
shall negotiate in good faith within the ninety (90) day period next following
the receipt by the Landlord of the
<PAGE>
5
Tenant's Notice as to the location, configuration and area of the Reserved
Premises upon which the Additional Premises are to be erected, the area of the
Additional Premises, and all matters as may be necessary for the parties to
achieve agreement in respect of the construction of the Additional Premises and
the terms and conditions of a further lease to be entered into with respect to
the Additional Premises ("the Additional Lease") including term, rental rate and
such other matters as the parties may deem appropriate; provided, however, that
in such negotiations the parties agree that the location, size and configuration
of the Additional Premises must be in conformity with a plan to be developed by
the Landlord with respect to the development of the Reserved Premises; without
limiting or restricting the generality of the foregoing, the location,
configuration and size of the land comprising the Additional Premises must not
compromise the marketability of the remaining portion of the Reserved Premises
(should the Additional Lease not be for the whole of the Reserved Premises), the
Additional Premises must be of such style and design and composed of such
materials such that the Additional Premises and the Building (as defined in the
Main Lease) and any other buildings erected pursuant to the provisions hereof
shall appear to form part of a single integrated project. In the event that the
parties cannot achieve agreement in respect of any of the foregoing matters
within the ninety (90) day delay, notwithstanding their good faith efforts, then
both Landlord and Tenant shall be relieved of any further obligation to
negotiate further in respect of the subject matter of the Tenant's Notice.
DEFAULT
13. In any of the events following, namely:
(a) if the Tenant shall fail to pay the Landlord any installment of Rent
or any other amount payable hereunder after it shall have become due
and payable as herein provided so long as the Landlord has notified
the Tenant in writing of its default and the Tenant has not rectified
the said default within ten (10) days of being notified of same;
(b) if the Tenant or Guarantor shall be declared dissolved, bankrupt or
wound-up or shall make any general assignment for the benefit of its
creditors or take or attempt to take the benefit of any insolvency,
winding-up or bankruptcy legislation or if a petition in bankruptcy or
in winding-up or for reorganization shall be filed by or granted
against the Tenant or Guarantor or if a receiver or trustee be
appointed for or enter into physical possession of the property of the
Guarantor, or any part thereof;
(c) if the Tenant shall assign, sublet or permit the use of the Premises
by others without the consent of the Landlord (which consent is to be
provided or withheld in accordance with section 9 of this Lease);
(d) if the Tenant is in default of the Main Lease (or, in the event that
the Main Lease contains a period within which the Tenant is able to
cure a default, such period expires without the default being cured);
(e) if the Tenant shall default in the performance of any of its other
obligations under this Lease so long as the Landlord has notified the
Tenant in writing of its default
<PAGE>
6
and the Tenant has not rectified the said default within fifteen (15)
days of being notified of same (or such longer period of time as is
necessary for the Tenant to remedy such default (provided the Tenant
promptly commences and thereafter continues diligently to remedy such
default)),
this Lease may be terminated at the option of the Landlord without further
notice to the Tenant to such effect. It is expressly agreed that such right
of termination shall be in addition and without prejudice to all other
rights as provided by law or herein, and the Landlord may re-enter the
Reserved Premises to have again, repossess and enjoy, as of its former
estate, anything herein contained to the contrary notwithstanding and
re-let the Reserved Premises to whomsoever it may choose without further
notice or demand being necessary and may recover from the Tenant all
amounts due hereunder at the date of such termination, and Rent for the
three (3) months next succeeding the date of such termination or such
longer period as may be allowed by law, all of which shall immediately
become due and payable. Thereafter the Tenant shall pay to the Landlord, as
liquidated damages until the end of the Term, an amount equivalent to the
rental provided in this Lease, less the sum of the net receipts (if any)
derived by the Landlord from the re-letting of the Reserved Premises. Any
sums received by the Landlord from or for the account of the Tenant when
the Tenant is in default hereunder may be applied, at the Landlord's
option, to the satisfaction in whole or in part of any obligation of the
Tenant then due hereunder in such manner as the Landlord sees fit and
regardless of any imputation by law or any designation or instruction of
the Tenant to the contrary. The Landlord agrees that so long as any default
by the Tenant is rectified within the time period hereinbefore provided,
the default shall be deemed to have not occurred.
NOTICES
14. For the purpose of all notices to the Landlord, the Landlord's address is:
c/o Canderel Management Inc.
2000 Rue Peel
Suite 900
Montreal, Quebec
H3A 2W5
Attn: President
Fax No.: (514) 284-1054
with a copy to:
Canderel Management Inc.
1145 Hunt Club Road,
Suite 220,
Ottawa, Ontario,
K1V OY3
<PAGE>
7
Fax No.: (613) 738-6196
Attention: The Senior Vice-President;
and in respect of the Tenant, the Tenant's address is:
c/o Entrust Technologies Incorporated
One Preston Park South
Suite 400
4975 Preston Park Blvd.
Plano, TX
USA 75093
Attention: Controller
Fax: (972) 943-7305
with a copy to:
(a) prior to the Commencement Date,
Entrust Technologies Limited
750 Heron Road
Suite E08
Ottawa, Ontario
K1V 1A7
Attention: The Facilities Manager
Fax: (613) 247-3663
(b) on or after the Commencement Date, at the Main Premises; and for
the purpose of all notices to the Guarantor, the Guarantor's
address is:
Entrust Technologies Incorporated
One Preston Park South
Suite 400
4975 Preston Park Blvd.
Plano,TX
USA 75093
Attention: Controller
Fax: (972) 943-7305
Notwithstanding the foregoing, any of the parties may notify the other of a
change of address in which event all official notices shall thereafter be
sent to the last address of which notice is given. All notices required or
permitted to be given by any of the parties
<PAGE>
8
to the other shall be in writing and sent by registered mail (postage
prepaid and return receipt requested), delivered personally, delivered by
courier or delivered by bailiff or sent by facsimile machine during
Business Hours (as defined in the Main Lease) to the numbers set out above.
OVERHOLDING
15. It is hereby agreed that should the Tenant hold over after the end of the
Term and the Landlord thereafter accept rent for the Reserved Premises, the
Tenant shall hold the Reserved Premises as a monthly tenant only of the Landlord
at one and one-half (1 1/2) times that Rent and otherwise subject in all other
respects to the Terms and conditions of this Lease.
GUARANTEE
16.
(a) The Guarantor, in consideration of the sum of One Dollar ($1.00) now
paid by the Landlord to the Guarantor (the receipt whereof is hereby
acknowledged) and other valuable consideration, hereby directly and
unconditionally guarantees to and covenants with the Landlord that the
Tenant will duly perform, observe and keep each and every covenant,
proviso, condition and agreement in this Lease on the part of the
Tenant to be performed, observed and kept, including the payment of
rent and all other sums and payments agreed to be paid or payable
under this Lease on the days and at the times and in the manner herein
specified, and that if any default shall be made by the Tenant,
whether in payment of any rent or other sums from time to time falling
due hereunder as and when the same become due and payable or in the
performance, observance or keeping of any of the said covenants,
provisos, conditions or agreements which under the terms of this Lease
are to be performed, observed or kept by the Tenant, the Guarantor
will forthwith pay to the Landlord on demand the said rent and other
sums in respect of which such default shall have occurred and all
damages that may arise in consequence of the non-observance or
non-performance of any of the said covenants, provisos, conditions or
agreements.
(b) The Guarantor covenants with the Landlord that the Guarantor is
jointly and severally bound with the Tenant for the fulfillment of all
obligations of the Tenant under this Lease. In the enforcement of its
rights hereunder, the Landlord may proceed against the Guarantor as if
the Guarantor were named Tenant hereunder.
(c) The Guarantor hereby waives any rights to require the Landlord to
proceed against the Tenant or to take or perfect or proceed against or
to exhaust any security held from the Tenant or to pursue any other
remedy whatsoever which may be available to the Landlord before
proceeding against the Guarantor.
(d) No neglect or forbearance of the Landlord in endeavoring to obtain
payment of the Rent reserved herein or other payments required to be
made under the provisions of this Lease as and when the same become
due, no delay of the Landlord in taking any steps to enforce
performance or observance of the several
<PAGE>
9
covenants, provisos or conditions contained in this Lease to be
performed, observed or kept by the Tenant, no extension or extensions
of time which may be given by the Landlord from time to time to the
Tenant, and no other act or failure to act of or by the Landlord shall
release, discharge or in any way reduce the obligations of the
Guarantor under the guarantee contained in this Section.
(e) In the event of a termination of this Lease other than by a surrender
accepted by the Landlord (including without limitation repudiation by
the Tenant under applicable bankruptcy legislation), or in the event
of the bankruptcy or insolvency of the Tenant, or in the event of a
disclaimer of this Lease pursuant to any statute, the Guarantor agrees
to pay to the Landlord all rents or other amounts payable hereunder
for the full term of this Lease notwithstanding any such disclaimer,
bankruptcy, insolvency, or determination and the Guarantor shall be
deemed to have executed a new lease for the Premises between the
Landlord as Landlord and the Guarantor as Tenant for term equal in
duration to the residue of the term remaining unexpired at the date of
such termination or such disclaimer. Such lease shall contain the like
Landlord's and Tenant's obligations respectively and the like
covenants, provisos, agreements and conditions in all respects
(including the proviso for re-entry) as are contained in this Lease.
(f) The Guarantor confirms and acknowledges that the liability of the
Guarantor hereunder shall remain in full force and effect throughout
any such renewals or extensions. In addition, the Landlord may deal
with the Tenant with respect to any modification to the terms and
conditions of this Lease and/or any security held from the Tenant as
the Landlord sees fit and the liability of the Guarantor hereunder
shall remain in full force and effect and will include any covenants,
provisoes, conditions or agreement resulting front such modification.
(g) The Guarantor hereby submits to the jurisdiction of the courts of the
Province of Ontario in any action or proceeding whatsoever by the
Landlord to enforce its rights hereunder.
MISCELLANEOUS
17.
(a) Sale or Lease by Landlord: In the event of any sale or lease of the
-------------------------
Reserved Premises, the Landlord shall be and hereby is entirely
released and relieved front all covenants and obligations of the
Landlord hereunder (except for any liability or obligations
outstanding at the time of the sale or lease of the Reserved Premises)
or arising in respect of the period prior to the sale or lease of the
Reserved Premises) provided such purchaser or lessee agrees to assume
and carry out any and all such covenants and obligations (except for
any liability or obligations outstanding at the time of the sale or
lease of the Reserved Premises or arising in respect of the period
prior to the sale or lease of the Reserved Premises)
<PAGE>
10
(b) Amendment of Lease: No assent or consent to changes in or waiver of
------------------
any part of this Lease shall be deemed or taken as made unless the
same be done in writing and attached to or endorsed hereon by Landlord
and Tenant. No covenant or term of the present lease stipulated in
favour of the Landlord or Tenant shall be waived, except by express
written consent of the other, whose forbearance or indulgence in any
regard whatsoever shall not constitute a waiver of the covenant, term
or condition to be performed; and until complete performance of the
said covenant, term or condition, the applicable party shall be
entitled to invoke any remedies available under this Lease or by law
despite such forbearance or indulgence.
(c) Late Payments: The acceptance by the Landlord of any postdated cheque
-------------
or money owing for Rent or additional rent after its due date is to be
considered as a mode of collection only, without novation of, nor
derogation from any of Landlord's rights, recourses and actions in
virtue of this Lease which demands punctual payment of all
obligations. All sums owing by either the Landlord or the Tenant under
this Lease not paid when due shall thereafter bear interest at a rate
equivalent to two percent (2%) per annum above the prime lending rate
of The Toronto-Dominion Bank front time to time in effect.
(d) Tenant (and Guarantor, if applicable): All the covenants herein
-------------------------------------
contained shall be deemed to have been made by and with the heirs,
executors, administrators and permitted assigns or successors of each
of the parties hereto, and if more than one Tenant (or Guarantor, if
applicable), the covenants herein contained on the part of the Tenant
(or Guarantor, if applicable) shall be construed as being several as
well as joint and where necessary reference to the Tenant (or
Guarantor, if applicable) as being of the masculine gender or in the
singular number shall be construed as being in the feminine or neuter
gender or in the plural number.
(e) Brokerage Commission: As part of the consideration for the granting of
--------------------
this Lease, the Tenant represents and warrants that no broker, agent
or other intermediary introduced the parties or negotiated or was
instrumental in negotiating or consummating this Lease.
(f) Registration of Lease: Tenant shall not register this Lease at length
---------------------
but only by notice thereof and then only after the form and terms of
such notice have been approved in writing by the Landlord or its legal
counsel, the whole at the cost of the Tenant, including the cost of
registration and a copy for the Landlord. Should a notice of this
Lease be registered, the Tenant shall, at the termination of this
Lease, execute a release of lease in form and content satisfactory to
the Landlord.
(g) Additional Rent: In addition to Rent, all other monies payable
---------------
pursuant to this Lease, as well as all sales, business transfer, goods
and services and value added taxes, rates and duties or similar taxes,
rates and duties which may at any time hereafter be imposed upon or by
reference to the Rent and other sums owing by Tenant hereunder shall
be payable by Tenant to Landlord immediately when due
<PAGE>
11
without reduction, deduction or compensation whatsoever and shall be
additional rent and collectable as such.
(h) Rights Cumulative: No right or remedy herein conferred upon or
-----------------
reserved to the Landlord is intended to be exclusive of any other
right or remedy herein or by law provided, but such rights shall be
cumulative and in addition to every other right or remedy herein or by
law provided.
(i) Performance by the Landlord: If the Tenant fails to pay any sum to any
---------------------------
third party or perform any other obligation under this Lease, the
Landlord may, after fifteen (15) days written notice to the Tenant,
pay the said sum or perform the said obligation in the place and stead
of the Tenant who shall be thereupon obliged to repay the said sum
and/or reimburse any costs incurred by the Landlord in performing such
obligation, together with a fee equal to fifteen percent (15%) of the
amount paid or the costs incurred, as the case may be, the whole
without prejudice to any other rights or recourses of the Landlord
which may accrue in the circumstances.
(j) Severability: If any clause or provision herein contained shall be
------------
adjudged invalid, the same shall not affect the validity of any other
clause or provision of this Lease, or constitute any other cause of
action in favour of either party against the other.
(k) Governing Law: This agreement shall be construed and interpreted in
-------------
accordance with the laws of the Province of Ontario.
(l) Captions: The captions appearing in this Lease have been inserted as a
--------
matter of convenience and for reference only and in no way define,
limit or enlarge the scope or meaning of this Lease or any provision
thereof.
(m) Time of Essence: Time is of the essence of this Lease.
---------------
<PAGE>
12
IN WITNESS WHEREOF the parties have executed these presents.
786473 ONTARIO LIMITED
Per: /s/ Douglas Pascal
______________________________________
Name: Douglas Pascal
Per: ______________________________________
Name:
I/We have authority to bind the Corporation.
ENTRUST TECHNOLOGIES LIMITED
Per: /s/ David L. Thompson
------------------------------------------
Name: David L. Thompson, Chief Financial Officer
Per: ______________________________________
Name:
I/We have authority to bind the Corporation.
ENTRUST TECHNOLOGIES INCORPORATED
Per: /s/ David L. Thompson
------------------------------------------
Name: David L. Thompson, Chief Financial Officer
Per: ______________________________________
Name:
I/We have authority to bind the Corporation.
