-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KLSiup2momVfHSBAfGGAOVEV1zbeoJALx4IKgZdk6Fqsp22LUWO3OGiQseFqrUSt 0cPfeCT8FdwbyokHJPOC1g== 0000929624-01-000422.txt : 20010319 0000929624-01-000422.hdr.sgml : 20010319 ACCESSION NUMBER: 0000929624-01-000422 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERTICOM CORP CENTRAL INDEX KEY: 0001075710 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15010 FILM NUMBER: 1570505 BUSINESS ADDRESS: STREET 1: 200 MATHESON BOULEVARD WEST CITY: MISSISSAUGA STATE: A6 BUSINESS PHONE: 9055074220 10-Q 1 0001.txt CERTICOM CORPORATION - FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended January 31, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ___ to ___ Commission File Number: 001-15010 CERTICOM CORP. ---------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Yukon Territory, Canada Not Applicable - ----------------------- ------------------- (State or other (I.R.S. Employer Jurisdiction of Identification No.) Incorporation) 25801 Industrial Boulevard Hayward, California 94545 - --------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (Registrant's telephone number, including area code): (510) 780-5400 -------------------------------------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ___ As of March 12, 2001, there were 26,508,270 of registrant's common shares outstanding. TABLE OF CONTENTS
Page Exchange Rate Information................................................................................ 1 Special Note Regarding Forward-Looking Statements........................................................ 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements............................................................................. 2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10 Factors That May Affect Operating Results........................................................ 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................................ 26 Item 6. Exhibits and Reports on Form 8-K................................................................. 28 Signatures............................................................................................... 29
All share numbers in this Form 10-Q have been adjusted to reflect a two-for-one split of our outstanding common shares, which was effective as of July 12, 2000. Certicom(R) and Security Builder(R) are our registered trademarks, and certicom encryption(TM), SSL Plus(TM), SSL Plus for Embedded Systems(TM), WTLS Plus(TM), Certilock(TM), MobileTrust(TM) and Trustpoint(TM) are our trademarks. In this Form 10-Q, the terms "Certicom," "we," "us," and "our" refer to Certicom Corp., a Yukon Territory corporation, and/or its subsidiaries. EXCHANGE RATE INFORMATION Unless otherwise indicated, all dollar amounts in this Form 10-Q are expressed in United States dollars. References to "$" or "U.S.$" are to United States dollars, and references to "Cdn.$" are to Canadian dollars. The following table sets forth, for each period indicated, information concerning the exchange rates between U.S. dollars and Canadian dollars based on the inverse of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"). The table illustrates how many U.S. dollars it would take to buy one Canadian dollar. On January 31, 2001, the Noon Buying Rate was U.S. $0.6669 per Cdn.$1.00.
U.S.$ per Cdn.$ Noon Buying Rate -------------------------------- Average(1) Low High Period End ---------- --- ---- ---------- Fiscal year ended - ----------------- April 30, 2000 0.6804 0.6969 0.6607 0.6756 Nine months ended - ----------------- January 31, 2000 0.6790 0.6969 0.6607 0.6888 January 31, 2001 0.6668 0.6889 0.6410 0.6669 Three months ended - ------------------ January 31, 2000 0.6837 0.6969 0.6740 0.6888 January 31, 2001 0.6569 0.6692 0.6410 0.6669
_______ (1) The average of the daily Noon Buying Rates on the last business day of each month during the period. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report contains forward-looking statements that reflect management's beliefs, objectives and expectations as of the date hereof. These statements, which may be identified by words such as "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions, relate to, among other things, our intent to market and sell the VPN software product directly to enterprise customers (see Overview), the expectation that royalties and revenue from sales of certificates and VPN client software will become a greater portion of overall revenue in the future (see Sources of Revenue and Revenue Recognition Policy), the expectation that revenues will continue to be generated mostly in U.S. dollars and some expenses will continue to be denominated in Canadian dollars (see Sources of Revenue and Revenue Recognition Policy), the expectation that expenses will increase in the future (see Costs and Expenses; Results of Operations - Selling and Marketing, - Research and Development, and - Consulting and Systems Integration), the expectation that we will continue to incur substantial losses in the next few years (see Net Losses and Results of Operations), the expectations regarding the payment of income taxes in Canada (see Net Losses) and the expectation that future capital requirements will be substantial and that we can meet our short-term liquidity needs (see Financial Condition, Liquidity and Capital Resources). Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward- looking statements, including, among others, those which are discussed in "Factors That May Affect Operating Results", beginning on page 16 of this Form 10-Q, in our Annual Report on Form 10-K and in other documents that we file or have filed with the Securities and Exchange Commission and Canadian securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. We do not intend, and do not assume any obligation, to update these forward-looking statements. 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CERTICOM CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars, except number of shares)
April 30, January 31, 2000 2001 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 10,508 $ 1,944 Marketable securities, available for sale 2,550 36,322 Accounts receivable (net of allowance for doubtful accounts of $161 and $411 (unaudited), respectively) 3,862 7,624 Unbilled receivables 2,115 1,773 Inventories 218 340 Prepaid expenses, deposits and other current assets 1,740 1,982 ---------- ----------- Total current assets 20,993 49,985 Property and equipment, net 5,213 10,246 Patents 873 1,163 Acquired intangibles (net of accumulated amortization of $10,586 and $17,491 (unaudited), respectively) 24,437 27,695 ---------- ----------- Total assets $ 51,516 $ 89,089 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 974 $ 6,107 Accrued liabilities 2,107 3,693 Income taxes payable 430 510 Deferred revenue 909 2,418 Note payable 10,000 - ---------- ----------- Total current liabilities 14,420 12,728 Lease inducements 1,105 981 ---------- ----------- Total liabilities 15,525 13,709 Shareholders' equity: Common shares, no par value; shares authorized: unlimited; shares issued and outstanding: 23,087,866 and 26,496,814 respectively 80,859 143,453 Additional paid-in capital 11,922 22,520 Deferred compensation expense - (6,069) Accumulated other comprehensive loss (2,497) (2,453) Deficit (54,293) (82,071) ---------- ----------- Total shareholders' equity 35,991 75,380 ---------- ----------- Total liabilities and shareholders' equity $ 51,516 $ 89,089 ========== ===========
See accompanying notes to condensed consolidated financial statements. 2 CERTICOM CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of U.S. dollars, except number of shares and per share data) (Unaudited)
Three months ended Nine months ended January 31, January 31, ------------------------------ --------------------------- 2000 2001 2000 2001 -------------- -------------- ------------- ------------- Revenues $ 3,309 $ 7,627 $ 8,069 $ 18,981 -------------- -------------- ------------- ------------- Costs and expenses: Cost of hardware sold 186 240 361 695 Consulting and systems integration (including deferred compensation amortization of $0 in 2000, and $1,290 for three months and $2,150 for nine months in 2001, respectively) 502 3,262 1,206 6,622 Selling and marketing 1,676 5,030 4,414 12,509 Research and development 1,034 3,558 2,616 9,006 Depreciation and amortization 1,854 3,146 5,364 8,881 General and administrative (including deferred compensation amortization of $0 in 2000, and $(6) for three months and $604 for nine months in 2001, respectively) 1,461 3,221 4,468 9,061 One time secondary offering costs - 1,693 - 1,693 Purchased in-process research and development 535 - 535 - -------------- -------------- ------------- ------------- Total costs and expenses 7,248 20,150 18,964 48,467 Operating loss (3,939) (12,523) (10,895) (29,486) Non-cash interest income (expense) - - - (423) Interest income (expense), net 9 481 (12) 2,266 -------------- -------------- ------------- ------------- Loss before income taxes (3,930) (12,042) (10,907) (27,643) Income taxes - - 134 135 -------------- ------------- ------------- ------------- Net loss $ (3,930) $ (12,042) $ (11,041) $ (27,778) Other comprehensive income: Unrealized gain (loss) on marketable securities, available for sale - (74) - 44 -------------- ------------- ------------- ------------- Comprehensive loss $ (3,930) $ (12,116) $ (11,041) $ (27,734) -------------- ------------- ------------ -------------- Basic and diluted net loss per share $ (0.18) $ (0.46) (0.50) $ (1.07) ============== ============= ============= ============= Shares used in computing basic and diluted net loss per share 22,348,000 26,239,038 22,028,000 25,926,432 ============== ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 3 CERTICOM CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) (Unaudited)
Nine months Nine months ended January 31, ended January 31, 2000 2001 -------------------- ------------------- Cash flows from operating activities: Net loss $ (11,041) $ (27,778) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,047 1,974 Amortization of acquired intangibles 4,317 6,905 Write-off of purchased in-process research and development 535 - Deferred compensation - 2,754 Stock compensation 238 2 Non-cash interest expense - 423 Changes in non-cash working capital items Accounts receivable (2,674) (3,420) Inventories 96 (122) Prepaid and other current assets (108) (396) Accounts payable and accrued liabilities 128 6,719 Income taxes payable 135 80 Deferred revenue 376 1,509 -------------------- --------------------- Net cash used in operating activities (6,951) (11,350) -------------------- --------------------- Cash flows from investing activities: Business acquisitions (net of cash acquired) 182 - Purchase of property and equipment (3,268) (6,960) Purchase of patents (377) (337) Purchase of marketable securities, available for sale (4,855) (38,566) Sales and maturities of marketable securities, available for sale 11,458 4,892 -------------------- --------------------- Net cash (used in) provided by investing activities 3,140 (40,971) -------------------- --------------------- Cash flows from financing activities: Issuance of common shares 3,024 53,881 Leasehold inducements 838 (124) Repayment of note payable - (10,000) -------------------- --------------------- Net cash provided by financing activities 3,862 43,757 -------------------- --------------------- (Decrease) increase in cash and cash equivalents 51 (8,564) Cash and cash equivalents, beginning of period 1,400 10,508 -------------------- --------------------- Cash and cash equivalents, end of period $ 1,451 $ 1,944 ==================== ===================== Supplemental disclosure of cash flow information: Income taxes paid $ - $ 55 Interest paid $ - $ 37 Non-cash investing and financing activities: Common shares and options issued for business acquisitions $ 10,386 $ 17,804 Warrant issued in connection with line of credit $ - $ 423
See accompanying notes to condensed consolidated financial statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The condensed consolidated financial statements included in this document are unaudited and reflect all adjustments (consisting only of (i) normal recurring adjustments and (ii) other adjustments as explained in Note 2- Acquisition of DRG Resources Group, Inc.) which are, in the opinion of our management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods shown. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended April 30, 2000. The results of operations for the interim periods ended January 31, 2001 are not necessarily indicative of the results for the entire fiscal year ending April 30, 2001. Revenue Recognition and Deferred Revenues We recognize software licensing revenue in accordance with all applicable accounting regulations including the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended. Following the requirements of SOP 97-2, we recognize license revenues when all the following conditions are met: . we have signed a non-cancelable license agreement with the customer; . we have delivered the software product to the customer; . the amount of the fees to be paid by the customer are fixed or determinable; and . we believe that collection of the fees is probable. Maintenance and support services revenue is recognized ratably over the applicable period, usually one-year. Revenue derived from consulting and systems integration is recognized upon performance of the related services. Research and Product Development Cost We expense all research and development costs as they are incurred. Scientific research tax credits are recognized at the time the related costs are incurred and recovery is reasonably assured. We have capitalized certain legal costs associated with the filing of approximately fifty patent applications in various jurisdictions. These patent filings relate to Elliptic Curve Cryptography (ECC), various mathematical computational methodologies, security protocols and other cryptographic inventions. Once granted, we amortize the individual patent cost over three years. Note 2. Acquisition of DRG Resources Group, Inc. On September 12, 2000, we acquired all of the outstanding common shares of DRG Resources Group, Inc., a corporation based in Redwood City, California. DRG Resources Group is an e-commerce security consulting company. Prior to our acquisition of DRG Resources Group, Digital Resources Group, LLC merged into DRG Resources Group. At the time these two companies merged, Digital Resources Group LLC transferred $100,000 in assets into DRG Resources Group. Prior to the merger of Digital Resources Group, LLC and DRG Resources Group, all other assets and liabilities of Digital Resource Group LLC were distributed to its members. In connection with the acquisition, we also assumed stock options exercisable to acquire a total of 103,100 of our common shares. Details of the consideration and the fair values of the net assets acquired are as follows (in thousands of U.S. dollars): 5 Net assets acquired Current assets (net equity per agreement) $ 100 Other acquired intangibles 634 Goodwill 9,529 Deferred compensation expense 7,741 ---------------- $ 18,004 ================ Consideration Common shares (397,595 shares issued) $ 15,482 Options to acquire 103,100 common shares 2,322 Acquisition costs 200 ---------------- $ 18,004 ================
The following summary presents the results of operations as if DRG Resources Group had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, primarily amortization of goodwill, deferred compensation, and other intangible assets and excluding intercompany revenues and expenses (in thousands of U.S. dollars, except per share amounts):
Nine months ended January 31, ---------------------- 2000 2001 --------- --------- Pro forma revenues $ 9,009 $ 20,060 Pro forma net loss $ (16,457) $ (30,095) Pro forma basic and diluted net loss per share $ (0.74) $ (1.16)
Note 3. Net Loss per Common Share Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from options and warrants to purchase common shares and common shares subject to repurchase, using the treasury stock method. The following potential common shares have been excluded from the calculation of diluted net loss per share for all periods presented because the effect would have been anti-dilutive:
Nine months ended January 31, ---------------------- 2000 2001 --------- --------- Shares issuable under stock options 3,955,828 5,385,250 Shares issuable pursuant to warrants 0 30,000 Shares of restricted stock subject to repurchase 0 198,797
The weighted average exercise price of stock options, calculated by using the nine months average exchange rates, was $4.55 and $9.81 at January 31, 2000 and 2001, respectively. The weighted average exercise price of warrants, calculated by using the nine months average exchange rate, was $25.43 at January 31, 2001. The weighted average purchase price of restricted stock was $38.94. Note 4. Note Payable On April 27, 2000, we entered into an agreement with Sand Hill Capital II, LP for a line of credit of $15 million bearing interest at the prime rate of interest plus 3%. As of the end of fiscal year 2000, we had borrowed $10 million against this line. In connection with this financing, we issued a warrant which 6 entitles Sand Hill to purchase up to 30,000 of our common shares for Cdn. $38.13 per share ($25.43 based on the exchange rate on January 31, 2001) until April 27, 2005. The amount borrowed was repaid in May 2000, and the line of credit was terminated. The warrant was valued at $423,000 at the time of issuance based on the Black-Scholes option valuation model. The value of the warrant was charged to interest expense in the first quarter of fiscal 2001 as the note payable was paid off with proceeds from a public offering completed on May 3, 2000. See Note 6 - "Public Offering and Stock Split." Note 5. Disclosure About Revenue Sources We operate in one reportable segment. We are a developer, manufacturer and vendor of digital information security products, technologies and consulting and systems integration services within the industry segment of electronic commerce. Information about our revenue types is as follows (in thousands of U.S. dollars):
Three months ended Nine months ended January 31, January 31, ------------------------ ------------------------ 2000 2001 2000 2001 ---------- ---------- ---------- ---------- Software licensing $ 2,465 $ 5,637 $ 6,070 $ 14,792 Consulting and systems integration 674 1,698 1,553 3,302 Hardware 170 292 446 887 ---------- ---------- ---------- ---------- Total revenue $ 3,309 $ 7,627 $ 8,069 $ 18,981 ========== ========== ========== ==========
Information about our geographic operations is given below (in thousands of U.S. dollars):
Three months ended Nine months ended January 31, January 31, ------------------------ ------------------------ 2000 2001 2000 2001 ---------- ---------- ---------- ---------- United States revenue $ 3,200 $ 6,010 $ 7,591 $ 14,716 Canada revenue 93 1,012 326 1,771 International (non-Canadian/US) revenue 16 605 152 2,494 ---------- ---------- ---------- ---------- Total revenue $ 3,309 $ 7,627 $ 8,069 $ 18,981 ========== ========== ========== ==========
Note 6. Public Offering and Stock Split On May 3, 2000, we completed a public offering of 2,500,000 common shares in the United States and Canada for net proceeds of approximately $51,500,000. On July 12, 2000, we completed a two-for-one split of our outstanding common shares. On October 27, 2000, we filed a registration statement with the U.S. Securities and Exchange Commission and a preliminary short form prospectus with each of the provinces of Canada, other than Quebec and New Brunswick, pursuant to the U.S./Canada Multi-Jurisdictional Disclosure System for a proposed public offering. On December 1, 2000, we announced the withdrawal of this proposed public offering due to the market conditions. On December 18, 2000, we formally withdrew this proposed public offering due to then current market conditions. Note 7. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires us to measure all derivatives at fair value and to recognize them on the balance sheet as an asset or liability, depending on our rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. We will adopt SFAS No. 133 no later than the first quarter of fiscal year 2002. 7 In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of FASB Statement No. 133. SFAS No. 138 amends certain sections of SFAS No. 133. The impact of this statement has not been determined. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), "Second Amendment: Revenue Recognition in Financial Statements", which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. The impact of SAB 101 has not been determined. Note 8. Stock Option Repricing In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of APB Opinion No. 25, "Accounting for Stock Issued to Employees," which, among other things, requires variable-award accounting for repriced options from the date the options are repriced until the date of exercise. This interpretation became effective on July 1, 2000 to cover specific events that occur after December 15, 1998. On March 17, 1999, our Board of Directors approved the exchange of options to acquire an aggregate of 1,106,240 of our common shares for options having a right to acquire 382,914 common shares. Because these options were repriced after December 15, 1998, they are covered by the interpretation. Accordingly, these options will be accounted for as variable until the date they are exercised, forfeited or expire unexercised. The portion of the options' intrinsic value at July 1, 2000 that is unvested will be recognized over the remaining vesting period. However, if the price of our common shares subsequently declines below the share price at July 1, 2000, compensation cost would be reduced proportionately. Additional compensation cost would be measured for the full amount of any increases in share price after the effective date and will be recognized over the remaining vesting period. Any adjustment to the compensation cost for further changes in share price after the options vest will be recognized immediately. The average exercise price of the newly issued options was $5.44 per common share, the quoted market price of the shares, compared to an average exercise price of $10.19 for the original options. Deferred compensation amortization credit of $6,143 and deferred compensation amortization expense of $604,432 were recorded for the three months and nine months ended January 31, 2001, respectively. Note 9. Subsequent Events On October 19, 2000, our shareholders approved the subdivision of our common shares on a two-for-one or three-for-two basis, at the discretion of our Board of Directors, on up to two occasions at any time prior to October 19, 2001. Since January 1, 2001, Philip C. Deck resigned as Chairman and a member of our board of directors in order to devote his full attention to his new position as Chief Executive Officer of Mortice Kern Systems Inc., a publicly held software company in Canada, and Erling Rasmussen resigned as a director of our company. Robert P. Wierderhold, President and Chief Executive Officer and a director of Tality Corporation, a provider of product development outsourcing, has been appointed to the Board of Directors. In January 2001, we entered into a non-binding term sheet with respect to the possible acquisition by us of all of the outstanding shares of a European- based company engaged in the provision of information security software and services. Completion of this transaction is conditional upon, among other things, satisfactory completion of due diligence investigations and the parties entering into mutually acceptable definitive documentation. We currently anticipate we would satisfy the purchase price for this acquisition through the issuance of our common shares. We cannot assure you that this acquisition will be completed, or if acquired that this company will be successfully integrated into our operations. 8 On March 9, 2001, we entered into an underwriting agreement with a syndicate of underwriters to issue and sell up to 3,500,000 of our common shares at a price of Cdn.$12.50 (approximately U.S.$8.07) per share. In addition, we have granted to the underwriters an option to purchase up to an additional 500,000 common shares at a price of Cdn.$12.50 (approximately U.S.$8.07) per share for a period of 30 days for the purpose of covering over-allotments and for market stabilization purposes. The gross proceeds of this offering will be Cdn.$43.75 million (approximately U.S.$28.245 million) and Cdn.$50 million (approximately U.S.$32.28 million) before and after giving effect to the exercise of the underwriters' option, respectively. The offering is expected to close on or about March 26, 2001. The obligations of the underwriters under the underwriting agreement are several and may be terminated at their discretion upon the occurrence of certain events. These securities will not be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are a leading provider of information security software and services, specializing in solutions for mobile e-business. Our products and services are specifically designed to address the challenges imposed by a wireless data environment. We offer solutions that incorporate our proprietary encryption technology and are based on industry standards for information security that utilize public key cryptography. We believe that the addition of our products to wireless infrastructures will help to build the trust and confidence necessary for the success of mobile e-business. Historically, we have focused on the development and marketing of cryptographic and information security protocol toolkits. We have also launched a line of authentication solutions including public key infrastructure (PKI) software, certificate authority (CA) services and virtual private network (VPN) client software for handheld devices. In addition, we provide consulting and systems integration services to assist our customers in designing and implementing efficient security solutions. Our OEM customers integrate our technologies into their hardware and software products, then sell the finished products to consumers or enterprise customers. We also market and sell our VPN software product directly to enterprise customers. Our products are currently licensed by more than 150 customers including 724 Solutions, Inc., Aether Systems, Inc., ePocrates, Inc., Motorola, Inc., Palm, Inc., QUALCOMM, Inc., Research In Motion Ltd., Sony International (Europe) GmbH, and Sybase, Inc.. We were founded in 1985 and are governed by the laws of the Yukon Territory, Canada. We determined that commencing May 1, 1999 our functional currency was the U.S. dollar and, accordingly, we began measuring and reporting our results of operations in U.S. dollars from that date. We changed our functional currency as we derive a majority of our revenues and incur a significant portion of our expenses in U.S. dollars. Our consolidated financial statements contained in this Form 10-Q are reported in U.S. dollars and are presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The following discussion and analysis relates to our financial statements that have been prepared in accordance with U.S. GAAP. Sources of Revenue and Revenue Recognition Policy We operate in one reportable segment. We derive our revenues from a variety of sources that we generally classify as software licensing, consulting and systems integration, and hardware. We earn software licensing revenues from one- time base license fees or technology access fees, royalties, and annual maintenance and support fees. Royalties, which are based upon per unit or per usage charges or a percentage of the revenue from licensees' products containing our technology, historically have not represented a significant portion of our software license revenues. However, we expect that royalties, along with the revenue that we anticipate will be derived from sales of certificates and VPN client software, will become a greater portion of our revenue over time. Some of our license agreements permit the licensee to sublicense without us receiving any revenue from the sub-licensees. Consulting and systems integration revenue is derived from the performance of contracted services for customers and is accounted for based upon a time-and-materials basis, a percentage completion basis or a fixed contract for a complete solution. Hardware revenues comprise sales of products manufactured by third parties to our specifications and components procured from third parties and resold by us. We negotiate most of our customer contracts on a case-by-case basis. However, most of our contracts (other than our contracts for consulting and systems integration or hardware sales) include provisions for us to receive an up-front license fee or royalties. Our royalties for software licenses for mobile and wireless devices vary based on a number of factors, including the size of the contract and the nature of the contract and of the customer. The following table sets forth our revenues by category and by geography for the periods indicated: 10
Three months ended Nine months ended January 31, January 31, -------------------------------- --------------------------------- 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Software licensing 74.5% 73.9% 75.2% 77.9% Consulting and systems integration 20.4 22.3 19.3 17.4 Hardware 5.1 3.8 5.5 4.7 ------------ ------------ ------------ ------------ Total revenue 100% 100% 100% 100% ============= ============ ============ ============ U.S. revenue 96.7% 78.8% 94.1% 77.5% Canadian revenue 2.8 13.3 4.0 9.4 International (non-Canadian/US) revenue 0.5 7.9 1.9 13.1 ------------ ------------ ------------ ------------ Total revenue 100% 100% 100% 100% ============ ============ ============ ============
We recognize software licensing revenue in accordance with all applicable accounting regulations including the American Institute of Certified Public Accountants Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," as amended. Following the requirements of SOP 97-2, we recognize license revenues when all the following conditions are met: . we have signed a non-cancelable license agreement with the customer; . we have delivered the software product to the customer; . the amount of the fees to be paid by the customer are fixed or determinable; and . we believe that collection of these fees is probable. Maintenance and support services revenue is recognized ratably over the applicable period, usually one year. Revenue derived from consulting and systems integration is recognized upon performance of the related services. For the three months ended January 31, 2001, approximately 98.2% of our revenue was generated in U.S. dollars. In the same period, approximately 29.0% of our expenses were incurred in Canadian dollars, and the balance was incurred primarily in U.S. dollars. For the nine months ended January 31, 2001, approximately 98.8% of our revenue was generated in U.S. dollars. In the same period, approximately 28.7% of our expenses were incurred in Canadian dollars, and the balance was incurred primarily in U.S. dollars. We expect that a substantial majority of our revenue will continue to be generated in U.S. dollars for the foreseeable future and that a portion of our expenses, including labor costs as well as capital and operating expenditures, will continue to be denominated in Canadian dollars. If the Canadian dollar appreciates against the U.S. dollar, our results of operations could be materially adversely affected. Costs and Expenses Our costs and expenses consist of selling and marketing, research and development, depreciation and amortization, general and administrative expenses, consulting and systems integration, and cost of hardware sold. Our selling and marketing expenses consist primarily of employee salaries and commissions, related travel, public relations and corporate communications costs and trade shows, marketing programs and market research. Research and development expenses consist primarily of employee salaries, sponsorship of cryptographic research activities at various universities, participation in various cryptographic, wireless and e-business standards associations and related travel and other costs. Depreciation and amortization represent the allocation to income of the cost of fixed assets and intangibles over their estimated useful lives. General and administrative expenses consist primarily of salaries and other personnel- related expenses for executive, financial, legal, information services and administrative 11 functions and amortization of deferred compensation expense which represents the repricing of stock options (See Note 8- "Stock Option Repricing" in item 1 above). Consulting and systems integration expenses consist primarily of salaries and travel, and amortization of deferred compensation expense recorded in connection with the acquisition of DRG Resources Group. Our cost of hardware sold consists primarily of the component cost of our hardware products manufactured by third parties to our specifications as well as the procured costs of third-party hardware technology. We have recognized certain non-recurring costs in connection with special events. In the third quarter of fiscal 2001, we recognized one-time costs in connection with our efforts toward a secondary offering (see Note 6 - "Public Offering and Stock Split" in item 1 above). In the third quarter of fiscal 2000, purchased in-process research and development costs were booked in connection with the acquisition of Trustpoint. We have capitalized certain legal costs associated with the filing of patent applications in various jurisdictions. These patent filings are in the areas of ECC technology, various mathematical computational methodologies, security protocols and other cryptographic inventions. Once granted, we amortize the individual patent cost over three years. In anticipation of business growth, we expect to incur significantly higher selling and marketing, research and development, and general and administrative expenses and capital expenditures in subsequent periods, including expenses related to the construction of new facilities. In addition, to the extent that we complete additional acquisitions, we anticipate that depreciation, amortization and deferred compensation expenses will increase. Net Losses We have incurred significant annual and quarterly net losses and losses from our operations since our inception. We expect to incur significant net losses and operating losses on both an annual and quarterly basis for the next few years as we grow our business by hiring additional personnel, increasing marketing and capital expenditures, and enhancing our product and service offerings. In the first quarter of fiscal 2001, we devoted a substantial portion of our consulting and system integration personnel resources to internal non- revenue producing projects. From time to time, we may choose to utilize our personnel in the same manner. Furthermore, given the rapidly evolving nature of our business and fluctuations in the timing of our sales, our operating results are difficult to forecast and, accordingly, our historical financial results may not be meaningful assessments of our future business operations or prospects. We pay taxes in accordance with U.S. federal, state and local tax laws and Canadian federal, provincial and municipal tax laws. We do not expect to pay any significant corporate income taxes in Canada in the foreseeable future because we have significant Canadian tax credits and loss carry-forwards. Acquisitions On September 12, 2000, we acquired all of the outstanding common stock of DRG Resources Group, Inc. of Redwood City, California, an e-commerce security consulting company. The acquisition was completed with the issuance of 397,595 of our common shares. We also assumed stock options exercisable to acquire a total of 103,100 of our common shares. The total consideration for the acquisition was approximately $18 million in common stock including $7.7 million for future services, which will be amortized in consulting and systems integration expense. The acquisition of DRG Resources Group was accounted for by the purchase method, and the results of operations are included in our consolidated statements of operations from the date of acquisition. Results of Operations Although we have experienced substantial growth in revenues in recent periods, we have incurred substantial operating losses since our inception. As of January 31, 2001, we had an accumulated deficit of 12 approximately $82.1 million. We intend to invest heavily in sales and marketing and the development and enhancement of our product and service offerings. We expect to incur additional losses for the next few years, and we may never achieve profitability. The following table sets out, for the periods indicated, selected financial information from our consolidated financial statements as a percentage of revenue.