<PAGE>
Exhibit 10.6
------------
LEASE BETWEEN
3559807 CANADA INC.
and
ENTRUST TECHNOLOGIES LIMITED
and
ENTRUST TECHNOLOGIES INCORPORATED
TABLE OF CONTENTS
I DEFINITIONS............................................................1
Base Building Core & Shell......................................1
Building........................................................1
Business Days...................................................1
Business Hours..................................................1
Commencement Date...............................................1
Development Agreement...........................................2
Exterior Building Amenities.....................................2
Land............................................................2
Lease Year......................................................2
Notices.........................................................2
Operating Expenses..............................................4
Permitted Uses..................................................4
Premises........................................................4
Proportionate Share.............................................4
Real Estate Broker..............................................4
Real Estate Taxes...............................................5
Rent............................................................5
Schedules.......................................................5
Security Deposit................................................5
Substantial Performance Date....................................5
Tax on Capital..................................................5
Tenant Fit-Up...................................................5
Term............................................................5
Termination Date................................................5
II LEASE..................................................................6
III TERMINATION............................................................6
IV RENTAL.................................................................6
V NET RENTALS............................................................6
VI REAL ESTATE TAXES, TAX ON CAPITAL AND OPERATING
EXPENSES...............................................................7
VII USE OF PREMISES........................................................8
<PAGE>
VIII UTILITIES AND ADDITIONAL CHARGES.......................................8
IX SERVICES...............................................................9
X SECURITY..............................................................10
XI ASSIGNMENT AND SUBLETTING.............................................10
XII READINESS FOR OCCUPATION..............................................12
XIII TENANT CARE...........................................................12
XIV ALTERATIONS, ADDITIONS, IMPROVEMENTS AND REPAIRS......................13
XV MAJOR REPAIRS.........................................................16
XVI ACCESS TO PREMISES....................................................16
XVII PROTECTION OF EQUIPMENT...............................................17
XVIII COMPLIANCE WITH LAWS AND INDEMNIFICATION..............................17
XIX SECURITY DEPOSIT......................................................19
XX FIRE AND DESTRUCTION OF PREMISES......................................19
XXI NON-RESPONSIBILITY OF LANDLORD........................................20
XXII INSURANCE.............................................................21
XXIII DEFAULT...............................................................22
XXIV RELOCATION AND MODIFICATION OF BUILDING/PREMISES......................24
XXV ADDITIONAL PROVISIONS.................................................24
XXVI RULES AND REGULATIONS.................................................26
XXVII MORTGAGES AND SUBORDINATION...........................................27
XXVIII GUARANTOR.............................................................28
XXIX SCHEDULES.............................................................29
SCHEDULE "A"
LEGAL DESCRIPTION..............................................31
SCHEDULE "B"
PREMISES DESCRIPTION...........................................32
SCHEDULE "C"
LANDLORD'S WORK................................................33
SCHEDULE "D"
RULES AND REGULATIONS..........................................34
SCHEDULE "E"
MINIMUM BUILDING STANDARDS FOR
TENANT FINISHES................................................36
SCHEDULE "F"
ADDITIONAL PROVISIONS..........................................37
Certificate as to Area of the Building.........................37
Adjustment to the Rent.........................................37
Option to Extend the Term......................................37
Management of the Building.....................................38
Maintenance of the Building....................................38
<PAGE>
Leasehold Improvement Allowance/Tenant Fit-up..................39
Condition of the Building......................................39
Tenant's Right to Surrender its Interest in Portions of
the Premises.................................................40
Environmental..................................................41
Parking........................................................42
Occupancy......................................................42
News Release/Public Announcement...............................42
Consents/Approvals.............................................42
Tenant's Rights to Install.....................................42
Operating Expenses.............................................43
Landlord's Covenants...........................................44
Generator......................................................45
Opinion re: Guarantee..........................................46
SCHEDULE "G"
COST OF THE WORK FROM CCDC3....................................47
<PAGE>
MEMORANDUM OF AGREEMENT OF LEASE ENTERED INTO THIS 29TH DAY OF DECEMBER, 1999
BY AND BETWEEN:
3559807 CANADA INC.
(hereinafter referred to as the "Landlord")
AND:
ENTRUST TECHNOLOGIES LIMITED
(hereinafter referred to as the "Tenant")
AND:
ENTRUST TECHNOLOGIES INCORPORATED
(hereinafter referred to as the "Guarantor")
THIS AGREEMENT WITNESSETH:
SECTION I
---------
DEFINITIONS
-----------
1.01 As used herein, the following expressions shall have the following
meanings:
(a) Base Building Core & Shell: has the meaning ascribed to it in the
Development Agreement.
(b) Building: the building(s), structure(s) and improvements to be constructed
on the Land in accordance with the Development Agreement, including
Landlord's equipment, systems and fixtures therein having a gross building
area of approximately 146,100 square feet.
(c) Business Days: a day on which the Land Registry Office for the Land Titles
Division of Ottawa-Carleton is open for business with the public.
(d) Business Hours: 7 A.M. to 7 P.M. during Business Days or such other times
as may be designated by the Landlord in consultation with the Tenant from
time to time.
(e) Commencement Date: the Substantial Performance Date, providing that the
Tenant has taken occupancy of the Premises in whole or in part or the City
of Kanata has issued a completion notice or other notice or permit which
permits occupation of the Premises and the conduct of regular business
operations therein without material interference to the
<PAGE>
-2-
Tenant's business, except that if the reason that the Premises are not fit
for the purposes intended as aforesaid is due to any Entrust Delay (as
defined in the Development Agreement), the Commencement Date shall be such
date as the Premises would have been so fit but for the Entrust Delay.
(f) Development Agreement: that certain agreement entered into
contemporaneously with this lease between the Landlord and the Tenant with
respect to the development of the Land and of the Building.
(g) Exterior Building Amenities: has the meaning ascribed to it in the
Development Agreement.
(h) Land: those certain lands and premises more fully described in Schedule
"A".
(i) Lease Year: in respect of the first Lease Year, the period of time
commencing on the Commencement Date and expiring on the last day of the
month of December next following; thereafter Lease Year shall consist of
consecutive periods of twelve (12) calendar months. However, the last Lease
Year shall terminate upon the Termination Date or earlier termination of
this lease, as the case may be. Landlord may in its discretion change the
Lease Year from time to time provided that such change will not increase
Tenant's liability for any amounts payable pursuant to this lease.
(j) Notices: for the purpose of all notices to the Landlord, the Landlord's
address is:
c/o Canderel Management Inc.
2000 Rue Peel
Suite 900
Montreal, Quebec
H3A 2W5
Attn: President
Fax No.: (514)284-1054
with a copy to:
Canderel Management Inc.
1145 Hunt Club Road,
Suite 220,
Ottawa, Ontario,
KlV 0Y3
Fax No.: (613)738-6196
Attention: The Senior Vice-President;
for the purpose of all notices to the Tenant, the Tenant's address is:
<PAGE>
-3-
Entrust Technologies Limited
One Preston Park South
Suite 400
4975 Preston Park Blvd.
Plano, TX
USA 75093
Attention: Controller
Fax: (972) 943-7305
With a copy to:
(a) prior to the Commencement Date,
Entrust Technologies Limited
750 Heron Road
Suite E08
Ottawa, Ontario
KlV 1A7
Attention: The Facilities Manager
Fax: (613) 247-3663
(b) on and after the Commencement Date, at the Premises; and for the
purpose of all notices to the Guarantor, the Guarantor's address is:
Entrust Technologies Incorporated
One Preston Park South
Suite 400
4975 Preston Park Blvd.
Plano, TX
USA 75093
Attention: Controller
Fax: (972) 943-7305
Notwithstanding the foregoing, either of the parties may notify the other
of a change of address in which event all official notices shall thereafter
be sent to the last address of which notice is given. All notices required
or permitted to be given by either Landlord or Tenant to the other shall be
in writing and sent by registered mail (postage prepaid and return receipt
requested), delivered personally, delivered by courier or delivered by
bailiff or sent by facsimile machine during Business Hours to the Landlord
or the Tenant at the
<PAGE>
-4-
numbers set out above. Delays shall be computed or measured, as the case
may be, from the date of actual delivery of any notice referred to herein.
(k) Operating Expenses: unless otherwise expressly set forth herein as being
for the account of the Landlord, including any such item set forth in
Section 15 of Schedule "F" attached hereto, all costs, charges and expenses
incurred by the Landlord in connection with the operation, maintenance,
repair of and improvement to the Premises including without limitation:
heating, ventilating and air-conditioning costs, maintenance, repairs and
replacements; administration fees equal to two and nine tenths percent
(2.9%) of all amounts payable by tenants of the Building; salaries, wages
and benefits of employees directly engaged in the operation,
administration, maintenance and repair of the Premises, but only to the
extent of their involvement with the Premises; electricity, fuel, water and
other utilities, taxes, licenses and fees; insurance costs, premiums and
deductible payments in respect of fire, casualty, liability, property
damage, boiler, loss of rental and such other form or forms of insurance
relating to the Premises from time to time in effect; cleaning,
supervision, maintenance, operation and repair costs, expenses and charges
relating to the Premises (including, without limitation, the elevators, the
garage (if any) and parking facilities and other common areas and
facilities) and the equipment, systems and fixtures therein and the making
of all necessary repairs, modifications, renovations or replacements
therein and thereto (with capital expenditures to be dealt with as
hereinafter provided); building and cleaning supplies; equipment rental;
cleaning; capital expenses (including expenditures relating to energy
conservation measures or programs) amortized over the useful life of the
item, together with interest on the unamortized portion of such expenses,
calculated each month at a rate equal to one twelfth (1/12) of the
aggregate of one and one-half percent (1.5%) plus the "Prime Rate" (as
hereinafter defined) on the first day of each month for loans in Canadian
dollars; snow removal, gardening and landscaping; garbage and waste
collection and disposal; amounts payable pursuant to service contracts with
independent contractors for maintenance, elevators, cleaning, refuse
removal, security operations and repairs; legal and accounting fees and
expenses; any expenses incurred by Landlord in obtaining or attempting to
obtain a reduction in Real Estate Taxes.
For the purposes of this lease, the expression "Prime Rate" means the rate
of interest per annum established from time to time by the Toronto Dominion
Bank ("the Bank") as the reference rate of interest for the determination
of interest rates that the Bank will charge to customers of varying degrees
of credit worthiness in Canada for Canadian Dollar demand loans in Toronto,
Ontario.
(l) Permitted Uses: general offices, research and development and related and
ancillary uses (including the recording of software on recording media and
the packaging thereof).
(m) Premises: the Land and the Building.
(n) Proportionate Share: Deleted.
(o) Real Estate Broker, if any:
<PAGE>
-5-
J. J. Barnicke Ltd.
(p) Real Estate Taxes: all taxes, rates and assessments, general or special, or
any other taxes, rates, assessments, levies and impositions which are now
or which may ever be levied against the Premises or revenues or rentals for
principal, provincial, federal, school, public betterment, general, local
improvement or other purposes. If the system of taxation with respect to
the taxes described in the previous sentence now in effect is altered and
any new tax or levy is imposed or levied upon the Premises and/or the owner
thereof and/or the revenues or rentals therefrom in substitution for or in
addition to all taxes presently levied or imposed upon real property, the
expression "Real Estate Taxes" shall include such new tax or levy. If the
competent authorities shall at any time eliminate any tax, rate, assessment
or imposition which comprise part of the Real Estate Taxes, Landlord shall
eliminate same from the definition of Real Estate Taxes.
(q) Rent: subject to the provisions of Schedule "F", from the Commencement Date
until the Termination Date, an annual rental of:
(i) during the period between the Commencement Date to and including the
last day of the fifth year of the Term, Seventeen Dollars and
Eighty-eight Cents ($17.88) per square foot of gross building area of
the Building; and
(ii) during the period between the first day of the sixth year of the Term
to and including the Termination Date, Twenty Dollars and Twelve Cents
($20.12) per square foot of gross building area of the Building.
(r) Schedules: the following schedules are attached hereto: "A" - Legal
Description of Land, "B" - Premises Description, "C" - Landlord's Work, "D"
- Rules and Regulations, "E" - Minimum Building Standards for Tenant
Finishes, "F" - Additional Provisions, "G" - CCDC3 Cost of the Work.
(s) Security Deposit: Zero Dollars ($0.00).
(t) Substantial Performance Date: has the meaning ascribed to it in the
Development Agreement.
(u) Tax on Capital: a sum equal to the taxes, levies or excises which are now
or which may ever be imposed upon a landlord or the owner of the Premises
by any governmental authority which is measured or based in whole or in
part upon the capital employed by the Landlord or owner with respect to the
Premises and whether so characterized as a capital tax, large corporations
tax, or as any other tax, levy or excise, all calculated as if the Premises
were the only property of the Landlord.
(v) Tenant Fit-Up: has the meaning ascribed to it in the Development Agreement.
(w) Term: the period commencing on the Commencement Date and terminating on the
Termination Date.
<PAGE>
-6-
(x) Termination Date: the day that is the last day of the tenth full year after
the Commencement Date.
SECTION II
----------
LEASE
-----
2.01 Landlord does hereby lease the Premises to the Tenant for the Term.
SECTION III
-----------
TERMINATION
-----------
3.01 This lease shall terminate without notice or demand therefor being
necessary on the Termination Date (subject to the Tenant exercising an option to
extend the Term pursuant to the provisions of Section 3 of Schedule "F" of this
lease). Should the Tenant remain in occupation of the Premises after the
Termination Date without having executed a new written agreement with the
Landlord, such holding over shall not constitute a renewal or extension of this
lease. In such event, the Landlord may, at its option, elect to treat the Tenant
as one who has not removed at the end of the Term and the Landlord shall be
entitled to all remedies against the Tenant provided by law in that situation,
or the Landlord may elect, at its option, to construe such holding over as a
tenancy from month to month subject to all the terms and conditions of this
lease save as to its duration and save that the Rent payable pursuant to Section
IV hereof shall be two (2) times the Rent payable in the preceding year.
SECTION IV
----------
RENTAL
------
4.01 Tenant covenants and agrees to pay the Rent to the Landlord in equal,
consecutive, monthly installments, in advance on the first day of each calendar
month. In the event that the Term begins on any day of the month other than the
first day, any Rent or other amount payable hereunder for such month and the
last month of the Term (as the case may be) shall be calculated on a per diem
basis and paid in advance.
4.02 The Rent shall be payable in lawful money of Canada to Landlord at its
offices in Montreal (being at the date of execution of this lease the address in
Montreal set out in Section 1.01(j) hereof) or at such other place or to such
other person as may be specified from time to time by Landlord without any
demand therefor being necessary, without set-off, reduction, deduction or
compensation whatsoever, save as otherwise specifically set out in this lease.
SECTION V
---------
NET RENTALS
-----------
5.01 Save only as herein expressly set forth, including, without limitation the
provisions of Schedule "F", Tenant acknowledges that the Rent shall be
absolutely net and carefree to the Landlord; Landlord shall not be responsible
for any costs, charges, expenses or outlays of any
<PAGE>
-7-
nature or kind whatsoever arising from or relating to the Premises, the contents
thereof, or the business carried on therein, and Tenant shall pay all such
charges, impositions, costs and expenses of every nature and kind (including
such as may be incurred by or paid for by Landlord on its behalf) to Landlord's
complete and entire exoneration as well as Real Estate Taxes, Tax on Capital and
Operating Expenses as hereinafter set forth and any taxes imposed thereon and on
the Rent.
5.02 Tenant shall not be responsible for the payment of Landlord's income taxes
(except for Tax on Capital to the extent herein mentioned) and Tenant shall not
be responsible for the payment of principal or interest due under any mortgage
or deed of trust affecting the Premises.
SECTION VI
----------
REAL ESTATE TAXES, TAX ON CAPITAL AND OPERATING EXPENSES
--------------------------------------------------------
6.01 Throughout the Term, any renewal thereof and/or holding over thereunder,
the Tenant shall pay as additional rent Real Estate Taxes in respect of the
Premises. During the first and last years of the Term (in the event same
comprise less than a complete tax year), the amount the Tenant is required to
pay pursuant to the foregoing shall be subject to per diem adjustments.
6.02 The Landlord shall invoice the Tenant for Real Estate Taxes in respect of
the Premises for the then current tax year(s) which the Tenant shall pay no
later than the later of thirty (30) days following receipt or five (5) days
prior to the date on which Real Estate Taxes are payable by the Landlord without
the taxing authority imposing interest or late penalties.
6.03 Deleted.
6.04 Landlord shall have no obligation to contest, appeal, object to or litigate
the levying or imposition of Real Estate Taxes in respect of the Premises and/or
any valuation imposed with respect thereto. Except during the last eleven months
of the Term (and provided that a right to extend the Term as set out in Section
3 of Schedule "F" of this lease has not been exercised) the Landlord shall in
all cases consult with the Tenant prior to the undertaking of any of the
foregoing actions. The Tenant, at its own cost, shall itself have the right to
contest, appeal, object to or litigate the levying or imposition of Real Estate
Taxes and if necessary, in the name of the Landlord, provided the Tenant
received the prior written consent of the Landlord, which consent shall not be
unreasonably withheld or delayed. If required, the Landlord shall provide all
reasonable assistance to the Tenant in respect of such contestation. During the
last eleven months of the Term (and provided that a right to extend the Term as
set out in Section 3 of Schedule "F" of this lease has not been exercised) the
Landlord may settle, compromise, consent to, waive or otherwise determine in its
sole discretion all matters and things relating thereto and the Tenant shall not
itself contest, appeal, object to or litigate the levying or imposition of Real
Estate Taxes in respect of the Premises.
6.05 Throughout the Term, any renewal thereof and/or holding over thereunder,
the Tenant shall pay as additional rent Operating Expenses and Tax on Capital.
During the first and last years of the Term (in the event same comprise less
than a complete Lease Year), the amount the Tenant is required to pay pursuant
to the foregoing shall be subject to per diem adjustments.
--- ----
<PAGE>
-8-
6.06 On or before the Commencement Date Landlord shall estimate the amount of
Operating Expenses and Tax on Capital for the then current Lease Year and shall
invoice Tenant for same in equal consecutive monthly installments which Tenant
shall pay to Landlord in advance on the first day of each calendar month. Within
one hundred and twenty (120) days of the end of each Lease Year, Landlord shall
furnish Tenant with a statement audited by an independent firm of chartered
accountants setting forth the actual Operating Expenses and Tax on Capital for
such year. If such amount is greater or less than the payments on account
thereof made by Tenant pursuant hereto, appropriate adjustments shall be made
forthwith. Thereafter, Tenant shall continue to make the aforementioned monthly
installments on account of estimated Operating Expenses and Tax on Capital for
the ensuing Lease Year on the same basis or on the basis of Landlord's revised
reasonable estimate of same, as the case may be, and so on from time to time.
Landlord shall provide, with such estimate, a reasonably detailed explanation of
the increase in the components of Operating Expenses. The Landlord agrees that
the Tenant shall have the right, at its expense, to inspect and audit the
Landlord's books and records (which inspection may include the taking of copies
of any relevant information, data or invoices in that regard) in respect of any
amount payable by the Tenant with respect to Operating Expenses, Real Estate
Taxes, Tax on Capital and utilities consumed within the Premises for a period of
two (2) years from the date on which the Landlord furnishes the Tenant with the
Landlord's audited statement.
6.07 Deleted.
6.08 Failure or delay on the part of the Landlord to avail itself of any of the
provisions of this Section VI shall not constitute any waiver or renunciation of
its rights provided herein.
SECTION VII
-----------
USE OF PREMISES
---------------
7.01 The Tenant shall use the Premises for the Permitted Uses and for no other
purpose. Nothing herein shall be so interpreted as to imply that this lease is
conditional upon the Tenant obtaining any permits or licenses for the
exploitation of such business from any municipal, provincial or other authority,
and the Landlord makes no warranty with respect to the ability of the Tenant to
carry out the Permitted Uses within the Premises.
SECTION VIII
------------
UTILITIES AND ADDITIONAL CHARGES
--------------------------------
8.01 The Tenant shall pay as and when due all water taxes or rates, sewer rates,
business taxes, license fees and other similar rates and taxes which may be
levied or imposed upon the Premises or upon the business carried on therein
and/or any property on the Premises owned or brought thereon by Tenant, and also
all other rates and taxes which are or may be payable by the Tenant as tenant or
occupant thereof. If the mode of collecting such taxes be so altered as to make
the Landlord and/or the proprietor liable therefor instead of the Tenant, the
Landlord will pay such accounts and the Tenant will repay the Landlord as
additional rent within ten (10) days of the Tenant's receipt of an invoice for
same, the amount so paid.
8.02 Deleted.
<PAGE>
-9-
8.03 The Landlord (subject to its ability to obtain the same from its principal
supplier) will cause the Premises to be supplied with electric current for the
lightening and power required therein for the operation of the Tenant's
reasonable needs, the cost of which is to form part of Operating Expenses. The
obligations of the Landlord hereunder shall be subject to any rules or
regulations to the contrary of the hydro electric corporation providing
electrical services to the Building, or any other municipal or governmental
authority.
8.04 The Tenant shall pay for the cost of all utilities consumed or used within
the Premises, same to include, without limitation, the cost of electricity,
water, gas, steam, fuel or other energy and Tenant shall pay for the cost of all
fittings, machines, apparatus, meters or other things leased in respect thereof
and for all work or services performed by any corporation or commission in
connection with any such utilities.
8.05 The Tenant shall retain evidence of payment of any charges referred to in
this Section which it pays directly to any public authority for inspection by
the Landlord at the Tenant's offices during Business Hours, the whole for a
period of two (2) years following the due dates for payment of said charges.
SECTION IX
----------
SERVICES
--------
9.01
(a) Access to the Premises: The Tenant shall have access to the Premises
twenty- four (24) hours per day, seven (7) days per week.
(b) Cleaning: The Landlord shall clean the Building in accordance with
standards for comparable buildings at such time or times outside Business
Hours on Business Days as Landlord may, in its sole discretion, determine.
The Tenant shall leave the Building reasonably tidy for purposes of
cleaning.
(c) Heating: The Landlord shall heat labs located within the Building
twenty-four (24) hours per day, seven (7) days per week and the rest of the
Building during Business Hours. The Landlord shall not be responsible for
the failure of heating equipment to perform its functions if such failure
is due to circumstances beyond the control of the Landlord. The Tenant
shall be responsible for the failure of heating equipment performing its
function if such failure results from unapproved partitioning within the
Building, unapproved changes or alterations thereto.
(d) Air-Conditioning: The Landlord shall provide reasonable air-conditioning
service to the labs located within the Building twenty-four (24) hours per
day, seven (7) days per week and to the rest of the Building during
Business Hours. The Landlord shall not be responsible for the failure of
air-conditioning equipment to perform its function if such failure is due
to circumstances beyond the control of the Landlord. The Tenant shall be
responsible for the failure of air-conditioning equipment performing its
functions if such failure shall result from unapproved partitioning within
the Building or unapproved changes or alterations thereto, the failure on
the part of the Tenant to shade windows
<PAGE>
-10-
which are exposed to the sun, or excessive use of electrical power or
mechanical systems by the Tenant.
(e) Elevators: The Landlord shall keep the passenger elevator(s) in operation
during Business Hours. Limited elevator access within the Building will be
made available at all other times.
(f) Lightening: Replacement of lamps, bulbs, starters and ballasts within the
Building shall be completed by the Landlord at the entire cost of the
Tenant, the Landlord reserving the right to relamp the entire Building at
the Tenant's cost when the Landlord, acting reasonably considers it cost
efficient or otherwise in accordance with sound property management
practice to do so.
9.02 The cost of providing all of the foregoing services shall form part of
Operating Expenses. At the Tenant's request and cost and upon reasonable prior
notice, heating, ventilating and air-conditioning service outside of Business
Hours will be provided. The Landlord warrants that the provision of heating and
air-conditioning services outside of Business Hours can be provided to certain
zones of the Building as described in the "Project Definition Binder" (as
defined in the Development Agreement).
SECTION X
---------
SECURITY
--------
10.01 Deleted
SECTION XI
----------
ASSIGNMENT AND SUBLETTING
-------------------------
11.01 The Tenant shall not assign this lease or sublet the Premises or any part
thereof or allow the Premises or any part thereof to be used by another without
the prior written consent of the Landlord, which consent shall not be
unreasonably withheld. The Landlord's refusal of consent shall be deemed
reasonable (without in any way restricting the Landlord's right to refuse its
consent on other reasonable grounds) where the prospective assignee or subtenant
is a consulate, embassy, trade commission or other representative of a foreign
government, where the Premises are intended to be used as medical or dental
offices or facilities, government or quasi-government offices, where the
proposed assignee or subtenant does not intend to bona fide physically occupy
and carry on business from the Premises, when the proposed assignment or
sublease is made prior to the Tenant commencing to physically and bona fide
occupy and carry on business from the Premises or where it is reasonably
anticipated by the Landlord that the number of persons visiting the Premises
will substantially increase as a result of the assignment or subletting.
11.02 As an alternative to such consent (and without being obliged or affecting
its other rights), the Landlord shall have the right to cancel the lease for the
Premises (or, as the case may be, for that portion thereof that Tenant seeks to
sublet) (with the intention that, subject to the obligations in this lease on
the part of the Tenant that are intended herein to continue after termination
(such
<PAGE>
-11-
as re-adjustments and the condition in which the Premises were to have been
delivered to the Landlord) , the Tenant shall no longer be liable to the
Landlord under this lease with respect to the Premises (or, as the case may be,
for that portion thereof that Tenant seeks to sublet)) the whole as, of and from
the date Tenant wishes to assign this lease or sublet the Premises or permit
their use by another. Landlord shall exercise the rights herein granted by
sending notice thereof to Tenant within thirty (30) days following receipt of
the notice referred to in Section 11.04 hereof.
11.03 Notwithstanding any assignment, subletting or permitted use by another,
the Tenant shall remain jointly and severally responsible with the assignee,
sublessee or user (and in the circumstances contemplated in Section 11.05
hereof, with the party who acquires control), without benefit of division or
discussion, for the payment of the Rent and all additional rentals and for the
performance of all other obligations of the Tenant under this lease. The Rent
payable by the Tenant shall be increased by an amount equal to the profit, if
any, derived by Tenant from the sublease, assignment or transfer. For all
purposes hereof, "profit" shall mean any benefit given, or the rent, additional
rent and other amounts payable directly or indirectly by the subtenant,
transferee or assignee to or for the account of the Tenant in excess of the Rent
and additional rentals payable by Tenant hereunder including but not limited to
all capital or other sums paid for improvements or otherwise. Landlord shall
have the right to require the subtenant, transferee or assignee to pay its rent
directly to the Landlord.
11.04 Tenant agrees to provide Landlord with at least thirty (30) days' prior
written notice of its intention to assign this lease or sublet the Premises, and
the name, address and nature of business of the proposed assignee or sublessee,
such credit references and other information as Landlord may reasonably request
and copies of the executed assignment or sublease agreement which must be
conditional upon Tenant obtaining the Landlord's consent as hereinabove
provided. Landlord may, at its option, require that as a condition of giving its
consent to an assignment or subletting, Tenant and the proposed assignee or sub
lessee sign a form of assignment or sublet document (in form and content
satisfactory to Landlord). Further, all out-of-pocket costs, charges and
expenses incurred by Landlord in respect of such assignment or sublet document,
as well as a reasonable administrative fee shall be payable as a condition of
the giving of Landlord's consent.
11.05 In the event that the Tenant is an incorporated entity, if at any time
effective control of the Tenant is acquired or exercised by any person or
persons not having effective control of the Tenant on the date of execution of
this lease, the same shall be deemed to constitute a sublease to the party
acquiring such control subject to all of the provisions hereof. This provision
shall not apply to Entrust Technologies Limited.
11.06 The Tenant will not advertise the Premises for the purpose of any sublease
or assignment without obtaining the prior written approval of the Landlord to
the proposed text, such approval not to be unreasonably withheld. In no event
will the rental rate appear or be referred to in any such advertisements.
11.07 Without derogating from the provisions of Section 11.03 hereof, the Tenant
shall not be required to obtain the consent of the Landlord to an assignment or
sublease to an affiliated body corporate or a subsidiary body corporate (as such
expressions are defined in the Canada Business
<PAGE>
-12-
Corporations Act R.S.C. 1985, as such Act is constituted as at the date of
execution of this lease) of Entrust Technologies Limited. The Tenant agrees to
provide to the Landlord notice of any such assignment or sublease within five
(5) days of same occurring.
11.08 The Landlord and the Tenant agree that in the event that the Landlord
consents to an assignment of this lease under the provisions of this Section XI
or the assignment of this lease is effected pursuant to section 11.07 hereof,
the said assignment must include an assignment to the proposed assignee of a
certain lease entered into between 786473 Ontario Limited, the Tenant and
Guarantor entered into contemporaneously with this lease with respect to certain
vacant land abutting the Premises.
SECTION XII
-----------
READINESS FOR OCCUPATION
------------------------
12.01 Deleted
SECTION XIII
------------
TENANT CARE
-----------
13.01 The Tenant shall maintain and keep the Premises, including all
replacements, alterations, additions and improvements thereto, in good order and
condition, reasonable wear and tear which does not render the Premises
untenantable, damage by fire and other insured perils excepted, and shall, in
accordance with the procedures set forth in Section XIV hereof, perform or cause
to be performed all repairs (other than structural repairs of a non-recurring
nature not caused by the Tenant's fault, negligence or breach of any obligation
hereunder or at law) which may from time to time be required therein or thereto.
13.02 At the expiration or sooner termination of this lease, Tenant shall return
the Premises to Landlord in the state and condition in which they are to be
maintained and repaired as provided for in this lease, reasonable wear and tear
which does not render the Premises untenantable and damage by fire and other
insured perils excepted.
13.03 The Tenant shall not bring into the Building any machinery, equipment,
article or thing that by reason of weight or size might cause damage thereto and
in no event shall Tenant overload the floors of the Building.
13.04 In the event Tenant fails to comply with the obligation to maintain,
repair and replace imposed hereunder, the Landlord, after giving written notice
of twenty (20) days to the Tenant (unless such default cannot reasonably be
remedied within such twenty (20) day period in which case unless the Tenant has
failed to commence to remedy to prosecute with due diligence the curing of such
default until it is remedied), shall have the right (but shall not be obligated)
to carry out such maintenance, repairs and replacements and any and all costs
incurred by the Landlord in so doing, together with a fee equal to ten per cent
(10%) of such costs, shall be payable by the Tenant to Landlord as additional
rental on demand. Notwithstanding the foregoing, in the event any work or action
is urgently required at times when authorized representatives of Tenant cannot
be located, Landlord may proceed with such reasonable steps as
<PAGE>
-13-
in its discretion are deemed by it to be necessary for the protection and
preservation of the Premises and Tenant shall reimburse Landlord for the amount
expended, together with a fee equal to ten per cent (10%) of such amount, as
additional rental on demand.
SECTION XIV
-----------
ALTERATIONS, ADDITIONS, IMPROVEMENTS AND REPAIRS
------------------------------------------------
14.01 All improvements in and to the Premises other than the improvements which
are the Landlord's responsibility to carry out pursuant to the Development
Agreement (including the Tenant Fit-Up) and other than those which the Landlord
elects to carry out as set out in Section 14.02 of this lease and other than the
Tenant Fit-Up (which the Landlord is to carry out in accordance with the
provisions of this lease and the Development Agreement), shall be the
responsibility of Tenant and shall be performed at Tenant's sole cost and
expense, the whole subject to the terms and conditions set forth in this Section
XIV.