Three months Nine months ended January 31, ended January 31, ---------------- ---------------- 2000 2001 2000 2001 ---- ---- ---- ---- Consolidated Statement of Operations Data: Revenues 100% 100% 100% 100% Costs and expenses: Cost of hardware sold 6 3 4 4 Consulting and systems integration 15 43* 15 35* Selling and marketing 51 66 55 66 Research and development 31 47 32 47 Depreciation and amortization 56 41 67 46 General and administrative 44 42** 55 48** One time secondary offering costs - 22 - 9 Purchased in-process research and development 16 - 7 - Interest income (expense), net 0 6 0 12 Non-cash interest income (expense) 0 0 0 (2) Loss before income taxes (119) (158) (135) (145) Income taxes 0 0 (2) (1) ------------------------ ------------------ Net loss (119)% (158)% (137)% (146)% ======================== ==================
* Including the amortization of deferred compensation expense in connection with the acquisition of DRG Resources Group. ** Including the percentage of non-cash expense related to the repricing of stock options under FASB Interpretation No. 44. Three and nine months ended January 31, 2001 and 2000 Revenue. Revenue for the quarter ended January 31, 2001 was $7.6 million, a 130% increase from $3.3 million in the same quarter of fiscal 2000. Revenue for the nine months ended January 31, 2001 was $19.0 million, a 135% increase from $8.1 million in the same period of fiscal 2000. The increases were primarily attributable to increased software licensing, which grew to approximately $5.6 million for the three months ended January 31, 2001, a 129% increase over $2.5 million for the three months ended January 31, 2000, and grew to approximately $14.8 million for the nine months ended January 31, 2001, a 144% increase over $6.1 million for the nine months ended January 31, 2000. The increase in software licensing revenue was primarily a result of growing market awareness of our products and, to a lesser extent, an expanded sales force. In addition, consulting and systems integration revenue was approximately $1.7 million for the three months ended January 31, 2001, a 152% increase over $0.7 million for three months ended January 31, 2000, and approximately $3.3 million for the nine months ended January 31, 2001, a 113% increase over $1.6 million for nine months ended January 31, 2000. We added resources in this area during the first nine months of fiscal 2001 both from external hiring as well as from the acquisition of DRG Resources Group, an eleven person professional consulting organization specializing in security for the Internet and specifically public-key infrastructure, in the second quarter of fiscal 2001. Hardware sales for the three months ended January 31, 2001 grew 72% to $0.3 million compared to $0.2 million for the three months ended January 31, 2000. Hardware sales for the nine months ended January 31, 2001 grew 99% to $0.8 million compared to $0.4 million for the nine months ended January 31, 2000. Cost of Hardware Sold. Cost of hardware sold increased 29% in the third quarter of fiscal 2001 to approximately $0.24 million from $0.19 million in the third quarter of fiscal 2000. Cost of hardware sold 13 increased 93% for the nine months ended January 31, 2001 to approximately $0.70 million from $0.36 million for the nine months ended January 31, 2000. This increase was primarily due to higher hardware sales, but is also attributable to a shift in product mix with a greater proportion of hardware sales being generated by sales of higher cost third-party procured hardware. Consulting and Systems Integration. Consulting and systems integration expenses were $3.3 million for the third quarter of fiscal 2001, a 550% increase over $0.5 million for the third quarter of fiscal 2000. Consulting and systems integration expenses were $6.6 million for the nine months ended January 31, 2001, a 449% increase over $1.2 million for the nine months ended January 31, 2000. This increase was primarily a result of increasing the number of engineers in this group in order to keep up with growing customer and internal demands and the deferred compensation expense and other costs recorded in connection with the acquisition of DRG Resources Group. We expect that this trend will continue as we amortize the existing deferred compensation expense and potentially add resources through both hiring of personnel and acquisitions of other entities, if any. Selling and Marketing. Selling and marketing expenses were $5.0 million for the three months ended January 31, 2001 compared to $1.7 million for the three months ended January 31, 2000, an increase of 200%. Selling and marketing expenses were $12.5 million for the nine months ended January 31, 2001 compared to $4.4 million for the nine months ended January 31, 2000, an increase of 183%. These increased expenses were primarily due to an increase in personnel costs, branding (such as PKS), MobileTrust launch costs and VPN beta testing and launch costs. We are in the process of adding marketing personnel and expanding our marketing operations into Europe, South America and the Asia Pacific region and anticipate that expenses in this area will continue to increase. Research and Development. Our research and development expenses were $3.6 million for the three months ended January 31, 2001 versus $1.0 million for the three months ended January 31, 2000, an increase of 244%. Research and development expenses were $9.0 million for the nine months ended January 31, 2001 versus $2.6 million for the nine months ended January 31, 2000, an increase of 244%. These increases are the result of the addition of personnel necessary to support new product development in the PKI and VPN areas. We expect that these expenses will continue to increase as we add additional engineering resources and continue to grow our technical capabilities to support the growth of our business. Depreciation and Amortization. Depreciation and amortization increased 70% to $3.1 million in the third quarter of fiscal 2001 compared to $1.8 million in the third quarter of fiscal 2000. Depreciation and amortization increased 66% to $8.9 million for the nine months ended January 31, 2001 compared to $5.4 million for the nine months ended January 31, 2000. The primary reason for the increase was that our results for the three months and nine months ended January 31, 2001 included amortization expenses relating to our acquisition of Trustpoint, which occurred at the end of the third quarter of fiscal 2000, and our acquisition of DRG Resources Group, which occurred during the second quarter of fiscal 2001. General and Administrative. General and administrative expenses increased 120% in the third quarter of fiscal 2001 to $3.2 million from $1.5 million for the third quarter of fiscal 2000. General and administrative expenses increased 103% for the nine months ended January 31, 2001 to $9.1 million from $4.5 million for the nine months ended January 31, 2000. This increase resulted from growth in personnel and office space in California, Nasdaq reporting requirements, the expense portion of system enhancements, and amortization related to the repricing of stock options. One Time Secondary Offering Costs. In the third quarter of fiscal 2001, we incurred $1.7 million in one-time costs in connection with our efforts toward a secondary public offering. See Note 6 -"Public Offering and Stock Split" in item 1 above. Purchased In-process Research and Development. $0.5 million of purchased in-process research and development was charged for the three months ended January 31, 2000 in connection with the acquisition of Trustpoint. On January 26, 2000, we acquired all of the outstanding common shares of Trustpoint, a corporation based in Mountain View, California. Trustpoint is a provider of comprehensive, flexible, cross-platform PKI products that allow OEMs to develop applications with built-in 14 digital certificates services. Management estimated that the purchased in- process technology that represents $0.5 million of purchase consideration had not yet reached technological feasibility and had no future alternative use. Accordingly, $0.5 million was immediately expensed upon consummation of the acquisition. Interest and Other Income (Expense). In the third quarter of fiscal 2001, interest income increased 4,700% to $0.48 million from $0.01 million in the third quarter of fiscal 2000. For the nine months ended January 31, 2001, interest income was $1.8 million, a 17,900% increase compared to an interest expense of $0.01 million for the nine months ended January 31, 2000. This increase consists of an increase in the amount of cash and marketable securities invested during the three months and nine months ended January 31, 2001, as well as currency adjustments, primarily Canadian dollars to U.S. dollars. This increase is net of the one-time, non-cash interest expense of $0.4 million from the warrants issued to Sand Hill Capital II, LP, which is included in our results for the nine months ended January 31, 2001. Income Taxes. No income tax expense was recorded for the third quarter of both fiscal 2001 and fiscal 2000. Income tax expense was $0.14 million and $0.13 million for the nine months ended January 31, 2001 and 2000, respectively. The income tax expenses for the three months and nine months ended January 31, 2001 were estimated based on the projected effective tax rate for fiscal 2001. Net Loss. Our net loss increased 170% in the third quarter of fiscal 2001 to $12.0 million ($0.46 per share basic and diluted) compared to $3.9 million ($0.18 per share basic and diluted) for the same period of the previous fiscal year. Our net loss increased 152% in the nine months ended January 31, 2001 to $27.8 million ($1.07 per share basic and diluted) compared to $11.0 million ($0.50 per share basic and diluted) for the nine months ended January 31, 2000. This increase was predominately attributable to the amortization of acquisition-related intangibles and deferred compensation expense, the increased expense for personnel and office space in California, Nasdaq reporting requirements, costs associated with secondary public offering efforts, as well as the expense portion of system enhancements. Financial Condition, Liquidity and Capital Resources In May 2000, we completed a public offering of 2,500,000 common shares in the United States and Canada. Our net proceeds from the offering were approximately $51.5 million. On April 27, 2000, we borrowed $10 million from Sand Hill Capital II, LP, or Sand Hill, at the prime rate of interest plus 3%. As partial consideration for making advances to us under this credit facility, we granted Sand Hill a warrant to purchase up to 30,000 of our common shares at an exercise price of Cdn. $38.13 per share (U.S. $25.43 based on the exchange rate on January 31, 2001) until April 27, 2005. We repaid the loan and interest on May 5, 2000, using a portion of the proceeds received from our public offering, and terminated this facility. Total cash and available-for-sale marketable securities decreased $9.0 million during the third quarter of fiscal 2001 and increased $25.2 million during the nine months ended January 31, 2001. Our cash and cash equivalents and marketable securities at January 31, 2001 were $38.3 million. We lease premises totaling approximately 111,000 square feet in Hayward, California. This lease expires on July 31, 2007. We also have a lease for approximately 30,300 square feet of office space in Mississauga, Ontario, which expires on December 25, 2009. Currently, our Canadian offices occupy this space. We recently signed a ten-year lease for approximately seven acres in Mississauga, Ontario upon which a facility of approximately 130,000 square feet is being constructed by the landlord at our expense. If the landlord intends to sell the leased premises, we have a right of first refusal for this property on terms to be negotiated and an option to purchase adjoining property of approximately 6 acres. We anticipate subleasing our current Canadian office space and relocating our Canadian operations to the new site in the fall of 2001. The annual rental fee for the new site varies between approximately Cdn.$10.88 to Cdn.$13.08 per square foot (U.S.$7.26 to U.S.$8.72 per square foot based on the exchange rate on January 31, 2001) over the life of the lease, with rental payments commencing in May 2001. In addition, we currently anticipate making facility leasehold improvements of approximately $10 million. We also have a lease for approximately 6,000 square feet in Herndon, Virginia that expires on October 31, 2007, and we occasionally execute month-to-month leases for short-term office space. The total annual base rent for all facilities (other than the newly-leased property in Mississauga) is $2.0 million. 15 Our future capital requirements will be substantial and will depend on, and could increase as a result of, many factors, including: costs associated with facility expansion and construction; new products, such as our MobileTrust(TM) Certificate Authority service and our VPN client software business; our research and development programs; acquisitions of companies; purchases of technology from third parties; the time and costs involved in obtaining regulatory approvals; costs involved in filing, prosecuting and enforcing patent claims; competing technological and market developments; our success in entering into collaborative relationships; and administrative and legal expenses. We believe our current cash and cash equivalents, marketable securities position and the net proceeds from our recently announced common share offering will be sufficient to meet our liquidity needs for the near term. In the future, we may need to augment our cash in order to fund our activities. Such capital may be raised through additional public or private financing, as well as collaborative relationships, borrowings and other available sources. There can be no assurance that additional or sufficient financing will be available, or, if available, that it will be available on acceptable terms. If we raise funds by issuing additional securities, dilution to existing shareholders may result. If adequate funds are not available, we may be required to significantly curtail one or more of our research and development programs or commercialization efforts or to obtain funds through arrangements with collaborative partners or others on less favorable terms. Factors That May Affect Operating Results We operate in a dynamic and rapidly changing environment that involves risks and uncertainties. You should carefully consider the risks described below and the other information in this Form 10-Q. These risks and uncertainties are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially harmed. This section should be read in conjunction with our annual report on Form 10-K for the fiscal year ended April 30, 2000. Risks Related to Our Company We have a limited operating history and have incurred losses since inception and anticipate incurring losses for the foreseeable future Although we have been engaged in the cryptographic security industry since 1985, we did not ship our first commercial toolkit or enter the U.S. market until 1997. Accordingly, our business operations are subject to all of the risks inherent in a new business enterprise, such as competition and viable operations management. Since our inception, we have incurred substantial net losses. As of January 31, 2001, we had an accumulated deficit of approximately $82.1 million and, in addition, an accumulated other comprehensive loss of $2.5 million. We expect to incur additional losses for the next few years, and we may never achieve profitability. If we do achieve profitability, we may not be able to sustain it. Because we may be unable to sustain our revenue growth, you should not consider our historical growth indicative of our future revenue levels or operating results. Our success will depend in large part upon our ability to generate sufficient revenue to achieve profitability and to maintain existing customer relationships and to develop new customer relationships. Because our quarterly operating results are subject to fluctuations, period-to- period comparisons of our operating results are not necessarily meaningful and you should not rely on them as an indication of future performance Our quarterly operating results have historically fluctuated and may fluctuate significantly in the future. Accordingly, our operating results in a particular period are difficult to predict and may not meet the expectations of securities analysts or investors. If this were to occur, our share price would likely decline significantly. Factors that may cause our operating results to fluctuate include: 16 . the level of demand for our products and services as well as the timing of new releases of our products; . our dependence in any quarter on the timing of a few large sales; . our ability to maintain and grow a significant customer base; . the fixed nature of a significant portion of our operating expenses, particularly personnel, research and development, and leases; . costs related to the opening or expansion of our facilities; . unanticipated product discontinuation or deferrals by our OEM customers; . changes in our pricing policies or those of our competitors; . currency exchange rate fluctuations; and . timing of acquisitions, our effectiveness at integrating acquisitions with existing operations and related costs. Accordingly, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. In addition, we expect to increase our operating expenses significantly as we: . expand our sales and marketing operations and develop new distribution channels; . improve existing or build additional software development centers; . improve our operational and financial systems; . pursue our acquisition strategy; . broaden our customer support capabilities; and . fund greater levels of research and development. If we do not significantly increase our revenue to meet these increased operating expenses, our business, financial condition and operating results could be materially adversely affected. Our revenues are difficult to predict We derive our revenue primarily from sales of our products and services to our OEM customers. Our sales vary in frequency, and OEM customers may or may not purchase our products and services in the future. The sale to, and implementation by, OEMs of our products and services typically involves a lengthy education process, significant technical evaluation and commitment of capital and other resources by them. This process is also subject to the risk of delays associated with their internal budgeting and other procedures for approving capital expenditures, deploying new technologies and testing and accepting new technologies that affect key operations. As a result, the sales and implementation cycles associated with many of our products and services are generally lengthy, and we may not succeed in closing transactions on a timely basis, if at all. If orders expected from a specific customer for a particular period are not realized, our revenues could fail to materialize. 