All architectural plans and specifications setting forth Tenant's work may be
prepared by a designer and/or architect of the Tenant's choice but shall be
subject to Landlord's prior written approval as herein mentioned. Said plans and
specifications shall include, without limitation, complete working drawings and
specifications, floor plans, interior elevations, interior finishing schedules,
special facilities or installations that affect the Premises and/or Tenant's
perimeter walls, mechanical, plumbing, sprinklers, telephone and electrical work
(including all fixtures, equipment and under floor services where applicable)
and static and dynamic loading of floors. The Tenant plans and specifications
shall be drawn to the same scale as the base Building working drawings. Tenant
shall be responsible to ensure that the Tenant work, as designed, complies with
all relevant laws, by-laws and regulations as well as with the Building module
and structure and with the Building's mechanical, electrical, plumbing and other
systems. Complete working drawings and specifications shall be submitted:
(a) with respect to work to be carried out on or about the Commencement Date,
to the Landlord within twenty-one (21) days following execution of this
lease or within such other delay as the Landlord and Tenant have otherwise
agreed; and
(b) in any other event no later than thirty (30) days prior to the date on
which the work is to be carried out.
Within ten (10) days following receipt of the complete working drawings and
specifications, Landlord shall notify Tenant either of its approval thereof or
of changes required and if Landlord notifies Tenant that changes are required,
Tenant shall, within seven (7) days thereafter, submit the necessary amended
plans and specifications. Failure by Tenant to submit complete working drawings
and specifications or final plans and specifications within the delays herein
contemplated shall be deemed to be a delay in the completion of the Premises
attributable to Tenant's fault.
14.02 Any and all leasehold improvements and installations to the licenses
required by the Tenant may, at the option of Landlord, be carried out by the
Landlord or under the latter's coordination, in which event the Tenant shall pay
for the costs thereof as well as an amount equal to:
<PAGE>
-14-
(a) with respect to the Tenant Fit-up, those fees set out in Section 6 of
Schedule "F" of this lease; and
(b) with respect to any other leasehold improvements and installations, ten
percent (10%) of such cost on account of Landlord's overhead and
administration.
The Landlord agrees that with respect to such leasehold improvements and
installations:
(a) the Landlord shall issue all such work for tender and shall obtain no less
than three (3) competitive quotations for all such work, subject to the
Tenant's written agreement to accept less than three (3) quotations;
(b) the Landlord shall provide to the Tenant copies of the approved tender
packages to be issued for tender, all correspondence during the tender
period and all tender submissions;
(c) the Landlord shall provide its review and analysis of all tender
submissions and shall make a recommendation for contract award to the
Tenant; and
(d) upon receipt of the Tenant approval and instructions, the Landlord shall
award the contracts for the said work (which award the Landlord agrees
that the Tenant may direct to a tendering party which may not have been
the lowest bidder).
In addition, the Tenant shall pay for the cost of all architectural, engineering
and/or working drawings prepared to comply with the Tenant's requirements and
for the cost of inputting such working drawings in any of the Premises'
computerized design records that may from time to time be maintained as well as
the foregoing fees calculated on the cost thereof. Payment shall be effected by
way of a cash deposit and progress draws during the course of the work, the
specifics of which shall be established by the Landlord, acting reasonably, from
time to time.
14.03 If the applicable work is carried out by the Tenant, the Tenant shall be
required to comply with all applicable laws and regulations with respect to
carrying out same and without limiting the generality of the foregoing, the
Tenant shall not itself make any such improvements, alterations, additions or
repairs to the Premises without obtaining all necessary permits from the
appropriate public authorities and without the prior written consent of the
Landlord pursuant to Section 14.01 hereof. The Tenant shall be required to
submit to the Landlord plans and specifications (in accordance with the
provisions of Section 14.01 hereof and within the delays therein mentioned) for
all such improvements, alterations, additions or repairs and Tenant shall pay
for the cost of inputting such plans and specifications in any Building
computerized design records that may from time to time be maintained. All such
work shall be done by contractors approved by the Landlord, which approval shall
not be unreasonably withheld. All such work shall be conditional upon such
contractors paying the cost of temporary services and coordination during such
construction, upon such contractors timing and performing their work in
accordance with such rules and regulations as the Landlord may from time to time
prescribe, upon such contractors carrying property damage and liability
insurance satisfactory to the Landlord for its operations in the Building and
upon the employees of such contractors not causing any labour trouble by their
presence in the Building. Furthermore, the Tenant shall require that prior to
entering the Premises or performing any work therein, the Tenant's contractors
shall deliver to the Landlord a waiver and release from all lien rights that may
then or
<PAGE>
-15-
thereafter exist for work done, labour performed or materials furnished under
any contract and such contractors must agree to furnish to the Landlord a good
and sufficient waiver of lien rights for every subcontractor and supplier
furnishing labour and material under the contract. In the event that any lien is
registered in respect of any interest in the Lands as a result of any such work,
the Tenant shall forthwith attend to the removal of such lien, failing such
removal within fifteen (15) days the Landlord may, in the name of the Tenant,
and in addition to any other remedies available to the Landlord, be entitled to
attend to the removal of such lien by payment into Court at the cost of the
Tenant (including any expenses and legal fees incurred by the Landlord in
effecting such removal). The Tenant shall be responsible for any costs and
expenses of the Landlord occasioned directly or indirectly by such work in the
Premises as well as the Landlord's reasonable costs and fees for the supervision
and co-ordination of the Tenant's work. The cost of such improvements,
alterations, additions or repairs shall be the sole responsibility of the Tenant
and if any payment in respect thereof shall be made by the Landlord, the
Landlord hereby reserving the right to do so in its sole discretion, the same
shall be immediately payable by the Tenant within ten (10) days of receipt of an
invoice therefor as additional rent. The Tenant shall furthermore pay to the
Landlord as additional rent within ten (10) days of receipt of an invoice
therefor an amount equal to ten percent (10%) of the total cost of all such
work, representing the Landlord's fee for administration and co-ordination of
same.
14.04 All improvements, alterations, additions or repairs to the Premises
(including the Tenant Fit-Up) shall, upon their completion, become part of the
Premises and the property of the Landlord, and, subject as hereinafter provided,
shall be surrendered with the Premises upon termination of the lease without any
compensation being due therefor. Notwithstanding the foregoing, the Tenant may
elect that any or all installations made or installed by or on behalf of the
Tenant (other than Tenant Fit-Up, with the exception of (i) roof-top satellite
dishes, transmission devices and other roof-top devices; and (ii) equipment,
including cafeteria equipment, other than mechanical or electrical equipment) be
removed and if the Tenant so elects then it shall be Tenant's obligation to
restore the Premises to the condition they were in before the installation of
such alterations, installation, partitions and/or fixtures. Without limiting
Tenant's repair and maintenance obligations otherwise set out in this lease, or
the Tenant's obligation to reinstate in accordance with the preceding paragraph,
and subject to the payment obligation set out below, the Tenant shall have no
obligation to remove or reinstate any part of the Building on the Termination
Date (as may be extended in accordance with the provisions of this lease). The
Landlord may elect to require the Tenant to pay for:
(a) the removal of those items which have been noted by "*" in Section 14 of
Schedule "F" of this lease;
(b) the removal of internal staircases (excluding staircases installed as part
of the Base Building Core & Shell in accordance with applicable laws) and
the reinstatement of the floor in such areas to base building (smooth,
trowelled concrete) condition;
(c) with respect to the cafeteria, the capping of all utility services which
had serviced the area (including the capping of any exhaust or other
specialty venting) within such cafeteria area; and
<PAGE>
-16-
(d) the removal of any or all special, non-standard mechanical or electrical
equipment or systems, ceilings, and specialty rooms installed after the
Commencement Date (except that in respect of cables, whether installed
prior to or after the Commencement Date, the only obligation of the Tenant
will be to cap or sever such cables, not to pull or remove).
The obligation of the Tenant to pay for the removal and reinstatement of the
applicable items set out above (which for the sake of clarity, does not include
standard building staircases or cables) shall only be to the extent that the
said item is not re-usable by the Landlord. Such re-usability and the quantum of
contribution in respect thereof shall be established by negotiation and based
upon reasonable estimates and allocations provided by an engineer, architect or
quantity surveyor independent of and acceptable to the parties. Failing
agreement on such basis, the quantum of contribution shall be determined by
arbitration in accordance with the provisions of this lease. The Landlord agrees
that it shall obtain three cost estimates with respect to carrying out the
applicable work and the lowest cost estimate so obtained shall be used by the
Landlord for the purposes of invoicing the Tenant with respect to same.
SECTION XV
----------
MAJOR REPAIRS
-------------
15.01 Should the Landlord effect improvements, alterations, additions,
maintenance, improvements or repairs to the Premises, the Tenant shall permit
same to be performed without being entitled to any indemnity or reduction in
rental or any damages or compensation therefor so long as the Tenant's use and
enjoyment of the Premises are not materially adversely affected (with the
intention that if the Tenant's use and enjoyment of the Premises are materially
adversely affected, and all additional rentals payable hereunder shall abate,
and then only to the extent and for such period of time that the Tenant's use
and occupancy of the Premises are thereby materially adversely affected (Rent to
be calculated at the rate set out in Section 1.01(q) of this lease, subject to
such rate having been varied pursuant to Section 2 of Schedule "F" of this
Lease). All such work shall be completed by the Landlord with reasonable
dispatch and the cost thereof shall be included in Operating Expenses unless
such work is otherwise Landlord's responsibility hereunder.
SECTION XVI
-----------
ACCESS TO PREMISES
------------------
16.01 The Landlord, its agents and representatives may enter the Premises at all
reasonable times with prior reasonable notice to the Tenant and subject to the
Tenant's security requirements (and at any time without notice during an
emergency) to examine their condition and to view their state of repair,
maintain, clean, re-lamp or otherwise and Tenant covenants to repair according
to notice.
16.02 The Tenant shall allow the Premises to be exhibited during Business Hours,
with prior reasonable notice to the Tenant and subject to the Tenant's security
requirements, to persons interested in acquiring the Premises or advancing money
upon the security thereof. During the last eleven months of the Term (and
provided that a right to extend the Term as set out in Section 3 of Schedule "F"
of this lease has not been exercised), Tenant shall also allow the Premises to
<PAGE>
-17-
be exhibited to persons interested in leasing same, with prior reasonable notice
to the Tenant and provided the Tenant's reasonable security procedures are
respected.
SECTION XVII
------------
PROTECTION OF EQUIPMENT
-----------------------
17.01 The tenant shall protect from damage and the Landlord shall at the expense
of the Tenant (in accordance with the provisions of Section XIV hereof) make all
necessary repairs and replacements to the heating, ventilating and
air-conditioning apparatus, water, gas and drain pipes, water closets, sinks and
accessories thereof in and about the Building and keep same free from all
obstructions that might prevent their free working and shall give to the
Landlord prompt written notice of any accident to or defects in same or any of
their accessories of which the Tenant becomes aware.
SECTION XVIII
-------------
COMPLIANCE WITH LAWS AND INDEMNIFICATION
----------------------------------------
18.01 The Landlord and the Tenant will not do or permit anything to be done in,
upon or about the Premises or bring or keep anything therein which will in any
way conflict with the regulations of the fire, police or health departments or
with the rules, regulations, by-laws or ordinances of the municipality in which
the Premises are situate, or any governmental authority having jurisdiction over
the Premises or the business conducted therein, all of which the Landlord and
the Tenant undertake to abide by and conform to.
The Landlord and the Tenant will indemnify and hold harmless the other, their
agents and contractors from and against any penalty imposed for or damage
arising from the breach of any such rules, regulations, by-laws or ordinances by
the applicable party or those for whom the applicable party is in law
responsible.
18.02 The Tenant shall pay to the Landlord any extra premiums of insurance that
the company or companies insuring the Premises may exact in consequence of the
business carried on by the Tenant, of anything brought into or stored in the
Premises by the Tenant, or of the Tenant's operations.
The Tenant shall in no event bring into or store in the Premises anything which
may make any insurance carried by the Landlord subject to cancellation.
18.03 The Tenant shall comply with the requirements of all insurance companies
having policies of any kind whatsoever in effect covering the Premises of which
the Tenant has been given notice. The Landlord represents that as of the date of
execution of this lease it has not received notice from any such insurance
company of any such requirement based upon the proposed use of the Premises as
disclosed by the Tenant to the Landlord. In addition, in the event that the
Landlord receives any such notice from any such insurance company of any such
requirement prior to the Commencement Date, the Landlord shall promptly notify
the Tenant of same. In no event shall any inflammable materials or explosives
(except, to the extent required
<PAGE>
-18-
by Tenant to carry on its business and then only as permitted by Landlord's and
Tenant's insurers) be taken into or maintained within the Premises.
18.04 Unless caused by the negligent acts or omissions of the Landlord, its
employees, agents or contractors and then only in respect of matters against
which the Tenant is not insured nor obliged to be insured pursuant to this
lease, the Tenant shall indemnify and hold harmless the Landlord from and
against all claims, liabilities or payments relating to the use and occupancy of
the Premises and, without limiting the generality of the foregoing, Tenant does
hereby agree to indemnify and hold harmless the Landlord from and against all
claims, liabilities, damages, costs, suits or actions arising from:
(a) any accident, injury (including death) or damage whatsoever or howsoever
caused to any person or persons (including the Tenant, its employees,
agents and invitees, any subtenant or licensee of the Tenant and all other
persons claiming through or under any of them) or to the property of any
such person or persons occurring during the Term, caused by want of repair
(other than want of repair occurring as a result of inherent structural
defects in the Building), or by the use or occupation of the Premises;
(b) any breach, violation or non-performance of any covenant, condition or
agreement set forth in the present lease on the part of Tenant to be
fulfilled, kept, observed or performed;
(c) the conduct or management of or from any work or thing whatsoever done, or
not done, in or about the Premises by the Tenant, its agents, employees or
contractors, or arising from any act of negligence by the Tenant or any of
its agents, employees or contractors; and
(d) the failure of the Tenant to fully, faithfully and punctually comply with
all of the legitimate requirements of any public or quasi-public authority
having jurisdiction over the Premises.
18.05 Notwithstanding any express or implicit obligation on the part of Landlord
to insure and further notwithstanding any obligation on the part of Tenant to
contribute to the payment of Landlord's premiums, Tenant acknowledges that
Tenant shall remain responsible for its negligence and those of all persons for
whom it is in law responsible, that no insurable interest is conferred upon the
Tenant under any of Landlord's insurance policies and that Tenant shall have no
right to recover any proceeds thereunder or claim any right or title to such
proceeds.
18.06 Unless any of the following matters are matters against which the Tenant
is insured or obliged to be insured pursuant to this lease (in which case the
following indemnity is not to apply), the Landlord shall indemnify and hold
harmless the Tenant from:
(a) any accident, injury (including death) or damage whatsoever or howsoever
caused to any person or persons or to the property of any such person or
persons occurring during the Term, caused by want of repair occurring as a
result of inherent structural defects in the Building;
<PAGE>
-19-
(b) any claims, liability or payments arising from any breach, violation or
non-performance of any covenant, condition or agreement set forth in this
lease on the part of the Landlord to be fulfilled, kept, observed or
performed;
(c) any negligent act or omission of the Landlord, its employees, agents or
contractors; or
(d) the failure of the Landlord to fully, faithfully and punctually comply
with all of the legitimate requirements of any public or quasi-public
authority having jurisdiction over the Premises and which requirement is
the Landlord's responsibility to comply with pursuant to the terms of this
lease.
SECTION XIX
-----------
SECURITY DEPOSIT
----------------
Deleted.
SECTION XX
----------
FIRE AND DESTRUCTION OF PREMISES
--------------------------------
20.01 If the Building is damaged or destroyed, in whole or in part the following
provisions shall apply:
(a) If the damage is such as to render the whole or any part of the Building
unusable for the purpose of the Tenant's use and occupancy thereof, the
Landlord shall deliver to the Tenant within sixty (60 days following the
occurrence of the damage an independent architect's written opinion as to
whether or not the damage is capable of being repaired within one hundred
and eighty (180) days following commencement of reconstruction;
(b) If in the said architect's opinion the Building is capable of being
repaired as aforesaid within such one hundred and eighty (180) days, the
Landlord shall diligently and expeditiously proceed to perform such
repairs;
(c) If it is the said architect's opinion that the Building is not capable of
being repaired as aforesaid within one hundred and eighty (180) days
following the date of commencement of reconstruction, either the Landlord
or the Tenant may, at its option, elect by written notice given to the
other within fifteen (15) days following receipt of the said opinion to
terminate this lease, whereupon the Tenant shall immediately surrender
possession of the Premises, and Rent and all other payments for which the
Tenant is liable hereunder shall be apportioned to the date of the
occurrence of such damage or destruction. If the Landlord or the Tenant
does not so elect to terminate this lease, the Landlord shall diligently
proceed to repair the Building; and
(d) If the Building is, as a result of any such occurrence, rendered unusable
in whole or in part for the purpose of the Tenant's use and occupancy
thereof, the Rent and all additional rentals payable hereunder shall abate
only to the extent and for such period of time that the Tenant's use and
occupancy of the Premises is thereby diminished (Rent to
<PAGE>
-20-
be calculated at the rate set out in Section 1.01(q) of this lease,
subject to such rate having been varied pursuant to Section 2 of Schedule
"F" of this lease) from the date of such occurrence, only to the extent
that the Landlord is able to draw upon the rental insurance which it is
obliged to keep in force hereunder until Landlord's repair obligations
have been completed.
The Landlord agrees to make reasonable efforts having regard to the nature and
extent of the loss, to notify the Tenant of the said architect's opinion within
a shorter period of time.
20.02 Notwithstanding the foregoing, Landlord shall not be required to restore
or rebuild the Building under any circumstances in the event less than two (2)
years remain in the Term from the date of occurrence of the damage or
destruction.
20.03 In the event Landlord elects to restore or rebuild as aforesaid, it is
expressly understood and agreed that the extent of Landlord's obligation will be
to rebuild or restore to substantially the condition in which the Premises were
initially delivered to Tenant (which for clarity is to include the Tenant
Fit-Up) subject to existing by-laws and other modifications as Landlord and
Tenant, acting reasonably, shall mutually agree upon. Nothing herein contained
shall be construed to oblige the Landlord to repair or reconstruct any
alterations, improvements or property of the Tenant. On the contrary, all other
improvements in and to the Premises shall be the responsibility of Tenant who
shall be obliged to repair and re-fixture to a standard at least equivalent to
that which existed prior to the date of damage and destruction.
SECTION XXI
-----------
NON-RESPONSIBILITY OF LANDLORD
------------------------------
21.01 Save and except for the fault or negligence of the Landlord, or those for
whom the Landlord is in law responsible, and then only in respect of matters
against which the Tenant is not insured nor obliged to be insured pursuant to
this lease, the Landlord shall not be liable for any damage, loss, injury or
destruction arising in or upon the Premises to any property or person nor for
any personal injuries sustained by the Tenant, its officers, servants,
employees, agents, invitees or licensees, which may result at any time from any
reason or cause whatsoever, the Tenant hereby covenanting to indemnify the
Landlord of and from all loss, costs, claims or demands in respect of such
damage, loss, injury or destruction. Without limiting the generality of the
foregoing, the Landlord shall not under any circumstances (other than as set out
above) be liable for any damage resulting from water, steam, rain or snow which
may leak into, issue or flow from the pipes or plumbing or sprinklers or from
any other part of the Building or from any other place or quarter. No event or
occurrence herein contemplated shall be deemed an eviction or disturbance of the
Tenant's enjoyment of the Premises nor render the Landlord liable in damages to
the Tenant nor entitle the Tenant to claim any diminution in Rent or in any
other amount payable hereunder.
21.02 Subject to the provisions of the Development Agreement, Landlord shall not
be liable for failure to perform any of its obligations hereunder nor be
responsible for any damage resulting from delays in the construction and/or
finishing of the Premises and/or the interruption or modification of any service
or facility provided in the Building caused or required by strikes,
<PAGE>
-21-
riots, labour controversies, accidents, fault or delays caused by Tenant or
third parties, fuel shortages, Acts of God or of the Queen's enemies, fire or
other casualty, force majeure, cas fortuit, or any other cause beyond the
Landlord's reasonable control and Landlord shall not be responsible for any acts
or omissions of any other tenants or occupants of the Building or other third
parties. No such occurrence or event shall be deemed an eviction or disturbance
of the Tenant's enjoyment of the Premises nor render the Landlord liable in
damages to the Tenant nor entitle the Tenant to claim any diminution in Rent or
other amounts payable hereunder, but in any such event the Landlord shall
without delay take all reasonable steps to remove the cause of such
interruption.
With the exception of monetary obligations of the Tenant pursuant to this lease,
the Tenant shall not be liable for failure to perform any of its obligations
hereunder caused or required by strikes, riots, labour controversies, accidents,
fault or delays caused by Landlord or third parties, the shortages, Acts of God
or of the Queen's enemies, fire or other casualty, force majeure, cas fortuit,
or any other cause beyond the Tenant's reasonable control. No such occurrence or
event shall render the Tenant liable in damages to the Landlord, but in any such
event the Tenant shall without delay take all reasonable steps to remove the
cause of such interruption.
21.03 Save and except for the fault or negligence of the Landlord, or those for
whom the Landlord is in law responsible, and then only in respect of matters
against which the Tenant is not insured nor obliged to be insured pursuant to
this lease, without limiting the generality of the foregoing, the Landlord shall
not be liable for any damage of any kind or nature to the Premises or to any
goods, merchandise, stock-in-trade, assets, fixtures, furniture, accessories or
equipment belonging to the Tenant or to the Tenant's officers, servants,
employees, agents, invitees or licensees resulting from robbery, burglary, theft
or acts of violence of any kind, and the Tenant will hold the Landlord free,
clear and harmless from any liability or loss resulting therefrom.
SECTION XXII
------------
INSURANCE
---------
22.01 Throughout the Term and any renewal thereof, Tenant shall take out and
keep in force:
(a) comprehensive general liability insurance (including blanket contractual
liability coverage) with respect to the business carried on in or from the
Premises and the use and occupancy thereof on an occurrence basis for
bodily injury and death and damage to property of others in an amount of
at least five million dollars ($5,000,000.00) for each occurrence as well
as automobile liability insurance including contractual liability covering
all licensed vehicles operated by or on behalf of the Tenant;
(b) all-risks insurance including the perils of fire, extended coverage,
leakage from sprinkler and other fire protective devices, earthquake,
collapse and flood in respect to furniture, equipment, inventory and
stock-in-trade, fixtures, (plate glass if appropriate) and leasehold
improvements located within the Premises and such other property located
in or forming part of the Premises, including all mechanical or electrical
systems (or portions thereof) installed by Tenant in the Premises, the
whole for the full replacement cost (without depreciation) in each such
instance;
<PAGE>
-22-
(c) tenants' legal liability insurance in an amount equal to the replacement
cost of the Premises; and
(d) such additional insurance as Landlord, acting reasonably and in accordance
with industry standards, may from time to time require.
22.02 All policies of insurance shall be placed with insurers to which the
Landlord has no reasonable objection, and provide that they will not be
cancelled or permitted to lapse unless the insurer notifies Landlord in writing
at least thirty (30) days prior to the date of cancellation or lapse. Each such
policy shall name Landlord and any other party required by Landlord, including
but not limited to its property manager and mortgagees, as an additional
insured(s) as its (or their) interest(s) may appear. The Tenant's insurance
policies and coverages shall be primary. Each liability policy will contain a
provision of cross-liability and severability of interests as between Landlord
and Tenant. All other policies referred to above shall contain a waiver of
subrogation rights which Tenant's insurers may have against Landlord, Landlord's
insurers and persons under Landlord's care and control. Notwithstanding anything
contained in this lease to the contrary, Tenant hereby releases and waives any
and all claims against Landlord and those for whom Landlord is in law
responsible with respect to occurrences which are or which are required to be
insured against by Tenant hereunder. Tenant shall from time to time furnish
Landlord with certificates of all such insurance policies and the renewals
thereof.
22.03 Should Tenant fail to take out or keep in force such insurance, Landlord,
subject to a ten (10) day written notification (or such shorter period of time
as the Landlord is given by its insurer to cure the default) to the Tenant
(unless the default is cured within the aforesaid period) will have the right to
do so and to pay the premiums therefor and in such event Tenant shall repay to
Landlord the amount paid as premiums as additional rental on demand.
SECTION XXIII
-------------
DEFAULT
-------
23.01 In any of the events following, namely:
(a) if the Tenant shall fail to pay the Landlord any installment of Rent or
any additional rent after it shall have become due and payable as herein
provided so long as the Landlord has notified the Tenant in writing of its
default and the Tenant has not rectified the said default within ten (10)
days of being notified of same;
(b) if the Tenant or Guarantor shall be declared dissolved, bankrupt or
wound-up or shall make any general assignment for the benefit of its
creditors or take or attempt to take the benefit of any insolvency,
winding-up or bankruptcy legislation or if a petition in bankruptcy or in
winding-up or for reorganization shall be filed by or granted against the
Tenant or if a receiver or trustee be appointed for or enter into physical
possession of the property of the Tenant, or any part thereof;
(c) if the Tenant shall assign, sublet or permit the use of the Premises by
others except in a manner herein permitted so long as the Landlord has
notified the Tenant in writing of its default and the Tenant has not
rectified the said default within fifteen (15) days' of being
<PAGE>
-23-
notified of same (or such longer period of time as is necessary for the
Tenant to remedy such default (provided the Tenant promptly commences and
thereafter continues diligently to remedy such default));
(d) if any of the property of the Tenant in the Premises is seized by any
person whatsoever so long as the Landlord has notified the Tenant in
writing of its default and the Tenant has not rectified the said default
within fifteen (15) days' of being notified of same (or such longer period
of time as is necessary for the Tenant to remedy such default (provided
the Tenant promptly commences and thereafter continues diligently to
remedy such default));
(e) if any insurance carried by the Landlord be cancelled in consequence of
the business carried on by the Tenant or in consequence of anything
brought into or stored in the Premises by the Tenant so long as the
Landlord has notified the Tenant in writing of its default and the Tenant
has not rectified the said default within fifteen (15) days' of being
notified of same; or
(f) if the Tenant shall default in the performance of any of its other
obligations under this lease including, without limitation, the obligation
to pay business taxes in a timely manner, fail to effect any payment that
may result in a charge, lien, encumbrance or other right on the Premises
or the property located therein or shall violate any of the rules and
regulations hereinafter set forth or hereafter to be established by the
Landlord so long as the Landlord has notified the Tenant in writing of its
default and the Tenant has not rectified the said default within fifteen
(15) days' of being notified of same (or such longer period of time as is
necessary for the Tenant to remedy such default (provided the Tenant
promptly commences and thereafter continues diligently to remedy such
default)),
this lease may be terminated at the option of the Landlord without further
notice to the Tenant to such effect. It is expressly agreed that such right of
termination shall be in addition and without prejudice to all other rights as
provided by law or herein, and the Landlord may re-enter the Premises to have
again, repossess and enjoy, as of its former estate, anything herein contained
to the contrary notwithstanding and re-let the Premises to whomsoever it may
choose without further notice or demand being necessary and may recover from the
Tenant all amounts due hereunder at the date of such termination, expenses of
such re-letting (including any repairs, decorating, alterations or improvements
necessitated thereby) and rental for the three (3) months next succeeding the
date of such termination or such longer period as may be allowed by law, all of
which shall immediately become due and payable. Thereafter the Tenant shall pay
to the Landlord, as liquidated damages until the end of the Term, an amount
equivalent to the rental provided in this lease, less the sum of the net
receipts (if any) derived by the Landlord from the re-letting of the Premises.
As used herein, the expression "rental" shall mean the Rent, Real Estate Taxes,
Operating Expenses and Tax on Capital, and all other additional rents payable
hereunder. Any sums received by the Landlord from or for the account of the
Tenant when the Tenant is in default hereunder may be applied, at the Landlord's
option, to the satisfaction in whole or in part of any obligation of the Tenant
then due hereunder in such manner as the Landlord sees fit and regardless of any
imputation by law or any designation or instruction of the Tenant to the
contrary. The Landlord agrees that so long as any default by the Tenant is
rectified within the time period hereinbefore provided, the default shall be
deemed to have not occurred.
<PAGE>
-24-
23.02 The Tenant waives and renounces the benefit of any present or future
statute taking away or limiting the Landlord's right of distress, and covenants
and agrees that notwithstanding any such statute none of the goods and chattels
of the Tenant on the Premises at any time during the Term shall be exempt from
levy by distress for rent in arrears.
SECTION XXIV
------------
RELOCATION AND MODIFICATION OF BUILDING/PREMISES
------------------------------------------------
24.01 Notwithstanding any provision of this lease to the contrary, the Landlord
reserves the right at any time and from time to time, following consultation
with the Tenant, to make minor changes, alterations, amendments or expansions to
the Building as the Landlord, in its sole and entire discretion deems expedient
(save that to the extent any of the foregoing may affect the Tenant's use and
enjoyment of the Premises, no such work, saving an emergency, shall be effected
without the consent of the Tenant) same to include without limitation, the right
of the Landlord to add additional floors to the Building, to expand the length
or width of the Building and/or change, alter and amend the location, dimensions
or specifications of the pipes, wires, ducts, conduits, utilities, mechanical
systems, common areas and other building services (including such as may be
contained within the Premises provided that any such changes, alterations or
amendments which are in the Premises are minor in nature and do not materially
affect the Tenant's use and enjoyment of the Premises). The Tenant waives and
renounces any and all claims as a consequence of the foregoing. In the event any
such change results in additional land being utilized to service the Premises,
such additional land shall be deemed included in the definition of "Land" for
all purposes of this lease.
24.02 Deleted.
SECTION XXV
-----------
ADDITIONAL PROVISIONS
---------------------
25.01
(a) Landlord: In the event of any sale or lease of the Premises, the Landlord
--------
shall be and hereby is entirely released and relieved from all covenants
and obligations of the Landlord hereunder (except for any liability or
obligations outstanding at the time of the sale or lease of the Premises
or arising in respect of the period prior to the sale or lease of the
Premises) provided such purchaser or lessee agrees to assume and carry out
any and all such covenants and obligations (except for any liability or
obligations outstanding at the time of the sale or lease of the Premises
or arising in respect of the period prior to the sale or lease of the
Premises).
(b) Amendment of Lease: No assent or consent to changes in or waiver of any
------------------
part of this lease shall be deemed or taken as made unless the same be
done in writing and attached to or endorsed hereon by Landlord and Tenant.
No covenant or term of the present lease stipulated in favour of the
Landlord or Tenant shall be waived, except by express written consent of
the other, whose forbearance or indulgence in any regard whatsoever shall
not constitute a waiver of the covenant, term or condition to be
performed; and until
<PAGE>
-25-
complete performance of the said covenant, term or condition, the
applicable party shall be entitled to invoke any remedies available under
this lease or by law despite such forbearance or indulgence.