17 In addition, our customers may defer the purchase of, or stop using, our products and services at any time, and certain license agreements may be terminated by the customer at any time. We negotiate most of our customer contracts on a case-by-case basis, which makes our revenues difficult to predict. Our customer contracts typically provide for base license fees, technology access fees and/or royalties based on a per unit or per usage charge or a percentage of revenue from licensees' products containing our technology. Additionally, a number of our large contracts provide that we will not earn additional royalty revenues from those contracts until these customers' shipments exceed certain thresholds. As a result, our revenues are not recurring from period to period, which makes them more difficult to predict. In addition, estimating future revenue is difficult because we generally ship our products soon after an order is received and, as such, we do not have a significant backlog. Our expense levels are based, in part, on our expectations of future revenues and are largely fixed in the short term. We may not be able to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues. Some of our products are new, unproven and currently generate little or no revenue In late 2000 and early 2001 we launched our PKI products, CA service and VPN client software product. We cannot predict the future level of acceptance, if any, of these new products, and we may be unable to generate significant revenue from these products. Our business depends on continued development of the Internet and the continued growth of mobile e-business Our future success is substantially dependent upon continued growth in the use of the Internet and the acceptance of mobile and wireless devices and their use for mobile e-business. The adoption of the Internet for commerce and communications, particularly by individuals and companies that have historically relied upon alternative means of commerce and communication, generally requires the understanding and acceptance of a new way of conducting business and exchanging information. In particular, companies that have already invested substantial resources in other means of conducting commerce and exchanging information may be particularly reluctant or slow to adopt a new, Internet-based strategy that may make their existing infrastructure obsolete. To the extent that individuals and businesses do not consider the Internet to be a viable commercial and communications medium, our business may not grow. In addition, our business may be harmed if the number of users of mobile and wireless devices does not increase, or if e-business and mobile e-business do not become more accepted and widespread. The use and acceptance of the Internet and of mobile and wireless devices may not increase for any number of reasons, including: . actual or perceived lack of security for sensitive information, such as credit card numbers; . traffic or other usage delays on the Internet; . competing technologies; . governmental regulation; and . uncertainty regarding intellectual property ownership. Capacity constraints caused by growth in the use of the Internet may impede further development of the Internet to the extent that users experience delays, transmission errors and other difficulties. If the necessary infrastructure, products, services or facilities are not developed, if the Internet does not become a viable and widespread commercial and communications medium or if individuals and businesses do not increase their use of mobile and wireless devices for mobile e-business, our business, financial condition and operating results could be materially adversely affected. 18 Our success depends on an increase in the demand for digital signatures in mobile e-business transactions and ECC technology becoming accepted as an industry standard For handheld devices, many of the advantages our ECC-based technology has over conventional security technology are not applicable to a transaction that does not involve the creation of a digital signature on a handheld device. The vast majority of e-business and mobile e-business transactions currently do not involve such digital signatures. Participants in mobile e-business have only recently begun to require client digital signatures in some applications, such as enterprise data access and certain high-value transactions. Unless the number of mobile e-business transactions involving client digital signatures increases, the demand for our products and services, and consequently, our business, financial condition and operating results could be materially adversely affected. To date, ECC technology has not been broadly accepted. In order for our business to be successful, ECC technology must become accepted as an industry standard, which may never happen. The technology of our principal competitor, RSA Security Inc., is and has been for the past several years, the de facto standard for security over open networks like the Internet. The patent related to this competing technology expired in September 2000, making this technology freely available. The free availability of such security technology could significantly delay or prevent the acceptance of ECC as a security standard. We must manage our growth We have experienced a period of significant growth in our sales and personnel that has placed strain upon our management systems and resources. Our sales increased from $8.1 million for the nine months ended in January 31, 2000 to $19.0 million for the nine months ended in January 31, 2001. The number of our full-time, part-time and contract employees increased from 102 at the end of fiscal 1999 to 165 at the end of fiscal 2000 and subsequently to approximately 374 as of January 31, 2001. We intend to continue to grow in the foreseeable future and to pursue existing and potential market opportunities, including acquisitions. Our growth has placed, and will continue to place, significant demands on our management and operational resources, particularly with respect to: . recruiting, training, supervising and retaining skilled marketing and management personnel in an environment where there is intense competition for skilled personnel; . developing and managing a larger, more complex international organization; . expanding our treasury and accounting functions and information systems to meet the demands of a growing company; . strengthening our financial and management controls in a manner appropriate for a larger enterprise; . expanding our facilities and other infrastructure in a timely manner to accommodate a significantly larger workforce; . maintaining and expanding a cutting edge research and development staff; . expanding our sales and marketing efforts; and . preserving our culture, values and entrepreneurial environment. Our revenue may not continue to grow at a pace that will support our planned costs and expenditures. To the extent that our revenue does not increase at a rate commensurate with these additional costs and expenditures, our results of operations and liquidity would be materially adversely affected. Our management has limited experience managing a business of our size and, in order to manage our growth effectively, we must concurrently develop more sophisticated operational systems, procedures 19 and controls. If we fail to develop these systems, procedures and controls on a timely basis, it could impede our ability to deliver products in a timely fashion and fulfill existing customer commitments and, as a result, our business, financial condition and operating results could be materially adversely affected. Acquisitions could harm our business We acquired Consensus Development Corporation and Uptronics Incorporated in fiscal year 1999, Trustpoint in fiscal year 2000 and DRG Resources Group in fiscal year 2001. We may acquire additional businesses, technologies, product lines or services in the future either in the United States or abroad. Acquisitions involve a number of risks, potentially including: . disruption to our business; . inability to integrate, train, retain and motivate key personnel of the acquired business; . diversion of our management from our day-to-day operations; . inability to incorporate acquired technologies successfully into our products and services; . additional expense associated with completing an acquisition and amortization of any acquired intangible assets; . impairment of relationships with our employees, customers and strategic partners; and . inability to maintain uniform standards, controls, procedures and policies. In addition, we may not be able to maintain the levels of operating efficiency that any acquired company achieved or might have achieved separately. Successful integration of the companies we acquire will depend upon our ability to eliminate redundancies and excess costs. As a result of difficulties associated with combining operations, we may not be able to achieve cost savings and other benefits that we might hope to achieve with these acquisitions. We may satisfy the purchase price of any future acquisitions through the issuance of our common shares, which would result in dilution to our existing shareholders. We may also incur debt or assume liabilities. We cannot assure you that we will be able to obtain any additional financing on satisfactory terms, or at all. The incurrence of indebtedness would make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures. The terms of any additional indebtedness may include restrictive financial and operating covenants, which could limit our ability to compete and expand our business. Our business strategy also includes entering into strategic investments and joint ventures with other companies. These transactions are subject to many of the same risks identified above for acquisitions. Our success depends on attracting and retaining skilled personnel Our success is largely dependent on the performance of our management team and other key employees, particularly Scott A. Vanstone, our Chief Cryptographer. Our success also depends on our ability to attract, retain and motivate qualified personnel. Most of our key technical and senior management personnel are not bound by employment agreements. Loss of the services of any of these key employees would harm our business, financial condition and operating results. We do not maintain key person life insurance policies on any of our employees. Competition for qualified personnel in the digital information security industry is intense, and finding and retaining qualified personnel in the San Francisco Bay Area and the Greater Toronto Area are difficult. We believe there are only a limited number of individuals with the requisite skills to serve in many of our key positions, and it is becoming increasingly difficult to hire and retain such persons. 20 Competitors and others have in the past and may attempt in the future to recruit our employees. A major part of our compensation to our key employees is in the form of stock option grants. A prolonged depression in our share price could make it difficult for us to retain employees and recruit additional qualified personnel. In addition, the volatility and current market price of our common shares may make it difficult to attract and retain personnel. We face risks related to our international operations We are currently in the process of expanding our international presence and operations. This expansion is expected to involve opening foreign sales offices, which may cause us to incur substantial costs. International sales and operations may be limited or disrupted by increased regulatory requirements, the imposition of government and currency controls, export license requirements, political instability, labor unrest, transportation delays and interruptions, trade restrictions, changes in tariffs and difficulties in staffing and coordinating communications among international operations. These foreign markets may require us to develop new products or modify our existing products. There can be no assurance that we will be able to manage effectively the risks associated with our international operations or that those operations will contribute positively to our business, financial condition or operating results. We must successfully complete the transition of our financial, accounting and treasury systems from Canada to the United States Our Chief Executive Officer and Chief Financial Officer are located in our Hayward, California office rather than our Mississauga, Ontario office. We are in the process of moving our internal financial, accounting and treasury functions from Mississauga to Hayward. These changes could cause significant disruption in our company and adversely affect these critical functions. If that were to occur, our business, financial condition and operating results could be materially adversely affected. We face risks related to intellectual property rights We rely on one or more of the following to protect our proprietary rights: patents, trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy and may succeed in copying aspects of our product designs, products or trademarks, or obtain and use information we regard as proprietary. Preventing the unauthorized use of our proprietary technology may be difficult in part because it may be difficult to discover such use. Stopping unauthorized use of our proprietary technology may be difficult, time-consuming and costly. In addition, the laws of some countries in which our products are licensed do not protect our products and services and related intellectual property to the same extent as the laws of Canada, the United States and countries of the European Union. While we believe that at least some of our products are covered by one or more of our patents and these patents are valid, a court may not agree if the matter is litigated. There can be no assurance that we will be successful in protecting our proprietary rights and, if we are not, our business, financial condition and operating results could be materially adversely affected. The industry in which we compete has many participants who own, or claim to own, intellectual property. We indemnify our licensees against third- party intellectual property claims based on our technology. Claims relating to intellectual property by any third-party business, individual or university, whether or not with merit, could be time-consuming to evaluate, result in costly litigation, cause shipment delays for products or the cessation of the use and sale of products or services, or require us to obtain licenses by paying license fees and/or royalties to the owners of the intellectual property. Such licensing agreements, if required, may not be available on royalty or other terms acceptable to us. Any of these situations could materially adversely affect our business, financial condition and operating results. We also currently license third party technology for use in some of our products and services. These third party technology licenses may not continue to be available on commercially reasonable terms or may not be available at all. Our business, financial condition and operating results could be materially adversely affected if we lose the right to use certain technology. 21 We are engaged in joint development projects with certain companies. One of these projects has resulted in the issuance of jointly owned patents. There is a risk that the companies with which we are working could decide not to commercialize the joint technology and that we may be unable to commercialize joint technology without their consent and/or involvement. We are a member of certain organizations which set standards. As part of the standards process, the participants are requested to file statements identifying any patents they consider to be essential to implementation of the standard. As such, we may be required to disclose and license patents that we own which are necessary for practice of the standard. Further, to provide products that are compliant with standards that have been adopted or will be adopted in the future, we may have to license patents owned by others. As a part of some standards processes, other companies have disclosed patents that they believe are required to implement those standards. We cannot assure you that we will be able to gain licenses to these patents, if needed, on terms acceptable to us. Such licensing requirements may materially adversely affect the value of our products, and, consequently, our business, financial condition and operating results. Our products could have defects which could delay their shipment, harm our reputation and increase costs Our products are highly complex and, from time to time, may contain design defects that are difficult to detect and correct. Errors, failures or bugs may be found in our products after commencement of commercial shipments. Even if these errors are discovered, we may not be able to correct such errors in a timely manner or at all. The occurrence of errors and failures in our products could result in damage to our reputation, lost revenue and the loss of, or delay in achieving, market acceptance of our products, and correcting such errors and failures in our products could require significant expenditure of capital by us. The sale and support of these products may entail the risk of product liability or warranty claims based on damage to such equipment. In addition, the failure of our products to perform to customer expectations could give rise to warranty claims. Our insurance may not cover or its coverage may be insufficient to cover any such claims successfully asserted against us, and therefore the consequences of such errors, failures and claims could have a material adverse effect on our business, financial condition and operating results. System interruptions and security breaches could harm our business We are in the process of constructing a secure data center for issuing certificates. We will depend on the uninterrupted operation of that data center. We will need to protect this center and our other systems from loss, damage or interruption caused by fire, power loss, telecommunications failure or other events beyond our control. In addition, most of our systems and the data center are located, and most of our customer information is stored, in the San Francisco Bay Area, which is susceptible to earthquakes. Any damage or failure that causes interruptions in our data center and our other computer and communications systems could materially adversely affect our business, financial condition and operating results. Our success also depends upon the scalability of our systems. Our systems have not been tested at the usage volumes that we expect will be required in the future. As a result, a substantial increase in demand for our products and services could cause interruptions in our systems. Any such interruptions could materially and adversely affect our ability to deliver our products and services and our business, financial condition and operating results. Although we intend to periodically perform, and retain accredited third parties to perform, evaluations of our operational controls, practices and procedures, we may not be able to meet or remain in compliance with our internal standards or those set by these third parties. If we fail to maintain these standards, we may have to expend significant time and money to return to compliance, and our business, financial condition and operating results could be materially adversely affected. We will retain certain confidential customer information in our planned data center. It is important to our business that our facilities and infrastructure remain secure and be perceived by the marketplace to be secure. Despite our security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, attacks by hackers or other disruptive problems. It is possible that we may have to 22 expend additional financial and other resources to address these problems. Any physical or electronic break-ins or other security breaches or compromises of the information stored at our planned data center may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability and damage to our reputation, and customers could be reluctant to use our products and services. Such an occurrence could also result in adverse publicity and adversely affect the market's perception of our products and services, which could materially adversely affect our business, financial condition and operating results. We must continue to develop and maintain strategic and other relationships One of our business strategies has been to enter into strategic or other collaborative relationships with many of our OEM customers to develop new technologies and leverage their sales and marketing organizations. We may need to enter into additional relationships to execute our business plan. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms. As a result, we may have to devote substantially more resources to the development of new technology and the distribution, sales and marketing of our security products and services than we would otherwise. The failure of one or more of our strategic relationships could materially adversely affect our business, financial condition and operating results. We have only recently begun to sell directly to enterprise customers We have recently started to expand our sales efforts to encompass sales of certain products directly to enterprises other than OEMs. The expansion of our direct sales efforts will require that we attract, hire, train, manage and adequately compensate a larger group of professionals. We cannot assure you that we will be successful in expanding and managing our sales effort or that the revenues produced by our direct sales will offset our increased expenses. These non-OEM, or enterprise, customers will require different products, support services and integration services than our existing OEM customer base. We cannot assure you that we will be successful in developing the products and services necessary to serve this new customer base. We compete with some of our customers We regularly license some of our products to customers who compete with us in other product categories. For example, we license our Security Builder(R) cryptographic toolkit to Baltimore Technologies for incorporation into their UniCERT(TM) product, which competes with our Trustpoint(TM) product line. This potential conflict may deter existing and potential future customers from licensing some of our component products, most notably our Security Builder(R) cryptographic toolkit. We expect to compete with a greater number of our customers as we further expand our product line. Our share price has been, and will likely continue to be, volatile The market price of our common shares has declined significantly in recent months, and we expect that the market price of our common shares may fluctuate substantially as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our common shares is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common shares may fall dramatically in response to a variety of factors, including: . announcements of technological or competitive developments; . acquisitions or entry into strategic alliances by us or our competitors; . the gain or loss of a significant customer or strategic relationship; . changes in estimates of our financial performance; 23 . changes in recommendations from securities analysts regarding us, our industry or our customers' industries; and . general market or economic conditions. This risk may be heightened because our industry is new and evolving, is characterized by rapid technological change and is susceptible to the introduction of new competing technologies or competitors. In addition, equity securities of many technology companies have experienced significant price and volume fluctuations. These price and volume fluctuations are sometimes unrelated to the operating performance of the affected companies. Volatility in the market price of our common shares could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs to us and a diversion of our management's attention and resources. We have limited financial resources and may require additional financing that may not be available We may require additional equity or debt financing in the future. There can be no assurance that we will be able to obtain on satisfactory terms, or at all, the additional financing required to compete successfully. Failure to obtain such financing could result in the delay or abandonment of some or all of our business plans, which could have a material adverse effect on our business, financial condition and operating results. Risks Related to Our Industry Public key cryptographic technology is subject to risks Our products and services are largely based on public key cryptographic technology. With public key cryptographic technology, a user has both a public key and a private key. The security afforded by this technology depends on the integrity of a user's private key and on it not being stolen or otherwise compromised. The integrity of private keys also depends in part on the application of certain mathematical principles such as factoring and elliptic curve discrete logarithms. This integrity is predicated on the assumption that solving problems based on these principles is difficult. Should a relatively easy solution to these problems be developed, then the security of encryption products using public key cryptographic technology could be reduced or eliminated. Furthermore, any significant advance in techniques for attacking cryptographic systems could also render some or all of our products and services obsolete or unmarketable. Even if no breakthroughs in methods of attacking cryptographic systems are made, factoring problems or elliptic curve discrete logarithm problems can theoretically be solved by computer systems that are significantly faster and more powerful than those currently available. In the past, there have been public announcements of the successful decoding of certain cryptographic messages and of the potential misappropriation of private keys. Such publicity could also adversely affect the public perception as to the safety of public key cryptographic technology. Furthermore, an actual or perceived breach of security at one of our customers, whether or not due to our products, could result in adverse publicity for us and damage to our reputation. Such adverse public perception or any of these other risks, if they actually occur, could materially adversely affect our business, financial condition and operating results. Our future success will depend upon our ability to anticipate and keep pace with technological changes The information security industry is characterized by rapid technological change. Technological innovation in the marketplace, such as in the areas of mobile processing power or wireless bandwidth, or the development of new cryptographic algorithms, may reduce the comparative benefits of our products and could materially adversely affect our business, financial condition and operating results. Our inability, for technological or other reasons, to enhance, develop and introduce products in a timely manner in response to changing market conditions, industrial standards, customer requirements or competitive offerings could result in our products becoming obsolete, or could otherwise have a material adverse effect on our business, financial condition and operating results. Our ability to compete successfully will depend in large measure on our ability to maintain a technically competent research and development staff and to 24 adapt to technological changes and advances in the industry, including providing for the continued compatibility of our products with evolving industry standards and protocols. We face significant competition which could harm our ability to maintain or increase sales of our products or reduce the prices we can charge for our products We operate in a highly competitive industry. Many of our competitors have greater name recognition, larger customer bases and significantly greater financial, technical, marketing, public relations, sales, distribution and other resources than we do. We anticipate that the quality, functionality and breadth of our competitors' product offerings will improve, and there can be no assurance that we will be able to compete effectively with such product offerings. In addition, we could be materially adversely affected if there were a significant movement towards the acceptance of open source solutions or other alternative technologies that compete with our products. We expect that additional competition will develop, both from existing businesses in the information security industry and from new entrants, as demand for information products and services expands and as the market for these products and services becomes more established. Moreover, as competition increases, the prices that we charge for our products may decline. If we are not able to compete successfully, our business, financial condition and operating results could be materially adversely effected. Our most significant direct competitors include RSA Security, VeriSign, Inc., Baltimore Technologies plc and Entrust Technologies Inc. Our business could be adversely affected by United States and foreign government regulation The information security industry is governed by regulations that could have a material adverse effect on our business. The export of cryptographic equipment and software, including many of our products, is regulated by both the U.S. and Canadian governments. It is also possible that laws could be enacted covering issues such as user privacy, pricing, content and quality of products and services in these markets. Such regulations and laws could cause us to compromise our source code protection, minimize our intellectual property protection, negatively impact our plans for global expansion and consequently materially adversely effect our business. Risks Related to Our Corporate Charter; Limitations on Dividends The anti-takeover effect of certain of our charter provisions could delay or prevent our being acquired Our authorized capital consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in one or more series. Although we currently do not have outstanding any preferred shares, our board of directors has the authority to issue preferred shares and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of these shares without any further vote or action by shareholders. The rights of the holders of common shares will be subject to, and may be adversely affected by, the rights of holders of any preferred shares that may be issued in the future. The issuance of preferred shares, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, or the issuance of additional common shares could make it more difficult for a third party to acquire a majority of our outstanding voting shares. This could deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of our company. Our shareholder rights plan could delay or prevent our being acquired We have adopted a shareholder rights plan. The provisions of this plan could make it more difficult for a third party to acquire a majority of our outstanding voting shares, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of our company. We do not currently intend to pay any cash dividends on our common shares in the foreseeable future. We have never paid or declared any cash dividends on our common shares and we currently intend 25 to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common shares in the foreseeable future. In addition, any dividends paid to residents of the United States would be subject to Canadian withholding tax, generally at the rate of 15%. Item 3. Quantitative and Qualitative Disclosures about Market Risk Foreign Exchange Risk Currency fluctuations may materially adversely affect us. For the three months ended January 31, 2001, 29.0% of our operating expenses were paid in currencies other than the U.S. dollars. For the nine months ended January 31, 2001, 28.7% of our operating expenses were paid in currencies other than the U.S. dollar. Fluctuations in the exchange rate between the U.S. dollar and such other currencies may have a material adverse effect on our business, financial condition and operating results. In particular, we may be materially adversely affected by a significant strengthening of the Canadian dollar against the U.S. dollar. Interest Rate Risk We hold a significant portion of our cash in interest-bearing instruments and are exposed to the risk of changing interest rates and their effect on future earnings. Generally, if interest rates decrease, our interest income would also decrease. We do not use any derivative instruments to reduce our exposure to interest rate fluctuations. PART II. OTHER INFORMATION Item 1. Legal Proceedings The nature of our business subjects us to numerous regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of our business. The results of these legal proceedings cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on our results of operations in any future period, depending partly on the results for that period, and a substantial judgement could have a material adverse impact on our financial condition. However, it is the opinion of management, after consultation with our legal counsel, that we are currently not subject to any material litigation. We have received a letter on behalf of Carnegie Mellon University asserting that it owns the trademark "CERT", and that it believes our use of the stock symbol "CERT" will cause confusion with and/or dilute its purported trademark. Although we intend to defend our use of the stock symbol "CERT" vigorously, there can be no assurance that we will be successful in doing so, or that this dispute with the University will not have a material adverse impact on us. We have also received a letter on behalf of Geoworks Corporation. Asserting that it holds a patent on certain aspects of technology which are part of the WAP standard. Our WTLS Plus(TM) toolkit may be used to implement WAP- compliant technology. After an internal investigation based upon the description provided by Geoworks of its purportedly patented technology, it is our belief that our toolkits do not include implementation of the Geoworks technology. We have also become aware of a letter circulated on behalf of a Mr. Bruce Dickens asserting that he holds a patent on certain aspects of technology that are implemented within certain aspects of the SSL standard. After an internal investigation, it is our belief that we do not implement any validly patented technology. We recently received a letter on behalf of eSignX Corporation drawing our attention to a patent which it purports to hold on certain aspects of technology related to the use of WAP enabled portable electronic authorization devices for approving transactions. The letter states that, based upon a review of a press release announcing our Trustpoint PKI product, that product may be covered by eSignX's patent. We are currently conducting an internal investigation to determine whether our products include implementations of eSignX's technology. Although we intend to 26 vigorously defend any litigation that may arise in connection with these matters, there can be no assurance that we will be successful in doing so, or that such disputes will not have a material adverse impact on us. In addition, we recently became aware of a lawsuit commenced by Mr. Leon Stambler against one of our customers and certain other parties asserting that Mr. Stambler holds patents on certain aspects of technology related to online transactions. Although we have not been named in this legal action, under the terms of the license agreement we have entered into with this customer, we have agreed to defend our customer against any claim that our licensed product, when used within the scope of the license agreement, infringes any U.S. or Canadian patent and to indemnify the customer in certain circumstances for related costs and expenses it incurs as a result of such a claim. We had previously reviewed the Stambler patent and prepared documentation indicating a possible prior use of the subject matter purportedly claimed in the referenced patent. We are currently investigating the scope of protection afforded by the claims detailed in the complaint and effect, if any, of these claims on the products supplied by Certicom. There can be no assurance that such asserted patent will not have a material adverse impact on us. 27 Item 6. Exhibits and Reports on Form 8-K (a) Index to Exhibits Exhibit Number Description -------------- ------------------------------------------- 10.1 Amended 1997 Stock Option Plan 10.2 Amended 2000 United States Stock Plan (b) Reports on Form 8-K None 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 16th day of March, 20001. Certicom Corp. By: /s/ Richard P. Dalmazzi ----------------------- Richard P. Dalmazzi President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard D. Brounstein ------------------------- Richard D. Brounstein Senior Vice President, Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 29 EX-10.1 2 0002.txt AMENDED 1997 STOCK OPTION PLAN EXHIBIT 10.1 CERTICOM CORP. 1997 STOCK OPTION PLAN (AS AMENDED AS OF OCTOBER 19, 2000) 1. Purpose of the Plan The purpose of the Plan is to encourage directors, officers and employees of Certicom Corp. (the "Corporation") or any of its subsidiaries and other persons: (a) to promote the interests, growth and development of the Corporation by providing them with the opportunity through share options to acquire a proprietary interest in the Corporation; (b) to recognize the contribution of such directors, officers, employees and other persons; and (c) to encourage such directors, officers, employees and other persons to acquire Common Shares of the Corporation. 