(c) Late Payments: The acceptance by the Landlord any postdated cheque or
-------------
money owing for Rent or additional rent after its due date is to be
considered as a mode of collection only, without novation of, nor
derogation from any of Landlord's rights, recourses and actions in virtue
of this lease which demands punctual payment of all obligations. All sums
owing by either the Landlord or the Tenant under this lease not paid when
due shall thereafter bear interest at a rate equivalent to two percent
(2%) per annum above the prime lending rate of The Toronto-Dominion Bank
from time to time in effect.
(d) Tenant (and Guarantor, if applicable): All the covenants herein contained
------------------------------------
shall be deemed to have been made by and with the heirs, executors,
administrators and permitted assigns or successors of each of the parties
hereto, and if more than one Tenant (or Guarantor, if applicable), the
covenants herein contained on the part of the Tenant (or Guarantor, if
applicable) shall be construed as being several as well as joint and where
necessary reference to the Tenant (or Guarantor, if applicable) as being
of the masculine gender or in the singular number shall be construed as
being in the feminine or neuter gender or in the plural number.
(e) Brokerage Commission: As part of the consideration for the granting of
--------------------
this lease, the Tenant represents and warrants that no broker, agent or
other intermediary introduced the parties or negotiated or was
instrumental in negotiating or consummating this lease other than the Real
Estate Broker, if any, named in Section 1.01 hereof.
(f) Registration of Lease: Tenant shall not register this lease at length but
---------------------
only by notice thereof and then only after the form and terms of such
notice have been approved in writing by the Landlord or its legal counsel
(which approval is not to be unreasonably withheld or delayed), the whole
at the cost of the Tenant, including the cost of registration and a copy
for the Landlord. Should a notice of this lease be registered, the Tenant
shall, at the termination of this lease, execute a release of lease in
form and content satisfactory to the Landlord.
(g) Additional Rent: In addition to Rent, all other monies payable pursuant to
---------------
this lease, as well as all sales, business transfer, goods and services
and value added taxes, rates and duties or similar taxes, rates and duties
which may at any time hereafter be imposed upon or by reference to the
Rent and other sums owing by Tenant hereunder shall be payable by Tenant
to Landlord immediately when due without reduction, deduction or
compensation whatsoever and shall be additional rent and collectable as
such.
(h) Prior Agreements: With the exception of the Development Agreement, the
----------------
present lease cancels and supersedes all prior leases and agreements,
written or otherwise, entered into by the Landlord and the Tenant
regarding the Premises. This lease and such rules and regulations as may
be adopted and promulgated by the Landlord from time to time constitute
the entire agreement between the parties.
<PAGE>
-26-
(i) Rights Cumulative: No right or remedy herein conferred upon or reserved to
-----------------
the Landlord is intended to be exclusive of any other right or remedy
herein or by law provided, but such rights shall be cumulative and in
addition to every other right or remedy herein or by law provided.
(j) Performance by the Landlord: If the Tenant fails to pay any sum to any
---------------------------
third party or perform any other obligation under this lease, the Landlord
may, after fifteen (15) days written notice to the Tenant, pay the said
sum or perform the said obligation in the place and stead of the Tenant
who shall be thereupon obliged to repay the said sum and/or reimburse any
costs incurred by the Landlord in performing such obligation, together
with a fee equal to fifteen percent (15%) of the amount paid or the costs
incurred, as the case may be, the whole without prejudice to any other
rights or recourses of the Landlord which may accrue in the circumstances.
(k) Severability: If any clause or provision herein contained shall be
------------
adjudged invalid, the same shall not affect the validity of any other
clause or provision of this lease, or constitute any other cause of action
in favour of either party against the other.
(l) Governing Law: This agreement shall be construed and interpreted in
-------------
accordance with the laws of the Province of Ontario.
(m) Captions: The captions appearing in this lease have been inserted as a
--------
matter of convenience and for reference only and in no way define, limit
or enlarge the scope or meaning of this lease or any provision thereof.
(n) Time of Essence: Time is of the essence of this lease.
---------------
SECTION XXVI
------------
RULES AND REGULATIONS
---------------------
26.01 The rules and regulations respecting the Premises which are more fully set
forth in Schedule "D" hereto shall, during the Term, be observed and performed
by the Tenant, its officers, servants, employees, agents, invitees and
licensees, and the Landlord shall have the right to make reasonable alterations
and additions to such rules and regulations and to make such other and further
reasonable rules and regulations as in its judgment may from time to time be
required for the safety, care and cleanliness of the Premises, and for the
preservation of good order therein, and the same shall be observed and performed
by the Tenant, its officers, servants, employees, agents, invitees and
licensees. The Landlord may waive any one or more of these rules and regulations
for the benefit of any particular tenant or tenants, but no such waiver by the
Landlord shall be construed as a waiver of the rules and regulations in favour
of any other tenant or tenants nor prevent the Landlord from thereafter
enforcing any rules and regulations against all or any of the tenants in the
Building. The Landlord agrees to notify the Tenant in writing of any changes in
the rules and regulations. All such rules and regulations shall be adopted by
the Landlord, acting reasonably, and shall not be applied by the Landlord in an
arbitrary or capricious manner. The Landlord agrees that it will consult with
the Tenant prior to making any such changes in the rules and regulations.
<PAGE>
-27-
SECTION XXVII
-------------
MORTGAGES AND SUBORDINATION
---------------------------
27.01 Subject to the Landlord receiving from the applicable party an agreement
in from and content satisfactory to the Tenant, acting reasonably, to the effect
that notwithstanding any default by the Landlord and so long as the Tenant is
not in default hereunder, its possession of the Premises will not be disturbed,
this lease and all rights of Tenant hereunder shall be subject and subordinate
at all times to any and all underlying leases, mortgages, hypothecs, deeds of
trust or other security interests affecting the Premises which have been
executed or which may at any time hereafter be executed, and any and all
extensions and renewals thereof and substitutions therefor. Tenant agrees to
execute any instrument or instruments which Landlord may deem necessary or
desirable to evidence the subordination of this lease or to subordinate priority
of its registration to any or any such underlying leases, mortgages, hypothecs,
deeds of trust or other security interests.
27.02 Tenant covenants and agrees that if by reason of default by Landlord as
lessee under any underlying lease in the performance of any of the terms or
provisions of such underlying lease or by reason of a default under any
mortgage, hypothec, deed of trust or other security interest to which this lease
is subject or subordinate and Landlord's title is terminated, it will attorney
to the lessor under such underlying lease or the acquirer of the Premises
pursuant to any action taken under any such mortgage, hypothec, deed of trust or
other security interest and Tenant will recognize such lessor or such acquirer
as Tenant's lessor under this lease.
27.03 Tenant waives the provisions of any statute or rule of law now or
hereafter in effect which may give or purport to give the Tenant any right of
election to terminate this lease or to surrender possession of the Premises in
the event any such proceeding to terminate the underlying lease is brought by
the lessor under any such underlying lease or any such action is taken under any
such mortgage, hypothec, deed of trust or other security interest and agrees
that this lease shall not be affected in any way whatsoever by any such
proceeding.
27.04 Tenant agrees to execute and deliver, at any time and from time to time
upon the request of Landlord or of the lessor under any such underlying lease,
or of the holder of any such mortgage, hypothec, deed of trust or other security
interest any instrument which may be necessary or appropriate to evidence such
attornment. Tenant shall execute and deliver such instrument (or instruments)
within ten (10) Business Days after being requested to do so and failing which
Landlord may do so on Tenant's behalf.
27.05 Tenant will upon request of Landlord furnish to the Landlord, a lessor
under any underlying lease and/or to each creditor under a mortgage, hypothec,
deed of trust or other security interest and/or to an actual or prospective
purchaser, in and to the Premises and/or underlying lease a written statement
that this lease is in full force and effect and that the Landlord has complied
with all its obligations under this lease (or state those with which it has not
complied) and any other reasonable written statement, document or estoppel
certificate requested by the Landlord or any such lessor, creditor, purchaser or
lessee.
<PAGE>
-28-
SECTION XXVIII
--------------
GUARANTOR
---------
28.01 The Guarantor, in consideration of the sum of One Dollar ($1.00) now paid
by the Landlord to the Guarantor (the receipt whereof is hereby acknowledged)
and other valuable consideration, hereby directly and unconditionally guarantees
to and covenants with the Landlord that the Tenant will duly perform, observe
and keep each and every covenant, proviso, condition and agreement in this lease
on the part of the Tenant to be performed, observed and kept, including the
payment of rent and all other sums and payments agreed to be paid or payable
under this lease on the days and at the times and in the manner herein
specified, and that if any default shall be made by the Tenant, whether in
payment of any rent or other sums from time to time falling due hereunder as and
when the same become due and payable or in the performance, observance or
keeping of any of the said covenants, provisos, conditions or agreements which
under the terms of this lease are to be performed, observed or kept by the
Tenant, the Guarantor will forthwith pay to the Landlord on demand the said rent
and other sums in respect of which such default shall have occurred and all
damages that may arise in consequence of the non-observance or non-performance
of any of the said covenants, provisions, conditions or agreements.
28.02 The Guarantor covenants with the Landlord that the Guarantor is jointly
and severally bound with the Tenant for the fulfillment of all obligations of
the Tenant under this lease. In the enforcement of its rights hereunder, the
Landlord may proceed against the Guarantor as if the Guarantor were named Tenant
hereunder.
28.03 The Guarantor hereby waives any rights to require the Landlord to proceed
against the Tenant or to take or perfect or proceed against or to exhaust any
security held from the Tenant or to exhaust any security held from the Tenant or
to pursue any other remedy whatsoever which may be available to the Landlord
before proceeding against the Guarantor.
28.04 No neglect or forbearance of the Landlord in endeavouring to obtain
payment of the rent reserved herein or other payments required to be made under
the provisions of this lease as and when the same become due, no delay of the
Landlord in taking any steps to enforce performance or observance of the several
covenants, provisos or conditions contained in this lease to be performed,
observed or kept by the Tenant, no extension or extensions of time which may be
given by the Landlord from time to time to the Tenant, and no other act or
failure to act of or by the Landlord shall release, discharge or in any way
reduce the obligations of the Guarantor under the guarantee contained in this
Section.
28.05 In the event of a termination of this lease other than by a surrender
accepted by the Landlord (including without limitation repudiation by the Tenant
under applicable bankruptcy or insolvency legislation), or in the event of the
bankruptcy or insolvency of the Tenant, or in the event of a disclaimer of this
lease pursuant to any statute, the Guarantor agrees to pay to the Landlord all
rents or other amounts payable hereunder for the full term of this lease
notwithstanding any such disclaimer, bankruptcy, insolvency, or determination
and the Guarantor shall be deemed to have executed a new lease for the Premises
between the Landlord as Landlord and the Guarantor as Tenant for term equal in
duration to the residue of the term remaining unexpired at the date of such
termination or such disclaimer. Such lease shall contain
<PAGE>
-29-
the like Landlord's and Tenant's obligations respectively and the like
covenants, provisos, agreements and conditions in all respects (including the
proviso for re-entry) as are contained in this lease.
28.06 The Guarantor waives notice of the taking effect of and coming into force
of any renewals or extensions of the Term and confirms and acknowledges that the
liability of the Guarantor hereunder shall remain in full force and effect
throughout any such renewals or extensions. In additions the Landlord may deal
with the Tenant with respect to any modification to the terms and conditions of
this lease and/or any security held from the Tenant as the Landlord sees fit and
the liability of the Guarantor hereunder shall remain in full force and effect
and will include any covenants, provisos, conditions or agreement resulting from
such modification.
SECTION XXIX
------------
SCHEDULES
---------
29.01 The Schedules are included in and form an integral part of this lease.
<PAGE>
-30-
IN WITNESS WHEREOF, the parties have signed these presents on the date
first hereinabove mentioned.
3559807 CANADA INC.
Per: /s/ Douglas Pascal
----------------------
Name: Douglas Pascal c/s
Per:
----------------------
Name:
I/We have authority to bind the Corporation
ENTRUST TECHNOLOGIES LIMITED
Per: /s/ David L. Thompson
----------------------
Name: David L. Thompson c/s Chief Financial Officer
Per:
----------------------
Name:
I/We have authority to bind the Corporation
ENTRUST TECHNOLOGIES INCORPORATED
Per: /s/ David L. Thompson
----------------------
Name: David L. Thompson c/s Chief Financial Officer
Per:
----------------------
Name:
I/We have authority to bind the Corporation
<PAGE>
-31-
3559807 CANADA INC.
-------------------
SCHEDULE "A"
------------
LEGAL DESCRIPTION
-----------------
Part of Lot 8, Concession 3, Township of March, now in the City of Kanata,
Regional municipality of Ottawa-Carleton, designated as parts 4, 5, 6 and 7 on
Plan 4R-15831.
<PAGE>
-32-
3559807 CANADA INC.
-------------------
SCHEDULE "B"
------------
PREMISES DESCRIPTION
--------------------
N/A
<PAGE>
-33-
3559807 CANADA INC.
-------------------
SCHEDULE "C"
------------
LANDLORD'S WORK
---------------
N/A
<PAGE>
-34-
3559807 CANADA INC.
-------------------
SCHEDULE "D"
------------
RULES AND REGULATIONS
---------------------
1. The Landlord will have the care of the heating and air-conditioning
apparatus and may provide information for the regulation of same.
2. The Tenant shall not permit the introduction of any machine or electrical or
mechanical device of a nature to occasion objectionable noise and vibration or
be injurious to the Premises.
3. The Tenant shall not without the written consent of the Landlord use any
electric current except that supplied from the general system installed in the
Building, and the Landlord shall not be responsible in damages by reason of any
failure of such current. If the Landlord grants the Tenant permission to
introduce any special electric power, telegraphic or telephone connection, the
Landlord reserves the right to direct where and how wires are to be introduced,
and without such direction no boring or cutting shall be permitted.
4. The Tenant shall keep the Premises in a good state of preservation and shall
not suffer any accumulation of useless property or rubbish therein. No animals
shall be kept in or about the Premises.
5. The Tenant, its employees, clerks or servants, shall not use the Premises
for the purpose of lodging rooms, or for any immoral or unlawful purpose, and
shall not throw anything out the windows or doors or down through the passages
or skylights of the Building.
6. The Tenant shall not mark, paint, drill into or in any way deface the walls,
ceilings, partitions, floors, wood, stone or iron work, or any other
appurtenance to the Premises other than as part of normal office decorating,
provided that same causes no permanent damage to the Premises.
7. The sidewalks, entries, passages, halls, elevators and stairways shall be
under the exclusive control of the Landlord and shall not be obstructed by the
Tenant, or used by it for any purpose than the ingress and egress to and from
its respective offices or places of business.
8. Any damages which may be caused to the Premises in the carrying of
furniture, bulky articles or construction materials to or from the Premises
shall be the sole responsibility of the Tenant.
9. The Landlord shall not be responsible for any damage to the furniture,
effects, goods or equipment of the Tenant while being transported or moved to
and from the Premises or in the elevators, corridors, basement or other premises
of the Landlord.
10. No signs, advertisements, notices or other lettering, other than as set out
in Section 14 of Schedule "F", and other than a sign similar to the Tenant's
building mounted sign age which is at
<PAGE>
-35-
the date of execution of this lease mounted on the building municipally known as
750 Heron Road, Ottawa, Ontario, shall be exhibited, inscribed, painted or
affixed by the Tenant on any part of the outside or inside of the Premises or
Building without the prior written consent of the Landlord. Interior signs on
doors will be inscribed, painted or affixed for the Tenant by the Landlord at
the expense of the Tenant.
11. The Tenant shall not place any additional locks upon any doors of the
Building without written permission and shall not permit any duplicate keys to
be made therefor, but shall use only additional keys obtained from the Landlord
at the expense of the Tenant. The Tenant shall surrender to the Landlord at the
termination of this lease all keys to the Premises and the Building.
12. The Tenant shall not perform any acts which may injure the Premises and
shall forthwith upon the request of the Landlord discontinue all acts or
practices in violation of this regulation and repair any damage or injury to the
Premises caused thereby.
13. The Landlord shall have the right to prohibit any advertising by the Tenant
which, in its opinion, tends to impair the reputation or character of the
Building and upon written notice from the Landlord, the Tenant shall refrain
from or discontinue such advertising.
14. Canvassing, soliciting and peddling in the Building is prohibited and the
Tenant shall cooperate to prevent the same.
15. The Tenant shall have no right to advertise by using the words "LIQUIDATION
SALE", "AUCTION SALE", "FORCED TO VACATE", "GIVING UP LEASE", or "GIVING UP
BUSINESS", or make use of terms and phrases denoting same or having similar
meaning. The Landlord may remove such signs or advertising at the Tenant's cost
without any recourse in damages against the Landlord which the Tenant herein
expressly waives.
16. The Tenant shall not install window shades, vertical venetian blinds,
curtains or drapes of any kind or description without the Landlord's prior
written approval.
17. The Tenant shall not lay linoleum, rubber, cork or other floor coverings so
that the same shall come in direct contact with the floor, and if linoleum,
rubber or cork floor covering is desired to be used, an interlining of builder's
deadening felt shall be first affixed to the floor by a paste or other adhesive
which may be readily removed with water.
18. If any apparatus used or installed by the Tenant requires a permit as a
condition for installation, the Tenant must file a true copy of such permit with
the Landlord.
19. The Tenant undertakes to abide by and participate in any fire drills or
other similar manoeuvres called or arranged by the municipality, fire
department, or the Landlord for the security and protection of the Building.
<PAGE>
-36-
3559807 CANADA INC.
-------------------
SCHEDULE "E"
------------
MINIMUM BUILDING STANDARDS FOR TENANT FINISHES
----------------------------------------------
The Tenant acknowledges that the Tenant's finishing of the Premises will conform
to the following minimum standards:
(a) Partitioning:
Floor to underside of suspended ceiling. 1/2" drywall, complete with sound
insulation on 2 1/2" steel studs. All drywall surfaces are to be taped,
sanded and painted to Tenant's choice of colour. All demising walls are to
be constructed from slab to slab with sound baffling and in compliance
with Building Code provisions.
(b) Doors and Frames:
Solid core 9' height wood veneer doors, frames and entrances conforming to
Building standards.
(c) Electrical Outlets:
Standard duplex wall mounted electrical receptacles and/or standard floor
mounted monuments.
(d) Flooring:
All floors to be finished in either a minimum of twenty-eight (28) ounce
carpet direct glue down method or 12" x 12" vinyl composite tiles or
carpet tile installed to Tenant's choice of one colour each from samples
supplied by the Landlord. Carpet base with serged edge in all carpeted
areas. Vinyl cove base in all tiled areas.
(e) Sprinkler Redistribution:
Installation, modification and redistribution of sprinkler heads in the
premises shall be according to the standards from time to time of the Fire
Department of the City of Kanata and the Landlord's insurers.
(f) Window Blinds:
Window blinds to be building standard type, if installed by the Tenant.
<PAGE>
-37-
3559807 CANADA INC.
-------------------
SCHEDULE "F"
------------
ADDITIONAL PROVISIONS
---------------------
1. CERTIFICATE AS TO THE AREA OF THE BUILDING
The Landlord agrees that the gross building area of the Building shall be
measured prior to the Commencement Date in accordance with ANSI/BOMA "Standard
Method for Measuring Gross Building Area in Office Building" - Single Tenant
Occupancy (Z65.1-1996) at the Landlord's cost by a professional land surveyor or
architect. The Landlord and the Tenant agree that with respect to the basement
level of the Building ("the Basement"), Rent for the Basement shall be
calculated based on the area of the Basement being the lesser of the actual
measured area of the Basement or five thousand (5,000) square feet.
2. ADJUSTMENT TO THE RENT
The Landlord and the Tenant agree that if modifications (any such modification
to be referred to in this Schedule as a "Modification") in the Preliminary Plans
and Specification, the Progress Drawings and Specification, the Site Plan and
the Tenant Fit-Up Plans and Specifications (all as defined in the Development
Agreement) ordered by the Tenant are consented to by the Landlord and decrease
or increase the total cost of the Base Building Core & Shell, the Rent payable
by the Tenant to the Landlord in each month of the Term shall be decreased or
increased by an amount equal to:
(a) where the Modification has a useful life beyond the Term and is of value
to a potential future tenant, $0.08l per square foot per annum for each
$100,000.00 of cost of the Modification; and
(b) in any other event, $0.103 per square foot per annum for each $100,000.00
of cost of the Modification,
all pro-rated to take into consideration the actual cost of the Modification.
The Tenant agrees that the Landlord shall not be required to consent to a
Modification only if:
(A) the Landlord is unable to obtain funds from the is mortgagee with respect
to carrying out the modification); or
(B) the Landlord reasonably determines that the Modification is not beneficial
to the Premises on a long-term basis; or
(C) Rent is increased beyond what is deemed by the Landlord, acting
reasonably, to be an acceptable market rent for premises which are similar
to and in the vicinity of the Premises.
3. OPTION TO EXTEND THE TERM
Provided the Tenant is not then in material default at the time of the exercise
of the applicable option in respect of any of the terms and conditions of this
lease beyond any cure period herein
<PAGE>
-38-
provided and provided the Tenant remains in occupation of all of the Premises
(or if the Tenant has exercised any of its rights to cancel this lease with
respect to portions of the Premises as provided for in Section 8 of Schedule "F"
of this lease, the Premises as defined after such cancellation(s)), the Tenant
shall have two (2) consecutive options to extend the Term for the entirety of
the Premises for periods of five (5) years each upon the same terms and
conditions as set out in this lease, save and except that:
(a) there shall not be any tenant allowances or inducements (subject to what
is hereinafter set out with respect to establishing Market Rate) or any of
the rights contained in Section 8 of this Schedule "F");
(b) there shall be no further options to renew the lease or to extend the
Term; and
(c) the Rent shall be the "Market Rate".
To exercise the foregoing option, the Tenant shall provide written notice
thereof to the Landlord no less than twelve (12) months prior to the expiration
of the initial Term or first extension of the Term, as the case may be, in
default whereof the first option and, if applicable, the second option shall be
deemed null and void and of no further legal effect.
For the purposes of this lease, the expression "Market Rate" means the net
rental rate per square foot for comparable space in other buildings in the area
of comparable quality, considering the size of the premises, the quality of the
tenant covenant and the tenant inducements being offered at the time for five
(5) year leases including but not limited to cash and leasehold improvement
allowances and free rent periods, and taking into account applicable brokerage
commissions. The Landlord and the Tenant agree to use their best efforts to
agree on the Market Rate. In the event that they do not so agree upon the Market
Rate for the extended Term nine (9) months prior to the Termination Date, Market
Rate shall be established by the arbitration of a single arbitrator appointed
pursuant to and governed by the provisions of the Arbitrations Act of Ontario
(as such legislation is constituted as at the date of execution of this lease).
4. MANAGEMENT OF THE BUILDING
The Landlord shall manage the Premises (at the expense of the Tenant, as part of
Operating Expenses) including the provision of landscaping services, snow
removal and maintenance of the exterior of the Building, and excluding security
services for the Premises (which the Tenant shall manage directly) as a prudent
and reasonable owner, in keeping with standard industry practice for first class
office buildings. In the event that the Tenant, acting reasonably, is
dissatisfied with the cost, standard or quality of the delivery of services to
be co-ordinated and administered by the Landlord for the Premises, the Tenant
may request that the Landlord replace the provider of the service and the
Landlord shall use its best efforts to comply with such request.
5. MAINTENANCE OF THE BUILDING
The Landlord agrees that, subject to the Tenant's obligations set out in this
lease, the Landlord shall maintain the Premises in a first-class condition, in a
good state of repair, and in compliance with applicable laws and the Tenant
agrees that the cost of same shall be included in Operating
<PAGE>
-39-
Expenses (except as otherwise provided for in this lease). Except to the extent
the Tenant is responsible therefor under this lease, the Landlord shall comply
with all laws, by-laws, codes, regulations or ordinances in respect of the
operation, maintenance and condition of the Premises.
6. LEASEHOLD IMPROVEMENT ALLOWANCE/TENANT FIT-UP
The parties hereto agree that the Tenant Fit-Up shall be carried out by the
Landlord to the Premises at the Tenant's expense and shall be completed, subject
to the provisions of the Development Agreement, on or about the Commencement
Date. The Landlord agrees to contribute an allowance ("the Allowance") towards
the cost of the Tenant Fit- Up, as provided for in Section 4.1(c) of the
Development Agreement. The Allowance shall be paid and applied as against the
cost of the Tenant Fit-Up and in accordance with the provisions of the
Development Agreement.
In addition to administrative out-of pocket disbursements (such as couriers,
faxes, photocopies, long distance telephone charges) of the Landlord, the
following fee shall be payable by the Tenant within respect to the construction
cost component of the Tenant Fit-Up:
(a) ten percent (10%) with respect to the first Forty Dollars ($40.00) per
square foot of the "Cost of the Work" (as such expression is defined in a
CCDC3 1998 cost- plus contract, expanded upon as set out in Schedule "G"
attached hereto) relating to the Tenant Fit-Up per square foot of gross
building area of the Building; and
(b) five percent (5%) with respect to the balance of the Cost of the Work
relating to the Tenant Fit-Up.
Notwithstanding the foregoing, the fee payable with respect to the Generator (as
hereinafter defined) shall be five percent (5%) of its installation costs (with
no fee applicable to the cost of the Generator itself). No fee shall be payable
with respect to:
(i) permits, design or general expenses applicable to the Tenant Fit-Up;
(ii) any landscaping or hardscaping costs that the Tenant may be
responsible to pay for in excess of the $ 175,000.00 allowance
provided for pursuant to the provisions of Section 3.14 of the
Development Agreement; or
(iii) any Tenant's Work (as defined in the Development Agreement).
There shall be no fee (or out-of pocket disbursements) applicable to any design,
consulting, architectural or engineering work relating to, nor in respect of the
construction of, the Base Building Core & Shell or Exterior Building Amenities,
unless same are impacted by the Tenant Fit-Up.
7. CONDITION OF THE BUILDING
The Landlord warrants that as at the Commencement Date:
<PAGE>
-40-
(a) it will not be aware of any structural or major repairs required to be
effected to the Building which have not been remedied, or are in the
process of being remedied;
(b) it will not have received any notice of non-compliance of laws, by-laws,
codes, regulations or ordinances in respect of the Land or Building which
has not been remedied, or is in the process of being remedied and the
Building complies with all applicable laws and by-laws;
(c) the Building and equipment therein will not contain any formaldehyde foam
insulation, asbestos or polychlorinated biphenyls;
(d) the heating, air-conditioning and ventilating systems, electrical and
other systems will be in good working order and are of sufficient capacity
(having regard to the fact that same were supplied and installed to the
Tenant's specifications) to service the Building for the uses intended by
the Tenant as outlined and agreed to in the Project Definition Binder (as
defined in the Development Agreement); and
(e) it will be the registered owner of the Land or, in the event that title to
the Land is not in the name of the Landlord as at such date, the Landlord
will cause the registered owner of the Land to sign this lease on or
before the Commencement Date.
8. TENANT'S RIGHT TO SURRENDER ITS INTEREST IN PORTIONS OF THE PREMISES
The Tenant is hereby granted an option ("the First Cancellation Option") to
cancel this lease with respect to one whole floor of the Building on November 1,
2005 and a further option ("the Second Cancellation Option") to cancel this
lease with respect to one whole floor of the Building on November 1, 2007 (the
applicable date to be referred to herein as "the Early Termination Date"). In
order to exercise either such option, the Tenant agrees to give to the Landlord
written notice ("the Surrender Notice") of its intention to do so no later than
nine (9) months prior to the applicable Early Termination Date. The Tenant shall
pay a termination payment to the Landlord on the applicable Early Termination
Date equal to the Unamortized Amount (as hereinafter defined) (pro-rated to take
into consideration the rentable area of the floor which is the subject of the
Surrender Notice), together with an amount equal to Rent, Operating Expenses,
Realty Taxes, Tax on Capital and utilities for a period of three (3) months (as
if the Building had been fully occupied) for such floor, all together with
applicable taxes on such amounts.
For the purposes of this section, the expression "Unamortized Amount" means the
unamortized balance of the following amounts:
(a) the Allowance;
(b) legal fees, leasing fees and brokerage commissions incurred in securing
the transaction contemplated by this lease; and
<PAGE>
-41-
(c) the cost of all Modifications (having regard only, in the case of those
detailed in Section 2(b) of this Schedule "F", to the portion of the
unamortized balance applicable to the end of the initial Term),
all as at the Early Termination Date (which amounts are to be deemed to be
amortized for the purposes of this section over a ten (10) year period from the
Commencement Date (other than in respect of a Modification of the nature
described in Section 2(b) of this Schedule "F", in which case the amortization
is to be over its useful life) with an interest factor often percent (10%) per
annum, compounded monthly).
The Surrender Notice shall specify which floor of the Building is to be the
subject of the Tenant's option. In no event is the said floor to be the ground
floor or basement level of the Building. In addition, if the Tenant has
exercised the First Cancellation Option and then intends to exercise the Second
Cancellation Option, the applicable floors of the Building which are the subject
of the Surrender Notices are to be contiguous.
In the event that the Tenant exercises any or both of the First Cancellation
Option or the Second Cancellation Option, the Tenant acknowledges that:
(a) the form of this lease shall have to be amended in order to incorporate
concepts such as (but not limited to) common areas and proportionate
shares and other amendments appropriate to the conversion of the Building
to a multi-tenant building;
(b) the Tenant shall be required to surrender its interest in certain other
portions of the Premises such as (but not limited to) parking stalls,
exterior areas (such as landscaping), portions of the ground floor of the
Building so as to permit the establishment of a lobby area, loading docks,
mechanical areas (all with the intention that where possible such areas
are to be for the common use and enjoyment of all tenants of the
Building); and
(c) the area of the Premises after any cancellation shall be calculated as
being the area of the Building as at the Commencement Date (as increased,
if applicable in the event that further areas of the Building are
constructed for the Tenant after the Commencement Date) less the area of
the premises which is the subject of a Surrender Notice (or Surrender
Notices, as the case may be), which area is to be measured at the Tenant's
expense in accordance with the ANSI/BOMA "Standard Method for Measuring
Basic Rentable Area in Office Building" (Z65.l-1996).
9. ENVIRONMENTAL
The Landlord shall be responsible, at its expense, for the cost of clean-up or
any other remedial measures for any contamination to the Land or Building
existing prior to the Commencement Date or caused at any time by any person
other than the Tenant or those for whom the Tenant is in law responsible. The
Landlord agrees that it will indemnify and save harmless the Tenant for any such
costs or fines
<PAGE>
-42-
that may be levied as a result of such contamination. The Landlord warrants that
it is not aware of any such contamination. The Tenant agrees that it shall be
responsible, at its expense, for the cost of clean-up or any other remedial
measures for any contamination to the Land or Building caused by the Tenant or
those for whom the Tenant is in law responsible and it will indemnify and save
harmless the Landlord for any such costs or fines that may be levied as a result
of such contamination. The Tenant shall not be responsible for any contamination
which comes from any adjacent lands unless same is caused by the Tenant or those
for whom the Tenant in law responsible.
10. PARKING
The Tenant shall have the right during the Term or any extension or renewal
thereof to occupy four (4) stalls per one thousand square feet of gross building
area of the Building within the parking lot to be constructed on the Land
without the payment of any parking rental, other than Operating Expenses, Tax on
Capital and Realty Taxes.