2. Definitions In this Plan: (a) "Associate" has the meaning assigned by the Securities Act (Ontario), as amended from time to time; (b) "Board of Directors" means the board of directors of the Corporation; (c) "Committee" means a committee appointed by the Board of Directors and consisting of not less than three members of the Board of Directors to administer the Plan. All references in the Plan to the Committee means the Board of Directors if no Committee has been appointed; (d) "Common Shares" means the Common Shares of the Corporation or, in the event of an adjustment contemplated in Section 9 hereof, such other securities to which an Eligible Person may be entitled upon the exercise of an Option as a result of such adjustment; (e) "Date of Grant" means the date an Eligible Person is granted an Option; (f) "Director" means a person occupying the position of director on the Board of Directors; (g) "Eligible Persons" means any Director or Employee or any other person or corporation approved by the Committee; (h) "Employee" means an employee of the Corporation or its subsidiaries; (i) "Exchange" means The Toronto Stock Exchange or, if the Common Shares are not then listed and posted for trading on The Toronto Stock Exchange, on such stock exchange on which such shares are listed and posted for trading as may be selected for such purpose by the Committee; (j) "Exercise Date" means the date the Corporation receives from the Eligible Person a completed Stock Option Purchase Form with payment for the Option Shares being purchased; (k) "Insider" means: (i) an insider of the Corporation as defined by the Securities Act (Ontario) as amended from time to time, other than a person who falls within such definition solely by virtue of being a director or senior officer of a subsidiary of the Corporation; and (ii) an Associate of any person who is an Insider by virtue of clause (i) of this definition; (l) "Market Price" per Common Share at any date shall be the closing price of the Common Shares on the Exchange (or, if the Common Shares are not then listed and posted for trading on the Exchange, on such stock exchange on which such shares are listed and posted for trading as may be selected for such purpose by the Committee) on the trading day immediately preceding the Date of Grant. In the event that the Common Shares are not listed and posted for trading on any stock exchange, the Market Price shall be determined by the Committee in its sole discretion; (m) "Option" means the right granted by the Corporation pursuant to the Plan to purchase Common Shares; (n) "Option Period" means the period set forth in Section 6 during which an Eligible Person may purchase Option Shares; (o) "Option Price" means the price per share at which an Eligible Person may purchase Option Shares"; (p) "Option Shares" means the Common Shares of the Corporation which an Eligible Person is entitled to purchase pursuant to an Option; (q) "Outstanding Issue" means the number of Common Shares that are outstanding immediately prior to any issuance of Options under the Plan or any issuance of Option Shares, as the case may be, excluding Option Shares issued pursuant to the Plan and all other plans or stock option agreements to which the Corporation may be a party during the preceding one year period; (r) "Participants" means Eligible Persons to whom Options are granted pursuant to the Plan and which remain unexercised; and (s) "Plan" means this Certicom Corp. 1997 Stock Option Plan. 3. Administration (a) The Plan shall be administered by the Committee. The members of the Committee shall serve at the pleasure of the Board and vacancies occurring in the Committee shall be filled by the Board. (b) A majority of the members of the Committee shall constitute a quorum and all actions of the Committee shall be taken by a majority of the members present at any meeting. Any action of the Committee may be taken by an instrument or instruments in writing signed by all the members of the Committee, and any actions so taken shall be as effective as if it had been passed by a majority of the votes cast by the members of the Committee present at a meeting of such members duly called and held. (c) The Committee shall have the power, where consistent with the general purpose and intent of the Plan and subject to the specific provisions of the Plan: (i) to establish policies and to adopt rules and regulations for carrying out the purposes, provisions and administration of the Plan; (ii) to interpret and construe the Plan and to determine all questions arising out of the Plan and any Option granted pursuant to the Plan, and any such interpretation, construction or termination made by the Committee shall be final, binding and conclusive for all purposes; (iii) to determine to which Eligible Persons Options are to be granted and to grant Options; (iv) to determine the number of Common Shares covered by each Option; (v) to determine the Option Price; (vi) to determine the time or times when Options will be granted and exercisable; (vii) to determine if the Common Shares that are subject to an Option will be subject to any restrictions upon the exercise of such Option; and (viii) to prescribe the form of the instruments relating to the grant, exercise and other terms of Option Shares. 4. Number of Option Shares The aggregate number of Option Shares which may be issued hereunder shall not exceed 8,000,000. Option Shares in respect of which Options are not exercised prior to expiry in accordance with the terms of the Plan shall be available for subsequent grants of Options under the Plan. The following restrictions shall also apply to the Plan and to all other plans or stock option agreements to which the Company may be a party: (i) no Participant together with such Participant's Associates shall be issued, within any one year period, a number of Option Shares which exceeds 5% of the Outstanding Issue; and (ii) the number of Option Shares reserved for issuance pursuant to Options to any one Participant shall not exceed 5% of the Outstanding Issue; 5. Price for Option Shares The Committee shall advise each Participant designated to participate in the Plan of the number of Option Shares such Participant is entitled to purchase and the Option Price at which the Option Shares may be purchased and the Option Period. The Option Price at which the Option Shares may be purchased under the Plan shall be fixed by the Committee based upon the Market Price of the Common Shares at the Date of the Grant. 6. Vesting (a) The limitation period or periods and the vesting period or periods during which Options or a portion thereof vests and may be exercised by the Participant shall be determined by the Committee and be consistent with the provisions of the Plan provided, however, the limitation period or periods for exercise and the vesting period or periods may not exceed 10 years from the date of the granting of Options. (b) If no specific determination is made by the Committee with respect to any of the following matters, each Option shall, subject to any other specific provisions of the Plan, contain the following terms and conditions: (i) the period during which an Option shall be exercisable shall be 5 years from the date the Option is granted to the Eligible Person; and (ii) the Participant may not take up and pay for any of the Common Shares covered by the Option until the expiry of a 12-month period following the date of the grant of the Option, and thereafter, the Participant shall be entitled to take up and pay for not more than 25% of the Common Shares covered by the Option immediately following the expiry of such 12-month period following the date of the grant of the Option, and a further 2.083333% of the Shares covered by the Option following the expiry of each one-month period following the expiry of such 12-month period from the date of the grant of the Option; provided, however, the Participant shall have the right, at any time or from time to time during the remainder of the term of the Option, to purchase such number of Common Shares subject to the Option that were purchasable, but not purchased by him, during any period. 7. Payment The Participant from time to time at any time during the Option Period, may elect to purchase all or a portion of the Option Shares available for purchase during the relevant Option Period by lump sum payment by delivering to the Corporation at its registered office, a notice in writing which shall specify the number of Option Shares the Participant desires to purchase and shall be accompanied by payment in full of the purchase price for such Option Shares. Payment can be made by cash, certified cheque, bank draft, money order or the equivalent payable to the order of Certicom Corp. 8. Certificates (a) Each Option granted hereunder shall be evidenced by a certificate, substantially in the form of Schedule "A", issued by the Corporation to each Participant specifying the number of Option Shares, the Option Price and the Option Period. (b) Upon exercise of an Option and payment in full of the purchase price the Corporation shall cause to be delivered to the Participant within a reasonable period of time a certificate or certificates in the name of the Participant representing the number of Option Shares the Participant has purchased. 9. Adjustment in Common Shares (a) The number of Common Shares subject to the Plan, the number of Common Shares available under Options granted and the Option Price shall be adjusted automatically from time to time to reflect adjustments in the number of Common Shares arising as a result of subdivisions, stock dividends, consolidations or reclassifications of the Common Shares or other relevant changes in the authorized or issued capital of the Corporation. No fractional Common Shares may be purchased or issued hereunder. If a Participant is entitled to purchase a fraction of a Common Share pursuant to an Option, such entitlement shall be rounded down to the nearest whole number. (b) In the case of a proposed merger or amalgamation of the Corporation with one or more other corporations, the making of a take-over bid (as defined in the Securities Act (Ontario)) for any of the outstanding Common Shares, the sale or distribution of all or substantially all of the Corporation's assets or a proposed corporate arrangement or reorganization, the Board of Directors may, in its absolute discretion, determine the manner in which all unexercised Options granted under the Plan shall be treated including, notwithstanding Section 16 hereof, changing the Option Period. 10. Termination (a) Subject to the provisions of Section 10(d) hereof, in the event that an Employee's employment with the Corporation or any of its subsidiaries is terminated during the Option Period or a Director shall cease to be a Director for any reason other than death or cause, the Participant may elect to purchase all or a portion of the remaining Option Shares that have vested at the time such employment is terminated or of ceasing to be a Director at any time during the 90-day period following the date of termination of employment or ceasing to be a director (but in no event, after the expiration of the Option Period). For the purposes of the Plan, the transfer of the Employee's employment to the Corporation or to any subsidiary of the Corporation shall not be considered a termination of employment and the Employee's rights under the Option shall be the same as if such transfer had not occurred. (b) Subject to the provisions of Section 10(d) hereof, in the event of the termination of the relationship of a Participant with the Corporation or any of its subsidiaries for cause prior to the expiry of all outstanding Options granted to such Participant, all such Options shall terminate forthwith without further notice to the Participant. (c) Subject to the provisions of Section 10(d) hereof, in the event the Participant dies during the Option Period, the Participant's legal representative will be permitted to exercise any previously unexercised portion of an Option granted under the Plan prior to the Participant's death and take delivery of all Option Shares previously purchased but not delivered, at any time during the 180 day period following the death of the Participant (but in no event after the expiration of the Option Period). (d) At any time before or after the relevant period set forth in Sections 10(a), (b) or (c), the Committee may extend such period as it applies to any former Participant, to a date which shall not be later than the expiration of the Option Period. 11. Transfer and Assignment The Participant's rights under Options granted under the Plan are not assignable or transferable by the Participant or subject to any other alienation, sale, pledge or encumbrance by such Participant during the Participant's lifetime and therefore the Options are exercisable during the Participant's lifetime only by the Participant. The obligations of each Participant shall be binding on his or her heirs, executors and administrators. 12. Employment and Board Position Non-Contractual The granting of an Option to a Participant under the Plan does not confer upon the Participant any right to continue in the employment of the Corporation or any subsidiary of the Corporation or on the Board of Directors, as the case may be, nor does it interfere in any way with the right of the Participant or the Corporation to terminate the Participant's employment at any time or shareholders right to elect directors. 13. Rights as Shareholders The Participant shall not have any rights as a shareholder with respect to Option Shares until full payment has been made to the Corporation and a share certificate or share certificates have been duly issued. 14. Notices All written notices to be given by the Participant to the Corporation may be delivered personally or by registered mail, postage prepaid, addressed as follows: Certicom Corp. 25801 Industrial Boulevard Hayward, California U.S.A. 94545 Attention: Secretary Any notice given by the Participant pursuant to the terms of the Option shall not be effective until actually received by the Corporation at the above address. Any notice to be given to the Participant shall be sufficiently given if delivered personally or by postage prepaid mail to the last address of the Participant on the records of the Corporation and shall be effective seven days after mailing. 15. Corporate Action Nothing contained in the Plan or in the Option shall be construed so as to prevent the Corporation or any subsidiary of the Corporation from taking corporate action which is deemed by the Corporation or the subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan. 16. Amendments The Board of Directors shall have the right, in its sole discretion, to alter, amend or discontinue the Plan from time to time and at any time. No such amendment or discontinuation, however, may, without the consent of the Participant, alter or impair his rights or increase his obligations under the Plan. Any amendment to the Plan will require the prior approval of the Exchange and may require the approval of the Corporation's shareholders. 17. Termination of Plan Except as otherwise provided herein, options may be granted only within the ten-year period from the date the Plan has been adopted by the Board of Directors of the Corporation. 18. Governing Law The Plan is established under the laws of the Province of Ontario and the rights of all parties and the construction and effect of each provision of the Plan shall be according to the laws of the Province of Ontario and the laws of Canada applicable therein. 19. Government Regulations The Corporation's obligation to issue and deliver Common Shares under any Option is subject to: (a) the satisfaction of all requirements under applicable securities law in respect thereof and obtaining all regulatory approvals as the Corporation shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof; (b) the admission of such Common Shares to listing on any stock exchange on which Common Shares may then be listed; and (c) the receipt from the Participant of such representations, agreements and undertakings as to future dealings in such Common Shares as the Corporation determines to be necessary or advisable in order to safeguard against the violation of the securities law of any jurisdiction. In this connection, the Corporation shall take all reasonable steps to obtain such approvals and registrations as may be necessary for the issuance of such Common Shares in compliance with applicable securities law and for the listing of such Common Shares on any stock exchange on which such Common Shares are then listed. 20. Approvals (a) The Plan shall be subject to acceptance by the Exchange and compliance with all conditions imposed by the Exchange. Any Options granted prior to such acceptance shall be conditional upon such acceptance being given and any conditions complied with and no such Options may be exercised unless such acceptance is given and such conditions are complied with. (b) The Plan shall also be subject to the approval of the shareholders of the Corporation. Any Options granted prior to such approval shall be conditional upon such approval being given and no such Options may be exercised unless and until such approval is given. SCHEDULE "A" ------------ CERTIFICATE Date of Grant: . Certificate No.: . This Certificate is issued to . (the "Participant") pursuant to the 1997 Stock Option Plan of Certicom Corp. (the "Plan"). This Certificate evidences an option to purchase . Common Shares of Certicom Corp. for the Option Price of $. per Optioned Share. The Option evidenced hereby expires on .. The rights, privileges and obligations of the Participant under this Option are subject to the provisions of the Plan. CERTICOM CORP. By: _______________________________ c/s Name: Title: EX-10.2 3 0003.txt AMENDED 2000 UNITED STATES STOCK PLAN Exhibit 10.2 CERTICOM CORP. 2000 UNITED STATES STOCK PLAN (AS AMENDED AS OF OCTOBER 19, 2000) 1. Adoption and Purpose of the Plan This stock plan, to be known as the Certicom Corp. 2000 United States Stock Plan (but referred to herein as the "Plan"), has been adopted by the board of directors (the "Board") of Certicom Corp., a corporation incorporated in the Yukon Territory (the "Company"), and is subject to the approval of its shareholders pursuant to Section 15. The purpose of the Plan is to encourage Directors, Officers, Employees and Consultants of the Company or any of its Subsidiaries who are residents of the United States: (a) to promote the interests, growth and development of the Company by providing them with the opportunity through options (the "Options") for Shares (the "Option Shares") to acquire a proprietary interest in the Company; (b) to recognize the contribution of such Directors, Officers, Employees and other persons; and (c) to encourage such Directors, Officers, Employees and other persons to acquire Shares of the Company through the grant of Options and Stock Purchase Rights. Options granted hereunder may be either ISOs or Nonstatutory Stock Options and Shares may be sold to Employees or Consultants pursuant to Stock Purchase Rights hereunder, at the discretion of the Administrator and as reflected in the terms of a written Option Agreement or a Restricted Stock Purchase Agreement, as applicable. 2. Certain Definitions The defined terms set forth in Exhibit A attached hereto and incorporated herein (together with other capitalized terms defined elsewhere in the Plan) will govern the interpretation of the Plan. 3. Eligibility The Company may grant Options and Stock Purchase Rights under the Plan only to (a) persons who, at the time of such grant, are Directors, Officers and Employees of the Company and/or any of its Subsidiaries and (b) Consultants of the Company (collectively, "Eligible Participants"); provided that, no grant of Options or Stock Purchase Rights may be made to any person who is not a United States resident on the date such Options or Stock Purchase Rights are approved for grant by the Administrator. No person will be an Eligible Participant following his or her Termination of Eligibility Status and no Option or Stock Purchase Right may be granted to any person other than an Eligible Participant. A person who has been granted an Option or Stock Purchase Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. 4. Shares Subject to the Plan (a) Subject to the provisions of Section 16, the maximum aggregate number of Shares that may be optioned and/or sold under the Plan is 3,000,000. If any Option or Stock Purchase Right shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the Shares not purchased under such Option or Stock Purchase Right shall revert to again become available for issuance under the Plan. The following restrictions shall also collectively apply to the Plan and to all other plans or stock option agreements, including the 1997 Stock Option Plan, to which the Company may be a party: (i) no Participant together with such Participant's Associates shall be issued, within any one-year period, a number of Option Shares under all such plans and agreements which exceeds 5% of the Outstanding Issue. (ii) the number of Option Shares under all such plans and agreements reserved for issuance pursuant to Options under all such plans and agreements to any one Participant shall not exceed 5% of the Outstanding Issue. (b) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 5. Administration (a) The Plan will be administered and interpreted by the Board, or by a Committee appointed by the Board for such purpose in accordance with Section 5(c) (the Board, or such Committee, referred to herein as the "Administrator"). A majority of the members of the Board, or a Committee if so appointed, shall constitute a quorum and all actions of the Board or Committee shall be taken by a majority of the members present at any meeting. Any action of the Board, or a Committee, may be taken by an instrument or instruments in writing signed by all the members of the Board, or a Committee, and any actions so taken shall be as effective as if it had been passed by a majority of the votes cast by the members of the Board, or a Committee, present at a meeting of such members duly called and held. (b) Subject to the express terms and conditions hereof, the Administrator is authorized to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for its administration and interpretation. Specifically, the Administrator will have full and final authority in its discretion, subject to the specific limitations on that discretion as are set forth herein and in the organic instruments of the Company, at any time: (i) to select and approve the Eligible Participants to whom Options will be granted from time to time hereunder. (ii) to grant Stock Purchase Rights; to determine the price per share and the method of payment for any Shares to be sold pursuant to a Stock Purchase Right; to determine the Eligible Participants to whom and the time or times at which Shares may be sold under Stock Purchase Rights; and to determine the number of Shares to be sold and all additional terms of the Restricted Stock Purchase Agreement. (iii) with respect to each Option it decides to grant, to determine the terms and conditions of that Option to be set forth in the Option Agreement evidencing that Option (the form of which also being subject to approval by the Administrator), which may vary from the "default" terms and conditions set forth in Section 9, except to the extent otherwise provided in the Plan, including, without limitation, as follows: (A) the total number of Option Shares that may be acquired by the Optionee pursuant to the Option; (B) if the Option satisfies the conditions under Section 422(b) of the Code, whether the Option will be treated as an ISO; (C) the per share purchase price to be paid and the method of payment to the Company by the Optionee to acquire the Option Shares issuable upon exercise of the Option (the "Option Price"), provided that the Option Price will not be less than the Market Value of the Shares as of the Grant Date, unless the Optionee is a 10% shareholder, in which case the Option Price will not be less than 110% of such Market Value; (D) the maximum period or term during which the Option will be exercisable (the "Option Term"), provided that in no event may the Option Term be longer than 10 years from the Grant Date; (E) the maximum period following any Termination of Eligibility Status, whether resulting from an Optionee's death, disability or any other reason, during which period (the "Grace Period") the Option will be exercisable, subject to Vesting and to the expiration of the Option Term, provided that in no event may the Administrator designate a Grace Period that is shorter than six months after such Termination of Eligibility Status by reason of the Optionee's death or disability or 30 days after such Termination of Eligibility for any other reason, except in the event of a Termination for Cause, in which case no Grace Period will be required (i.e., the Option will terminate immediately); (F) the conditions (e.g., the passage of time or the occurrence of events), if any, that must be satisfied prior to the vesting of the right to exercise all or specified portions of an Option (such portions being described as the number of Option Shares or the percentage of the total number of Option Shares that may be acquired by the Optionee pursuant to the Option; the vested portion being referred to as a "Vested Option" and the unvested portion being referred to as an "Unvested Option"); and (G) to prescribe the form of the instruments relating to the grant, exercise and other terms of Option Shares and the persons to receive Option Shares. (iv) to delegate all or a portion of the Administrator's authority under this Section 5 to one or more members of the Board who also are executive officers of the Company, subject to such restrictions and limitations as the Administrator may decide to impose on such delegation. (v) The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board. In the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Code Section 162(m), or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in the Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Within the scope of this authority, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options and Stock Purchase Rights to eligible persons who (i) are not then subject to Section 16 of the Exchange Act and/or (ii) are either (A) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Option or (B) not persons with respect to whom the Company wished to comply with Section 162(m) of the Code. 6. Stock Purchase Rights (a) Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 16 of the Plan. 7. Payment The Participant from time to time may elect to purchase all or a portion of the Option Shares available for purchasing during the relevant Option Period or the Shares which he or she is eligible to purchase pursuant to a Stock Purchase Right by lump sum payment by delivering to the Company at its corporate office in the United States, a notice in writing which shall specify the number of Option Shares or Shares the Participant desires to purchase and shall be accompanied by payment in full of the purchase price of such Option Shares or Shares. Payment can be made by (a) cash, certified check, bank draft, money order or the equivalent in U.S. dollars payable to the order of Certicom Corp; (b) delivery of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender and (ii) have a Market Value on the date of surrender equal to the aggregate Option Price of the Shares as to which said Option shall be exercised; or (c) such other consideration approved by the Administrator. 8. Buyout Provisions The Administrator may at any time offer to buy out for a payment in cash or Shares an Option or Stock Purchase Right previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Participant at the time that such offer is made. 9. Default Terms and Conditions of Option Agreements Unless otherwise expressly provided in an Option Agreement based on the Administrator's determination pursuant to Section 5, the following terms and conditions will be deemed to apply to each Option as if expressly set forth in the Option Agreement: 9.1 ISO. If granted to an Eligible Participant who, as of the Grant Date, is an Employee of the Company or any Subsidiary, and expressly designated as an ISO, the Option will be an ISO, subject to the following additional terms and conditions: (a) The Market Value of Option Shares (determined as of the Grant Date) with respect to which all ISOs are exercisable for the first time by any individual during any calendar year (pursuant to the Plan and all other plans of the Company and/or its Subsidiaries) cannot exceed $100,000. (b) The Option Price will not be less than 100% of the Market Value of the Shares as of the Grant Date, except that if the Optionee is a 10% shareholder the Option Price will not be less than 110% of the Market Value of the Shares as of the Grant Date, and the Option Term may not be more than 5 years. (c) Notwithstanding any Grace Period selected by the Administrator pursuant to Section 5(b)(iii)(E) above, or the default provisions of Section 9.3 below, the tax treatment available pursuant to Section 422 of the Code upon the exercise of the ISO will not be available to an Optionee who exercises the Option more than (i) three months following the Optionee's Termination of Eligibility Status other than by reason of his or her death or permanent and total disability (within the meaning of Section 22(e)(3) of the Code), or (ii) 12 months following such Optionee's Termination of Eligibility Status by reason or his or her permanent and total disability. 9.2 Option Term. The Option Term will be for a period of 5 years beginning on the Grant Date. In the case of an ISO granted to a 10% shareholder, the Option Term will not exceed a period of 5 years beginning on the Grant Date. 9.3 Grace Periods. Following a Termination of Eligibility Status, the Vesting in respect of Options held by that Participant shall immediately cease but: (a) the Grace Period will be ninety (90) days, unless the Termination of Eligibility Status is a result of a Termination for Cause or the death or disability of the Optionee; (b) the Grace Period will be one hundred eighty (180) days if the Termination of Eligibility Status is a result of the death or disability of the Optionee; (c) the Option will terminate, and there will be no Grace Period, effective immediately as of the date and time of a Termination for Cause of the Optionee, regardless of whether the Option is Vested or Unvested; and (d) to the extent permitted by the Code at any time before or after the expiration of the Grace Period set forth in Sections 9.3(a), 9.3(b) and 9.3(c), the Administrator may extend such period as it applies to any Participant to a date which is not later than the expiration of the term of such Options. 9.4 Vesting. The Option initially will be deemed an entirely Unvested Option, but portions of the Option will vest and become a Vested Option ("Vesting") on the following schedule: 25% of the Option Shares shall vest on the first anniversary of the Grant Date of the Option and thereafter a further 2.083333% of the Shares covered by the Option following the expiration of each one-month period following the expiration of the initial 12-month period from the Grant Date; provided that the Optionee does not suffer a Termination of Eligibility Status prior to each such vesting date and provided further that additional vesting will be suspended during any period while the Optionee is on a leave of absence from the Company or its Subsidiaries, as determined by the Administrator. 9.5 Exercise of the Option; Issuance of Shares. (a) The portion of the Option that is an Unvested Option may not be exercised. The portion of the Option that is a Vested Option may be exercised by giving written notice thereof to the Company, on such form as may be specified by the Administrator, but in any event stating: the Optionee's intention to exercise the Option; the date of exercise; the number of full Option Shares to be purchased; the amount and form of payment of the Option Price; and such assurances of the Optionee's investment intent as the Company may require to ensure that the transaction complies in all respects with the requirements of the 1933 Act and other applicable securities laws. The notice of exercise will be signed by the person or persons exercising the Option. In the event that the Option is being exercised by the representative of the Optionee, the notice will be accompanied by proof satisfactory to the Company of the representative's right to exercise the Option. The notice of exercise will be accompanied by full payment of the Option Price for the number of Option Shares in the manner set forth in Section 7. (b) To the extent required by applicable United States federal, state, local or Canadian law, and as a condition to the Company's obligation to issue any Shares upon the exercise of the Option in full, the Optionee will make arrangements satisfactory to the Company for the payment of any applicable Tax Withholding Liability that may arise by reason of or in connection with the exercise, sale or repurchase of Options or Option Shares. Such arrangements may include, in the Company's sole discretion, that the Optionee tender to the Company the amount of such Tax Withholding Liability, in a manner set forth in Section 7 of the Plan. (c) After receiving a proper notice of exercise and payment of the applicable Option Price and Tax Withholding Liability, the Company will cause to be issued the Option Shares as to which the Option has been exercised. 10. Compliance with Law Notwithstanding any other provision of the Plan, Options and Stock Purchase Rights may be granted pursuant to the Plan, and Option Shares and Shares may be issued pursuant to the exercise thereof by an Optionee or grantee, only after and on the condition that there has been compliance with all applicable United States federal and state securities laws, applicable Canadian and provincial laws and, to the extent applicable, all applicable rules and regulations of all stock exchanges or quotation systems on which the Shares are listed or posted for trading (together "Applicable Laws"). The Company's obligation to issue and deliver Shares under any Option or Stock Purchase Right or to sell any Shares is subject to: (a) the satisfaction of all requirements under Applicable Laws in respect thereof and obtaining all regulatory approvals as the Company shall determine to be necessary or advisable in connection with the authorization, issuance and sale thereof; (b) the admission of such Shares to listing on the Nasdaq National Market; and (c) the registration of the Plan and the Shares to be issued pursuant to the Plan with the United States Securities and Exchange Commission on a Form S-8 Registration Statement under the 1933 Act, or any successor form thereto. In this connection, the Company shall take all reasonable steps to obtain such approvals and registrations as may be necessary for the issuance of such Shares in compliance with Applicable Laws and for the registration of such Shares. As a condition to the exercise of an Option or the sale of any Shares, the Company may impose various conditions, including a requirement that the person exercising such Option or purchasing such Shares represents and warrants, at the time of any such exercise or purchase, that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares and other restrictions on such Shares relating to employment or other matters as may be determined by the Board. The Company may, upon advice of counsel to the Company, place legends on share certificates issued under the Plan as counsel to the Company deems necessary or advisable in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Shares. 11. Restrictions on Transfer An Option shall not be transferable except by will or the laws of descent and distribution. During the lifetime of a natural person who is granted an Option under the Plan, the Option will be exercisable only by him or her. Notwithstanding anything else in the Plan to the contrary, no Option Agreement will contain any provision which is contrary to, or which modifies, the provisions of this Section 11. 