11. OCCUPANCY
The Landlord and the Tenant agree that in the event that parts of the Building
are ready for occupation by the Tenant prior to the Substantial Completion Date
(as defined in the Development Agreement) and the Tenant is prepared to accept
such partial occupation prior to such date, Rent shall be payable in respect of
such parts so occupied as at the date their being so occupied from the date of
such occupation by the Tenant on the basis of the rate set out in Section
1.01(q) per square foot of gross building area so occupied per annual, together
with all other amounts payable under this lease with respect to the said area so
occupied (including Operating Costs, Real Estate Taxes, Tax on Capital and
utilities consumed within such portion of the Premises).
12. NEWS RELEASE/PUBLIC ANNOUNCEMENT
No new release, public announcement or any form of advertising shall be made by
the Landlord with respect to this lease without the prior written consent of the
Tenant, which consent is not to be unreasonably withheld or delayed.
13. CONSENTS/APPROVALS
Any consent, permission or approval of either party required under this lease
shall, unless otherwise specified in this lease, not be unreasonably withheld or
delayed, and the applicable party agrees to give reasons in writing if consent
is refused.
14. TENANT'S RIGHTS TO INSTALL
Tenant shall, at its expense and in accordance with the provisions of Section
XIV of this lease, have the sole and exclusive right to install any or all of
the following, subject only to municipal approvals where applicable and
Landlord's written consent, such consent not to be unreasonably withheld or
delayed:
- - exterior signage at the top of the Building (*)
- - exterior signage adjacent to the entrance of the Building (*)
- - signage within the Building lobby (*)
- - special lab areas and/or raised floor for dry labs (*)
- - separate security system for the building
- - Building infrastructure upgrades
<PAGE>
-43-
- - Building communication upgrades
- - satellite dishes and transmission devices on the roof of the Building as
required(*)
- - additional roof-top units
- - core/slab drilling
- - exterior landscaping, including recreational areas (*)
- - smoking shelters and patios (*)
15. OPERATING EXPENSES
The Landlord agrees that it shall not act in an unreasonable or arbitrary manner
in incurring or allocating Operating Expenses. In addition, the Landlord agrees
that:
(a) the cost of services and supplies provided by persons or companies not
dealing at arm's length with the Landlord are to be competitive;
(b) Operating Expenses are not to include the cost of (i.e. not be charged
back to the Tenant):
(i) the Landlord's head office personnel (i.e. salary, wages and
benefits only of on-site personnel plus building manager or
proportionate share thereof, as the case may be are to be included
in Operating Expenses);
(ii) the cost of structural repairs of the Building (including its
foundation, concrete floors and structural frames) resulting from
inherent structural defects or weaknesses;
(iii) any loss or damage to the Building or any personal injury for which
the Landlord is or is obliged to have been insured for under this
lease, other than deductible payments in accordance with industry
standards;
(iv) all fines, suits, claims, demands, costs, charges and expenses for
which the Landlord is liable by reason of the negligent or willful
act or omission of the Landlord or those for whom the Landlord is
in law responsible (and then, only to the extent that the Tenant is
not insured or required to be insured pursuant to the terms of this
lease);
(v) all work to the Building or Land made necessary by the Landlord's
noncompliance with applicable laws, regulations, by-laws and
governing codes relating to the original construction of the
Building and which were in force at the time of said construction;
(vi) the cost of repairing items under warranty during the applicable
warranty period to the extent that the Landlord is able to enforce
such warranties;
(vii) the cost of repairing latent defects in the design of the Building
and parking areas;
(viii) any charges directly levied against or imposed on the Tenant;
<PAGE>
-44-
(ix) ground rent (if any);
(x) amortization and interest or any capital retirement of debt
affecting the Land;
(xi) any costs to the extent that insurance and/or warranty proceeds in
respect thereof are recovered by the Landlord from any other person;
or
(xii) depreciation of the Building.
16. LANDLORD'S COVENANTS
(a) The Landlord covenants with the Tenant for quiet enjoyment and covenants
to act reasonably and as a prudent owner in exercising all rights and so
as not to interfere more than is reasonably necessary under the
circumstances with the Tenant's use and enjoyment of the Premises.
(b) The Landlord shall, throughout the Term of this lease or any renewal
thereof, maintain the following insurance at the Tenant's cost:
(i) Insurance in respect of such perils as are from time to time covered
in an "all risks" policy not less broad than the standard commercial
property floater policy with the exclusions relating to earthquake
and flood removed therefrom for the replacement cost of the Building
and its equipment and Landlord's leasehold improvements forming part
of the Premises (such replacement cost to be determined by Landlord
acting reasonably upon consultation with Landlord's insurance
consultants). In addition, this insurance will cover the interest of
the Tenant, if any, in the leasehold improvements. Subsequent
increases in such replacement cost shall be determined in the
reasonable opinion of the Landlord from time to time. However, if
despite the Landlord's best efforts "all risk" coverage is not
available at reasonable cost, the Landlord shall obtain the most
comprehensive coverage available;
(ii) Rental insurance in an amount equal to the aggregate of twelve (12)
months Rent, Real Estate Taxes, Operating Expenses, Tax on Capital,
utility charges and other amounts payable hereunder;
(iii) Broad boiler, machinery and unfired pressure vessel, and electrical
equipment insurance, including repair or replacement coverages in an
amount mutually agreeable to the Landlord and Tenant or, failing
such agreement, as established by an appraiser mutually agreeable to
the Landlord and Tenant and paid for by the Tenant but at no time
less than as required by any mortgagee of the Building; and
(iv) General liability insurance with respect to bodily injury and
property damage suffered by third parties and arising out of risks
associated only with the ownership of the Premises in an amount of
at least five million dollars ($5,000,000.00) for each occurrence or
such greater amount as the Landlord, may from time to time
reasonably require.
<PAGE>
-45-
(c) All insurance policies, where applicable, shall include a waiver of
subrogation in favour of the Tenant, the Tenant's insurers and those for
whom the Tenant is in law responsible (whether or not the loss or damage
is caused by their acts or omissions) and each liability policy shall in
addition contain a provision for cross-liability and severability of
interest.
17. GENERATOR
One or more generators will be installed within the Premises as part of the
Tenant Fit-Up which includes its (or their) associated engine(s), alternator and
alternator control panel, battery and charger system (i.e. what is generally
referred to as the "Uninteruptable Power Supply" or "UPS"), cooling system,
exhaust system, fuel pump and day tank (all of the said items to be collectively
referred to as "the Generator") together with its associated exterior enclosure,
concrete pad and all structural supports and screening, main fuel tank and fuel
delivery system outside the said enclosure, subsystems within the enclosure
(such as, but not limited to power panel, lighting, heating, and monitoring
equipment), automatic transfer switch, and all feeder conductors from the
generator into the Building. The Tenant acknowledges that the Landlord will be
connecting the Building's life safety system ("the LSS") to the Generator and
that such connection shall continue throughout the Term. For clarity, the Tenant
agrees that such connection shall continue in the event that the Tenant has
exercised any of its rights to cancel this lease with respect to portions of the
Premises as provided for in Section 8 of Schedule "F" of this lease. Without
limiting any of the Tenant's obligations under this lease, the Tenant agrees
that it shall maintain the Generator in good order and condition at its expense
throughout the Term. Notwithstanding the foregoing, the testing and maintenance
of the LSS, including such portion of the Generator relating to the LSS, shall
be carried out by the Landlord in accordance with any building codes applicable
thereto. The said testing and maintenance shall be at such intervals as would be
carried out by a prudent owner of a building similar to the Building and the
cost thereof will be included in Operating Expenses.
In consideration of the Tenant permitting the LSS to be connected to the
Generator the Landlord agrees to contribute the sum of $85,000.00 ("the
Generator Allowance") to the acquisition price of the Generator. The Generator
Allowance shall be credited to the Tenant's rental account on the day that is
the later of thirty (30) days after the Commencement Date and the date on which
the LSS is connected to the Generator.
At the end of the Term (as extended, if applicable), the Tenant agrees that the
Landlord shall have the option to purchase the Generator ("the Generator
Purchase Option") upon payment to the Tenant of an amount ("the Landlord's
Generator Payment") calculated as being the unamortized balance (based on a
straight-line amortization over twenty (20) years) of the difference between the
Tenant's acquisition cost of the Generator (which cost for clarity is not to
include any cabling or equipment other than the Generator) and the Generator
Allowance. The Generator Purchase Option may be exercised by the Landlord at any
time prior to the last sixty (60) days of the Term (as extended, if applicable)
and in the event that it is so exercised:
(a) the Landlord's Generator Payment shall be paid to the Tenant within thirty
(30) days of the Landlord notifying the Tenant that it is exercising the
Generator Purchase Option;
<PAGE>
-46-
(b) the Tenant shall execute and deliver to the Landlord at the time that the
Generator Payment is made to the Tenant:
(i) a bill of sale and other documentation reasonably required by the
Landlord to transfer title to the Generator to the Landlord or its
nominee free and clear of any encumbrances; and
(ii) an assignment of any and all warranties applicable to the Generator,
in form and content satisfactory to the Landlord, acting reasonably.
In the event that the Landlord does not so exercise the Generator Purchase
Option, the Tenant shall:
(a) remove the Generator from the Premises and, at the Landlord's option,
their associated cabling and equipment and other items set out in the
first paragraph of this Section 17, and restore the Premises to the
condition they were in before the installation of the Generator, and
(b) pay to the Landlord the unamortized balance (based on a straight-line
amortization over twenty (20) years) of the Generator Allowance within
forty-five (45) days of the last day of the Term.
18. OPINION RE: GUARANTEE
The Tenant and the Guarantor agree that the Landlord shall be provided with an
opinion (or opinions) in form and content satisfactory to the Landlord, acting
reasonably, from counsel from the Guarantor as to the enforceability of the
guarantee provisions contained in this lease. In the event that such opinion is
not provided to the Landlord within thirty (30) days of execution of this lease,
the Guarantor agrees that it shall be deemed to be named Tenant hereunder until
such time as the Landlord has been provided with the said opinion(s).
<PAGE>
-47-
SCHEDULE "G"
------------
COST OF THE WORK FROM CCDC3
---------------------------
For the purposes of this Schedule, the definitions from the CCDC3 are to have
the following meanings:
"Contract Documents" means the Development Agreement.
"Contract Fee" means the amounts set out in Section 6(a) of Schedule "F".
"Contractor" means the Landlord.
"Owner" means the Tenant.
"Place of the Work" means the Premises.
"Work" means the Tenant Fit-Up.
"ARTICLE A-9 COST OF THE WORK
The Owner agrees to pay the Contractor for the Cost of the Work in addition to
the Contract Fee. The Cost of the Work shall be at rates prevailing in the
locality of the Place of the Work, except with the prior consent of the Owner,
and shall include:
(a) wages and benefits paid for labour in the direct employ of the Contractor
in the performance of the Work under applicable collective bargaining
agreements, or under a salary or wage schedule agreed upon by the Owner
and Contractor;
(b) salaries, wages and benefits of the Contractor's personnel, when stationed
at the field office, in whatever capacity employed; salaries, wages and
benefits of personnel engaged at shops, or on the road, in expediting the
production or transportation of materials or equipment, for that portion
of their time spent on the Work; salaries, wages and benefits of head
office or other personnel for that portion of their time spent on the
Work;
(c) contributions, assessments or taxes incurred during the performance of the
Work for such items as unemployment insurance, workers' compensation, and
Canada or Quebec Pension Plan, insofar as such costs are based on wages,
salaries, or other remuneration paid to employees of the Contractor and
included in the Cost of the Work under paragraphs (a) and (b) above;
(d) the portion of travel and subsistence expenses of the Contractor or of his
officers or employees incurred while travelling in discharge of duties
connected with the Work;
(e) the cost of all materials, products, supplies and equipment incorporated
into the Work, including costs of transportation thereof;
<PAGE>
-48-
(f) the cost of materials, products, supplies, equipment, temporary services
and facilities, and hand tools not owned by the workers, including
transportation and maintenance thereof, which are consumed in the
performance of the Work, and cost less salvage value on such items used,
but not consumed, which remain the property of the Contractor;
(g) rental costs of all tools, machinery, and equipment, exclusive of hand
tools, used in the performance of the Work, whether rented from the
Contractor or others, including installation, minor repairs and
replacements, dismantling, removal, transportation and delivery costs
thereof,
(h) deposits lost;
(i) the amounts of all subcontracts and the costs to the Contractor that
result from any Subcontractor's insolvency or failure to perform;
(j) the cost of quality assurance such as independent inspection and testing
services;
(k) charges levied by authorities having jurisdiction at the Place of the
Work;
(l) royalties, patent license fees, and damages for infringement of patents
and costs of defending suits therefor subject always to the Contractor's
obligations to indemnify the Owner from and against claims, demands,
losses, costs, damages, actions, suits, or proceedings arising out of the
Contractor's performance of the Contract Documents which are attributable
to an infringement or an alleged infringement of a patent of invention by
the Contractor or anyone for whose acts he may be liable;
(m) premiums for all bonds and insurance which the Contractor is required, by
the Contract Documents, to purchase and maintain;
(n) taxes and duties related to the Work and for which the Contractor is
liable;
(o) losses and expenses sustained by the Contractor for matters which are the
subject of insurance under the policies prescribed in the Contract
Documents when such losses and expenses are not recoverable because the
amounts are in excess of collectible amounts or within the deductible
amounts
(p) charges for telegrams, telexes, telephones, courier services, expressage,
and petty cash items incurred in connection with the Work;
(q) the cost of removal and disposal of Waste products and debris;
(r) costs incurred due to emergencies affecting the safety of persons or
property;
(s) legal costs, incurred by the Contractor, arising out of the execution of
the Work in accordance with the Contract Documents;
<PAGE>
-49-
(t) costs incurred by the Contractor for the correction of defects or
deficiencies in the Work other than those defects or deficiencies to be
corrected at the Contractor's own expense pursuant to the provisions of
the Contract Documents;
(u) the cost of financing the Work;
(v) the cost of auditing when requested by the Owner;
(w) the cost of computer time and usage with respect to the Work; and
(x) other costs incurred in the performance of the Work as listed below:
Cutting and Patching Glass Cleaning
DNC Publication Garbage Removal
Construction Project Signs Field Engineer
Shop Drawings Supervision
Construction Photographs General labour
Quality Control Staff mileage
Concrete testing Winter Heat
Inspection fees - allowance Temporary Enclosures
Soils/Compaction Testing Climatic Protection
Site office, tools sheds, etc. Misc. Food and Water
Temporary Light and Power Financing Charges
Scaffolding and Platforms Architectural drawings
Courier, office supplies, etc. Interior design
First Aid Kit Structural drawings
Security Mechanical/Electrical drawings
Staff Protective Wear Other Project Design Consultants
Hoarding and safety barricades Accountants
Site toilets Insurance - Liability & Builder's Risk
Site Telephone & Fax Bonding
Equipment Rentals/Small tools Building Permit - TFU
Misc. Material Mun/RMOC/Educ. Development Charges
Trucking Printing and Photocopies
Hoisting
Clean up & close out
It is the intention of the parties that the Cost of the Work referred to herein
shall cover and include any and all contingencies other than those which are the
result of or occasioned by any failure on the part of the Contractor to exercise
reasonable care and diligence in his attention to the Work. Any cost due to
failure on the part of the Contractor to exercise reasonable care and diligence
in his attention to the Work shall be borne by him.
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-95375 of Entrust Technologies Inc. of our report dated February 5, 1999
(November 4, 1999 as to Note 11, third paragraph) appearing in the Prospectus,
which is part of this Registration Statement, and to the reference to us under
the headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 3, 2000