12. Corporate Reorganizations In the case of a proposed merger or amalgamation of the Company with one or more other corporations or other entities, the making of a takeover bid (as defined in the Securities Act (Ontario)) for any of the outstanding Shares, the sale or distribution of all or substantially all of the Company's assets or a proposed corporate arrangement or reorganization, the Board may, in its absolute discretion, determine the manner in which all unexercised Options granted under the Plan shall be treated including, notwithstanding Section 19 hereof, changing the Option Period. 13. Notices Any notice to be given to the Company under the terms of an Option Agreement or a Restricted Stock Purchase Agreement will be addressed to the Company at its corporate office in the United States: Attention: Secretary, or at such other address as the Company may designate in writing. Any notice to be given to an Optionee or grantee will be addressed to him or her at the address provided to the Company by such person. Any such notice will be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, deposited, postage prepaid, in a post office or branch post office regularly maintained by the local postal authority. 14. Other Provisions Each Option Agreement and Stock Purchase Right may contain such other terms and provisions not inconsistent with the Plan and Applicable Law, as may be determined by the Administrator in its sole discretion. 15. Term of the Plan The Plan will become effective on the date of its adoption by the Shareholders of the Company. The Plan will expire on the tenth (10th) anniversary of the date of its adoption by the shareholders of the Company unless it is terminated earlier pursuant to Section 19 of the Plan, after which no more Options or Stock Purchase Rights may be granted under the Plan, although all outstanding Options and Stock Purchase Rights granted prior to such expiration or termination will remain subject to the provisions of the Plan, and no such expiration or termination of the Plan will result in the expiration or termination of any such Option or Stock Purchase Right prior to the expiration or early termination of the applicable Option Term or the term set forth in the Stock Purchase Right, as applicable. 16. Adjustments Upon Changes in Shares The number of Shares subject to the Plan, the number of Shares available under Options and the Stock Purchase Rights granted and the Option Price and the price payable for Shares under the Stock Purchase Right shall be adjusted automatically from time to time to reflect adjustments in the number of Shares arising as a result of subdivisions, stock dividends, consolidations or reclassifications of the Shares or other relevant changes in the authorized or issued capital of the Company. No such adjustments will be required by reason of the issuance or sale by the Company for cash or other consideration of additional Shares or securities convertible into or exchangeable for Shares. No fractional Shares may be purchased or issued hereunder. If a Participant is entitled to purchase a fraction of a Share pursuant to an Option or Stock Purchase Right such entitlement shall be rounded down to the nearest whole number. 17. Modification, Extension and Renewal of Options Subject to the terms and conditions and within the limitations of the Plan, the Administrator may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). Notwithstanding the foregoing, however, no modification of any Option will, without the consent of the Optionee, alter or impair any rights or obligations under any outstanding Option. 18. Governing Law The internal laws of the Province of Ontario (irrespective of its choice of law principles) will govern the validity of the Plan, the construction of its terms and the interpretation of the rights and duties of the parties hereunder and under any Option Agreement. 19. Amendment and Discontinuance The Board may amend, suspend or discontinue the Plan at any time or from time to time; provided that no action of the Board will, without the approval of the shareholders of the Company, materially increase (other than by reason of an adjustment pursuant to Section 16 hereof) the maximum aggregate number of Shares subject to the Plan, materially increase the benefits accruing to Eligible Participants, or materially modify the category of, or eligibility requirements for persons who are Eligible Participants. However, no such action may alter or impair any Option or Stock Purchase Right previously granted under the Plan without the consent of the Optionee or grantee, nor may the number of Shares subject to the Plan be reduced to a number that is less than the aggregate number of Option Shares and Shares (i) that may be issued pursuant to the exercise of all outstanding and unexpired Options or Stock Purchase Rights granted hereunder and (ii) that have been issued and are outstanding pursuant to the exercise of Options or Stock Purchase Rights granted hereunder. The Board may in its sole discretion submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. 20. No Shareholder or Employment Rights; Corporate Action No rights or privileges of a shareholder in the Company are conferred by reason of the granting of an Option or Stock Purchase Right. No Optionee will become a shareholder in the Company with respect to any Option Shares unless and until the Option has been properly exercised, the Option Price has been fully paid as to the portion of the Option exercised and the name of the person rightfully exercising the Option has been entered in the register of shareholders of the Company. The granting of an Option or the sale of Shares to a Participant pursuant to a Stock Purchase Right does not confer upon the Participant any right to continue in the employment of the Company or any Subsidiary of the Company or on the Board, as the case may be, nor does it interfere in any way with the right of the Participant or the Company to terminate the Participant's employment at any time or shareholders' right to elect directors. Nothing contained in the Plan or in the Option Agreement or Restricted Stock Purchase Agreement shall be construed so as to prevent the Company or any Subsidiary from taking corporate action which is deemed by the Company or the Subsidiary to be appropriate or in the Company's best interest, whether or not such action would have an adverse effect on the Plan. 21. Copies of Plan; Electronic Delivery A copy of the Plan will be delivered to each Optionee and grantee of a Stock Purchase Right at or before the time he, she or it executes an Option Agreement or Restricted Stock Purchase Agreement, as applicable. Notwithstanding any other provision of the Plan, to the extent permitted by Applicable Law, the Company may provide copies of the Plan and any other documentation or writing to be delivered to any Participant or Eligible Participant (including Option Agreements and Restricted Stock Purchase Agreements) electronically, and, as determined by the Administrator and permitted by Applicable Law, all notices and other documentation or writing required to be provided by a Participant or Eligible Participant to the Company may be transmitted electronically. Date Plan Adopted by Board of Directors: March 26, 2000 Date Plan Approved by the Shareholders: April 27, 2000 CERTICOM CORP. 2000 UNITED STATES STOCK PLAN Exhibit A Definitions 1. "10% shareholder" means a person who owns, either directly or indirectly by virtue of the ownership attribution provisions set forth in Section 424(d) of the Code at the time he or she is granted an Option, shares possessing more than 10% of the total combined voting power or value of all classes of equity of the Company and/or of its Subsidiaries. 2. "1997 Stock Option Plan" means the Company's 1997 Stock Option Plan, as may be amended from time to time. 3. "1933 Act" means the United States Securities Act of 1933, as amended. 4. "Administrator" has the meaning set forth in Section 5(a) of the Plan. 5. "Affiliate" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. 6. "Associate" has the meaning assigned by the Securities Act (Ontario), as amended from time to time. 7. "Board" has the meaning set forth in Section 1 of the Plan. 8. "Code" means the United States Internal Revenue Code of 1986, as amended (references herein to Sections of the Code are intended to refer to Sections of the Code as enacted at the time of the Plan's adoption by the Board and as subsequently amended, or to any substantially similar successor provisions of the Code resulting from recodification, renumbering or otherwise). 9. "Committee" means a committee appointed by the Board in accordance with Section 5(c) of the Plan. 10. "Company" has the meaning set forth in Section 1 of the Plan. 11. "Consultant" is as an individual who is a Contractor or who: (a) provides ongoing consulting services to the Company or an Affiliate under a written contract; (b) possesses technical, business or management expertise of value to the Company or an Affiliate; (c) spends a significant amount of time and attention on the business and affairs of the Company or on an Affiliate; and (d) has a relationship with the Company or an Affiliate that enables the individual to be knowledgeable concerning the business and affairs of the Company. 12. "Contractor" means an individual who is not an Employee but works full-time or part-time for the Company providing services normally provided by an Employee. 13. "Covered Employee" means the chief executive officer and the four other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. 14. "disability" means any physical or mental disability which results in a Termination of Eligibility Status under applicable law, except that for purposes of Section 9.3(a) of the Plan, the term "disability" means permanent and total disability within the meaning of Section 22(e)(3) of the Code. 15. "Director" means a member of the Board. 16. "Eligible Participants" has the meaning set forth in Section 3 of the Plan. 17. "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. 18. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended. 19. "Grace Period" has the meaning set forth in Section 5(b)(iii)(E) of the Plan. 20. "Grant Date" means, with respect to an Option, the date on which the Option Agreement evidencing that Option is entered into between the Company and the Optionee, or such other date as may be set forth in that Option Agreement as the "Grant Date" which will be the effective date of that Option Agreement. 21. "ISO" means an "incentive stock option" as defined in Section 422 of the Code. 22. Market Value" per Share at any date shall be the closing price of the Shares on the Nasdaq National Market (the "NNM") (or if the Shares are not then listed and posted for trading on the NNM, on such stock exchange on which such Shares are then listed and posted for trading as may be selected for such purpose by the Administrator) on the trading day immediately preceding the Grant Date or, in the event of a measurement of Share price pursuant to Section 7(b), the trading day immediately preceding the surrender of the Shares. In the event that the Shares are not listed and posted for trading on the NNM or any stock exchange, the Market Value shall be determined by the Administrator in its sole discretion; provided that, such determination is consistent with the requirements of Section 422 of the Code. Notwithstanding the preceding, in the event that the Shares are listed in a currency other than U.S. dollars, the Market Value shall be converted into U.S. dollars from such currency based on the New York foreign exchange mid-range rates applying to trading among banks in the amounts of $1 million and more as quoted at 4 p.m. New York time on the trading day preceding the Grant Date (or, in the event of a measurement of Share price pursuant to Section 7(b), the date prior to the surrender of the Shares) as reported by Reuters and other sources or, if not available, such other exchange rate as determined by the Administrator in its sole discretion. 23. "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or Subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or Subsidiary for services rendered as a Consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the 1933 Act), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K or (ii) is otherwise considered a "non-employee director" for purposed of Rule 16b-3. 24. "Nonstatutory Stock Option" means an Option not intended to qualify as an ISO. 25. "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Stock Purchase Right grant. 26. "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. 27. "Option Agreement" means an agreement pursuant to which an Optionee is granted Options to purchase Option Shares pursuant to the Plan. 28. "Option Price" has the meaning set forth in Section 5(b)(iii)(C) of the Plan. 29. "Option Shares" has the meaning set forth in Section 1 of the Plan, provided that for purposes of Section 12 of the Plan, the term "Option Shares" includes all Shares issued by the Company to a Participant (or his, her or its predecessor) by reason of such holdings, including any securities which may be acquired as a result of a stock split, stock dividend and other distributions of Shares in the Company made upon, or in exchange for, other securities of the Company. 30. "Option Term" has the meaning set forth in Section 5(b)(iii)(D) of the Plan. 31. "Optionee" means a person who is granted an Option pursuant to the Plan. 32. "Options" has the meaning set forth in Section 1 of the Plan. 33. "Outside Director" means a Director who either (i) is not a current Employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former Employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an Officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. 34. "Outstanding Issue" means the number of Shares that are outstanding immediately prior to any issuance of Options under the Plan or any issuance of Option Shares, as the case may be, excluding Option Shares issued pursuant to the Plan and all other plans or stock option agreements, including the 1997 Stock Option Plan, to which the Company may be a party during the preceding one- year period. 35. "Participant" means Eligible Participants to whom Options are granted pursuant to the Plan which remain unexercised or to whom a Stock Purchase Right has been granted which remains unexercised. 36. "Plan" has the meaning set forth in Section 1 of the Plan. 37. "Restricted Stock Purchase Agreement" means a written agreement between the Company and the grantee of a Stock Purchase Right evidencing the terms and restrictions applying to Shares to be purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. 38. "Rule 16b-3" means Rules 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 39. "Shares" means the Common Shares of the Company or, in the event of an adjustment contemplated in Section 16 hereof, such other securities to which an Eligible Participant may be entitled upon the exercise of an Option or a Stock Purchase Right as a result of such adjustment. 40. "Stock Purchase Right" means the right to purchase Shares pursuant to Section 6 of the Plan, as evidenced in the Notice of Grant. 41. "Subsidiary" for purposes of Section 3 of the Plan only, has the same meaning as "subsidiary corporation" as defined in the Securities Act (Ontario); for all other purposes under the Plan, "Subsidiary" means a corporation or other entity that is both (i) a "subsidiary corporation" as defined in the Securities Act (Ontario) and (ii) a "subsidiary corporation" as defined in Section 424(f) of the Code. 42. "Tax Withholding Liability" in connection with the exercise, sale or repurchase of any Option or Option Shares means all Canadian or United States federal, state or provincial income taxes, social security taxes, employment taxes and any other taxes (together with any interest or penalties applicable thereon) related to any compensation income arising from the transaction required by applicable law to be withheld by the Company. 43. "Termination of Eligibility Status" means (i) in the case of any Employee of the Company and/or any of its Subsidiaries, a termination of his or her employment, whether by the Employee or employer, and whether voluntary or involuntary, including without limitation as a result of the death or disability of the Employee; (ii) in the case of any Consultant of the Company and/or any of its Subsidiaries, the termination of the services relationship pursuant to any contract between the parties or otherwise under applicable law; and (iii) in the case of any director of the Company and/or any of its Subsidiaries, the death of or resignation by the director or his or her removal from the Board in the manner provided by the organic instruments of the Company or Subsidiary or otherwise in accordance with applicable law. 44. "Termination for Cause" means (i) in the case of an Optionee who is an Employee of the Company and/or any of its Subsidiaries, a termination by the employer of the Optionee's employment for "cause" as defined by applicable law, by any contract of employment or the Option Agreement or the Restricted Stock Purchase Agreement, or if not defined therein, pursuant to the "For Cause Standard" set forth below, (ii) in the case of an Optionee who is or which is an Consultant to the Company and/or any of its Subsidiaries, a termination of the services relationship by the hiring party for "cause" or breach of contract, as defined by applicable law, by any contract between the parties or the Option Agreement or the Restricted Stock Purchase Agreement, or if not defined therein, pursuant to the "For Cause Standard" set forth below, and (iii) in the case of an Optionee who is a Director of the Company and/or any of its Subsidiaries, removal of him or her from the Board by action of the shareholders or, if permitted by applicable law and the articles, bylaws or other organic instruments of the Company or the Subsidiary, as the case may be, or pursuant to applicable law, by the other Directors, in connection with the good faith determination of the Board (or of the Company's or Subsidiary's shareholders if so required, but in either case excluding the vote of the subject individual if he or she is a Director or a shareholder) that the Optionee has engaged in any acts which breach any fiduciary duty to the Company, any of its Subsidiaries or their shareholders, or in any acts involving dishonesty or moral turpitude or in any acts that materially and adversely affect the business, affairs or reputation of the Company or any of its Subsidiaries (the "For Cause Standard"). 45. "Unvested Options" has the meaning set forth in Section 5(b)(iii)(F) of the Plan. 46. "Vested Option" has the meaning set forth in Section 5(b)(iii)(F) of the Plan. 47. "Vesting" has the meaning set forth in Section 9.4 of the Plan. -----END PRIVACY-ENHANCED MESSAGE-----